SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549FORMForm 20-F
(Mark(Mark One)
[ ] 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, 2000. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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, 2002.
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period from _______________ to _______________
Commission file number 000-29736
MARNETICS BROADBAND TECHNOLOGIES LTD. (Exact Name of Registrant as specified in its charter) NOT APPLICABLE (Translation of Registrant's name into English ISRAEL (Jurisdiction of incorporation or organization) 10 HAYETZIRA STREET RA'ANANA 43000 ISRAEL ---------------------- (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each Name of each exchange Class on which registered ------------ -------------------- None
Marnetics Broadband Technologies Ltd.
(Exact Name of Registrant as specified in its charter)
Not applicable
(Translation of Registrant’s name into English
Israel
(Jurisdiction of incorporation or organization)
10 Hayezira Street
Ra’anana 43000 Israel(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each
ClassName of each exchange
on which registeredNone
Securities registered to or to be registered pursuant to Section 12(g) of the Act.
ORDINARY SHARES, NOMINAL VALUE NIS 0.08 PER SHARE (Title of Class)
Ordinary Shares, nominal value NIS 0.08 per share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
NONE (Title of Class)
None
(Title of Class)
Indicate the number of outstanding shares of each of the
issuer'sissuer’s classes of capital or common stock as of the close of the period covered by the annual report.As of December 31,
2000, 6,407,3332002, 7,362,390 of theRegistrant'sRegistrant’s Ordinary Shares, par value NIS 0.08 per share, were issued and outstanding.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
----- -----___Indicate by check mark which financial statement item the registrant has elected to follow
Item 17 ___Item 18 X
--- ---CAUTIONARY STATEMENTTABLE OF CONTENTS
PART I
PAGE
Item 1:
Identity of Directors, Senior Management and Advisers
3
Item 2:
Offer Statistics and Expected Timetable
3
Item 3:
Key Information
3
Item 4:
Information on the Company
12
Item 5:
Operating and Financial Review and Prospects
24
Item 6:
Directors, Senior Management and Employees
32
Item 7:
Major Shareholders and Related Party Transactions
41
Item 8:
Financial Information
46
Item 9:
The Offer and Listing
49
Item 10:
Additional Information
51
Item 11:
Quantitative and Qualitative Disclosures about Market Risk
61
Item 12:
Description of Securities Other than Equity Securities
61
PART II
Item 13:
Defaults, Dividend Arrearages and Delinquencies
61
Item 14:
Material Modifications to the Rights of Security Holders and
Use of Proceeds61
Item 15:
Controls and Procedures
60
Item 16A:
Audit Committee Financial Report
62
Item 16B:
Code of Ethics
62
PART III
Item 17:
Financial Statements
62
Item 18:
Financial Statements
63
Item 19:
Exhibits
63
Reference herein to the (1) “Company”, is to Marnetics Broadband Technologies Ltd., which may be referred to as “we,” “us” or “our” and unless context indicates otherwise, includes its wholly-owned subsidiary, Marnetics, Ltd.and Marnetics Ltd.’s wholly-owned subsidiary Marnetics, Inc., and (2) referenced herein to “Marnetics” unless context indicates otherwise, refers to Marnetics Ltd. and Marnetics Ltd.’s wholly- owned subsidiary Marnetics, Inc..
BITmax™ and Prospera™ are trademarks of the Company. This annual report also contains trademarks of other companies.
Note Regarding Forward-Looking Statements
Our disclosure and analysis in this report contains statements relating to
futureresultsof Marnetics Broadband Technologies Ltd. (the "COMPANY," which may be referred to as "WE," "US" or "OUR" and unless context indicates otherwise, includes its wholly-owned subsidiary, Marnetics, Ltd.) (includingincluding certain projections and businesstrends)trends that are considered"forward-looking statements"“forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “intends,” “expects” and similar expressions are intended to identify forward-looking statements. Such risks and uncertainties include, but are not limited to the risks detailed under “Item 3: Key Information –Risk Factors”. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to, changes in economic conditions and competitive pressures within theCompany'sCompany’s markets, as well as other risks and uncertainties detailed from time to time in the filings of the Company with the Securities and Exchange Commission. In addition, any forward-looking statements represent estimates only as of the date this annual report was first filed with the Securities Exchange Commission and should not be relied upon as representing the Company’s estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligations to do so, even if its estimates change.3
PART I
ITEMItem 1.
NOT APPLICABLE. ITEMIdentity of Directors, Senior Management and AdvisersNot Applicable.
Item 2.
NOT APPLICABLE. ITEMOffer Statistics and Expected TimetableNot Applicable.
Item 3.
KEY INFORMATION.Key Information.A. Selected Financial Data
The following selected summary of financial information was derived from our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Effective December 31, 2000, Marnetics Ltd. was acquired by the Company (formerly named Stav Electrical Systems (1994) Ltd.) in exchange for which the Company issued to the shareholders and
optionholdersoption holders of Marnetics Ltd. shares and options in the Company representing approximately 75% of its outstanding shares, on a fully diluted basis. The acquisition of Marnetics Ltd. by the Company was accounted for as a reverse acquisition. Marnetics Ltd. was determined to be the"accounting acquirer"“accounting acquirer” in the transaction since the former shareholders andoptionholdersoption holders of Marnetics Ltd., as a group, received the largest ownership interest in the Company. As a result, the historical financial statements of the Company prior to December 31, 2000 were replaced with the historical financial statements ofMarnetics Ltd. Therefore,Marnetics. The statement of operations for 2001 includes thefollowing financial summaryoperations of the Companyrefers toand of Marnetics. The statements of operations for 2000, and 1999 include only the results ofoperationoperations of Marnetics. The December 31, 2002, December 31, 2001 and December 31, 2000 balance sheet includes the consolidated accounts of the Company and Marnetics.As of April 26, 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development. The remaining employees are in the area of administration and will be left for the next few months, possibly to the end of the year 2003.
The selected summary data should be read in conjunction with Item 5: “Operating and
areFinancial Review and Prospects”, and as qualified in their entirety by our Consolidated Financial Statements andnotes thereto, which areRelated Notes, and Item 18 - Financial Statements, including General - Note 1b, presentedelsewhere hereinin United States dollars in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), and audited and prepared byreference to "Item 5: Operations and Financial Review and Prospects." 2Brightman Almagor & Co., Certified Public Accountants (Israel), a member of Deloitte Touche Tohmatsu, independent public accountants in Israel, 1 Azrieli Center, Tel Aviv 67201, Israel.4
CUMULATIVE FROM JUNE 1, 1998 (DATE OF SEVEN MONTHS COMMENCEMENT OF YEAR ENDED ENDED OPERATIONS) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, --------------- ------------ ------------ 2000 1999 1998(1) 2000 ---- ---- ------- ---- US$ IN THOUSANDSResearch and development costs 252 33 131 416 Sales and marketing expenses, net 142 -- -- 142 General and administrative expenses 722 44 181 947 Non-cash compensation expenses 2,408 2,408 -------- -------- -------- -------- OPERATING LOSS (3,524) (77) (312) (3,913) Financial income, net 167 9 8 184 Loss on sale of property and equipment -- (28) -- (28) Share in losses of affiliate (639) (21) -- (660) -------- -------- -------- -------- LOSS FOR THE PERIOD (3,996) (117) (304) (4,417) ======== ======== ======== ======== Per share data (Note 2h) Loss per share: Basic and diluted (4.15) (0.20) (0.91) Shares used in computing Loss per ordinary share Basic and diluted 962,553 575,234 335,143
AT DECEMBER 31, ------------------------------ BALANCE SHEET DATA 2000 1999 1998(1) ---- ---- -------Working capital.................... 4,925 282 342 Total assets....................... 25,376 418 445 Short term credits and current maturities of long-term debt....... 3,337 -- -- Long-term debt..................... 213 -- -- Shareholders' equity............... 18,527 408 379- ----------------------------------------
Year ended
December 31,
Year Ended
December 31,
Cumulative from June 1,
1998 to December 31, (1)
2002
2 0 01
2000
1999
2002
US $ in thousands
Revenues
19
—
—
—
19
Research and development costs
486
812
252
33
1,714
Sales and marketing
expenses, net
464
310
142
—
916
General and administrative expenses
784
1,128
722
44
2,859
Provision of legal claims
(500)
750
—
—
250
Impairment of
Goodwill
—
9,309
—
—
9,309
Loss allowance on loan to related party
—
1,228
—
—
1,228
Collection of loan from
related party
(266)
—
—
—
(266)
Write-down of investment
to affiliate
522
—
—
—
522
Provision for a Bank
guarantee
716
—
—
—
716
Non-cash compensation expenses
792
805
2,408
—
4,005
(2,979)
(14,342)
(3,524)
(77)
(21,253)
Financial income, net
32
175
167
9
391
Loss on sale of property
and equipment
—
—
—
(28)
(28)
Taxes in
Income
(74)
—
—
—
(74)
Share in losses of affiliate
—
—
(639)
(21)
(660)
Loss from
continuing operations
(3,021)
(14,167)
(3,996)
(117)
(21,605)
Discontinued
operations:
Loss from
operations of
electrical division
—
(450)
—
—
(450)
Loss on sale of electrical
division
—
(2,278)
—
—
(2,278)
(3,021)
(16,895)
(3,996)
(117)
(24,333)
Basic and diluted:
Loss per share from
continuing operations
$ (0.41)
$ (2.11)
$ (4.15)
$ (0.20)
Loss from discontinued operations
$ —
$ (0.40)
$ —
$ —
$ (0.41)
$ (2.51)
$ (4.15)
$ (0.20)
Shares used in
computing loss per
ordinary share
Basic and diluted
7,362,390
6,725,685
962,553
575,234
At December 31,
US $ in thousands
2002
2001
2000
1999
Working capital
3
1,652*
4,925
282
Total assets
1,485
3,451*
25,376
418
Short term credits and
current maturities of long-
term debt
—
50
3,337
—
Long-term debt
—
—
213
—
Shareholders’ equity
208
2,437
18,527
408
(1) Marnetics Ltd. was established and commenced its operations in June19981998.
* Reclassified.5
B.
NOT APPLICABLE.CAPITALIZATION AND INDEBTEDNESSNot Applicable.
C.
NOT APPLICABLE.REASONS FOR THE OFFER AND USE OF PROCEEDSNot applicable.
D.
RISK FACTORSRisk FactorsGeneral Overview
The
Company'sCompany’s operationsconsistduring 2002 consisted oftwo lines of business: (1) our currentthe core business of developing and marketingInternet performancenetwork capacity enhancement and network information analysis solutions(the "INTERNET BUSINESS"),for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd.(the "MARNETICS SUBSIDIARY"During 2002 the Company also dealt with some legal issues and collection of debt relating to the Electrical Business, which was sold during 2001. See “Item 8B – Significant Changes.”Our business, operating results and financial condition could be seriously harmed due to any of the following risks. If we do not successfully address any of the risks described below, we could experience a material adverse effect on our business, results of operations and financial condition and our share price may decline. We cannot assure you that we will successfully address any of these risks.
On February 2, 2003 the American Stock Exchange (“AMEX” or the “Exchange”), notified the Company that the Company no longer complies with the Exchange’s continued listing standards and
(2) our historical business of electrical and communications contracting and engineering business (the "ELECTRICAL BUSINESS"), which we proposetherefore the Company’s Ordinary Shares are subject tosell, followingbeing delisted from the Exchange. On February 9, 2003, the Company submitted a request forbids announcedan oral hearing before a committee of the Exchange in order to appeal the Exchange’s above determination. On March 27, 2003 the AMEX, notified the Company of the decision of the Exchange’s Listing Qualification Panel (the “Panel”), which considered a request for review by the Company of the AMEX staff’s determination to prohibit the continued listing of the Company’s ordinary shares onMay 15, 2001the Exchange andconcludedinitiate delisting proceedings due to the Company not meeting the market value standard set forth in Section 1003(b)(i)(C) of the AMEX Company Guide (the “Guide”), in that the Company’s aggregate market value of shares publicly held is less than $1,000,000 for more than 90 consecutive days, as well as the substantial period of time at which the Company’s Ordinary Shares have been selling for a low price per share (Section 1003(f)(v) of the Guide).Upon its review, at the request of the Company, the Panel has agreed with the determination of the AMEX Staff that the Company’s ordinary shares should be delisted by the Exchange. In turn, the AMEX applied to the SEC to strike the Company’s ordinary shares from listing and registration on
May 30, 2001,the AMEX. The Company recently started trading on the Pink Sheets, which are substantially less liquid andsubjectefficient. See “Item 9B – Listing – Markets.”As of April 26, 2003, the Company decided to
shareholders' approval at our Annual General Meeting scheduled to be heldlay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in thethird quarter, 2001.areas of marketing, sales and research and development. The remaining employees are in the area of administration and will be left for the next few months, possibly to the end of the year 2003. A new updated budget was approved that reflects the reduction of the research and development, and marketing and sales operations of the Company and Marnetics Ltd. The Company asked the assistance of several investment bankers and consultants to evaluate the subsidiary, Marnetics Ltd., in order to assist the Board of Directors regarding the possible sale of Marnetics Ltd. or its technology. There is no guarantee the Company will find a buyer for Marnetics Ltd. or its technology. See"ITEM“Item 8B- SIGNIFICANT CHANGES." 3– Significant Changes.”Risks Relating to the Network Business
The Company’s operations during 2002 consisted of the core business of developing and marketing network capacity enhancement and network information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd. See “Item 8B – Significant Changes.”
6
RISKS RELATING TO INTERNET BUSINESS TECHNOLOGICAL FACTORS; UNCERTAINTY OF PRODUCT DEVELOPMENT OurAs of April 26, 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development. The remaining employees are in the area of administration and will be left for the next few months, possibly to the end of the year 2003.
Technological Factors; Uncertainty of Product Development
Despite the fact that the Company during 2002 finalized the research and development of the second version of the family of products
are still under development. Noof the Company and the fact that several installations and testings were made, no assurances can be given that our investment in research and development will be translated into marketable products. There can be no assurance that any of our products including those in development will satisfactorily perform all of the functions for which they have been designed or that they will be reliable or durable in extensive applications. Such efforts remain subject to all of the risks inherent in development of new products, including unanticipated delays, expenses and technical problems or difficulties, as well as the possible insufficiency of funds to implement efforts, which could result in abandonment or substantial change in product development. Our success will depend upon our products meeting targeted cost and performance objectives and the timely introduction of products into the marketplace. In order to obtain a strong market position, we must continue to allocate substantial resources to research and development and since the Company has reduced available funding in this area there is no guarantee that we will have the necessary funds given the present financial situation of the Company to be able to keep pace with the rate of technological change.INTELLECTUAL PROPERTY RIGHTSIntellectual Property Rights
Our success is substantially dependent upon our proprietary software technology. We do not yet hold any patents related to our software technology and currently rely or, in the future, expect to rely on a combination of contractual rights, copyrights, trademarks, and non-disclosure agreements with our employees, suppliers, distributors and customers. Marnetics submitted
apatentapplicationapplications on December6,13, 2000 (US Patent Application No.2196/1)09/734,921), for a method of data transfer acceleration in a TCP network environment, which is the core engine inBITmax(TM).BITmax™, and on December 20, 2001 (US Patent Application No. 10/022,912), for a method for enhancing physical bandwidth capacity in packet-switched network (Discrete State Driven Queuing (“DSDQ”) technology), which is the core technology to the Prospera™ family of products. The patentapplication isapplications are still pending.We intend to file additional patent applications in Israel and the United States for new technologies currently under development.The methods used and proposed for the protection of our intellectual property rights, however, may not afford complete protection and there can be no assurance that third parties will not independently develop such know-how or obtain access to our know-how, ideas, concepts and documentation. Although we believe that our products have been developed independently and do not infringe on the proprietary rights of others, there can be no assurances that the technology does not and will not so infringe or that third parties will not assert infringement claims against us in the future.In the case of infringement, we could, under certain circumstances, be required to modify our products or obtain a license. There can be no assurance that we would be able to do either in a timely manner, upon acceptable terms and conditions, or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action. Failure to do any of the foregoing could have a material adverse effect on us. Furthermore, if our products or technologies are deemed to infringe upon the rights of others, we could become liable for damages, which would have a material adverse effect on us.
4RISKS ASSOCIATED WITH ACQUISITION STRATEGY GENERAL.Risks Associated with Merger Strategy and Sale of Marnetics’ Technology
General. As a result of the termination of the day to day activities of the Company beginning July 1, 2003, and as part of its operating history and growth merger and acquisition strategy in the past, the Company seeks to
acquiremerge with other businesses. The Company has invited a valuation from a well known consulting firm regarding the value of the assets of Marnetics. The Company is continuallyseeks acquisitionseeking merger candidates in selected and, if possible, synergetic markets and from time to time engages in exploratory discussions with potentialacquisitionmerger candidates. Recently, during June 2003 the Company began negotiations with a past distributor of Marnetics in Israel, regarding a merger of the two companies and/or possible sale of the intellectual property assets of the Marnetics. There can be no assurance, however, that the Company will be successful in these negotiations or able to identify andacquiremerge with other targeted businesses, sell Marnetics technology, or obtain financing for suchacquisitionsmergers on satisfactory terms. Furthermore, there can be no assurance that competition foracquisitionmerger candidates will not escalate, thereby increasing the costs of makingacquisitions or making suitable acquisitionsmergers unattainable.LIMITED KNOWLEDGE AND OPERATING HISTORY.Further, based on the terms established in the agreement and in accordance with applicable law with the Office of the Chief Scientist of the State of Israel the Company may not sell its intellectual property to a non-Israeli entity.7
Limited Knowledge and Operating History. Notwithstanding its own due diligence investigation, management may have limited knowledge about the specific operating history, trends and customers of businesses
acquiredmerged with in future acquisitions. Consequently, no assurance can be given that the Company will be able to make futureacquisitionsmergers at favorable prices, thatacquiredmerged with lines of business will perform as well as they had performed historically or that the Company will have sufficient information to analyze accurately the markets in which it elects tomake acquisitions.merge with. Furthermore, additions by the Company of new products present certain risks and uncertainties resulting from theCompany'sCompany’s relative unfamiliarity with these new products, the market for such new products, and the financial and operating controls required to manage such new product offerings. There can be no assurance that the Company will be successful in marketing these or other additions to its product offering or that its existing customers will accept such additions to the products currently purchased from the Company.INTEGRATION.Integration. The process of integrating future
acquiredmerged with businesses into theCompany'sCompany’s operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention. Although the Company will endeavor to integrate and assimilate the operations ofacquiredmerged lines of business in an effective and timely manner, no assurance can be given that the Company will be successful in such integration attempts or that the Company will be able to hire, train, retain and assimilate individuals employed at theacquiredmerged businesses. Further, no assurance can be given that the Company will successfully integrate its recent acquisitions or any other futureacquiredmerged businesses into theCompany'sCompany’s purchasing, marketing and management information systems, or that theCompany'sCompany’s management and financial controls, personnel, computer systems and other corporate support systems will be adequate to manage the increase in the size and scope of theCompany'sCompany’s operations and merger and acquisition activity. Integration ofacquisitionsmergers is often a complex process which may entail material, non-recurring expenditures, including facility closing costs, warehouse assimilation expenses, assetwritedownswrite- downs and severance payments.SIGNIFICANT FUTURE CHARGES TO EARNINGS. Future acquisitions may involve the recordingLimited Relevant Operating History of
a significant amount of intangible assets, particularly goodwill, on the Company's balance sheet, which will be amortized over varying periods of time. 5LIMITED RELEVANT OPERATING HISTORY OF MARNETICS SUBSIDIARY; 1999 BUSINESS CONTRACTION TheMarneticsSubsidiary,Marnetics, which is the operating entity for the
InternetNetwork Business, has been in operation since June 1998. Accordingly, the Marnetics Subsidiary has a limited relevant operating history upon which an evaluation of the MarneticsSubsidiary'sSubsidiary’s performance and prospects can be made. The Marnetics Subsidiary is subject to all of the risks, needed financing, expenses, delays, problems, and difficulties typically encountered in the establishment of a newbusiness. In 1999, while our technology was in the research andbusiness, especially a development stageascompany.In early 2001, the global telecommunications markets experienced a major decline. As a result of
differing views on which markettheMarnetics Subsidiary should target for product development, anddownturn, theultimate decision to focus on the broadband Internet business market, the initial investors, who desired to focus the Marnetics Subsidiary's business on the end-user market, did not want to continue funding the Marnetics Subsidiary's start-up operations. Consequently, there was then a need to conserve cash and scale back operations until, the Marnetics Subsidiary found new financing and investors. Later that same year, the Marnetics Subsidiary was able to attract new investors and obtain additional capital resources to enable it to renew research and development efforts targeting the Internet broadband business market. The interests of such initial investors in the Marnetics Subsidiary were bought out at that time. TECHNOLOGY MARKET DECLINE AND SLOWDOWN IN BROADBAND IMPLEMENTATION Phenomenal investments in 3G cellular frequencies and telecom infrastructure during the past several years, contributed to the global decline of technology markets in early 2001. The anticipated rapid adoptiondeployment of broadband Internet accesshas been significantly delayed bothslowed dramatically, putting inEuropejeopardy Marnetics Ltd.’s business plan, which primarily targeted the broadband market. As a result thereof, Marnetics Ltd. shifted its technological focus and is developing products, theUnited States, dueProspera™ family of products, that intend totechnologicalprovide network capacity enhancement solutions for a bottleneck that may occur when Local Area Network (“LAN”) access meets the congested Wide Area Network (“WAN”) (the WAN Access Link) as well as network traffic analysis andfinancial considerations. Obtaining investments from venture capital firms has become increasingly difficult. The market is currently characterized by massive lay-offs, severe budget cuts, closingscapacity planning. At the end ofunder-financed and under-performing companies, and major reductions in purchases and investments that do not contribute immediately and directly to revenues and profits. The stateyear 2002 Marnetics completed the final development of theglobal broadband environment and technology industry materially adversely affected the resultssecond version family ofoperations for our Broadband enhancementproducts andservices. COMPETITION; TECHNOLOGICAL OBSOLESCENCEbegan sales.As of April 26, 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development The remaining employees are in the area of administration and will be left for the next few months, possibly to the end of the year 2003. Therefore there are existing risks regarding the continuation of the operations of the Company.
Market for the Technology
The market for network capacity enhancement solutions
improvingis in an early stage of development and its success is not guaranteed. Therefore, we cannot accurately assess the size of the market, the products needed to address the market, the optimal distribution strategy, or the competitive environment that will develop. In order for us to be successful, our potential customers must recognize the value of our new approach to network management solutions, and decide to invest in the management of their networks and the performanceand speedofInternet connections and for expanding the capacity for communication networks is characterized by intense competition, price erosion over the lifemission critical applications. The growth of theproductnetwork management solutions market also depends upon a number of factors, including the availability of inexpensive bandwidth, especially international links, andrapidly changing business conditions, customer requirementsthe growth in complexity of WAN, andtechnology. Our management believes that currently,the CapEx budgets of enterprises. As of April 26, 2003, the Companyhas few, if any, direct competitors fordecided to lay off the majority of the employees of the Company and itsInternet Business which combines capacity enhancement with accelerationwholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales anddifferentiated services. Itresearch and development. Therefore given the lack of funding, there isalso anticipateda risk thatour new product line will enhance rather than conflict with other Internet performance enhancement solutions.the products of Marnetics Ltd. cannot continue to be marketed.8
Competition; Pricing; Technological Obsolescence
Our products may
in the future,compete directly with, or be rendered obsolete, by products developed and marketed by numerous well-established companies in the communications and networks industries, including traffic managementvendors,developers, network optimization solution developers6and cellular vendors. In addition,system integrators. Increased competition could result in reduced prices and gross margins for our productswill compete indirectly with other Internet performance solutionsandenhancements.could require increased spending by us on research and development, any of which could harm our business. Many of these competitors have substantially greater financial, technical, personnel and other resources than the Company and have established reputations for success in the development, licensing, and sale of their products and technology. Certain of these competitors are industry leaders with the financial resources necessary to enable them to withstand substantial price competition or downturns in the market. Thus, our products may come under competitive pressure in terms of feasibility and price with a negative impact on future performance. The Company forecasts that the prices of bandwidth will not go down lower substantially, but if the prices were in actuality to go lower substantially, this would have a negative impact upon the products of Marnetics Ltd. There are also numerous other companies that have developed or may be expected to develop technologies or products that may be functionally similar to some or all of those being developed by us. There can be no assurance that other companies with greater financial resources and expertise do not have or are not currently developing functionally equivalent or superior products, or that functionally equivalent or superior products will not become available in the near future. In addition, the markets for our technology, products and proposed products are characterized by rapid changes and evolving industry standards, often resulting in product obsolescence or shortened product life span.Accordingly, our ability to compete will be dependent upon our ability continually to enhance and improve our future products and technologies, and to complete development of new products. There can be no assurance that we will be able to compete successfully, that our competitors or future competitors will not develop technologies or products that will render our products and technology obsolete or less marketable, or that the Company will be able to successfully enhance or satisfactorily adapt our existing technology or develop new products.
COMPETITION AND PRICING The Company may face strong competition by largeGiven the lack of funding andwell-established playersreductions of efforts inthe communicationsresearch andInternet industries. Thus, our products may come under competitive pressuredevelopment interms of feasibility and price withMarnetics during year 2003 this will have a negative impact onfuture performance. PROPOSED EXPANSION The Company intends to pursue a strategy of growth. We have, however, limited experience in effectuating rapid expansion or in managing operations that are geographically dispersed. We intend to pursue our growth strategy by entering into strategic alliances forMarnetics and themarketing of our products or technology (OEM Agreements), hiring and retaining skilled management, as well as financial, marketing, technical, and other personnel and successfully managing growth (including monitoring operations and controlling costs and maintaining effective quality controls). Our prospects could be adversely affected by unfavorable general economic conditions, including any downturns in the Israeli or international economies, or a decline in the economic prospects of particular governmental or commercial customers or segments or targeted markets, which could result in reduction or deferral of expenditures by prospective customers. There can be no assurance that we will be able to achieve significant market acceptance of future products, successfully introduce new products, or achieve significant penetration in new geographic markets. Our products may require a sophisticated marketing and sales effort targeted at several levels within a prospective customer's organization. We have recently expanded our marketing and sales staff and plan to further increase our staff, including sales, technical and 7customer support personnel. Competition for qualified sales personnel is intense and we may not be able to hire sufficient sales personnel to support our marketing efforts. As the Company grows, we will need to increase our staff to support new customers, as well as our continued research and development operations. The installation of Internet traffic management solutions, the integration of these solutions into existing networks and ongoing support can be complex. Accordingly, the Company needs highly-trained technical and customer support personnel. Hiring technical and customer support personnel is very competitive in this industry, due to the limited number of people available with the necessary technical skills and understanding of our products. This is particularly true in Israel, where competition for such personnel is intense. Our success depends upon ourability toattract, train and retain highly-qualified technical and customer support personnel. SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING; DEPENDENCE ON FINANCING TO IMPLEMENT EXPANSIONbe competitive.Significant Capital Requirements; Need for Additional Financing; Dependence on
Financing to Implement ExpansionThe
Company'sCompany’s capital requirements have been and will continue to besignificant and oursignificant. Our cash requirements have historically exceededand will likely exceedcash flow fromoperations.operations which was negative and the cash position of the Company will continue to be a major risk factor. The Company has budgeted enough cash for operations of the Company until September 2003. As a result, we may need to depend upon bank credit lines and sales of theCompany'sCompany’s securities to fund our development and marketing activities. TheCompany'sCompany’s ability to obtain additional financing, and the terms of any such financing, could be adversely affected by a variety of existing circumstances. No assurance can be given that the Company will be able to obtain such financing or that the financing obtained will be on terms satisfactory or favorable to theCompany. LIMITED MARKETING CAPABILITIES; DEPENDENCE ON THIRD PARTY MARKETING ARRANGEMENTSCompany, and as such the Company would be forced to cease operations and close down.Office of the Chief Scientist and other Government Programs which may be Discontinued
or Reduced and effect on Sale of Technology of MarneticsThe Company received funding under Government of Israel programs. In order to maintain our eligibility for these programs, we must continue to meet specified conditions and pay royalties with respect to grants received. In addition, some of the Office of the Chief Scientist’s programs restrict our ability to manufacture particular products or transfer particular technology outside of Israel. If we fail to comply with these conditions in the future, the benefits received could be canceled and we could be required to pay back the grants with penalties. The Government of Israel has
not yetreduced the benefits available under these programs in recent years and these programs may be discontinued or curtailed in the future. If the Government of Israel ends these programs, our business, financial condition and results of operations could be materially adversely affected. See “Item 4.B. Business Overview – Research and Development.”9
Limited Marketing Capabilities; Dependence on Third Party Marketing Arrangements
During 2003, the Company through Marnetics Ltd. had commenced marketing activities relating to product
commercialization and hascommercialization. It had limited marketing experience and limited financial, personnel and other resources to undertake extensive marketing activities independently. Accordingly, wemay relyrelied on arrangements with third parties for the marketing and distribution of our products, including arrangements with distributors.There can be no assurance that we or any third parties will be able to market our products successfully or that their efforts will result in any significant revenue.The Companycould also be dependent upon such dealersterminated these agreements during year 2003.Given the reduction in employees and
distributors and other third parties to provide installation and support services. To the extent that such third parties provide inadequate services and support, over which we will not have direct control, our reputation and our ability to continue to sell additional products through such distributors or dealers would be adversely affected. While we believe that any independent distributors or other strategic partners with which it enters into such arrangements will have an economic motivation to commercialize our products, the time and resources devoted to these activities generally will be contributed and controlled by such entities and not by us. A decline in the financial prospects of particular distributors or other strategic partners or of any of their customers, could have an adverse effect on the Company. Moreover, joint ventures or similar arrangements may require financial or other commitments by us. Therelimited budgeted funding up until September 2003, there can be no assurance that we will be able, for financial or other reasons, to continue to finalize any additional third party distribution, marketing, or joint venture8arrangements or thatsuch arrangements, if finalized, will result in the successful commercialization of any of our products.RELIANCE ON INTERNATIONAL SALESReliance on International Sales
The Company
anticipateshad anticipated having salesoutsidein Israel and in international markets, but given the reduction in employees, limited budgeted funding until September 2003, and termination ofIsrael, butvarious marketing and consulting agreements overseas, there can be no assurance that we will be able to do so or that such international markets will be viable.To the extent weCurrency Exchange Risks Associated with International Sales and Cash Balance
Limited revenues to date are
able to expand successfully, it will become increasingly subject to the risks associated with international sales, including economic and political instability, shipping delays, customs duties, export quotas, and other trade restrictions, any of which could have a significant impact on our ability to deliver products on a competitive and timely basis and exacerbate the risks inherentderived inour business. In addition, we may encounter significant difficulties in connection with the sales of our products in international markets, future imposition of, or significant increases in, the level of custom duties, export quotas, or other trade restrictions that may have an adverse effect on us. CURRENCY EXCHANGE RISKS ASSOCIATED WITH INTERNATIONAL SALES It is anticipated thatUnited States dollars, most ofour revenues will be derivedthe cash balance invested incurrencies other than NIS,related deposits, while a significant portion of our expenses are currently incurred in NIS. Therefore, the Company may be adversely affected by fluctuations in currency exchange rates. We have not engaged in currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. Even if we were to determine that it was in our best interests to enter into any such hedging transactions in the future, there can be no assurance that we will be able to do so or that such transactions, if entered into, will materially reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. Over the year 2003 the dollar has weakened almost nine percent against the New Israeli Shekel going from NIS 4.737 as of December 31, 2002, to one United States dollar to NIS 4.40 to one United States dollar. Any further changes in the exchange rate of dollar against the New Israeli Shekel could have a material adverse effect on our operations. In addition, the imposition of exchange or price controls or other restrictions on the conversion of foreign currencies into NIS may have a material adverse effect on our results of operations.POTENTIAL PRODUCT LIABILITY; WARRANTY EXPENSE ThePotential Product Liability; Warranty Expense
Despite the fact that the company performed routine basis tests of its products, though possible new products, if any, may contain errors after commencement of commercial shipment. Additionally, the company’s products,in order to perform, depend upon certain third party hardware and software, which may contain errors and defects that could reduce the performance of the company’s products. As a result, the Company may be exposed to potential product liability claims, experience future material warranty expense, by our customers, distributors and users of our
products. We may experience future material warranty expense. DEPENDENCE ON KEY PERSONNEL The successproducts, and not have adequate funds or personnel for providing maintenance.Dependence on Key Personnel
As of April 26, 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development. The remaining employees are in the area of administration and will be
largelyleft for the next few months, possibly to the end of the year 2003.The Company is dependent on the abilities and continued personal efforts of Marnetics Ltd.
's’s senior management, particularly those of Menachem Reinschmidt, Founder of Marnetics Ltd. andPresidentChairman of theCompany;Board of the Company whose consulting agreement is subject to renewal, David SheetritActingthe present acting Chief Executive Officer,andprevious Chief OperatingOfficer; Isaac Nissim, Chief Financial Officer;Officer of the Company and Director in the Company since April 2003, and Hanoch Newman, Vice President of Research andDevelopment; Karen Gold Anisfeld, Vice President Strategic Marketing; Ron Nuta, DirectorDevelopment ofBusiness Development; and Baruch Schechter, DirectorMarnetics Ltd. who is finishing June 2003 but will possibly be available for part time assistance dependent on some discussions the Company is having presently with him.10
The Board of
Marketing. Although someDirectors has approved the continuation of theofficers have entered into employment/consultingagreementsagreement until December 2, 2003 with Menachem Reinschmidt, subject to shareholder approval, and the appointment of David Sheetrit as acting Chief Executive Officer, previously Chief Operating Officer of the Companythese employment/since January 2001 and Director in the Company since April 2003, under the same terms and conditions of his existing service agreement. These consulting agreements are terminable on relatively short notice. The loss of the services ofone or more of suchthese key personnel would have a material effect on our ability to manage the on-going operations, and to develop or commercialize our products and technologies.9REGULATION WeRegulation
Where applicable and if possible given the limited operations and funding of the Company, and by way of a merger or otherwise, we intend to
providesupply theCompany'sCompany’s products to customers located throughout the United States and in several foreign countries. As a result, the Company may be required to qualify to do business, or be subject to tax or other laws and regulations, in these jurisdictions even if it does not have a physical presence or employees or property in these jurisdictions. The application of these multiple sets of laws and regulations is uncertain, but we could find the Company is subject to regulation, taxation, enforcement or other liability in unexpected ways, which could materially adversely affect our business, financial condition and results of operations.CONTROL BY PRINCIPAL SHAREHOLDERSControl by Principal Shareholders
As of
July 10, 2001,May 31, 2003, our Executive Officers and Directors and principal shareholderswillbeneficially own an aggregate of89%63.9% of theCompany'sCompany’s OrdinaryShares.Shares on a fully diluted basis (based on vested option, not taking into account unallocated options and options granted but not vested). Such Shareholders, if voting together, would likely have sufficient voting power to elect a majority of the Board of Directors, exercise control of the business, policies and affairs of the Company and, in general, determine the outcome of any corporate transaction or other matter submitted to Shareholders for approval such as: (i) any amendment to theCompany'sCompany’s Articles of Association, (ii) any merger, consolidation, sale of all or substantially all of the assets of the Company and (iii) any privatization transaction, and in general prevent or cause a change in control of the Company, all of which may adversely affect the Company and its Shareholders. In addition, certain shareholders have the right to appoint members of the Board of Directors. Although certain shareholders are contractually obligated to vote for certain director nominees, there is no joint ownership of the shares held by such shareholders under Israeli law and such shareholders do not constitute a"controlling group"“controlling group” underIsraeliIsrael corporateorand securitieslaws. SEE "ITEMlaws , and thus are not bound to vote together as a group. See “Item 6A- DIRECTORS AND SENIOR MANAGEMENT"– Directors and"ITEM 7-MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS." RISKS RELATING TO SALE OF ELECTRICAL BUSINESS FAILURE TO COMPLETE THE ASSET SALE COULD NEGATIVELY IMPACT THE COMPANY'S STOCK PRICE, FUTURE BUSINESS AND OPERATIONS. IfSenior Management” and “Item 7-Major Shareholders and Related Party Transactions.”Risks Relating to Collection of Debt to the
Asset Sale is not completed for any reason,CompanyEffective March 2001 the Company
may be subjectsold to Idan Millenium Investments and Assets Ltd. (“IDAN’), anumbercompany under the control ofmaterial risks, includingDov Strikovsky, a major shareholder and former President, Chairman and CEO of thefollowing: o The priceCompany, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount ofour Ordinary Shares may decline to the extent that the current market pricean appraised value ofour Ordinary Shares reflects a market assumption that the Asset Sale will be completed; o We would have to assume liabilities for certain expenses, debts and losses$2,000,000, relating to theElectrical Businesselectrical operations, for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. During 2002 $71,000 weretransferredrepaid on the account of the sale consideration. See “Item 7B – Related Party Transactions.”In prior years the Company granted loans to Mr. Strikovsky in the amount of $1,228,000. The loan was linked to the
buyerIsraeli CPI and bore interest of 2% per annum and was repayable in eight annual installments each comprised of 1/8 of theElectrical Business effective asprincipal and the accrued interest thereon commencing December 2000. At December 31, 2001 the Company reassessed the collectibility ofMarchthe loan in accordance with provisions of SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. During 2002 $142,000 were repaid on the account of the loan.11
To secure his obligations under the various agreements Mr. Strikovsky has collateralized 300,000 shares that he owns of the Company. No other payments were made by Mr. Strikovsky subsequent to December 31,
2001;2002. The Company has initiated legal efforts aimed at collecting amounts due from Mr. Strikovskyand the companies under his control. See “Item 7.B. – Related Party Transactions – Indemnification by Significant Shareholder.”On May 9, 2001 an agreement (the “Bank Agreement”) was signed between the Company and
o Certain costs relatedBank Hapoalim, Ltd. (the “Bank”) with respect to theAsset Sale, such as legal, accounting and financial advisor fees, must be paid even if the transaction is not completed. If our Board of Directors determines to seek another buyer for the assets relatingCompany’s debt to theElectrical Business, we may be unableBank in the amount of $3,127,000 (the “Debt”). In accordance with the Bank Agreement, the Bank has agreed tofindrelease the Company from its obligation to repay the Debt and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, by May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt (the “Repaid Amount”) and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount.In addition, the Company has provided the Bank with a
buyer willingguarantee of up toenter into such a transaction$716,000, which decreases in the ratio of NIS 1:2 paid onterms at least comparableaccount of the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note 3b). To date Hod-Hasharon has not made any re-payment on account of the debt, and therefore the guarantee has not decreased. According to the termsofferedof the Bank Agreement, following November 30, 2002, the Bank is entitled to exercise the outstanding amount of the guarantee, and since the guarantee has not decreased, the Company decided to establish an allowance for the guarantee in full. Nevertheless, the Company and its representatives are conducting on-going negotiations with Hod-Hasharon for the repayment of the debt to the Bank, although at present the Company cannot assess what portion of the debt will be recovered, if any, (and the guarantee decreased accordingly) as a result of such negotiations, or any future action by the Company. See “Item 8A - Legal Proceedings”.Failure to collect the total amounts, or part of it, from Idan Millenium Investments and Assets Ltd, Mr. Dov
Strikovsky. 10RISKS RELATING TO MARNETICS' LOCATION IN ISRAEL RISK OF POLITICAL INSTABILITY.Strikovsky and the municipality of Hod Hasharon has a major negative impact on the Company’s future cash flow and liquidity.Risks Relating to Legal Proceedings
The Company and Mr. Strikovsky was named as a defendant in a claim for specific performance of an agreement entered into by the Company and the plaintiff in April 1999 (the “Agreement”) as well as damages as a result of a breach of the agreement. On July 2, 2001, due to the fact that no defense and/or reply was provided by the Company or Mr. Strikovksy, judgment was entered against the Company in the amount of $725,000. On February 7, 2002 the Company and Mr. Strikovsky filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed an appeal on the court decision which was accepted by the Supreme Court of the State New York with instructions to allow evidentiary hearing. The hearing was held on May 22, 2003 and the Company is awaiting the court’s decision. The plaintiff proposed to settle the suit for $250,000 and while the Company was willing to further negotiate a substantially lower amount, in light of the plaintiff’s position the Company decided to reject the proposal. In 2001 the Company has established an allowance in the amount of $750,000 to provide for its possible exposure. In light of recent developments the Company decreased the allowance by $500,000 to $250,000 which, in light of the judgment against the Company and the settlement offer proposed, represents a conservative estimate of the probable exposure. See “Item 8A (1) – Financial Information -Legal Proceedings.”
Failure to successfully eliminate the judgment and the lawsuit against the Company, in relatively short time, will have a major negative impact on the Company’s future cash flow and liquidity.
Risks Relating to Marnetics’ Location in Israel
Risk of Political Instability. Our principal offices and the research and development facilities of the Company are located in Israel and, thus, are directly affected by economic, political and military conditions in Israel. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and various Arab countries. In addition, Israel and companies doing business with Israel have been the subject of an economic boycott by the Arab countries since
Israel'sIsrael’s establishment. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority and various declarations have been signed in connection with efforts to resolve some of the aforementioned problems, no prediction can be made as to whether a full resolution of these problems will be achieved or as to the nature of any such resolution. Since October 2000, there has been a substantial deterioration in the relationship between Israel and the Palestinians, which has resulted in increased violence. Israel has experienced terrorist incidents within its borders, including in Judea, Samaria and Gaza. As a result, negotiations between Israel and representatives of the Palestinian Authority ceased. The future effect of this deterioration and violence on the Israeli economy and our operations is unclear. Ongoing violence between Israel andits Arab neighbors and thePalestinians havehada material adverseimpacteffect onthe Electrical Businessour business, financial conditions andour financial condition. However, there can be no assurance that continuationresults ofthese problems will not have such an impact in the future. HISTORY OF INFLATION.operations.12
History of Inflation. In the early to mid-1980s,
Israel'sIsrael’s economy was subject to a period of very high inflation. However, inflation was significantly reduced by the late 1980s due primarily to government intervention. The annual rate of inflation in Israel was10.6% for 1996,7.0% for 1997, 8.6% for 1998, 1.3% for 1999,and0% for2000.2000, 1.4 % for 2001, and from January 2002 to May 2002 was 4.9%. The dollar"carrying value"“carrying value” of certain assets and liabilities of the Company, which are denominated or payable in NIS, are influenced by the rate of inflation in Israel compared with that of the United States and prevailing NIS/dollar exchange rates. Increases in inflation in Israel could have an adverse impact on our results of operations if the rate of inflation increases without a corresponding devaluation of the NIS against the dollar.MILITARY RESERVE DUTY.Military Reserve Duty. Certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any
time.time and are obligated to perform, dependent on rank, up to 36 days of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. We have operated effectively under these requirements since ourinception. No predictioninception though no assessment can be made as to theeffectfull impact of such requirements onthe Company of any expansion of these obligations. INCOME TAXATION.our remaining workforceIncome Taxation. Non-residents of Israel are subject to income tax on certain income (including cash dividends) derived from sources in Israel. The convention between the State of Israel and the federal government of the United States with respect to taxes on income provides for a maximum tax of 25% on dividends paid to residents of the United States.
11ITEM
It May Be Difficult to Enforce a United States Judgment Against the Company, its Officers and Directors in this Annual Report or to Assert United States Securities’ Laws’ Claims in Israel or Serve Process on Our Officers.
We are incorporated in Israel. Most of our executive officers and directors named in this annual report are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States based upon the civil liabilities provisions of the United States Federal securities laws against us or any of those persons or to effect service of process upon these persons in the United States. Additionally, it may be difficult for individuals to enforce civil liabilities under United States federal securities laws in original actions instituted in Israel.
Item 4.
INFORMATION ON THE COMPANYInformation on the CompanyA. History and Development of the
Company.CompanyThe Company was formed in 1994 as Stav Electrical Systems (1994) Ltd., a private company established in the State of
Israel corporation.Israel. From 1994 through 2000, the Company was an electrical andcommunicationslighting contracting and engineering firm engaged in the installation and maintenance of infrastructure works located in the State of Israel.InDuring December 1998, the Company consummated an initial public offering pursuant to which the Company sold 800,000 ordinary shares (including 100,000 ordinary shares sold by Mr. Dov Strikovsky, a former director and officer of the Company) for net proceeds of approximately $3.6 million.
On June 1, 2000 a share exchange agreement was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company’s shareholders on December 20, 2000, whereby the Company completed a combination transaction with Marnetics
Ltd.whereby the Company changed its name to Marnetics Broadband Technologies Ltd. The Company acquired all of the outstanding share capital of Marnetics,Ltd.,an Israeli company formed in 1998, andMarnetics Ltd.'sMarnetics’ shareholders receivedsecuritiesOrdinary Shares and options representing approximately 75% of theCompany'sCompany’s outstandingshares.Ordinary Shares and options on a fully-diluted basis. MarneticsLtd.became awholly-ownedwholly owned subsidiary of Marnetics Broadband Technologies Ltd. as a result of this transaction. The Company issued2,761,2364,993,048 Ordinary Shares and 1,761,236 options (including 308,300 newly unvested options to employees of Marnetics) in connection with thetransaction.transaction, and decided to reserve for the Employee Stock Option Plan 1,000,000 options. As a result of this transaction, the Company changed its focus from electrical contracting to the development and marketing of broadband Internet fortification solutions, designed to enhance performance and infrastructure utilization in the broadband Internet environment. In June 2001, due to changes in the broadband Internet market, the Company subsequently changed its technological focus as described in subsection B below.13
In February 2000, Marnetics issued 130,719 ordinary shares of NIS 0.01 par value to ECI Telecom Ltd. for $2,000,000. In October 2000 Marnetics reached an agreement with a group of new investors (the “Investors”). In accordance with the agreement, Marnetics issued to the Investors 221,200 ordinary shares in consideration of $5,076,000.
Effective March 2001, the Company sold to Idan Millenium Investments and Assets Ltd. (“IDAN’), a company under the control of Dov Strikovsky, a major shareholder and President, Chairman and former CEO of the Company, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of an appraised value of $2,000,000, relating to the electrical operations, for a consideration of $597,000. See “Item 7B – Related Party Transactions”.
During 2001, the Company changed the direction of its technology from its core business of developing and marketing broadband Internet fortification solutions to the development and marketing of network capacity enhancement and network information analysis solutions for IP networks or the Network Business.
During December 2001 the Company nominated Mr. Menachem Reinschmidt to the position of CEO of the Company.
During December 2002, the Company nominated Mr. Menachem Reinschmidt to the position of Chairman of the Board of the Company and elected new directors. At the end of June 2003, David Sheetrit, Director in the Company since April 2003 and Chief Operating Officer since January 2001, became Acting Chief Executive Officer of the Company. See “Item 6 -Directors, Senior Managers and Employees.”
As of April 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd.
Our principal executive offices are located at 10
HayetziraHayezira St.,Ra'ananaRa’anana 43000 Israel, and our telephone number is ++972-9-761-6868.B. Business Overview
The
Company'sCompany’s operationsconsistduring 2002 consisted oftwo lines of business: (1) our Internet Business, our currentthe core business of developing and marketingInternet performancenetwork capacity enhancement and network information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd. During 2002 the Company also dealt with some legal issues and collection of debt relating to the Electrical Business, which was sold during 2001. See“Item 8B – Significant Changes.”As of April 26, 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development The remaining employees are in the area of administration and will be left for the next few months, possibly to the end of the year 2003. The remaining employees will concentrate on selling the Marnetics
Subsidiary, and (2) our Electrical Business, our historical business of electrical and communications contracting and engineering business, which we propose to sell effective March 31, 2001, subject to shareholders' approval at our Annualor its technology.14
NETWORK BUSINESS
General
Meeting scheduled to be held in third quarter, 2001. See "ITEM 8B - SIGNIFICANT CHANGES." INTERNET BUSINESS GENERALThe
Company'sCompany’s operating subsidiary, Marnetics Ltd.,iswas in theproduct development stage. Marnetics Ltd. had been developingstage of commercialization of its productsintended to provide performance enhancement solutions for a bottleneck that may occur when broadband access meetsdeveloped between thecongested public Internet, thereby decreasing the speed and accuracy of data throughput.period 2001 through (or until) June 2003. In early 2001, the global telecommunications markets experienced a major decline. As a result of the downturn, the deployment of broadband Internet access slowed dramatically, putting in jeopardyMarnetics Ltd.'sMarnetics’ business plan, which primarily targeted the broadband market. As a result thereof, Marnetics Ltd. shifted its focus and developed a platform of products which it called thecurrent business climate,Prospera™ family of products, which are intended to provide network capacity enhancement and analysis solutions for bottlenecks that may occur especially when local area networks (“LAN”) meet theCompany is considering leveraging its technological assets, which were developed forcongested wide area network (WAN) (the WAN Access Link), thereby decreasing theBITmax(TM) 12product line, to address current market opportunitiesusability andnear-term trends, including data over cellularproductivity of revenue generating mission critical applications.Industry Background and
Enterprise solutions.Market OpportunityCurrent priorities in
Internet communication in these areasIP networks management are focusing on better utilization of existing infrastructure, improvement in performance and providingvalue-added services whicha quality of service level that can generaterevenues.revenues or reduce costs. TheCompany'sCompany’s objective is to utilize its existing technology and integrate it into asolution whichplatform of solutions that addresses these current market priorities.TECHNICAL DESCRIPTION OF WHAT WE DO Marnetics Ltd. does not yet have any commercial products.Enterprises expect mission-critical applications to run quickly and reliably, with predefined performance. Many applications running simultaneously can often cause congestion within the network especially in the routers, leading to variations in network availability that range from slow performance to denial of service. In such instances enterprises require that revenue generating mission-critical applications be allowed to function without delays created by less significant traffic and bandwidth-hogging Internet applications such as heavy downloads, music files, streaming media, and other non-critical applications.
The
Company is evaluatingadvent of thedevelopmentInternet and the explosive growth ofa new product line called Prospera, which will employ Marnetics' existing BITmax(TM) core technologytime-sensitive and revenue generating mission-critical applications such as ERP, CRM, Databases, etc., as well as Intranets, Extranets and the Web, are creating intense strain on IP networks. This is particularly prevalent at the interface links between the very fast 100Mbps-1Gbps Ethernet LAN and the much slower channels of frame relay, ATM, leased lines and VPN’s of the WAN (usually holds anewbandwidth of up to 2Mbps).Heavily congested networks cause a deterioration in the end-user experience, with peak traffic conditions and the unbalanced use of resources creating a snowball effect, resulting in compromised mission-critical application availability and causing events such as insufficient response time, server slowdown, bottlenecks and poor overall network performance.
Whilst the network and bandwidth management
technologymechanism are of importance, it should be recognized that a network’s architecture is designed to serve applications and users and not to deal with bandwidth-hungry applications, peak-time congestion packet losses or other adverse symptoms created by the unbalanced use of its resources.When considering the problem of how to improve mission-critical application performance it is necessary to concentrate on network congestion and those resources that have the greatest impact on the network when under intense strain or failure. The busy interface between the WAN and LAN affects network capacity, performance and availability more than any other point on the network, as it is through this point that those bandwidth-hungry, non-critical applications impact network resources. At this interface, there are typically frequent congestion and capacity problems, as heavy downloads and surfing congest routers, saturate links, exhaust buffers and flood servers - compromising both the health and availability of the network and those applications running over it.
To adequately address this, the objective of any solution should not be just to improve the overall performance of the network, but to fortify and accelerate those mission critical applications that require precedence over resource-consuming applications while maintaining acceptable economical cost effective ratios.
Existing Alternative Solutions
Because of the congested WAN access links, enterprises tend to add infrastructure until over-provisioning the network. This requires expensive upgrades to LAN and WAN infrastructure and associated network equipment. Moreover, incremental increases in infrastructure only temporarily alleviate network congestion, leaving the following problems unresolved: over-provisioning results in under-utilization of the network during non-peak periods; deployment costs and increased recurring service charges become expensive, especially for networks with many remote sites and for international networks; and there is no application performance visibility to enable effective capacity planning.
15
There are several distinctly different types of solutions currently
under development. Prospera is intendedavailable that attempt to address application and network performance issues, such as:Caching - Web Caching is the act of storing copies of Web pages on a ‘local’ system. If the same pages are requested at a later time, and the cached copy is still valid, there is no need to contact the origin server again. These cache hits can reduce latencies and network bandwidth, although there is no congestion handling or control of oversubscription as caching is designed mainly to reduce link traffic. The main drawback, however, is that most of the caching devices are HTTP oriented by design and do not support other significant high volume applications such as FTP and email. In addition to that, the cache algorithm is based on statistical algorithm, therefore limited to the actual “hit ratio” for every type of traffic. The efficiency for software downloading, music files, video streaming and cryptic files would be very limited.
Bandwidth Management (also called Quality of Service Solutions) - Bandwidth management is, in essence, discrimination between session and user types to assist in delivering higher quality of service for specific users or applications. Although this can provide limited relief to congested networks the initial implementation is highly problematic, requiring labor-intensive tailoring to exact individual network specifications. Ongoing maintenance is similarly cumbersome as this type of solution is highly-sensitive to changes on the network, requiring re-configuration and re-building whenever network modifications or upgrades are carried out.
Compression/Decompression – Data compression was very effective in the past, specifically with certain types of files, such as text files. However, data compression has lost it’s value in today’s corporate environment, as it is not effective when it comes to “random” data such as the documents used by enterprises today – wording files, presentations, spreadsheets, images, and zip files.When porting data compression to real-life packet-based networks, vendors, as well as users, have found that data compression is less effective. The reason behind this is that corporate networks and Internet technologies, usually carry pre-compressed material, and packets usually carry very little resemblance to prior packets. Implementing of compression products requires two sides installation, thus complicating the installation process. The cost of such solution would be very high, since installation would have to be not only in the data center but also in the remote branches.
Purchasing Additional Bandwidth - - Until recently certain network slow-down symptoms have been interpreted as an indication of bandwidth shortage, resulting in additional, extremely costly, WAN trunk bandwidth being purchased as an appropriate solution to the problem. Although increasing bandwidth can provide marginal relief to a network, accumulated experience has shown that additional bandwidth does not fundamentally change the situation as increasing bandwidth only serves to allow aggressive users/applications to disproportionately consume the additional resources, compounding both the problem and the relative costs involved.
Our Products and Services – Prospera™ family of products
Prospera™, Marnetics’ product line, is an innovative Capacity Enhancement Platform, which improves bandwidth utilization and enables more subscribers to be served simultaneously over the Wide Area Network. Prospera™ addresses one of the fundamental problems of
communicationscommunication networks: capacity and scalability, especially in high-volume traffic situations. Prospera™ solves the problem of mission-critical application performance on congested IP networks by fortifying and accelerating applications such as ERP and CRM in a fully adaptive and automatic manner. The product is intended to better manage over-subscription situations in Internet and Intranet networks. As a result, users of Prospera™ save money by delaying additional bandwidth purchases, while improving the quality of service level and customer satisfaction.As of today, the Prospera™ family of products comprises two main products:
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The Prospera MegaLink™ (a software solution) - A Network Capacity Enhancement solution aimed towards service providers and enterprises. It introduces a new, comprehensive approach to IP network capacity challenges, mission critical application protection and maximizes network infrastructure utilization by increasing the effective capacity, enabling enterprises and Service Providers to provide better service to their customers at lower costs. Complimenting the Prospera MegaLink™, is the Prospera CisMate (a hardware solution), a router companion device specifically designed for resolving problematic network congestion situations and optimizing the actions of the Cisco router in the network while enabling mission critical data applications.
ADSL FreeFlow (a limited functionality software solution), aims to solve the problem of a very narrow upload link in ADSL lines used especially in SOHO (small office, home office) by allowing critical application such as HTTP to send acknowledgements to remote servers and as a result continue the sessions.
The Prospera Expert™ - A Network Information System that brings a new approach to network performance and capacity monitoring and analysis for service providers and enterprises. The commercial version of Prospera Expert™ (V2.1) is complete.
Further, Marnetics has launched an ISP Rating tool through which consumers will be able to compare the performance of the various ISPs operating in Israel and also serve as a marketing/reference site for the capabilities of the Prospera Expert™.
Prospera MegaLink™
Marnetics has developed a cost-effective, enterprise-class application-acceleration and network capacity enhancement technology based on the patent pending DSDQ (Discrete State Driven Queuing) technology that offers a new and comprehensive approach to the challenges of saturated IP Networks and the performance of mission-critical applications.
Aimed at enterprises, Internet related service providers and cellular carriers of all types, Prospera MegaLink™ is a technology that protects both the user and mission-critical application in peak-load times, dynamically adapting to the various network conditions to enable mission-critical applications to run significantly faster, smoother, and with greater availability.
Through protecting key network resources in over-subscription situations, Prospera MegaLink™ delivers streamlined capacity and performance distribution that allows more users and applications to simultaneously share network resources as well as improving the overall health and stability of the network. It is a scalable, software-based solution that reflects as a standard network device, making it easy to install, manage and upgrade configurations, as well as system management and traffic analysis functionality.
Market Positioning
To the best knowledge of the Company, Marnetics’ technology stands apart from other solutions in that it specifically addresses the problem of performance on congested IP networks. It uniquely fortifies and accelerates those specific applications that are vital to the smooth running of the enterprise’s operations by increasing the number of concurrent sessions. In fact, in instances where mission-critical applications, such as CRM, are an inherent part of the enterprises core business, Marnetics solution can provide a significant performance advantage over the competition as well as greater user satisfaction and operational profitability.
The Technology
Prospera MegaLink™ is built on a patent-pending, state-of-the-art and intelligent traffic and application-optimization engine, DSDQ that actively monitors and manages resources and applications on a per-session basis. DSDQ dynamically adapts to different traffic patterns (states) and end-to-end session conditions, enabling streamlined performance and availability of mission-critical applications and network resources.
Designed to effectively handle different dynamic mixtures of traffic, DSDQ offers real-time session optimization, relief and recovery from extreme congestion situations, fast recovery from packet-loss and dynamic balancing between sessions, bandwidth-consumption and other network events that influence the utilization and efficiency of mission-critical applications and network resources. Prospera MegaLink™ is independent of upper layer protocols and physical trunk line infrastructure and supports multi link and multi channel environments, within the WAN topology, from a single box. Installed at the site of the network data center (typically housed at the enterprise headquarters) it supports all trunks from this focal point to the other locations/remote branches.
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Mission-critical application protection and capacity enhancement are achieved through the employment of Prospera MegaLink™. Deploying Prospera MegaLink™ on the network assures the smooth operation and streamlining of ERP and CRM applications, even in peak time situations, by applying dynamic bandwidth balancing between all active connections. Once installed, Prospera MegaLink™ allows more users to share the congested WAN access links through its traffic algorithm optimization. In addition, mission critical applications are fortified and protected from performance degradation, improving their availability, and response time.
The Prospera platform is based on Microsoft operating systems such as Windows 2000 or Windows XP running on Intel CPU.
In addition, Prospera
may offerMegaLink™ and Prospera Expert™ are software-based and scalable to medium traffic volume, up to 100 MBPS.CisMate
CisMate is positioned to monitor and optimize the actions of the Cisco router in the network. Routers are configured to optimize their own operation to the detriment of the rest of the network, even increasing and further exacerbating packet flow problems. Marnetics advocates focusing on integrating a bottleneck-centered solution that is directly aligned, integrated and compatible with the functioning of the router. This enhanced router would organize the packet flow to minimize the overall effects of the entire network when dropping packets in times of congestion.
Network stability depends directly on good routers. However, routers automatically take destabilizing measures to reduce rapidly evolving queue-caused latencies: “Excess” packets are dropped from the queue in order to alleviate this latency upsurge. Packet dropping is detrimental to network mission critical applications (MCAs), the sender resends the “lost” packet and decelerates its transmission pace (in order to avoid more packet losses). It considerably impacts the user’s perceived performance. The “Snow Ball” effect caused by the self-slow-down mechanism in the TCP protocol creates the feeling that “something is stuck in the system”. For corporate MCA’s, packet dropping is very serious. Poor performance (e.g. ERP, CRM, etc.) is translated immediately to productivity problems, financial damages, lost customers, and so on.
The CisMate is a LAN device directly attached to the WAN router by installing both devices on the same Ethernet switch. Using DSDQ, CisMate controls the entire LAN-to-WAN transmitted packet queue. Under normal traffic conditions, the CisMate remains unobtrusive while the data is forwarded directly to the router. However, when the router begins congesting, indicated by increased packets awaiting router service, the DSDQ technology commences.
DSDQ incorporates several vital proprietary mechanisms which specifically address strong traffic bursts that saturate the router. Its main goals include preventing packet-dropping and router-latency minimization. Under site testing, the packet loss ratio under large volumes of traffic decreased from a previously high 5% - 20% range to less than 0.5% with the newly installed CisMate.
The implications of this steep reduction are considerable. A significant percentage of saturated networks packet dropping is eliminated and congested routers are protected from severe performance degradation, maintaining much better service level toward the network users. Session slow-downs will hover around 5% instead of the previous 80% level without the CisMate, equal to a speed increase of over 500%.
CisMate protects the WAN routers and the whole network from severe service level deterioration under strong traffic stress. Also, MCAs will endure the fewest possible problems during network’s most difficult moments, like downtimes, severe slow downs, thus, minimizing damage to the enterprise’s productivity.
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Prospera Expert™
Prospera Expert™ enables enterprises, ISP’s, and cellular operators to obtain a detailed overall panoramic picture of their traffic over Wide Area Network (WAN), to help manage their network resources effectively. Users receive comprehensive traffic reports both in real time and in an historical mode by a simple click and view operation in an executive format. Prospera Expert™ is specially designed to operate over a large variety of different networks, independent of physical infrastructure and can be deployed easily and quickly at central locations on the network.
Prospera Expert™ is an advanced Network Information Systems tool. Traditional network management systems focus on monitoring and troubleshooting. Prospera Expert™ shifts the center of gravity to issues such as network economy, service level analysis, congestion analysis and future capacity planning. It complements the Prospera MegaLink™ product that maximizes network infrastructure utilization by increasing the effective capacity and protection of mission critical applications.
Prospera Expert™ was created to meet the need of executives, IT (“Information Technology”) managers and network administrators for a high level tool that focuses on performance provided to the users or subscribers. It also provides a profile of network utilization through a large variety of predefined reports, as well as customized, user defined queries, which are accessible through any standard browser by multiple users. Most important, Prospera Expert™ provides a new
serieslevel ofvalue-added features, like differentiated services, billing interface,network insight without the need to understand the underlying technologies or protocols.Prospera Expert™ software/hardware sales would be a result from purchases by clients either directly or through distributors and
trafficinstalled on the network. Staff of the client’s IT department operate the system and use it either with or without the further involvement of Marnetics staff or local affiliates.The commercial version of Prospera Expert™ (V2.1) is intended to be completed by June 2003.
NetQA
During 2002, Marnetics launched a new service to be offered to its customers that was the main sales revenue source for the Company in years 2002 and 2003. The service aims the needs of enterprises to better design their network for capacity and performances optimization. Marnetics uses its expertise in IP networks combined with its advanced Network Information Systems tool, the Prospera Expert™, to perform a comprehensive network performance analysis. The outcome of the analysis is in-depth reports and
monitoring. Management hopes that Prosperarecommendations to the IT managers and network managers how to better utilize their enterprise network infrastructure and how to plan ahead their network infrastructure. Marnetics intends to implement the service using its own resources or, in some other cases, together with its qualified distributors.ISP Rating
The ISP Rating concept is the setting up of a web site through which consumers will be able to compare the performance of the various ISPs operating in their local market. By providing this unique service, the site is expected to become an important hub.
ISP Rating is based on the deployment of Marnetics’ technologies for the Israeli market. For its first deployment in Israel, ISP Rating is seen as a marketing tool which can demonstrate the abilities of the Expert in a public area.
Customers and Distributors
The Prospera™ family of products will offer increased functionality while reducing costs and improving
performance. The Company intends that Prospera will combine capacity enhancement, accelerationperformance anddifferentiated services in one package, thereby increasing the utilizationtotal Cost ofnetworks' resources and expanding effective bandwidth. The Company's Management anticipates that the developmentNetwork Ownership. Prospera™ family ofthe product will present opportunities for OEM agreements, as well as modular solutions thatproducts mayprovide an additional source of revenues from an install base, once it is established, although there can be no assurances that it will do so. CUSTOMERS Prospera is likely tobe adaptedto fourby three main marketsegments, including Cellular Carriers, Enterprises,segments: enterprises, InternetService Providersrelated service providers andWeb Hosts.cellular carriers. These target audiences will be reached either through direct contact or, throughvarious strategic partnershipsqualified distributors or, marketing channels, such as Value-AddedResellers.Resellers or System Integrators. The Companyplans to focushas focused its initial marketing efforts in the Middle East, United States, andEurope.the Far East.19
In early July 2001, Marnetics signed an OEM agreement with Speedwise Technologies Ltd., a company in which
theMarneticsSubsidiary hasLtd. owns a17.25% holding. Speedwise is engaged in the design, development, distribution and sale14.73% interest as ofproducts used in the Internet and mobile data industries. The OEM agreement willDecember 31, 2002, to enable Marnetics to sell its products for cellular customers (which are currently in development), whether integrated intoSpeedwise'sSpeedwise’s products or as stand-alone products, toSpeedwise's installSpeedwise’s installed base of approximately7040 cellular companies worldwide and a much broader network of contacts. Pursuant to this agreement, Speedwisewillwas to pay Marnetics 30% of the income generated by the sale and maintenance of the Marnetics products. This agreementhashad aone yearone-year term with automaticrenewal unlessrenewal. As of November 1, 2001, the OEM agreement was cancelled between the parties.In March 2002, Marnetics signed a
party gives one-months' prior written noticedistribution agreement with Magalcom Communications & Computers Ltd. to become a non–exclusive distributor oftermination. 13COMPETITION OurMarnetics products in Israel. The agreement has terminated during June 2003.In April 2002, Marnetics signed a distribution agreement with TNN Networks Ltd. to become a non–exclusive distributor of Marnetics products in Israel. The agreement has terminated during June 2003.
In October/November 2002, Marnetics installed its first commercial site with Singapore’s National Cancer Center (NCC) through the deployment of the Marnetics’ Prospera™ product line, the MegaLink and the Expert, to improve performance and visibility across the networks for their oncology department. NCC operates a distributed Intranet network, and has benchmarked Marnetics with other, leading bandwidth management
believes that currently,solutions. Marnetics Prospera MegaLink solution was selected primarily due to its success in fortifying the performance of mission-critical real-time applications, even when the network is heavily congested. NCC has also installed the Prospera™ Expert to conduct ongoing analysis and reporting on the traffic flow across the network.During 2002, Marnetics completed tests of its products and started to sell its products and services mainly in Israel.
During 2003, the Company has
few, if any, direct competitors forceased marketing efforts outside of Israel and was concentrating itsnew Internet performance enhancement focus, which uniquely combines capacity enhancementefforts inside Israel as well as attempted to find distributors in the United States through the agreement withacceleration and differentiated services. While various technologies exist which address each of these solutions separately, to date, there is no similar product based on a similar technology like that developed by Marnetics to increase capacity for data over cellular. In the future, competing products may be developed and marketed by numerous well-established, well-financed companies, including traffic management vendors, network optimization solutions developers, cellular application providers and cellular vendors. In addition, our products will compete indirectly with other Internet performance enhancement solutions, although we believe that our new product line will enhance rather than conflict with these products. PRODUCT ROLLOUT SCHEDULE The exact components of Prospera to be commercialized will be examined and determined by the Company by year-end 2001. The timetable for the various stages of development and commercialization is expected to be finalized and announced within this time frame. The Company's current estimation, provided the successful conclusion of its research and development, is that it will be able to generate sales of Prospera by the end of the third quarter in 2002. The Marnetics Subsidiary has sufficient cash to finance the anticipated costs of development and commercialization activities through year-end 2002. The decision to modify the Company's technology road map following the broadband Internet market decline will accordingly delay the commercialization of the Company's products and services from what was previously reported by the Company. RESEARCH AND DEVELOPMENT Our current research and development plan is aimed at leveraging the Company's current technology and developing the Prospera product and related products. GROWTH STRATEGY - ACQUISITIONS As part of its growth strategy, the Company seeks to acquire other businesses. The Company is seeking acquisition candidates in selected markets and from time to time engages in exploratory discussions with potential acquisition candidates, although it has not entered into any definitive agreement to do so. There can be no assurance, however, that the Company will be able to identify and acquire targeted businesses or obtain financing for acquisitions on satisfactory terms. Furthermore, there can be no assurance that competition for acquisition candidates will not escalate, thereby increasing the costs of making acquisitions or making suitable acquisitions unattainable. 14LICENSING ARRANGEMENTSRevenueTraction, LLC.Licensing Arrangements
In April 2001, Marnetics Ltd. entered into a
Software License Agreementsoftware license agreement with Speedwise Technologies Ltd., a company in which Marnetics Ltd.holdsowns a17.25% interest.14.73% interest as of December 31, 2002. Under thisLicense Agreement,license agreement, Marnetics granted Speedwise a non-exclusive license to use certain programs and software products owned by Marnetics which Speedwise is using to develop other software products. Marnetics is entitled to receive a fee based on the sale of this derivative software product of either (a) US $25 perproductconcurrent user if sold bundled with other Speedwise products, or (b) 15% of net revenues from the product. The agreement has a perpetual term. During October 2002 Speedwise sold most of its assets and IP. and the Company does not expect significant revenues from this agreement, if any. See “Item 7. B. - Related Party Transactions.”Competition
We compete in a new, rapidly evolving and highly competitive sector. We expect competition to persist and intensify in the future from a number of different sources. We compete with products of Packeteer, Allot, Expand, Peribit, Cisco, Check Point and several small private companies that sell products that utilize competing technologies to provide bandwidth management and network monitoring systems. In addition, our products and technology compete for information technology budgets (CapEx) allocations with services that offer network analysis offered by IT service providers. Lastly, we face indirect competition from companies that offer enterprises and service providers’ increased bandwidth and infrastructure upgrades that increase the capacity of their networks, and thereby may lessen or delay the need for capacity enhancement.
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We believe the principal competitive factors in the capacity enhancement solutions market are:
• expertise and in-depth knowledge of IP networks structure, networks traffic and infrastructure behavior;
• timeliness of new product introductions;
• ability to integrate easily into the existing network infrastructure;
• ability to ensure end-user productivity and mission critical application performance;
• compatibility with industry standards;
• products that decrease latency and packet loss;
• products that demonstrate short Return on Investment (ROI);
• size and scope of distribution network;
• brand name; and
• access to customers and size of installed customer base.
While various such solutions and technologies exist which address the network management problem, there is, to the best of our knowledge, no similar product based on a similar technology like that developed by Marnetics to increase capacity of traffic flow over IP networks.
In the future, competing products may be developed and marketed by numerous well-established, well-financed companies, including traffic management vendors, network optimization solutions developers, cellular application providers and cellular vendors. In addition, our products presently compete indirectly with other network capacity enhancement solutions and other queuing schemes, although we believe that our product line enhances rather than conflict with these products.
Research and Development
Our research and development plan was aimed at leveraging the Marnetic’s current technology and developing the Prospera™ family of product and related products.
Marnetics has sufficient cash to finance the anticipated costs of development activities of its product line until June 2003.
In May 2002, Marnetics submitted an application to obtain research and development grant in the sum of $230,000 from the Office of the Chief Scientist, of the Ministry of Industry and Trade, of the State of Israel (“OCS”) which was approved in November 2002. To date Marnetics has received a grant of $185,000. The grant is based on research and development expenses that Marnetics had actually expensed until May 2003. There can be no certainty that the remaining funding will be received by Marnetics.
As mentioned earlier, Prospera MegaLink™was originally Marnetics’ intended flag ship product. However, market feedback, especially the difficulties in selling software to operate on an existing network, has resulted in a shift in strategy towards:
a) Developing the NetQA methodology, including the development of the Prospera Expert Pro, both supporting the overall revenue generating objectives.
b) Migration of the Prospera software to positioning as an appliance (hardware) with the CisMate to be clearly positioned to boost router performance.
c) The development of the ADSL FreeFlow which provides capacity enhancement functionality to ADSL connected businesses.
As a result, Marnetics intends to position its products as both actively and passively protecting the network, rather than simply improving its performance.
The commercial version of Prospera Expert™ (V2.1) is intended to be completed in June 2003.
Prototype of CisMate has been introduced allowing a relatively fast release of the product during Q1 of 2003.
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During April/May 2003, the Marnetics laid off the research and development employees including the VP R&D, Mr. Newman who will be leaving the Company and Marnetics in June 2003 and will possibly be available for consultation dependent on negotiations between the Company and him. The Company plans to further reduce its R&D staff during the Q3 2003. Such actions will have an adverse effect on the business and operations of Company and Marnetics.
Trade Show
Marnetics exhibited at CommunicAsia 2002, Asia’s premier international information and communications technology forum that took place June 17-21, 2002 in Singapore, its Prospera™ line of products. The Company chose to introduce its products at CommunicAsia 2002 because it is the largest INFOCOMM show in Asia. By exhibiting alongside other international technology leaders who showcase their products to business professionals looking for the latest IT products and services, the Company makes potential distributors aware of its products.
Current Strategy – Mergers and Acquisitions, and Selling of Marnetics Technology
As part of its survival strategy, the Company seeks to merge with other businesses and/or sell Marnetics technology. The Company has exploratory discussions with hi-tech companies, but has not entered into any definitive agreements. Discussions with one of our previous distributors are at an advanced stage, but there can be no assurance, however, that the Company will be able to reach agreement on satisfactory terms.
Marnetics needs additional cash resources to (i) accelerate the pace of product development and bring forward the dates of product launch, (ii) increase investment in marketing and business development activities, including the appointment of distributors, progress with strategic partners and general corporate promotion such as appearance at exhibitions and conferences, and (iii) consider M&A activities, leveraging the fact that it is a traded public company with tax shelter.
Further, Marnetics is limited when planning the possible sale of its technology, based on the terms established in the agreement with the Office of the Chief Scientist of Israel and under applicable law, on the condition that Marnetics may not sell its intellectual property to a non-Israeli entity.
Marketing, Promotional, and Consultants
In January 2002, Marnetics entered into promotional agreement with Karif Communications Ltd. to provide to Marnetics public relations services, subject to extension during June, 2002. The agreement finished May 2003.
In February 2002, Marnetics entered into a services agreement with Expenion LLC, to provide to Marnetics, primarily in the United States but not limited to such, on a non-exclusive basis, business development services for the sale of its products.
In February 2002, the Company entered into a non-exclusive finder’s agreement with Gentech Holdings SA and Opus Holdings SA to assist in raising equity investment during year 2002 for fees and securities.
In March 2002, Marnetics entered into a services agreement with Levi Zelkind, to provide to Marnetics in the Territories of Russia, Kazakhstan, Poland, Yugoslavia, Slovenia, Czech Republic, and Greece, on a non-exclusive basis, business development services for the sale of its products. The agreement has come to an end.
In March 2002, Marnetics signed a distribution agreement with Magalcom Communications & Computers Ltd. to become a non–exclusive distributor of Marnetics products in Israel. In April 2002, Marnetics signed a distribution agreement with TNN Networks Ltd. to become a non–exclusive distributor of Marnetics products in Israel. The Company terminated these agreements in June 2003 and as such the Company and remains without any local distributors in the Israeli market.
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In April 2002, Marnetics entered into a services agreement with Menachem Sharron to provide to Marnetics in the Territory of Southern Africa, on a non-exclusive basis, business development services for the sale of its products.
In June 2002, the Company entered into a letter of intent with PortfolioPR, a New York based company, for public relation and investor relations services. The Agreement came to an end in August 2002.
On December 15, 2002, the Company entered into a non-exclusive services agreement with RevenueTraction, LLC to identify potential distributors, business opportunities, investment prospects and other financing for the Company and/or any affiliates of the Company. The Agreement came to an end in May 2003.
On December 16, 2002, the Company entered into a non-exclusive services agreement with Yitzhak Rosenbaum, to engage in services to assist the Company in approaching prospects for the purpose of obtaining funding for the Company or its affiliates by means of investment, merger, acquisition or sale of asset transactions, as well as for the establishment of business relationships for the marketing of the Company’s products.
On February 3, 2003, Marnetics announced the launch of an ISP rating site that utilizes the advanced technology provided by the ProsperaTM Expert. The site tests five major Israeli ADSL ISP’s service levels based on five parameters that best describe the overall service and its relative importance to the ADSL users. The site operates automatically, providing information five times daily to the users (current and potential ADSL users). The information is then accumulated and presented on a weekly and monthly basis along with colorful graphics. Marnetics believes its the first of the kind in the ADSL market.
Distribution Network
Potential for Marnetics’ products exist throughout the world, wherever IP networks are in operation. However, the process to research the local market, select and appoint suitable distributors and provide the necessary technical support is relatively expensive. Consequently, Marnetics is focusing on selected major markets which likely justify that investment.
Prospera products were marketed via two parallel routes:
• Direct – directly between Marnetics and customers.
• Indirect – through a geographically spread network of distributors.
In the local market, the initial focus was to build a customer base (primarily larger enterprises). Successful take up by these customers should act as reference sites, generating interest from other potential direct customers and potential distributors.
Distributors will supply products and offer services (installation, maintenance and Net QA). Their staff will receive full training, so that they will be able to provide the same quality of service as provided by Marnetics itself.
The preferred profile of distributors is systems integrators with existing customer base, providing network maintenance services.
CisMate will be distributed by suppliers of network hardware, especially those companies covering LAN products.
In the first quarter of 2003, Marnetics had carried out a highly active public relations activity aimed at raising and maintaining interest in the Company from the investor community and firmly placing Marnetics on the industry radar screen in terms of attracting interest from potential customers and business partners. So far, the response has been limited which can have a possible adverse effect on the Company.
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Events that took place during the first half of year 2003 were:
First Half - OCS Grant 2003 - Appointment of a chief technical manager - Revenue Traction Agreement - Launching of the ISP Rating website. - Customer installations – Orbotech, NCC Singapore, Kibbutz Erez, Magan David Adom, Negev Ceramics, Iscor and more. - Handling of Legal Issues Strategic Partnerships
Following decisions reached at the AGM in November 2002, the Company has resolved to pursue alliances and partnerships with leading companies in the Network arena.
The Marnetics technologies have been developed with the ability to easily integrate and operate alongside other network products. As a result, there are opportunities to establish OEM agreements with developers/suppliers of network products or to sell/license technologies to leading industry players.
The opportunity of strategic cooperation has an important effect on product definition and design. As product rollout continued during Q1 and Q2 of 2003, the efforts to increase market knowledge/feedback and approach potential partners was intensified especially with the assistance of RevenueTraction, LLC. This agreement has been terminated on the response has been has been limited which can have a possible adverse effect on the Company.
ELECTRICAL BUSINESS
GENERALPrior to December 2000, the
Company'sCompany’s sole business was as an electrical andcommunicationslighting contracting and engineering firm engaged in the installation and maintenance of infrastructure works located in the State of Israel. The Electrical Business has been characterized by intense competition and pricing pressures over the past several years. The results of operation of the Electrical Business have also been materially adversely affected by the economic slowdown and political instability in Israel. As a result and in order to enable the Company to focus on theInternetNetwork Business, the Companyshall, subject to shareholder approval, sellsold the Electrical Business, effective as of March 31, 2001. See"ITEM“Item 8B- SIGNIFICANT CHANGES." CUSTOMERS/CLIENTS The Company's Electrical Business was primarily directed toward two categories of customers: (i) government entities, including municipalities, requiring electrical maintenance services and whose projects include site development, highways, transport projects, public buildings, and other public works; and (ii) private organizations, particularly, industrial, and commercial real estate developers. MARKETING AND SALES The Company's marketing and sales efforts for the Electrical Business were conducted by the Company's management, engineering staff, and technical employees. A substantial portion of the Company's marketing was accomplished by customer referrals and recommendations. The Company had developed relationships with major contractors in central Israel which serve as a principal source of business for the Company. SUPPLIERS Materials required for the Company's Electrical Business were generally purchased on an as-needed basis in accordance with orders received and work in process. Normally, the Company did not maintain an inventory of such materials, except for certain items 15.” necessary to comply with its municipal maintenance obligations and certain items which either have long order lead times or which are subject to shortages. Materials returned from various work sites were also held in inventory. A portion of the materials purchased by the Company for its Electrical Business were produced abroad and purchased by local Israeli companies, which in turn were sold to the Company. Consequently, the Company was be affected by fluctuations in the prices of materials that are produced outside of Israel. All of the supplies required for the Company's work were available from a number of sources at competitive prices, and the Company is not dependent on any one supplier for its components. This allowed the Company to seek better prices and favorable credit terms. The Company researched the market with respect to more expensive materials and selected suppliers which offered these items at the most favorable terms to the Company. COMPETITION The Company primarily competed for two types of Electrical Business contracts: (i) contracts for a term of years for the installation and maintenance of municipal electrical works; and (ii) contracts for the provision of electrical and communications infrastructure contracting and engineering services, e.g., installation services. Such segments of the electrical contracting industry were and continue to be highly competitive and require substantial capital. The Company competed with numerous regional and local companies, and international companies, many of which had significantly larger operations and greater financial, marketing, human, and other resources than the Company, which gave them competitive advantages, such as the ability to negotiate superior terms from suppliers.– Significant ChangesC. Organizational Structure
The following is a list of the
Company'sCompany’s direct and indirect significant subsidiaries as ofJuly 10, 2001:May, 2003:
NAME OF PERCENTAGE OF OWNERSHIP SIGNIFICANT SUBSIDIARY COUNTRY OF INCORPORATION INTEREST AND VOTING POWER - ---------------------- ------------------------ ------------------------Name of
Significant
Subsidiary/AffiliateCountry of Incorporation
Percentage of Ownership
Interest and Voting(1)Marnetics, Ltd.
Israel
100%(3)
Marnetics, Inc. (a subsidiary
of Marnetics Ltd.)
(not active)Delaware, USA
100%
Speedwise Technologies Ltd.
(a subsidiary
(an affiliate of Marnetics
Ltd.)(2)Israel
17.25%17.1%
14.73% fully diluted basis
(1)
On fully diluted basis. (2)
The Company holds 450,000 Ordinary Shares of Speedwise Technologies Ltd (“Speedwise”). Speedwise entered into an agreement to sell all its assets and intellectual property to Orsus Solutions Ltd., an Israeli technology company. See “Item 7. B. Related Party Transactions”. (3)
On December 11, 2002 the Board of Directors resolved to authorize management of Marnetics Ltd.) Nulan Technologies, Ltd.* Israel 100%to structure an Employment Stock Option Plan for the year 2003 and to allocate to employees of Marnetics up to 5 (five) per cent of the issued and outstanding share capital of Marnetics on a fully diluted basis. The program has not yet gone into effect.- ---------- * This subsidiary is to be transferred to the purchaser of the Electrical Business, subject to shareholder approval.24
D. Property, Plants and
Equipment. During the year 2000, our offices were located at a leased facility in Moshav Batzra, Israel. The facility consisted of a building of approximately 469 square meters and a parking lot of approximately 543 square meters. A portion of the building served as the Company's offices and the remaining portion served as a warehouse for storing tools and inventory. The 16rent expense for the facility throughout the year 2000 was approximately $2,175 per month, plus Israeli value added tax.EquipmentAs of December 20, 2000, we relocated our headquarters from Moshav Batzra to a facility in
Ra'anana,Ra’anana, Israel, leased by the subsidiary - Marnetics Ltd. The facility consists of approximately 232 square meters. The leaseexpiresexpired on May15, 2002.30, 2003 and was renewed until December 2003. The rent expense for the facility is currently approximately US$ 2,950$2,088 per month, plus Israeli value added tax.As part of sale of the
Company'sCompany’s electrical operations as described in"Item“Item 8B-– SignificantChanges"Changes”, all rights and obligations of the Company regarding the facility in Batzra were assigned to the purchaser of theCompany'sCompany’s Electrical Business, Idan Millennium Investments and Assets Ltd., as of March 31, 2001.ITEMItem 5. Operations and Financial Review and
Prospects.ProspectsThe following contains forward-looking statements, which involve risks and uncertainties. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. The following discussion and analysis of financial condition and results of operations should be read along with the accompanying
consolidated financial statementsConsolidated Financial Statements for the year ended December 31,2000 in2001. See “Item8.A.8A –Financial Information”. These reports are presented in United States dollars and have been prepared in accordance withaccounting principles generally accepted in the United States.US GAAP.A. Operating Results
OVERVIEWOverview
Marnetics Broadband Technologies Ltd. (formerly Stav Electrical Systems (1994) Ltd.) (the
"Company"“Company” or"Stav"“Stav”) was engaged in the manufacture, installation and maintenance of electrical and lighting systems, mainly for public institutions and in the development of Internet performance enhancement solutions through its wholly owned subsidiary Marnetics Ltd.The Company’s operations during 2002 consisted of the core business of developing and marketing network capacity enhancement and network information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd.
("Marnetics")During 2002 the Company also dealt with legal issues and collection of debt relating to the Electrical Business, which was sold during 2001. See “Item 8B – Significant Changes.”On June 1, 2000, a share exchange agreement
(the "Agreement")was signed between the Company andMarnetics.Marnetics Ltd. The agreement was consummated after final approval of theCompany'sCompany’s shareholders on December 31, 2000.Pursuant to the agreement, the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 2,761,236 respectively, representing 75% of its outstanding shares in exchange for all shares in Marnetics.The fair value of Stav shares, US$ 11,314,280 was determined on the basis of the average market price of its outstanding shares US$ 8.00. Goodwill in the amount of $11,309,000 was recorded accordingly.The
acquisition ofmerger between Marneticsbyand the Company was accounted for as a reverseacquisition.merger. As the shareholders of Marnetics (as a group) received the largest ownership interest in the Company, Marnetics was determined to be the"accounting acquirer"“accounting acquirer” in the reverse acquisition. As a result, the historical financial statements of the Company (prior to December 31, 2000) were replaced with the historical financial statements of Marnetics. The statements of operations for 20001999and19981999 include the operations of Marnetics. The17December 31, 2000 balance sheet includes the accounts of the Company and Marnetics,Marnetics. The fair value of Stav shares, US$ 11,314,280 was determined on the basis of the average market price of its outstanding shares US$ 8.00 per share. Goodwill in the amount of $11,309,000 was recorded accordingly.25
Effective March 2001, sold off the electrical business and wrote-off goodwill in the
December 31, 1999 balance sheet includesamount of $2 million as discontinued business. Further, during 2001, in view of theaccountsmarkets downturn, the Company assessed the value and future benefit ofMarnetics.its enterprise level goodwill pursuant to Accounting Principles Board Opinion No. 17, “Intangible Assets” (“APB 17”). The result of the assessment was a full write-off of the goodwill in the amount of $9,309,000Marnetics has a limited operating history and is subject to risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for
Internetnetwork capacity enhancement products and services.In 1999, Marnetics reduced its activities, dismissed mostThere is no assurance, however, that additional capital will be available to the Company and the inability to obtain such financing would have a material adverse effect on the Company. The consolidated financial statements do not include any adjustments that might result from the outcome ofits employeesthis uncertainty andsold its fixed assets.these adjustments may be material.During 2000, Marnetics
hasraised US$7.47.04 million from new investors and recruited additional employees.Marnetics'During 2001, Marnetics continued to increase its research and development activities and shifted its core business from developing and marketing Internet performance enhancement solutions to the development and marketing of IP network, capacity and analysis solutions.The Company has a limited operating history and has sustained losses since its inception. As shown in the accompanying financial statements, the Company incurred a net loss of $3,021,000 for the year ended December 31, 2002 and as of that date has accumulated a loss of $24,333,000. Management is actively seeking additional funds or M&A transactions that will provide funds needed to support its operation in order to fully implement its business plans. Failure to find the appropriate funds or M&A will force the Company to close down in the third quarter of year 2003.
In May 2002, Marnetics submitted an application to obtain research and development grant in the sum of $230,000 from the Office of the Chief Scientist, of the Ministry of Industry and Trade, of the State of Israel (“OCS”) which was approved in November 2002. To date Marnetics has received a grant of $185,000. The grant is based on research and development expenses that Marnetics had actually expensed until May 2003. There can be no certainty that the remaining funding will be received by Marnetics.
As of April 26, 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development. The remaining employees are in the area of administration and will be left until the end of year 2003. A new updated budget was approved that reflects the reduction of the research and development, and marketing and sales operations of the Company and Marnetics Ltd.
Effective March 2001 the Company sold to Idan Millenium Investments and Assets Ltd. (“IDAN’), a company under the control of Dov Strikovsky, a major shareholder and President, Chairman and former CEO of the Company, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of an an appraised value of $2,000,000, relating to the electrical operations, for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. During 2002 $71,000 were repaid on the account of the sale consideration. See “Item 7B – Related Party Transactions.”
In prior years the Company granted loans to Mr. Strikovsky in the amount of $1,228,000. The loan was linked to the Israeli CPI and bore interest of 2% per annum and was repayable in eight annual installments each comprised of 1/8 of the principal and the accrued interest thereon commencing December 2000. At December 31, 2001 the Company reassessed the collectibility of the loan in accordance with provisions of SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. During 2002 $142,000 were repaid on the account of the loan.
To secure his obligations under the various agreements Mr. Strikovsky has collateralized 300,000 shares that he owns of the Company. No other payments were made by Mr. Strikovsky subsequent to December 31, 2002. The Company is involved in ongoing legal efforts aimed at collecting amounts due from Mr. Strikovskyand the companies under his control. . See “Item 7.B. – Related Party Transactions – Indemnification by Significant Shareholder.”
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On May 9, 2001 an agreement (the “Bank Agreement”) was signed between the Company and Bank Hapoalim, Ltd. (the “Bank”) with respect to the Company’s debt to the Bank in the amount of $3,127,000 (the “Debt”). In accordance with the Bank Agreement, the Bank has agreed to release the Company from its obligation to repay the Debt and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, by May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt (the “Repaid Amount”) and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount.
In addition, the Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note 3b). To date Hod-Hasharon has not made any re-payment on account of the debt, and therefore the guarantee has not decreased. According to the terms of the Bank Agreement, following November 30, 2002, the Bank is entitled to exercise the outstanding amount of the guarantee, and since the guarantee has not decreased, the Company decided to establish an allowance for the guarantee in full. Nevertheless, the Company and its representatives are conducting on-going negotiations with Hod-Hasharon for the repayment of the debt to the Bank, although at present the Company cannot assess what portion of the debt will be recovered, if any, (and the guarantee decreased accordingly) as a result of such negotiations, or any future action by the Company. See “Item 8A - Legal Proceedings”.
Failure to collect the total amounts, or part of it, from Idan Millenium Investments and Assets Ltd, Mr. Dov Strikovsky and the municipality of Hod Hasharon could have a negative
operatingimpact on the company future cash flowhave been significant to date. Marnetics anticipates that bothand liquidity.The loss from operation of the
losses and negative operating cash flow will continue to increase duringdiscontinued activities in theforeseeable future until Marnetics develops a customer base that will generate sufficient revenues to fund operating expenses. Since its inception in June 1998, through December 31,Electrical Business was $450,000. The loss on the sale of the Electrical Business was $2,278,000.Until September 2000
Marnetics has incurred cumulative losses of $4,417,000 and cumulative negative operating cash flows of $1,233,000. As of July 10, 2001, Marnetics Ltd. holds 17.25%the Company held 33.6% of the outstanding shares of Speedwise TechnologiesLtd. ("Speedwise"Ltd (“Speedwise”), an Israeli start-up company established. In September 2000, Speedwise issued shares to a third party which resulted inJuly 1999. Thea decrease in the Company’s holdings in Speedwisedoto 19.19% and during February 2001 additional shares were issued to Orsus Solutions Ltd., (“Orsus”) an Israeli technology company resulting in a further dilution to 14.73%. In October 2002 Speedwise sold its assets and intellectual property to a third party in consideration of cash and shares. Based on the consideration received by Speedwise, the Company assesses that the recoverable amount of its investment in Speedwise will be $60,000 and as a result the Company recorded as of December 31, 2002 a write down of $522,000 of investment.YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
UPDATEOperating Revenues
Company had no sales in year ending December 31, 2001. Commercialization of the products started in third quarter of 2002. The Company had $19,000 sales in the year ending December 31, 2002, $9,000 from the Speedwise OEM Agreement, and $6,000 from selling Prospera products, and $4,000 from consulting services.
Operating Expenses
Research and Development expenses consisted primarily of salaries and related expenses. Research and Development expenses decreased from $812,000 in the year ending December 31, 2001 to $486,000 in the year ending December 31, 2002. The decrease was primarily due to Company’s reduction of its research and development activities and the accrued of a grant from the OCS in the sum of $140,000.
Selling and Marketing expenses consisted mostly of salaries and increased from $310,000 at the end of December 31, 2001 to $464,000 at the end of December 31, 2002, due to initialization of business development efforts. Travel and promotional expenses increased as products were ready for sale.
27
General and Administrative expenses consisted primarily of salaries and related expenses for administrative and executive staff, fees for professional services, and general office and rent expenses. General and Administrative expenses decreased from $1,128,000 in the year ending December 31, 2001, to $784,000 in the year ending December 31, 2002. The decrease was primarily due to the reduction of employees and decreased professional and consulting fees.
The Company and Mr. Strikovsky were named as a defendant in a claim for specific performance of an agreement entered into by the Company and the plaintiff, Ananda Capital Partners, Inc., in April 1999 (the “Agreement”) as well as damages as a result of a breach of the agreement. On July 2, 2001, due to the fact that no defense and/or reply were provided by the Company, judgment was entered against the Company in the amount of $725,000. On February 7, 2002 the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed an appeal on the court decision which was accepted by the Supreme Court of the state New York with instructions to allow evidentiary hearing that is now in process. The plaintiff proposed to settle the suit for $250,000 but the Company rejected the proposal. In 2001 the Company has established an allowance in the amount of $750,000 to provide for its possible exposure. Based on the new developments the Company decreased the allowance by $500,000 to $250,000 which is its current estimate of the probable exposure.See “Item 8A (1) – Financial Information -Legal Proceedings.”
On June 1, 2000, a share exchange agreement was signed between the Company and Marnetics Ltd. The fair value of Stav shares, US$ 11,314,280 was determined on the basis of the average market price of its outstanding shares at US$ 8.00 per share. Goodwill in the amount of $11,309,000 was recorded accordingly. Effective March 2001, sold off the electrical business and wrote-off goodwill in the amount of $2 million as discontinued business. Further, during 2001, in view of the markets downstream, the Company assessed the value and future benefit of its enterprise level goodwill pursuant to Accounting Principles Board Opinion No. 17, “Intangible Assets” (“APB 17”). See “Item 18 Financial Statements - Note 1 & 3b”. The result of the assessment was a full write-off of the goodwill in the amount of $9,309,000.
On December 31, 2001 the Company reassessed the collectibility of the loan given to Mr. Dov Strikovsky and his affiliated companies, a major shareholder and President, Chairman and former CEO of the Company, in the amount of $1,228,000 in accordance with provisions of SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. During 2002, $266,000 were repaid to the Company. See “Item 7B - Related Party Transactions - - Loans to Significant Shareholder and Former Director and CEO”.
During the year ending December 31, 2002, the Company recorded a write down of $522,000 based on the estimated recoverable amount of $60,000 of its holdings in Speedwise Technologies Ltd. from the sale of Speedwise’s assets and intellectual property in consideration of cash and shares.
The Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note 3b). To date Hod-Hasharon has not
currently imposemade anyobligationsre-payment onMarnetics. YEARSaccount of the debt, and therefore the guarantee has not decreased. According to the terms of the Bank Agreement, following November 30, 2002, the Bank is entitled to exercise the outstanding amount of the guarantee, and since the guarantee has not decreased, the Company decided to establish an allowance for the guarantee in full.Non-cash compensation expenses totaled $805,000 in the year ending December 31, 2001 compared to $792,000 in the year ending December 31, 2002.
Non-cash compensation includes the amortization of unearned employee stock-based compensation and expenses for options granted to a related party. Stock-based compensation expenses are amortized over the vesting schedule of the option, typically four years, using the straight-line approach.
Financial Income
Net financial income for the year ending December 31, 2001 and the year ending December 31, 2002 was $175,000 and $32,000, respectively. These items consist of interest earned on bank deposits and gains and losses from a re-measurement of monetary balance sheet items resulting from transactions in non-dollar currencies.
28
Share in losses of Affiliate
Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd (“Speedwise”). In September 2000, Speedwise issued shares to a third party which resulted in a decrease in the Company’s holdings in Speedwise to 19.19%. During February 2001 additional shares were issued to third parties resulting in a further dilution to 14.73%. During the year ending December 31, 2000 the Company followed the equity method and shared in the losses of the affiliate in the amount of $639,000. Effective January 1, 2001, the investment was carried at cost, and therefore, the Company does not share in any losses of the affiliate in the years thereafter. In October 2002 Speedwise sold its assets and intellectual property to a third party as stated above under Operating Expenses. Based on the consideration received by Speedwise, the Company assesses that the recoverable amount of its investment in Speedwise will be $60,000 and as a result an impairment charge of $522,000 has been recorded.
Tax
During the year 2002 the Company and Marnetics reached an agreement with the tax authorities regarding tax liability for the years 1998 to 2001. The Company made a provision for this liability and for the year 2002. Marnetics Ltd. has not been assessed for income tax purposes since incorporation.
Discontinued Operations
On June 10, 2001, the Company executed an agreement, effective March 31, 2001, to sell, it’s Electrical Business, including certain related liabilities, to Idan Millenium Investments and Assets Ltd, wholly-owned by the Company’s President, Chairman and former Chief Executive Officer and current major stockholder, Dov Strikovsky. The company recorded a loss on the sale in the sum of $2,278,000. The company recorded the loss from the Electrical Business for the first quarter of 2001 as a discontinued operation resulting in a loss of $450,000.
Net Loss
Net loss in the year ending December 31, 2001 and the year ending December 31, 2002 was $16,895,000 and $3,021,000, respectively. Net loss per share was $(2.51) and $(0.41) respectively.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
AND 1999. OPERATING REVENUES As Marnetics' products are still in the development phase, MarneticsOperating Revenues
The Company had no sales in either the years ending December 31,
19992000 or December 31,2000. OPERATING EXPENSES2001. Commercialization of the products started in second quarter of 2002.Operating Expenses
Research and Development expenses consisted primarily of salaries and related
expenses and sub-contractorexpenses. Research and Development expenses increased from$33,000 in the year ending December 31, 1999, to$252,000 in the year ending December 31,2000.2000 to $812,000 in the year ending December 31, 2001. The increase was primarily due toMarnetics' resumptionCompany’s expansion of its research and developmentactivities after Marnetics obtained equity financing inactivities.Selling and Marketing expenses consisted mostly of salaries and rose from $142,000 at the
first quarterend of2000.December 31, 2000 to $310,000 at the end of December 31, 2001, due to initialization of business development efforts.General and Administrative expenses consisted primarily of salaries and related expenses for administrative and executive staff, fees for professional services, and general office and rent expenses. General and Administrative expenses increased from
$44,000 in the year ending December 31, 1999, to$722,000 in the year ending December 31,2000.2000, to $1,128,000 in the year ending December 31, 2001. The increase was primarily due to the recruiting and hiring of additionalemployees.employees and due to increased professional and consulting fees.29
The Company and Mr. Strikovsky was named as a defendant in a claim for specific performance of an agreement allegedly entered into by the Company and the plaintiff, Ananda Capital Partners, Inc., in April 1999 (the “Agreement”) as well as damages as a result of a breach of the agreement. On July 2, 2001, due to the fact that no defense and/or reply were provided by the Company, judgment was entered against the Company in the amount of $725,000. On February 7, 2002 the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed an appeal on the court decision which was accepted by the Supreme Court of the state New York with instructions to allow evidentiary hearing that is now in process. The plaintiff proposed to settle the suit for $250,000 but the Company rejected the proposal. In 2001 the Company has established an allowance in the amount of $750,000 to provide for its possible exposure. See “Item 8A (1) – Financial Information - -Legal Proceedings.”
On June 1, 2000, a share exchange agreement was signed between the Company and Marnetics Ltd. The fair value of Stav shares, US$ 11,314,280 was determined on the basis of the average market price of its outstanding shares at US$ 8.00 per share. Goodwill in the amount of $11,309,000 was recorded accordingly. Effective March 2001, sold off the electrical business and wrote-off goodwill in the amount of $2 million as discontinued business. Further, during 2001, in view of the markets downstream, the Company assessed the value and future benefit of its enterprise level goodwill pursuant to Accounting Principles Board Opinion No. 17, “Intangible Assets” (“APB 17”). See “Item 18
”. The result of the assessment was a full write-off of the goodwill in the amount of $9,309,000. NON-CASH COMPENSATION EXPENSESFinancial Statements - Note 1 & 3bOn December 31, 2001 the Company reassessed the collectibility of the loan given to Mr. Dov Strikovsky, a major shareholder and President, Chairman and former CEO of the Company, in the amount of $1,228,000 in accordance with provisions of SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. See “Item 7B - Related Party Transactions - - Loans to Significant Shareholder and Former Director and President, Chairman andCEO”. During year 2002 the Company managed to collect $266,000 plus interest from Mr. Strikovsky.
Non-cash Compensation includes the amortization of unearned employee stock-based compensation and expenses for options granted to a related party. Stock-based compensation expenses are amortized over the vesting schedule of the option, typically four years, using the straight-line approach.
During the year ending December 31,
2000, Marnetics2001, Company recorded anaggregateaggregated unearned stock-based compensation of$1,836,000.$60,000. Stock-based compensation included in operating expenses totaled $805,000 in the year ending December 31, 2001 compared to $2,408,000 in the year ending December 31,2000, compared to no such expenses in the year ended December 31, 1999. FINANCIAL INCOME2000.Financial Income
Net financial income in the year ending December 31,
19992000 and the year ending December 31,20002001 was$9,000$167,000 and$167,000,$175,000, respectively. These items consist of interest earned on bank deposits and gains and losses from aremeasurementre-measurement of monetary balance sheet items resulting from transactions in non-dollar currencies.YEAR ENDED DECEMBER 31, 1999 AND THE SEVEN MONTHS ENDED DECEMBER 31, 1998 OPERATING REVENUES As Marnetics' products are stillShare in losses of Affiliate
Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd (“Speedwise”). In September 2000, Speedwise issued shares to a third party which resulted in a decrease in the
development phase, Marnetics had no salesCompany’s holdings ineither ofSpeedwise to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 14.73%. During the year ending December 31,1998 or2000 the Company followed the equity method and shared in the losses of the affiliate in the amount of $639,000. Effective January 1, 2001, the investment is carried at cost, and therefore, the Company does not share in any losses of the affiliate in the year ending December 31,1999. OPERATING EXPENSES Research2001.30
Discontinued Operations
On June 10, 2001, the Company executed an agreement, effective March 31, 2001, to sell, it’s Electrical Business, including certain related liabilities, to Idan Millenium Investments and
Development expenses consisted primarilyAssets Ltd, wholly-owned by the Company’s President, Chairman and former Chief Executive Officer and current major stockholder, Dov Strikovsky. The company recorded a loss on the sale in the sum ofsalaries$2,278,000. The company recorded the loss from the Electrical Business for the first quarter of 2001 as a discontinued operation resulting in a loss of $450,000.Net Loss
Net loss in the year ending December 31, 2000 and
related expensesthe year ending December 31, 2001 was $3,996,000 andsub-contractor expenses. Research and Development expenses decreased from $131,000 in 1998, to $33,000 in 1999. The decrease was due primarily to a slowdown in research and development activities and efforts of Marnetics to raise funds in order to finance its activities. General and Administrative expenses consisted primarily of salaries and related expenses for administrative and executive staff, fees for professional services, and general office and rent expenses. General and Administrative expenses decreased from $181,000 in 1998, to $44,000 in 1999. The decrease was due primarily to a slowdown in research and development activities and efforts of Marnetics to raise funds in order to finance its activities. FINANCIAL INCOME Net financial income in 1998 and 1999 was $8,000 and $9,000,$16,895,000, respectively.These items consist of interest earned on bank deposits and gains and losses from a remeasurement of monetary balance sheet items, resulting from transactions in non-dollar currencies. 19B. Liquidity and Capital Resources
To date,
Marneticsthe Company has funded its operations through equityinvestments.investments and bank credit lines. During the year 2000 Marnetics issued shares in consideration of $7,297,000. On December 31,2000, Marnetics2002, the Company had$6.5 million$957,000 of cash and cash equivalents compared to$284,000$2,418,000 at December 31,1999.2001. Theincreasedecrease is mostly due to cash used to finance thefunds raised during the year 2000. In November 2000, Marnetics raised US $5.1 million through the private placement of 221,200 of its Marnetics Ordinary Shares to a group of venture capital funds including STIVentures Investments No. 2 B.V. and Prime Technology Ventures NV, each a company registeredoperation activities in theNetherlands. On March 2, 2000, Marnetics issued 130,719 Ordinary Shares to ECI Communications Ltd. in exchange for US $2.0 million. On January 16, 2000, Marnetics raised US $0.3 million throughamount of $1,391,000. As of December 31, 2001, thesale of 36,318 Marnetics Ordinary Shares to Sunny.com Ltd. Marnetics'Company had no bank credit lines and is financing its activity based only on cash available.The Company’s capital requirements have been
and will continue to be, significant and itsreduced. Still, cash requirements could exceed cash flow from limited operations. As a result,Marneticsthe Company may become dependent on bank credit lines and sales of its securities to fund its development and activities.Currently, Marnetics has $3.3 million short-term bank credit.The Company reduced during 2003 its operating expenses in order to reserve enough cash for the anticipated expenses and legal issues.
Net cash used in operating activities in
1998, 19992,000, 2001, and20002002 was$237,000, $122,000$872,000, $4,120,000, and$872,000,$1,391,000, respectively. SinceMarneticsthe Company has not generatedanymeaningful revenues to date, it must use its working capital to fund its research anddevelopment.development, marketing, sales general and administrative expenses.The Company had as of December 31, 2002 a working capital of $3,000, compared to a working capital of $1,652,000 as of December 31, 2001.
The Company’s cash and cash equivalents are generally held in short term US dollar bank deposits.
Total shareholder equity on December 31, 2002 was $208,000 compared to $2,437,000 on December 31, 2001.
On May 9, 2001 an agreement (the “Bank Agreement”) was signed between the Company and Bank Hapoalim, Ltd. (the “Bank”) with respect to the Company’s debt to the Bank in the amount of $3,127,000 (the “Debt”). In accordance with the Bank Agreement, the Bank has agreed to release the Company from its obligation to repay the Debt and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, by May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt (the “Repaid Amount”) and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount.
In addition, the Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note 3b). To date Hod-Hasharon has not made any re-payment on account of the debt, and therefore the guarantee has not decreased. According to the terms of the Bank Agreement, following November 30, 2002, the Bank is entitled to exercise the outstanding amount of the guarantee, and since the guarantee has not decreased, the Company decided to establish an allowance for the guarantee in full. Nevertheless, the Company and its representatives are conducting on-going negotiations with Hod-Hasharon for the repayment of the debt to the Bank, although at present the Company cannot assess what portion of the debt will be recovered, if any, (and the guarantee decreased accordingly) as a result of such negotiations, or any future action by the Company. See “Item 8A - Legal Proceedings”.
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Failure to collect the total amounts, or part of it, from Idan Millenium Investments and Assets Ltd., from Mr. Dov Strikovsky or from the municipality of Hod Hasharon, or losing the litigation or a monetary settlement with Ananda Capital Partners could have a severe negative impact on the company future cash flow and liquidity. See “Item 3D – Risk Factors - Risks Relating to Collection of Debt by the Company and Risk Factors – Risks Related to Legal Proceedings.”
C. Research and Development
As the Company is in the product development stage, it anticipates that a significant amount of its operating expenses will be expended in the area of research and development.Research and Development expenses increased from
$33,000 in the year ending December 31, 1999, to$252,000 in the year ending December 31,2000.2000 to $812,000 in the year ending December 31, 2001, then decreased to $486,000 in the year ending December 31, 2002. Theincreasedecrease was primarily due toMarnetics' resumptionMarnetics reduction of its research and development activities,afterreducing staff and hiring additional staff with lower salaries, receiving the OCS grant, and purchase of equipment and software. As of June 2003, the Vice President of R&D, Nr. Hanoch Newman, will no longer be an employee of Marnetics,obtained equity financingand possibly be available for consultation dependent on current negotiations the Company is having with him. Present research and development efforts are currently reduced.The main targets of the research and development department for the year 2002 were to commercialize new versions of the ProsperaTM product line.
In May 2002, Marnetics Ltd. submitted to the OCS a request to obtain research and development funding in the sum of $250,000 from the Office of the Chief Scientist, of the Ministry of Industry and Trade, of the State of Israel (“OCS”) for development of products for the Prospera™ platform which was approved on November 2002. The total amount of grants accrued and received at December 31, 2002 was $ 140,000. Marnetics continued to receive grant funding through the first
quarterhalf of2000. D. Trend Information Phenomenal investments in 3G cellular frequencies and telecom infrastructure during the past several years, contributedyear 2003 as well.Marnetics is committed to pay royalties to the
global declineOffice oftechnologythe Chief Scientist of the Government of Israel on proceeds from sales of products in which the Chief Scientist has participated by way of grants, up to the amount of 100% of the grants received, in dollar terms plus interest at LIBOR. The royalties are payable at a rate of 3% for the first three years of product sales and 3.5% thereafter. No royalty expenses were paid to the Chief Scientist in 2002. The research and development grants are presented in the statements of operations as an offset to research and development costs. The refund of the grant is contingent on future sales and Marnetics has no obligation to refund these grants, if sufficient sales are not generated. Based on the terms established in the agreement with the OCS the Company may not sell its IP to a non-Israeli entity.D. Trend Information
The market for network capacity enhancement solutions is in an early stage of development and its success is not guaranteed. Therefore, we cannot accurately assess the size of the market, the products needed to address the market, the optimal distribution strategy, or the competitive environment that will develop. In order for this area to be successful, potential customers must invest in traffic management of their networks and improving the performance of mission critical applications. The growth of the network capacity enhancement solutions market also depends upon a number of factors, including the availability of inexpensive bandwidth, especially in international markets,
in early 2001. The anticipated rapid adoption of broadband Internet access has been significantly delayed both in Europeand theUnited States, duegrowth in complexity of WAN and the CapEx of enterprises.Recently Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements SFAS Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” SFAS No. 145 will impact how companies account for sale-leaseback transactions and how gains or losses on debt extinguishments are presented in financial statements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, early application is encouraged. Under the provisions of SFAS 4 gains and losses associated with extinguishments of debts were reclassified as extraordinary item. SFAS No. 145 provides that gains and losses associated with extinguishments of debts will be classified as extraordinary item only if they meet the criteria of APB Opinion No. 30. The application of the requirements of SFAS No. 145 will not have a material impact on the Company’s financial position or results of operations.
32
In July 2002, the FASB issued SFAS No.146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The application of the requirements of SFAS No. 146 will not have a material impact on the Company’s financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which clarifies disclosure and recognition/measurement requirements related to
technologicalcertain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of the requirements of FIN 45 will not have a material impact on the Company’s financialconsiderations. Obtaining investments from venture capital firms has become increasingly difficult.position or results of operations.In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation—Transition and Disclosure—as Amendment to FAS 123.” SFAS 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are now required for interim periods in addition to the traditional annual disclosure. The
marketamendments to SFAS No. 123, which provides for additional transition methods, are effective for periods beginning after December 15, 2002, although earlier application iscurrently characterized by massive lay-offs, severe budget cuts, closings of under-financed and under-performing companies, and major reductions in purchases and investments thatpermitted. The amendments to the disclosure requirements are required for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.E. Off-Balance Sheet Arrangements
We do not
contribute immediately and directly to revenues and profits. We expect that the state of the global broadband environment and technology industry will materially adversely affect the results of operations for our broadband Internet enhancement products and services. 20ITEMhave any off-balance-sheet arrangements.Item 6. Directors, Senior Managers and Employees
A.
DIRECTORS AND SENIOR MANAGEMENTDirectors and Senior ManagementThe following is a list of our directors and senior management, as of the end of June 2003, 2003 followed by a description of their business background:
NAME POSITION ---- --------Name
Age
Position
Menachem Reinschmidt 43
Chairman of the Board*
Moshe Rubin 50
External Director
Dr. Ora Setter 51
External Director
George Balot 61
Director and to become Acting Chief Financial Officer*
David Sheetrit 41
Director and Acting Chief Executive Officer
Ilan Hadar 38
Chief Financial Officer*
Hanoch Newman 37
Vice President – Research and Development*
* Mr. Jacob Ben-Gur.......................Ben-Gur, Chairman of the BoardMoshe Kessner.......................of the Company, announced his resignation from the position of Chairman of the Board of DirectorIlja Bobbert........................ Director Moshe Rubin......................... Director Yossi Shelly........................ Director Menachem Reinschmidt................ Director, Presidentat a Company board meeting on January 31, 2002, due to his heavy work load andresponsible for Marnetics Ltd.'s technology development Baruch Schechter.................... Director,other duties other than as Chairman and Director ofMarketingthe Company. He officially resigned on June 5, 2002. Mr. Menachem Reinschmidt became Chairman of the Board of the Company on November 2002. Mr. DavidSheetrit......................Sheetrit, who had been the Chief Operating Officer of the Company from January 2001, has become the Acting Chief Executive Officerand Chief Operating Officer Isaac Nissim........................of the Company effective June 22, 2003. Mr. Ilan Hadar the Chief Financial OfficerHanoch Newman....................... Vice President - Research and Development Karen Gold Anisfeld................. Vice President Strategic Marketing Ron Nuta............................ DirectorofBusiness Developmentthe Company up until July 26, 2003. Beginning June 27, 2003 Mr. George Balot will share the duties with Mr. Hadar until Mr. Hadar’s leaving the Company at the end of July 2003 at which time Mr. Balot will be the sole Acting Chief Financial Officer of the Company on a part-time basis until September 30, 2003.JACOB BEN-GUR is33
Menachem Reinschmidt, Chairman of the Board of the Company since November 2002 and Director of the Company since 2001; Mr. Reinschmidt has been Director of Marnetics
Broadband Technologies,Ltd.,a position to which he was appointed in March 2001. He is the former Chairman of Pelephone Communications Ltd., Israel's firstandleading cellular carrier, a post which he held for 3 years. Within the framework of his position at Pelephone, Mr. Ben-Gur served as a member of the Boards of Bezeq The Israel Telecommunication Corp. from 1996-2000 and YES - DBS Satellite Services from 1998-2000. He currently serves as Member of the Board of Directors of Liraz Systems Ltd. since 1997. He is a Certified Public Accountant, and earned a BA in Accounting and Economics from Ben-Gurion University. MOSHE KESSNER is Associate Vice President Business Development, ECI Telecom Ltd. (NASDAQ: ECIL), a telecom equipment vendor which holds a 16% stake in the Company. In this capacity, he is involved in the investment strategy and investment companies of ECI Telecom, such as Encotone Ltd. a company in which ECI Telecom has recently invested. Prior to joining ECI in 1999, Mr. Kessner was Vice President Technology and Business Development Tadiran Telecommunications Ltd. He served as Lieutenant Colonel in the Israel Defense Forces as Chief Research Engineer in the Signal Corp, involved in developing the computer security standards and several strategic and tactical communication systems. He holds an M.Sc. in Computer Science and a B.Sc. in Electrical Engineering. ILJA BOBBERT is a founder and managing partner of Prime Technology Ventures. He led many technology investments while he was with Holland Venture BV, one of the oldest and most successful venture capital firms in the Netherlands. He has extensive knowledge and experience in a wide variety of technological areas. Previously he served in both financial and engineering positions at Koninklijke Bijenkorf Beheer, Unilever and Glynwed. Mr. Bobbert is a cum laude graduate in Chemical Engineering and holds an M.Sc. in Business 21Administration and a BA in business economics. He currently serves on the boards of Tridion and Q-Go. He focuses on the company's technology investments in the Benelux and Israel. MOSHE RUBIN, OUTSIDE DIRECTOR. Mr. Rubin currently serves as a Financing Consultant for the Jerusalem branch of Pama Car Financing. For 15 years, he operated the Dihatsu car dealership, which he opened in Herzliya. He has also sold used cars, car parts and accessories, as well as worked in car maintenance. YOSSI SHELLY, OUTSIDE DIRECTOR. Mr. Shelly, who currently serves as an Outside Director for Marnetics Broadband Technologies, is ManagingDirector ofS. Alexander Ltd. Investment & Consulting firm, based in Beer-Sheva, Israel. During Mr. Shelly's career, he has served on many boardsMarnetics, Inc, since the establishment ofdirectors of corporations and organizations. For nearly a decade, he held various posts within the Municipality of Beer-Sheva. Prior to his career in management and consulting, Mr. Shelly served in the Israel Defense Forces for 17 years, dedicating most of his service as the commander of the Computerized Recruitment Center and concluding his service as a Personnel Officer in the Armored Corps. He retired as a Major. He holds a BSc in Industrial Engineering and Management and is currently studying for a degree in law. MENACHEM REINSCHMIDT, DIRECTOR AND PRESIDENT.both entities. Mr. Reinschmidt established Marnetics in 1998, and wasitsthe first Chief Executive Officerand oversees all technology development activitiesofthe Company.Marnetics. One of the leading data communication experts in Israel, Mr. Reinschmidt has1718 years of experience in the most advanced fields of computer networks, including design, analysis, integration and development. His expertise incorporates advanced networking topics, including frame relay, TCP/IP, Internet architecture, ATM, Local Area Networks, routers and switches, voice-over IP, etc. Prior to founding Marnetics, from 1993 to 1997 Mr. Reinschmidt was President of ATLan, a software development company located in Tel Aviv. He is a lecturer and the author of the Hebrew bestsellerLOCAL AREA NETWORKS FORLocal Area Networks for PCAND COMPATIBLES. BARUCH SCHECHTER, DIRECTOR AND MARKETING DIRECTOR. Baruch Schechterand Compatibles.Moshe Rubin, External Director of the Company since 1999, currently serves as a Financing Consultant for the Jerusalem branch of Pama Car Financing. For 15 years, he operated the Dihatsu car dealership, which he opened in Herzliya. He has also been involved in businesses in car parts, accessories, and car maintenance.
Dr. Ora Setter, External Director of the Company since November 2002, currently serves also as External Director on the
Boardboard of directors of Israeli Ligtharege and Supply Ltd. and Ravad Ltd., two publicly traded companies. Dr. Setter has 20 years of experience in performing consulting to variety of large enterprises in Israel including the major industrial companies and as well as political parties. Dr. Setter established few start-up companies in the area of knowledge management and e-learning. She is a very active lecturer in Israel and in international conferences. Dr. Setter has been for 10 years a lecturer in the Business School of Management at Tel Aviv University. Dr. Setter received her doctorate of business from the Business School of Management at Tel Aviv University.George Balot, Director of the Company since December 2002 and Director of Marnetics Ltd.
and its affiliate company, Speedwise. He is also Executive Vice President, member of theLinkware Group, oneAudit Committee of theCompany's major shareholders.Company until June 2003, and Acting Chief Financial Officer effective as of June 15, 2003. Mr. George Balot has extensive experience in the financial management of medium and large corporations in addition to non-profit organizations in the USA and Israel. Beforejoining Linkware,coming to Israel in 1978, Mr.Schechter servedBalot, a Certified Public Accountant (USA) was a manager with KPMG in NY, USA. In Israel Mr. Balot has held positions asSenior Division Manager, Corporate &CFO at large high tech companies, a large non-profit educational institution with branches located located throughout the entire country, and also as an independent financial consultant to high tech companies and others. Mr. Balot holds a B.S. from the Rutgers University School of BusinessSales Division, Pelephone, as Marketing and Sales manager at Better Office Automation, and as Sales Manager of Major Account Clients at Cellcom,Administration, NJ, USA, where hewas one of the company's sales leaders. At Pelephonemajored in Accounting.David Sheetrit, Director since April 2003, and
Cellcom, Mr. Schechter became one of Israel's leading sales/marketing specialists in the cellular market. Mr. Schechter served as a Major officer in the Intelligence service of the Israeli army. He holds a B.A. in Economics and has studied Marketing Management. DAVID SHEETRIT, ACTING CHIEF EXECUTIVE OFFICER AND CHIEF OPERATING OFFICER. Mr. Sheetrit has been serving as the Company'sActing Chief Executive Officer since June 22, 2003, has also served as Marnetics Ltd’s President andChief Operating OfficerDirector sinceearlyApril 2003. Since January 2001and he also serves as Director of Marnetics Ltd. In early 2000,Mr. Sheetrit wasappointedthe Chief Operating Officer of theLinkware Group, oneCompany and Marnetics Ltd.Mr. Sheetrit serves also as a Director ofthe Company's major shareholders.Marnetics Inc. Before joiningLinkware andMarnetics, Mr. Sheetrit was22Head of the Tel Aviv Branch of the College of Management since 1995. In this capacity he supervised the operations, investments, marketing activities and academic programs of the College, which iswas comprised of 3,000 students and 200 faculty and staff. Mr. Sheetrit has lectured at various colleges and academies and served as an independent organizational and business consultant to various organizations and institutions.ISAAC NISSIM, CHIEF FINANCIAL OFFICER. ResponsibleHe holds a M.Sc. degree in Industrial Management/Business Administration from Ben Gurion University.Ilan Hadar, Chief Financial Officer of the Company until June 26, 2003. Mr. Hadar is responsible for financial management and
control.control and has been with the Company since May 2002. Mr.NissimHadar possesseseleventen years of experience in financial management positions with particular expertise in facilitatingIPO's, spearheading MergersIPOs, M &AcquisitionsA and maintaining shareholder and investor relationships. Additionally, Mr.NissimHadar has extensive experience in managing the operations ofmultinational enterprises.publicly traded enterprises in various operating sectors. Prior to joining the Company, Mr.NissimHadar served as the Chief Financial Officer of Kardan Technologies Ltd (TASE: KRTC) where he participated in the team that led the IPO of the company. Mr. Hadar was also a member of the investment activities team of the company in the e-commerce sector. Prior to Kardan Technologies Mr. Hadar spentsixseveral years withthe Makhteshim Agan GroupNessuah Zannex Ltd. (TASE:MAIN) where he held senior management positions inNESU), a leading Israeli full service brokerage house, the Israeli representative of US Bancorp Piper Jaffray andsubsequentlyInvesco. Mr. Hadar led theNorth American operations. As CFO & COO,merger between Nessuah and Zannex to form the current structure of that company. Today Mr.Nissim directed all financial and information technology functions forHadar serves as External Director with the$100 million North American division.NZ portfolio Management Ltd. Mr.NissimHadar is a Certified Public Accountant (Israel and USA) and holdsaM.B.A. in Finance and B.A. in Economics & Accounting fromTel Aviv University. HANOCH NEWMAN, VICE PRESIDENT RESEARCH AND DEVELOPMENT.the Hebrew University in Jerusalem. Beginning the end of July 2003, Mr. Hadar will no longer be an employee of the Company.34
Hanoch Newman,Vice President Research and Development, joined Marnetics in June 2000 as its Vice President of Research and Development. He is a specialist in real-time systems, embedded systems, UNIX/WIN, C++/C communication, and device drivers. He also has vast experience in computer programming, with expertise in TCP/IP and other Internet and Communication protocols, as well as system management. His past experience includes serving as Project Manager at Elron Software NCC from 1999 to 2000, R&D Manager at CT Motion (start-up) from 1998 to 1999, and CTO and MIS in the Israeli Air Force for five years prior thereto. Mr. Newman will be leaving the Company on a full time basis in June 2003 but will possibly be available for consultation dependent on present negotiations with the Company. He holds a B.A. in Computer Sciences.
KAREN GOLD ANISFELD, VICE PRESIDENT STRATEGIC MARKETING. SpecializingChanges in
Corporate Identity Management and International Business, Ms. Anisfeld has spentthedecade before joining Marnetics providing strategy-based communication consulting and marketing support services to some of Israel's largest industrial concerns, high-tech companies, Government ministries and others, to facilitate cooperation between Israeli and foreign companies. From 1997 to 1998, she also served as Vice President and MemberComposition of theManagement teamBoard ofRuder Finn (Israel) Public Relations,Directors during the Year 2002/2003During 2002 Mr. Jacob Ben Gur, former Chairman of the Board, Mr. Moshe Kessner, Mr. Yossi Shelly, External Director and Mr. Joshua Piasetzky resigned from
1987their office as directors. Each of the above resignations were for personal reasons and none of the directors had disagreements with the Company on any matter relating to1989 shethe Company’s operations, policies or practices.On July 2002 Mr. Pekka Roine joined the Board of Directors and replaced Mr. Ilja Bobbert as a Director. On March 4, 2003, Mr, Roine resigned from the Board of Directors.
On October 13, 2002 Mr. Yossi Shelly resigned from his office as External Director and Dr. Ora Setter was
Coordinator of Financial and Public Relations at The Limited, Inc. corporate headquarters (NYSE, LSE, TSE). She has an M.A. in Public Relations/International Business. RON NUTA, BUSINESS DEVELOPMENT DIRECTOR. Prior to joining Marnetics in June 2000, Mr. Nuta had many years of diverse experience in technology research and development, sales and business development. From 1996 until joining Marnetics, Mr. Nuta servedelected as theheadsecond External Director on November 26, 2002.On October 22, 2002 Mr. David Sheetrit, Chief Operating Officer, joined the Board of Directors temporarily until the Annual General Meeting at which time he resigned. As of April, 2003, Mr. Sheetrit rejoined the Board of Directors.
On December 11, 2002 George Balot was appointed as a member of the
International Business UnitCompany’s Board ofTelrad Business Communication. Prior thereto, he was the Managing DirectorDirectors and Marnetics Ltd. and Audit Committee of theDatacom Business Unit of Arad Systems (a start-up) for approximately one year. For eleven years prior,Company. Upon Mr. Balot’s appointment as Acting Chief Financial Officer, hewas the headceased to be a member of theMarketing and Sales Department at Koor Communications and served as Development Engineer inAudit Committee of theSignal Corps for five years during his service in the Israel Defense Forces. He holds an M.S.M. degree in Business Management specializing in entrepreneurship and e- 23business, and a B.B.A. in marketing, international business and technology as wellCompany.In April 2003 David Sheetrit was appointed as a
Practical Engineer diploma in Electronics. TERM AND RIGHTS TO DESIGNATE BOARD MEMBERSmember of the Company’s Board of Directors.Term and Rights to Designate Board Members
The Articles of Association of the Company provide that at the Company’s annual meeting of shareholders, each director is elected for a period of one year
at the Company's annual meeting of shareholdersand serves until the next such meeting or until his or her successor is duly elected and qualified. Directors may be re-elected annually without limitation.The
Company'sCompany’s directors, with the exception of twoOutside Directorsexternal directors representing the public (who are paid in accordance with the provisions of the Companies Law, as defined below), do not currently receive any compensation for their services asdirectors.directors except for George Balot whom receives a per meeting attendance fee of US $200. Certain shareholders and option-holders of the Company have the right to nominate and, pursuant to shareholder agreements, have elected their designees for theCompany'sCompany’s Board of Directors.Until November 25, 2001, ISG Solid Capital Markets, LLC, the representative of several investors in our initial public offering, has the right, at its option, to designate one director to the Board of Directors, which director will be reasonably acceptable to the Board of Directors. The Company has agreed to pay such director or non-voting advisor an attendance fee of $1,500 per meeting of the Board of Directors. There currently is no such designated member of the Board.The former Marnetics Subsidiary shareholders agreed that they will vote in favor of certain nominees for Director of the Company as follows: (i)
two nomineesone nominee designated by ECITelecommunicationsTelecom Ltd.,(“ECI”) in the event that ECI holds 12.5% of the issued and outstanding share capital of the Company, or two nominees in the event that ECI holds 25% of the issued and outstanding share capital of the Company, (ii) one nominee designated by STI Ventures Investments No. 2 B.V.and(“STI”), as long as STI holds not less than 5% of the outstanding share capital of the Company, as well as STI can appoint one member as an observer to the Board of Directors of the Company, (iii) one nominee designated collectively by Prime Technology Ventures NV, Docor International BV and Ronchal InvestmentsNV.NV, as long as the Docor Group holds no less than 5% of the outstanding share capital of the Company, and (iv) one nominee designated by Linkware Ltd. (a company under the control of Mr. Reinschmidt) as based on an agreement between the shareholders. Mr. Pekka Roine represented collectively by Prime Technology Ventures NV, Docor International BV and Ronchal Investments NV and resigned during year 2003. To date, STIVentures Investments No. 2 B.V.has not yet designated a nominee for theCompany'sCompany’s board and ECI has only designated one directornominee. ALTERNATE DIRECTORSnominee Mr. Joshua Piasetzky that served until October 7, 2002.35
Alternate Directors
The Articles of Association of the Company provide that any director may, by written notice to the Company, appoint another director or any other person to serve as an alternate director, and may cancel such appointment. An alternate director has the number of votes equivalent to the number of directors who appointed him. The term of appointment of an alternate director may be for one meeting of the Board of Directors or for a specified period.
OUTSIDE DIRECTORSExternal Directors
Under the Israel Companies Law (the
"COMPANIES LAW"“Companies Law”), public companies are required to elect twooutsideexternal directors who must meet specified standards of independence. Companies that are registered under the laws of Israel and whose shares are listed for trading on a stock exchange outside of Israel, such as the Company, are defined as public companies and under such definition are subject to the requirement of electing twooutsideexternal directors. Anoutsideexternal director may not have had during the previous two years any economic relationship with the Company. Controlling shareholders of a company, 50% shareholders,24and their relatives or employees cannot serve as outsideexternal directors.OutsideExternal directors are elected by shareholders. No individual shall be appointed as anoutsideexternal director if his other positions or affairs create or are liable to create a conflict of interest with his position as director, or if they are liable to constrain his ability to serve as director. The shareholders voting in favor of their election must include at least one-third of the shares of the non-controlling shareholders of the Company who are present at the meeting. This minority approval requirement need not be met if the total shareholdings of the non-controlling shareholders who vote against their election represent 1% or less of all of the voting rights in the Company. Under the Companies Law,outsideexternal directors serve for a three-year term, which may be renewed for only one additional three-year term.OurOne of our two
independentexternal directors,Messrs.Moshe Rubin,and Shelly werewas appointed on October 4, 1999 before the adoption of the Companies Law and under the previous Israeli corporate laws. Pursuant to the provisions of the Companies Law an external director appointed in accordance with the provisions of the former corporate governance laweachshallservebe deemed an external director appointed in accordance with the provisions of the Companies Law however the term of appointment shall be for a five-yeartermperiod therefore Mr. Rubin shall remain in office until 2004.Under the Companies law,
outsideexternal directors can be removed from office only by the same special percentage of shareholders as can elect them, or by a court, and then only if theoutsideexternal directors cease to meet the statutory qualifications with respect to their appointment or if they violate their duty of loyalty to the Company. If, when anoutsideexternal director is elected, all members of the board of directors of a company are of one gender, theoutsideexternal director to be elected must be of the other gender. Any committee of the board of directors must include at least oneoutsideexternal director. Anoutsideexternal director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.LIABILITY OF OFFICERS AND DIRECTORSThe Company’s Amended and Restated Articles of Association provides that the Board of Directors shall consist of a minimum of two (2) and a maximum of eleven (11) directors. Each director, except for External Directors, shall serve as a director from the time of appointment until the next Annual General Meeting. As mentioned above, External Directors elected after the adoption of the Companies Laws in 2000 shall hold office for 3 year terms and an External Director elected under the previous Israeli corporate statute, the Companies Ordinance, such as the Company’s external director, Moshe Rubin, shall serve for five-year terms, until 2004. Dr. Ora Setter, appointed after the adoption of the Companies Law in 2000, will serve for three-year terms or until 2005.
The Amended and Restated Articles of Association provides that directors may be removed only for cause by a majority of shareholders. The Companies Law also provides that a director shall be removed from office in one of the following events: (i) if he has resigned or removed in accordance with the provisions stated therein; (ii) upon conviction for a criminal offence as detailed therein; (iii) in the event that a court has ordered his removal; (iv) in the event that he has been declared bankrupt.
36
Liability of Officers and Directors
The Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his duty of loyalty, but may exculpate in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care. The
Company'sCompany’s Articles of Association provide that, subject to any restrictions imposed by corporate law, the Company may enter into a contract for the insurance of the liability of any of theCompany'sCompany’s office holders with respect to an act performed by him in his capacity as an office holder and regarding:o a breach of his duty of care to the Company or to another person; o a breach of his duty of loyalty to the Company, provided that the office holder acted in good faith and had a reasonable basis to assume that his act would not prejudice the Company's interests; or o
• a breach of his duty of care to the Company or to another person;
• a breach of his duty of loyalty to the Company, provided that the office holder acted in good faith and had a reasonable basis to assume that his act would not prejudice the Company’s interests; or
• a financial liability imposed upon him in favor of another person.
In addition, the Company may indemnify an office holder against:
25o a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator's award approved by a court in respect of an act performed in his capacity as an office holder; and o reasonable litigation expenses, including attorneys' fees, expended by such office holder or charged to him by a court, in proceedings the Company institutes against him or instituted on the Company's
• a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator’s award approved by a court in respect of an act performed in his capacity as an office holder; and
• reasonable litigation expenses, including attorneys’ fees, expended by such office holder or charged to him by a court, in proceedings the Company institutes against him or instituted on the Company’s behalf or by another person, or in a criminal charge from which he was acquitted, or a criminal charge for which he was convicted, providing such charge does not require proof of criminal intent.
These provisions are specifically limited in their scope by the Companies Law, which provides that a company may not indemnify an office holder, nor enter into an insurance contract, which would provide coverage for any monetary liability incurred as a result of any of the following:
o a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; o a breach by the office holder of his duty of care if such breach was done intentionally or in disregard of the circumstances of the breach or our consequences; o any act or omission done with the intent to derive an illegal personal benefit; or o
• a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
• a breach by the office holder of his duty of care if such breach was done intentionally or in disregard of the circumstances of the breach or our consequences;
• any act or omission done with the intent to derive an illegal personal benefit; or
• any fine levied against the office holder.
Under the Companies Law, the
Company'sCompany’s shareholders may amend the Articles of Association to include either of the following provisions:o A provision authorizing the Company to grant in advance an undertaking to indemnify an office holder, provided that the undertaking is limited to types of events which the board of directors deems to be anticipated and limited to an amount determined by the board of directors to be reasonable under the circumstances; or o
• A provision authorizing the Company to grant in advance an undertaking to indemnify an office holder, provided that the undertaking is limited to types of events which the board of directors deems to be anticipated and limited to an amount determined by the board of directors to be reasonable under the circumstances; or
• A provision authorizing the Company to retroactively indemnify an office holder.
37
In addition, pursuant to the Companies Law, approval of the
Company'sCompany’s audit committee and theCompany'sCompany’s Board of Directors and, in specified circumstances, by theCompany'sCompany’s shareholders, must be obtained for the indemnification of, and procurement of insurance coverage for, theCompany'sCompany’s office holders for the following actions:26o breach of duty of care by any office holder owed to the Company or any other person; o breach of fiduciary duty by any office holder owed to the extent that such office holder acted in good faith and had a reasonable basis to assume that the action would not prejudice the Company; and o
• breach of duty of care by any office holder owed to the Company or any other person;
• breach of fiduciary duty by any office holder owed to the extent that such office holder acted in good faith and had a reasonable basis to assume that the action would not prejudice the Company; and
• any financial liability imposed on any office holder for the benefit of a third party as a result of any act or omission such office holder committed as an office holder of the Company.
As a result of
any act or omission such office holder committed as an office holder ofa Shareholders Resolution dated November 26, 2002, theCompany. TheCompany has entered into an indemnification agreement with the officers and directors of the Company as ofDecember 2000March 13, 2003 andintends to enterentered into an agreement with each newdirector, subject to shareholder approval.director. Such agreements contain provisions which endeavor to limit the personal liability of the officers and directors, both to the Company and to our shareholders, for monetary damages resulting from breaches of certain of their fiduciary duties as directors and officers of the Company. In particular, such agreements provide that the Company will indemnify such individuals to the fullest extent permitted by the Companies Law, as such rights shall from time to time be amended or limited, against all expense, liability, and loss reasonably incurred or suffered by the indemnitee as a result of serving as an officer or director or employee of the Company, or any affiliate thereof or any other entity at the request of the Company.In addition, the Company has obtained reimbursement indemnity insurance to reimburse directors and officers of the Company for losses sustained as a result of any claim arising from a wrongful act, individually or collectively, in the discharge of their duties or in breach of their fiduciary duties solely in their capacity as officers and directors of the Company, and to reimburse the Company for losses sustained as a result of any claim arising from any such wrongful act where an indemnity has been given or lawfully is required to be given to officers or directors of the Company.
Consequently, under the
Company'sCompany’s Amended Articles of Association, the Company may indemnifyourits officers and directors for financial obligations imposed on them in favor of a third party by a court judgment, including a compromise judgment or a court-approvedarbitrator'sarbitrator’s decision, as well as for concomitant reasonable legal expenses, includingattorney'sattorney’s fees, as a result of any claim arising from a wrong act in the discharge of their duties in their capacity as officers or directors of the Company which could materially adversely affect the business, prospects, financial condition, or results of operations of the Company.Furthermore, the ability of United States shareholders to recover monetary damages from officers and directors of the Company for certain breaches of their fiduciary duties may be significantly limited.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to officers, directors, and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the U.S. Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable in the United States.
27B.
COMPENSATIONCompensationThe
Company'sCompany’s directors do not currently receive any compensation for their services asdirectors, although the director nominee, if any, of ISG Solid Capital Markets, LLC, shall have the right to an attendance fee of $1,500 per meeting. There is currently no such designated member of the Board.directors. In addition, under the Companies Law,outsideexternal directors are entitled to annual compensation plusaper meeting attendance fee. The Company currently pays itsoutsideexternal directors an annual fee ofNIS 14,420 (US $3,500)US $3,100 and per meeting attendance fee of US $200. Every two telephone conference calls are considered one meeting. Mr. Yossi Shelly also received travel expenses of fifty cents per kilometer. The Company granted Mr. Moshe Kessner, who was a member of the board of directors of the Company and in light of his services to the Company, options to purchase 21,000 Ordinary Shares of the Company, which shall vest over a period of 12 months from the date of his nomination. Mr. George Balot receives a per meeting attendance fee ofNIS 915 (US $222).US $200. In addition, upon Mr. Balot assuming the function of Acting Chief Financial Officer of the Company he will receive compensation of $2,000 per month for 70 hours per month of work for the Company.38
Effective December 2, 2001, Marnetics Ltd. entered into a services agreement with Netlogic Ltd., a company under the control of Menachem Reinschmidt, Chairman of the Board of the Company, and provides on a non-exclusive basis, executive managerial and other related services with respect to the Company, Marnetics Ltd. and any of its affiliated companies, as may be prescribed from time to time by the board of directors of Marnetics,
The Board of Director after receiving the approval of the Audit Committee, decided to approve an Addendum to the Netlogic Ltd. Services Agreement (effective December 2, 2002) for six (6) months, from December 2, 2002 to June 2, 2003. The position of Mr. Reinschmidt during the period with the Company was that of Active Chairman of the Board of Directors on a part time basis of fifty percent of his time. Among the duties of the Active Chairman will be to approach companies for potential partnerships, merger and acquisitions investments and selling the Company’s technology and intellectual property. The compensation for such duties will be a monthly gross fee of $5,000 (five thousand dollars) plus Value Added Tax. In addition, the Company will supply Mr. Reinschmidt with a leased car and cellular phone for the duration of the extension of the Netlogic Ltd. Services Agreement.
A Second Addendum to this Services Agreement effective December 2, 2002, was signed on June 2, 2003, subject to shareholder approval, for an additional period from June 3, 2003 and to expire December 2, 2003.
Mr. David Sheetrit who is the Chief Executive Office of the Company as of June 2003, the Chief Operating Officer of the Company since January 2001, and Director in the Company since April 2003, provides services under a services agreement and receives monthly compensation of $4,000 plus a Company car and is supplied with a cellular phone, exactly as when he was the Chief Operating Officer of the Company.
Mr. Ilan Hadar will be leaving the Company effective the end of July 2003.
Based on a signed agreement June 22, 2003, effective June 15, 2003 and in effect until September 30, 2003, Mr. George Balot will be the Acting Chief Financial Officer of the Company on a part-time basis of $2000 a month for 70 hours of work, with an additional $45 per hour for every hour over that time. In addition, Mr. Balot is presently negotiating an agreement with the Company to receive a finder’s fee based only on success in selling the Company’s technology and/or finding an appropriate merger partner for the Company.
Mr. Hanoch Newman who is VP Research and Development of the Company provided services to the Company during 2003 at a reduced rate of 80% of his time. In addition to receiving his salary at an 80% rate, he was entitled to receive from the Company sales commission of 8 percent of sales accomplished through his efforts. Mr. Newman will be leaving the Company in June 2003 and will possibly be available for consultation services dependent on negotiations between the Company and him.
C.
BOARD PRACTICESBoard PracticesSee
Section A“Item 6A – Director and Senior Management” forstart dates and terms of services forperiod that our directors andsignificant managers. COMMITTEES OF THE BOARD OF DIRECTORS - AUDIT COMMITTEEsenior management are serving.Committees of the Board of Directors – Audit Committee
The Companies Law also provides that public companies must appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the
Company'sCompany’s business and approving related-party transactions as required by law. An audit committee must consist of at least three members, and include all of theCompany's outsideCompany’s external directors. However, the chairman of the board of directors, any director employed by the Company or providing services to the Company on a regular basis, any controlling shareholder and any relative of a controlling shareholder may not be a member of the audit committee. An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval twooutsideexternal directors are serving as members of the audit committee and at least one of theoutsideexternal directors was present at the meeting in which an approval was granted.39
In addition, the Companies Law requires the board of directors of a public company to appoint an internal auditor nominated by the audit committee. A person who does not satisfy the Companies
Law'sLaw’s independence requirements may not be appointed as an internal auditor. The role of the internal auditor is to examine, among other things, the compliance of theCompany'sCompany’s conduct with applicable law and orderly business practice. Following the combination transaction between the Company and Marnetics, Ltd., the Company has decided to appoint a new internal auditor whose candidacy will be recommended by the Audit Committee and approved by theCompany'sCompany’s Board of Directors.The Company has an audit committee
whichthat consists ofYossi Shelly, Chairman,Ora Setter, Moshe Rubin andIlja Bobbert.George Balot. Mr. Balot will be resigning as a member of the audit committee upon his assuming the function of Acting Chief Financial Officer during June 2003. The audit committee exercises the powers of the Board of Directors with respect to theCompany'sCompany’s accounting, reporting and financial control practices.Advisory Committee
During year 2002 to further the Company’s progress in both marketing and technology, an Advisory Committee comprised of the following persons that represent both the technology and the investments made in the Company was formed: Erez Aluf, representing STI Ventures Investments No. 2 B.V., Moshe Kessner, Joshua Piasetzky representing ECI Telecom Ltd, and Michael Schlesinger representing Docor International BV.These representatives do not have the power of board of director membersbut are advisory in nature to the management of the Company. Since August, 2002 the Advisory Committee has been inactive.
D. Employees
AsOn December 11, 2002 the Board of
DecemberDirectors resolved to authorize management of Marnetics to structure an Employment Stock Option Plan for the year 2003 and to allocate to employees of Marnetics up to 5 (five) per cent of the issued and outstanding share capital of Marnetics on a fully diluted basis. The program has not yet gone into effect.On March 31,
2000,2003 the Company employed approximately1413 persons,full-timeof whom six (6) worked in research and6 persons part-time, exclusivedevelopment, two (2) in marketing and sales, and five (5) in general and administrative. As ofthose workingApril 26, 2003, the Company decided to lay off the majority of the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in theElectrical Business.areas of marketing, sales and research and development. The28Electrical Businessremaining employees are in the area of administration and will behired byleft for thepurchasernext few months, possibly to the end of theElectrical Business upon closingyear 2003. A new updated budget was approved that reflects the shut down of the research and development, and marketing and sales operations of the Company and Marnetics Ltd.A Second Addendum to this Services Agreement effective December 2, 2002, was signed June 2, 2003, subject to shareholder approval, for an additional period from June 3, 2003 and to expire December 2, 2003, whereby Mr. Menachem Reinschmidt through the company Netlogic Ltd. is dedicating 50% of his time to the Company as an active Chairman. The compensation for such duties will be a monthly gross fee of $5,000 (five thousand dollars) plus Value Added Tax. In addition, the Company will supply Mr. Reinschmidt with a leased car and cellular phone for the duration of the extension of the Netlogic Ltd. Services Agreement. See “Item 7.B. Related Party Transactions – Netlogic Ltd.”
Mr. David Sheetrit who is the Acting Chief Executive Officer as of June 2003 of the Company, had been from January 2001 up until this time the Chief Operating Officer of the Company and Director in the Company since April 2003, is providing services to the Company under a services agreement and receives monthly compensation of $4,000 plus a Company car and is supplied with a cellular phone for his use in his work for the Company, exactly as when he was the Chief Operating Officer of the Company.
Mr. Ilan Hadar will be leaving the Company effective the end of July 2003.
Based on a signed agreement June 22, 2003, effective June 15, 2003 and in effect until September 30, 2003, Mr. George Balot will be the Acting Chief Financial Officer of the Company on a part-time basis of $2000 a month for 70 hours of work, with an additional $45 per hour for every hour over that
sale. Thetime. In addition, Mr. Balot is presently negotiating an agreement with the Companybelieves that relations with our employees are good.to receive a finder’s fee based only on success in selling the Company’s technology and/or finding an appropriate merger partner for the Company.40
Mr. Hanoch Newman who is VP Research and Development of the Company provides services to the Company at a reduced rate of 80% of his time. In addition to receiving his salary at an 80% rate, he is entitled to receive from the Company sales commission of 8 percent of sales accomplished through his efforts. Mr. Newman will be leaving the Company in June 2003 and will possibly be available for consultation services dependent on negotiations between the Company and him..
Israeli law, as well as collective bargaining agreements and orders of the Israeli Ministry of Labor and Welfare, contain provisions regarding conditions of employment, including, among other things, the length of the workday, minimum wages, insurance for work-related accidents, the determination of severance pay, and adjustments of wages in accordance with inflation. The Company generally provides our employees with benefits and working conditions at or above the required minimums. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Since January 1, 1995, such amounts have included payments for national health insurance. The payments to the National Insurance Institute are
betweenapproximately10% to 15%14.6% of wages, of which4.93%4.9% are contributed by the Company pursuant to Israeli lawrequirements. Somerequirements, and the rest, 9.7%, by the employee.Most of the
Company'sCompany’s employees are insured through aManagers'Managers’ Insurance Policy, which offers a combination of pension plans, insurance in cases of death and injury, and retirement and severance pay benefits. An amount equal to 5% of anemployee'semployee’s gross salary is contributed to theManagers'Managers’ Insurance Policy by the Company and an additional 5% by the employee.This 10% comprises the pensionAnother componentandof up to3.5%2.5% paid by the Company covers insurance for damages sustained by employees due to loss of work capability. An additional amount equal to 8.3%of the employee's gross salaryiscontributedfunded by the Companyforto cover severancepay benefits. Mostliability.In addition, most of the
Company'sCompany’s employees haveelected to be insured through a basic pension fund in "Mivtahim." An amount equal to 6.0% ofanemployee's gross salary is contributed to Mivtahim by the Company, and an additional 5.5% by the employee. This 11.5% comprises the pension component and up to 3.5% covers insurance for damages sustained by employees due to disability. An additional amount equal to 8.3% of the employees' gross salary is contributed by the Company for severance pay benefits. A portion of the more highly compensated employees are insured both through a basic or limited pension fund in Mivtahim and a Manager's Insurance Policy. In addition, since June 1998, all of the Company's officers have a Keren Hishtalmut saving planEducational Fund Savings Plan pursuant to which the Company contributes an amount equal to 7.5% of theofficer'semployee’s salary and theofficeremployee contributes an amount equal to 2.5% of his salary.Obligations of the Company resulting from the termination of employer-employee relationships are primarily accounted for through allocations made on behalf of the employees to various compensation funds, pension funds, and insurance companies within the framework of Managers’ Insurance Policies and the Mivtahim
and Managers' Insurance Policies.Pension Fund,The wages of
allmost of theCompany'sCompany’s employees are linked toa percentagechanges of the Israeli standard of living price index (CPI) as determined byperiodic agreements between the Histadrut andthe IsraeliGovernment. CertainBureau ofthe Electrical Business employees of the Company are members of a workers union.Statistics.The
Company and our employees in the Electrical Business are parties to 29the collective bargaining agreement relating to the building industry, signed between the Histadrut and The Center of Contractors' and Constructors' Associationtotal overhead expenses for wages in Israelgoverning relations between the employees and the Company.are usually, approximately 30%.As of
DecemberMay 31,2000,2003, the Company had no outstanding loans to employees and officers of the Company except to Mr. Dov Strikovsky, the President, Chairman and former CEO, who is no longer employed by the Company but is a significant shareholder of the Company. See"ITEM 7B-RELATED PARTY TRANSACTIONS."“Item 7B-Related Party Transactions.”E.
SHARE OWNERSHIP [Not applicable] ITEMShare OwnershipSee Item 7: “Major Shareholders and Related Party Transactions.”
Stock Option Plan
In connection with the June 1, 2000 share exchange agreement (“the agreement”) signed between the Company and Marnetics, the Board of Directors of the Company adopted an unwritten Option Plan (the “Option Plan”). The Option Plan provides for the grant of options to purchase up to an aggregate of 1,000,000 Ordinary Shares to directors, key employees and consultants of the Company. The Board of Directors of the Company will determine the terms of the grants. Under the Option Plan, the Company granted, to a company under the control of the former CEO and chairman of the board of the Company, 400,000 fully vested options to purchase shares at the exercise price of $3. With respect to these options non-cash compensation expenses totaling $2,000,000 were recorded and charged to earnings in accordance with APB 25 “Accounting for Stock Issued to Employees”.
The Company’s board of directors adopted a written stock option plan in its meeting of June 17, 2001. As of May 31, 2003, 279,206 options are allocated to employees on a fully diluted basis. In addition, former employees of Stav, have been allocated 157,143 options, which are fully vested. There remain 552,224 options that are unallocated.
41
On December 11, 2002 the Board of Directors resolved to authorize management of Marnetics to structure an Employment Stock Option Plan for the year 2003 and to allocate to employees of Marnetics up to 5 (five) per cent of the issued and outstanding share capital of Marnetics on a fully diluted basis. The program has not yet gone into effect.
Item 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSMajor Shareholders and Related Party TransactionsA.
MAJOR SHAREHOLDERSMajor ShareholdersThe following table identifies, as of
July 10, 2001,May 31, 2003, certain information with respect to the beneficial ownership ofOrdinary Sharessecurities of the Company of each person or entity by the Company to be the beneficial owner of five percent (5%) or more of the Ordinary Shares of the Company:
Name and Address of
Beneficial Owner
Number
Percent(1)
Linkware Ltd.
1,740,575(2)
18.77%
3 Hadror Street
P.O. Box 73
Hod Hasharon 45100 Israel
Dov Strikovsky
985,714(3)
10.63%
83 Akiva Street
Ra’anana, Israel
ECI Telecommunications Ltd.
1,187,439(4)
12.81%
34 Hasivim Street
Kiryat Aryeh Industrial Park
Petach Tikva Israel
STI Ventures Investments No. 2 B.V
1,180,907
12.74%
Hullenbergweg 379
1101 Cr. Amsterdam
Zuide – Oost
The Netherlands
Prime Technology Ventures NV
630,550
6.80%
Stroombaan 6-8
1181 VX Amstelveen,
The Netherlands
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1) - ---------------- ------ -------Linkware Ltd.................................. 1,740,575(2) 25.1% 3 Hadror Street P.O. Box 73 Hod Hasharon 45100 Israel(1) The number of shares beneficially owned is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days after May 31, 2003, through the exercise of any stock option or other right. The inclusion herein of such shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares such power with his or her spouse, with respect to all shares of capital stock listed as owned by such person or entity. This does not include an unallocated pool (including prior to merger) of 552,224 options in the calculation of the percentages. (2) Includes 302,266 shares that may be acquired pursuant to options that are presently or will become exercisable within 60 days at an exercise price of par value per share. (3) Includes 550,000 shares that may be acquired pursuant to options with an exercise price of $3.00 per share, which are presently or will become exercisable within 60 days by O.S.I Limited which is controlled by a trust, the beneficiaries of which are family members of Dov Strikovsky................................ 1,015,714(3) 14.5% 83 Akiva Street Ra'anana, Israel ECI Telecommunications Ltd.................... 1,187,439(4) 18.0% 34 Hasivim Street Kiryat Arye Industrial Park Petah Tikva Israel STI Ventures Investments No. 2 B.V............ 1,180,907(5) 17.9% Hullenbergweg 379 1101 Cr. Amsterdam Zuide - Oost The NetherlandsStrikovsky.3042
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1) - ---------------- ------ -------Prime Technology Ventures NV.................. 630,550(6) 9.7% Entrada 102, 10g6 EA Amsterdam, NetherlandsAs of May 31, 2003, 1,008,809 Ordinary Shares of the Company were held of record in the United States. Such Ordinary Shares were held by five (5) record holders and represented 13.7% of the total Ordinary Shares then outstanding (10.9% on fully diluted basis). On May 31, 2003, 6,353,581 of the Ordinary Shares were held of record outside of the United States. Such shares were held by seventeen (17) record holders and represented 86.3% (89.1% on a fully diluted basis) of the total Ordinary Shares outstanding. Since 927,546 of these Ordinary Shares were held by brokers or other nominees, the number of record holders in the United States may not be representative of the number of beneficial holders or where the beneficial holders are resident.
The following table sets forth certain information as of May 31, 2003, with respect to the beneficial ownership of shares of Ordinary Shares by each of the Company’s directors and executive officers, individually, and the directors and executive officers of the Company as a group, assuming conversion of all convertible debt or preferred stock and exercise of all warrants and stock options by such person and only by such person.
Amount and Nature of
Beneficial Ownership(1)
Number of
Shares
Percent
of Class(2)
Menachem Reinschmidt, Director and CEO
1,740,575(3
)
18.7
%
Moshe Rubin, External Director
—
—
David Sheetrit, Director and COO*
31,250(4
)
*
Ilan Hadar, CFO*
27,500(5
)
*
Hanoch Newman, VP R&D
53,141 (6
)
*
All Officers and Directors as a Group
(6 individuals)
2,451,356
26.4
%
* Less than 1%; also during June 2003 David Sheetrit became acting CEO, and at the end of July 2003 Ilan Hadar will step down as CFO and leave the Company.
(1) The number of shares beneficially owned is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares
whichthat the individual has the right to acquire within 60 days afterJuly 10, 2001,October 23, 2002, through the exercise of any stock option or other right. The inclusion herein of such shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares such power with his or her spouse, with respect to all shares of capital stock listed as owned by such person or entity. This does not include an unallocated pool (including prior to merger) of 552,224 options in the calculation of the percentages nor 115,505 unvested options of employees.(2)
Includes 230,942 shares currently issuableBased on in 7,362,390 Ordinary Shares outstanding as of May 31, 2003 and 1,945,593 options which are presently or will become exercisable within 60 days after June 30, 2003.(3) Menachem Reinschmidt is a controlling shareholder of Linkware Ltd. and, as such, has the ability to control the voting and disposition of the securities owned by such company. Mr. Reinschmidt disclaims beneficial ownership of such shares. It includes 302,266 shares that may be acquired pursuant to options which are presently or will become exercisable within 60 days by Linkware Ltd. at an exercise price of par value per share.
(3)(4) Includes
580,00031,250 shares that may be acquired pursuant to optionswith an exercise price of $3.00 per sharewhich are presently or will become exercisable within 60days by O.S.I Limited which is controlled by a trust, the beneficiariesdays. Mr. Sheetrit has an option to acquire 2% of Linkware Ltd. Out of which 1% arefamily memberspresently or will become exercisable within 60 days after October 23, 2002.(5) Includes 27,500 shares that may be acquired pursuant to options which are presently or will become exercisable within 60 days.
(6) Includes 53,141 shares that may be acquired pursuant to options which are presently or will become exercisable within 60 days.
43
B. Related Party Transactions
Sale of Electrical Business
Effective March 2001 the Company sold to Idan Millenium Investments and Assets Ltd. (“IDAN’), a company under the control of Dov
Strikovsky. (4) Includes 190,661 shares currently issuable. (5) Includes 189,612 shares currently issuable. (6) Includes 101,244 shares currently issuable. As of July 10, 2001, 995,926 Ordinary SharesStrikovsky, a major shareholder and President, Chairman and former CEO of the Company,were held of recordall the fixed assets, inventories, other assets and liabilities and related goodwill, in theUnited States. Such Ordinary Shares were held by five (5) record holdersamount of an appraised value of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each andrepresented 15.5%the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. During 2002 $71,000 was repaid on the account of thetotal Ordinary Shares then outstanding. On July 10,sale consideration. See “Item 8B – Significant Changes.”Speedwise Technologies Ltd.
In April 2001,
5,411,407 of the Ordinary Shares were held of record outside of the United States. Such shares were held by seventeen (17) record holders and represented 84.5% of the total Ordinary Shares outstanding. Since 263,246 of these Ordinary Shares were held by brokers or other nominees, the number of record holders in the United States may not be representative of the number of beneficial holders or where the beneficial holders are resident. B. RELATED PARTY TRANSACTIONS SALE OF ELECTRICAL BUSINESS On June 10, 2001, the Company executed anMarnetics Ltd. entered into a software license agreementto sell, subject to shareholder approval, our Electrical Business, including certain related liabilities, towith Speedwise Technologies Ltd., a companywholly-owned by the Company's former chief executive officer and current major stockholder, Mr. Dov Strikovsky.in which Marnetics Ltd. owns 14.7% interest. See"ITEM 8B - SIGNIFICANT CHANGES."“Item 4B – Licensing Arrangements.”In July 2001,
the 31CompanyMarnetics Ltd. entered into an OEM agreement with Speedwise Technologies Ltd., a company in whichtheMarneticsSubsidiaryowns17%14.7% of its outstanding shares. Income of $9,000 was made from Speedwise during year 2002. See"ITEM“Item 4B- CUSTOMERS." COMBINATION TRANSACTION– Customersand Distributors.” The OEM agreement was cancelled in November 2001.Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd (“Speedwise”). In September 2000, Speedwise issued shares which resulted in a decrease in the Company’s holdings in Speedwise to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 14.73%. In October 2002 Speedwise sold its assets and intellectual property to Orsus Solutions Ltd., (“Orsus”) an Israeli technology company, in consideration of cash and shares. Based on the consideration received by Speedwise, the Company assesses that the recoverable amount of its holdings in Speedwise will be $60,000 and as a result an impairment charge of $522,000 has been recorded.
Netlogic Ltd.
Effective December 2, 2001, Marnetics Ltd. entered into a services agreement with Netlogic Ltd., a company under the control of Menachem Reinschmidt, Chairman of the Board of the Company, and provides on a non-exclusive basis, executive managerial and other related services with respect to the Company, Marnetics Ltd. and any of its affiliated companies, as may be prescribed from time to time by the board of directors of Marnetics.
44
The Board of Director after receiving the approval of the Audit Committee, decided to approve an Addendum to the Netlogic Ltd. Services Agreement (effective December 2, 2002) for six (6) months, from December 2, 2002 to June 2, 2003. The role of Mr. Reinschmidt during the period was to hold the office of Active Chairman of the Board of Directors on a part time basis of fifty percent of his time. Among the duties of the Active Chairman will be to approach companies for potential partnerships, merger and acquisitions investments and selling the Company’s technology and intellectual property. The compensation for such duties will be a monthly gross fee of $5,000 (five thousand dollars) plus Value Added Tax. In addition, the Company will supply Mr. Reinschmidt with a leased car and cellular phone for the duration of the extension of the Netlogic Ltd. Services Agreement.
A Second Addendum to this Services Agreement effective December 2, 2002, was signed on June 2, 2003, subject to shareholder approval, for an additional period of a few more months, from June 3, 2003 and to expire December 2, 2003.
Inter Company Loan Agreement
During September 2002 the Company signed a loan agreement with Marnetics Ltd, a fully owned subsidiary, whereby Marnetics Ltd made available to the Company a secured loan of up to $500,000. The principle of the loan will be linked to the changes in the Israeli CPI. The interest was set to 4% annually. The loan will be paid until December 31, 2005. In order to secure the repayment of the loan, the Company agreed to pledge in favor of Marnetics Ltd. the amounts that will be collected from the account of the “Loans to Significant Shareholder and Former Director and Officer” in the amount of $1,228,000.
Combination Transaction
Effective December 31, 2000, Stav Electrical Systems (1994) Ltd. acquired Marnetics Ltd. pursuant to the terms of that certain
Share Exchange Agreementshare exchange agreement among the Company, Marnetics Ltd. and the security holders of Marnetics Ltd. Upon the closing of that transaction, certain entities and individuals affiliated with the Company, including Dov Strikovsky, a principal shareholder and the President, Chairman and former Chief Executive Officer of the Company or entities affiliated with Mr. Strikovsky, received options to purchase up to1,000,000400,000 Ordinary Shares of the Company.ASSIGNMENT OF BANK DEBTAssignment of Bank Debt
On May
30,9, 2001 an agreement was signed between the Company and Bank Hapoalim Ltd. (“Bank”) with respect to thelender ofCompany’s debt to theCompany's long-term debt obligations, entered into an assignment agreement entitled Assignment of Debt Agreement, pursuant to which: o Shlavor Systems Ltd., a company wholly-owned by Mr. Strikovsky, assumed liability for the current debtBank in the amount ofNIS 9,100,000 (approximately $2.2 million); o$3,127,000 (the “Debt”). In accordance with the Bank agreement, the Bank has agreed to release the Company from its obligation to repay the Debt and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, by May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt (the “Repaid Amount”) and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid thebank$954,000 and made the assignment in the aforesaid amount.In addition, the Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS
4,000,000 (US $953,970); o The Company assigned its accounts payable from1:2 paid on account of theCityoutstanding debt of Hod Hasharon,inwhich has been assigned to thefaceBank (Note 3b). To date Hod-Hasharon has not made any re-payment on account of the debt, and therefore the guarantee has not decreased. According to the terms of the Bank Agreement, following November 30, 2002, the Bank is entitled to exercise the outstanding amount ofNIS 9,100,000 (US $2.2 million)the guarantee, and since the guarantee has not decreased, the Company decided to establish an allowance for the guarantee in full. Nevertheless, the Company and its representatives are conducting on-going negotiations with Hod-Hasharon for the repayment of the debt to thebank; o TheBank, although at present the Companygranted the bank a limited guaranty (up to NIS 3,000,000 (US $0.7 million))cannot assess what portion of theobligationsdebt will be recovered, if any, (and the guarantee decreased accordingly) as a result ofShlavor Systems Ltd. undersuch negotiations, or any future action by theassumed debt;Company. See “Item 8A - Legal Proceedings”.45
Indemnification by Significant Shareholder
1. Following the Bank agreement, on June 30, 2001 an agreement was signed between Mr. Strikovsky and
o Bank Hapoalim releasedthe Companyfrom all liabilitypursuant to which Strikovsky agreed to reimburse the Company for thecurrentRepaid Amount and any additional amount that the Company may have to pay to the Bank if the Bank exercises the guarantee related to the debtin theof Hod Hasharon. The reimbursement amount ofNIS 13,100,000 (approximately $3.2 million), released$954,000 is due and payable to thefloating chargeCompany andany related liens or security interests it holds. INDEMNIFICATION BY SIGNIFICANT SHAREHOLDERwill be paid in monthly installments of $48,000 commencing on June 1, 2004 until paid in full. All amounts due and payable to the Company are linked to the Israeli CPI and bear interest of 4% per annum. The reimbursement amount of $954,000 was not yet recognized as the probability of its realization is in doubt.2. In connection with the Stav/Marnetics transaction and pursuant to an amendment to the
Share Exchange Agreement,share exchange agreement, Mr. Strikovsky granted an indemnification to the former shareholders of Marnetics Ltd. against certain losses or damages related to the Electrical Business and had deposited 200,000 shares of the Company held by him in escrow as security for his indemnification obligations.3. During the audit of the financial statements of Stav Electrical Systems (1994) Ltd. for the year ended December 31, 2000, it was discovered that excess advances were paid to certain suppliers in the amount of $0.5 million. On June 30, 2001, Mr. Strikovsky, the Company and the former shareholders of Marnetics Ltd. entered into a separate
Indemnification Agreementindemnification agreement that further defined, clarified and expanded the terms of the initial indemnification, added indemnification obligations related to the bank debtrestructuringassignment (as describedbelow)above) and provided for an additional 100,000 shares of the Company held by Mr. Strikovsky to be held in escrow as security for such indemnification obligations. Under thisIndemnification Agreement,indemnification agreement, Mr. Strikovsky agreed to:32o Reimburse the Company for NIS 4,000,000 (US $970,875)
• Reimburse the Company for US $954,000 which is the amount the Company has paid to the bank pursuant to the debt assignment described above, to be paid in monthly installments of US $48,000 commencing June 1, 2004 until paid in full. All amounts due and payable to the Company are linked to the Israeli CPI and bear interest of 4% per annum. The reimbursement amount of $954,000 was not yet recognized as the probability of its realization is in doubt; and
• Guaranty the repayment of $0.5 million to the Company by certain suppliers of the Company in connection with excess advances made to such suppliers by the Company in the year-ended December 31, 2000. Such sum was paid to the Company in July 2001 by realization of bank guarantees in favor of the Company.
• To indemnify the Company for any amount it may pay to Bank Hapoalim in the future under the guarantee granted by the Company in favor of the bank under the debt assignment or for any losses the Company may incur in connection with such debt assignment documents.
4. The Company and Mr. Strikovsky were named as a defendant in a claim for specific performance of an agreement allegedly entered into by the Company and the plaintiff in April 1999 (the “Agreement”) as well as damages as a result of a breach of the agreement. On July 2, 2001, due to the fact that no defense and/or reply were provided by the Company or Mr. Strikovsky, judgment was entered against the Company and Mr. Strikovsky in the amount of $725,000. On February 7, 2002 the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed an appeal on the court decision which was accepted by the Supreme Court of the State New York with instructions to allow evidentiary hearing. The hearing was held on May 22, 2003 and the Company is awaiting the court’s decision. The plaintiff proposed to settle the suit for $250,000 and while the Company was willing to further negotiate a substantially lower amount, in light of the plaintiff’s position the Company decided to reject the proposal. In 2001 the Company has
paidestablished an allowance in the amount of $750,000 tothe bank pursuant to the debt assignment described above, to be paid in monthly installmentsprovide for its possible exposure. In light ofNIS 200,000 (US $48,500) commencing June 1, 2004; and o Guaranty the repayment of $0.5 million torecent developments the Company decreased the allowance bycertain suppliers$500,000 to $250,000 which, in light of theCompany in connection with excess advances made to such suppliers byjudgment against the Companyinand theyear-ended December 31, 2000. Such sum was paid to the Company in July 2001 by realization of bank guarantees in favorsettlement offer proposed, represents a conservative estimate of theCompany. o To indemnify the Company for any amount it may payprobable exposure. See “Item 8A (1) – Financial Information -Legal Proceedings.”Loans to
Bank Hapoalim in the future under the guarantee granted by the Company in favor of the bank under the debt assignment or for any losses the Company may incur in connection with such debt assignment documents. LOANS TO SIGNIFICANT SHAREHOLDER AND FORMER DIRECTOR AND OFFICERSignificant Shareholder and Former Director and CEOThe Company has, from time-to-time, made loans to Dov Strikovsky during the period of time he was Chairman of the Board of Directors, President, and Chief Executive Officer of the Company. At December 31, 1997, 1998, and 1999 the amount of such loans outstanding was
NIS 4,721,000 (US $1,151,000), NIS 5,915,000 (US $l,443,000),US $1,151,000, US $1,443,000 andNIS 6,540,000 (US $1,570,000)US $1,570,000 respectively. Such loans did not bear interest through December 31, 1997.Such(Such loans currently linked to the Israeli Consumer Price Index and bear interest at the rate per annum equal to LIBOR plus3%.2 %.) In addition, during 1999 and 2000, the Company inadvertently made excess advances to Mr. Strikovsky. Upon discovery of this error, Mr. Strikovsky repaid to the Company the amount of such excessadvances in full.advances.46
In preparation for its initial public offering, in April 1998, the Company entered into an agreement with Mr. Strikovsky which provided that he would pay interest only on such loans through October 1, 1998 and will amortize the principal amount, and pay interest thereon, commencing on January 1, 2000 and terminating on December 31, 2003. In September 1998, such agreement was superceded by an agreement pursuant to which Mr. Strikovsky agreed to repay such loans together with the interest thereon, on or prior to November 25, 2000, subject to extension in the sole discretion of the disinterested members of the Board of Directors of the Company. Mr. Strikovsky applied the net proceeds of the sale in the
Company'sCompany’s initial public offering of a number of his Ordinary Shares, approximately US $522,000, and also agreed to apply 50% of all dividends paid, net of taxes, on the Ordinary Shares owned by him to the prepayment of such loans. Pursuant to the September 1998 agreement, in 1999, the disinterested members of theCompany'sCompany’s Board of Directors voted to extend the repayment terms of the net loan. The loan is currently payable in eight annual installments, which commenced in1999December 31, 2000 and shall be repaid in full by December 31, 2007. First payment was made by way of applying Mr. Strikovsky’s net proceeds of the sale in the Company’s initial public offering in the amount of $522,000. In September, 1999 a dividend that was paid to Mr. Strikovsky in the sum of $90,000, and he applied half of this amount, $45,000 towards repayment of the loan.During August, September 2002 Mr. Strikovsky paid the Company sum of $225,000 including interest. This amount credited first against the balance of its currents account in the sum of $87,000 and the sum of $138,000 was credited against the balance due of the loan.
Mr. Strikovsky did not make further payments towards this loan. The
first two installments were paid. 33Company notified Mr. Strikovsky of its default and is involved in ongoing legal efforts aimed at collecting amounts due from Mr. Strikovsky and the companies under his control.. At December 31, 2001 the Company reassessed the collectibility of the net loan, in the amount of $1,228,000 granted to Mr. Strikovsky in previous years, in accordance with provisions of SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method.
C.
NOT APPLICABLE ITEMInterests of Experts and CounselNot Applicable
Item 8.
FINANCIAL INFORMATIONFinancial InformationA. Financial Information
See
"ITEM 18-FINANCIAL INFORMATION"“Item 18-Financial Statements”.LEGAL PROCEEDINGSLegal Proceedings
1. The Company and Mr. Strikovsky was named as a defendant in a claim for specific performance of an agreement entered into by the Company and the plaintiff in April 1999 (the “Agreement”) as well as damages as a result of a breach of the agreement. On July 2, 2001, due to the fact that no defense and/or reply were provided by the Company or Mr. Strikovksy, judgment was entered against the Company in the amount of $725,000. On February 7, 2002 the Company and Mr. Strikovsky filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed an appeal on the court decision which was accepted by the Supreme Court of the State New York with instructions to allow evidentiary hearing. The hearing was held on May 22, 2003 and the Company is
currentlyawaiting the court’s decision. The plaintiff proposed to settle the suit for $250,000 and while the Company was willing to further negotiate a substantially lower amount, in light of the plaintiff’s position the Company decided to reject the proposal. In 2001 the Company has established an allowance in the amount of $750,000 to provide for its possible exposure. In light of recent developments the Company decreased the allowance by $500,000 to $250,000 which, in light of the judgment against the Company and the settlement offer proposed, represents a conservative estimate of the probable exposure.47
2. On May 9, 2001 an agreement was signed between the Company and Bank Hapoalim, Ltd. with respect to the Company’s debt to the Bank in the amount of $3,127,000. See Item7 - Related Party Transactions - Assignment of Bank Debt.
After the consummation of the Bank Agreement, the Company was informed that the municipality of Hod Hasharon is delaying the payments due to the Bank. As a consequence the Company is carrying out negotiations with the municipality of Hod Hasharon for the repayment of the debt including interest accrued thereon. The legal advisor of the Company in a letter dated June 6, 2002 wrote that the present negotiations by the lawyers of the Company with the lawyers representing the municipality of Hod Hasharon can be considered to be legal procedures and that the guarantee can be considered extended under the Bank agreement until November 30, 2002.
3. On December 4, 2001, Yossi Tessler and Lavni Krasni, shareholders in the Company sent to Menachem Reinschmidt, CEO of the Company, a demand letter with claims regarding information published by the Company regarding the BITmax Line of Products, in the Proxy Statement filed in November 17, 2000. Menachem has rejected these claims and the so-called damages being claimed. As of the date of June 30, 2002, to the best of the knowledge of the Company no action has been taken by the proposed claimants. On September 14, 2001, by way of a Shareholders Meeting, Marnetics Ltd.’s shareholders approved a resolution to indemnify Menachem Reinschmidt in respect to the demand letter sent by Advocate Yori Nehustan on behalf of Yossi Tessler and Lavie Krasni, in accordance with the provisions and limitations set out in the Companies Law 5759-1999.
4. During March 2003, the Company received letters from the lawyers of Marot Imaging Israel Ltd., the Israeli representative of Getty Images, Inc. that pictures from GETTYIMAGES were incorporated into the Company’s internet site without obtaining the copyright permission of the owner. The Company denied responsibility for the alleged infringement, as the builder of the site retained by the Company was responsible for the incorporation of the images into the site. Upon notification that the images may be infringing rights of third party’s, the Company ceased to use the pictures in question and has so notified the agent of Getty Images. Although Marot Imaging has offered to settle the matter the Company at this time has decided not to accept the settlement offer. To date no action has been filed with the courts by Marot in this matter.
5. During year 2002, the Company resolved an issue with the Israel Airports Authority regarding previous agreements made with the former CEO of the Company whereby the Company had issued in the past a guarantee to provide electrical work to the Israel Airports Authority.
On November 24, 1997 the Company under the previous name Stav Electrical Systems(1994) Ltd signed an agreement to perform services for the Israel Airports Authority and provided a guarantee to perform the services under the agreement. On January 21, 2001 a further agreement was signed regarding changes and additions to such services to be performed. The Company, under its previous name, requested that Stav Lighting Manufacturer Electric Services (Company no. 51-1108128) and Stav Electric Works Ltd. (Company no. 51-1065880) perform the services and manage the work for the Company.
On November 28, 2002 Stav Electric Works Ltd. and Stav Lighting Manufacturer Electric Services joined with the Company, jointly and severally, to perform the services for the Israel Airport Authority, whereby the monies owing under the agreements with the Israel Airports Authority will be paid to the Company.
On December 10, 2002, the Company and the Israeli Airports Authority came to agreement regarding payment to the Company for work provided by the previous companies involved in
any material litigation. DIVIDEND POLICYthe previous agreements, upon the Company committing to renew the guarantee by March 2, 2003. Since then the guarantee has been cancelled.6. The
Marnetics SubsidiaryCompany received a bill for legal services from the legal offices of Holland and Knight for previous work of approximately $30,000. The Company questioned certain items on the bill and asked the internal auditor of the Company to review the bill. Several of the invoices reviewed included excessive hours billed. The internal auditor in a letter dated March 18, 2003 to the Audit Committee of the Company believes that many of the hours charged are unreasonable and that there were significant over-billings. As such the Company hasneverexpanded its review of the Holland and Knight invoices, both current and prior in order to determine the extent of the over billings. In the meanwhile, Holland and Knight has demanded payment for such services which the Company has not paidany cash dividendstodate on its ordinary shares.date.48
Dividend Policy
Although in 1999 we declared a cash dividend on
itsour Ordinary Shares, we do not anticipate declaring a dividend for the foreseeable future. In addition, the payment of cash dividends in the future (if ever declared by the Board) is limited by the Israeli law to the profits of the Company and could potentially be limited or prohibited by the terms of financing agreements we may enter into(E.G.(e.g., a bank line of credit or an agreement relating to the issuance of debt securities of the Company). Marnetics has never paid any cash dividends to date on its ordinary shares.B.
SIGNIFICANT CHANGES SALE OF ELECTRICAL BUSINESS On June 10, 2001,Significant ChangesThe Company’s operations during 2002 consisted of the core business of developing and marketing network capacity enhancement and network information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd. During 2002 the Company
executed an agreement to sell, subject to shareholder approval, its Electrical Business, including certain related liabilities, to a company (the "Purchaser") wholly-owned by the Company's former chief executive officeralso dealt with some legal issues andcurrent major stockholder, Dov Strikovsky. The Purchaser was the sole bidder in a public request for proposals which was announced on May 15, 2001 and ended on May 30, 2001. The Boardcollection ofDirectors considered the purchase offer and authorized the Company's acceptance of the Purchaser's bid. ASSETS TO BE SOLD. The Company has contracted to sell certain of its assets relateddebt relating to the Electrical Business, which was sold during 2001.Reduction of Marnetics Business and Research and Development Activities
As of April 26, 2003, the
purchaser shall assume certain related liabilities asCompany decided to lay off the majority ofMarch 31, 2001. SALE PRICE.the employees of the Company and its wholly-owned subsidiary, Marnetics Ltd. in the areas of marketing, sales and research and development The remaining employees are in the area of administration and will be left for the next few months, possibly to the end of the year 2003. A new updated budget was approved that reflects the shut down of the research and development, and marketing and sales operations of the Company and Marnetics Ltd. The Company asked the assistance of several investment bankers and consultants to evaluate, Marnetics Ltd., in order to assist the Board of Directors regarding the possible sale of Marnetics Ltd. or its technology. There is no guarantee the Company will find a buyer for Marnetics Ltd. or its technology.Delisting of Trading of Shares from the Amex
On February 2, 2003 the AMEX, notified the Company that the Company no longer complies with the Exchange’s continued listing standards and that therefore the Company’s Ordinary Shares are subject to being delisted from the Exchange. The Exchange has
contracted to sellalso notified theassetsCompany of itsElectrical Businessintention to proceed with the filing of an application with the Securities and Exchange Commission (the “SEC”) to strike the Company’s Ordinary Shares from listing and registration on the Exchange. The notice stated that the Company’s Ordinary Shares are subject to delisting due to falling below Section 1003(b)(i)(C) of the Guide, in that the Company’s aggregate market value of shares publicly held is less than $1,000,000 for more than 90 consecutive days, as well as the substantial period of time at which the Company’s Ordinary Shares have been selling for a low price per share (Section 1003(f)(v)).On February 9, 2003, the Company submitted a request for an oral hearing before a committee of the Exchange in order to appeal the Exchange’s above determination.
On March 27, 2003 the AMEX, notified the Company of the decision of the Exchange’s Listing Qualification Panel (the “Panel”), which considered a request for review by the Company of the AMEX staff’s determination to prohibit the continued listing of the Company’s ordinary shares on the Exchange and initiate delisting proceedings due to the
PurchaserCompany not meeting the market value standard set forth in Section 1003(b)(i)(C) of the Guide, in that the Company’s aggregate market value of shares publicly held is less than $1,000,000 forNIS 2.5 million (approximately $587,000)more than 90 consecutive days, as well as the substantial period of time at which the Company’s Ordinary Shares have been selling for a low price per share (Section 1003(f)(v) of the Guide).Upon its review, at the request of the Company, the Panel has agreed with the determination of the Amex Staff that the Company’s ordinary shares should be delisted by the Exchange.
49
The Amex has notified the Company that pursuant to Section 1204(d) of the Guide, the Exchange will suspend trading in the Company’s ordinary shares as soon as practicable, and will proceed with the filing of an application with the SEC to strike the Company’s ordinary shares from listing and registration on the Exchange when and if authorized, in accordance with Sections 1205(g), 1206(d) and/or Section 1206(e) of the Guide.
The Company may request that the Committee on Securities review the decision of the Panel; however, such a request for review will not operate as a stay of the Panel’s decision. Due to the Company’s assessment of the likelihood of reversing the decision of the Panel, as well as the costs involved, the Company has chosen not to request a review by the Committee on Securities.
Marnetics Broadband Technologies Ltd. recently started trading on the Pink Sheets, which are substantially less liquid and efficient, under the symbol MXBT.PK See Item 9B – Listing – Markets.”
Sale of Electrical Business
Effective March 2001 (executed June 10, 2001) the Company sold to Idan Millenium Investments and Assets Ltd. (“IDAN’), a company under the control of Dov Strikovsky, a major shareholder and President, Chairman and former CEO of the Company, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of an appraised value of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of
NIS 100,000 (approximately $24,000)$24,000 commencingonFebruary 1, 2002. Inaddition,May 2002 thePurchaserCompany signed an addendum with IDAN to change the terms of payments to such that the first 11 installment willalso assume approximately NIS 3.0 million (approximately $715,000)be reduced to $7,000 each and the remaining 14 installments will be ofliabilities related$37,000. The Company, considering the collectibility probability, decided to establish an allowance on theElectrical Business.amount not yet collected. During 2002 Mr. Strikovsky repaid $71,000 on the account of the sale consideration. See “Item 7B – Related Party Transactions.”This summary highlights selected information about the Electrical Business
Purchase Agreementpurchase agreement and may not contain all of the information that is important to you. To understand the sale of the Electrical Business more fully and for a more complete34description of the legal terms, you should read “Item 7B – Related Transactions”, and the agreementagreements, whichisare attached asExhibit 10.8Exhibits 10.6 and 10.7 hereto and the other documents referred to herein.ITEMThe Company’s operations during 2001 consisted of two lines of business: (1) core business of developing and marketing broadband Internet fortification solutions which shifted to the development and marketing of capacity enhancement and information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd., and (2) historical business of electrical and lighting contracting and engineering business or the Electrical Business, which was sold during 2001.
During the year 2001, due to the shift of the technology focus of Marnetics, a new CEO was brought into the Company. Menachem Reinschmidt established Marnetics in 1998 and was its first Chief Executive Officer, and oversees all technology development activities of the Company. One of the leading data communication experts in Israel, Mr. Reinschmidt has 17 years of experience in the most advanced fields of computer networks, including design, analysis, integration and development. His expertise incorporates advanced networking topics, including frame relay, TCP/IP, Internet architecture, ATM, Local Area Networks, routers and switches, and voice-over IP.
50
Item 9.
THE LISTINGThe ListingA.
LISTING DETAILSListing DetailsThe following are the
lowhigh andhighlow sales prices by fiscal quarter for the quarterly periods in which the Ordinary Shares have been traded on theAmerican Stock Exchange.AMEX.
ORDINARY SHARES TRADING PRICES --------------- HIGH LOW ---- ---1998 Fourth Quarter (from November, 25, 1998)......... US $6.125 US $4.875 1999 First Quarter.................................... 5.250 4.000 Second Quarter................................... 4.125 1.750 Third Quarter.................................... 2.500 1.500 Fourth Quarter................................... 3.500 1.3125 2000 First Quarter.................................... 24.750 2.500 Second Quarter .................................. 15.750 6.750 Third Quarter.................................... 17.500 14.0625 Fourth Quarter................................... 14.500 6.3125 2001 First Quarter.................................... 7.750 4.000 Second Quarter................................... 4.500 1.100 Third Quarter (through July 11, 2001)............ 2.200 2.000
Ordinary Shares
Trading Prices
High
Low
Fourth Quarter (from November, 25, 1998)
US $6.12
US $4.87
First Quarter
5.25
4.00
Second Quarter
4.12
1.75
Third Quarter
2.50
1.50
Fourth Quarter
3.50
1.33
First Quarter
24.75
2.50
Second Quarter
15.75
6.75
Third Quarter
17.50
14.06
Fourth Quarter
14.50
6.31
First Quarter
7.25
4.20
Second Quarter
4.60
1.10
Third Quarter
2.20
0.30
Fourth Quarter
0.90
0.35
First Quarter
0.89
0.30
Second Quarter
0.44
0.20
Third Quarter
0.25
0.06
Fourth Quarter
0.18
0.06
First Quarter
0.22
0.06
Second Quarter
0.15
0.01
B.
NOT APPLICABLE. C. MARKETS The Company'sMarketsOn February 2, 2003 the AMEX, notified the Company that the Company no longer complies with the Exchange’s continued listing standards and that therefore the Company’s Ordinary Shares are subject to being delisted from the Exchange. The Exchange has also notified the Company of its intention to proceed with the filing of an application with the Securities and Exchange Commission (the “SEC”) to strike the Company’s Ordinary Shares from listing and registration on the Exchange. The notice stated that the Company’s Ordinary Shares are subject to delisting due to falling below Section 1003(b)(i)(C) of the Guide, in that the Company’s aggregate market value of shares publicly held is less than $1,000,000 for more than 90 consecutive days, as well as the substantial period of time at which the Company’s Ordinary Shares have been selling for a low price per share (Section 1003(f)(v)).
On February 9, 2003, the Company submitted a request for an oral hearing before a committee of the Exchange in order to appeal the Exchange’s above determination.
On March 27, 2003 the AMEX, notified the Company of the decision of the Exchange’s Listing Qualification Panel (the “Panel”), which considered a request for review by the Company of the AMEX staff’s determination to prohibit the continued listing of the Company’s ordinary shares on the Exchange and initiate delisting proceedings due to the Company not meeting the market value standard set forth in Section 1003(b)(i)(C) of the Guide, in that the Company’s aggregate market value of shares publicly held is less than $1,000,000 for more than 90 consecutive days, as well as the substantial period of time at which the Company’s Ordinary Shares have been selling for a low price per share (Section 1003(f)(v) of the Guide).
51
Upon its review, at the request of the Company, the Panel has agreed with the determination of the Amex Staff that the Company’s ordinary shares should be delisted by the Exchange.
The Amex has notified the Company that pursuant to Section 1204(d) of the Guide, the Exchange will suspend trading in the Company’s ordinary shares as soon as practicable, and will proceed with the filing of an application with the SEC to strike the Company’s ordinary shares from listing and registration on the Exchange when and if authorized, in accordance with Sections 1205(g), 1206(d) and/or Section 1206(e) of the Guide.
The Company may request that the Committee on Securities review the decision of the Panel; however, such a request for review will not operate as a stay of the Panel’s decision. Due to the Company’s assessment of the likelihood of reversing the decision of the Panel, as well as the costs involved, the Company has chosen not to request a review by the Committee on Securities.
Marnetics Broadband Technologies Ltd. recently quoted on the
American Stock ExchangePink Sheets, which are substantially less liquid and efficient, under the symbol"MXB." The Company has no present intention to list or quote its securities on any markets outsideMXBT.PKC. Plan of Distribution
Not applicable.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the
United States. However,IssueNot applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
Marnetics Broadband Technologies Ltd. is an Israeli company registered with the Israel Registrar of Companies, registration no. 520004389-4.
On November 26, 2002, at the annual general meeting of shareholders, the shareholders of the Company
may seek such listings in the future if its Board of Directors determines that it is in the best interestamended Article 99 of theCompany. 35D. - F. NOT APPLICABLE. ITEM 10. ADDITIONAL INFORMATION A. Not applicable. B. MEMORANDUM AND ARTICLES OF ASSOCIATION PURPOSES AND OBJECTS OF THE COMPANYArticles of Association of the Company to provide to the fullest extent allowed under Israeli Companies Law a change of language to provide provisions which endeavor to limit personal liability of an office holder towards the Company and shareholders regarding insurance coverage, indemnification and exemption from duty of care. This amendment to the Articles of Association is included as an exhibit as revised articles of association to this annual report on Form 20-F. See “Item 19 – Exhibits”.Purposes and Objects of the Company
Pursuant to Section 3 of our Articles of Association, the
Company'sCompany’s purpose is to operate according to business considerations for the production of profits.POWERS OF THE DIRECTORS52
Powers of the Directors
The Directors shall formulate the
Company'sCompany’s policy and shall supervise the exercise of the GeneralManager'sManager’s office and his acts, including, but not limited to the determination of theCompany'sCompany’s plans of activity, the principles for financing such plans and the organizational structure of the Company.The power of our directors to vote on a proposal, arrangement or contract in which the director is materially interested is limited by the relevant provisions of the Companies Law.
RIGHTS ATTACHED TO SHARESRights Attached to Shares
Our registered share capital consists of a single class of 25,000,000
ordinary shares,Ordinary Shares, par value NIS 0.08 per share, of which6,407,333 ordinary shares7,362,390 Ordinary Shares were issued and outstanding as ofJuly 10, 2001.June 2003. All outstandingordinary sharesOrdinary Shares are validly issued, fully paid and non-assessable. The rights attached to the Ordinary Shares are as follows:DIVIDEND RIGHTSDividend Rights
Subject to the permitted distribution provisions of the Companies Law, the Board of Directors may declare a dividend to be paid to the shareholders according to their rights and interests in the profits, and may fix the record date for eligibility and the time for payment.
Subject to any preferential, deferred, qualified or other rights, privileges or conditions attached to any special class of shares with regard to dividends, the profits of the Company available for dividend and resolved to be distributed shall be applied in payment of dividends upon the shares of the Company in proportion to the amount paid up or credited as paid up per the nominal value thereon respectively.
The Board of Directors may from time to time pay to the shareholders on account of the next forthcoming dividend such interim dividends as, in their judgment, the position of the Company justifies.
36VOTING RIGHTSVoting Rights
Holders of our
ordinary sharesOrdinary Shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The quorum required for any meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent, in the aggregate, at least one third of the voting rights of the issued share capital. In the event that a quorum is not present within fifteen minutes of the scheduled time, theshareholders'shareholders’ meeting will be adjourned to the same day in the following week, or such time and place as the board of directors may determine. If at such reconvened meeting a quorum is not present within half an hour from the time appointed for holding the meeting, any two shareholders present in person or by proxy will constitute a quorum.Notwithstanding the aforesaid, if a General Meeting was convened at the demand of shareholders as permitted by Section 63(b) of the Companies Law, then a quorum at such adjourned meeting shall be present only if one or more shareholders are present who held in the aggregate at least 5% of the issued share capital of the Company and at least 1% of the voting rights in the Company or one or more shareholders who hold in the aggregate at least 5% of the voting rights in the Company.
Subject to the Companies Law, except decisions regarding the amendment of Article 101 of our Articles Association and/or the approval of transactions with interested parties (as listed in our Articles of Associations), any resolution at a General Meeting shall be deemed adopted if approved by the holders of a majority of the voting rights in the Company represented at the meeting in person or by proxy and voting thereon.
The Directors of the Company are appointed by the Annual General Meeting, unless appointed by the Board to fill a vacancy, and shall serve as Directors from the time of appointment until the next Annual General Meeting, unless such Director is disqualified for whatever reason.
RIGHTS IN THE EVENT OF LIQUIDATION53
Rights in the Event of Liquidation
If the Company shall be liquidated, whether voluntarily or otherwise, the liquidators may, subject to the provision of the Statutes, divide among the shareholders any part of the assets of the Company and may vest any part of the assets of the Company in trustees upon such trusts, for the benefit of the shareholders, as the liquidators deem appropriate.
CHANGING RIGHTS ATTACHED TO SHARESChanging Rights Attached to Shares
If, at any time, the share capital is divided into different classes of shares, the rights attached to any class may be varied with the sanction of a majority vote at a meeting of the shareholders passed at a separate meeting of the holders of the shares of the class.
37GENERAL MEETINGSGeneral Meetings
An Annual General Meeting shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding Annual General Meeting, and at such time and place as may be determined by the Board of Directors. Such Annual General Meetings shall be called
"Annual Meetings"“Annual Meetings”, and all other Meetings of the shareholders shall be called"Extraordinary Meetings"“Extraordinary Meetings”. The Annual Meeting shall receive and consider theDirectors'Directors’ Report, the Financial Statements, appoint auditors, elect Directors, and transact any other business which, under these Articles or by the Companies Law, may be transacted at a General Meeting of the Company, provided that notice of such other business was given to shareholders in accordance with the provisions of the Articles.At least twenty-one (21) days and not more than sixty (60)days notice of any General Meeting shall be given, specifying the place, the day and the hour of meeting and, in the case of special business, the nature of such business, shall be given in the manner hereinafter mentioned, to such shareholders as are under the provisions of the Articles, entitled to receive notices from the Company.
An Extraordinary Meeting may be convened by the Board of Directors, whenever they think fit or upon a demand in writing by members holding at least 10% of our issued capital.
INCREASE IN OUR CAPITALLimitations on Foreign Shareholders to Hold or Exercise Voting Rights
There are no limitations on foreign shareholders in our articles of association. Israeli law restricts the ability of citizens of countries that are in a state of war with Israel to hold shares of Israeli companies.
Approval of Transactions under Israeli Law
The Companies Law imposes fiduciary duties that “office holders,” including directors and executive officers, owe to their company. An office holder’s fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care generally requires an office holder to act with the level of care which a reasonable office holder in the same position would have acted under the same circumstances. The duty of loyalty generally requires an office holder to act in good faith and for the good of the company. Specifically, an office holder must avoid any conflict of interest between the office holder’s position in the company and his or her other positions or personal affairs. In addition, an office holder must avoid competing against the company or exploiting any business opportunity of the company for his or her own benefit or the benefit of others. An office holder must also disclose to the company any information or documents relating to the company’s affairs that the office holder has received due to his or her position in the company. The term “office holder” includes any person who, either formally or in substance, serves as a director, general manager or chief executive officer, or who reports directly to the general manager or chief executive officer. Each person listed in the table under “Item 6. Directors, Senior Managers and Employees—A. Directors and Senior Management” above is an “office holder” of the Company.
Under the Companies Law, all arrangements as to compensation of office holders who are not directors require approval of the board of directors and, in certain cases, the prior approval of the audit committee. Arrangements as to compensation of directors also require audit committee and shareholder approval.
54
The Companies Law requires that an office holder promptly disclose any personal interest that he or she may have, and all related material information known to him or her, in connection with any existing or proposed transaction by the company. A personal interest of an office holder includes a personal interest of the office holder’s relative or a corporation in which the office holder or the office holder’s relative is a 5% or greater shareholder, director or general manager or has the right to appoint at least one director or the general manager. The office holder’s duty to disclose shall not apply in the event that the personal interest only results from a personal interest of the office holder’s relative in a transaction that is not an extraordinary transaction. An extraordinary transaction is a transaction not in the ordinary course of business, not on market terms, or likely to have a material impact on the company’s profitability, assets or liabilities.
Under the Companies Law, once the office holder complies with the above disclosure requirement, the board of directors is authorized to approve the transaction, unless the articles of association provide otherwise. A transaction that is adverse to the company’s interest may not be approved. If the transaction is an extraordinary transaction, then it also must be approved by the company’s audit committee and board of directors, and, under certain circumstances, by the shareholders of the company. Generally, when an extraordinary transaction is considered by the audit committee and board of directors, the interested directors may not be present or vote.
Duties of Shareholders
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. A controlling shareholder is a shareholder who has the ability to direct the activities of a company, including a shareholder that owns 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights, but excluding a shareholder whose power derives solely from his or her position on the board of directors or any other position with the company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the engagement of a controlling shareholder as an office holder or employee, generally require the approval of the audit committee, the board of directors and the shareholders. The shareholder approval must include at least one-third of the shares of non-interested shareholders voted on the matter. However, the transaction can be approved by shareholders without this one-third approval if the total shares of non-interested shareholders voted against the transaction do not represent more than one percent of the voting rights in the company.
In addition, under the Companies Law, each shareholder has a duty to act in good faith toward the company and other shareholders and to refrain from abusing his or her power in the company, such as in shareholder votes. In addition, specified shareholders have a duty of fairness toward the company. These shareholders include any controlling shareholder, any shareholder who knows that it possesses the power to determine the outcome of a shareholder vote and any shareholder who, pursuant to the provisions of the articles of association, has the power to appoint an office holder or any other power with respect to the company. However, the Companies Law does not define the substance of this duty of fairness.
Increase in Our Capital
The Company may from time to time by a majority vote at a meeting of shareholders, whether all the shares for the time being authorized shall have been issued or all the shares for the time being issued shall have been fully called up or not, increase its share capital by the creation of new shares.
C.
MATERIAL CONTRACTS Software License Agreement byMaterial Contracts(i) Services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, Director and
between Marnetics Ltd. and Speedwise Technologies, Ltd. dated asChairman ofApril 17, 2001. See "ITEM 4B - BUSINESS OVERVIEW - LICENSING ARRANGEMENTS." Indemnification Agreement between Dov Strikovsky,the Company effective December 2, 2001, dated February 11, 2002, and (ii) an Addendum to theformer shareholders of Marnetics Ltd.Services agreement dated December 2, 2002 until June 2, 2003, and a Second Addendum to the Services agreement from June 3, 2003 to December 2, 2002. See “Item 7B - Major Shareholders and Related Party Transactions – Related Party Transactions.”55
Amendment to the asset purchase agreement dated as of June
30, 2001. See "ITEM 7B - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY TRANSACTIONS - INDEMNIFICATION BY SIGNIFICANT SHAREHOLDER." Asset Purchase Agreement10, 2001 (Effective March 31, 2001) between the Company and Idan Millennium Investments andAssets dated as of June 10, 2001. See "ITEM 8B - SIGNIFICANT CHANGES - SALE OF ELECTRICAL BUSINESS." Agreements to the Assignment of Debt by and among the Company, Bank Hapoalim Ltd. and Shlavor Systems Ltd. datedAssetsdated as of May30, 2001.6, 2002. See"ITEM“Item 8B – Significant Changes – Sale of Electrical Business.”Speedwise entered into an agreement to sell all its assets and intellectual property to Orsus Solutions Ltd., (“Orsus”) an Israeli technology company, dated October 2002. Based on the consideration received by Speedwise, the Company assesses that the recoverable amount of its holdings in Speedwise will be $60,000 and as a result an impairment charge of $522,000 has been recorded in the attached “Item 18 - Consolidated Financial Statements December 31, 2002”. See also “Item 7B -
38MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONSMajor Shareholders and Related Party Transactions – Related Party Transactions.”InterCompany Loan Agreement between the Company and Marnetics where as Marnetics Ltd will grant the Company a loan of up to $500,000 dated September 2002. See “Item 7B -
RELATED PARTY TRANSACTIONSMajor Shareholders and Related Party Transactions – Related Party Transactions.”In March 2002, Marnetics signed a distribution agreement with Magalcom Communications & Computers Ltd. to become a non–exclusive distributor of Marnetics products in Israel. The agreement has terminated during June 2003. See “Item 4.B. -
ASSIGNMENT OF BANK DEBT." OEM AgreementInformation on the Company – Business Overview - Marketing, Promotional and Consultants.”In April 2002, Marnetics signed a distribution agreement with TNN Networks Ltd. to become a non–exclusive distributor of Marnetics products in Israel. The agreement has terminated during June 2003. See “Item 4.B. - Information on the Company – Business Overview - Marketing, Promotional and Consultants”
D. Currency Exchange Controls
Since January 1, 2003, all exchange control restrictions imposed by
and between Marnetics Ltd. and Speedwise Technologies Ltd. dated asthe State ofJuly 8, 2001. See "ITEM 4B - CUSTOMERS." D. EXCHANGE CONTROLS The Israeli Currency Control Law, 1978, imposes certain limitations concerningIsrael have been removed, although there are still reporting requirements for foreign currencytransactions and transactions between Israeli and non-Israeli residents, which limitations may be regulated or waived by the Controller of Foreign Exchange at the Bank of Israel, through "general" and "special" permits. In May 1998, a new "general permit" was issuedtransactions. However, legislation remains in effect pursuant to whichsubstantially all transactions in foreigncurrencyare permitted. Any dividends or other distributions paid in respectcontrols can be imposed by administrative action at any time. Nonresidents of Israel who purchase our ordinary sharesandare able to receive any dividends thereon (and any amounts payable upon the dissolution, liquidationorand winding up of ouraffairs, as well as the proceeds of any sale in Israel of our securities to an Israeli resident areaffairs) freely repatriableintoin non-Israelicurrencies at the rate of exchange prevailing at the time of conversion,currency, provided that Israeli income tax has been paid or withheld on(or withheld from)suchpayments.amounts. See “Item 10.E. Additional Information - Taxation - Taxation of Non-Resident Shareholders.”Non-residents of Israel may freely hold and trade our ordinary shares, and the proceeds of sale thereof are not subject to Israeli currency control restrictions. Neither our Memorandum of Association, Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of shares by non-residents, except with respect to subjects of countries
which arethat in a state of war with Israel.E. TAXATION
TaxationThe following is a summary of the
current tax structure applicable to companies in Israel, with special reference to its effect on the Company. The following also contains a discussion ofmaterial Israeli and United States tax consequences,to persons purchasing or holding Ordinary Shares.Israeli foreign exchange regulations and certain Israeli government programs affecting us. To the extent that the discussion is based on new tax or other legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax or other authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice,andis not exhaustive of all possible taxconsiderations. Prospective purchasersconsiderations andholders of Ordinary Sharesshouldconsult their ownnot be relied upon for taxadvisors asplanning purposes.Tax Reform in Israel
On January 1, 2003 a comprehensive tax reform took effect in Israel. Pursuant to the
U.S.,reform, resident companies are subject to Israeli tax on income accrued orother tax consequencesderived in Israel or abroad. In addition, the concept ofthe purchase, ownership, and disposition of the Ordinary Shares, including, in particular, the effect of any“controlled foreignstate, or local taxes. GENERAL CORPORATE TAX STRUCTURE Currently, the regular rate of corporate taxcorporation’’ was introduced according to which an Israeli company may become subject to Israeli taxes on certain income of a non-Israeli subsidiary if the subsidiary’s primary source of income is passive income (such as interest, dividends, royalties, rental income or capital gains). The tax reform also substantially changed the system of taxation of capital gains.56
General Corporate Tax Structure
Israeli companies are generally subject to corporate tax at the rate of 36% of their taxable income. However in our case, the rate is
36%. TAXATION UNDER INFLATIONARY CONDITIONScurrently effectively reduced, as described below.Special Provisions Relating to Measurement of Taxable Income
The Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the “Inflationary Adjustments Law,
1985 (the "INFLATIONARY ADJUSTMENTS LAW"), was designed” represents an attempt toneutralizeovercome theerosion of capital investments in 39business andproblems presented topreventa traditional taxbenefits resulting from deduction of inflationary expenses. This law applies a supplementary set of inflationary adjustments to the normal taxable profits computed under regular historical cost principles.system by an economy undergoing rapid inflation. The Inflationary Adjustments Lawintroducedis highly complex. The material aspects to us can be described as follows:There is a special tax adjustment for the preservation of equity
based on changes in the Israeli consumer price index,whereby certain corporate assets are classified broadly into fixed,(inflation-resistant)inflation resistant, assets and non-fixed (soft) assets. Where acorporation'scompany’s equity,(asas defined inthe Inflationary Adjustments Law)law, exceeds the depreciated cost of fixed assets, ataxdeduction from taxable income that takes into account the effect of the applicable annual rate of inflation on such excess is allowed,(upup to a ceiling of 70% of taxable incomefor companiesin any single tax year, with the unused portion permitted to be carried forward on a linkedbasis, without limit). For income derived from state bonds or funds invested above 75% in state bonds, such ceiling is not used (100% is deducted).basis. If the depreciated cost of fixed assets exceedsshareholders'a company’s equity, then such excess multiplied by the applicable annual rate of inflationrate,is added to taxable income.CAPITAL GAINS TAXSubject to certain limitations, depreciation deductions on fixed assets and losses carried forward are adjusted for inflation based on the increase in the Israeli consumer price index (CPI).
Capital Gains Tax Applicable to Resident and Non-Resident Shareholders
Israeli law generally imposes a capital gains tax on the sale of capital assets located in Israel, including shares in Israeli resident companies, by both residents and non-residents of
Israel.Israel, unless a specific exemption is available or unless a treaty between Israel and the country of the non-resident provides otherwise. Regulations promulgated under the Israeli Income Tax Ordinance provided for an exemption from Israeli capital gains tax for gains accrued before January 1, 2003 and derived from the sale of shares of “industrial companies’’ that are traded on specified non-Israeli markets, including Thegains generated by anNasdaq National Market, provided that the sellers purchased their shares either in the company’s initial public offering or in public market transactions thereafter. This exemption does not apply to shareholders who are in the business of trading securities, or to shareholders that are Israelicompany, which isresident companies subject to theInflationary AdjustmentsIncome Tax (Adjustments for Inflation) Law- 1985.On January 1, 2003, the Law for Amendment of the Income Tax Ordinance (Amendment No.132), 5762-2002, known as the tax reform, came into effect thus imposing capital gains tax at a rate of 15% on gains derived on or after January 1, 2003 from the
dispositionsale ofsecurities,shares in Israeli companies publicly traded on a recognized stock exchange outside of Israel. This tax rate does not apply to: (1) dealers in securities; (2) shareholders that report in accordance with the Income Tax Law (Inflationary Adjustment) - 1985; or (3) shareholders who acquired their shares prior to an initial public offering. The tax basis of shares acquired prior to January 1, 2003 will be determined in accordance with the average closing share price in the three trading days preceding January 1, 2003. Non-Israeli residents shall be exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on a stock exchange recognized by the Israeli Ministry of Finance provided such shareholders did not acquire their shares prior to an initial public offering. Notwithstanding the foregoing, dealers in securities in Israel are taxedaccordingat regular tax rates applicable to business income. In any event, the provisions ofsuch Law. Pursuantthe tax reform shall not affect the exemption from capital gains tax for gains accrued before January 1, 2003, as described in the previous paragraph.57
In addition, pursuant to the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income, as amended (the
"U.S.-ISRAEL TAX TREATY"“United States- Israel Tax Treaty”), the sale, exchange or disposition of ordinary sharesor redeemable warrantsby a person who qualifies as a resident of the United States within the meaning of theU.S.-IsraelUnited States-Israel Tax Treaty and who is entitled to claim the benefits afforded to suchresidentperson by theU.S.-IsraelUnited States- Israel Tax Treaty("TREATY U.S. RESIDENT"(a “Treaty United States Resident”) generally will not be subject to the Israeli capital gains tax unless such TreatyU.S.United States Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the12-month12- month period preceding such sale, exchange ordisposition.disposition, subject to certain conditions. A sale, exchange or disposition of ordinary sharesor redeemable warrantsby a TreatyU.S.United States Resident who holds, directly or indirectly, shares representing 10% or more of our voting power at any time during such preceding 12-month period would be subject to such Israelitax;tax, to the extent applicable; however, under theU.S.-IsraelUnited States-Israel Tax Treaty, such TreatyU.S.United States Resident would be permitted to claim a credit for such taxes against theU.S.United States federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in United States laws applicable to foreign tax credits.TAXATION OF NON-RESIDENTSThe United States-Israel Tax Treaty does not relate to United States state or local taxes.Taxation of Non-Resident Shareholders
Non-residents of Israel are subject to Israeli income tax on income accrued or derived from sources in
Israel.Israel, including passive income such as dividends, royalties and interest. On distributions of dividends, other than bonus shares(stock dividends),and stock dividends, income tax at the rate of 25% (12.5% for dividends not generated by an approved enterprise if the non-resident is a United States corporation and holds 10% or more of our voting power throughout a certain period, and 15% for dividends generated by an approved enterprise) is withheld at the source, unless a different rate is provided in a treaty between Israel and theshareholder'sshareholder’s country of residence.The U.S.-IsraelUnder the United States- Israel Tax Treaty,provides for athe maximum taxof 25%on dividends paid to a holder of ordinary shares who is a TreatyU.S.United States Residentand for a 40will be 25%, however, under the Investment Law, dividends generated by an approved enterprise are taxed at the rate of 12.5%15%.Under a recent amendment to the Inflationary Adjustments Law, non-Israeli corporations might be subject to Israeli taxes on
dividendsthe sale of traded securities in an Israeli company, subject to the provisions of any applicable double taxation treaty.Foreign Exchange Regulations
Dividends, if any, paid to the holders of the ordinary shares, and any amounts payable upon dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable dollars at the rate of exchange prevailing at the time of conversion.
United States Federal Income Taxes
The following summary sets forth the material United States federal income tax consequences applicable to the following persons who purchase, hold or dispose of ordinary shares (“U.S. Shareholders”): (i) citizens or residents (as defined for United States federal income tax purposes) of the United States; (ii) corporations or other entities taxable as corporations created or organized in or under the laws of the United States or any state thereof; (iii) estates, the income of which is subject to United States federal income taxation regardless of its source; and (iv) trusts, if (a) a United States
corporationcourt is able to exercise primary supervision over its administration, and (b) one or more United States persons have the authority to control all its substantial decisions. This discussion is based on the provisions of the Internal Revenue Code of 1986, as amended (the “Code”), United States Treasury Regulations promulgated there under and administrative and judicial interpretations thereof, all as in effect as of the date of this Annual Report on Form 20-F. This discussion generally applies only to U.S. Shareholders thatholdswill hold the ordinary shares as capital assets and does not consider (a) all aspects of U.S. federal income taxation that may be relevant to particular U.S. Shareholders by reason of their particular circumstances (including potential application of the alternative minimum tax), (b) special treatment under the United States federal income tax laws applicable to such persons as financial institutions, insurance companies, broker-dealers, tax-exempt organizations and foreign individuals or entities, (c) the special rules applicable to U.S. Shareholders owning, directly or by attribution, 10% or more of our outstanding voting shares, (d) the special rules applicable to U.S. Shareholders who hold the ordinary shares as part of a hedging, straddle or conversion transaction, (e) the special rules applicable to U.S. Shareholders who acquire ordinary shares in a compensatory transaction, (f) the special rules applicable to U.S. Shareholders whose functional currency is not the dollar, and (g) any aspect of state, local or non-United States tax law. Accordingly, each investor should consult his or her own tax advisor as to the particular tax consequences to him or her of an investment in ordinary shares, including the effects of applicable state, local or foreign tax laws and possible changes in the tax laws.58
Dividends Paid on Ordinary Shares
A U.S. Shareholder generally will be required to include in gross income as ordinary dividend income the amount of any distributions in respect of ordinary shares (including the amount of any Israeli taxes withheld there from) to the extent that such distributions are paid out of our current or accumulated earnings and profits, as determined for United States federal income tax purposes. Distributions in excess of such earnings and profits will be treated first as a non-taxable return of capital reducing the U.S. Shareholder’s tax basis in his, her or its ordinary shares to the extent of the distributions, and then as capital gain from a deemed sale or exchange of such ordinary shares. Such dividends generally will not qualify for the dividends received deduction available to corporations. The amount of any cash distribution in respect of ordinary shares paid in NIS will equal the United States dollar value of the distribution, calculated by reference to the exchange rate in effect on the date of the distribution.
Subject to certain conditions and limitations, any Israeli tax withheld or paid with respect to dividends on the ordinary shares will be eligible for credit against a U.S. Shareholder’s United States federal income tax liability at such U.S. Shareholder’s election. The Code provides limitations on the amount of foreign tax credits that a U.S. Shareholder may claim, including extensive separate computation rules, under which foreign tax credits allowable with respect to specific categories of income cannot exceed the United States federal income taxes otherwise payable with respect to each such category of income. U.S. Shareholders that do not elect to claim a foreign tax credit may instead claim a deduction for Israeli income tax withheld or paid, but only for a year in which these U.S. Shareholders elect to do so for all foreign income taxes. Dividends with respect to the ordinary shares generally will be classified as foreign-source “passive income” for the purpose of computing a U.S. Shareholder’s foreign tax credit limitations for United States foreign tax credit purposes. The rules relating to foreign tax credits are complex and you should consult your tax advisor to determine whether and if you would be entitled to this credit.
Disposition of Ordinary Shares
The sale or exchange of ordinary shares generally will result in the recognition of capital gain or loss in an amount equal to the difference between the amount realized on the sale or exchange and the U.S. Shareholder’s tax basis in the ordinary shares. Such gain or loss generally will be long-term capital gain or loss if the U.S. Shareholder’s holding period of the ordinary shares exceeds one year at the time of the disposition. Gain or loss recognized by a U.S. Shareholder on a sale or exchange of ordinary shares generally will be treated as United States-source income or loss for United States foreign tax credit purposes. Under the tax treaty between the United States and Israel, gain derived from the sale, exchange or other disposition of ordinary shares by a holder who is a resident of the United States for purposes of the treaty and who sells the ordinary shares within Israel may be treated as foreign-source income for United States foreign tax credit purposes.
Passive Foreign Investment Company Status
Generally, a foreign corporation is treated as a passive foreign investment company (“PFIC”) for United States federal income tax purposes for any tax year if, in such tax year, either (i) 75% or more of its gross income is passive in nature (the “Income Test”), or (ii) the average percentage of its assets during such tax year which produce, or are held for the production of, passive income (determined by averaging the percentage of the fair market value of its total assets which are passive assets as of the end of each quarter of such year) is 50% or more (the “Asset Test”).
59
Because less than 75% of our gross income in 2002 and in prior years constituted passive income, as defined for purposes of the Income Test, we do not believe that application of the Income Test would have resulted in our classification as a PFIC for any of such years. In addition, we do not believe that application of the Asset Test would have resulted in our classification as a PFIC for any tax year prior to 2001. For 2001 and 2002, however, it is possible that we could be classified as a PFIC under the Asset Test principally because a significant portion of our assets continued to consist of the cash raised in connection with the two public offerings of our ordinary shares in 1999, coupled with the decline in the public market value of our ordinary shares during 2001 and 2002 and the timing of the required valuations, although there is no definitive method prescribed in the Code, United States Treasury Regulations or administrative or judicial interpretations thereof for determining the value of a foreign corporation’s assets for purposes of the Asset Test. While the legislative history of the United States Taxpayer Relief Act of 1997 indicates that “the total value of a publicly-traded foreign corporation’s assets generally will be treated as equal to the sum of the aggregate value of its outstanding stock plus its liabilities”, there remains substantial uncertainty regarding the valuation of a publicly-traded foreign corporation’s assets for purposes of the Asset Test, and it is arguable that under alternative valuation methodologies, the value of our total assets as of the relevant valuation dates in 2001 and/or 2002 would not result in our classification as a PFIC during either or both of such years.
In view of the uncertainty regarding the valuation of our assets for purposes of the Asset Test and the complexity of the issues regarding our treatment as a PFIC for 2001, 2002 and, quite possibly, subsequent years, U.S. Shareholders are urged to consult their own tax advisors for guidance as to our status as a PFIC. For those U.S. Shareholders who determine that we were a PFIC for 2001, 2002 and/or any subsequent years and notify us in writing of their request for the information required in order to effectuate the QEF Election described below, we will promptly make such information available to them.
If we are treated as a PFIC for United States federal income tax purposes for any year during a U.S. Shareholder’s holding period of ordinary shares and the U.S. Shareholder does not make a QEF Election or a “mark-to-market” election (both as described below), any gain recognized by the U.S. Shareholder upon the sale of ordinary shares (or the receipt of certain distributions) would be treated as ordinary income. This income would be allocated over the U.S. Shareholder’s holding period with respect to his ordinary shares and an interest charge would be imposed on the amount of deferred tax on the income allocated to prior taxable years.
Although we generally will be treated as a PFIC as to any U.S. Shareholder if we are a PFIC for any year during the U.S. Shareholder’s holding period, if we cease to satisfy the requirements for PFIC classification, the U.S. Shareholder may avoid the consequences of PFIC classification for subsequent years if he elects to recognize gain based on the unrealized appreciation in the ordinary shares through the close of the tax year in which we cease to be a PFIC. Additionally, if we are treated as a PFIC, a U.S. Shareholder who acquires ordinary shares from a decedent would be denied the normally available step-up in tax basis for these ordinary shares to fair market value at the date of death and instead would have a tax basis equal to the decedent’s tax basis in these ordinary shares.
A U.S. Shareholder who beneficially owns shares of a PFIC must file Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) with the
Israeli company. PROPOSED TAX REFORM On May 4, 2000,United States Internal Revenue Service for each tax year in which he holds shares in acommittee chairedPFIC. This form describes any distributions received with respect to these shares and any gain realized upon the disposition of these shares.For any tax year in which we are treated as a PFIC, a U.S. Shareholder may elect to treat his, her or its ordinary shares as an interest in a qualified electing fund (a “QEF Election”), in which case, the U.S. Shareholder would be required to include in income currently his, her or its proportionate share of our earnings and profits in years in which we are a PFIC regardless of whether distributions of our earnings and profits are actually distributed to the U.S. Shareholder. Any gain subsequently recognized upon the sale by the
Director GeneralU.S. Shareholder of his ordinary shares, however, generally would be taxed as capital gain and the denial of theIsraeli Ministrybasis step-up at death described above would not apply.As an alternative to a QEF Election, a U.S. Shareholder generally may elect to mark his ordinary shares to market annually, recognizing ordinary income or loss (subject to certain limitations) equal to the difference between the fair market value of
Finance issuedhis ordinary shares and the adjusted tax basis of his ordinary shares. Losses would be allowed only to the extent of net mark-to-market gain accrued under the election. If areport recommendingmark-to-market election with respect to ordinary shares is in effect on the date of asignificant reformU.S. Shareholder’s death, the normally available step-up in tax basis to fair market value will not be available. Rather, the tax basis of the ordinary shares in theIsraeli systemhands oftaxation.a U.S. Shareholder who acquired them from a decedent will be the lesser of the decedent’s tax basis or the fair market value of the ordinary shares.60
The
proposed reform would significantly alter the taxation of individuals, and would also affect corporate taxation. In particular, the proposed reform would reduce, but not eliminate, the tax benefits available to approved enterprises. The Israeli cabinet has approved the recommendation in principle, butimplementation of many aspects of thereformCode’s PFIC rules requireslegislation by Israel's Knesset.the issuance of regulations which in many instances have yet to be promulgated and which may have retroactive effect. We cannot becertain whether the proposed reformsure that any of these regulations will beadopted, when itpromulgated or, if so, what form they willbe adoptedtake or whatformeffect they will have on the foregoing discussion. Accordingly, and due to the complexity of the PFIC rules, U.S. Shareholders should consult their own tax advisors regarding our status as a PFIC for 2001, 2002 and anyreform will ultimately take.subsequent years and the eligibility, manner and advisability of making a QEF Election or a mark-to-market election if we are treated as a PFIC.For information with respect to the applicability of Israeli capital gains taxes on the sale of ordinary shares by United States residents, see “Capital Gains Tax Applicable to Resident and Non-Resident Shareholders,” above.
E. Dividends and Paying Agents
Not applicable.
F. Statement of Experts
Not applicable.
G.
Not applicable. H. DOCUMENTS ON DISPLAYDocuments on DisplayThe Company (formerly named Stav Electrical Systems (1994) Ltd.) is subject to certain of the informational requirements of the Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunderthere under and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission. Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission atRoom 1024,450 Fifth Street, N. W., Washington, D. C. 20549 and at the Regional Offices thereof at7 World Trade Center, Suite 1300,233 Broadway, New York, New York and atNorthwestern Atrium Center,175 West Jackson Boulevard, Suite1400, 500 West Madison Street,900, Chicago, Illinois. Copies of such information can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N. W., Washington, D. C. 20549 at prescribed rates. In addition, beginning in July 2001 the Company began filing its reports with the Commission electronically and any reports, proxy statements and other information filed by the Company after such date may also be inspected theCommission'sCommission’s web site atWWW.SEC.GOV. I. SUBSIDIARY INFORMATION.www.sec.gov.You may request a copy of our U.S. Securities and Exchange Commission filings, at no cost, by writing or calling us at Marnetics Broadband Technologies Ltd., 10 Hayetzira Street, Ra’anana 43000, Israel, Attention: Mr. Ilan Hadar, Chief Financial Officer, telephone: ++ 972-9-7616868. A copy of each report submitted in accordance with applicable United States law is available for public review at our principal executive offices.
A copy of each document (or a translation thereof to the extent not in English) concerning Marnetics Broadband Technologies Ltd. that is referred to in this Annual Report on Form 20-F, is available for public view at our principal executive offices at Marnetics Broadband Technologies Ltd., 10 Hayetzira Street, Ra’anana 43000, Israel.
H. Subsidiary Information
Not Applicable.
ITEMItem 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.Quantitative and Qualitative Disclosures about Market RiskThe Company is exposed to various market risks, including but not limited to risks deriving from changes in interest rates and inflation rates and changes in the exchange rate of the NIS against foreign currencies.
INTEREST RATE RISK.61
Interest Rate Risk. At December 31,
2000,2002, the Company had cash and cash equivalentsand short term bank depositsin the aggregate amount of$6.5 million,$957,000 deposited primarily in major Israelibanks and $6.6 million in short-term and long-term interest bearing loans or 41debts.banks. These amounts accrue or bear nominal interestwhich isbased on U.S. dollar interest rate and NIS interest rate.Foreign Currency Exchange Risks. At December 31, 2002, 92.3% of the cash and cash equivalent were deposits denominated in NIS and linked to the
interest fixed by the Bank of Israel, therefore any inflationary changes in the consumer price index in Israel or changes in theUS dollar exchangerate between NIS and the U.S. dollar may effect these amounts. FOREIGN CURRENCY EXCHANGE RISKS. At December 31, 2000, one-halfrate. Only 7.7% of theCompany'sCompany’s current assets were cash deposits denominated in NIS in the aggregate amount of$6.5 million.$76,000. These amounts as presented in U.S. dollars may be affected by changes in the exchange rate between NIS and the U.S. dollars.FAIR VALUE OF FINANCIAL INSTRUMENTS.Fair value of financial instruments. The financial instruments of the Company consist
primarilymainly of cash and cash equivalents, current accounts receivable, accounts payable andaccounts payable. In view of their nature,accruals. Due to the relatively short period to maturity, the fair value of the financial instruments included in theCompany'sworking capitalis usually identical or close toof the Company approximates their carryingamount. ITEMamounts.Item 12. Description of Securities Other than Equity Securities
Not applicable.
PART II
ITEMItem 13.
DEFAULTS, DIVIDEND ARREARAGE AND DELINQUENCIES.Defaults, Dividend Arrearage and DelinquenciesNone.
ITEMItem 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS. Not applicable. ITEMMaterial Modifications to the Rights of Security Holders and Use of ProceedsNone.
Item 15.
[RESERVED] ITEM 16. [RESERVED]Controls and Procedures(a) We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our periodic filings with the SEC is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms relevant to our Company. Within 90 days prior to the filing date of this Annual Report on Form 20-F, we have carried out an evaluation, under the supervision and with the participation of our management, including our active chairman of the board and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective in assuring that all material information relating to our Company is made known to them.
(b) There have been no significant changes in our internal controls or in other factors, which could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Annual Report on Form 20-F.
Item 16A. Audit Committee Financial Report
Reserved.
Item 16B. Code of Ethics.
Reserved.
PART III
ITEMItem 17.
FINANCIAL STATEMENTS.Financial Statements.Not applicable. The Company has elected to furnish financial statements pursuant to Item 18 below.
ITEM62
Item 18.
FINANCIAL STATEMENTS. SeeFinancial Statements.The Consolidated Financial Statements
Attached 42MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000MARNETICS BROADBAND TECHNOLOGIES LTD. CONSOLIDATED FINANCIAL STATEMENTS CONTENTSand related notes required by this item are found at the end of this Annual Report, F-1 to F-19.
PAGE ----MARNETICS BROADBAND TECHNOLOGIES LTD REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2INDEX TO CONSOLIDATED
BALANCE SHEETSFINANCIAL STATEMENTSPage
Report of Independent Public Accountants
F-2
Consolidated Balance Sheets as
atof December 31,20002002 and19992001F-3
CONSOLIDATED STATEMENTS OF OPERATIONS forConsolidated Statements of Operations or the years ended December 31,
20002002, 2001,
and1999 for the period of seven months ended December 31, 19982000 and for the cumulative period from June 1, 1998 to December 31,20002002F-4
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYStatements of Changes in Shareholders’ Equity for the years ended December 31,
20002002,
2001 and19992000F-5
Statements of Consolidated Cash Flows
for theperiod of seven monthsyears ended December 31,19982002, 2001 and 2000
and for the cumulative period from June 1, 1998 to December 31, 2002F-6 to F-8
Notes to the Financial Statements
F-9 to F-19
Item 19.
EXHIBITS
1.1
Memorandum of Association of the Registrant (filed as Exhibit 3.1 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein).
1.2
Amended and Restated Articles of Associations of the Registrant (including revision for Amendment from November 26, 2002 reflected in amended wording to Article 99).
4.1
2001 Share Option Plan (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 20-F for year ended December 31, 2000).
4.2
Services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, Director and then Chief Executive Officer of the Company, effective December 2, 2001, dated February 11, 2002 (incorporated by reference to Exhibit 4.2 to the Company’s annual report on Form 20-F for year ended December 31, 2001).
4.3
Addendum to services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, current Chairman of the Board of the Company, dated December 2, 2002.
4.4
Second addendum to services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, current Chairman of the Board of the Company dated June 2, 2003.
8
List of subsidiaries (incorporated by reference to “Item 4 – Information on the Company – Organizational Structure” in this Annual Report on Form 20-F).
10.1
Form of officers’ and directors’ indemnification agreement (filed as Exhibit 10.3 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein).
10.2
Loan agreement between Bank Hapoalim Ltd. and the Registrant (filed as Exhibit 10.4 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein).
10.3
Promissory Note issued by Dov Strikovsky, the former President, Chairman and CEO of the Company, to the Company (filed as Exhibit 10.5 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein).
10.4
Share exchange agreement among Marnetics Ltd., its Shareholders and the Registrant dated as of May 31, 2000,
F-5 CONSOLIDATED STATEMENTS OF CASH FLOWSas amended (filed as Exhibit 10.6 to Form 20-F for the year-ended December 31, 2000 and by this reference incorporated herein)63
10.5
Indemnification agreement between Dov Strikovsky, the former President, Chairman and CEO of the Company, the Company and the former shareholders of Marnetics Ltd. dated as of June 30, 2001 (incorporated by reference to Exhibit 10.5 to the Company’s annual report on Form 20-F for year ended December 31, 2000).
10.6
Asset purchase agreement between the Company and Idan Millennium Investments and AssetsLtd. dated as of June 10, 2001 (incorporated by reference to Exhibit 10.7 to the Company’s annual report on Form 20-F for year ended December 31, 2000)
10.7
Amendment to the asset purchase agreement between the Company and Idan Millennium Investments and AssetsLtd. dated as of May 6, 2002 ((incorporated by reference to Exhibit 10.7 to the Company’s annual report on Form 20-F for year ended December 31, 2001).
10.8
Agreements to the assignment of debt by and among the Company, Bank Hapoalim Ltd. and Shlavor Systems Ltd. dated as of May 9, 2001 (incorporated by reference to Exhibit 10.9 to the Company’s Annual Report on Form 20-F for year ended December 31, 2000).
10.9
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
10.10
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
64
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
MARNETICS BROADBAND TECHNOLOGIES LTD.
By:
/s/ Menachem Reinschmidt
Menachem Reinschmidt, Chairman of the Board
By:
/s/ Ilan Hadar
Ilan Hadar, Chief Financial Officer
Date: June 29, 2003
65
CERTIFICATION
I, Menachem Reinschmidt, certify that:
1.
I have reviewed this annual report on Form 20-F of Marnetics Broadband Technologies Ltd.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 29, 2003
/s/ Menachem Reinschmidt
Menachem Reinschmidt, Chairman of the Board
66
CERTIFICATION
I, Ilan Hadar, certify that:
1.
I have reviewed this annual report on Form 20-F of Marnetics Broadband Technologies Ltd.;
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4.
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
6.
The registrant’s other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: June 29, 2003
/s/ Ilan Hadar
Ilan Hadar, Chief Financial Officer
67
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002
MARNETICS BROADBAND TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
Page
Report of Independent Public Accountants
2
Consolidated Balance Sheets
as at December 31, 2002 and 20013
Consolidated Statements of Operations
for the years ended December 31,20002002, 2001 and1999 for the period of seven months ended December 31, 19982000
and for the cumulative period from June 1, 1998 to December 31,2000 F-6 NOTES TO THE FINANCIAL STATEMENTS F-8 STAV ELECTRICAL SYSTEMS (1994) LTD. (PREVIOUS REGISTRANT) CONSOLIDATED BALANCE SHEETS F-19 as at December 31, 2000 and 1999 CONSOLIDATED STATEMENTS OF OPERATIONS F-2020024
Statements of Changes in Shareholders’ Equity
for the years ended December31,2000, 199931, 2002, 2001 and1998 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY F-2120005
Consolidated Statements of Cash Flows
for the years ended December31,2000, 199931, 2002, 2001 and1998 CONSOLIDATED STATEMENTS OF CASH FLOWS F-222000
and for theyears endedcumulative period from June 1, 1998 to December31,2000, 1999 and 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-24 APPENDIX A - CONSOLIDATED FINANCIAL STATEMENTS OF SPEED-WISE TECHNOLOGIES LTD.31, 20026
Notes to the Financial Statements
9
F-1REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF MARNETICS BROADBAND TECHNOLOGIES LTD.To the Shareholders of Marnetics Broadband Technologies Ltd.
We have audited the accompanying consolidated balance sheets of
MARNETICS BROADBAND TECHNOLOGIES LTD. ("Marnetics Broadband Technologies Ltd. (“theCompany"Company”) (adevelopment-development - stage company) as of December 31,20002002 and1999,2001, and the related consolidated statements of operations,changes in shareholders'shareholders’ equity and cash flows for the years ended December 31,20002002, 2001 and1999, the seven months ended December 31, 19982000 and the cumulative period from June 1, 1998 (date of commencement of operations) to December 31,2000.2002. These consolidated financial statements are the responsibility of theCompany'sCompany’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the
Company'sCompany’s management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company (a development-stage company) as of December 31,
20002002 and1999,2001, and its consolidated results of operationschanges in shareholders' equityand its cash flows for the years ended December 31,20002002, 2001 and1999, the seven months period ended December 31, 19982000 and the cumulative period from June 1, 1998 (date of commencement of operations) to December 31,2000,2002, in conformity with accounting principles generally accepted in the United States of America.BRIGHTMAN ALMAGORThe accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1b to the financial statements, the Company’s recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also described in Note 1b. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Brightman Almagor &
CO. CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL)Co.
Certified Public Accountants (Israel)
AMEMBER OF DELOITTE TOUCHE TOHMATSUmember of Deloitte Touche TohmatsuTel Aviv, Israel
April 26, 2001 F-2
May 13, 2003- 2 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) (U.S$ IN THOUSANDS)
(A Development Stage Company)
(U.S$ in thousands)CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------ 2000 1999 ---- ---- US$ IN THOUSANDSCURRENT ASSETS: Cash and cash equivalents 6,546 284 Receivables: Trade, net of allowance for doubtful accounts totaling as of December 31, 2000 and 1999, $ 48,000 and $ 43,000 , respectively 723 8 Related parties (Note 3) 690 -- Other (Note 6a) 123 -- Inventories 224 -- Recoverable costs and estimated earnings- not yet billed 3,255 -- ------ ----- TOTAL CURRENT ASSETS 11,561 292 ------ ----- LONG-TERM LOAN TO RELATED PARTIES (Note 3) 1,272 -- ------ ----- Investment in affiliate (Note 4) 126 ----- 582 ------ FIXED ASSETS (Notes 2f & 5) Cost 1,065 -- Less - accumulated depreciation 413 -- ------ ----- 652 -- ------ ----- OTHER ASSETS 11,309 -- ------ ----- 25,376 418 ====== ===== CURRENT LIABILITIES: Short-term bank credit (Note 6b) 3,337 -- Payables: Trade 1,553 -- Other (Note 6c) 1,745 2 Related parties (Note 6d) 1 8 ------ ----- TOTAL CURRENT LIABILITIES 6,636 10 ------ ----- LONG-TERM LIABILITIES (Note 7) 65 -- ------ ----- ACCRUED SEVERANCE PAY 148 -- ------ ----- COMMITMENTS AND CONTINGENT LIABILITIES (Note 8) SHAREHOLDERS' EQUITY (Note 9) Share capital: Ordinary shares of NIS 0.08 par value (Authorized, 5,000,000 shares, issued and outstanding 6,407,303 and 266,559 at December 31, 2000 and 1999 respectively) 130 1 Additional paid-in capital 25,143 828 Deferred stock compensation (2,329) -- Accumulated deficit (4,417) (421) ------ ----- 18,527 408 ------ ----- 25,376 418 ====== =====THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-3
December 31,
2 0 0 2
2 0 0 1
Current assets:
Cash and cash equivalents
$
957
$
2,418
Receivables:
Trade
13
-
Related parties (Note 3)
11
-
Other (Note 6a)
291
248
Total current assets
1,272
2,666
Investment in affiliate (Note 4)
60
582
Fixed assets (Notes 2e & 5)
Cost
287
267
Less - accumulated depreciation
134
64
153
203
$
1,485
$
3,451
Current liabilities:
Short-term bank credit (Note 6b)
$
-
$
50
Payables:
Trade
19
135
Other (Note 6c)
1,250
829
Total current liabilities
1,269
1,014
Accrued severance pay
8
-
Commitments and contingent liabilities (Note 7)
Shareholders’ equity (Note 8)
Share capital:
Ordinary shares of NIS 0.08 par value
(Authorized, 25,000,000 shares, issued and outstanding at December
31, 2002 and 2001 7,362,390)
130
130
Additional paid-in capital
25,203
25,203
Deferred stock based compensation
(792
)
(1,584
)
Accumulated deficit
(24,333
)
(21,312
)
208
2,437
$
1,485
$
3,451
The accompanying notes are an integral part of the financial statements
- 3 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) (U.S$ IN THOUSANDS)
(A Development Stage Company)
(U.S$ in thousands, except share and per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FROM JUNE 1, 1998 (DATE OF SEVEN MONTHS COMMENCEMENT OF YEAR ENDED ENDED OPERATIONS) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------ ------------ ------------ 2000 1999 1998 2000 ---- ---- ---- ---- US$ IN THOUSANDS ----------------Research and development costs (excluding $138,000 of non-cash compensation in the year ended December 31, 2000) (Note 11a) 252 33 131 416 Sales and marketing expenses, net (Note 11b) 142 -- 142 General and administrative expenses (excluding $2,270,000 of non-cash compensation in the year ended December 31, 2000) (Note 11c) -- 44 181 947 Non-cash compensation expenses 2,408 2,408 -------- ------- ------- ------- OPERATING LOSS (3,524) (77) (312) (3,913) Financial income, net 167 9 8 184 Loss on sale of property and equipment (28) (28) Share in losses of affiliate (63 (21) (660) -------- ------- ------- ------- LOSS FOR THE PERIOD (3,996) (117) (304) (4,417) ======== ======= ======= ======= PER SHARE DATA (NOTE 2h) LOSS PER SHARE: BASIC AND DILUTED (4.15) (0.20) (0.91) ======== ======= ======= Shares used in computing Loss per ordinary share BASIC AND DILUTED 962,553 575,234 335,143 ======== ======= =======THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-4
Year ended December 31,
Cumulative from
June 1, 1998
(date of
commencement of
operations) to
December 31,
2 0 0 2
2 0 0 1
2 0 0 0
2 0 0 2
Revenue
$
19
$
-
$
-
$
19
Research and development costs (excluding
$702 and $1,585 of non-cash compensation for
the year ended December 31, 2002 and
cumulative from June 1, 1998 to December 31,
2002, respectively) (Note 10a)
486
812
252
1,714
Sales and marketing expenses, net (Note 10b)
464
310
142
916
General and administrative expenses (excluding
$90 and $2,420 of non-cash compensation for
the year ended December 31, 2002 and
cumulative from June 1, 1998 to December 31,
2002, respectively) (Note 10c)
784
1,128
722
2,859
Provision for legal claim (Note 7c)
(500
)
750
-
250
Impairment of goodwill (Note 11)
-
9,309
-
9,309
Loss allowance on loan to related party (Note 3)
-
1,228
-
1,228
Collection of loan from related party (Note 3)
(266
)
-
-
(266
)
Write-down of investment in affiliate
522
-
-
522
Provision for a Bank guarantee (Note 10d)
716
-
-
716
Non-cash compensation expenses
792
805
2,408
4,005
Total costs and expenses
2,998
14,342
3,524
21,253
Operating loss
(2,979
)
(14,342
)
(3,524
)
(21,234
)
Financial income, net
32
175
167
391
Loss on sale of property and equipment
-
-
-
(28
)
Taxes on income
(74
)
-
-
(74
)
Share in losses of affiliate
-
-
(639
)
(660
)
Loss from continuing operations
(3,021
)
(14,167
)
(3,996
)
(21,605
)
Discontinued operations:
Loss from operations of electrical division
-
(450
)
-
(450
)
Loss on sale of electrical division
-
(2,278
)
-
(2,278
)
Loss for the period
$
(3,021
)
$
(16,895
)
$
(3,996
)
$
(24,333
)
Per share data (Note 2g)
Basic and diluted:
Loss per share from continuing operations
$
(0.41
)
$
(2.11
)
$
(4.15
)
Loss from discontinued operations
$
-
$
(0.40
)
$
-
Net loss
$
(0.41
)
$
(2.51
)
$
(4.15
)
Shares used in computing
loss per ordinary share
Basic and diluted
7,362,390
6,725,685
962,553
The accompanying notes are an integral part of the financial statements
- 4 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) (U.S$ IN THOUSANDS) STATEMENT
(A Development Stage Company)
(U.S$ in thousands)
STATEMENTS OFCHANGES IN SHAREHOLDERS'SHAREHOLDERS’ EQUITY
DEFICIT ACCUMULATED NUMBER ADDITIONAL DURING THE OF SHARE PAID-IN DEFERRED DEVELOPMENT SHARES CAPITAL CAPITAL COMPENSATION STAGE TOTAL ------ ------- ---------- ------------ ----------- ----- US$ IN THOUSANDS ----------------BALANCE AT JUNE 1, 1998 (DATE OF COMMENCEMENT OF OPERATIONS) CHANGES IN THE SEVEN MONTHS FROM JUNE 1, 1998 TO DECEMBER 31, 1998: Issuance of shares 266,000 1 682 683 Loss for the period (304) (304) --------- ------- ---------- ------------ ----------- ------ Balance at December 31, 1998 266,000 1 682 -- (304) 379 --------- ------- ---------- ------------ ----------- ------ Issuance of shares for no consideration 559 Adjustment due to issuance of shares of a development - stage affiliate to a third party 146 146 Loss for the year (117) (117) --------- ------- ---------- ------------ ----------- ------ Balance at December 31, 1999 266,559 1 828 -- (421) 408 --------- ------- ---------- ------------ ----------- ------ Issuance of share capital 388,237 1 7,297 7,298 Adjustments due to issuance of shares of a development - stage affiliate to a third party 1,095 1,095 Issuance of options to a related party 270 270 Deferred compensation related to employee stock option grants 631 (631) -- Adjustments due to reverse merger - additional compensation due to a new measurement date 1,836 (1,836) -- Amortization of deferred compensation 138 138 Adjustments due to reverse merger 759,489 30 30 Issuance of shares in a reverse merger 4,993,048 98 11,186 11,284 Compensation relating to options granted to former CEO and chairman of the board 2,000 2,000 Loss for the period (3,996) (3,996) --------- ------- ---------- ------------ ----------- ------ Balance at December 31, 2000 6,407,333 130 25,143 (2,329) (4,417) 18,527 ========= ======= ========== ============ =========== ======THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-5
Number
of shares
Share
capital
Additional
paid-in
capital
Deferred
compensation
Deficit
accumulated
during the
development
stage
Total
January 1, 2000
266,559
$
1
$
828
$
—
$
(421
)
$
408
Issuance of share capital
388,237
1
7,297
7,298
Adjustments due to issuance of shares of a development - stage affiliate to a third party
1,095
1,095
Issuance of options to a related party
270
270
Deferred compensation related to employee stock option grants
631
(631
)
—
Adjustments due to reverse merger - additional compensation due to a new measurement date
1,836
(1,836
)
—
Amortization of deferred compensation
138
138
Adjustments due to reverse merger
759,489
30
30
Issuance of shares in a reverse merger
4,993,048
98
11,186
11,284
Compensation relating to options granted to former CEO and chairman of the board
2,000
2,000
Loss for the period
(3,996
)
(3,996
)
Balance at December 31, 2000
6,407,333
130
25,143
(2,329
)
(4,417
)
18,527
Amortization of deferred compensation
745
745
Compensation related to options granted to service providers
60
60
Issuance of shares for no consideration
955,057
Loss for the year
(16,895
)
(16,895
)
Balance at December 31, 2001
7,362,390
130
25,203
(1,584
)
(21,312
)
2,437
Amortization of deferred compensation
-
792
792
Loss for the year
-
(3,021
)
(3,021
)
Balance at December 31, 2002
7,362,390
$
130
$
25,203
$
(792
)
$
(24,333
)
$
208
The accompanying notes are an integral part of the financial statements
- 5 -
MARNETICS BROADBAND TECHNOLOGIES
LTD. (A DEVELOPMENT STAGE COMPANY) (U.S$ IN THOUSANDS)LTD
(A Development Stage Company)
(U.S$ in thousands)
STATEMENTS OF CONSOLIDATED CASH FLOWS
CUMULATIVE FROM JUNE 1, 1998 (DATE OF SEVEN MONTHS COMMENCEMENT OF YEAR ENDED ENDED OPERATIONS) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------ ------------ ------------ 2000 1999 1998 2000 ---- ---- ---- ---- US$ IN THOUSANDS ----------------CASH FLOWS FROM OPERATING ACTIVITIES: Loss for the period (3,996) (117) (304) (4,417) Adjustments to reconcile loss for the period to cash used in operating activities (Appendix A): 3,124 (7) 67 3,184 -------- ------- ------- ------- Net cash used in operating activities (872) (124) (237) (1,233) -------- ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired in a non-cash reverse merger 22 -- -- 22 Purchase of property and equipment (186) -- (47) (233) Proceeds from sale of property and equipment -- 10 -- 10 -------- ------- ------- ------- Net cash provided by (used in) investing activities (164) 10 (47) (201) -------- ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of share capital 7,298 -- 683 7,981 Investment in affiliate -- (1) -- (1) -------- ------- ------- ------- Net cash provided by (used in) financing activities 7,298 (1) 683 7,980 -------- ------- ------- ------- Increase (decrease) in cash and cash equivalents 6,262 (115) 399 6,546 Cash and cash equivalents at the beginning of the period 284 399 -- -- -------- ------- ------- ------- Cash and cash equivalents at the end of the period 6,546 284 399 6,546 ======= ====== ======= =======THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-6
Year ended December 31,
Cumulative from
June 1, 1998
(date of commencement of
operations) to
December 31,
2 0 0 2
2 0 0 1
2 0 0 0
2 0 0 2
Cash flows from operating
activities:
Loss for the period
$
(3,021
)
$
(16,895
)
$
(3,996
)
$
(24,333
)
Adjustments to reconcile loss
for the period to cash used
in operating activities (Appendix A):
1,630
12,775
3,124
17,589
Net cash used in operating activities
(1,391
)
(4,120
)
(872
)
(6,744
)
Cash flows from investing activities:
Cash acquired in a non-cash reverse
merger (Appendix B)
-
-
22
22
Purchase of fixed assets
(20
)
(85
)
(186
)
(338
)
Proceeds from sale of fixed assets
-
-
-
10
Net cash used in
investing activities
(20
)
(85
)
(164
)
(306
)
Cash flows from financing activities:
Short-term debt, net
(50
)
(751
)
-
(801
)
Repayment of long-term loan
-
828
-
828
Issuance of share capital
-
-
7,298
7,981
Investment in affiliate
-
-
-
(1
)
Net cash provided by (used in)
financing activities
(50
)
77
7,298
8,007
Increase (decrease) in cash
and cash equivalents
(1,461
)
(4,128
)
6,262
957
Cash and cash equivalents
at the beginning of the period
2,418
6,546
284
—
Cash and cash equivalents
at the end of the period
$
957
$
2,418
$
6,546
$
957
The accompanying notes are an integral part of the financial statements
- 6 -
MARNETICS BROADBAND TECHNOLOGIES
LTD. (A DEVELOPMENT STAGE COMPANY) (U.S$ IN THOUSANDS)LTD
(A Development Stage Company)
(U.S$ in thousands)APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
Cumulative from
June 1, 1998
(date of
commencement of
operations) to
December 31,
2 0 0 2
2 0 0 1
2 0 0 0
2 0 0 2
Appendix A
Adjustments to reconcile loss for
the period to net cash used in
operating activities:
Depreciation
$
70
$
53
$
8
$
196
Loss on sale of fixed assets
-
-
-
28
Accrued severance pay
8
-
-
8
Share in losses of affiliate
-
-
639
660
Loss on sale of discontinued
operations (Appendix C)
-
2,278
-
2,278
Impairment of goodwill
-
9,309
-
9,309
Loss allowance on loan to related
party
-
1,228
-
1,228
Non cash compensation expenses
792
805
2,408
4,005
Write-down for decline in value of
investees
522
522
Provision for a bank guarantee
716
-
-
716
Changes in assets and liabilities:
Decrease (increase) in accounts
receivable
(13
)
303
(61
)
222
Increase in other receivables
(54
)
(235
)
-
(345
)
Decrease in inventories
-
684
-
684
(Decrease) increase in trade payables
(116
)
(1,342
)
34
(1,423
)
(Decrease) Increase in other payables
and accrued expenses
(295
)
(308
)
96
(499
)
$
1,630
$
12,775
$
3,124
$
17,589
Supplemental Cash Flow Data
Appendix B:
Purchase of a subsidiary in a
reverse merger:
Current assets
$
4,947
$
4,947
Non-current assets
1,272
1,272
Fixed assets
474
474
Goodwill
11,309
11,309
Current liabilities
(6,497
)
(6,497
)
Long-term liabilities
(213
)
(213
)
Cash acquired
22
22
Total non-cash consideration
$
11,314
$
11,314
The accompanying notes are an integral part of the financial statements
- 7 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
(U.S$ in thousands)APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
Cumulative from
June 1, 1998
(date of
commencement of
operations) to
December 31,
2 0 0 2
2 0 0 1
2 0 0 0
2 0 0 2
Appendix C:
Sale of electrical division:
Current assets
$
1,076
$
1,076
Fixed assets
425
425
Goodwill
2,000
2,000
Current liabilities
(867
)
(867
)
Long-term liabilities
(356
)
(356
)
Loss on sale of electrical division
(see Note 3b)
$
2,278
$
2,278
Information on non-cash
transactions
Extinguishments of a short-term
debt to bank in exchange for
assignment of a receivable
(see Note 3b)
Short-term debt
$
2,173
$
2,173
Assignment of a receivable
(2,173
)
(2,173
)
$
-
$
-
The accompanying notes are an integral part of the financial statements
- 8 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial StatementsNote 1 – General
CUMULATIVE FROM JUNEa.
Marnetics Broadband Technologies Ltd. (formerly Stav Electrical Systems (1994) Ltd.) (“the Company or Stav”) is engaged in the development of capacity enhancement and traffic analysis solutions for IP networks through its wholly owned subsidiary Marnetics Ltd. (“Marnetics”) and was engaged in the manufacture, installation and maintenance of electrical and lighting systems, mainly for public institutions (see below).
On June 1,
1998 (DATE OF SEVEN MONTHS COMMENCEMENT OF YEAR ENDED ENDED OPERATIONS) TO DECEMBER2000 a share exchange agreement (“the agreement”) was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company’s shareholders on December 31,DECEMBER2000. Pursuant to the agreement, the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 respectively, representing 75% of its outstanding shares and options, on a fully diluted basis, in exchange for all shares in Marnetics.The merger between Marnetics and the Company was accounted for as a reverse merger. As the shareholders of Marnetics (as a group) received the largest ownership interest in the Company, Marnetics was determined to be the “accounting acquirer” in the reverse acquisition. As a result, the historical financial statements of the Company (prior to December 31,
DECEMBER2000) were replaced with the historical financial statements of Marnetics. The statements of operations for 2000 and 1999 include the operations of Marnetics. The December 31,------------ ------------ ------------20001999 1998 2000 ---- ---- ---- ----balance sheet includes the accounts of the Company and Marnetics. The fair value of Stav shares, US$IN THOUSANDS ----------------APPENDIX A ADJUSTMENTS TO RECONCILE LOSS FOR THE PERIOD TO NET CASH USED IN OPERATING ACTIVITIES:11,314,280 was determined on the basis of the average market price of its outstanding shares US$8.00 per share. Goodwill in the amount of $11,309,000 was recorded accordingly.The following unaudited pro forma summary present information as if the acquisition of Stav occurred at the beginning of the periodpresented. The pro forma information, which is provided for informational purposes only, is based on historical information and does not necessarily reflect the results that would have occurred, nor is it necessarily indicative of future results of operations of the consolidated entities.
(Unaudited)
Year ended December 31,
2 0 0 0
Revenues
$
4,498
Net income
(10,751
)
Earnings per share:
Basic
(1.68
)
Diluted
$
(1.68
)
Effective March 2001 the Company sold to Idan Millennium Investments and Assets Ltd (“IDAN”) , a company under the control of Mr. Strikovsky, former CEO and former chairman of the board, all the fixed assets, inventories, other assets and liabilities and goodwill related to the electrical operations for a consideration of $ 597,000. The balance of $ 597,000 was not recognized as the probability of its realization was in doubt (See also Note 3).
- 9 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial StatementsNote 1 – General (cont.)
b.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company has a limited operating history and has sustained losses since its inception. As shown in the accompanying financial statements, the Company incurred a net loss of $ 3,021,000 for the year ended December 31, 2002 and as of that date has accumulated loss of $ 24,333,000. The future of the Company is dependent upon future profitable operations from the commercial success of its operations. Management is seeking additional capital and M&A transactions that will provide funds needed to continue its operations.
In April 2003 and in light of the current financial position and liquidity considerations, the Company’s board of directors resolved to decrease its level of operating expenses and to lay-off the majority of the Company’s employees and seek a potential purchaser for the subsidiary or its IP. Management anticipates that its cash balance will be sufficient to finance its operations until September 2003.
The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty and these adjustments may be material.
Note 2 - Significant accounting policies
a.
Development-stage enterprise
Since planned principal operations have not yet begun to generate any revenues, the Company is a development-stage company. All pre-operating costs have been expensed as incurred.
b.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
c.
Financial statements in U.S. dollars
The reporting currency of the Company is the U.S. dollar. The currency of the primary economic environment in which the operations of the Company are conducted is the dollar, and the dollar has been determined to be the Company’s functional currency.
Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards (“SFAS”) No. 52 “Foreign Currency Translation”. All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are reflected in the statement of operations as they occur.
- 10 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A Development Stage Company)
Notes to the Consolidated Financial StatementsNote 2 - Significant accounting policies (cont.)
d.
Cash equivalents
Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities when purchased of three months or less.
e.
Fixed assets
Property and equipment are stated at cost. Depreciation
8 2 7 17 Loss on saleis calculated using the straight-line method over the estimated useful lives of the assets, as follows:Computers and software
3 years
Furniture and fixtures
10-15 years
The Company periodically assesses the recoverability of the carrying amount of property and equipment
-- 28 -- 28 Sharebased on expected undiscounted cash flows. If an asset’s carrying amount is determined to be not recoverable, the Company recognizes an impairment loss based upon the difference between the carrying amount and the fair value of such assets, inlossesaccordance with SFAS No. 144 “Accounting for the Impairment or Disposal ofaffiliate 639 21 -- 660 Non cash compensation expenses 2,408 -- -- 2,408 Changes inLong-Lived Assets” (“SFAS No. 144”).f.
Research and development costs
Research and development costs are expensed as incurred.
g.
Earnings per share
The Company has adopted Statement No. 128 of the FASB “Earnings Per Share” (SFAS 128”). Basic and diluted earnings per ordinary share are computed using the weighted average number of shares outstanding.
h.
Deferred income taxes
Deferred income taxes are provided for temporary differences between the assets and
liabilities: Increaseliabilities, as measured for financial statement purposes and for tax purposes, at tax rates expected to be in effect when these differences reverse.i.
Fair value of financial instruments
The financial instruments of the Company consist mainly of cash and cash equivalents, current accounts receivable,
(61) (1) (6) (68) Increase (decrease)accounts payable and accruals. Due to the relatively short period to maturity, the fair value of the financial instruments included intrade payables 34 (20) 21 35 Increase (decrease)the working capital of the Company approximates their carrying amounts.j.
Reclassification
Certain figures from prior years have been reclassified in
other payables and accrued expenses 96 (37) 45 104 ----- --- -- ------ 3,124 (7) 67 3,184 ===== === == ====== SUPPLEMENTAL CASH FLOW DATA PURCHASE OF A SUBSIDIARY IN A REVERSE MERGER: Current assets 4,947 4,947 Non-current assets 1,272 1,272 Fixed assets 474 474 Goodwill 11,309 11,309 Current liabilities (6,497) (6,497) Long-term liabilities (213) (213) Cash acquired 22 22 ----- ------ Total non-cash consideration 11,314 11,314 ====== ======order to conform to the 2002 presentation.THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-7- 11 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1
(A Development Stage Company)
Notes to the Consolidated Financial StatementsNote 2 -
GENERALSignificant accounting policies (cont.)
k.
Recent accounting pronouncements
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements SFAS Nos. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” SFAS No. 145 will impact how companies account for sale-leaseback transactions and how gains or losses on debt extinguishments are presented in financial statements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, early application is encouraged. Under the provisions of SFAS 4 gains and losses associated with extinguishments of debts were reclassified as extraordinary item. SFAS No. 145 provides that gains and losses associated with extinguishments of debts will be classified as extraordinary item only if they meet the criteria of APB Opinion No. 30. The application of the requirements of SFAS No. 145 will not have a material impact on the Company’s financial position or results of operations.
In July 2002, the FASB issued SFAS No.146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The application of the requirements of SFAS No. 146 will not have a material impact on the Company’s financial position or results of operations.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 15, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of the requirements of FIN 45 will not have a material impact on the Company’s financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock Based Compensation—Transition and Disclosure—as Amendment to FAS 123.” SFAS 148 provides two additional transition methods for entities that adopt the preferable method of accounting for stock based compensation. Further, the statement requires disclosure of comparable information for all companies regardless of whether, when, or how an entity adopts the preferable, fair value based method of accounting. These disclosures are now required for interim periods in addition to the traditional annual disclosure. The amendments to SFAS No. 123, which provides for additional transition methods, are effective for periods beginning after December 15, 2002, although earlier application is permitted. The amendments to the disclosure requirements are required for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002.
Note 3 - Related parties
a.
(1)
In prior years the Company granted loan to Mr. Strikovsky in the amount of $1,228,000. The loan was linked to the Israeli CPI and bore interest of 2% per annum and was repayable in eight annual installments each comprised of 1/8 of the principal and the accrued interest thereon commencing December 2000. At December 31, 2001 the Company reassessed the collectibility of the loan in accordance with provisions of SFAS No. 114 “Accounting by Creditors for Impairment of a Loan”, and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. During 2002 $142,000 were repaid on the account of the loan.
(2)
In prior years Mr. Strikovsky withdrew funds from the Company in excess of the maximum allowable amount under the loan agreement. During 2002 $91,000 were repaid, in full return of these excess funds.
- 12 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(FORMERLY STAV ELECTRICAL SYSTEMS (1994) LTD.) ("the Company or Stav") is engaged in the manufacture, installation and maintenance of electrical and lighting systems, mainly for public institutions and in the development of performance enhancement solutions for Internet applications through its wholly owned subsidiary Marnetics Ltd. ("Marnetics"). On June 1, 2000 a share exchange agreement ("the agreement") was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company's shareholders on December 31, 2000. Pursuant
(A Development Stage Company)
Notes to theagreement, the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 respectively, representing 75% of its outstanding shares and options, on a fully diluted basis, in exchange for all shares in Marnetics. The acquisition of Marnetics by the Company was accounted for as a reverse acquisition. As the shareholders of Marnetics (as a group) received the largest ownership interest in the Company, Marnetics was determined to be the "accounting acquirer" in the reverse acquisition. As a result, the historical financial statements of the Company (prior to December 31, 2000) were replaced with the historical financial statements of Marnetics. The statements of operations for 2000, 1999 and 1998 include the operations of Marnetics. The December 31, 2000 balance sheet includes the accounts of the Company and Marnetics, and the December 31, 1999 balance sheet includes the accounts of Marnetics. The fair value of Stav shares, US$ 11,314,280 was determined on the basis of the average market price of its outstanding shares US$ 8.00. The following unaudited pro forma summary presents information as if the acquisition of Stav occurred at the beginning of the periods presented. The pro forma information, which is provided for informational purposes only, is based on historical information and does not necessarily reflect the results that would have occurred, nor is it necessarily indicative of future results of operations of the consolidated entities.
(UNAUDITED) YEAR ENDED DECEMBER 31, 2000 1999 ---- ----Revenues 4,498 5,152 Net income (10,751) (1,227) Earnings per share: Basic (1.68) (0.19) Diluted (1.68) (0.19)Marnetics has a limited operating history and is subject to risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for Internet products and services. In 1999, Marnetics reduced its activities, dismissed most of its employees and sold its fixed assets. During 2000, Marnetics has raised US$ 2.3 million from new investors and recruited additional employees. F-8MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES a. DEVELOPMENT-STAGE ENTERPRISE Since planned principal operations have not yet begun to generate any revenues, Marnetics is a development-stage company. All pre-operating costs have been expensed as incurred. b. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. c. FINANCIAL STATEMENTS IN U.S. DOLLARS The reporting currency of the Company is the U.S. dollar. The currency of the primary economic environment in which the operations of the Company are conducted is the dollar, and the dollar has been determined to be the Company's functional currency. Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured into dollars in accordance with the principles set forth in Statement ofConsolidated FinancialAccounting Standard ("SFAS") No. 52. All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are reflected in the statement of operations as they occur. d. CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities when purchased of three months or less. e. INVENTORIES Raw materials are stated at the lower of cost or market value. Cost is determined using the "first in-first out" method. f. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, as follows: Computers and software 3 years Furniture and fixtures 10-15 years In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," management reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. An impairment loss is recognized when the undiscounted future cash flows are less than the carrying value of the assets. The loss recognized would be equal to the difference between the carrying value and the fair value of the asset. F-9MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.) g. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses are expensed as incurred. h. EARNINGS PER SHARE The Company has adopted Statement No. 128 of the FASB "Earnings Per Share" (SFAS 128"). Basic and diluted earnings per ordinary share are computed using the weighted average number of shares outstanding. i. DEFERRED INCOME TAXES Deferred income taxes are provided for temporary differences between the assets and liabilities, as measured for financial statement purposes and for tax purposes, at tax rates expected to be in effect when these differences reverse. j. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Company consist mainly of cash and cash equivalents, current accounts receivable, accounts payable and accruals. Due to the relatively short period to maturity, the fair value of the financial instruments included in the working capital of the Company approximates their carrying amounts. k. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS 133) standardizes the accounting for derivative instruments by requiring that an entity recognize all derivatives as assets or liabilities in the statement of financial position and measure these instruments at fair value. When certain criteria are met, it also provides for matching the timing of gain or loss recognition on the derivative hedging instrument with the recognition of (a) the changes in the fair value or cash flows of the hedged asset or liability attributable to the hedged risk or (b) the earnings effect of the hedged forecasted transaction. This statement will be adopted effective January 1, 2001, but is not expected to materially effect the Company's financial statements. NOTEStatementsNote 3 -
RELATED PARTIES Comprised as follows:Related parties (cont.)
(3)
In prior years advances were paid to certain suppliers in the amount of $478,000. In accordance with the share exchange agreement (see Note 1) the Company asked Mr. Strikovsky for the repayment of such amounts. The excess advances were paid during 2001.
b.
(1)
On May 9, 2001 an agreement (the “Bank Agreement”) was signed between the Company and Bank Hapoalim, Ltd.(the “Bank”) with respect to the Company’s debt to the Bank in the amount of $3,127,000 (the “Debt”).
In accordance with the Bank Agreement, the Bank has agreed to release the Company from its obligation to repay the Debt and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, by May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt (the “Repaid Amount”) and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount.
In addition, the Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon (See Note 10d).
(2)
Following the Bank Agreement, on June 30, 2001 an agreement (the “Agreement”) was signed between Mr. Strikovsky and the Company pursuant to which Strikovsky agreed to reimburse the Company for the Repaid Amount and any additional amount that the Company may have to pay to the Bank if the Bank exercises the guarantee related to the debt of Hod Hasharon. The reimbursement amount of $954,000 is due and payable to the Company and will be paid in monthly installments of $48,000 commencing on June 1, 2004 until paid in full. All amounts due and payableto the Company are linked to the Israeli CPI and bear interest of 4% per annum.
The reimbursement amount of $954,000 was not yet recognized as the probability of its realization is in doubt.
(3)
Effective March 2001 the Company sold to IDAN, a company under the control of Strikovsky, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the probability of collection, decided to establish an allowance of $597,000 on the amount not yet collected. As of December 31, 2002 $71,000 were repaid on account of the sale consideration.
(4)
To secure his obligations under the various agreements Mr. Strikovsky has collateralized 300,000 shares that he owns of the Company. No other payments were made by Mr. Strikovski subsequent to December 31,
2000 1999 ---- ---- US$ IN THOUSANDSMR. DOV STRIKOVSKI (FORMER CEO AND CHAIRMAN OF THE BOARD): Loan (1) 1,484 -- ====== ==== Current account (2) 478 -- ====== ====2002. The Company is involved in ongoing legal efforts aimed at collecting amounts due from Mr. Strikovsky and companies under his control.(1) The loan is linked to the Israeli CPI and bears interest of 2% per annum. The loan is repaidNote 4 – Investment in
eight annual installments each comprised of 1/8 of the principal and the accrued interest thereon. The loan is not secured. F-10MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (2) During the audit of the financial statements of Stav for the year ended December 31, 2000 it was discovered that excess advances were paid to certain suppliers in the amount of $ 478,000. In accordance with the share exchange agreement (see Note 1) the Company asked Mr. Strikovsky for the repayment of such amounts. To secure the repayment Mr. Strikovsky provided the Company with a bank guaranty to be exercised not earlier than within 30 days from June 30, 2001. NOTE 4 - INVESTMENT IN AFFILIATEaffiliateUntil September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd
("Speedwise"(“Speedwise”). In September 2000, Speedwise issued shares to a third party resulting in a decrease in theCompany'sCompany’s holdings in Speedwise to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 14.73%.TheIn October 2002 Speedwise sold its assets and intellectual property to a third party in consideration of cash and shares. Based on the consideration received by Speedwise, the Companyretainedassesses that the recoverable amount of itssignificant influence over Speedwise. Theinvestment inthe affiliate consistsSpeedwise will be $60,000 and as a result an impairment charge ofthe following:
DECEMBER 31, ----------- 2000 1999 ---- ---- US$ IN THOUSANDS ----------------Investment in shares 1 1 Adjustment due to issuance of shares to a third party 1,241 146 Share in losses of affiliate (660) (21) ------ ----- 582 126 ====== =====Following is the condensed balance sheet of Speedwise Technologies Ltd. as at December 31, 2000 and 1999.
DECEMBER 31, ----------- 2000 1999 ---- ---- US$ IN THOUSANDS ----------------Current assets 3,078 361 Property and equipment 407 39 Other assets 56 9 ------- ------ 3,541 409 ======= ====== Current liabilities 505 33 Shareholders' equity: Ordinary shares 6 3 Additional paid-in capital 7,083 436 Deferred stock compensation (969) -- Deficit accumulated during the development stage (3,084) (63) ------- ------ 3,036 376 ------- ------ 3,541 409 ======= ======F-11$522,000 has been recorded.- 13 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE
(A Development Stage Company)
Notes to the Consolidated Financial StatementsNote 5
- PROPERTY AND EQUIPMENT Consist of the following:
DECEMBER 31, ----------- 2000 1999 ---- ---- US$ IN THOUSANDS ----------------Cost: Computers and software 304 -- Leasehold improvements 116 -- Motor vehicles 610 Furniture and fixtures 35 -- ------- ------ 1,065 -- ======= ====== Accumulated depreciation: Computers and software (100) -- Leasehold improvements (55) -- Motor vehicles (257) Furniture and fixtures (1) -- ------- ------ (413) -- ======= ======NOTE– Fixed assets
December 31,
2 0 0 2
2 0 0 1
Cost:
Computers and software
$
196
$
178
Leasehold improvements
51
50
Furniture and fixtures
40
39
$
287
$
267
Accumulated depreciation:
Computers and software
$
(118
)
$
(62
)
Leasehold improvements
(10
)
(1
)
Furniture and fixtures
(6
)
(1
)
$
(134
)
$
(64
)
Note 6 -
SUPPLEMENTARY BALANCE SHEET INFORMATION a. OTHER RECEIVABLESSupplementary balance sheet information
DECEMBER 31, -------------------------- 2000 1999 ---- ---- US$ IN THOUSANDS ----------------------------Prepaid expenses 77 -- Restricted cash 24 -- Advances to suppliers 14 -- Others 8 -- ----- ----- 123 -- ===== =====a.
Other receivables
b. SHORT-TERM BANK CREDIT
December 31,
2 0 0 2
2 0 0 1
Prepaid expenses
$
60
$
13
Restricted cash
30
30
Government authorities
199
102
Others
2
103
$
291
$
248
DECEMBER 31, ------------ 2000 1999 INTEREST RATES ---- ---- % US$ IN THOUSANDS -------------- ----------------UNLINKED SHEKEL CREDIT Overdraft 13.7-10.2 2,609 --b.
Short-term
loans 6.2-10.2 680 -- ------ ----- 3,289 -- Current maturities of long-term loans 48 -- ------ ----- 3,337 -- ====== =====bank credit
Interest rates
December 31,
%
2 0 0 2
2 0 0 1
Unlinked shekel credit
Overdraft
13.7-10.2
-
$
50
Short-term loans
6.2-10.2
-
-
-
50
Current maturities of
long-term loans
-
-
-
$
50
Liens - see Note
8d.7c.c.
Other payables:
F-12
December 31,
2 0 0 2
2 0 0 1
Wages and related accruals
$
82
$
52
Government authorities
98
27
Other accrued expenses (see also Note 7b)
354
750
Provision for a Bank guarantee
716
-
$
1,250
$
829
- 14 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - SUPPLEMENTARY BALANCE SHEET INFORMATION (cont.) c. OTHER PAYABLES:
DECEMBER 31, ------------------------ 2000 1999 ---- ---- US$ IN THOUSANDS ----------------Wages and related accruals 508 -- Accrual for taxes less payments Government authorities 834 -- Accrued expenses 284 -- Other 119 -- ------ ----- 1,745 -- ====== =====d. RELATED PARTIES: Consist of the following:
DECEMBER 31, ----------------- 2000 1999 ---- ---- US$ IN THOUSANDS ----------------Speedwise Technologies Ltd. 1 2 Infotier Ltd. -- 7 ---- ---- 1 9 ==== ====NOTE 7 - LONG-TERM DEBT
DECEMBER 31, ------------------------- 2000 1999 ---- ---- US$ IN THOUSANDS ----------------Long-term loan 44 -- Finance leases (1) 85 -- Less - current maturities 48 -- ----- ---- 81 -- Less - deposit(2) 16 -- ----- ---- 65 -- ===== ====(1) The loans are linked
(A Development Stage Company)
Notes to theIsraeli CPIConsolidated Financial StatementsNote 7 – Commitments and
bear average interest at 7.5% per annum. (2) Under each of the lease agreements, the Company undertook to deposit amount equal to the last three payments. The deposit is linked to the terms of the loan principal. F-13contingent liabilities
a.
Lease agreement
The facilities of the subsidiary are rented under an operating lease. The agreement included a lease extension option to extend the lease for one year period upon prior written notice. The Company exercised the option and extended the lease term for additional year until May 2003. The rent expenses under the operating lease for the year ended December 31, 2002 totaled $ 31,000.
b.
Liens, security and guarantees
1.
As of December 31, 2002, the Company was contingently liable for bank guarantees under performance obligations to customers related to the electrical operation totaling US$ 87,000.
2.
The Company has obtained a bank guarantee of $28,000, secured by a restricted deposit, in connection with the Company’sfacilities operating lease agreement in Israel.
c.
Legal claim
The Company and Mr. Strikovski was named as a defendant in a claim for specific performance of an agreement allegedly entered into by the Company and the plaintiff in April 1999 (the “Agreement”) as well as damages as a result of a breach of the agreement. On July 2, 2001, due to the fact that no defense and/or reply was provided by the Company, judgment was entered against the Company in the amount of $725,000. On February 7, 2002 the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed an appeal on the court decision which was accepted by the Supreme Court of the State New York with instructions to allow evidentiary hearing. The hearing was held on May 22, 2003 and the Company is awaiting the court’s decision. The plaintiff proposed to settle the suit for $250,000 and while the Company was willing to further negotiate a substantially lower amount, in light of the plaintiff’s position the Company decided to reject the proposal. In 2001 the Company has established an allowance in the amount of $750,000 to provide for its possible exposure. In light of recent developments the Company decreased the allowance by $500,000 to $250,000 which, in light of the judgment against the Company and the settlement offer proposed, represents a conservative estimate of the probable exposure.
d.
Royalties
The Company is committed to pay royalties to the office of the Chief Scientist of the Government of Israel on proceeds from sales of products in the research and development of which the Chief Scientist has participated by way of grants, up to the amount of 100% of the grants received, in dollar terms plus interest at LIBOR. The royalties are payable at a rate of 3% for the first three years of product sales and 3.5% thereafter. No royalties were paid to the Chief Scientist.
The total amount of grants accrued at December 31, 2002 was $ 140,000.
The research and development grants are presented in the statements of operations as an offset to research and development costs.
The refund of the grant is contingent on future sales and the Company has no obligation to refund these grants, if sufficient sales are not generated.
Based on the terms established in the agreement with the OCS the Company may not sell its IP to a non-Israeli entity.
- 15 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE
(A Development Stage Company)
Notes to the Consolidated Financial StatementsNote 8 -
COMMITMENTS AND CONTINGENT LIABILITIES a. LEASE AGREEMENT The facilities of the Company are rented under an operating lease for a period ending November 30, 2000. The future minimum lease commitment under the operating lease for the year ended December 31, 2000 is US$ 26,100. The facilities of the subsidiary are rented under an operating lease for a period of one year commencing May 14, 2000 and include a two-year lease extension option to extend the lease for one year periods upon prior written notice. The rent expenses under the operating lease for the year ended December 31, 2000 totaled $ 27,281. b. EMPLOYMENT AGREEMENT In June 1999, the Company entered into an employment agreement with Mr. Strikovsky providing that, through December 31, 2002, Mr. Strikovsky will serve as President and Chief Executive Officer of the Company at a base salary of $15,000 per month payable in New Israeli Shekels (subject to increase by the Board of Directors) and such bonuses as may be determined by the Board of Directors. Mr. Strikovsky participates in pension severance pay funds and insurance policies and savings plans. In addition, Mr. Strikovsky will receive reimbursement for certain business expenses including use of a Company-owned automobile, and reimbursement of telephone expenses and insurance. Upon termination of Mr. Strikovsky's employment, the Company is required to transfer to him title of severance pay and related insurance policies in lieu of severance payments. Upon the termination of such agreement, Mr. Strikovsky is subject to certain noncompete, non-disturbance, and non-interference provisions for a period of two years during which time and in consideration of which and provided that he is not otherwise employed, Mr. Strikovsky shall continue to draw his last salary and benefits. The contract was terminated on March 31, 2001. c. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Company consist mainly of current accounts receivable, short-term credits, accounts payable, accruals and long term debt. In view of their nature, the fair value of the financial instruments included in workingShare capitalof the Company are usually identical or close to their carrying amounts. d. LIENS, SECURITIES AND GUARANTEES 1. Liabilities of the Company to banks, totalling, as at December 31, 2000, US$ 3,337,000 are secured by a lien on the Company's assets. In addition, the Company has registered a fixed and floating lien on its unpaid share capital, goodwill and assets. 2. Liabilities of the Company to finance leasing companies, totalling as at December 31, 2000, US$ 69,000 are secured by a lien on the vehicles. 3. As at December 31, 2000, the Company was contingently liable for bank guarantees under performance obligations to customers totaling US$ 184,000. 4. As at December 31, 2000 the Company guaranteed discounted checks totaling US$682,000. F-14
a.
In December 1998 the Company consummated an Initial Public Offering (IPO).
Subsequent to the IPO, the Company’s ordinary shares were quoted and listed on the American Stock Exchange (AMEX). In April 2003 the AMEX had notified the Company that it no longer qualify for trading and that its shares would be delisted from trading on the AMEX. The Company’s shares are now traded on the Pink Sheets.
b.
In January 2000, Marnetics issued 36,318 ordinary shares of NIS 0.01 par value to an investor in consideration for $295,000. In addition, Marnetics granted the investor options to purchase 10,465 outstanding shares of the Company at $8.12 per share.
c.
In February 2000, Marnetics issued 130,719 ordinary shares of NIS 0.01 par value to ECI Telecom Ltd. for $2,000 thousand.
d.
Through September 30, 2000, Marnetics had granted to specific employees options to purchase 40,437 ordinary shares of the Company’s subsidiary pursuant to their employment agreements. The exercise price of the options is $1. Most of the options vest over four years. As part of the share exchange agreement these options were replaced with 308,300 options to purchase ordinary shares of the Company (see also Note 8(g) below).
e.
In October 2000 Marnetics reached an agreement with a group of new investors (the “Investors”). In accordance with the agreement, the Company issued to the Investors 221,200 ordinary shares in consideration of $5,076 thousand.
f.
On June 1, 2000 a share exchange agreement (“the agreement”) was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company’s shareholders on December 20, 2000. Pursuant to the agreement the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 (including 308,300 options to employees of Marnetics - see 8(g) below) respectively, representing 75% of its outstanding shares and options, on a fully diluted basis, in exchange for all shares in Marnetics.
g.
Pursuant to the agreement the Company issued newly unvested options to purchase 308,300 ordinary shares of the Company to the employees of Marnetics for their unvested options in Marnetics. In connection with this issuance, the Company recorded a deferred stock compensation expense totaling $1,836,000.
h.
In connection with the agreement, the Board of Directors of the Company adopted an Option Plan (the “Option Plan”). The Option Plan provides for the grant of options to purchase up to an aggregate of 1,000,000 Ordinary Shares to directors, key employees and consultants of the Company. The Board of Directors of the Company will determine the terms of the grants. Under the Option Plan, the Company granted, to a company under the control of the former CEO and chairman of the board of the Company, 400,000 fully vested options to purchase shares at the exercise price of $3. With respect to these options non-cash compensation expenses totaling $2,000,000 were recorded and charged to earnings in accordance with APB 25 “Accounting for Stock Issued to Employees”.
The amount of options outstanding as at December 31, 2002 is 2,151,664 of which 268,772 were granted to employees.
i.
During 2001, option granted to Marnetics certain shareholder in connection with the merger, were expired unexercised. According to the merger agreement such options must be divided pro-ratably between the formers shareholder of Marnetics. In 2001 the Company issued 955,057 shares which were divided pro-ratably according to the agreement.
- 16 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - SHARE CAPITAL a. In December 1998 the Company consummated an Initial Public Offering (IPO). Subsequent
(A Development Stage Company)
Notes to theIPO, the Company's ordinary shares are quoted and listedConsolidated Financial StatementsNote 9 – Taxes on
the American Stock Exchange (AMEX). b. In January 2000, Marnetics issued 36,318 ordinary shares of NIS 0.01 par value to an investor in consideration for $ 295,000. In addition, Marnetics granted the investor options to purchase 10,465 outstanding shares of the Company at $ 8.12 per share. c. In February 2000, Marnetics issued 130,719 ordinary shares of NIS 0.01 par value to ECI Communications Ltd. for $ 2,000 thousand. d. Through September 30, 2000, Marntics has agreed to grant to specific employees options to purchase 40,437 ordinary shares of the Company pursuant to their employment agreements. The exercise price of the options is $1. Most of the options vest over four years. As part of the share exchange agreement such options were replaced with 308,300 options to purchase ordinary shares of the Company (see also Note 9(g) below). e. In October 2000 Marnetics reached an agreement with a group of new investors (the "Investors"). In accordance with the agreement, the Company issued to the Investors 221,200 ordinary shares in consideration of $5,076 thousand. f. On June 1, 2000 a share exchange agreement ("the agreement") was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company's shareholders on December 20, 2000. Pursuant to the agreement the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 (including 308,300 options to employees of Marnetics - see 9(g) below.) respectively, representing 75% of its outstanding shares and options, on a fully diluted basis, in exchange for all shares in Marnetics. g. Pursuant to the agreement the Company issued newly unvested options to purchase 308,300 ordinary shares of the Company to the employees of Marnetics for their unvested options in Marnetics. In connection with this issuance, the Company recorded a deferred stock compensation expense totaling $ 1,836,000. h. In connection with the agreement, the Board of Directors of the Company adopted an unwritten Option Plan (the "Option Plan"). The Option Plan provides for the grant of options to purchase up to an aggregate of 1,000,000 Ordinary Shares to directors, key employees and consultants of the Company. The Board of Directors of the Company will determine the terms of the grants. Under the Option Plan, the Company granted, to a company under the control of the former CEO and chairman of the board of the Company, 400,000 fully vested options to purchase shares at the exercise price of $3. With respect to these options non-cash compensation expenses totaling $2,000,000 were recorded and charged to earnings in accordance with APB 25 "Accounting for Stock Issued to Employees". After the consummation of the reverse merger the amount of outstanding ordinary shares of the Company is 6,407,333 and the amount of options outstanding is 2,918,379 of which 1,045,443 were granted to employees and 420,000 were granted to two consultants. F-15MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - TAXES ON INCOMEincomeThe Company is assessed under the provisions of the Israeli Income Tax Law (Inflationary Adjustments) 1985, pursuant to which results for tax purposes are measured in new Israeli shekels in real terms in accordance with changes in the Israeli consumer price index.
Income is taxable at the ordinary corporate tax rate of 36%.
DEFERRED TAXESDeferred taxes
The main components of the
Company'sCompany’s deferred tax assets are as follows:
DECEMBER 31, ------------------ 2000 1999 ---- ---- US$ IN THOUSANDS ----------------Deferred tax assets: Net operating loss carryforwards in Israel (1,786) (101) Accrued severance pay, inventory adjustments, accrued vacation pay and allowances for doubtful debts (96) -- Less - Valuation allowance 1,882 101 ------- ----- Balance -- -- ======= =====
December 31,
2 0 0 2
2 0 0 1
Deferred tax assets:
Net operating loss carryforwards in Israel
$
(2,545
)
$
(3,507
)
Less – Valuation allowance
2,545
3,507
Balance
$
—
$
—
Under SFAS No. 109, deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss carryforwards and deductible temporary differences, unless it is more likely than not that some or all of the deferred tax assets will not be realized. The adjustment is made by a valuation allowance.
Since the realization of the net operating loss
carryforwardscarry forwards is less likely than not, a valuation allowance has been established for the amounts of the related tax benefits.Tax loss
carryforwardscarry forwards of the Company and its subsidiary companytotallingtotaling US$4,9617,070 thousand are unlimited in duration, denominated in NIS and linked to the Israeli consumer price index.TAX ASSESSMENTSTax assessments
The Company has closed assessments through 1998, inclusive. The Subsidiary has not been assessed for income tax purposes since incorporation.
NOTE 11Note 10 -
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION a. RESEARCH AND DEVELOPMENT COSTSSupplementary statement of operations information
CUMULATIVE FROM JUNE 1, 1998 (DATE OF SEVEN MONTHS COMMENCEMENT OF YEAR ENDED ENDED OPERATIONS) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, ------------ ------------ ------------ 2000 1999 1998 2000 ---- ---- ---- ---- US$ IN THOUSANDS ----------------Salariesa.
Research and
related expenses 355 11 100 466 Sub-contractors 17 20 23 60 Depreciation 6 2 8 16 Other 12 -- -- 12 ----- ---- ----- ----- 390 33 131 554 ===== ==== ===== =====development costsF-16
Year ended December 31,
Cumulative from
June 1, 1998
(date of
commencement of
operations) to
December 31,
2 0 0 2
2 0 0 1
2 0 0 0
2 0 0 2
Salaries and related
expenses
534
$
670
$
217
$
1,532
Sub-contractors
-
-
17
60
Depreciation
61
53
6
77
Other
31
89
12
185
626
812
252
1,854
Less - participation of the
government of Israel
140
-
-
140
$
486
$
812
$
252
$
1,714
- 17 -
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11
(A Development Stage Company)
Notes to the Consolidated Financial StatementsNote 10 -
SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATIONSupplementary statement of operations information (cont.)b. SALES AND MARKETING EXPENSES, NET
CUMULATIVE FROM JUNE 1, 1998 (DATE OF SEVEN MONTHS COMMENCEMENT OF YEAR ENDED ENDED OPERATIONS) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 1998 2000 ---- ---- ---- ---- US$ IN THOUSANDS ----------------Salaries and related expenses 95 -- -- 95 Advertisingb.
Sales and marketing
costs 61 -- -- 61 ----- ---- ---- ----- Gross sales and marketing costs 156 -- -- 156 Less-participation from the Government of Israel (14) -- -- (14) ----- ---- ---- ----- 142 142 ===== ==== ==== =====c. GENERAL AND ADMINISTRATIVE EXPENSES
CUMULATIVE FROM JUNE 1, 1998 (DATE OF SEVEN MONTHS COMMENCEMENT OF YEAR ENDED ENDED OPERATIONS) TO DECEMBER 31, DECEMBER 31, DECEMBER 31, 2000 1999 1998 2000 ---- ---- ---- ---- US$ IN THOUSANDS ----------------Salaries and relatedexpenses,242 11 101 354 Professional services 305 8 26 339 Management fee 43 -- -- 43 Others 132 25 54 211 ----- ---- ----- ----- 722 44 181 947 ===== ==== ===== =====netF-17STAV ELECTRICAL SYSTEMS (1994) LTD. (PREVIOUS REGISTRANT) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000 F-18STAV ELECTRICAL SYSTEMS (1994) LTD.(PREVIOUS REGISTRANT) CONSOLIDATED BALANCE SHEETS
Year ended December 31,
Cumulative from
June 1, 1998
(date of
commencement of
operations) to
December 31,
2 0 0 2
2 0 0 1
2 0 0 0
2 0 0 2
Salaries and related expenses
$
324
$
251
$
95
$
670
Subcontractors
64
64
Advertising and marketing
Costs
76
75
61
212
Gross sales and marketing
Costs
464
326
156
946
Less-participation from
the Government of Israel
-
(16
)
(14
)
(30
)
$
464
$
310
$
142
$
916
ADJUSTED NEW ISRAELI CONVENIENCE SHEKELS TRANSLATION -------------------- ----------- December 31, December 31, 2000 1999 2000 ---- ---- ---- US$ IN THOUSANDS ----------------CURRENT ASSETS Cash and cash equivalents 87 19 22 Restricted cash 99 -- 24 Receivables: Trade, net of allowance for doubtful accounts totaling as of December 31, 1999 and 2000, NIS 175,000 and NIS 194,000 (US$ 48,000), respectively 2,645 1,896 655 Related parties (Note 3) 2,789 818 690 Other (Note 5a) 402 1,536 99 Inventories (Note 2d, 5c) 907 1,600 224 Recoverable costs and estimated earnings- not yet billed 13,152 14,045 3,255 -------- -------- -------- TOTAL CURRENT ASSETS 20,081 19,914 4,969 -------- -------- -------- LONG-TERM LOAN TO RELATED PARTIES (Note 3) 5,141 5,722 1,272 -------- -------- -------- FIXED ASSETS (Notes 2e&4) Cost 3,553 3,335 879 Less - accumulated depreciation 1,638 1,225 405 -------- -------- -------- 1,915 2,110 474 -------- -------- -------- OTHER ASSETS (Note 5b) - 135 - -------- -------- -------- 27,137 27,881 6,715 ======== ======== ======== CURRENT LIABILITIES Short-term bank credit (Note 5d) 13,485 4,172 3,337 Payables: Trade 6,139 4,254 1,519 Other (Note 5e) 6,632 7,717 1,641 -------- -------- -------- TOTAL CURRENT LIABILITIES 26,256 16,143 6,497 -------- -------- -------- LONG-TERM LIABILITIES (Notes 6) 261 333 65 -------- -------- -------- ACCRUED SEVERANCE PAY (Note 7) 597 374 148 -------- -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 8) SHAREHOLDERS' EQUITY (Note 9) Share capital: Ordinary shares of NIS 0.08 par value 127 127 31 (Authorized - 5,000,000 shares, issued and outstanding 1,414,285 at December 31, 2000 and 1999) Additional paid-in capital 27,955 11,660 6,918 (Accumulated deficit) Retained earnings (28,059) (756) (6,944) -------- -------- -------- 23 11,031 5 -------- -------- -------- 27,137 27,881 6,715 ======== ======== ========THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-19STAV ELECTRICAL SYSTEMS (1994) LTD. CONSOLIDATED STATEMENTS OF OPERATIONS
CONVENIENCE TRANSLATION INTO ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS ---------------------------- ---------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------- ------------ 2000 1999 1998 2000 ---- ---- ---- ---- U.S.$ IN THOUSANDS NIS IN THOUSANDS (EXCEPT PER SHARE AND (EXCEPT PER SHARE AND SHARE DATA) SHARE DATA) --------------------------------- ---------------------Revenues (Notes 2g&13a) 18,176 20,821 32,632 4,498 COST OF REVENUES (NOTE 13b) 20,698 14,621 19,541 5,122 ----------- ---------- --------- ---------- GROSS PROFIT (LOSS) (2,522) 6,200 13,091 (624) Selling expenses 73 138 87 18c.
General and administrative expenses
(excluding
Year ended December 31,
Cumulative from
June 1, 1998
(date of
commencement
of operations) to
December 31,
2 0 0 2
2 0 0 1
2 0 0 0
2 0 0 2
Salaries and related expenses
$
194
$
472
$
242
$
1,020
Professional services
291
321
305
951
Management fee
10
-
43
53
Others
289
335
132
835
$
784
$
1,128
$
722
$
2,859
d.
Provision for a Bank guarantee
The Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS
16,295,000 (US$4,032,000)1:2 paid on account of the outstanding debt of Hod Hasharon, which has been assigned to the Bank (Note13c) 5,872 6,937 2,319 1,453 ----------- --------- -------- ---------- 5,945 7,075 2,406 1,471 ----------- --------- -------- ---------- Non-cash compensation expenses 16,295 - - 4,032 ----------- --------- -------- ---------- OPERATING (LOSS) INCOME (24,762) (875) 10,685 (6,127) Financial expenses, net (Note 13d) (1,894) (2,342) (2,591) (468) Other income 8 - - 2 ----------- --------- -------- ---------- INCOME BEFORE TAXES ON INCOME (26,648) (3,217) 8,094 (6,593) Taxes3b). To date Hod-Hasharon has not made any re-payment onincome (Notes 2f&10) 655 1,268 2,940 162 ----------- --------- -------- ---------- (LOSS) NET INCOME FOR THE YEAR (27,303) (4,485) 5,154 (6,755) =========== ========= ======== ========== PER SHARE DATA (NOTE 2h) (LOSS) EARNINGS PER SHARE: BASIC AND DILUTED (19.31) (3.17) 6.67 (4.78) Weighted average number =========== ========= ======== ==========account ofsharesthe debt, and therefore the guarantee has not decreased. According to the terms of the Bank Agreement, following November 30, 2002, the Bank is entitled to exercise the outstandingBASIC AND DILUTED 1,414,285 1,414,285 772,618 1,414,285 ========== ========= ======== ===========THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-20STAV ELECTRICAL SYSTEMS (1994) LTD. CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Adjusted New Israeli Shekels ----------------------------------------------------------------------- RETAINED ADDITIONAL EARNINGS NUMBER OF SHARE PAID-IN (ACCUMULATED SHARES CAPITAL CAPITAL DEFICIT) TOTAL ----- ------- ------- -------- ----- NIS in thousands ----------------BALANCE AS AT JANUARY 1, 1998 297,500 34 158 192 Share issuance (netamount ofissuance expenses) 1,116,785 93 11,660 11,753 Net incomethe guarantee, and since the guarantee has not decreased, the Company decided to establish an allowance for theyear 5,154 5,154 --------- ------- ------- -------- -------- BALANCE AS AT DECEMBER 31, 1998 1,414,285 127 11,660 5,312 17,099 Lossguarantee in full.Nevertheless, the Company and its representatives are conducting on-going negotiations with Hod-Hasharon for the
year (4,485) (4,485) Dividends (1,583) (1,583) --------- ------- ------- -------- -------- BALANCE AS AT DECEMBER 31, 1999 1,414,285 127 11,660 (756) 11,301 Issuancerepayment ofshare optionsthe debt toTo consultants and shareholders 16,295 16,295 Loss fortheyear (27,303) (27,303) BALANCE AS AT DECEMBER 31, 2000 --------- ------- ------- -------- -------- 1,414,285 127 27,955 (28,059) 23 ========= ======= ======= ======== ========THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-21STAV ELECTRICAL SYSTEMS (1994) LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS
CONVENIENCE TRANSLATION INTO ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS ---------------------------- ---------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------- ------------ 2000 1999 1998 2000 ---- ---- ---- ---- NIS IN THOUSANDS U.S.$ IN THOUSANDS ---------------- ------------------Cash flows from operating activities: (Loss) net income forBank, although at present theyear (27,303) (4,485) 5,154 (6,755) Adjustments to reconcile net income (loss) to cash providedCompany cannot assess what portion of the debt will be recovered, if any, (and the guarantee decreased accordingly) as a result of such negotiations, or any future action by(used in) operating activities (Appendix A) 20,067 (1,534) (4,608) 4,967 -------- -------- -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (7,236) (6,019) 546 (1,788) -------- -------- -------- -------- CASH FLOW FROM INVESTING ACTIVITIES Payment for acquisition of consolidated subsidiary(Appendix B) - - (525) Increase in restricted cash (99) - - (24) Proceeds from long-term loan to related parties 581 1,961 2,086 142 Long-term loan to related party - (2,473) (1,213) - Increase in related party- current account (1,971) - - (488) Additions to fixed assets (540) (555) (655) (134) Proceeds from sale of fixed assets 92 68 6 23 -------- -------- -------- -------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,937) (999) (301) (481) -------- -------- -------- -------- CASH FLOW FROM FINANCING ACTIVITIES Dividends paid - (1,583) - - Share issuance - - 12,708 - Share issuance costs - - (699) - Long-term loan received 179 325 173 44 Long-term loan paid (359) (539) (231) (89) Short-term credit from banks, net 9,421 3,699 (7,061) 2,332 -------- -------- -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 9,241 1,902 4,890 2,287 -------- -------- -------- -------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 68 (5,116) 5,135 18 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19 5,135 - 4 -------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD 87 19 5,135 22 ======== ======== ======== ========the Company.THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-22STAV ELECTRICAL SYSTEMS (1994) LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS APPENDIX A- ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
CONVENIENCE TRANSLATION INTO ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS ---------------------------- ---------------- YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, ----------------------- ------------ 2000 1999 1998 2000 ---- ---- ---- ---- NIS IN THOUSANDS U.S.$ IN THOUSANDS ---------------- ------------------INCOME AND EXPENSES NOT RELATING TO CASH FLOWS Depreciation and amortization 585 427 245 144 Amortization of deferred stock based compensation 16,295 - - 4,032 Increase in accrued severance pay 223 212 108 55 Loss from sale of fixed assets 8 51 6 2 Erosion of long-term loan - (36) 5 - -------- -------- -------- -------- 17,111 654 364 4,233 -------- -------- -------- -------- CHANGES IN ASSETS AND LIABILITIES ITEMS: Increase in trade receivables (749) (604) (677) (185) Decrease (increase) in other receivables 1,184 739 (1,683) 293 Decrease (Increase) in deferred taxes 135 1,044 (158) 33 Decrease (Increase) in recoverable costs and estimated earnings - not yet billed 893 (4,325) (5,689) 221 Decrease (Increase) in inventories 693 (65) (30) 174 Increase (decrease) in trade payables 1,885 1,048 (801) 466 Increase (decrease) in other payables (1,085) (25) 4,066 (268) -------- -------- -------- -------- 2,956 (2,188) (4,972) 734 -------- -------- -------- -------- 20,067 (1,534) (4,608) 4,967 ======== ======== ======== ======== APPENDIX B Assets acquired 1,145 Assumed liabilities (620) ----- 525 =====THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS F-23STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1-
GENERAL a. STAV ELECTRICAL SYSTEMS (1994)18 -MARNETICS BROADBAND TECHNOLOGIES LTD.
("
(A Development Stage Company)
Notes to theCompany") is engagedConsolidated Financial StatementsNote 11 – Impairment of goodwill
In 2001, in view of the
manufacture, installation and maintenance of electrical and lighting systems, mainly for public institutions. b. On June 1, 2000 a share exchange agreement ("the agreement") was signed betweenmarkets decline, the Company assessed the value andMarnetics Ltd, an Israeli company, engaged in the development of performance enhancement solutions for Internet applications ("Marnetics"). Pursuant to the agreement the Company issued to the shareholders of Marnetics shares and option in the amounts representing 75%future benefit of itsoutstanding shares in exchange for all their shares in Marnetics. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES a. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTSenterprise level goodwill pursuant to Accounting Principles Board Opinion No. 17, “Intangible Assets” (“APB 17”) (see Note 1). Thepreparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dateresult of thefinancial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. b. ADJUSTED FINANCIAL STATEMENTS 1. GENERAL The Company maintains its accounts in nominal new Israeli shekels ("NIS"). The nominal figures have been adjusted to NIS of constant purchasing power, in accordance with principles prescribed by statementsassessment was a full write-off of theInstitute of Certified Public Accountants in Israel, based on changes in the Israeli consumer price index ("CPI"). The financial statements are presented on the basis of historical cost in NIS of constant purchasing power (NIS of December 2000) ("adjusted new Israeli shekels"). Following is the annual increase in the CPI. Year ended December 31, 2000 0% Year ended December 31, 1999 1.3% Year ended December 31, 1998 8.6% The term "cost" in these financial statements refers to cost in adjusted NIS. 2. PRINCIPLES OF ADJUSTMENTS: i. BALANCE SHEETS: Monetary items (items whose values represents their current or realizable value at the balance sheet date) are presented at their nominal values. Comparative figures have been adjusted to the Israeli CPI of December 2000. Non-monetary items (principally, fixed assets and share capital) have been adjusted in accordance with changes in the Israeli CPI between the date of acquisition or origination to the balance sheet date. The adjusted values of non-monetary items included in the financial statements do not necessarily represent realizable value or any other economic value, but only their original historical cost in terms of constant NIS. F-24STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.) b. ADJUSTED FINANCIAL STATEMENTS (cont.) 2. PRINCIPLES OF ADJUSTMENTS (CONT.): ii. STATEMENTS OF OPERATIONS: Income and expense items (other than financial income or expenses and those deriving from non-monetary items) are adjusted from the transaction date to the balance sheet date. Income and expenses deriving from non-monetary items are adjusted on the same basis as the related balance sheet items. The effects of the inflationary erosion of monetary items and interest are included in financial income or expenses, as appropriate. c. RATE OF EXCHANGE AND LINKAGE BASIS Assets and liabilities in, or linked to, foreign currency are included on the basis of the representative exchange rate prevailing at the balance sheet date. Representative rates of exchange for the U.S. dollar were as follows: December 31, 2000 - NIS 4.041 December 31, 1999 - NIS 4.153 December 31, 1998 - NIS 4.160 Balances linked to the Israeli CPI are stated using the specific index to which the balances are linked. d. INVENTORIES Raw materials are stated at the lower of cost or market value. Cost is determined using the "first in-first out" method. Work-in-progress - represents the cost of development in progress. e. FIXED ASSETS Fixed assets are presented at cost. Depreciation is calculated using the straight-line method, over the estimated useful lives of the assets, at the following annual rates: Motor vehicles 15% Furniture and equipment 6-33% (mainly 10%) Leasehold improvements over the term of the lease f. DEFERRED INCOME TAXES Deferred income taxes are provided for net operating loss carryforwards and temporary differences between the assets and liabilities, as measured in the financial statements, and for tax purposes at the tax rates expected to be in effect when these differences reverse, if it is more likely than not that some or all of the deferred tax assets will not be realized an adjustment is made by means of valuation allowance, in accordance with Statement No. 109 of the Financial Accounting Standards Board ("FASB") (Accounting for Income Taxes). F-25STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.) g. REVENUE RECOGNITION MAINTENANCE CONTRACTS Revenues from maintenance services, mainly from municipalities, are billed monthly and are recognized on straight line basis over the term of the respective contracts. Under these contracts the Company provides electrical services to public facilities on customer's request. Costs, mainly salaries, are recorded on a monthly basis as incurred. INSTALLATION AND MANUFACTURE CONTRACTS These are "fixed price contracts" under which revenues are recognized based on the unit-of-delivery method, which is a modified percentage of completion method. Revenues and billings are computed by multiplying the units supplied by the price per unit on a monthly basis. Costs incurred on undelivered units are reported as work in progress in inventories. A provision for anticipated losses is made during the period when these losses become evident. h. EARNINGS PER SHARE The Company has adopted Statement No. 128 of the FASB "Earnings Per Share" (SFAS 128"). Basic and diluted earnings per ordinary share are computed using the weighted average number of shares outstanding. i. CONVENIENCE TRANSLATION Solely for the reader's convenience the financial statements have been translated from NIS into the US dollars using the representative exchange rate as at December 31, 2000 (U.S.$1 = NIS 4.041). The translated United States dollar figures should not be construed as a representation that the Israeli currency amounts actually represent, or could be converted into, United States dollars. j. EFFECT OF INFLATION In accordance with Israeli GAAP, the Company comprehensively includes the effects of price level changes in the accompanying financial statements as described in Note 2b. Such Israeli accounting principles measure the effects of price level changes in the inflationary Israeli economy and, as such, is considered a more meaningful presentation than financial reporting based on nominal historical cost, for Israeli and US accounting purposes. Accordingly, price level adjustments have not been reversed as a reconciliation of Israeli accounting principles to U.S. GAAP. F-26STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - RELATED PARTIES Comprised as follows:
CONVENIENCE ADJUSTED NEW TRANSLATION ISRAELI SHEKELS INTO U.S. DOLLARS --------------- ----------------- December 31 December 31 ----------- ----------- 2000 1999 2000 ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ---------------- -----------------MR. DOV STRIKOVSKI: Loan (1) 5,998 6,540 1,484 ======= ======= ======= Current account (2) 1,932 - 478 ======= ======= =======(1) The loan is linked to the Israeli CPI and bears interest of 2% per annum. The loan is repaid in eight annual installments each comprised of 1/8 of the principal and the accrued interest thereon. The loan is not secured. (2) During the audit of the financial statements of Stav for the year ended December 31, 2000 it was discovered that excess advances were paid to certain suppliersgoodwill in the amount of$ 478,000. In accordance with the share exchange agreement (see Note 1) the Company asked Mr. Strikovsky for the repayment of such amounts. To secure the repayment Mr. Strikovsky provided the Company with a bank guaranty to be exercised not earlier than within 30 days from June 30, 2001. NOTE 4$9,309,000.-
FIXED ASSETS a. COMPRISED AS FOLLOWS:
CONVENIENCE ADJUSTED NEW TRANSLATION ISRAELI SHEKELS INTO U.S. DOLLARS --------------- ----------------- December 31 December 31 ----------- ----------- 2000 1999 2000 ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ---------------- -----------------COST: Computers and office equipment 771 768 191 Motor vehicles (*) 2,463 2,248 610 Leasehold improvements 319 319 78 ------- ------- ------- 3,553 3,335 879 ======= ======= ======= ACCUMULATED DEPRECIATION: Computers and office equipment 376 260 93 Motor vehicles 1,040 801 257 Leasehold improvements 222 164 55 ------- ------- ------- 1,638 1,225 405 ======= ======= =======(*) Including motor vehicles held under a financial lease totalling NIS 533,000 (US$ 132,000). b. Liens19 -see Note 8e. F-27STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - SUPPLEMENTARY BALANCE SHEET INFORMATION a. OTHER RECEIVABLES
CONVENIENCE ADJUSTED NEW TRANSLATION ISRAELI SHEKELS INTO U.S. DOLLARS --------------- ----------------- December 31 December 31 ----------- ----------- 2000 1999 2000 ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ---------------- -----------------Prepaid expenses 310 326 77 Advances to suppliers 59 1,077 14 Deferred taxes - 124 - Others 33 9 8 ------- ------- ------- 402 1,536 99 ======= ======= ========b. OTHER ASSETS
CONVENIENCE ADJUSTED NEW TRANSLATION ISRAELI SHEKELS INTO U.S. DOLLARS --------------- ----------------- December 31 December 31 ----------- ----------- 2000 1999 2000 ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ---------------- -----------------Deferred taxes - 135 - ======= ======= ========c. INVENTORIES
CONVENIENCE ADJUSTED NEW TRANSLATION ISRAELI SHEKELS INTO U.S. DOLLARS --------------- ----------------- December 31 December 31 ----------- ----------- 2000 1999 2000 ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ---------------- -----------------Raw materials 907 1,600 224 ======= ======= ========F-28STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 5 - SUPPLEMENTARY BALANCE SHEET INFORMATION (cont.) d. SHORT-TERM BANK CREDIT
CONVENIENCE TRANSLATION INTO U.S. ADJUSTED NEW ISRAELI SHEKELS DOLLARS ---------------------------- ----------- December 31 December 31 ----------- ----------- 2000 1999 2000 ---- ---- ---- NIS IN INTEREST NIS IN US$ IN THOUSANDS RATE THOUSANDS THOUSANDS --------- -------- --------- ---------% --- UNLINKED SHEKEL CREDIT Overdraft 10,541 15-18/5 2,194 2,609 Short-term loans 2,749 8.2 1,675 680 -------- ------- ------- 13,290 3,869 3,289 -------- ------- ------- Current maturities of Long-term loans 195 303 48 -------- ------- ------- 13,485 4,172 3,337 ======== ======= =======Liens - see Note 8e. e. OTHER PAYABLES:
CONVENIENCE ADJUSTED NEW TRANSLATION ISRAELI SHEKELS INTO U.S. DOLLARS --------------- ----------------- December 31 December 31 ----------- ----------- 2000 1999 2000 ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ---------------- -----------------Wages and related accruals 1,934 1,027 478 Accrual for taxes less payments - 4,833 - Government authorities 3,086 1,070 764 Accrued expenses 1,132 738 280 Other 480 49 119 ------- ------- ------- 6,632 7,717 1,641 ======= ======= =======F-29STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - LONG-TERM LIABILITIES
CONVENIENCE ADJUSTED NEW TRANSLATION ISRAELI SHEKELS INTO U.S. DOLLARS --------------- ----------------- December 31 December 31 ----------- ----------- 2000 1999 2000 ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ---------------- -----------------Long-term loan 179 - 44 Finance leases (1) 342 797 85 Less - current maturities 195 303 48 ----- ----- ----- 326 494 81 Less - deposit(2) 65 161 16 ----- ----- ----- 261 333 65 ===== ===== =====(1) The leases are linked to the Israeli CPI and bear average interest at 7.5% per annum. (2) Under the leases agreement, the Company undertook to deposit a leasing deposit in the amount of the last three payments. The deposit is linked to the terms of the loan principal. Liens - see Note 8e. NOTE 7 - ACCRUED SEVERANCE PAY Israeli laws and labor agreements determine the obligations of the Company to make severance payments to dismissed employees leaving employment under certain other circumstances. The liability for severance pay benefits, as determined by Israeli Law, is based upon length of service and the employee's most recent monthly salary. This liability is primarily covered by regular deposits made by the Company into recognized severance and pension funds and by insurance policies purchased by the Company. The amounts so funded are not reflected on the balance sheet, since they are controlled by the fund trustees and insurance companies and are not under the control and management of the Company. The aggregate value of the insurance plans for the years ended December 31, 1999 and 2000 was NIS 737,920 and NIS 970,000 (US$ 240,000) respectively. Severance pay expenses for the years ended December 31, 1998, 1999 and 2000 was NIS 110,000 NIS 212,000 and NIS 245,000 (US$ 61,000) respectively. F-30STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES a. LEASE AGREEMENT The facilities of the Company are rented under operating lease for a period ending November 30, 2000. Future minimum lease commitment under operating lease for the year ended December 31, 2000 is NIS 108,393 (US$ 26,100). b. EMPLOYMENT AGREEMENT In June 1999, the Company entered into an employment agreement with Mr. Strikovsky providing that, through December 31, 2002, Mr. Strikovsky will serve as President and Chief Executive Officer of the Company at a base salary of $15,000 per month payable in New Israeli Shekels (subject to increase by the Board of Directors) and such bonuses as may be determined by the Board of Directors. Mr. Strikovsky participates in Mivtahim policy and Keren Hishtalmut saving plan. In addition, Mr. Strikovsky will receive reimbursement for certain business expenses including use of a Company-owned automobile, borne telephone expenses, and insurance. Upon termination of Mr. Strikovsky's employment, the Company is required to transfer title to him of severance pay and related insurance policies in lieu of severance payments. Upon the termination of such agreement, Mr. Strikovsky is subject to certain noncompete, non-disturbance, and non-interference provisions for a period of two years during which time and in consideration of which and provided that he is not otherwise employed, Mr. Strikovsky shall continue to draw his last salary and benefits. c. CONCENTRATION OF CREDIT RISK For the year ended December 31, 2000, three of the Company's customers accounted for 54% of total revenues for the year then ended (as at December 31, 1998 and 1999 - four and two customers respectively accounted for 67% and 68% of the revenues for the years then ended). On the basis of past experience, the Company maintains an allowance for doubtful accounts, which in management's estimation adequately covers all anticipated losses in respect of trade receivables. d. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Company consist mainly of current accounts receivable, short-term credits, accounts payable, accruals and long term debt. In view of their nature, the fair value of the financial instruments included in working capital of the Company are usually identical or close to their carrying amounts. e. LIENS, SECURITIES AND GUARANTEES 1. Liabilities of the Company to banks, totalling, as at December 31, 2000, NIS 13,469,000 (US$ 3,333,000) are secured by a lien on the Company's assets. In addition, the Company has registered a fixed and floating lien on its unpaid share capital, goodwill and assets. 2. Liabilities of the Company to finance leasing companies, totalling as at December 31, 2000, NIS 277,000 (US$ 69,000) are secured by a lien on the vehicles. 3. As at December 31, 2000, the Company was contingently liable for a bank guarantees under performance obligations to customers totaling NIS 742,000 (US$ 184,000). 4. As at December 31, 2000 the Company has guaranteed discounted checks totaling NIS 2,754,000 (US$682,000). F-31STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - SHARE CAPITAL a. In December 1998 the Company consummated an Initial Public Offering (IPO) pursuant to which the Company sold 800,000 ordinary shares NIS 0.08 par value (including 100,000 ordinary shares NIS 0.08 par value sold by Mr. Strikovsky, president and Chief Executive Officer) for net proceeds of approximately U.S.$ 3.6 million (see also Note 3). Subsequent to the IPO, the Company's ordinary shares are quoted and listed on the American Stock Exchange (AMEX). b. In September 2000 the Company declared and paid a cash dividend in the per share amount of NIS 1.11 (US$ 0.26). The gross amount was NIS 1,583,000 (US$ 380,000), representing 30% of the net income for the year ended December 31, 1999. c. On June 1, 2000 a share exchange agreement ("the agreement") was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company's shareholders on December 20, 2000. Pursuant to the agreement the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 respectively, representing 75% of its outstanding shares, on a fully diluted basis, in exchange for all shares in Marnetics. d. Pursuant to the agreement the Company issued to two consultants and to the CEO of the Company 420,000 and 180,000 respectively, options to purchase ordinary shares of the Company. The exercise prices of the options are $3 and are fully vested immediately. The Company accounted for the grant to the consultants under the fair value method of SFAS No. 123 and EITF 96-18. The fair value for these options was estimated using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of 8%, dividend yield of 0%, volatility rate of 100% and expected life of the options of 0.5 years. The options granted to the CEO were accounted for under the intrinsic value in accordance with APB 25 "Accounting for Stock Issued to Employees". The Company recorded non-cash compensation expenses totaling $ 3,247,000. e. The Board of Directors of the Company adopted the 1999 Stock Option Plan (the "Plan"). The Plan provides for the grant of options to purchase up to an aggregate of 157,143 Ordinary Shares to employees, directors, and consultants of the Company. Pursuant to the agreement between the Company and the underwriters of the Company's initial public offering, options cannot be granted with an exercise price less than fair market value on the date of grant. Under the terms of the Plan, options are granted to employees for no consideration, and are exercisable by the employees at a price to be determined from time to time by the Company's Board of Directors or a committee of the Board of Directors, selected in accordance with the Company's Amended Articles of Association (the "Committee"). In December 31, 2000 prior to the final approval of the agreement with Marnetics, the Company agreed to grant to specific employees the options to purchase 157,143 ordinary shares of the Company. The exercise price of the options is $3. The options vest immediately. With respect to these options non-cash compensation expenses totaling $785,000 were recorded and charged to earnings in accordance with APB 25 "Accounting for Stock Issued to Employees". F-32STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - TAXES ON INCOME a. TAXATION UNDER INFLATIONARY CONDITIONS The Company is assessed under the provisions of the Income Tax Law (Adjustments Due To Inflation), 1985, pursuant to which the results for tax purposes are measured in real terms in accordance with changes in the Israeli CPI. b. DEFERRED TAXES Deferred taxes are computed for temporary differences in respect of the provision for doubtful debts, vacation pay, severance pay and inventory:
CONVENIENCE TRANSLATION INTO ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS ---------------------------- ----------- December 31 December 31 ----------- ----------- 2000 1999 1998 2000 ---- ---- ---- ---- NIS in thousands US$ IN THOUSANDS --------------------------------- ----------------Net operating loss carry forwards 4,555 1,130 1,145 1,127 Accrued severance pay, inventory adjustments, accrued vacation pay and allowances for doubtful debts 387 259 158 96 ------- ------- ------- -------- 4,942 1,389 1,303 1,223 Valuation allowance (4,942) (1,130) - (1,223) ------- ------- ------- -------- - 259 1,303 - ======= ======= ======= ========1. Under Statement No. 109 of the FASB, deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss carryforwards and deductible temporary differences, unless it is more likely than not that some or all of the deferred tax assets will not be realized. The adjustment is made by means of a valuation allowance. 2. The Company and its subsidiary have not been assessed for income tax purposes since its incorporation. 3. Tax loss carry forwards of the Company totalling $3,130,000 are unlimited in duration, denominated in NIS and linked to the Israeli CPI. F-33STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - TAXES ON INCOME (cont.) c. THEORETICAL INCOME TAXES A reconciliation of the theoretical tax amount, assuming all income is taxed at the statutory rates, to the actual tax in the statement of operations is as follows:
CONVENIENCE TRANSLATION INTO ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS ---------------------------- ----------- YEAR ENDED YEAR ENDED DECEMBER 31 DECEMBER 31 ---------------------- ----------- 2000 1999 1998 2000 ---- ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ----------------- ----------------(Loss) Income before taxes on income (26,648) (3,217) 8,094 (6,593) ======== ======= ====== ========= Theoretical tax on the Above amount (9,593) (1,158) 2,913 (2,373) Increase (decrease) in valuation allowance 3,812 1,130 (101) 943 Change in prior years' accrual for income taxes 400 -- -- 100 Non-deductible compensation expenses 5,866 -- -- 1,451 Other permanent differences 170 1,296 128 41 -------- ------- ------- -------- 655 1,268 2,940 162 ======== ======= ======= ======== Theoretical tax rates 36% 36% 36% 36% ======== ======= ======= ========NOTE 11 - TRANSACTIONS WITH RELATED PARTIES
CONVENIENCE TRANSLATION INTO ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS ---------------------------- ----------- YEAR ENDED YEAR ENDED DECEMBER 31 DECEMBER 31 ---------------------- ----------- 2000 1999 1998 2000 ---- ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ----------------- ----------------Financial income 177 98 641 44 Expenses - General and administrative expenses 720 747 166 178F-34STAV ELECTRICAL SYSTEMS (1994) LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 12 - SUPPLEMENTARY STATEMENT OF OPERATIONS DATA a. PRINCIPAL CUSTOMERS SALES TO FOLLOWING CUSTOMERS CONSTITUTED 10% OR MORE OF TOTAL SALES:
YEAR ENDED DECEMBER 31, ----------------------- 2000 1999 1998 ---- ---- ----Customer F 21% 13% 19% Customer H 23% 30% 24% Customer I 14% 11% 12% Customer J - - 12%
CONVENIENCE TRANSLATION INTO ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS ---------------------------- ----------- YEAR ENDED YEAR ENDED DECEMBER 31 DECEMBER 31 ---------------------- ----------- 2000 1999 1998 2000 ---- ---- ---- ---- NIS IN THOUSANDS US$ IN THOUSANDS ----------------- ----------------b. COST OF REVENUES Purchase of raw materials 9,813 5,979 10,207 2,428 Salaries, wages and benefits 6,896 5,157 4,503 1,707 Subcontract 2,236 2,533 3,514 553 Other expenses 1,502 746 1,251 372 Depreciation 251 206 66 62 ------ ------ ------ ------ 20,698 14,621 19,541 5,122 ====== ====== ====== ====== c. GENERAL AND ADMINISTRATIVE EXPENSES Including bad debt expenses 19 9 79 5 ====== ====== ====== ====== d. FINANCIAL EXPENSES, NET Bank commissions 73 96 76 18 Interest on short-term credit 830 1,922 2,836 205 Interest from related parties (177) (106) (684) (44) Interest on long-term credit 591 228 80 146 Interest on debts to governments authorities 680 - - 168 Inflationary erosion of the Israeli currency (103) 202 283 (25) ------ ------ ------ ------ 1,894 2,342 2,591 468 ====== ====== ====== ======F-35APPENDIX A SPEED - WISE LTD. (FORMERLY SPEED-ON TECHNOLOGIES LTD.) (A DEVELOPMENT-STAGE COMPANY) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000SPEED - WISE LTD. (FORMERLY SPEED-ON TECHNOLOGIES LTD.) (A DEVELOPMENT-STAGE COMPANY) CONSOLIDATED FINANCIAL STATEMENTS CONTENTS
PAGE ----REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 FINANCIAL STATEMENTS: CONSOLIDATED BALANCE SHEET as at December 31, 2000 2 CONSOLIDATED STATEMENTS OF OPERATION for the year ended December 31, 2000 3 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY for the year ended December 31, 2000 4 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF SPEED - WISE LTD. We have audited the accompanying consolidated balance sheet of SPEED - WISE LTD. ("the Company") (a development- stage Company) and its subsidiary as of December 31, 2000 and 1999, and the related consolidated statements of operations, changes in shareholders' equity for the year ended December 31, 2000, for the period of six months ended December 31, 1999 and the cumulative period from July 1, 1999 (date of commencement of operations) to December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the financial position of the Company (a development-stage company) and its subsidiary as of December 31, 2000 and 1999, and its consolidated results of operations and changes in shareholders' equity for the year ended December 31, 2000, the period of six months ended December 31, 1999 and the cumulative period from July 1, 1999 (date of commencement of operations) to December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. BRIGHTMAN ALMAGOR & CO. CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL) A MEMBER OF DELOITTE TOUCHE TOHMATSU Tel Aviv, Israel April 26, 2001. -1-SPEED - WISE LTD. (A DEVELOPMENT-STAGE COMPANY) CONSOLIDATED BALANCE SHEETS DECEMBER 31, ------------------------ 2000 1999 --------- --------- US$ US$ --------- ---------ASSETS CURRENT ASSETS Cash and cash equivalents 2,964,755 343,592 Accounts receivable 50,149 17,012 Other receivables 63,307 -- --------- ------- Total current assets 3,078,211 360,602 --------- ------- PROPERTY AND EQUIPMENT (Note 3) Cost 469,877 40,937 Less - Accumulated depreciation 62,460 1,736 --------- ------- 407,417 39,201 --------- ------- OTHER ASSETS (Note 4) 55,547 9,148 --------- ------- 3,541,175 408,953 ========= ======= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank credit 77,810 3,598 Accounts payables and accrued expenses (Note 8) 426,947 29,302 --------- ------- Total current liabilities 504,757 32,900 --------- ------- SHAREHOLDERS' EQUITY Share capital: Ordinary shares of NIS 0.01 par value (Authorized - 3,800,000 shares, issued and outstanding - 2,345,000 at December 31, 2000 ) 5,863 3,260 Deferred stock compensation (969,150) -- Additional paid-in capital 7,083,517 435,740 Deficit accumulated during the development stage (3,083,812) (62,947) --------- ------- 3,036,418 376,053 --------- ------- 3,541,175 408,953 ========= =======The accompanying notes are an integral part of the financial statements. -2-SPEED - WISE LTD. (A DEVELOPMENT-STAGE COMPANY) CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM FOR THE PERIOD OF JULY 1, 1999 (DATE OF FOR THE YEAR ENDED SIX MONTHS ENDED COMMENCEMENT OF OPERATIONS) DECEMBER 31, DECEMBER 31, TO DECEMBER 31, ------------------ ----------------- --------------------------- 2000 1999 2000 ------------------ ----------------- --------------------------- US$ US$ US$ ------------------ ----------------- ---------------------------Revenues 44,774 -- 44,774 Research and development costs (Note 9) 914,168 52,562 966,730 General and administrative expenses (Note 9) 1,945,288 25,191 1,970,479 Non-cash compensation 138,450 -- 138,450 --------- --------- --------- OPERATING LOSS 2,953,132 77,753 3,030,885 Financial (expenses) income, net (67,733) 14,806 (52,927) --------- --------- --------- LOSS FOR THE PERIOD 3,020,865 62,947 3,083,812 ========= ========= =========The accompanying notes are an integral part of the financial statements. -3-SPEED - WISE LTD. (A DEVELOPMENT-STAGE COMPANY) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
NUMBER OF SHARE DEFERRED STOCK ADDITIONAL SHARES CAPITAL COMPENSATION PAID-IN CAPITAL --------- ------- -------------- --------------- US$ US$ US$ US$ --------- ------- -------------- ---------------Balance at July 1, 1999 (date of commencement of operations) -- -- -- -- Changes in the six months from July 1, 1999 to December 31, 1999: Issuance of shares 1,339,000 3,260 435,740 Loss for the period --------- --------- ---------- --------- Balance at December 31, 1999 1,339,000 3,260 -- 435,740 Changes during 2000: Issuance of shares 1,006,100 2,603 5,540,177 Deferred compensation related to employee stock (1,107,600) 1,107,600 option grants Amortization of stock based compensation 138,450 Loss for the year --------- --------- ---------- --------- Balance at December 31, 2000 2,345,100 5,863 (969,150) 7,083,517 ========= ========= ========== =========DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE TOTAL -------------------------- ----- US$ US$ -------------------------- -----Balance at July 1, 1999 (date of commencement of operations) -- -- Changes in the six months from July 1, 1999 to December 31, 1999: Issuance of shares 439,000 Loss for the period (62,947) (62,947) ---------- ---------- Balance at December 31, 1999 (62,947) 376,053 Changes during 2000: Issuance of shares 5,542,780 Deferred compensation related to employee stock option grants Amortization of stock based compensation 138,450 Loss for the year (3,020,865) (3,020,865) ---------- ---------- Balance at December 31, 2000 (3,083,812) 3,036,418 ========== ==========The accompanying notes are an integral part of the financial statements. -4-SPEED - WISE LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 -- GENERAL SPEED - WISE LTD. (the "Company"), an Israeli company, was established in 1999. The Company is engaged in the development of technology for accelerating by Internet on the cellular market. SPEED - WISE INC. (the "Subsidiary"),a wholly owned subsidiary of the Company, was incorporated puruant to the laws of the state of Delaware on May 16, 2000, and commenced its operations on June 6, 2000. The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for Internet products and services. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES DEVELOPMENT-STAGE ENTERPRISE Since planned principal operations have not yet begun to generate any revenues, the Company is a development-stage company. All pre-operating costs have been expensed as incurred. USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. FINANCIAL STATEMENTS IN U.S. DOLLARS The reporting currency of the Company is the U.S. dollar. The currency of the primary economic environment in which the operations of the Company are conducted is the dollar, and the dollar has been determined to be the Company's functional currency. Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured into -5-dollars in accordance with the principles set forth in Statement of Financial Accounting Standard ("SFAS") No. 52. All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are reflected in the statement of operations as they arise. CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities when purchased of three months or less. NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES (CONTD.) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of assets, as follows:
Computers and software 3 years Furniture and fixtures 6-7 yearsIn accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," management reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. An impairment loss is recognized when the undiscounted future cash flows are less than the carrying value of the assets. The loss recognized will be equal to the difference between the carrying value and the fair value of the asset. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses are expensed as incurred. DEFERRED INCOME TAXES Deferred income taxes are provided for temporary differences between the assets and liabilities, as measured in the financial statements and for tax purposes, at tax rates expected to be in effect when these differences reverse. -6-FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Company consist mainly of cash and cash equivalents, current accounts receivable, accounts payable and accruals. Due to the relatively short period to maturity, the fair value of the financial instruments included in the working capital of the Company approximates their carrying amounts. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"(amended in June 2000 by SFAS 138). SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (as amended by SFAS No. 137). SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each year in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction, and if it is the type of hedge transaction. The Company does not expect the adoption of SFAS No. 133 (as amended by SFAS 138) to have a material impact on its consolidated financial statements. As of December 31, 1999, the Company has no derivative instruments. -7-NOTE 3 -- PROPERTY AND EQUIPMENT Consist of the following:
DECEMBER 31, --------------------- 2000 1999 ---- ---- US$ US$ ---- ----Cost: Computers and software 385,146 35,865 Furniture and fixtures 26,577 5,072 Leaseholds improvements 58,154 ------- - ------- 469,877 40,937 ======= ====== Accumulated depreciation: Computers and software 58,528 1,596 Furniture and fixtures 2,531 140 Leaseholds improvements 1,401 ------- - ------- 62,460 1,736 ====== =====NOTE 4 -- OTHER ASSETS Other assets include US$ 47,291 prepaid expenses in respect of the last six months' rental of motors vehicles, which are due for payment in 2002 and US$ 8,256 security deposit. NOTE 5 -- COMMITMENTS AND CONTINGENT LIABILITIES a. In November 1999, the Company signed an operational motor vehicle lease agreement, according to which the Company will from time to time lease motor vehicles for a period of 36 months, in consideration of monthly leasing fees linked to the Israeli CPI to be fixed periodically. As at the balance sheet date, the Company leased sixteen motor vehicles and undertook to pay in respect thereof monthly leasing fees of US$ 11,511. b. In December 1999, the Company signed an operational equipment and computer system lease agreement, according to which the Company will from time to time lease computer software and equipment for the period of 24 -8-months, in consideration of monthly leasing fees linked to the Israeli CPI to be fixed periodically. As at the balance sheet date, the Company leased one computer and undertook to pay in respect thereof monthly leasing fees of US$ 243. c. The premises of the Company are rented under two operating lease agreements. The first agreement expires in February 2002. The second agreement expires in August 2001 and includes a two year lease extention option to extend the lease for one year periods upon prior written notice. Lease expenses for the year ended December 31, 2000 were US$ 25,000. NOTE 6 -- SHARE CAPITAL ISSUANCE OF SHARES During 2000, the Company issued 1,006,100 shares to eight investors for consideration of US$ 5,534 thousand. Through December 31, 2000, the Company has committed to grant to specific employees options to purchase 340,400 ordinary shares of the Company pursuant to their employment agreements of which 247,400 were actually granted . The exercise price of the options is $1. The options vest over four years. With respect to these options a deferred compensation is recorded and charged to earnings over the vesting period in accordance with APB 25 "Accounting for Stock Issued to Employees". NOTE 7 -- TAXES ON INCOME The Company is assessed under the provisions of the Israeli Income Tax Law (Inflationary Adjustments) 1985, pursuant to which results for tax purposes are measured in new Israeli shekels in real terms in accordance with changes in the Israeli consumer price index. Income is taxable at the ordinary corporate tax rate of 36%. -9-DEFERRED TAXES The main components of the Company's deferred tax assets are as follows:
DECEMBER 31, ---------------------- 2000 1999 ---- ---- US$ US$ ---- ----Deferred tax assets: Net operating loss carryforwards in Israel (1,037,670) (9,573) Less - Valuation allowance 1,037,670 9,573 ---------- ------ Balance -- -- ========== ======Under SFAS No. 109, deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss carryforwards and deductible temporary differences, unless it is more likely than not that some or all of the deferred tax assets will not be realized. The adjustment is made by a valuation allowance. Since the realization of the net operating loss carryforwards is less likely than not, a valuation allowance has been established for the amounts of the related tax benefits. TAX ASSESSMENTS The Company has not been assessed for income tax purposes since incorporation. -10-NOTE 8 -- SUPPLEMENTARY BALANCE SHEET INFORMATION ACCOUNTS PAYABLES AND ACCRUED EXPENSES Consist of the following:
DECEMBER 31, ------------------------- 2000 1999 ---- ---- US$ US$ ---- ----Accounts payables 240,137 4,341 Payroll and related amounts 51,770 10,978 Accrued expenses 57,557 13,983 Other payables 77,483 -- ------- ------ 426,947 29,302 ======= ======NOTE 9 -- SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION RESEARCH AND DEVELOPMENT COSTS
FOR THE PERIOD FROM FOR THE PERIOD OF JULY 1, 1999 (DATE OF FOR THE YEAR ENDED SEVEN MONTHS ENDED COMMENCEMENT OF OPERATIONS) DECEMBER 31, DECEMBER 31, TO DECEMBER 31, ------------------ ------------------ --------------------------- 2000 1999 2000 ---- ---- ---- US$ US$ US$ ---- ---- ----Salaries and related expenses 716,770 37,030 735,800 Sub-contractors 58,301 13,543 71,844 Depreciation 50,837 1,454 52,291 Others 88,260 535 88,795 -------- ------- -------- 914,168 52,562 966,730 ======== ======= ========-11-NOTE 9 -- SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (CONT.) GENERAL AND ADMINISTRATIVE EXPENSES
FOR THE PERIOD FROM FOR THE PERIOD OF JULY 1, 1999 (DATE OF FOR THE YEAR ENDED SEVEN MONTHS ENDED COMMENCEMENT OF OPERATIONS) DECEMBER 31, DECEMBER 31, TO DECEMBER 31, ------------------ ------------------ --------------------------- 2000 1999 2000 ---- ---- ---- US$ US$ US$ ---- ---- ----Advertising (*) 116,891 9,752 126,643 Professional services 243,014 4,238 247,252 Rent and maintenance 115,597 3,080 118,677 Vehicle maintenance 72,883 2,800 75,683 Salaries and related expenses 848,681 -- 848,681 Travel expenses 374,672 -- 374,672 Others 173,550 5,321 178,871 --------- ------- --------- 1,945,288 25,191 1,970,479 ========= ======= =========(*) Net of US$ 9 thousand Grants from the Government of Israel. NOTE 10 -- SUBSEQUENT EVENTS Subsequent to the balance sheet date the Company issued 178,126 of NIS 0.01 shares for consideration of US$ 2,000 thousand. -12-ITEM 19. FINANCIAL STATEMENT AND EXHIBITS. (a) Financial Statements. CONSOLIDATED FINANCIAL STATEMENTS
PAGE ----MARNETICS BROADBAND TECHNOLOGIES LTD REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS F-2 CONSOLIDATED BALANCE SHEETS as at December 31, 2000 and 1999 F-3 CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 2000 and 1999 for the period of seven months ended December 31, 1998 and for the cumulative period from June 1, 1998 to December 31, 2000 F-4 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY for the years ended December 31, 2000 and 1999 for the period of seven months ended December 31, 1998 and for the cumulative period from June 1, 1998 to December 31, 2000 F-5 CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 2000 and 1999 for the period of seven months ended December 31, 1998 and for the cumulative period from June 1, 1998 to December 31, 2000 F-6 NOTES TO THE FINANCIAL STATEMENTS F-8 STAV ELECTRICAL SYSTEMS (1994) LTD. (PREVIOUS REGISTRANT) CONSOLIDATED BALANCE SHEETS F-19 as at December 31, 2000 and 1999 CONSOLIDATED STATEMENTS OF OPERATIONS F-20 for the years ended December 31,2000, 1999 and 1998 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY F-21 for the years ended December 31,2000, 1999 and 1998 CONSOLIDATED STATEMENTS OF CASH FLOWS F-22 for the years ended December 31,2000, 1999 and 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-24APPENDIX A - CONSOLIDATED FINANCIAL STATEMENTS OF SPEED-WISE TECHNOLOGIES LTD. (b) Exhibits. 3.1 Memorandum of Association of the Registrant (filed as Exhibit 3.1 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 3.2 Amended and Restated Articles of Associations of the Registrant. 4.1 2001 Share Option Plan 10.1 Form of Officers' and Directors' Indemnification Agreement (filed as Exhibit 10.3 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.2 Loan Agreement between Bank Hapoalim and the Registrant (filed as Exhibit 10.4 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.3 Promissory Note issued by Dov Strikovsky to the Company (filed as Exhibit 10.5 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.4 Share Exchange Agreement among Marnetics Ltd., its Shareholders and the Registrant dated as of May 31, 2000, as amended (filed as Exhibit 10.6 to Form 20-F for the year-ended December 31, 2000 and by this reference incorporated herein). 10.5 Software License Agreement by and between Marnetics Ltd. and Speedwise Technologies, Ltd. dated as of April 17, 2001. 10.6 Indemnification Agreement between Dov Strikovsky, the Company and the former shareholders of Marnetics Ltd. dated as of June 30, 2001. 10.7 Request for Proposals. 10.8 Asset Purchase Agreement between the Company and Idan Millennium Investments and Assets dated as of June 10, 2001. 10.9 Agreements to the Assignment of Debt by and among the Company, Bank Hapoalim Ltd. and Shlavor Systems Ltd. dated as of May 9, 2001. 10.10 OEM Agreement by and between Marnetics Ltd. and Speedwise Technologies Ltd. dated as of July 8, 2001.SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. MARNETICS BROADBAND TECHNOLOGIES LTD. By: /S/ JACOB BEN-GUR ------------------------------------ Jacob Ben-Gur, Chairman By: /S/ MENACHEM REINSCHMIDT ------------------------------------ Menachem Reinschmidt, President Date: July 12, 2001EXHIBIT INDEX Exhibit NO. DESCRIPTION - ------- ----------- 3.1 Memorandum of Association of the Registrant (filed as Exhibit 3.1 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 3.2 Amended and Restated Articles of Associations of the Registrant. 4.1 2001 Share Option Plan 10.1 Form of Officers' and Directors' Indemnification Agreement (filed as Exhibit 10.3 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.2 Loan Agreement between Bank Hapoalim and the Registrant (filed as Exhibit 10.4 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.3 Promissory Note issued by Dov Strikovsky to the Company (filed as Exhibit 10.5 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.4 Share Exchange Agreement among Marnetics Ltd., its Shareholders and the Registrant dated as of May 31, 2000, as amended (filed as Exhibit 10.6 to Form 20-F for the year-ended December 31, 2000 and by this reference incorporated herein). 10.5 Software License Agreement by and between Marnetics Ltd. and Speedwise Technologies, Ltd. dated as of April 17, 2001. 10.6 Indemnification Agreement between Dov Strikovsky, the Company and the former shareholders of Marnetics Ltd. dated as of June 30, 2001. 10.7 Request for Proposals. 10.8 Asset Purchase Agreement between the Company and Idan Millennium Investments and Assets dated as of June 10, 2001. 10.9 Agreements to the Assignment of Debt by and among the Company, Bank Hapoalim Ltd. and Shlavor Systems Ltd. dated as of May 9, 2001. 10.10 OEM Agreement by and between Marnetics Ltd. and Speedwise Technologies, Ltd. dated as of July 8, 2001.