SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(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
For 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
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)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
NONE
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
As of December 31, 2000, 6,407,333 of the Registrant'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 STATEMENT
Our disclosure and analysis in this report contains statements relating to
future results of 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.) (including
certain projections and business trends) that are considered "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995.
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 the Company'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.
PART I
ITEM 1. NOT APPLICABLE.
ITEM 2. NOT APPLICABLE.
ITEM 3. 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 optionholders 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" in the transaction since the former shareholders and
optionholders 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 of Marnetics Ltd. Therefore, the following financial summary of the
Company refers to the results of operation of Marnetics Ltd. The selected
summary data should be read in conjunction with and are qualified in their
entirety by our Consolidated Financial Statements and notes thereto, which are
presented elsewhere herein and by reference to "Item 5: Operations and Financial
Review and Prospects."
2
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 THOUSANDS
Research 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
- ----------------------------------------
(1) Marnetics Ltd. was established and commenced its operations in June 1998
B. NOT APPLICABLE.
C. NOT APPLICABLE.
D. RISK FACTORS
The Company's operations consist of two lines of business: (1) our current
core business of developing and marketing Internet performance enhancement
solutions (the "INTERNET BUSINESS"), which is handled through our wholly-owned
subsidiary, Marnetics Ltd. (the "MARNETICS SUBSIDIARY"), and (2) our historical
business of electrical and communications contracting and engineering business
(the "ELECTRICAL BUSINESS"), which we propose to sell, following a request for
bids announced on May 15, 2001 and concluded on May 30, 2001, and subject to
shareholders' approval at our Annual General Meeting scheduled to be held in the
third quarter, 2001. See "ITEM 8B - SIGNIFICANT CHANGES."
3
RISKS RELATING TO INTERNET BUSINESS
TECHNOLOGICAL FACTORS; UNCERTAINTY OF PRODUCT DEVELOPMENT
Our products are still under development. 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 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 there is no guarantee that we will have the
necessary funds to be able to keep pace with the rate of technological change.
INTELLECTUAL 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 a
patent application on December 6, 2000 (US Patent Application No. 2196/1), for a
method of data transfer acceleration in a TCP network environment, which is the
core engine in BITmax(TM). The patent application is 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.
4
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
GENERAL. As part of its operating history and growth strategy, the Company
seeks to acquire other businesses. The Company continually seeks acquisition
candidates in selected and, if possible, synergetic markets and from time to
time engages in exploratory discussions with potential acquisition candidates.
There can be no assurance, however, that the Company will be able to identify
and acquire targeted businesses or obtain financing for such 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.
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 acquired in
future acquisitions. Consequently, no assurance can be given that the Company
will be able to make future acquisitions at favorable prices, that acquired
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 to make acquisitions. Furthermore, additions by the
Company of new products present certain risks and uncertainties resulting from
the Company'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. The process of integrating future acquired businesses into the
Company'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 of acquired
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 the acquired businesses. Further, no assurance can be given that the Company
will successfully integrate its recent acquisitions or any other future acquired
businesses into the Company's purchasing, marketing and management information
systems, or that the Company'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 the Company's operations and acquisition
activity. Integration of acquisitions is often a complex process which may
entail material, non-recurring expenditures, including facility closing costs,
warehouse assimilation expenses, asset writedowns and severance payments.
SIGNIFICANT FUTURE CHARGES TO EARNINGS. Future acquisitions may involve the
recording of a significant amount of intangible assets, particularly goodwill,
on the Company's balance sheet, which will be amortized over varying periods of
time.
5
LIMITED RELEVANT OPERATING HISTORY OF MARNETICS SUBSIDIARY; 1999 BUSINESS
CONTRACTION
The Marnetics Subsidiary, which is the operating entity for the Internet
Business, has been in operation since June 1998. Accordingly, the Marnetics
Subsidiary has a limited relevant operating history upon which an evaluation of
the Marnetics Subsidiary's performance and prospects can be made. The Marnetics
Subsidiary is subject to all of the risks, expenses, delays, problems, and
difficulties typically encountered in the establishment of a new business.
In 1999, while our technology was in the research and development stage, as
a result of differing views on which market the Marnetics Subsidiary should
target for product development, and the ultimate 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 adoption of broadband
Internet access has been significantly delayed both in Europe and the United
States, due to technological and financial considerations. Obtaining investments
from venture capital firms has become increasingly difficult. The market is
currently characterized by massive lay-offs, severe budget cuts, closings of
under-financed and under-performing companies, and major reductions in purchases
and investments that do not contribute immediately and directly to revenues and
profits. The state of the global broadband environment and technology industry
materially adversely affected the results of operations for our Broadband
enhancement products and services.
COMPETITION; TECHNOLOGICAL OBSOLESCENCE
The market for solutions improving the performance and speed of Internet
connections and for expanding the capacity for communication networks is
characterized by intense competition, price erosion over the life of the product
and rapidly changing business conditions, customer requirements and technology.
Our management believes that currently, the Company has few, if any, direct
competitors for its Internet Business which combines capacity enhancement with
acceleration and differentiated services. It is also anticipated that our new
product line will enhance rather than conflict with other Internet performance
enhancement solutions. Our products may, in the future, compete directly with or
be rendered obsolete by products developed and marketed by numerous
well-established companies, including traffic management vendors, network
optimization solution developers
6
and cellular vendors. In addition, our products will compete indirectly with
other Internet performance solutions and enhancements. 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. 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 large and well-established
players in the communications and Internet industries. Thus, our products may
come under competitive pressure in terms of feasibility and price with a
negative impact on future 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 for the marketing 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
7
customer 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 our ability to attract, train and retain
highly-qualified technical and customer support personnel.
SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING; DEPENDENCE
ON FINANCING TO IMPLEMENT EXPANSION
The Company's capital requirements have been and will continue to be
significant and our cash requirements have historically exceeded and will likely
exceed cash flow from operations. As a result, we may need to depend upon bank
credit lines and sales of the Company's securities to fund our development and
marketing activities. The Company'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 the Company.
LIMITED MARKETING CAPABILITIES; DEPENDENCE ON THIRD PARTY MARKETING
ARRANGEMENTS
The Company has not yet commenced marketing activities relating to product
commercialization and has limited marketing experience and limited financial,
personnel and other resources to undertake extensive marketing activities
independently. Accordingly, we may rely 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 Company could also be dependent upon such dealers
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. There
can be no assurance that we will be able, for financial or other reasons, to
finalize any additional third party distribution, marketing, or joint venture
8
arrangements or that such arrangements, if finalized, will result in the
successful commercialization of any of our products.
RELIANCE ON INTERNATIONAL SALES
The Company anticipates having sales outside of Israel, but there can be no
assurance that we will be able to do so or that such markets will be viable. To
the extent we 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
inherent in our 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 that most of our revenues will be derived in currencies
other than NIS, 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. 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
The Company may be exposed to potential product liability claims by our
customers and users of our products. We may experience future material warranty
expense.
DEPENDENCE ON KEY PERSONNEL
The success of the Company will be largely dependent on the abilities and
continued personal efforts of Marnetics Ltd.'s senior management, particularly
those of Menachem Reinschmidt, Founder of Marnetics Ltd. and President of the
Company; David Sheetrit, Acting Chief Executive Officer and Chief Operating
Officer; Isaac Nissim, Chief Financial Officer; Hanoch Newman, Vice President of
Research and Development; Karen Gold Anisfeld, Vice President Strategic
Marketing; Ron Nuta, Director of Business Development; and Baruch Schechter,
Director of Marketing. Although some of the officers have entered into
employment/consulting agreements with the Company, these employment/consulting
agreements are terminable on relatively short notice. The loss of the services
of one or more of such key personnel would have a material effect on our ability
to develop or commercialize our products and technologies.
9
REGULATION
We intend to provide the Company'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 SHAREHOLDERS
As of July 10, 2001, our Executive Officers and Directors and principal
shareholders will beneficially own an aggregate of 89% of the Company's
Ordinary Shares. 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 the
Company'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" under Israeli
corporate or securities laws. SEE "ITEM 6A - DIRECTORS AND SENIOR MANAGEMENT"
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.
If the Asset Sale is not completed for any reason, the Company may be
subject to a number of material risks, including the following:
o The price of our Ordinary Shares may decline to the extent that the current
market price of our 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
relating to the Electrical Business that were transferred to the buyer of
the Electrical Business effective as of March 31, 2001; and
o Certain costs related to the Asset 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
relating to the Electrical Business, we may be unable to find a buyer willing to
enter into such a transaction on terms at least comparable to the terms offered
by Mr. Dov Strikovsky.
10
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'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. The future effect of
this deterioration and violence on the Israeli economy and our operations is
unclear. Ongoing violence between Israel and its Arab neighbors and the
Palestinians have had a material adverse impact on the Electrical Business and
our financial condition. However, there can be no assurance that continuation of
these problems will not have such an impact in the future.
HISTORY OF INFLATION. In the early to mid-1980s, Israel'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 was 10.6% for 1996, 7.0% for 1997, 8.6% for 1998,
1.3% for 1999 and 0% for 2000. The dollar "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. 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. We have operated
effectively under these requirements since our inception. No prediction can be
made as to the effect on the Company of any expansion of these obligations.
INCOME 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.
11
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company.
The Company was formed in 1994 as Stav Electrical Systems (1994) Ltd., a
State of Israel corporation. From 1994 through 2000, the Company was an
electrical and communications contracting and engineering firm engaged in the
installation and maintenance of infrastructure works located in the State of
Israel. In December 2000, 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, and Marnetics Ltd.'s
shareholders received securities representing approximately 75% of the Company's
outstanding shares. Marnetics Ltd. became a wholly-owned subsidiary of Marnetics
Broadband Technologies Ltd. as a result of this transaction. The Company issued
2,761,236 options in connection with the transaction. 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.
Our principal executive offices are located at 10 Hayetzira St., Ra'anana
43000 Israel, and our telephone number is ++972-9-761-6868.
B. Business Overview
The Company's operations consist of two lines of business: (1) our Internet
Business, our current core business of developing and marketing Internet
performance enhancement solutions, which is handled through 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 Annual General Meeting scheduled to be held in third quarter, 2001. See
"ITEM 8B - SIGNIFICANT CHANGES."
INTERNET BUSINESS
GENERAL
The Company's operating subsidiary, Marnetics Ltd., is in the product
development stage. Marnetics Ltd. had been developing products intended to
provide performance enhancement solutions for a bottleneck that may occur when
broadband access meets the congested public Internet, thereby decreasing the
speed and accuracy of data throughput. 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 jeopardy Marnetics Ltd.'s business plan, which primarily targeted the
broadband market. As a result of the current business climate, the Company is
considering leveraging its technological assets, which were developed for the
BITmax(TM)
12
product line, to address current market opportunities and near-term trends,
including data over cellular and Enterprise solutions.
Current priorities in Internet communication in these areas are focusing on
better utilization of existing infrastructure, improvement in performance and
providing value-added services which can generate revenues. The Company's
objective is to utilize its existing technology and integrate it into a solution
which addresses these current market priorities.
TECHNICAL DESCRIPTION OF WHAT WE DO
Marnetics Ltd. does not yet have any commercial products. The Company is
evaluating the development of a new product line called Prospera, which will
employ Marnetics' existing BITmax(TM) core technology as well as a new
traffic management technology currently under development. Prospera is
intended to address one of the fundamental problems of communications
networks: capacity and scalability, especially in high-volume traffic
situations. The product is intended to better manage over-subscription
situations in Internet and Intranet networks. In addition, Prospera may offer
a new series of value-added features, like differentiated services, billing
interface, and traffic analysis and monitoring.
Management hopes that Prospera will offer increased functionality, while
reducing costs and improving performance. The Company intends that Prospera will
combine capacity enhancement, acceleration and differentiated services in one
package, thereby increasing the utilization of networks' resources and expanding
effective bandwidth.
The Company's Management anticipates that the development of the product
will present opportunities for OEM agreements, as well as modular solutions that
may provide 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 to be adapted to four market segments, including
Cellular Carriers, Enterprises, Internet Service Providers and Web Hosts. These
target audiences will be reached either through direct contact or through
various strategic partnerships or marketing channels, such as Value-Added
Resellers. The Company plans to focus its initial marketing efforts in the
United States and Europe.
In early July, Marnetics signed an OEM agreement with Speedwise
Technologies, a company in which the Marnetics Subsidiary has a 17.25% holding.
Speedwise is engaged in the design, development, distribution and sale of
products used in the Internet and mobile data industries. The OEM agreement will
enable Marnetics to sell its products for cellular customers (which are
currently in development), whether integrated into Speedwise's products or as
stand-alone products, to Speedwise's install base of approximately 70 cellular
companies worldwide and a much broader network of contacts. Pursuant to this
agreement, Speedwise will pay Marnetics 30% of the income generated by the sale
and maintenance of the Marnetics products. This agreement has a one year term
with automatic renewal unless a party gives one-months' prior written notice of
termination.
13
COMPETITION
Our management believes that currently, the Company has few, if any, direct
competitors for its new Internet performance enhancement focus, which uniquely
combines capacity enhancement with acceleration 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.
14
LICENSING ARRANGEMENTS
In April 2001, Marnetics Ltd. entered into a Software License Agreement
with Speedwise Technologies Ltd., in which Marnetics Ltd. holds a 17.25%
interest. Under this 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 per product if sold bundled with other Speedwise
products, or (b) 15% of net revenues from the product. The agreement has a
perpetual term.
ELECTRICAL BUSINESS
GENERAL
Prior to December 2000, the Company's sole business was as an electrical
and communications 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 the Internet Business, the Company shall, subject to
shareholder approval, sell the Electrical Business effective as of March 31,
2001. See "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.
C. Organizational Structure
The following is a list of the Company's direct and indirect significant
subsidiaries as of July 10, 2001:
NAME OF PERCENTAGE OF OWNERSHIP
SIGNIFICANT SUBSIDIARY COUNTRY OF INCORPORATION INTEREST AND VOTING POWER
- ---------------------- ------------------------ ------------------------
Marnetics, Ltd. Israel 100%
Speedwise Technologies
Ltd. (a subsidiary of Israel 17.25%
Marnetics, Ltd.)
Nulan Technologies, Ltd.* Israel 100%
- ----------
* This subsidiary is to be transferred to the purchaser of the Electrical
Business, subject to shareholder approval.
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
16
rent expense for the facility throughout the year 2000 was approximately
$2,175 per month, plus Israeli value added tax.
As of December 20, 2000, we relocated our headquarters to a facility in
Ra'anana, Israel, leased by the subsidiary - Marnetics Ltd. The facility
consists of approximately 232 square meters. The lease expires on May 15, 2002.
The rent expense for the facility is currently approximately US $ 2,950 per
month, plus Israeli value added tax.
As part of sale of the Company's electrical operations as described in
"Item 8B - Significant Changes", all rights and obligations of the Company
regarding the facility in Batzra were assigned to the purchaser of the Company's
Electrical Business, Idan Millennium Investments and Assets Ltd., as of March
31, 2001.
ITEM 5. Operations and Financial Review and Prospects.
The 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
statements for the year ended December 31, 2000 in Item 8.A. These reports are
presented in United States dollars and have been prepared in accordance with
accounting principles generally accepted in the United States.
A. Operating Results
OVERVIEW
Marnetics Broadband Technologies Ltd. (formerly Stav Electrical Systems
(1994) Ltd.) (the "Company" or "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. ("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 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.
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
17
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.
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$ 7.4 million
from new investors and recruited additional employees.
Marnetics' losses and negative operating cash flow have been significant to
date. Marnetics anticipates that both the losses and negative operating cash
flow will continue to increase during the foreseeable 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, 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% of the outstanding shares
of Speedwise Technologies Ltd. ("Speedwise"), an Israeli start-up company
established in July 1999. The holdings in Speedwise do not currently impose any
obligations on Marnetics.
YEARS ENDED DECEMBER 31, 2000 AND 1999.
OPERATING REVENUES
As Marnetics' products are still in the development phase, Marnetics had no
sales in either the years ending December 31, 1999 or December 31, 2000.
OPERATING EXPENSES
Research and Development expenses consisted primarily of salaries and
related expenses and sub-contractor expenses. 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. The increase was primarily due to Marnetics'
resumption of its research and development activities after Marnetics obtained
equity financing in the first quarter of 2000.
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. The increase was primarily due to
the recruiting and hiring of additional employees.
18
NON-CASH COMPENSATION EXPENSES
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, Marnetics recorded an aggregate
unearned stock-based compensation of $1,836,000. Stock-based compensation
included in operating expenses totaled $2,408,000 in the year ending December
31, 2000, compared to no such expenses in the year ended December 31, 1999.
FINANCIAL INCOME
Net financial income in the year ending December 31, 1999 and the year
ending December 31, 2000 was $9,000 and $167,000, 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.
YEAR ENDED DECEMBER 31, 1999 AND THE SEVEN MONTHS ENDED DECEMBER 31, 1998
OPERATING REVENUES
As Marnetics' products are still in the development phase, Marnetics had no
sales in either of the year ending December 31, 1998 or the year ending December
31, 1999.
OPERATING EXPENSES
Research and Development expenses consisted primarily of salaries and
related expenses and sub-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, 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.
19
B. Liquidity and Capital Resources
To date, Marnetics has funded its operations through equity investments. On
December 31, 2000, Marnetics had $6.5 million of cash and cash equivalents
compared to $284,000 at December 31, 1999. The increase is due to the funds
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 registered in the Netherlands. 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 through the sale of 36,318 Marnetics Ordinary Shares to Sunny.com
Ltd.
Marnetics' capital requirements have been, and will continue to be,
significant and its cash requirements could exceed cash flow from operations. As
a result, Marnetics 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.
Net cash used in operating activities in 1998, 1999 and 2000 was $237,000,
$122,000 and $872,000, respectively. Since Marnetics has not generated any
revenues to date, it must use its working capital to fund its research and
development.
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. The increase was primarily due to Marnetics' resumption of
its research and development activities after Marnetics obtained equity
financing in the first quarter of 2000.
D. Trend Information
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 adoption of broadband
Internet access has been significantly delayed both in Europe and the United
States, due to technological and financial considerations. Obtaining investments
from venture capital firms has become increasingly difficult. The market is
currently characterized by massive lay-offs, severe budget cuts, closings of
under-financed and under-performing companies, and major reductions in purchases
and investments that 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.
20
ITEM 6. Directors, Senior Managers and Employees
A. DIRECTORS AND SENIOR MANAGEMENT
The following is list of our directors and senior management followed by a
description of their business background:
NAME POSITION
---- --------
Jacob Ben-Gur....................... Chairman of the Board
Moshe Kessner....................... Director
Ilja Bobbert........................ Director
Moshe Rubin......................... Director
Yossi Shelly........................ Director
Menachem Reinschmidt................ Director, President and responsible for
Marnetics Ltd.'s technology development
Baruch Schechter.................... Director, Director of Marketing
David Sheetrit...................... Acting Chief Executive Officer and Chief
Operating Officer
Isaac Nissim........................ Chief Financial Officer
Hanoch Newman....................... Vice President - Research and Development
Karen Gold Anisfeld................. Vice President Strategic Marketing
Ron Nuta............................ Director of Business Development
JACOB BEN-GUR is Chairman of the Board 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 first and leading 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
21
Administration 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 Managing Director
of S. Alexander Ltd. Investment & Consulting firm, based in Beer-Sheva,
Israel. During Mr. Shelly's career, he has served on many boards of directors
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. Mr. 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, 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
bestseller LOCAL AREA NETWORKS FOR PC AND COMPATIBLES.
BARUCH SCHECHTER, DIRECTOR AND MARKETING DIRECTOR. Baruch Schechter serves
as a Director on the Board of Marnetics Ltd. and its affiliate company,
Speedwise. He is also Executive Vice President of the Linkware Group, one of the
Company's major shareholders. Before joining Linkware, Mr. Schechter served as
Senior Division Manager, Corporate & Business Sales Division, Pelephone, as
Marketing and Sales manager at Better Office Automation, and as Sales Manager of
Major Account Clients at Cellcom, where he was one of the company's sales
leaders. At Pelephone 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's Acting Chief Executive Officer
and Chief Operating Officer since early 2001 and he also serves as Director of
Marnetics Ltd. In early 2000, Mr. Sheetrit was appointed Chief Operating Officer
of the Linkware Group, one of the Company's major shareholders. Before joining
Linkware and Marnetics, Mr. Sheetrit was
22
Head 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 is 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. Responsible for financial management
and control. Mr. Nissim possesses eleven years of experience in financial
management positions with particular expertise in facilitating IPO's,
spearheading Mergers & Acquisitions and maintaining shareholder and investor
relationships. Additionally, Mr. Nissim has extensive experience in managing the
operations of multinational enterprises. Prior to joining the Company, Mr.
Nissim spent six years with the Makhteshim Agan Group (TASE: MAIN) where he held
senior management positions in the Israeli and subsequently the North American
operations. As CFO & COO, Mr. Nissim directed all financial and information
technology functions for the $100 million North American division. Mr. Nissim is
a Certified Public Accountant and holds a B.A. in Economics & Accounting from
Tel Aviv University.
HANOCH NEWMAN, VICE PRESIDENT RESEARCH AND DEVELOPMENT. Mr. Newman 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. He holds a B.A. in Computer Sciences.
KAREN GOLD ANISFELD, VICE PRESIDENT STRATEGIC MARKETING. Specializing in
Corporate Identity Management and International Business, Ms. Anisfeld has spent
the decade 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 Member of the Management team of Ruder Finn
(Israel) Public Relations, and from 1987 to 1989 she 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 served as the head of the International Business Unit of Telrad
Business Communication. Prior thereto, he was the Managing Director of the
Datacom Business Unit of Arad Systems (a start-up) for approximately one year.
For eleven years prior, he was the head of the Marketing and Sales Department at
Koor Communications and served as Development Engineer in the Signal 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-
23
business, and a B.B.A. in marketing, international business and technology as
well as a Practical Engineer diploma in Electronics.
TERM AND RIGHTS TO DESIGNATE BOARD MEMBERS
The Articles of Association of the Company provide that each director is
elected for a period of one year at the Company's annual meeting of shareholders
and 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's directors, with the exception of two Outside Directors
representing the public, do not currently receive any compensation for their
services as directors. Certain shareholders and option-holders of the Company
the right to nominate and, pursuant to shareholder agreements, have elected
their designees for the Company'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
nominees designated by ECI Telecommunications Ltd., (ii) one nominee designated
by STI Ventures Investments No. 2 B.V. and (iii) one nominee designated
collectively by Prime Technology Ventures NV, Docor International BV and Ronchal
Investments NV. To date, STI Ventures Investments No. 2 B.V. has not yet
designated a nominee for the Company's board and ECI has only designated one
director nominee.
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 DIRECTORS
Under the Israel Companies Law (the "COMPANIES LAW"), public companies are
required to elect two outside 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 two outside directors. An outside director may
not have had during the previous two years any economic relationship with the
Company. Controlling shareholders of a company, 50% shareholders,
24
and their relatives or employees cannot serve as outside directors. Outside
directors are elected by shareholders. No individual shall be appointed as an
outside 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,
outside directors serve for a three-year term, which may be renewed for only one
additional three-year term.
Our two independent directors Messrs. Rubin and Shelly were appointed on
October 4, 1999 before the adoption of the Companies Law and under the previous
Israeli corporate laws. Pursuant to the former corporate governance law, each
shall serve for a five-year term until 2004.
Under the Companies law, outside 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 the outside 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 an outside director is elected, all members
of the board of directors of a company are of one gender, the outside director
to be elected must be of the other gender. Any committee of the board of
directors must include at least one outside director. An outside 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 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'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 the Company'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 financial liability imposed upon him in favor of another person.
In addition, the Company may indemnify an office holder against:
25
o 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 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 any fine levied against the office holder.
Under the Companies Law, the Company'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 retroactively indemnify an
office holder.
In addition, pursuant to the Companies Law, approval of the Company's audit
committee and the Company's Board of Directors and, in specified circumstances,
by the Company's shareholders, must be obtained for the indemnification of, and
procurement of insurance coverage for, the Company's office holders for the
following actions:
26
o 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 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.
The Company has entered into an indemnification agreement with the officers
and directors of the Company as of December 2000 and intends to enter into an
agreement with each new director, subject to shareholder approval. 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's Amended Articles of Association, the Company
may indemnify our 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-approved arbitrator's decision, as well as for concomitant
reasonable legal expenses, including attorney'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.
27
B. COMPENSATION
The Company's directors do not currently receive any compensation for their
services as directors, 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. In addition,
under the Companies Law, outside directors are entitled to annual compensation
plus a per meeting attendance fee. The Company currently pays its outside
directors an annual fee of NIS 14,420 (US $3,500) and a per meeting attendance
fee of NIS 915 (US $222).
C. BOARD PRACTICES
See Section A for start dates and terms of services for our directors and
significant managers.
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's business and approving
related-party transactions as required by law. An audit committee must consist
of at least three members, and include all of the Company's outside 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 two outside directors are serving as members of the audit
committee and at least one of the outside directors was present at the meeting
in which an approval was granted.
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'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 the
Company'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 the
Company's Board of Directors.
The Company has an audit committee which consists of Yossi Shelly,
Chairman, Moshe Rubin and Ilja Bobbert. The audit committee exercises the powers
of the Board of Directors with respect to the Company's accounting, reporting
and financial control practices.
D. Employees
As of December 31, 2000, the Company employed approximately 14 persons
full-time and 6 persons part-time, exclusive of those working in the Electrical
Business. The
28
Electrical Business employees will be hired by the purchaser of the Electrical
Business upon closing of that sale. The Company believes that relations with our
employees are good.
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 between approximately 10% to 15% of wages,
of which 4.93% are contributed by the Company pursuant to Israeli law
requirements.
Some of the Company's employees are insured through a 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
an employee's gross salary is contributed to the Managers' Insurance Policy by
the Company and an additional 5% by the employee. This 10% comprises the pension
component and up to 3.5% 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 salary is contributed by the Company for severance pay benefits.
Most of the Company's employees have elected to be insured through a basic
pension fund in "Mivtahim." An amount equal to 6.0% of an employee'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 plan pursuant to which the
Company contributes an amount equal to 7.5% of the officer's salary and the
officer 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 Mivtahim and Managers' Insurance
Policies.
The wages of all of the Company's employees are linked to a percentage of
the Israeli standard of living as determined by periodic agreements between the
Histadrut and the Israeli Government.
Certain of the Electrical Business employees of the Company are members of
a workers union. The Company and our employees in the Electrical Business are
parties to
29
the collective bargaining agreement relating to the building industry, signed
between the Histadrut and The Center of Contractors' and Constructors'
Association in Israel, governing relations between the employees and the
Company.
As of December 31, 2000, the Company had no outstanding loans to employees
and officers of the Company except to Mr. Dov Strikovsky who is no longer
employed by the Company but is a significant shareholder of the Company. See
"ITEM 7B-RELATED PARTY TRANSACTIONS."
E. SHARE OWNERSHIP
[Not applicable]
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table identifies, as of July 10, 2001, certain information
with respect to the beneficial ownership of Ordinary Shares 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) 25.1%
3 Hadror Street
P.O. Box 73
Hod Hasharon 45100 Israel
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 Netherlands
30
NAME AND ADDRESS OF
BENEFICIAL OWNER NUMBER PERCENT(1)
- ---------------- ------ -------
Prime Technology Ventures NV.................. 630,550(6) 9.7%
Entrada 102, 10g6 EA
Amsterdam, Netherlands
(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 which the individual has the right to acquire within 60
days after July 10, 2001, 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.
(2) Includes 230,942 shares currently issuable and 302,266 shares that may be
acquired pursuant to options which are presently or will become exercisable
within 60 days at an exercise price of par value per share.
(3) Includes 580,000 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.
(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 Shares of the Company were held of
record in the United States. Such Ordinary Shares were held by five (5) record
holders and represented 15.5% of the total Ordinary Shares then outstanding. On
July 10, 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 an agreement to sell, subject to
shareholder approval, our Electrical Business, including certain related
liabilities, to a company wholly-owned by the Company's former chief executive
officer and current major stockholder, Mr. Dov Strikovsky. See "ITEM 8B -
SIGNIFICANT CHANGES." In July 2001, the
31
Company entered into an OEM agreement with Speedwise, a company in which the
Marnetics Subsidiary owns 17% of its outstanding shares. See "ITEM 4B -
CUSTOMERS."
COMBINATION TRANSACTION
Effective December 31, 2000, Stav Electrical Systems (1994) Ltd.
acquired Marnetics Ltd. pursuant to the terms of that certain Share 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 former Chief Executive Officer of the Company or entities
affiliated with Mr. Strikovsky, received options to purchase up to 1,000,000
Ordinary Shares of the Company.
ASSIGNMENT OF BANK DEBT
On May 30, 2001, the Company and Bank Hapoalim, the lender of the
Company'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 debt in the amount of NIS 9,100,000
(approximately $2.2 million);
o The Company paid the bank NIS 4,000,000 (US $953,970);
o The Company assigned its accounts payable from the City of Hod Hasharon in
the face amount of NIS 9,100,000 (US $2.2 million) to the bank;
o The Company granted the bank a limited guaranty (up to NIS 3,000,000 (US
$0.7 million))of the obligations of Shlavor Systems Ltd. under the assumed
debt; and
o Bank Hapoalim released the Company from all liability for the current debt
in the amount of NIS 13,100,000 (approximately $3.2 million), released
the floating charge and any related liens or security interests it holds.
INDEMNIFICATION BY SIGNIFICANT SHAREHOLDER
In connection with the Stav/Marnetics transaction and pursuant to an
amendment to the 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. 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
Agreement that further defined, clarified and expanded the terms of the
initial indemnification, added indemnification obligations related to the
bank debt restructuring (as described below) 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 this Indemnification
Agreement, Mr. Strikovsky agreed to:
32
o Reimburse the Company for NIS 4,000,000 (US $970,875) 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 NIS 200,000 (US
$48,500) commencing June 1, 2004; and
o 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.
o 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.
LOANS TO SIGNIFICANT SHAREHOLDER AND FORMER DIRECTOR AND OFFICER
The 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), and NIS 6,540,000 (US $1,570,000) respectively. Such
loans did not bear interest through December 31, 1997. Such loans currently bear
interest at the rate per annum equal to LIBOR plus 3%. In addition, during 1999,
the Company inadvertently made excess advances to Mr. Strikovsky. Upon discovery
of this error, Mr. Strikovsky repaid to the Company the amount of such excess
advances in full.
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'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 the Company's Board of Directors voted to extend the repayment terms
of the loan. The loan is currently payable in eight annual installments which
commenced in 1999 and shall be repaid in full by December 31, 2007. The first
two installments were paid.
33
C. NOT APPLICABLE
ITEM 8. FINANCIAL INFORMATION
A. Financial Information
See "ITEM 18-FINANCIAL INFORMATION".
LEGAL PROCEEDINGS
The Company is currently not involved in any material litigation.
DIVIDEND POLICY
The Marnetics Subsidiary has never paid any cash dividends to date on
its ordinary shares. Although in 1999 we declared a cash dividend on its
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 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., a bank line of credit or an
agreement relating to the issuance of debt securities of the Company).
B. SIGNIFICANT CHANGES
SALE OF ELECTRICAL BUSINESS
On June 10, 2001, 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 officer and current 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 Board of Directors
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
related to the Electrical Business and the purchaser shall assume certain
related liabilities as of March 31, 2001.
SALE PRICE. The Company has contracted to sell the assets of its Electrical
Business to the Purchaser for NIS 2.5 million (approximately $587,000) in
installments of NIS 100,000 (approximately $24,000) commencing on February 1,
2002. In addition, the Purchaser will also assume approximately NIS 3.0 million
(approximately $715,000) of liabilities related to the Electrical Business.
This summary highlights selected information about the Electrical Business
Purchase 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 complete
34
description of the legal terms, you should read the agreement which is
attached as Exhibit 10.8 hereto and the other documents referred to herein.
ITEM 9. THE LISTING
A. LISTING DETAILS
The following are the low and high sales prices by fiscal quarter for the
quarterly periods in which the Ordinary Shares have been traded on the American
Stock Exchange.
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
B. NOT APPLICABLE.
C. MARKETS
The Company's Ordinary Shares are quoted on the American Stock Exchange
under the symbol "MXB." The Company has no present intention to list or quote
its securities on any markets outside of the United States. However, the Company
may seek such listings in the future if its Board of Directors determines that
it is in the best interest of the Company.
35
D. - F. NOT APPLICABLE.
ITEM 10. ADDITIONAL INFORMATION
A. Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
PURPOSES AND OBJECTS OF THE COMPANY
Pursuant to Section 3 of our Articles of Association, the Company's purpose
is to operate according to business considerations for the production of
profits.
POWERS OF THE DIRECTORS
The Directors shall formulate the Company's policy and shall supervise the
exercise of the General Manager's office and his acts, including, but not
limited to the determination of the Company'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 SHARES
Our registered share capital consists of a single class of 25,000,000
ordinary shares, par value NIS 0.08 per share, of which 6,407,333 ordinary
shares were issued and outstanding as of July 10, 2001. All outstanding ordinary
shares are validly issued, fully paid and non-assessable. The rights attached to
the Ordinary Shares are as follows:
DIVIDEND 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.
36
VOTING RIGHTS
Holders of our ordinary 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, the
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 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 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.
37
GENERAL 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", and all other Meetings of the shareholders shall be
called "Extraordinary Meetings". The Annual Meeting shall receive and consider
the 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 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 by and between Marnetics Ltd. and Speedwise
Technologies, Ltd. dated as of April 17, 2001. See "ITEM 4B - BUSINESS
OVERVIEW - LICENSING ARRANGEMENTS."
Indemnification Agreement between Dov Strikovsky, the Company and the
former shareholders of Marnetics Ltd. dated as of June 30, 2001. See "ITEM
7B - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY
TRANSACTIONS - INDEMNIFICATION BY SIGNIFICANT SHAREHOLDER."
Asset Purchase Agreement between the Company and Idan Millennium
Investments and Assets 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. dated as of May 30, 2001. See "ITEM
7B -
38
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY
TRANSACTIONS - ASSIGNMENT OF BANK DEBT."
OEM Agreement by and between Marnetics Ltd. and Speedwise Technologies
Ltd. dated as of July 8, 2001. See "ITEM 4B - CUSTOMERS."
D. EXCHANGE CONTROLS
The Israeli Currency Control Law, 1978, imposes certain limitations
concerning foreign currency transactions 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 issued pursuant to
which substantially all transactions in foreign currency are permitted. Any
dividends or other distributions paid in respect of ordinary shares and any
amounts payable upon the dissolution, liquidation or winding up of our affairs,
as well as the proceeds of any sale in Israel of our securities to an Israeli
resident are freely repatriable into non-Israeli currencies at the rate of
exchange prevailing at the time of conversion, provided that Israeli income tax
has been paid on (or withheld from) such payments.
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 are in a state
of war with Israel.
E. TAXATION
The 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 of Israeli tax consequences to persons
purchasing or holding Ordinary Shares. To the extent that the discussion is
based on new tax 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 authorities in question.
The discussion is not intended, and should not be construed, as legal or
professional tax advice and is not exhaustive of all possible tax
considerations.
Prospective purchasers and holders of Ordinary Shares should consult their
own tax advisors as to the U.S., Israeli, or other tax consequences of the
purchase, ownership, and disposition of the Ordinary Shares, including, in
particular, the effect of any foreign, state, or local taxes.
GENERAL CORPORATE TAX STRUCTURE
Currently, the regular rate of corporate tax to which Israeli companies are
subject is 36%.
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax (Inflationary Adjustments) Law, 1985 (the "INFLATIONARY
ADJUSTMENTS LAW"), was designed to neutralize the erosion of capital investments
in
39
business and to prevent tax benefits 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.
The Inflationary Adjustments Law introduced 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) assets and non-fixed assets. Where a corporation's equity
(as defined in the Inflationary Adjustments Law) exceeds the depreciated cost of
fixed assets, a tax deduction that takes into account the effect of the annual
rate of inflation on such excess is allowed (up to a ceiling of 70% of taxable
income for companies in any single year, with the unused portion carried forward
on a linked basis, without limit). For income derived from state bonds or funds
invested above 75% in state bonds, such ceiling is not used (100% is deducted).
If the depreciated cost of fixed assets exceeds shareholders' equity, then such
excess, multiplied by the annual inflation rate, is added to taxable income.
CAPITAL GAINS TAX
Israeli law imposes a capital gains tax on the sale of capital assets by
both residents and non-residents of Israel. The gains generated by an Israeli
company, which is subject to the Inflationary Adjustments Law on the disposition
of securities, will be taxed according to the provisions of such Law.
Pursuant to the Convention Between the Government of the United States of
America and the Government of Israel with Respect to Taxes on Income (the
"U.S.-ISRAEL TAX TREATY"), the sale, exchange or disposition of ordinary shares
or redeemable warrants by a person who qualifies as a resident of the United
States within the meaning of the U.S.-Israel Tax Treaty and who is entitled to
claim the benefits afforded to such resident by the U.S.-Israel Tax Treaty
("TREATY U.S. RESIDENT") will not be subject to the Israeli capital gains tax
unless such Treaty U.S. Resident holds, directly or indirectly, shares
representing 10% or more of our voting power during any part of the 12-month
period preceding such sale, exchange or disposition. A sale, exchange or
disposition of ordinary shares or redeemable warrants by a Treaty U.S. 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
Israeli tax; however, under the U.S.-Israel Tax Treaty, such Treaty U.S.
Resident would be permitted to claim a credit for such taxes against the U.S.
income tax imposed with respect to such sale, exchange or disposition, subject
to the limitations applicable to foreign tax credits.
TAXATION OF NON-RESIDENTS
Non-residents of Israel are subject to income tax on income derived from
sources in Israel. On distributions of dividends other than bonus shares (stock
dividends), income tax at the rate of 25% is withheld at source, unless a
different rate is provided in a treaty between Israel and the shareholder's
country of residence. The U.S.-Israel Tax Treaty provides for a maximum tax of
25% on dividends paid to a Treaty U.S. Resident, and for a
40
rate of 12.5% on dividends paid to a United States corporation that holds 10%
or more of the shares of the Israeli company.
PROPOSED TAX REFORM
On May 4, 2000, a committee chaired by the Director General of the Israeli
Ministry of Finance issued a report recommending a significant reform in the
Israeli system of taxation. 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, but implementation of the reform requires
legislation by Israel's Knesset. We cannot be certain whether the proposed
reform will be adopted, when it will be adopted or what form any reform will
ultimately take.
F. Not applicable.
G. Not applicable.
H. DOCUMENTS ON DISPLAY
The 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 thereunder 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 at Room 1024, 450 Fifth
Street, N. W., Washington, D. C. 20549 and at the Regional Offices thereof at 7
World Trade Center, Suite 1300, New York, New York and at Northwestern Atrium
Center, Suite 1400, 500 West Madison Street, 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 the
Commission's web site at WWW.SEC.GOV.
I. SUBSIDIARY INFORMATION.
Not Applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The 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. At December 31, 2000, the Company had cash, cash
equivalents and short term bank deposits in the aggregate amount of $6.5
million, deposited primarily in major Israeli banks and $6.6 million in
short-term and long-term interest bearing loans or
41
debts. These amounts accrue or bear nominal interest which is linked to the
interest fixed by the Bank of Israel, therefore any inflationary changes in the
consumer price index in Israel or changes in the exchange rate between NIS and
the U.S. dollar may effect these amounts.
FOREIGN CURRENCY EXCHANGE RISKS. At December 31, 2000, one-half of the
Company's current assets were cash deposits denominated in NIS in the aggregate
amount of $6.5 million. 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. The financial instruments of the
Company consist primarily of cash and cash equivalents and accounts payable. In
view of their nature, the fair value of the financial instruments included in
the Company's working capital is usually identical or close to their carrying
amount.
ITEM 12. Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGE AND DELINQUENCIES.
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS.
Not applicable.
ITEM 15.
[RESERVED]
ITEM 16.
[RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS.
Not applicable. The Company has elected to furnish financial statements
pursuant to Item 18 below.
ITEM 18. FINANCIAL STATEMENTS.
See Financial Statements Attached
42
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
MARNETICS BROADBAND TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
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-24
APPENDIX A - CONSOLIDATED FINANCIAL STATEMENTS OF SPEED-WISE
TECHNOLOGIES LTD.
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF MARNETICS BROADBAND TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of MARNETICS
BROADBAND TECHNOLOGIES LTD. ("the Company") (a development- stage company) as of
December 31, 2000 and 1999, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for the years ended
December 31, 2000 and 1999, the seven months ended December 31, 1998 and the
cumulative period from June 1, 1998 (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 consolidated financial position of the
Company (a development-stage company) as of December 31, 2000 and 1999, and its
consolidated results of operations, changes in shareholders' equity and cash
flows for the years ended December 31, 2000 and 1999, the seven months period
ended December 31, 1998 and the cumulative period from June 1, 1998 (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
F-2
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
(U.S$ IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------
2000 1999
---- ----
US$ IN THOUSANDS
CURRENT 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
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
(U.S$ IN THOUSANDS)
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 $2,270,000
of non-cash compensation in the
year ended December 31, 2000)
(Note 11c) -- 44 181 947
Non-cash compensation expenses 2,408 2,408
-------- ------- ------- -------
OPERATING LOSS (3,524) (77) (312) (3,913)
Financial income, net 167 9 8 184
Loss on sale of property and
equipment (28) (28)
Share in losses of affiliate (63 (21) (660)
-------- ------- ------- -------
LOSS FOR THE PERIOD (3,996) (117) (304) (4,417)
======== ======= ======= =======
PER SHARE DATA (NOTE 2h)
LOSS PER SHARE:
BASIC AND DILUTED (4.15) (0.20) (0.91)
======== ======= =======
Shares used in computing
Loss per ordinary share
BASIC AND DILUTED 962,553 575,234 335,143
======== ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
F-4
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
(U.S$ IN THOUSANDS)
STATEMENT OF CHANGES IN 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
MARNETICS BROADBAND TECHNOLOGIES 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
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
(U.S$ IN THOUSANDS)
APPENDICES TO CONSOLIDATED STATEMENTS OF 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
----------------
APPENDIX A
ADJUSTMENTS TO RECONCILE LOSS FOR
THE PERIOD TO NET CASH USED IN
OPERATING ACTIVITIES:
Depreciation 8 2 7 17
Loss on sale of property and
equipment -- 28 -- 28
Share in losses of affiliate 639 21 -- 660
Non cash compensation expenses 2,408 -- -- 2,408
Changes in assets and liabilities:
Increase in accounts receivable (61) (1) (6) (68)
Increase (decrease) in trade payables 34 (20) 21 35
Increase (decrease) 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
====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
F-7
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
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 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 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-8
MARNETICS 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 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 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-9
MARNETICS 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.
NOTE 3 - RELATED PARTIES
Comprised as follows:
December 31, December 31,
2000 1999
---- ----
US$ IN THOUSANDS
MR. DOV STRIKOVSKI (FORMER CEO
AND CHAIRMAN OF THE BOARD):
Loan (1) 1,484 --
====== ====
Current account (2) 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.
F-10
MARNETICS 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 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 resulting in a decrease in the Company's holdings in
Speedwise to 19.19%. The Company retained its significant influence over
Speedwise.
The investment in the affiliate consists of the 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
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 6 - SUPPLEMENTARY BALANCE SHEET INFORMATION
a. OTHER RECEIVABLES
DECEMBER 31,
--------------------------
2000 1999
---- ----
US$ IN THOUSANDS
----------------------------
Prepaid expenses 77 --
Restricted cash 24 --
Advances to suppliers 14 --
Others 8 --
----- -----
123 --
===== =====
b. SHORT-TERM BANK CREDIT
DECEMBER 31,
------------
2000 1999
INTEREST RATES ---- ----
% US$ IN THOUSANDS
-------------- ----------------
UNLINKED SHEKEL CREDIT
Overdraft 13.7-10.2 2,609 --
Short-term loans 6.2-10.2 680 --
------ -----
3,289 --
Current maturities of
long-term loans 48 --
------ -----
3,337 --
====== =====
Liens - see Note 8d.
F-12
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 to the Israeli CPI 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-13
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 $15,000 per month payable in New Israeli Shekels (subject to
increase by the Board of Directors) and such bonuses as may be determined
by the Board of Directors. Mr. Strikovsky participates in pension severance
pay funds and insurance policies and savings plans. In addition, Mr.
Strikovsky will receive reimbursement for certain business expenses
including use of a Company-owned automobile, and reimbursement of telephone
expenses and insurance. Upon termination of Mr. Strikovsky's employment,
the Company is required to transfer to him title of severance pay and
related insurance policies in lieu of severance payments. Upon the
termination of such agreement, Mr. Strikovsky is subject to certain
noncompete, non-disturbance, and non-interference provisions for a period
of two years during which time and in consideration of which and provided
that he is not otherwise employed, Mr. Strikovsky shall continue to draw
his last salary and benefits. The contract was terminated on March 31,
2001.
c. FAIR VALUE OF FINANCIAL INSTRUMENTS
The financial instruments of the Company consist mainly of current accounts
receivable, short-term credits, accounts payable, accruals and long term
debt. In view of their nature, the fair value of the financial instruments
included in working capital of the Company are usually identical or close
to their carrying amounts.
d. LIENS, SECURITIES AND GUARANTEES
1. Liabilities of the Company to banks, totalling, as at December 31, 2000,
US$ 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
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 to the IPO, the Company's ordinary shares are quoted and listed
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 $2,000,000 were recorded and charged to earnings in accordance
with APB 25 "Accounting for Stock Issued to Employees".
After the consummation of the reverse merger the amount of outstanding
ordinary shares of the Company is 6,407,333 and the amount of options
outstanding is 2,918,379 of which 1,045,443 were granted to employees and
420,000 were granted to two consultants.
F-15
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - TAXES ON INCOME
The Company is assessed under the provisions of the Israeli Income Tax Law
(Inflationary Adjustments) 1985, pursuant to which results for tax purposes are
measured in new Israeli shekels in real terms in accordance with changes in the
Israeli consumer price index.
Income is taxable at the ordinary corporate tax rate of 36%.
DEFERRED TAXES
The main components of the Company's deferred tax assets are as follows:
DECEMBER 31,
------------------
2000 1999
---- ----
US$ 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 -- --
======= =====
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 loss carryforwards of the Company and its subsidiary company totalling US$
4,961 thousand are unlimited in duration, denominated in NIS and linked to the
Israeli consumer price index.
TAX ASSESSMENTS
The Company has not been assessed for income tax purposes since incorporation.
NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION
a. RESEARCH AND DEVELOPMENT COSTS
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 355 11 100 466
Sub-contractors 17 20 23 60
Depreciation 6 2 8 16
Other 12 -- -- 12
----- ---- ----- -----
390 33 131 554
===== ==== ===== =====
F-16
MARNETICS BROADBAND TECHNOLOGIES LTD.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - SUPPLEMENTARY 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
Advertising 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 related expenses 242 11 101 354
Professional services 305 8 26 339
Management fee 43 -- -- 43
Others 132 25 54 211
----- ---- ----- -----
722 44 181 947
===== ==== ===== =====
F-17
STAV ELECTRICAL SYSTEMS (1994) LTD. (PREVIOUS REGISTRANT)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
F-18
STAV ELECTRICAL SYSTEMS (1994) LTD.(PREVIOUS REGISTRANT)
CONSOLIDATED BALANCE SHEETS
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-19
STAV 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 18
General and administrative expenses
(excluding NIS 16,295,000
(US$4,032,000) (Note 13c) 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)
Taxes on income (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 =========== ========= ======== ==========
of shares outstanding
BASIC 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-20
STAV 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
(net of issuance expenses) 1,116,785 93 11,660 11,753
Net income for the year 5,154 5,154
--------- ------- ------- -------- --------
BALANCE AS AT
DECEMBER 31, 1998 1,414,285 127 11,660 5,312 17,099
Loss 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
Issuance of share options to
To consultants and shareholders 16,295 16,295
Loss for the year (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-21
STAV 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 for the year (27,303) (4,485) 5,154 (6,755)
Adjustments to reconcile net income
(loss) to cash provided 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 ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS
F-22
STAV 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-23
STAV ELECTRICAL SYSTEMS (1994) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
a. STAV ELECTRICAL SYSTEMS (1994) LTD. ("the Company") is engaged in 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
between the Company and Marnetics 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%
of its outstanding shares in exchange for all their shares in Marnetics.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
a. USE OF ESTIMATES IN 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 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 statements of the Institute 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-24
STAV 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-25
STAV 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.$1 = NIS 4.041).
The translated United States dollar figures should not be construed as a
representation that the Israeli currency amounts actually represent, or
could be converted into, United States dollars.
j. EFFECT OF INFLATION
In accordance with Israeli GAAP, the Company comprehensively includes the
effects of price level changes in the accompanying financial statements as
described in Note 2b. Such Israeli accounting principles measure the
effects of price level changes in the inflationary Israeli economy and, as
such, is considered a more meaningful presentation than financial reporting
based on nominal historical cost, for Israeli and US accounting purposes.
Accordingly, price level adjustments have not been reversed as a
reconciliation of Israeli accounting principles to U.S. GAAP.
F-26
STAV ELECTRICAL SYSTEMS (1994) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - RELATED PARTIES
Comprised as follows:
CONVENIENCE
ADJUSTED NEW TRANSLATION
ISRAELI SHEKELS INTO U.S. DOLLARS
--------------- -----------------
December 31 December 31
----------- -----------
2000 1999 2000
---- ---- ----
NIS IN THOUSANDS US$ 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 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 - 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. Liens - see Note 8e.
F-27
STAV 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-28
STAV 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-29
STAV 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-30
STAV 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$682,000).
F-31
STAV ELECTRICAL SYSTEMS (1994) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - SHARE CAPITAL
a. In December 1998 the Company consummated an Initial Public Offering (IPO)
pursuant to which the Company sold 800,000 ordinary shares NIS 0.08 par
value (including 100,000 ordinary shares NIS 0.08 par value sold by Mr.
Strikovsky, president and Chief Executive Officer) for net proceeds of
approximately U.S.$ 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 $785,000 were recorded and charged
to earnings in accordance with APB 25 "Accounting for Stock Issued to
Employees".
F-32
STAV ELECTRICAL SYSTEMS (1994) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - TAXES ON INCOME
a. TAXATION UNDER INFLATIONARY CONDITIONS
The Company is assessed under the provisions of the Income Tax Law
(Adjustments Due To Inflation), 1985, pursuant to which the results for tax
purposes are measured in real terms in accordance with changes in the
Israeli CPI.
b. DEFERRED TAXES
Deferred taxes are computed for temporary differences in respect of the
provision for doubtful debts, vacation pay, severance pay and inventory:
CONVENIENCE
TRANSLATION INTO
ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS
---------------------------- -----------
December 31 December 31
----------- -----------
2000 1999 1998 2000
---- ---- ---- ----
NIS in thousands US$ 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 $3,130,000 are unlimited
in duration, denominated in NIS and linked to the Israeli CPI.
F-33
STAV ELECTRICAL SYSTEMS (1994) LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - TAXES ON INCOME (cont.)
c. THEORETICAL INCOME TAXES
A reconciliation of the theoretical tax amount, assuming all income is
taxed at the statutory rates, to the actual tax in the statement of
operations is as follows:
CONVENIENCE
TRANSLATION INTO
ADJUSTED NEW ISRAELI SHEKELS U.S. DOLLARS
---------------------------- -----------
YEAR ENDED
YEAR ENDED DECEMBER 31 DECEMBER 31
---------------------- -----------
2000 1999 1998 2000
---- ---- ---- ----
NIS IN THOUSANDS US$ 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 720 747 166 178
F-34
STAV 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-35
APPENDIX A
SPEED - WISE LTD.
(FORMERLY SPEED-ON TECHNOLOGIES LTD.)
(A DEVELOPMENT-STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000
SPEED - 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 5
REPORT 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 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 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-24
APPENDIX 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, 2001
EXHIBIT 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.