<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 _________
VIRYANET, LTD.
(Exact Name of Registrant as Specified in Its Charter)
ISRAEL NOT APPLICABLE
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
5 KIRYAT HAMADA STREET
SCIENCE BASED INDUSTRIES CAMPUS
P.O. BOX 23052
HAR HOTZVIM, JERUSALEM
ISRAEL 91230
(Address of Principal Executive Offices) (Zip Code)
(972-2) 581-1462
(Registrant's Telephone Number Including Area Code)
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
---- ----
There were 21,541,111 shares of the Company's Ordinary Shares, par value NIS
0.1, outstanding on November 13, 2000.
<PAGE>
VIRYANET, LTD.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
CONTENTS
<TABLE>
<S> <C>
Item Number PAGE
----------- ----
PART I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000 (Unaudited)
and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three months and
nine months ended September 30, 2000 (Unaudited) and September 30, 1999
(Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 (Unaudited) and September 30, 1999 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Certain Factors That May Affect Future Results 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 17
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Default Upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
</TABLE>
2
<PAGE>
VIRYANET LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
UNAUDITED
------------- ------------
U.S. DOLLARS IN THOUSANDS
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 34,454 $ 1,886
Restricted cash - 96
Trade receivables 2,631 2,755
Unbilled receivables 2,022 708
Other receivables and prepaid expenses 1,091 902
---------- -----------
Total current assets 40,198 6,347
---------- -----------
SEVERANCE PAY FUND 878 854
---------- -----------
PROPERTY AND EQUIPMENT, NET 1,914 1,491
---------- -----------
$ 42,990 $ 8,692
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Short-term bank credit $ 2,249 $ 5,283
Current maturities of long-term loans - 11
Trade payables 3,018 1,303
Deferred revenues 3,698 7,150
Other payables and accrued expenses 7,425 3,905
---------- -----------
Total current liabilities 16,390 17,652
---------- -----------
ACCRUED SEVERANCE PAY 1,746 1,595
---------- -----------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Share capital 610 397
Additional paid-in capital 98,811 37,728
Deferred stock compensation (1,335) (603)
Accumulated deficit (73,232) (48,077)
---------- -----------
Total shareholders' equity (deficiency) 24,854 (10,555)
---------- -----------
$ 42,990 $ 8,692
========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
VIRYANET, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------ --------------------------------------
2000 1999 2000 1999
--------------- --------------- ---------------- ----------------
UNAUDITED
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Software licenses $ 4,518 $ 1,260 $ 11,481 $ 2,872
Maintenance and services 2,956 2,782 7,413 8,258
---------- ---------- ----------- -----------
Total revenues 7,474 4,042 18,894 11,130
---------- ---------- ----------- -----------
Cost of revenues:
Software licenses 121 258 530 806
Maintenance and services 2,215 2,357 5,691 7,271
---------- ---------- ----------- -----------
Total cost of revenues 2,336 2,615 6,221 8,077
---------- ---------- ----------- -----------
Gross profit 5,138 1,427 12,673 3,053
---------- ---------- ----------- -----------
Operating expenses:
Research and development 1,883 1,798 5,255 5,000
Sales and marketing 4,273 2,931 11,696 10,545
General and administrative 1,024 959 2,822 2,647
Amortization of deferred stock
compensation 381 81 957 316
---------- ---------- ----------- -----------
Total operating expenses 7,561 5,769 20,730 18,508
---------- ---------- ----------- -----------
Operating loss (2,423) (4,342) (8,057) (15,455)
Financial expenses, net (73) (20) (491) (291)
Financial expenses related to
beneficial conversion feature
of convertible debenture (16,607) - (16,607) -
---------- ---------- ----------- -----------
Net loss $ (19,103) $ (4,362) $ (25,155) $ (15,746)
========== ========== =========== ===========
Preferred shares deemed dividend $ - $ - $ - $ (303)
========== ========== =========== ===========
Net loss to shareholders of
Ordinary shares $ (19,103) $ (4,362) $ (25,155) $ (16,049)
========== ========== =========== ===========
Basic and diluted net loss per share $ (3.83) $ (1.63) $ (7.25) $ (6.02)
========== ========== =========== ===========
Weighted average number of shares used
in computing basic and diluted net loss
per share 4,981,749 2,674,605 3,469,175 2,665,939
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
VIRYANET, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------------------
2000 1999
----------------- -----------------
UNAUDITED
----------------------------------------
U.S. DOLLARS IN THOUSANDS
----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
-------------------------------------
Net loss $(25,155) $(15,746)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 605 512
Increase in accrued severance pay, net 127 179
Amortization of deferred stock compensation 957 316
Amortization of compensation related to warrants 1,037 130
Beneficial conversion feature of convertible debenture 16,051 -
Increase in trade receivables and
unbilled receivables (1,190) (726)
Marketable securities, net - 561
Increase in other receivables and prepaid expenses (189) (31)
Increase (decrease) in trade payables 1,715 (543)
Increase (decrease) in deferred revenues (3,452) 3,659
Increase in other accounts payables and
accrued expenses 663 337
Others - 10
----------- -----------
Net cash used in operating activities (8,831) (11,342)
----------- -----------
Cash flows from investing activities:
-------------------------------------
Purchase of property and equipment (1,028) (730)
Proceeds from sale of property and equipment - 33
Restricted cash 96 -
----------- -----------
Net cash used in investing activities (932) (697)
----------- -----------
Cash flows from financing activities:
-------------------------------------
Short-term bank credit, net $ (3,034) $ 3,219
Proceeds from issuance of shares and
exercise of stock options, net 45,375 9,939
Proceed from issuance of warrants - 250
Principal payment of long-term loans (11) (62)
----------- -----------
Net cash provided by financing activities 42,330 13,346
----------- -----------
Increase in cash and cash equivalents 32,568 1,307
Cash and cash equivalents at the beginning of the year 1,886 554
----------- -----------
Cash and cash equivalents at the end of the period $ 34,454 $ (1,861)
=========== ===========
Supplemental disclosure of non-cash flows activities:
-----------------------------------------------------
Cash paid for the period:
Interest: $ 151 $ 108
=========== ===========
Supplemental disclosure of non-cash investing and financing activities:
------------------------------------------------------------------------
Accrued expenses related to issuance expenses $ 2,857 $ -
=========== ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
VIRYANET, LTD.
NOTES TO CONDENSEND CONSOLIDATED FINANCIAL STATEMENTS
Note 1: BASIS OF PRESENTATION
The condensed consolidated financial statements have been prepared by
ViryaNet Ltd., pursuant to the rules and regulations of the Securities
and Exchange Commission and include the accounts of ViryaNet Ltd. and its
wholly owned subsidiaries (collectively the "Company"). Certain
information and footnote disclosures, normally included in the financial
statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations. In the opinion of the Company, the unaudited financial
statements reflect all the adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the financial
position at September 30, 2000 and the operating results for the period
of three and nine months ended September 30, 2000 and 1999 and the cash
flows for the period of nine months ended September 30, 2000 and 1999.
These financial statements and notes should be read in conjunction with
the Company's audited consolidated financial statements and notes
thereto, included in the Company's Registration Statement on Form F-1
filed with the Securities and Exchange Commission.
The results of operations for the three months and nine months ended
September 30, 2000 are not necessarily indicative of results that may be
expected for any other interim period or for the full fiscal year ending
December 31, 2000.
Note 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. CASH AND CASH EQUIVALENTS:
The Company considers all highly liquid investment securities with
maturities from date of purchase of three months or less to be cash
equivalents.
B. REVENUE RECOGNITION:
The Company generates revenues from licensing the rights to use its
software products. The Company also generates revenues from sales of
professional services, including consulting, customization,
integration, implementation, training and maintenance.
Revenues from software license that require significant customization,
integration and installation are recognized using contract
accounting on a percentage of completion method based on the
relationship of actual costs incurred to total costs estimated to be
incurred over the duration of the contract.
Revenues from other software license agreements are recognized, in
accordance with Statement Of Position (SOP) 97-2 "Software Revenue
Recognition" (as amended), when persuasive evidence of an agreement
exists, delivery of the software has occurred, the fee is fixed or
determinable and collectibility is probable.
When software arrangements involve multiple elements, revenue is
allocated to each element based on vendor-specific objective evidence
("VSOE") of the relative fair values of each element in the
6
<PAGE>
arrangement. The Company's VSOE used to allocate the sales price to
professional services and maintenance is based on the price charged
when these elements are sold separately. License revenues are recorded
based on the residual method, in accordance with SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition, with respect
to certain transactions". Under the residual method, revenue is
recognized for the delivered elements when (1) there is VSOE of the
fair values of all the undelivered elements, (2) VSOE of fair value
does not exist for one or more of the delivered elements in the
arrangement, and (3) all revenue recognition criteria of SOP 97-2 as
amended, are satisfied. Under the residual method, any discount in the
arrangement is allocated to the delivered element.
Service revenues, which include fees for consulting, customization,
integration, implementation and training services, are recognized as
work is performed. Maintenance revenues are recognized ratably over
the term of the maintenance agreement, which, in most cases, is one
year.
A provision for estimated losses on uncompleted contracts is recorded
in the period in which such losses are first identified, in the
amount of the estimated loss on the entire contract.
Deferred revenues include unearned amounts received under maintenance
and support contracts and amounts billed to customers but not
recognized as revenues.
C. BASIC AND DILUTED NET LOSS PER SHARE:
Basic net loss per share is computed based on the weighted average
number of Ordinary Shares outstanding during each period. Diluted net
loss per share is computed based on the weighted average number of
Ordinary Shares outstanding during each period, plus dilutive
potential Ordinary Shares considered outstanding during the period, in
accordance with FASB Statement No. 128, "Earnings per Share".
D. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS:
In June 1998, the Financial Accounting Standards Board issued SFAS
No.133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts)
be recorded in the balance sheet as either an asset or liability
measured at its fair value. SFAS No. 133 also requires that changes
in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset
related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess
the effectiveness of transactions that receive hedge accounting. SFAS
No. 133 is effective for fiscal years beginning after June 15, 2000
and cannot be applied retroactively. SFAS No. 133 does not have any
material impact on the Company's consolidated balance sheets or
results of operations.
In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial
Statements ("SAB 101"), which among other things clarifies certain
conditions to be met in order to recognize revenue. The Company is
currently in the process of assessing the impact of SAB 101.
E. SHARE CAPITAL:
In September 2000, the Company completed its initial public offering
in which it sold 4,000,000 Ordinary Shares. The aggregate proceeds
received by the Company from these offerings was approximately $29.7
million. As a result of the initial public offering, all of the
Preferred Shares of the Company, were converted automatically into
10,146,387 Ordinary Shares of the Company.
In addition, in September 2000, as a result of the initial public
offering, the outstanding convertible debentures issued by the Company
to various investors in April 2000 were converted automatically into
3,343,885 Ordinary Shares of the Company.
7
<PAGE>
In September 2000, warrants granted to various investors and other
third parties were exercised into 1,288,069 Ordinary Shares. Of the
1,288,069 Ordinary Shares issued upon the exercise of the warrants,
195,120 Ordinary Shares were issued at $3 per share for a total
consideration of $585,360 and 1,092,949 Ordinary Shares were issued on
a cashless exercise basis.
F. SEGMENT, CUSTOMERS AND GEOGRAPHIC INFORMATION:
1. Summary information about geographical destinations:
The Company manages its business on a basis of one reportable
segment.
The Company attributes revenues from external customers, on the
basis of the location of product sales.
The following presents total revenues and long-lived assets for the
three months and nine months ended September 30, 2000 and
September 30, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED
--------------------- --------------------- ------------------------
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30
--------------------- --------------------- ------------------------
LONG- LONG- 2000 1999
TOTAL LIVED TOTAL LIVED TOTAL TOTAL
REVENUES ASSETS REVENUES ASSETS REVENUES REVENUES
----------- -------- ----------- -------- ----------- -----------
UNAUDITED
<S> <C> <C> <C> <C> <C> <C>
Israel ..................... $ -- $ 815 $ -- $ 777 $ -- $ --
United States................ 5,863 952 3,098 645 13,928 8,141
United Kingdom............... 474 87 736 121 1,191 2,553
Japan........................ 1,137 60 208 65 3,775 436
------ ------ ------ ------ ------- -------
$7,474 $1,914 $4,042 $1,608 $18,894 $11,130
====== ====== ====== ====== ======= -------
</TABLE>
2. Major Customer data as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- -------------------------
SEPTEMBER 30 SEPTEMBER 30
---------------------- -------------------------
2000 1999 2000 1999
---------- -------- ----------- ----------
UNAUDITED
<S> <C> <C> <C> <C>
Customer A.......................... 20.1% -- 10.6% --
Customer B.......................... 12.3% -- 12.6% --
Customer C.......................... 11.7% -- 5.4% --
Customer D.......................... 11.3% -- 4.5% --
Customer E.......................... 3.9% 6.7% 13.6% 2.4%
Customer F.......................... 3.2% 0.4% 10.1% 0.2%
Customer G.......................... 2.1% 25.5% 2.0% 26.9%
Customer H.......................... 4.2% 22.4% 5.0% 24.6%
Customer I.......................... -- 12.1% 7.0% 4.6%
Customer J.......................... 1.0% 6.4% 1.7% 13.3%
</TABLE>
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying financial
statements for the periods specified and the associated notes. Further reference
should be made to the Company's Registration Statement on Form F-1 (File No.
333-42158) as filed with the Securities and Exchange Commission.
OVERVIEW
ViryaNet is a provider of wireless workforce management solutions for field
service communities. Service communities encompass all participants in the
service management and delivery process, including service organizations, their
field engineers, customers, partners, vendors and suppliers. The Company's
solutions unite on a wireless Internet platform the many participants in a field
service community involved in the delivery of service, and support mobile field
engineers using wireless devices, such as PDAs, two-way pagers, and WAP-enabled
cell phones. The Company's solutions for wireless workforce management enable a
field service organization to schedule, monitor, report, and measure
field service activity, and schedule meetings, installations, and preventative
maintenance.
The Company was founded in 1988. Through 1997, the Company generated revenue
primarily from the sale of customized systems for customer service and product
support and related services and invested relatively few resources in developing
software products. In the first quarter of 1997, the Company began to develop
standardized service delivery chain management software. During 1997 and 1998,
the Company intensified its research and development activities and, in the
second quarter of 1998, the Company commercially released its service delivery
chain management product, Service Suite. Concurrently with the release, the
Company began to build its direct sales force and expand its marketing
activities. In the fourth quarter of 1999, the Company introduced its initial
internet-based product, Service Hub.
The Company derives revenues from licenses of its software products and from
related services, which include implementation, consulting, customer
customization and integration, post-contract customer support and training. The
Company's products are typically licensed to customers for a perpetual term.
Before the first quarter of 2000, all of the Company's license revenues were
derived from licenses of its Service Suite products. In the first quarter of
2000, the Company also started to recognize revenues relating to licenses and
implementation of Service Hub. The Company bills customers according to contract
terms. Amounts collected from customers in excess of revenues recognized are
recorded as deferred revenue.
The Company sells its products through its direct sales force, and expands
its sales efforts through relationships with system integrators and vendors of
complementary products. The Company's revenues are derived from customers in
the United States, United Kingdom and Japan.
A significant portion of the Company's revenues has been derived from a
small number of relatively large companies. In 1999, and the nine months ended
September 30, 2000, the Company derived 55% and 7% of its revenues from two
customers, Sun Microsystems, a shareholder, and GE Medical, a warrant holder. In
1999, 71% of the Company's revenues were derived from four clients, including
Sun Microsystems and GE Medical, and no one customer accounted for more than 33%
of the Company's revenues. In the nine months ended September 30, 2000, four
customers each accounted for approximately 10% or more of the Company's revenue
and represented an aggregate of 47% of the Company's total revenues. The Company
does not expect that these customers will represent a substantial percentage of
its revenues in the future. However, the Company does expect that a significant
portion of its future revenues will continue to be derived from a relatively
small number of customers. The Company expects this portion to decrease as a
percentage of its total revenues. The Company does not believe that the loss of
these customers will have a material adverse effect on the Company.
9
<PAGE>
RESULTS OF OPERATIONS
The following table describes, for the periods indicated, the percentage of
revenues represented by each of the items on the Company's consolidated
statements of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ----------------------------
SEPTEMBER 30 SEPTEMBER 30
--------------------------- ----------------------------
2000 1999 2000 1999
--------------------------- ----------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Software licenses .................... 60.4% 31.2% 60.8% 25.8%
Maintenance and services.............. 39.6 68.8 39.2 74.2
------- ------- ------- --------
Total revenues....................... 100.0 100.0 100.0 100.0
Cost of revenues:
Software licenses..................... 1.6 6.4 2.8 7.2
Maintenance and services.............. 29.6 58.3 30.1 65.3
------- ------- ------- --------
Total costs of revenues.............. 31.2 64.7 32.9 72.5
Gross profit........................... 68.8 35.3 67.1 27.5
------- ------- ------- --------
Operating expenses:
Research and development.............. 25.2 44.5 27.8 44.9
Sales and marketing................... 57.2 72.5 61.9 94.7
General and administrative............ 13.7 23.7 14.9 23.8
Amortization of deferred stock
compensation......................... 5.1 2.0 5.1 2.8
------- ------- ------- --------
Total operating expenses............. 101.2 142.7 109.7 166.2
Operating loss......................... (32.4) (107.4) (42.6) (138.7)
Financial expenses, net................ (1.0) (0.5) (2.6) (2.7)
Financial expenses related to
beneficial conversion feature of
convertible debenture................. (222.2) -- (87.9) --
------- ------- ------- --------
Net loss income........................ (255.6) (107.9) (133.1) (141.4)
======= ======= ======= ========
Preferred shares deemed dividend....... -- -- -- (2.8)
======= ======= ======= ========
Net loss to shareholders of ordinary
shares................................ (255.6)% (107.9)% (133.1)% (144.2)%
======== ======= ======= ========
</TABLE>
GEOGRAPHIC DISTRIBUTION
While the Company's products are sold in specified countries, the
implementation of these products may be performed for global clients on a
worldwide basis. The following table summarizes the revenues from the Company's
products and services by country, stated as a percentage of total revenues for
the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ----------------------
COUNTRY 2000 1999 2000 1999
------------------- ---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
United States....... 79% 77% 74% 73%
United Kingdom...... 6 18 6 23
Japan............... 15 5 20 4
---- ---- ---- ----
Total............... 100% 100% 100% 100%
==== ==== ==== ====
</TABLE>
10
<PAGE>
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
Revenues
Total revenues increased 85% from $4.0 million in the three months ended
September 30, 1999 to $7.5 million in the three months ended September 30, 2000.
Software Licenses. Software licenses revenues consist of licenses of the
Company's software as well as third-party software. Third-party software
consists of software that is either embedded in the Company's software or
enhances the functionality of its software. The Company resells third-party
software to its customers at margins that are lower than margins that the
Company earns on its software. Software licenses revenues increased 259% from
$1.3 million in the three months ended September 30, 1999 to $4.5 million in the
three months ended September 30, 2000. This increase was primarily attributable
to an increase in the number of significant software licensing transactions
consummated by the Company. License revenues in the third quarter of 2000
included four transactions, which accounted for 79% of total license
revenues, each of which represented in excess of 10% of total license revenues.
Maintenance and Services. Maintenance and services revenues consist of
consulting, implementation, customization and integration, post-contract
customer maintenance and training. The Company's maintenance and services
revenues increased 6% from $2.8 million in the three months ended September 30,
1999 to $3.0 million in the three months ended September 30, 2000. This increase
was primarily due to an increase in maintenance revenues of approximately
$173,000, and an increase in implementation services of $320,000 partially
offset by a reduction in customization services of approximately $319,000 from
the three months ended September 30, 1999 to the three months ended September
30, 2000. Maintenance and services revenues comprised 69% of the Company's
revenues in the three months ended September 30, 1999 and 40% in the three
months ended September 30, 2000. This decrease was a result of the Company's
efforts to increase sales of software licenses and because the implementation of
the Company's products requires less customization.
Cost of Revenues
Total cost of revenues decreased 11% from $2.6 million in the three months
ended September 30, 1999 to $2.3 million in the three months ended September 30,
2000.
Software Licenses. Cost of software licenses revenues consists primarily
of payments to third parties for the Company's reselling of their software.
Software licenses costs decreased 53% from $258,000 in the three months ended
September 30, 1999 to $121,000 in the three months ended September 30, 2000.
This decrease was primarily due to higher revenues from software licenses in the
three months ended September 30, 1999 which included a component of third-party
software. Cost of software licenses as a percentage of revenues from software
licenses declined from 20% in the three months ended September 30, 1999 to 3% in
the three months ended September 30, 2000. This decline was primarily due to a
contract with a client in the three months ended September 30, 1999 that
involved an unusually large component of third-party software.
Maintenance and Services. Cost of maintenance and services revenues
consists primarily of salaries and facility costs. Maintenance and service costs
decreased 6% from $2.4 million in the three months ended September 30, 1999 to
$2.2 million in the three months ended September 30, 2000. This decrease
resulted primarily from streamlining of support and training personnel.
Maintenance and services costs as a percentage of related maintenance and
services revenues was 85% in the three months ended September 30, 1999 and 75%
in the three months ended September 30, 2000. The decrease in maintenance and
services costs as a percentage of maintenance and services revenues results
primarily from the personnel reductions which the Company implemented in the
fourth quarter of 1999. The Company expects that the cost of service revenues
will increase in dollar amount as the Company expands its professional service
organization to meet anticipated customer demand.
11
<PAGE>
Operating Expenses
Research and Development. Research and development includes costs relating
to the development of the Company's products. These costs consist primarily of
employee salaries and benefits, facilities costs, and the cost of consulting
resources that supplement the Company's internal development team. Due to the
relatively short time between the date that the Company's products achieve
technological feasibility and the date that they generally become available to
customers, costs subject to capitalization under SFAS No. 86 have been
immaterial and have been expensed as incurred. Research and development, net
expenses increased 5% from $1.8 million in three months ended September 30, 1999
to $1.9 million in the three months ended September 30, 2000. This increase was
attributable to the increase of personnel costs due to the hiring of new
personnel for the Company's ongoing development efforts. The Company expects
that it will continue to devote substantial resources to research and
development and that these expenses will continue to increase.
Sales and Marketing. Sales and marketing expenses consist of salaries,
commissions, field office expenses, travel and entertainment, promotional
expenses and facility costs. Sales and marketing expenses increased 46% from
$2.9 million in the three months ended September 30, 1999 to $4.3 million in the
three months ended September 30, 2000. The increase of $1.4 million was
attributable to an increase in personnel expense that amounted to $0.4 million
and an increase in marketing programs that amounted to $1.0 million. The Company
expects that its sales and marketing expenses will continue to increase as the
Company continues to expand its sales efforts and increase promotional
activities.
General and Administrative. General and administrative expenses consist of
salaries for administrative, executive and finance personnel, information system
costs, professional services and allocated facilities costs. These costs
increased 7% from $959,000 in the three months ended September 30, 1999 to $1.0
million in the three months ended September 30, 2000. This increase was
attributable to increases in personnel expenses. The Company believes that its
general and administrative expenses will continue to increase as a result of
growing operations and additional expenses associated with operating as a public
company.
Amortization of Stock-Based Compensation. Amortization of stock-based
compensation includes the amortization of unearned employee stock-based
compensation and expenses for stock granted to consultants in exchange for
services. Stock-based compensation expense is amortized over the vesting
schedule of the option, typically four years, using the straight line approach.
With the grant of some stock options, the Company recorded aggregate unearned
stock-based compensation expense of $1.3 million through September 30, 2000.
Stock-based compensation included in operating expenses totaled $81,000 in the
three months ended September 30, 1999 and $381,000 in the three months ended
September 30, 2000.
Financial Income and Financial Expenses. Financial expenses were $20,000
in the three months ended September 30, 1999 compared to financial expenses of
$73,000 in the three months ended September 30, 2000. This increase in financial
expenses resulted from interest expenses from the use of bank lines of credit.
Financial Expenses Related to Conversion of Convertible Debentures and
Detachable Warrants. Financial expenses related to conversion of convertible
debentures and detachable warrants were $16.6 million in the three months ended
September 30, 2000. This one time non-cash charge was recorded at the time of
the Company's Initial Public Offering in September 2000, due to the discounted
conversion feature of the convertible debentures which converted into Ordinary
Shares at that time.
12
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
Revenues
Total revenues increased 70% from $11.1 million in the nine months ended
September 30, 1999 to $18.9 million in the nine months ended September 30, 2000.
Software Licenses. Software licenses revenues increased 300% from $2.9
million in the nine months ended September 30, 1999 to $11.5 million in the nine
months ended September 30, 2000. This increase was due to an increase in the
acceptance of the Company's products, which led to an increase in the number of
license contracts that were consummated by the Company. License revenues for the
nine months ended September 30 2000 included 4 transactions which accounted for
56% of total license revenues, each of which represented in excess of 10% of
total license revenues.
Maintenance and Services. The Company's maintenance and services revenues
decreased 10% from $8.3 million in the nine months ended September 30, 1999 to
$7.4 million in the nine months ended September 30, 2000. This decrease was
primarily due to a reduction in customization and implementation services of
approximately $1.3 million from the nine months ended September 30, 1999 to the
nine months ended September 30, 2000. This decrease was a result of the
Company's efforts to increase sales of software licenses and because the
implementation of the Company's products requires less customization. The
decrease was partially offset by increases in maintenance revenues of
approximately $0.4 million. Maintenance and services revenues comprised 74% of
the Company's revenues in the nine months ended September 30, 1999 and 39% in
the nine months ended September 30, 2000.
Cost of Revenues
Total cost of revenues decreased 23% from $8.1 million in the nine months
ended September 30, 1999 to $6.2 million in the nine months ended September 30,
2000.
Software Licenses. Software licenses costs decreased 34% from $806,000 in
the nine months ended September 30, 1999 to $530,000 in the nine months ended
September 30, 2000. This decrease was primarily due to higher revenues from
software licenses in the nine months ended September 30, 1999, which included a
component of third-party software. Cost of software licenses as a percentage of
revenues from software licenses declined from 28% in the nine months ended
September 30, 1999 to 5% in the nine months ended September 30, 2000. This
decline was primarily due to a contract with one client in the nine months ended
June 30, 1999 that involved an unusually large component of third-party
software.
Maintenance and Services. Maintenance and service costs decreased 22%
from $7.3 million in the nine months ended September 30, 1999 to $5.7 million in
the nine months ended September 30, 2000. This decrease resulted primarily from
streamlining of support and training personnel. Maintenance and services costs
as a percentage of related maintenance and services revenues was 88% in the nine
months ended September 30, 1999 and 77% in the nine months ended September 30,
2000. The decrease in maintenance and services costs as a percentage of
maintenance and services revenues results primarily from the personnel
reductions which the Company implemented in the fourth quarter of 1999. The
Company expects that the cost of service revenues will increase in dollar amount
as the Company expands its professional service organization to meet anticipated
customer demand.
Operating Expenses
Research and Development. Research and development expenses increased 5%
from $5.0 million in the nine months ended September 30, 1999 to $5.3 million in
the nine months ended September 30, 2000. This increase was attributable to the
increase of personnel costs due to the hiring of new personnel
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<PAGE>
for the Company's ongoing development efforts. The Company expects that it will
continue to devote substantial resources to research and development and that
these expenses will continue to increase.
Sales and Marketing. Sales and marketing expenses increased 11% from $10.5
million in the nine months ended September 30, 1999 to $11.7 million in the nine
months ended September 30, 2000. The increase of $1.1 million was attributable
to increase in personnel as well as marketing programs, which facilitated the
aforementioned increase in revenue from software licenses. The Company expects
that its sales and marketing expenses will continue to increase as the Company
continues to expand its sales efforts and increase promotional activities.
General and Administrative. General and administrative expenses increased
7% from $2.6 million in the nine months ended September 30, 1999 to $2.8 million
in the nine months ended September 30, 2000. This increase was attributable to
increases in personnel expenses. The Company believes that its general and
administrative expenses will continue to increase as a result of growing
operations and additional expenses associated with operating as a public
company.
Amortization of Stock-Based Compensation. Stock-based compensation
included in operating expenses totaled $316,000 in the nine months ended
September 30, 1999, and $957,000 in the nine months ended September 30, 2000.
Financial Income and Financial Expenses. Financial expenses were $291,000
in the nine months ended September 30, 1999, compared to financial expenses of
$491,000 in the nine months ended September 30, 2000. This increase in financial
expenses resulted from interest expenses from the use of bank lines of credit.
Financial Expenses Related to Conversion of Convertible Debentures and
Detachable Warrants. Financial expenses related to conversion of convertible
debentures and detachable warrants were $16.6 million in the nine months ended
September 30, 2000. This one time non-cash charge was recorded at the time of
the Company's initial public offering in September 2000, primarily due to the
discounted conversion feature of the convertible debentures which converted into
Ordinary Shares at the time of the initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily financed its operations through private placements
of its ordinary and preferred shares and convertible debentures, and, more
recently, through the Company's initial public offering. Prior to the Company's
initial public offering in September 2000, the Company raised gross proceeds
from private placements of ordinary and preferred shares and convertible
debentures amounting to $54.1 million. To a lesser extent, the Company has
financed its operations through short-term bank facilities and other financing
arrangements. In April 2000, the Company completed the sale of an aggregate of
$16.0 million in principal amount of convertible debentures, bearing interest at
the London interbank offered rate plus 2%, payable on a quarterly basis starting
in April 2001. $5.0 million of the $16.0 million was received in February and
March 2000, and $11.0 million was received in April 2000. In September 2000, the
Company completed the initial public offering of its Ordinary Shares, and the
convertible debentures, including unpaid interest, converted into ordinary
shares at a price per share of $4.80, representing a 40% discount to the price
of the shares sold in the offering. The Company issued 4,000,000 Ordinary shares
in its initial public offering at a price per share of $8.0.
As of September 30, 2000, the Company had cash and cash equivalents of $34.5
million and the Company had a working capital of $23.8 million, including $2.2
million of short-term borrowings which the Company substantially repaid in
October 2000. As of September 30, 2000, the Company did not have any long-term
borrowings.
14
<PAGE>
Net cash used in operating activities was $8.8 million and $11.3 for the
nine months ended September 30, 2000 and 1999 respectively. Net cash used in
investing activities was $932,000 and $697,000 for the nine months ended
September 30, 2000 and 1999 respectively. Investing activities consisted
primarily of purchases of property and equipment. Net cash provided by financing
activities was $42.3 million and $13.3 for the nine months ended September 30,
2000 and 1999 respectively. Net cash provided by financing activities consists
primarily of net proceeds from the issuances of preferred and ordinary shares,
as well as from long term convertible debentures and, in 1999, from a net
increase in the Company's short-term bank line of credit of $3.2 million.
As of September 30, 2000, the Company had a revolving line of credit with
Bank Hapoalim, which allowed the Company to borrow up to an aggregate of $6.0
million. Borrowings under the line of credit with Bank Hapoalim are in United
States dollars and bear interest annually at the London interbank offered rate
plus 1.5%. All borrowings under the line of credit with Bank Hapoalim are
secured by a lien on the Company's assets. Except as specified above, borrowings
under the line are not limited by the amount of the Company's assets and does
not require the Company to meet financial ratios or tests. As of September 30,
2000, the Company had $2.2 million of outstanding indebtedness under the
Company's lines of credit.
Payments under non-cancelable operating lease agreements for facilities and
other equipment expire on various dates through 2005, resulting in aggregate
lease expenses ranging from $430,000 to $880,000 per year.
The Company expects to continue to experience growth in its operating
expenses and the Company anticipates that its operating expenses and capital
expenditures will continue to be a material use of its cash resources. The
Company may utilize cash resources to fund acquisitions or investments in other
businesses, technologies, or product lines. The Company believes that available
cash and cash equivalents will be sufficient to meet its working capital and
operating requirements for at least the next 12 months. After that period, the
Company may require additional funds to support its working capital and
operating expense requirements, and may seek to raise additional funds through
public or private debt or equity financings. The Company cannot assure you that
this additional financing will be available, or, if available, will be on
reasonable terms.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Information provided by the Company from time to time, including statements
in this Form 10-Q which are not historical facts, are so-called "forward-looking
statements" that involve risks and uncertainties, made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. In
particular, statements contained in Management's Discussion and Analysis of
Financial Condition and Results of Operations which are not historical facts
(including, but not limited to, statements concerning the plans and objectives
of management; increases in sales and marketing, research and development and
general and administrative expenses; and the Company's expected liquidity and
capital resources) may constitute forward-looking statements. These forward-
looking statements are neither promises nor guarantees, but are subject to risk
and uncertainties that could cause results to differ materially from
expectations set forth in the forward-looking statements. Factors that may cause
such differences include, but are not limited to, the factors discussed below,
and the other risks discussed in the Company's Prospectus dated September 19,
2000 included in its Registration Statement on Form F-1 (Reg. No. 333-42158) and
from time to time in the Company's other filings with the Securities and
Exchange Commission.
The Company's future results are subject to substantial risks and
uncertainties. The Company has a limited history in its current principal market
which makes it difficult or impossible to predict the Company's future results
or operations. The Company has historically depended upon Service Suite
application and the Company's future success depends on market acceptance of the
Company's new Service Hub and related products, as well as continued acceptance
of the Company's Service Suite and related applications. If the Company's
products do not achieve market acceptance, the Company's revenues may decline.
The Company has a history of losses. As a result, the Company will need to
generate
15
<PAGE>
significant revenues to achieve and maintain profitability. If the Company does
achieve profitability, the Company cannot be certain that it could sustain or
increase profitability in the future. Historically, the Company's revenues have
been concentrated in a few large orders and a small number of customers. The
Company's business could be adversely affected if the Company loses a key
customer or if sales from a key customer are reduced significantly. The market
for internet-based and wireless service community platforms has only recently
begun to develop and is rapidly evolving. This makes it difficult to predict
demand and market acceptance of the Company's products. As a result, the Company
cannot guarantee that the market for its internet-based and wireless products
will grow or that its products will become widely accepted. If the market for
the Company's internet-based and wireless products does not develop as quickly
as the Company expects or if the Company's internet-based and wireless products
are not accepted by clients, the Company's future revenues and profitability
will be adversely affected. The Company's margins on service revenues have
declined from 1997 to 1999. Although the Company's margins on service revenues
improved in the nine month period ended September 30, 2000, this trend may not
continue. Failure to improve the Company's margins on service revenues could
cause the Company's business to be less profitable. The Company's sale cycle is
variable and sometimes long and involves significant resources on the Company's
part. Any delays in sales could cause the Company's operating results to widely
vary and if the sales cycles shorten, the Company's quarterly operating results
may become less predictable and may fluctuate more widely than in the past.
The market for third-party internet-based and wireless service community
platforms is relatively immature, but has begun to develop rapidly and
competition is intense. This market and the market for service management
solutions is fragmented and stratified. The Company's competitors may be in a
better position to devote significant resources to the development, promotion
and sale of their products and to respond more quickly to new or emerging
technologies and changes in client requirements. Current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase their ability to successfully
market their products. In addition, the Company expects that competition will
increase as a result of consolidations in the industry. As the Company develops
new products, the Company may begin to compete with companies with which the
Company has not previously competed. Competition may result in price reductions
for the Company's products and services, fewer client orders, reduced gross
margins or loss of market share, any of which could materially adversely affect
the Company's business, financial condition and results of operation.
The Company's stock prices, quarterly revenues, gross profits and results of
operations have fluctuated significantly in the past and will likely fluctuate
significantly in the future. Causes of such fluctuation have included and may
include, among others, changes in demand or timing of orders, especially large
orders for the Company's products, timing of product resales, the dollar value
and timing of contracts, delays in implementation, changes in the proportion of
service and license revenues, price and product competition, increases in
selling and marketing expenses, as well as other operating expenses,
technological changes, adverse economic conditions and currency fluctuations,
and consolidation of the Company's clients. A substantial portion of the
Company's expenses, including most product development and selling and marketing
expenses must be incurred in advance of when revenue is generated. If the
Company's projected revenues does not meet the Company's expectations, the
Company is likely to experience an even greater shortfall in its operating
profit relative to the Company's expectations. As a result, period-to-period
comparison of the Company's historical results are not necessarily meaningful as
an indication for future performance. In addition, it is possible that the
Company's quarterly results of operations may be below the expectations of
public market analysts and investors. If this happens, the price of the
Company's ordinary shares will likely decrease.
The Company is organized under the laws of the State of Israel. Most of the
Company's revenue are in dollars or are linked to the dollar, while a
substantial portion of the Company's expenses, are in New Israeli Shekels. As a
result, the Company is exposed to the risk that the rate of inflation in Israel
will exceed the rate of devaluation of the NIS in relation to the dollar or that
the timing of this devaluation lags behind inflation in Israel. This would have
the effect of increasing the dollar cost of the Company's operations. If the
dollar cost of the Company's operations in Israel increases, the Company's
dollar-measured results of operations will be adversely affected. The Company
has received grants in the past and receives tax benefits under Israeli
government programs. If the Company fails to comply with the conditions required
16
<PAGE>
to receive these grants or tax benefits, the Company may be required to refund
any payments previously received under these payments or pay increased taxes.
The programs and tax benefits may be discontinued or reduced in the future. If
these tax benefits and programs are terminated or reduced, the Company could pay
increased taxes in the future, which could decrease the Company's profits. In
addition, risk associated with the military and economic condition in Israel
could have a material adverse effect on the Company's business, operating result
and financial condition.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Revenues generated and costs incurred outside of the United States are
generally denominated in non-dollar currencies. Costs not effectively
denominated in United States dollars are translated to United States dollars,
when recorded, at the prevailing exchange rates for the purposes of the
Company's financial statements. Consequently, fluctuations in the rates of
exchange between the dollar and non-dollar currencies will affect the Company's
results of operations. An increase in the value of a particular currency
relative to the dollar will increase the dollar reporting value for transactions
in that particular currency, and a decrease in the value of that currency
relative to the dollar will decrease the dollar reporting value for those
transactions. This effect on the dollar reporting value for transactions is
generally only partially offset by the impact that currency fluctuations may
have on costs. The Company does not generally engage in currency hedging
transactions to offset the risks associated with variations in currency exchange
rates. Consequently, significant foreign currency fluctuations and other foreign
exchange risks may have a material adverse effect on the Company's business,
financial condition and results of operations.
Since the Company's revenues are generated in United States dollars and
currencies other than NIS, and a substantial portion of the Company's expenses
is incurred and will continue to be incurred in NIS, the Company is exposed to
risk by the amount that the rate of inflation in Israel exceeds the rate of
devaluation of the NIS in relation to the dollar and other currencies or if the
timing of the devaluation lags behind inflation in Israel. The Company does not
engage in any hedging or other transactions intended to manage risks relating to
foreign currency exchange rate or interest rate fluctuations. The Company also
does not own any market risk sensitive instruments. However, the Company may in
the future undertake hedging or other transactions or invest in market risk
sensitive instruments if the Company determines that it is necessary to offset
these risks.
PART II OTHER INFORMATION
-----------------
Item 1. Legal Proceedings
-----------------
In December 1999, the Company's former vice president of marketing and sales
filed an action in the district labor court of Jerusalem in Israel against the
Company and its chief executive officer seeking damages in the amount of up to
$1,364,000. The former employee alleges wrongful denial of his right to exercise
options, loss of compensation, including options to purchase shares granted to
him by his previous employer, severance payment and other social benefits, as
well as damage to his reputation.
In March 2000, the Company filed a counter action against the former
employee in the district labor court of Jerusalem seeking damages in the amount
of approximately $970,000. The Company alleged that the former employee had
acted in bad faith, had breached his fiduciary duty and did not perform his
duties as required.
The Company is unable to determine with any certainty the ultimate outcome
of the litigation and its effect on the Company's business, financial condition
and results of operations. The Company intends to vigorously defend this action.
17
<PAGE>
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(c) Changes in Securities
On July 17, 2000 the Company issued to employees and consultants options
to purchase up to 465,250 Ordinary Shares at an exercise price of $11 per share.
On July 17, 2000 the Company issued to an employee options to purchase up
to 5,000 Ordinary Shares at an exercise price of $10 per share.
On July 17, 2000 the Company issued to employees options to purchase up to
70,000 Ordinary Shares at an exercise price of $8 per share.
On July 17, 2000 the Company issued to employees options to purchase up to
8,500 Ordinary Shares at an exercise price of $5.75 per share.
On July 25, 2000 the Company issued to a customer warrants to purchase up
to 50,000 Ordinary Shares at an exercise price of $11 per share.
On July 31, 2000 the Company issued to a customer warrants to purchase
25,000 Ordinary Shares at an exercise price of $11 per share.
On July 31, 2000 an employee of the Company exercised incentive stock
options for 31,250 Ordinary Shares of the Company at an exercise price of
$2.30 per share.
On August 8, 2000 employees of the Company exercised incentive stock
options for an aggregate of 1,000 Ordinary Shares of the Company at an exercise
price of $5.75 per share.
On August 23, 2000 the Company issued to a reseller of its products
warrants to purchase 15,000 Ordinary Shares at an exercise price of $11 per
share.
On September 18, 2000 the Company issued to a customer warrants to purchase
45,000 Ordinary Shares at an exercise price of $11 per share.
On September 19, 2000 convertible debentures issued to various investors
were converted into 3,343,885 Ordinary Shares of the Company.
On September 19, 2000 all of the Company's Series A Preferred Shares,
Series B Preferred Shares, Series C-1 and Series C-2 Preferred Shares were
converted automatically into 10,146,387 Ordinary Shares.
On September 19, 2000 investors of the Company exercised warrants to
purchase 195,120 Ordinary Shares at an exercise price of $3 per share.
On September 19, 2000 investors of the Company exercised warrants to
purchase 1,092,949 Ordinary Shares of the Company on a cashless exercise basis.
On September 21, 2000 the Company issued to customers warrants to purchase
59,500 Ordinary Shares at an exercise price of $11 per share.
On September 21, 2000, the Company issued to a director, a consultant, and
employees options to purchase up to 280,500 Ordinary Shares at an exercise price
of $8 per share.
The issuance of all such securities of the Company during the quarter ended
September 30, 2000 were made in reliance on exemptions from registration under
Section 4(2) of the Securities Act. Each of the transactions involved a private
placement to a limited number of either institutional investors, venture capital
firms, strategic investors, customers, employees or other investors. None of
these transactions involved a general solicitation and each was completed
without brokers or placement agents.
(d) Use of Proceeds
On September 19, 2000, the Company commenced an initial public offering
("IPO") of 4,000,000 ordinary shares, par value NIS 0.1 per share (the "Ordinary
Shares"), of the Company pursuant to the Company's final prospectus dated
September 19, 2000 (the "Prospectus"). The Prospectus was contained in the
Company's Registration Statement on Form F-1, which was declared effective by
the Securities and Exchange Commission (SEC File No. 333-42158) on September 19,
2000. The initial public offering closed on September 22, 2000 upon the sale of
4,000,000 Ordinary Shares to the underwriters. Chase Securities Inc., Salomon
Smith Barney, Inc., and Dain Rauscher Incorporated acted as the representatives
of the underwriters in the initial public offering.
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<PAGE>
The aggregate offering price of the initial public offering to the public
was $32,000,000, with proceeds to the Company, after deduction of underwriting
discount, of $29,760,000 (before deducting offering expenses payable by the
Company).
From September 19, 2000, through September 30, 2000, the aggregate amount of
expenses incurred by the Company in connection with the issuance and
distribution of Ordinary Shares offered and sold in the initial public offering
were approximately $5,595,000, including $2,240,000 in underwriting
discounts and commissions and $3,355,000 in other expenses.
None of the expenses paid by the Company in connection with the initial
public offering were paid, directly or indirectly, to directors, officers,
persons owning ten percent or more of the Company's equity securities, or
affiliates of the Company.
The net proceeds to the Company from the initial public offering, after
deducting underwriting discounts and commissions and other expenses were
approximately $26,405,000.
From September 19, 2000, through September 30, 2000, the Company invested
the balance of net proceeds primarily in short term deposits.
None of the net proceeds from the initial public offering were used to pay,
directly or indirectly, directors, officers, persons owning ten percent or more
of the Company's equity securities, or affiliates of the Company.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On August 9, 2000, at an extraordinary meeting of the shareholders of the
Company (the "Extraordinary Meeting"), the shareholders of the Company approved
the following matters: (i) the issuance and sale of up to 5,175,000 Ordinary
Shares in an underwritten public offering in the United States and
internationally (the "Offering") through underwriters, for which chase
Securities Inc., Salomon Smith Barney Inc. and Dain Rauscher Incorporated, acted
as the representatives, (ii) the replacement of the Company's Articles of
Association with the new Articles of Association in the form attached to the
Shareholder Resolution dated August 9, 2000 (the "New Articles of Association"),
effective simultaneously with the U.S. Securities and Exchange Commission (the
"SEC") declaring effective the Company's registration statement on Form F-1
relating to the proposed Offering of the Company's Ordinary Shares, (iii) the
conversion of each one of the Company's issued and outstanding Series A
Preferred Shares par value NIS 0.1 each, Series B Preferred Shares par value NIS
0.1 each, Series C-1 Preferred Shares par value NIS 0.1 each and Series C-2
Preferred Shares par value NIS 0.1 into one Ordinary Share NIS 0.1 par value
each, effective simultaneously with the SEC declaring the offering effective.
(iv) the conversion of the Company into a "Public Company", within the meaning
of the Israeli Companies Law 5759-1999 (the "Companies Law") effective
simultaneously with the U.S. Securities and Exchange Commission declaring the
Offering effective, (v) the exculpation and exemption of the Company's Directors
and Officers from liabilities resulting from an act performed thereby, in their
capacity as Office Holders of the Company to the fullest extent permitted under
the Companies Law, effective on the date on which the Company's New Articles of
Association become effective, (vi) the purchase of a Directors & Officers
insurance policy for the purpose of providing insurance coverage to the
Company's Directors and Officers to the fullest extent permitted under by the
Companies Law, for liabilities incurred as a result of an act performed thereby,
in their capacity as Office Holders in the Company, effective on the date on
which the Company's New Articles of Association become effective, (vii) the
indemnification of each of the Company's Directors and Officers to the fullest
extent permitted under the Companies Law against liabilities resulting from an
act performed thereby, in their capacity as Office Holders of the Company, in
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<PAGE>
accordance with the provisions of the form of the Indemnification Agreement
attached to the Shareholders resolution dated August 9, 2000, effective on such
date on which the New Articles of Association become effective, (viii)
authorization of each of Mr. Samuel HaCohen or Mr. Yoram Bibring to take any
action and sign any document necessary, in the name and on behalf of the
Company, towards the proper execution of all of the resolutions adopted by the
Shareholders on August 9, 2000 and the transactions contemplated therein and
(ix) resolution that the sole signature either of Mr. Samuel HaCohen or Mr.
Yoram Bibring on any document relating to the Offering accompanied by the name
of the Company stamped, typed or printed shall bind the Company for all intents
and purposes, all effective on the date on which the Company's New Articles of
Association become effective. The holders of 12,115,337 shares voted for the
foregoing issues, while no holders of shares voted against or abstained.
On August 9, 2000, at separate special class meetings, the holders of the
Ordinary Shares, par value NIS 0.1 each, the holders of the Series A Preferred
Shares, par value NIS 0.1 each, the holders of the Series B Preferred Shares,
par value NIS 0.1 each, the holders of the Series C-1 Preferred Shares, par
value NIS 0.1 each, and the holders of the Series C-2 Preferred Shares, par
value NIS 0.1 each, approved the matters referred to in (v) through (ix) of the
previous paragraph. The holders of 2,230,020 Ordinary Shares, the holders of
3,951,740 Series A Preferred Shares, the holders of 650,000 Series B Preferred
Shares, the holders of 3,805,515 Series C1 Preferred Shares and the holders of
1,739,132 Series C2 Preferred Shares voted for the foregoing issues, while no
holder of shares voted against or abstained.
Item 5. Other Information
-----------------
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
Number Exhibit Description
------ -------------------
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
20
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VIRYANET, LTD.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VIRYANET, LTD.
November 14, 2000
By: /s/ Yoram Bibring
-------------------------
Yoram Bibring
Chief Financial Officer
21
