UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] Registration statement pursuant to Section 12 (b) or 12 (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, 1999
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 # 15038
ARYT INDUSTRIES, LTD.
(Exact Name of Registrant as Specified in its Charter and Translation of
Registrant's Name Into English)
ISRAEL
(Jurisdiction of Incorporation or Organization)
7 Haplada Street, P.O. Box 969, Or Yehuda 60256 ISRAEL
------------------------------------------------------
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section 12(b) of the
Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered or to be registered pursuant to Sections 12(g) of the
Act:
Ordinary Shares, par value 1.00 New Israeli Shekels per share
-------------------------------------------------------------
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
<PAGE>
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.
Ordinary Shares, par value 1.00 New Israeli Shekels per share: 43,333,781
-------------------------------------------------------------------------
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]
(applicable only to issuers involved in bankrupcy proceedings during the past
five years)
Indicate by check mark whether the registrant has filed all documents reports
required to be filed by section 12,13 or 15 (d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by
a court.
Yes [ ] No [ ]
<PAGE>
References in this Annual Report to NIS or Shekels are to New Israeli Shekels
and references to U.S. Dollars, Dollars, U.S.$ or $ are to United States
Dollars.
PART I
Item 1. DESCRIPTION OF BUSINESS
Aryt Industries, Ltd. is an Israeli holding company and since January
2000, we have been actively seeking investment opportunities in emerging
technology companies. We intend to be actively involved in leveraging our
business, product development and marketing experience to assist such
companies achieving their growth potential and accelerating their growth in
value. As of June 30, 2000 we have invested in three start up technology
ventures.
In addition, through our subsidiaries, Reshef Technologies Ltd.
("Reshef") and Amcoram Ltd. ("Amcoram"), we are engaged in developing,
manufacturing and marketing sophisticated electronics products for the
military market.
Civil Technology Market
In January 2000, we embarked on a new policy of actively seeking
investment opportunities in high technology companies and as of June 30, 2000
we have invested in three technology companies as follows:
Voice Diary Ltd. In January 2000, we purchased 10% of the issued and
outstanding shares of Voice Diary Ltd. ("Voice Diary") and received an option
to purchase an additional 10% of Voice Diary, in consideration of our
providing Voice Diary with a $150,000 line of credit to be drawn upon until
January 1, 2000. Our option is exercisable for a period of 1 year at an
exercise price of $100,000. Voice Diary is engaged in the development of a
palm diary activated by voice and intended for users with sight impairment.
Sensotech Ltd. In April 2000, we purchased 25% of the issued and
outstanding shares of Sensotech Ltd. ("Sensotech") for $1 million and also
received warrants to purchase an additional approximately 15% of the share
capital of Sensotech. The warrants are exercisable for a period of two years
at an exercise price of between $1 million to $1.2 million. Sensotech is
engaged in the development and marketing of patented non-contact ultrasound
sensors for the car, train and elevators industries. Sensotech has developed a
novel way of using ultrasound energy for smart sensing. We believe such
technology is the most advanced in the market. Currently, Sensotech is
negotiating possible co-operation agreements with leading firms in the
automotive business.
OfficeCore.com In May 2000, we entered into a Share Purchase
Agreement with OfficeCore.com Ltd. ("OfficeCore") for the purchase of 800 to
2,932 Preferred B Shares representing between 13% and 37% of the issued and
outstanding share capital of OfficeCore. The purchase price will be between
$200,000 and $800,000, depending upon the number of shares purchased.
OfficeCore is an Israeli company engaged in the development of complete
internet work environments, primarily for small and medium sized businesses.
Their products include office applications, customer relationship management,
e-commerce, web site management, inventory management and certain additional
modules. OfficeCore services may be accessed from cellular devices.
OfficeCore's strategy is to enable small business users to rent applications
tailored to their needs via the internet at significant cost and human
resources savings. OfficeCore is planning to release the "beta" version of its
service and anticipates ramping up to providing full end-user services during
the third quarter of 2000.
In January 2000, we sold our interest in Telegate Ltd. ("Telegate")
to Terayon Communication Systems, Inc. ("Terayon") in exchange for
approximately 220,000 shares of Terayon common stock and approximately
$160,000 in cash. Of the Terayon shares we received, 16,000 are held in escrow
by Terayon to secures certain rights of Terayon and are to be released from
escrow in January 2001, assuming no claim is made against the escrowed shares.
As a result of this sale we realized a capital gain of $13.03 million. As of
June 30, 2000, we sold approximately 200,000 of our Terayon shares at an
average price of $203 per share for aggregate proceeds of $40.06 million. As a
result of this sale we had a profit on the sale of marketable securities of
$35.38 million during the first quarter of 2000.
We intend to continue to seek additional investment opportunities in
promising technology companies.
Military Defense Industry
Through our subsidiary Reshef, we are engaged in the development,
manufacture and sale of electronic fuzes designed to control the detonation of
munitions. Amcoram is engaged in the development, manufacture and sale of
laser warning systems, computerized firing systems and opto-mechanical and
opto-electrical instruments, all for various military applications. Both
Reshef and Amcoram have ISO 9000 security standard certificates.
On June 19, 2000, Reshef entered into a Share Purchase Agreement with
Soltam Systems, Ltd. ("Soltam") and into an Activity Purchase Agreement with
Soltam's subsidiary, K.M. Fuzes Engineering, Ltd. ("Soltam Fuze"). Pursuant to
the agreement, Soltam will purchase from Reshef newly issued shares of Reshef,
representing 26% of Reshef, for $1.5 million and Reshef will purchase from
Soltam Fuze all of its operations relating to the development, manufacturing
and sale of electronic fuzes, for $1.5 million. The closing of this
transaction is subject to certain contingencies, including the receipt of
various Israeli regulatory approvals.
General
We were incorporated under the laws of the State of Israel in 1979
under the name "Ranly Investments Limited" and commenced our operations in
1981. We changed our name three times and adopted our current name in July
1992. Our principal offices are located at 7 Haplada Street, P.O. Box 696, Or
Yehuda, 60256, Israel. Unless the context indicates otherwise, "Aryt", the
"Company", "we" and "our" refer collectively to Aryt Industries, Ltd. and our
subsidiaries and affiliated companies.
(The remainder of this page was intentionally left blank)
<PAGE>
Below is our organizational chart as of June 30, 2000.
<TABLE>
<CAPTION>
<S> <C> <C>
-----------------------------------------------------------------------------------
| |
| ARYT INDUSTRIES LTD.* |
-----------------------------------------------------------------------------------
| |
| |
------------------------------ |
| Defense Sector | |
100%*** | |100% |
| | |
--------------------- --------------------- |
|Reshef Technologies | | Amcoram** | | Civil Technology
| Ltd. | | | | Sector
--------------------- --------------------- |
|
|
-----------------------------------------------------------------
| | |
10% | 25% | 13%|
| | |
-------------------- ----------------- ----------------------
| Voice Diary Ltd. | | Sensotech Ltd. | | Office Core Ltd. |
-------------------- ----------------- ----------------------
</TABLE>
* The Company has three inactive subsidiaries, G>S>T., Ltd., DT Industries,
Inc., and Indofinance, Ltd. The above chart does not include transactions,
which have not closed as of June 30, 2000.
** Amcoram has one inactive subsidiary, Amcoram Technologies (1993) Gmbh.
*** Certain employees of Reshef hold under 1% of Reshef's share capital
ARYT INDUSTRIES, LTD.
Aryt Industries, Ltd. is an Israeli holding company and since January
2000, we have been actively seeking investment opportunities in emerging
technology companies. We intend to be actively involved in leveraging our
business, product development and marketing experience to assist such
companies achieving their growth potential and accelerating their growth in
value. As of June 30, 2000 we have invested in three start up technology
ventures.
In addition, through our subsidiaries Reshef and Amcoram we are
engaged in developing, manufacturing and marketing sophisticated electronics
products for the military market.
Technology Investments
In January 2000, we embarked on a new policy of actively seeking
investment opportunities in high technology companies and as of June 30, 2000
we have invested in three technology companies as follows:
Voice Diary Ltd. In January 2000, we purchased 10% of the issued and
outstanding shares of Voice Diary Ltd. ("Voice Diary") and received an option
to purchase an additional 10% of Voice Diary, in consideration of our
providing Voice Diary with a $150,000 line of credit to be drawn upon until
January 1, 2000. Our option is exercisable for a period of 1 year at an
exercise price of $100,000. Voice Diary is engaged in the development of a
palm diary activated by voice and intended for users with sight impairment.
Sensotech Ltd. In April 2000, we purchased 25% of the issued and
outstanding shares of Sensotech Ltd. ("Sensotech") for $1 million and also
received warrants to purchase an additional approximately 15% of the share
capital of Sensotech. The warrants are exercisable for a period of two years
at an exercise price of between $1 million to $1.2 million. Sensotech is
engaged in the development and marketing of patented non-contact ultrasound
sensors for the car, train and elevators industries. Sensotech has developed a
novel way of using ultrasound energy for smart sensing. We believe such
technology is the most advanced in the market. Currently, Sensotech is
negotiating possible co-operation agreements with leading firms in the
automotive business.
OfficeCore.com In May 2000, we entered into a Share Purchase
Agreement with OfficeCore.com Ltd. ("OfficeCore") for the purchase of 800 to
2,932 Preferred B Shares representing between 13% and 37% of the issued and
outstanding share capital of OfficeCore. The purchase price will be between $
200,000 and $ 800,000 depending upon the number of shares purchased.
OfficeCore is an Israeli company engaged in the development of complete
internet work environments primarily for small and medium sized businesses.
Their products include office applications, customer relationship management,
e-commerce, web site management, inventory management and certain additional
modules. OfficeCore services may be accessed from cellular devices.
OfficeCore's strategy is to enable small business users to rent applications
tailored to their needs via the internet at significant cost and human
resources savings. OfficeCore is planning to release its "beta" version of its
service and anticipates ramping up to providing full end-user services during
the third quarter of 2000.
We intend to continue to seek additional investment opportunities in
promising technology companies.
RESHEF
General
Reshef was incorporated in 1984, under the laws of the State of
Israel, as Reshef Ammunition Ltd. Reshef is engaged in the development,
manufacture, marketing and sales of electronic fuzes for military
applications. Reshef changed its name to Reshef Technologies, Ltd. in 1988.
Pursuant to the Soltam transaction, which is currently pending, Soltam will
receive 26% of the share capital of Reshef.
Products
Reshef markets and sells an advanced line of precision fuze
detonation products which control ammunition detonation, based on either
precision time after firing or accurate target proximity above ground. All
products are based upon proprietary technology developed by Reshef.
Sales
Reshef sells its products to the Israeli Defense Forces ("IDF") and
to certain foreign customers. Sales to our direct foreign customers are
carried out through non-exclusive agents, who operate in various geographical
territories to procure orders for Reshef on a commission basis with
commissions ranging from 3% to 5% of each order.
In 1999, Reshef's revenues generated from the sale of fuzes amounted
to $3.27 million compared with $3.46 million in 1998 and $8.25 million in
1997.
Supplies
Reshef purchases certain components from subcontractors but is not
dependent on any sole source of supply. To date, Reshef has not experienced
difficulty in obtaining components for the assembly of its products. Because
of the military applications of most of its products, Reshef must obtain
export and import licenses for most of the components it uses and export
approval for sales to foreign customers. To date, Reshef has not experienced
major difficulties in obtaining any such permits, however, there can be no
assurance that we will be able to obtain such permits in the future on a
timely basis or at all. Reshef has ISO 9000 security standard certification.
Grants from the Office of the Chief Scientist
The Chief Scientist of the Ministry of Industry and Trade of the
State of Israel (the "Chief Scientist") is authorized to provide partial
grants to finance specific research and development project costs. Reshef
received Chief Scientist grants during 1999 in the amount of $50,000 compared
to grants totaling approximately $163,000 in 1998. We have not applied for any
Chief Scientist grants during 2000.
Competition.
Because of the secrecy involved in weapons development, it is
difficult to accurately determine the scope of potential competition for our
products. The standard fuze type currently in general use is a mechanical one.
Such fuzes are generally less expensive than the fuzes manufactured and sold
by Reshef, but are also less effective and less accurate than our products.
While barriers to entry in the ammunition fuze detonation business are high,
there are a number of companies worldwide who manufacture comparable products
to those produced by Reshef, many of which have substantially greater
financial resources providing them with greater research, development and
marketing capabilities. Our current competitors include Philips NV, Reunet
S.A., NET, Borletti, Bulva, Accudyne Corp., Fuchs Electronic Ltd. and
Thompson. We believe our products are more advanced and reliable than such
products. In addition, our fuzes are competitively priced and we believe we
are well positioned in the market.
AMCORAM, LTD.
Amcoram was founded by Amcor, Ltd. in 1969. Amcoram presently
develops, manufactures, markets and sells laser warning systems for tanks,
ships and helicopters, computerized firing systems and opto-mechanical and
opto-electrical instruments, all for various military applications including
spherical vision periscopes for armored vehicles.
Products
Amcoram develops, markets and sells the following lines of products.
All products are based upon proprietary technology developed by Amcoram.
Laser Warning Systems: An advance warning system which alerts
combat personnel of Optic based weapons systems and can be mounted on mobile
combat vehicles.
Computerized Firing Ranges: An advanced computerized military target
system designed to train military personnel in precision firing under field
conditions with changing targets and conditions. The system places targets and
reports on accuracy and other result parameters.
Opto-Mechanical/ Opto-Electrical Instruments: Opto-mechanical and
opto-electrical instruments for various military applications including
spherical vision periscopes for armored vehicles.
Research, Development and Manufacturing
Amcoram carries out its research, development and engineering of its
products through Reshef on an arms-length basis. Amcoram has ISO 9000 security
standard certification.
Supplies
Materials and components used by Amcoram in its product manufacturing
are generally available from a number of sources, and Amcoram has not
experienced difficulties in obtaining said materials.
Sales and Marketing
Amcoram's management believes that potential buyers of its products
are the armed forces and original equipment manufacturers of weapon systems,
which may integrate Amcoram's products into their own systems. Presently,
Amcoram markets all its products to the Israeli Defense Forces. In 1999,
Amcoram's sales revenues amounted to $3.63 million compared to $2.61 million
in 1998, and $3.48 million in 1997.
ARYT INUSTRIES, LTD.
Sales. The following is the breakdown of our sales on a consolidated
basis, by Major Customers (including approximate percentage of total sales for
each period):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------- -------------------------- -------------------------
1 9 9 9 1 9 9 8 1 9 9 7
------------------------- -------------------------- -------------------------
$ thousand % $ thousand % $ thousand %
----------- ---------- ------------ --S---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Foreign customer 1,508 21.4 1,554 25.6 1,214 16.5
Israel Ministry of Defense 3,737 53.1 2,681 44.1 5,546 47.3
Other Israeli customer 1,796 25.5 1,838 30.3 4,399 36.2
Others - - - - - - - - 572 - -
----------- ---------- ------------ --------- ------------ ---------
7,041 100.0 6,073 100.0 11,731 100.0
=========== ========== ============ ========= ============ =========
</TABLE>
The following is a breakdown of our sales by market segments on a
consolidated basis (including the approximate percentage of total sales for
each period):
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------- ------------------------- -----------------------
1 9 9 9 1 9 9 8 1 9 9 7(1)
------------------------- ------------------------- ------------------------
$ thousand % $ thousand % $ thousand %
------------ --------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Military products and 7,041 100% 6,073 100 11,731 100
sub-assemblies
------------ --------- ----------- --------- ----------- --------
7,041 100 6,073 100 11,731 100
============ ========= =========== ========= =========== ========
</TABLE>
The following is a breakdown of our sales by geographic regions, on a
consolidated basis, (including percentages of total sales for each period):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------ ------------------------ -------------------------
1 9 9 9 1 9 9 8 1 9 9 7
----------------------- ------------------------ -------------------------
$ thousand % $ thousand % $ thousand %
----------- --------- ------------ --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. and Canada - - - - - - - - 1,216 10.4
Asia 1,083 15.4 837 13.8 1,829 15.6
Israel 5,533 78.6 4,518 74.4 8,482 72.3
Europe 425 6.0 718 11.8 204 1.7
----------- --------- ------------ --------- ------------- ----------
7,041 100 6,073 100 11,731 100
=========== ========= ============ ========= ============= ==========
</TABLE>
Backlog. As of June 30, 2000, we had a backlog of orders of
approximately $4.25 million of which substantially all ordered products are
expected to be delivered by December 31, 2000. Of the aggregate backlog, 85%
belongs to the Israeli Defense Forces and the remaining 15% to foreign
customers and other Israeli customers.
Research and Development. Our research and development efforts,
involving approximately 7 employees as of June 30, 2000, are focused on
development of new products and technologies, on quality and performance
improvement of its existing products, and on upgrading our product line
through the development of additional features and improved functionality.
During 1999 we were involved in the development of certain features of our
electronic fuze and computerized firing range products in addition to other
research and development projects.
Research and development activities are conducted through Reshef's
engineering department located at its facilities in Or Yehuda, Israel.
We have received and continue to seek external financing for
development projects from the Chief Scientist, and from customers who
participate in the costs of a particular project.
The following is a breakdown of our R&D expenditures on a
consolidated basis:
-------------------
1 During 1997 we had sales from discontinued operations (Communications &
Telephone Equipment) in an amount of $448,000 (3.7% of our total sales
for that year). This amount is mentioned in our Financial Statements see
caption "Statement of Operations" under "income (loss) from discontinued
operations".
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------- -------------------------- -------------------------
1 9 9 9 1 9 9 8 1 9 9 7
--------------------------- -------------------------- ------------------------
$ % $ thousand % $ thousand %
thousand
------------ ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Expenditure(1) 895 12.7 942 15.5 1,775 15.1
Less Royalty Bearing Grants (50) 5.5 (163) 17.3 (434) 24.4
incl. of Israeli Govt. &
Others(2)
------------ ----------- ----------- ---------- ----------- ----------
Net Expenditure(1) 845 12.0 779 12.8 1,341 11.4
============ =========== =========== ========== =========== ==========
</TABLE>
(1) Percentage indicates item ratio to sales.
(2) Percentage indicates item ratio to total R&D expenditure.
The grant terms of the Chief Scientist prohibit our manufacture of
developed products outside Israel or the transfer of technologies developed
from the grants to any person without the prior written consent of the Chief
Scientist. Although such approvals have been obtained in the past, there can
be no assurance that we will be able to obtain such approvals in the future on
a timely basis or at all.
Royalties. We are required to make royalty payments to the Chief
Scientist on the sale of our products developed in whole or in part through
financing provided by the Chief Scientist, and to companies with whom we
jointly developed certain products and which retain certain rights thereto.
Under our research and development agreements with the Chief
Scientist, we are required to pay royalties at the rate of 2% to 3% of sales
of products developed with funds received from the Chief Scientist, up to the
dollar-linked amount equal to 100%-150% of such grants. In the year ended
December 31, 1999, we paid royalties totaling $34,000 compared to $146,000 in
1998 and $184,000 in 1997.
In addition, we have received a participation grant from the Fund for
Encouragement of Marketing Abroad (the "Fund") pursuant to which we are
obligated to pay royalties at the rate of 3% per annum on our increase in
exports of products marketed with the participation of the Fund.
As of December 31, 1999, our total contingent liability with respect
to royalties to the Chief Scientist and the Fund amounted to $2.44 million.
Patent And Intellectual Property. We do not hold any patents with
respect to our products or proprietary know-how, and are not presently seeking
patent-protection in any country. We rely on a combination of copyright, trade
secret and contractual restrictions as protection for our technology and
products and consider most of our products proprietary. There can be no
assurance, however, that such proprietary know-how and technology will not be
independently developed. We rely more on our innovative skills and technical
competence than on the legal protection of proprietary rights.
Government Regulation. As Israeli corporations, sales and transfer of
products, know-how and services of Reshef and Amcoram are regulated by the
Ministry of Defense of the State of Israel. Under Israeli law, Reshef and
Amcoram must obtain approval from the Ministry of Defense to export their
products and know-how. Certain of Reshef's products contain US-made restricted
components, and such products may require export permits from the relevant US
authorities. To date, Reshef and Amcoram have not experienced major
difficulties in obtaining such permits, however, there can be no assurance
that we will be able to obtain such permits on a timely basis, or at all, in
the future.
Employees. As of June 30, 2000, we employed 88 persons, of whom 12
are engineers (practical engineers and technicians), 62 are assembly workers,
and 14 are in administration, marketing and customer support.
Neither we nor our employees are parties to any collective bargaining
agreements. However, certain provisions of the collective bargaining
agreements between the Histadrut (General Labor Federation of Israel) and the
Coordinated Bureau of Economic Organizations are applicable to us by order of
the Israeli Ministry of Labor. These provisions mainly concern the length of
the work day, minimum daily wages for professional workers, contributions to
pension funds, insurance for work-related accidents, procedures for dismissal
of employees, determination of severance pay, and other terms of employment.
Israeli law generally requires severance pay upon retirement or death of an
employee, or termination of employment without due cause. Our severance pay
liability for key employees is fully funded through managers' insurance
policies and by accruals on our financial statements. The severance pay of
certain employees is funded by regular contributions by us to external pension
funds. We consider our employee relations to be satisfactory.
The Year 2000. Year 2000 issues arise because many computerized
systems use two digit rather than four digit to identify the year. In
addition, similar problems may arise in some systems which use certain dates
to represent something other than dates. The effect of the Year 2000 issue may
be experienced before, on or after January 1, 2000, and if not addressed the
impact on operations and financial reporting could affect our ability to
conduct normal business operations.
We expended approximately $120,000 to address our Year 2000 issues
and we believe that all such issues have been resolved. However it is not
possible to be certain that all aspects of the Year 2000 issue which may
affect us have been fully foreseen or were fully resolved. To date we have not
experienced any significant disruptions or product malfunctions or other
indications of Year 2000 related problems.
Group Structure
We are currently considering altering the holding structure for one
or more of our subsidiaries or investee companies. Such plans are still under
consideration. In contemplation of such possible alteration, on May 31, 2000,
we entered into a Memorandum of Understanding with Ram Zur Industries Ltd.
("Ram") and certain of its shareholders pursuant to which we are to purchase
approximately 63% of Ram's share capital from Ram and its shareholders for NIS
7.35 million. In addition, at closing, the shareholders of Ram will purchase
all of Ram's operations and assets in exchange for assuming all of Ram's
current obligations. The closing of this transaction is subject to certain
contingencies, including the receipt of various Israeli regulatory approvals.
If such transaction closes, Ram could serve as a publicly traded (Tel Aviv
Stock Exchange) vehicle through which we may directly or indirectly hold
certain of our subsidiaries or investee companies.
Special Considerations Applicable to Israeli Companies
The following table sets forth the changes in the Israeli consumer
price index, Israel inflation rate, Closing exchange rate of the U.S. Dollar,
and Annual devaluation rate of the NIS.
<PAGE>
<TABLE>
<CAPTION>
----------------------------- ---------------- ---------------- ----------------- ----------------
Israeli Closing Annual
Consumer price Israel exchange rate devaluation
Year ended Index inflation rate of the U.S. rate
December 31, (1) (2) dollar (4)
------------ ------------ -------------- ------------- ---------------
(3)
<S> <C> <C> <C> <C>
1995 129.4 8.1 3.135 3.9
1996 143.1 10.6 3.251 3.7
1997 153.1 7.0 3.536 8.8
1998 166.3 8.6 4.160 17.6
----------------------------- ---------------- ---------------- ----------------- ----------------
1999 168.5 1.3 4.153 (0.2)
----------------------------- ---------------- ---------------- ----------------- ----------------
</TABLE>
(1) For purpose of this table, the Israeli CPI figures use 1987 as
base equal to 100. These figures are based on reports of the
Israel Central Statistical Bureau.
(2) Annual inflation is the percentage change in the Israeli CPI
between December 31 of the year indicated and December 31 of the
preceding year.
(3) Closing exchange rate is the rate of exchange between the
Israeli currency and the dollar at December 31 of the year
indicated, as reported by the Bank of Israel.
(4) Annual devaluation is the percentage increase in the value of
the dollar in relation to the Israeli currency during the year
indicated.
Except for the years 1997 and 1998, NIS devaluation rate relative to
the dollar generally has not kept pace with the inflation rate, therefore,
Israeli companies whose sales are made in U.S. Dollars, while their local
costs are incurred in inflated Shekels, may be adversely affected.
To offset the effects of inflation on the purchasing power of Israeli
currency, the Israeli government has instituted "linkage" policies, also
practiced by most private organizations. Through linkage, the amount of an
obligation or payment is increased from time to time by an amount related to
index changes, which may be the exchange rate of a foreign currency or a price
index. The payee is thus compensated for any relative decline in the Israeli
currency's purchasing power. Linkage adjustments may be based upon the total
or only a specified percentage change in the index being used. Many
obligations or payments in Israeli currency are linked to the U.S. Dollar or
the CPI.
The dollar cost of our operations in Israel is influenced by the
extent to which any increase in the inflation rate in Israel is offset by the
devaluation of the Shekel in relation to the U.S. Dollar. Inflation in Israel
will have an adverse effect on our profitability if (i) we sell in U.S.
Dollars or other foreign currencies and incur costs in inflated Shekels and if
(ii) our liabilities linked to the inflated Shekels are higher than our
Dollar-linked assets, effects of such inflation may be offset by a shekel
devaluation.
Since exchange rates between the Shekel and the U.S. Dollar fluctuate
continuously, exchange rate fluctuations have an impact on our profitability
and period-to-period comparisons of our results. For the years ended December
31, 1997, 1998 and 1999, such impact did not have a material effect on our
operations. The caption "Financial expenses - net" in our financial statements
includes the impact of these factors.
Israel has an unfavorable balance of payments, due principally to
defense expenditures, immigrant absorption, providing a minimum standard of
living for its citizens, and maintaining a minimum level of net foreign
reserves. Most of the deficit is covered by unilateral transfers, mainly from
the U.S. Government and the private sector, and the balance through long-term
loans. The increase in foreign investments, along with receiving loan
guarantees from the U.S. Government, which lowers the cost of financing the
deficit, means that the Israel economy should have no problem in financing the
current account deficit.
Risk Factors
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND OTHER INFORMATION
IN THIS ANNUAL STATEMENT.
Risks Associated with Aryt
Our Current and Anticipated Operating Losses
We have a history of operating losses. We reported net losses of
$1.87 million, $3.06 million and $6.67 million for the years ended December
31, 1999, 1998 and 1997, respectively. There can be no assurance that we will
be successful in achieving operating profitability. If we fail to achieve
operating profitability, our financial prospects could be materially adversely
affected.
Potential Fluctuations in Our Results
We expect that our quarterly and annual operating results will
fluctuate significantly due to many factors, a number of which are discussed
in these "Risk Factors." Many of these factors are beyond our control. We do
not believe that period -to-period comparisons of our operating results are
necessarily meaningful nor should they be relied upon as indicators of our
future performance. Additionally, if our operating results in one or more
quarters do not meet the securities analysts' expectations, the price of our
common stock could be materially adversely affected.
Risks Associated with Expansion and Anticipated Growth
We intend to grow through the acquisition of additional companies in
the military defense sector and through investment in emerging technology
companies. This growth may place a significant strain on our resources and
systems. To manage our growth, we must implement systems and train and manage
our employees. Many of our senior management have only recently joined us.
These individuals have not previously worked together and are in the process
of becoming integrated as a management team. Our ability to manage our
anticipated future growth will depend on our:
o Ability to evaluate new markets;
o Monitor operations; and
o Control costs.
We cannot assure you that we will be able to effectively or
successfully manage our growth.
Risks Related to Holding Company Structure
We are a holding company and our material assets, other than existing
cash and marketable securities, consist of the stock of our subsidiaries and
investee companies. We have, in the past, relied on the issuance of
convertible debentures, sale of equity securities and the receipt of
shareholder and bank loans to generate the funds necessary to meet the
obligations of our subsidiaries. The payment of dividends and the repayment of
loans and advances by us to our subsidiaries are subject to statutory,
taxation and other restrictions, are dependent upon the earnings of such
subsidiaries and are subject to various business considerations.
Dependence upon Key Personnel
Our success is dependent, in part, upon our key management personnel.
In particular, we are dependent upon certain of our personnel, including
Shmuel Bachar and Arieh Geller. The loss of services of Mr. Bachar, Mr. Geller
or any of the other members of our senior management team could have a
material adverse effect on our business. We believe our future success will
depend in large part upon our ability to attract, retain and motivate highly
skilled employees. Such employees are in great demand and are often subject to
offers for competitive employment. There can be no assurance that we can
retain our key managerial employees or that we can attract, integrate or
retain such employees in the future.
Controlling Shareholders
Two of our shareholders control, in the aggregate, approximately
41.71% of our outstanding capital stock, not including approximately 10.71% of
our outstanding stock which is held by our subsidiary Amcoram. Such
shareholders may be able to control the election of substantially all of our
directors and the results of other shareholder votes. The exercise of the
voting power by such shareholders may present conflicts of interest between
them and the other owners of our capital shares. The concentration of
ownership in us may have the effect of delaying, deferring or preventing a
change in control of Aryt, a transaction which might otherwise be beneficial
to shareholders.
Absence of Dividends
Since 1993, we have not paid dividends on our Ordinary Shares and do
not anticipate paying any such dividends in the foreseeable future. In
addition, Our Series 3 Convertible Debentures contain certain restrictions on
our ability to declare and pay dividends on our Ordinary Shares.
Devaluation and Currency Risks
A material portion of our revenues and expenses are and will be
denominated in non-U.S. currencies. In addition, in the future, we may acquire
interests in entities that operate in countries where the expatriation or
conversion of currency is restricted. We currently do not hedge against
foreign currency exchange translation risks but may in the future commence
such hedging against specific foreign currency transaction risks. Because of
our constantly changing currency exposure we cannot quantify the effect of
exchange rate fluctuations on our future financial condition or results of
operations.
Risks Associated With Our Military Defense Industry Business
Risks of Reductions or Changes in Military Expenditures.
Our primary military Defense customer is the Israeli Defense Forces
through the Israeli Ministry of Defense, which represented approximately
47.6%, 44.4% and 59.8% of our sales for each of the years ended December 31,
1999, 1998, and 1997, respectively. It is not possible for us to predict
future levels of defense spending and declines in Israeli military
expenditures could materially adversely affect us and the results of our
operations. In addition, Israel receives material amounts of aid and loans
from the United States. As a condition to such aid, Israel is required to use
a substantial portion of such funds to purchase products manufactured in the
United States. As a result, in recent years, the Israeli military has reduced
the scope and amount of its military purchases in Israel. This reduction has
had, and is likely to continue to have, a negative effect on our business and
results of operations, possibly materially. The impact of possible further
declines in the level of Israeli defense procurement on our results of
operations and financial condition will depend upon the timing and size of the
changes and our ability to mitigate their impact with new business, or cost
reductions. The loss or significant curtailment of a material purchase program
in which we participate could materially adversely affect our future results
of operations and financial condition. In view of the uncertainty regarding
the size, content and priorities of the annual Israeli military procurement
schedule, our historical financial performance may not be indicative of future
performance.
Procurement and Other Related Laws and Regulations.
We are subject to extensive and complex Israeli and foreign laws and
regulations. These laws and regulations provide for ongoing audits and reviews
of contract procurement, performance and administration. Failure to comply,
even inadvertently, with these laws and regulations and with laws governing
the export and import of military equipment and related parts, could subject
us to potential contract termination, civil and criminal penalties, and under
certain circumstances, suspension and debarment from future military
procurement programs for a period of time. Any such actions could have a
material adverse effect on our results of operations and financial condition.
Additionally, under applicable regulations and certain of our contracts, we
are subject to audit and review by the Israeli Military as well as by certain
of our customers. The costs and prices under such contracts may be subject to
adjustment based upon the results of such audits. To date, such audits have
not had a material effect on our results of operations or financial condition;
however, no assurance can be given that future audits will not have a material
adverse effect on our results of operations or financial condition.
Licensing Requirements.
Licenses are required from U.S. Government agencies for export from
the United States of many of the parts incorporated in our products. In
addition, both Israeli and United Sates regulations restrict the export of our
products outside of Israel without the receipt of certain consents and
approvals. Although to date we have not experienced any material problem in
receiving the required import and export approval from the relevant
governmental authorities, there can be no assurance that we will continue to
be able to receive such approvals in a timely manner or at all. In the event
we were unable to receive such approvals, our military defense business and
results from operations would be adversely effected, possibly materially.
Competitive Bidding.
We obtain substantially all of our military contracts through either
competitive bidding or sole-sourced procurement. Contracts from which we have
derived and expect to derive a significant portion of our sales were or will
be obtained through competitive bidding in which, in many instances, numerous
bidders participated or will participate. There can be no assurance that we
will continue to be successful in having our bids accepted or, if accepted,
that awarded contracts will be profitable. Additionally, inherent in the
procurement process is the risk that if a bid is submitted and a contract is
subsequently awarded, actual performance costs may exceed the projected costs
upon which the submitted bid or contract price was based. To the extent that
actual costs exceed the projected costs on which bids or contract prices were
based, our profitability could be materially adversely affected.
Certain Other Risks.
We, like many defense businesses, are subject to risks associated
with uncertain cost factors related to scarce technological skills and
components, the frequent need to bid on programs in advance of design
completion (which may result in unforeseen technological difficulties and/or
cost overruns), rapid obsolescence and the potential need for design
improvement.
Risks Associated with Manufacturing and Handling of Explosive
Materials.
Certain of our products involve the manufacture and/or handling of a
variety of explosive materials. From time to time in the past, such
manufacturing and/or handling has resulted in explosive incidents which have
temporarily shut down or otherwise disrupted certain of our manufacturing
processes, thereby causing production delays. There can be no assurance that
we will not experience such incidents in the future or that any such incidents
will not result in production delays or otherwise have a material adverse
effect on the Company's results of operations or financial condition.
Supply of Key Raw Materials and Parts
Key raw materials and electronic, electro-mechanical and mechanical
components, subassemblies and subsystems which are integrated with our own
manufactured parts and products are purchased from third parties. We closely
monitor our sources of supply to attempt to assure an adequate supply of raw
materials and other supplies needed in our manufacturing processes. While we
do not rely on any sole source of supply, any disruption in our supply of such
material or parts and assemblies could adversely affect our business and
results of operations, possibly materially.
Competition.
We encounter intense competition for our military supply contracts
from numerous other companies. Most of these companies have financial,
technical, marketing, manufacturing, distribution and other resources
substantially greater than ours. Our ability to compete for these contracts
depends to a large extent on the effectiveness and innovativeness of our
research and development programs and our ability to offer better performance
at a competitive cost. In some instances, programs are sole sourced or work
directed by the U.S. Government to a single supplier. There can be no
assurance that we will be successful in competing for and obtaining military
supply contracts in the future. If we fail to compete successfully, our
business and results of operations will be materially adversely effected.
Risks Related to Investment in Emerging Technology Companies
Dependence on Portfolio Companies
Economic, governmental, industry and internal company factors outside
our control affect each of our technology portfolio companies. If our
technology portfolio companies do not succeed, the value of our assets could
decline. The material risks relating to our portfolio companies include:
oFluctuations in the market price of the common stock of future
publicly-traded portfolio companies, which are likely to affect the value
of our stock;
oLack of the widespread commercial use of certain technologies associated
with our portfolio company's products and services, which may prevent
them from succeeding; and
oIntensifying competition for the products and services that our portfolio
companies offer, which could lead to the failure of some of our portfolio
companies.
Rapid Growth of Portfolio Companies
Our portfolio companies have grown, and we expect them to continue to
grow rapidly by adding new products and services and hiring new employees.
This growth is likely to place significant strain on the portfolio companies'
resources and on the resources we have to allocate to assist our portfolio
companies.
Uncertainty of Investor Interest in the High Technology Industry
All of our civilian sector portfolio companies are involved in
sectors of the technology industry. Therefore, our success depends on the
ability of our portfolio companies and prospective portfolio companies to
raise capital and grow their businesses. If the private capital markets for
technology-related companies weaken for an extended period of time, such
companies may not be able to raise funds. If this occurs, such companies could
be materially adversely affected.
Competition
We face competition for investment opportunities from providers of
investment banking services for seed stage companies, seed stage venture
capital funds, private incubators, angel investor clubs and large
corporations. Many of these competitors have greater financial resources and
brand name recognition than we have. These competitors may limit our
opportunity to secure new portfolio companies. If we cannot secure new
attractive companies, our strategy to build a portfolio of technology
companies may not succeed.
Internet Valuations
Certain of our portfolio companies are or may be dependent on the
market for Internet-related technologies and services. If the market for
Internet-related companies were to weaken for an extended period of time, the
ability of such portfolio companies to grow and access the capital markets
will be impaired.
The development of the e-commerce market is in its early stages. If
widespread commercial use of the Internet does not develop, or if the Internet
does not develop as an effective medium for providing products and services,
our current or future portfolio companies may not succeed. Their success
depends on widespread market-acceptance of the Internet and e-commerce. A
number of factors could prevent such acceptance, including the following:
o The unwillingness of businesses and consumers to shift from
traditional processes to e-commerce processes;
o The necessary network infrastructure for substantial growth in
usage of e-commerce may not be adequately developed;
o Increased government regulation or taxation, or the issuance of a
patent may adversely affect the viability of e-commerce;
o Insufficient availability of telecommunication services or changes
in telecommunication services could result in slower response times for the
users of e-commerce; and
o Concern and adverse publicity about the security of e-commerce
transactions.
Protection of Proprietary Rights
Our current and possibly future portfolio companies are inventing new
ways of doing business. In support of this innovation, they will develop
proprietary techniques, trademarks, processes and software. Although we
anticipate that reasonable efforts will be taken to protect the rights to this
intellectual property, the complexity of international trade secret,
copyright, trademark and patent law, coupled with the limited resources of
these young companies and the demands of quick delivery of products and
services to market, create risk that their efforts will prove inadequate.
Further, the nature of Internet business demands that considerable detail
about their innovative processes and techniques be exposed to competitors,
because it must be presented on the web sites in order to attract clients.
Some of our portfolio companies also license content from third parties. It is
possible that we and our portfolio companies could become subject to
infringement actions based upon the content licensed from third parties or
based upon content they themselves invent or develop. We anticipate that our
portfolio companies will generally obtain representations as to the origin and
ownership of such licensed content; however, this may not adequately protect
them. Any claims against us or our current or future portfolio companies
concerning proprietary rights, with or without merit, could subject us and our
portfolio companies to costly litigation and the diversion of their technical
and management personnel. If we or our portfolio companies incur costly
litigation and their personnel are not effectively deployed, the expenses and
losses incurred by us and our portfolio companies will increase and their
profits, if any, will decrease. In addition, the inability of Aryt or its
portfolio companies to secure licenses or other rights which are necessary to
their business could materially and adversely affect such business.
Need to Upgrade Systems to Meet Increased Demand
Capacity limits on some of our current and future portfolio
companies' technology, transaction processing systems and network hardware and
software may be difficult to project and they may not be able to expand and
upgrade their systems to meet increased use. As traffic on our portfolio
companies' Web sites continues to increase, our portfolio companies must
expand and upgrade their technology, transaction processing systems and
network hardware and software. Our portfolio companies may be unable to
accurately project the rate of increase in the use of their Web sites. In
addition, our portfolio companies may not be able to expand and upgrade their
systems and network hardware and software capabilities to accommodate
increased use of their Web sites. If our portfolio companies are unable to
appropriately upgrade their systems and network hardware and software, the
operations and processes of our portfolio companies may be disrupted.
Inability to Attract Loyal Base of Users
Certain of our current or future portfolio companies may be
particularly dependent on content to attract business. Our success depends
upon the ability of these portfolio companies to deliver compelling Internet
content to their targeted users. If our portfolio companies are unable to
develop Internet content that attracts a loyal user base, the revenues and
profitability of our portfolio companies could be impaired. Internet users can
freely navigate and instantly switch among a large number of Web sites. Many
of these Web sites offer original content. Thus, our portfolio companies may
have difficulty distinguishing the content on their Web sites to attract a
loyal base of users.
Security Concerns
We believe that concern regarding the security of confidential
information transmitted over the Internet prevents many potential customers
from engaging in online transactions. If our portfolio companies that depend
on such transactions do not add sufficient security features to their future
product releases, our portfolio companies' products may not gain market
acceptance or risk claims for damages resulting from such breaches of
confidentiality. Despite measures which some of our current or future
portfolio companies have or may take, they are potentially vulnerable to
physical or electronic break-ins, viruses or similar problems. If a person
circumvents their security measures he or she could misappropriate proprietary
information or cause an interruption in the operations of such company.
Security breaches that result in access to confidential information could
damage the reputation of such company and expose it to a risk of loss or
liability.
Rapid Technological Changes
The markets in which our portfolio companies operate are
characterized by rapid technological change, frequent new product and service
introductions and evolving industry standards. Significant technological
changes could render our portfolio companies' existing technology or other
products and services obsolete. Market growth and intense competition
exacerbate these conditions. If our portfolio companies are unable to
successfully respond to these developments or do not respond in a
cost-effective way, our business, financial condition and operating results
will be adversely affected. To be successful, our portfolio companies must
adapt to their rapidly changing markets by continually improving the
responsiveness, services and features of their products and services and by
developing new features to meet the needs of their customers. Our success will
depend, in part, on our portfolio companies' ability to license leading
technologies useful in their businesses, enhance their existing products and
services and develop new offerings and technology that address the needs of
their customers. Our portfolio companies will also need to respond to
technological advances and emerging industry standards in a cost-effective and
timely manner.
Major Developments In The Political Or Economic Conditions In Israel Could
Cause Our Business To Suffer
Our Facilities and Resources are Located in Israel
We are incorporated under the laws of the State of Israel. Our
principal research and development facilities as well as our executive offices
are located in Israel. Any major hostilities involving Israel or the
interruption or curtailment of trade between Israel and its present trading
partners could significantly harm our business. Since its establishment in
1948, the State of Israel has been and continues to be in a state of hostility
with its neighbors, varying from time to time in intensity and degree. Some of
our senior officers and key 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. Fulfillment of these obligations
may deprive us of key employees for extended periods of time.
Inflation in Israel and devaluation of the NIS could have an impact
on our financial results. Although Israel has substantially reduced the rates
of inflation and devaluation in recent years, they are still relatively high
compared to those in the United States and we could be harmed by inflation or
devaluation. If inflation rates in Israel increase again and hurt Israel's
economy as a whole, our operations and financial condition could suffer.
Any Future Profitability May Be Diminished If Tax Benefits from the
State of Israel Are Reduced or Withheld
Pursuant to the Law for the Encouragement of Capital Investments, the
Israeli government has granted "Approved Enterprise" status to certain of our
existing capital investment programs. Consequently, we are eligible for tax
benefits for the first several years in which we generate taxable income. Our
future profitability may be diminished if all or a portion of these tax
benefits are reduced. These tax benefits may be cancelled in the event of
changes in Israeli government policies or if we fail to comply with requisite
conditions and criteria. Currently the most significant conditions which we
must continue to meet include making specified investments in fixed assets,
maintaining the development and production nature of our facilities, and
financing of at least 30% of these investments through the issuance of capital
stock.
Exchange Rate Fluctuations Between the U.S. Dollar and the NIS May
Negatively Affect Our Earnings
A significant portion of our research, development and production
expenses are incurred in NIS. In addition, we have outstanding loans
denominated in and dependent on NIS. As a result, we may be negatively
affected by fluctuations in the exchange rate between the U.S. Dollar and the
NIS.
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<PAGE>
Item 2. DESCRIPTION OF PROPERTY
The following is a description of our facilities:
Aryt leases 3,900 square meters of office, laboratory and production
space from an unaffiliated third party, in Or Yehuda, Israel, pursuant to a
short-term lease. The lease is extendible for three additional one-year
periods until August 2003. Our annual lease payments are approximately
$540,000. We currently sublet approximately 1,800 square meters to a third
party. We have exercised our option to terminate our lease of such 1,800
square meters effective November 1, 2000 and the sublease of that space will
terminate as of October 31, 2000.
In April 2000 we commenced leasing an additional 600 square meters in
the Or Yehuda building. The lease terminates as of March 31, 2005 and we have
an option to extend the lease for up to three additional one-year periods. Our
annual lease payments for the additional space are approximately $96,000.
In 1986, Reshef entered into a 49 year lease with the State of
Israel, for approximately 1000 square meters of industrial space in Sderot,
Israel, pursuant to a long-term lease. The lease payments for the entire
period are NIS 19,117 and has been pre-paid in its entirety. Upon expiration
of the lease, Reshef has an option to extend it for an additional period of up
to 49 years.
In addition, in February 2000 Reshef entered into a new lease for
approximately 1000 square meters of industrial space in Sderot, Israel,
pursuant to a short term lease for approximately NIS 6,400. The lease expires
as of February 28, 2001, however, we have the option to extend it for up to
seven additional one-year periods.
We believe that our facilities in Israel are greater than required to
support our current activities and anticipated growth.
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Item 3.
<PAGE>
LEGAL PROCEEDINGS
Shareholder Litigation
On November 2, 1999, a complaint was filed in the Tel Aviv District
Court by certain of our shareholders against Aryt Industries, Ltd., Channon
Associates Ltd., Gilad Shabtai, Yoram Oron and certain other parties (the
"Defendants"). The suit alleges that the Defendants, other than Aryt,
conspired to improperly take advantage of Aryt and its public shareholders for
their own personal benefit by assigning or transferring certain of our rights
in Telegate without receiving adequate consideration. In addition, the
plaintiffs allege that the Defendants improperly diluted, or caused the
dilution of, the value of Aryt by entering into, or approving, the private
placement with Altshuler-Shacham Ltd. ("ASL") since plaintiffs allege that
they offered to purchase such securities at a price higher than that paid by
ASL. This private placement is described in more detail in the "Other Matters"
section located on page 36. The plaintiffs are seeking to have the claim
certified as a shareholder derivative suit or a class action suit and are
seeking to have the relevant Defendants turn over all Telegate shares held by
them and to have the ASL share issuance declared void along with certain other
remedies.
The Company denies such allegations and intends to vigorously defend
against the suit. However, there can be no assurance as to the outcome of any
litigation.
Chief Scientist
In 1998 we received a claim from the office of the Chief Scientist alleging
that we owe them $602,000 with respect to royalties from sales of products
financed in part through grants from the Chief Scientist. We believe our
maximum liability is approximately $250,000 and we have recorded a provision
in our books in such amount.
Customer Dispute
Reshef has a dispute with one of is customers. The parties are in the
process of trying to resolve the dispute among themselves. We have provided
for such contingency in our financial statements.
We are not a party to any other material litigation or disputes.
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<PAGE>
Item 4. REGISTRANT CONTROL
The following table sets forth, as of June 30, 2000, the number of
shares beneficially owned by (i) all shareholders known to us to own
beneficially more than 10% of the our Ordinary Shares and (ii) all directors
and officers as a group.
<TABLE>
<CAPTION>
Number of Shares Percentage of all
Name and Address Beneficially Owned Ordinary Shares
Outstanding
------------------------------------------------------------------ -------------------- ---------------------------
<S> <C> <C>
1. Channon Associates Ltd. 13,392,455* 30.82%
2. Altshuler - Shacham Ltd. 2,746,000** 7.11%
3. Amcoram*** 4,642,275 10.68%
4. All directors and officers 58,494 0.13%
</TABLE>
* Channon Associates Ltd. Is a foreign entity which we understand is owned 25%
by Benny Shabtai, the brother of Gilad Shabtai, our chairman of the Board and
brother-in-law of Yitzhak Ironi, a Director of the Company.
** On a fully diluted basis ASL would own 9,114,000 shares representing 20.97%
of our issued and outstanding share capital.
*** Amcoram is a wholly owned subsidiary of the Company.
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<PAGE>
Item 5. NATURE OF TRADING MARKET
Our Ordinary Shares are traded on the Tel-Aviv Stock Exchange and in
the over-the-counter market in the United States, and are not traded on any
other stock exchange. Our Ordinary Shares have been traded on the Tel-Aviv
Stock Exchange since December 1982. On December 11, 1996, our Ordinary Shares
were delisted from the NASDAQ Stock Market, and since April 1997 have been
traded on the OTC Bulletin Board under the symbol ARYTF.
TEL-AVIV STOCK EXCHANGE
The following table sets forth the high and low closing prices in NIS
of our Ordinary Shares during the period indicated on the Tel Aviv Stock
Exchange. The price per Share on the Tel-Aviv Stock Exchange on June 26, 2000,
was NIS 1.67.
Ordinary Shares
High Low
----------- -----------
1998
First Quarter 1.31 0.61
Second Quarter 1.72 1.05
Third Quarter 1.74 1.02
Fourth Quarter 1.10 0.85
1999
First Quarter 1.13 0.90
Second Quarter 1.27 0.80
Third Quarter 1.62 1.14
Fourth Quarter 1.35 0.86
2000
First Quarter 2.70 0.92
UNITED STATES OVER-THE-COUNTER MARKET
The following table sets forth the high and low prices in U.S.
Dollars of our Ordinary Shares on the OTC Bulletin Board during the indicated
quarters.
High Low
----------------- -------------------
1998
First Quarter 0.260 0.100
Second Quarter 0.410 0.260
Third Quarter 0.550 0.219
Fourth Quarter 0.250 0.125
1999
First Quarter 0.24 0.19
Second Quarter 0.29 0.16
Third Quarter 0.44 0.22
Fourth Quarter 0.28 0.16
2000
First Quarter 0.72 0.25
As of June 30, 2000, approximately 8% of the Company's outstanding
shares were held in the United States.
<PAGE>
Item 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS EFFECTING SECURITY HOLDERS
In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents generally may freely
deal in foreign currency. There are currently no Israeli currency control
restrictions on remittances of dividends on our Ordinary Shares or the
proceeds from the sale of the shares, provided that any applicable Israeli
income tax has been paid or withheld on such amounts. See Item 7. "Taxation".
However, legislation remains in effect pursuant to which currency controls can
be imposed by administrative action at any time.
Non-residents of Israel may freely hold and trade our securities.
Neither our Memorandum of Association nor our Articles of Association nor the
laws of the State of Israel restrict in any way the ownership or voting of our
Ordinary Shares by non-residents, except that such restrictions may exist with
respect to citizens of countries which are in a state of war with Israel.
Israeli residents are allowed to purchase our Ordinary Shares.
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<PAGE>
Item 7. TAXATION
The following contains a discussion of certain Israeli and United
States tax consequences to United States holders of Ordinary Shares not doing
business in Israel. 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.
Taxation under Israeli Law of Non-Israeli
Shareholders; Estate Taxes
Under an exemption currently in effect, so long as the Ordinary
Shares are traded on the Tel Aviv Stock Exchange (or listed on a stock
exchange recognized under Israeli regulations) and we continue to qualify for
special treatment as an "Industrial Company" for Israeli tax law purposes,
gains on the sale of our Ordinary Shares will generally be exempt from Israeli
capital gains tax. A company qualifies as an "Industrial Company" if it is
resident in Israel and at least 90% of its income in a given tax year,
determined in NIS (exclusive of income from certain specified sources), is
derived from Industrial Enterprises owned by that company. An "Industrial
Enterprise" is defined as an enterprise whose major activity in a particular
tax year is industrial manufacturing activity. We currently qualify as an
Industrial Company. No assurance can be given however, that we will continue
to qualify as an Industrial Company. In addition, the Convention Between The
State Of Israel And The Government Of The United States Relating To Relief
From Double Taxation (the "Treaty") exempts from Israeli taxation any capital
gain realized on the sale, exchange or other disposition of Ordinary Shares by
a U.S. Resident (as defined in the Treaty) who owned, directly or indirectly,
less than 10% of our voting stock at all times during the 12-month period
preceding such sale, exchange or other disposition.
Individuals who are non-residents of Israel are subject to a
graduated income tax on income derived from sources in Israel. On the
distribution of dividends other than stock dividends, income tax at the rate
of 25% (15% to the extent of dividends distributed from the taxable income
attributable to an Approved Enterprise) is withheld at the source, unless a
different rate is provided in a treaty between Israel and the shareholder's
country of residence. The Treaty provides for a maximum amount tax of 25% on
dividends paid to a resident of the United States (as defined in the Treaty).
The withheld tax is the final tax in Israel on dividends paid to non-residents
not doing business in Israel. A non-resident of Israel who has interest,
dividend or royalty income derived from or accrued in Israel from which tax
was withheld at the source is generally exempt from the duty to file tax
returns in Israel in respect of such income, provided that such income was not
derived from a business conducted in Israel by the taxpayer, and the non
resident has no other taxable sources of income in Israel.
Residents of the United States generally will be entitled to a credit
or deduction for United States federal income tax purposes in the amount of
the taxes withheld in Israel. See "U.S. Federal Tax Considerations" below.
o Different rules apply to investors doing business in Israel.
o Israel has no estate tax.
On May 4, 2000, a committee chaired by the Director General of the Israeli
Ministry of Finance, Avi Ben-Bassat, issued a report recommending a sweeping
reform in the Israeli tax system. The proposed reform significantly alters 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 such as ours. The Israeli cabinet
has approved the recommendations in principle, but implementation of the
reform requires legislation by the Israeli Parliament, the Knesset. We cannot
foresee with certainty whether such proposed reform will indeed be adopted,
the date such reform would be adopted or the form which any reform will
ultimately take.
US. Federal Tax Considerations
Taxation of US Holders
The following summary describes the principal United States federal
income tax consequences to U.S. Holders (as defined below) of an investment in
our Ordinary Shares. This summary does not, however, purport to be a
comprehensive description of all of the tax considerations that may be
relevant to a decision to acquire our Ordinary Shares. The summary applies
only to U.S. Holders that will hold our Ordinary Shares as capital assets and
does not address special classes of holders, such as dealers in securities,
holders whose "functional currency" is not the U.S. Dollar, or holders that
own 10% or more of our voting shares.
In general, a "U.S. Holder" is any holder of Ordinary Shares who or
which is (i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States or under the laws of the
United States, any state thereof or the District of Colombia, (iii) an estate
the income of which is included in gross income for United States federal
income tax purposes, regardless of source or (iv) a trust, if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States fiduciaries have the
authority to control all substantial decisions of the trust. Notwithstanding
the preceding sentence to the extent provided by regulations, certain trusts
in existence on August 20, 1996, and treated as United States persons prior to
such date that elect to continue to be treated as United States persons, shall
also be considered U.S. Holders.
Distributions
In general, for U.S. federal income tax purposes, distributions paid
by us, if any, in respect of our Ordinary Shares to a U.S. Holder will, to the
extent of our current and accumulated earnings and profits, be treated as
dividends taxable as ordinary income, then as a non-taxable return of capital
to the extent of such U.S. Holder's adjusted tax basis in the Ordinary Shares,
and thereafter, as gain from the sale of a capital asset.
The gross amount of any dividends (before reduction for any Israeli
tax withheld at source) received from us will be included in a U.S. Holder's
ordinary income. Dividends paid in NIS will be included in the income of a
U.S. Holder in a U.S. Dollar amount calculated by reference to the spot rate
in effect on the day they are received by a U.S. Holder. If such payments are
converted into U.S. dollars on the day they are received, the U.S. Holder
generally should not be required to recognize foreign currency gain or loss in
respect of the dividend income.
Dividends received by a U.S. Holder will generally be treated as
foreign source "passive income" or, with respect to certain holders,
"financial services income" for foreign tax credits purposes. In general, a
U.S. Holder may elect for each taxable year whether to claim a deduction or,
subject to certain limitations, a credit in computing its U.S. tax liability
for Israeli taxes withheld from dividends received on the Ordinary Shares.
Dividends received by a U.S. Holder that is a corporation generally will not
qualify for the deduction for dividends received.
Dispositions
Subject to the Passive Foreign Investment Company Rules discussed
below, upon the sale or other disposition of Ordinary Shares a U.S. Holder
will recognize gain or loss for U.S. federal income tax purposes in an amount
equal to the difference between the amount realized on the sale of disposition
and the U.S. Holder's adjusted tax basis in the Ordinary Shares. Such gain or
loss will be capital gain or loss if the Ordinary Shares are a capital asset
in the hands of the U.S. Holder. The maximum tax rate applicable to net
capital recognized by individuals and other non-corporate taxpayers is 20% for
capital assets held for more than one year. The maximum net capital gains tax
rate for corporations is 35%. Under most circumstances, any gain recognized on
the sale or other disposition of Ordinary Shares will be treated under article
4 (6) of the Treaty as Israeli source income. Accordingly, if Israel were to
impose tax on any such gain, the Israeli tax would generally be available as a
credit for the U.S. Holder against U.S. federal income tax subject to the
limitations under U.S. federal law.
Passive Foreign Investment Company
We believe that we are not a passive foreign investment company for
United Sates federal income tax purposes and do not expect to become a passive
foreign investment company in the future. A company is considered a passive
foreign investment company for any taxable year if either (i) at least 75% of
its gross income is passive income, or (ii) at least 50% of the value of its
assets (based on an average of the quarterly values of the assets during a
taxable year) is attributable to assets that produce or are held for the
production of passive income.
We will be treated as owning our proportionate share of the assets
and earning our proportionate share of the income of any other corporation in
which we own, directly or indirectly, more than 25% (by value) of the stock.
In determining that we are not a passive foreign investment company,
we are relying on our projected acquisition and capital expenditure plans for
the current year and for future years. However, it is possible that our actual
acquisitions and capital expenditure will not match our projections, which may
result in our classification as a passive foreign investment company.
We must make a separate determination each year as to whether we are
a passive foreign investment company. As a result, our passive foreign
investment company status may change.
If we are a passive foreign investment company for any taxable year
during which you hold Ordinary Shares, you will be subject to special tax
rules with respect to any excess distribution that you receive and any gain
you realize from a sale or other disposition (including a pledge) of the
Ordinary Shares, unless you make a mark-to-market election as discussed below.
Distributions you receive in a taxable year that are greater than 125% of the
average annual distributions you received during the shorter of (i) the three
preceding taxable years and (ii) your holding period for the Ordinary Shares
will be treated as an excess distribution. Under these special tax rules (a)
the excess distribution or gain will be allocated ratably over your holding
period for the ordinary Shares, (b) the amount allocated to the current
taxable year, and any taxable year prior to the first taxable year in which we
were a passive foreign investment company, will be treated as ordinary income,
and (c) the amount allocated to each other year will be subject to tax at the
highest tax rate in effect for that year and the interest charge generally
applicable to underpayments of tax will be imposed on the resulting tax
attributable to each such year.
The tax liability for amounts allocated to years prior to the year of
disposition or excess distributions cannot be offset by any net operating
losses, and gains (but not losses) realized on the sale of the Ordinary Shares
cannot be treated as capital, even if you hold the Ordinary Shares as capital
assets.
If we are a passive foreign investment company, you may avoid
taxation under the rules described above by making a qualified electing funds
election to include your share of our income on a current basis, or a deemed
sales election once we no longer qualify as a passive foreign investment
company. However, you may make a qualified electing fund election only if we
agree to furnish you annually with certain tax information, and we do not
presently intend to prepare or provide such information.
Alternatively, a U.S. Holder of marketable stock in a passive foreign
investment company may make a mark-to-market election for stock of a passive
foreign investment company to elect out of the tax treatment discussed three
paragraphs above. If you make a mark-to-market election for the Ordinary
Shares, you will include in income each year an amount equal to the excess, if
any, of the fair market value of the Ordinary Shares as of the close of your
taxable year over your adjusted basis in such Ordinary Shares. You are allowed
a deduction for the excess, if any, of the adjusted basis of the Ordinary
Shares over their fair market value as of the close of the taxable year.
However, deductions are allowable only to the extent of any net mark-to-market
gains on the stock included in your income for prior taxable years. Amounts
included in your income under a mark-to-market election, as well as gain on
the actual sale or other disposition of the Ordinary Shares, are treated as
ordinary income. Ordinary loss treatment also applies to the deductible
portion of any mark-to-market loss on the Ordinary Shares, as well as to any
loss realized on the actual sale or disposition of the Ordinary Shares, to the
extent that the amount of such loss does not exceed the net mark-to-market
gains previously included for such Ordinary Shares. Your basis in the Ordinary
Shares will be adjusted to reflect any such income or loss amounts. The tax
rules that apply to distributions by corporations which are not passive
foreign investment companies would apply to distributions by us.
The mark-to-market election is available only for stock which is
regularly traded on a national securities exchange that is registered with the
Commission or on Nasdaq, or an exchange or market that the U.S. Secretary of
the Treasury determines has rules sufficient to ensure that the market price
represents a legitimate and sound fair market value. We expect that Ordinary
Shares will be listed on the Tel-Aviv Stock Exchange and, consequently, the
mark-to-market election would be available to you were we to be or become a
passive foreign investment company.
If you hold Ordinary Shares in any year in which we are a passive
foreign investment company, you would be required to file Internal Revenue
Service Form 8621 regarding distributions received on the Ordinary Shares and
any gain realized on the disposition of the Ordinary Shares.
(Remainder of Page Intentionally left blank)
<PAGE>
Item 8. SELECTED FINANCIAL DATA
The following selected consolidated financial information is derived
from our consolidated financial statements, prepared in accordance with
generally accepted accounting principles in Israel ("Israeli GAAP"). The data
should be read in conjunction with, and is qualified in its entirety by, the
consolidated financial statements, related notes and other financial
information included elsewhere herein. For all fiscal periods for which
financial data are set forth below, Israeli GAAP and U.S. GAAP as applied to
the Company differ in certain respects as explained in Note 28 of Notes to the
Company's Consolidated Financial Statements. The consolidated financial
statements have been prepared on the historical cost basis in United States
Dollars (See Note 2 of Notes to the Company's Consolidated Financial
Statements). The amounts presented below are not intended to represent the
value of assets, liabilities, costs or income at any date, but only their
historic values. In past years, the financial statements were prepared on the
historical cost basis, adjusted for changes in the United States Dollar
exchange rate.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA (in Thousand Except Per Share Amount)(1)
Year Ended December 31
--------------------------------------------------------
1999 1998 1997 1996 1995
US$ US$ US$ US$ US$
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from Sales 7,041 6,073 11,731 13,164 15,067
Operating Income (Loss) (1,215) (1,804) (5,956) (1,059) (2,535)
Other Income (Expenses), net (2) 1,912 (512) (262) (270) 504
(Loss) Income from Continuing Operations (1,866) (4,120) (7,217) (1,377) (1,913)
Income (Loss) from Discontinued Operations - - 1,054 (62) 287 (5,402)
Loss for The Year (1,866) (3,066) (6,671) (1,090) (7,344)
(LOSS) EARNINGS PER SHARE Basic and Diluted Loss per Share:
from Continuing Operations (0.05) (0.15) (0.27) (0.20) (0.28)
from Discontinued Operations - - (0.04) 0.02 (0.04) (0.78)
Basic and Diluted Loss per Share (0.05) (0.11) (0.25) (0.16) (1.06)
CASH DIVIDEND PER SHARE - - - - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA (in Thousands)(1)
December 31
-------------------------------------------------------------
1999 1998 1997 1996 1995
US$ US$ US$ US$ US$
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital (417) 2,366 3,233 1,178 3,850
Total Assets 9,331 11,231 11,752 21,447 23,799
Long-Term Liabilities(3) 2,490 7,507 4,580 11,626 14,145
Commitment to be converted into shares - - 1,021 2,485 134 - -
Shareholders' Equity (Deficiency) (999) (1,631) 992 569 1,659
</TABLE>
(1) This chart is only a summary
(2) Including financial expenses, write-off, good-will and fixed assets and
capital gain from early redemption of convertible debentures and
conversion of loan
(3) Including convertible bond
EXCHANGE RATE HISTORY
The following table sets forth, for the period indicated, the end,
high, low and average exchange rate between the NIS and the United States
Dollar, as announced by the Bank of Israel:
<TABLE>
<CAPTION>
Year ended
December 31 Closing Average High Low
<S> <C> <C> <C> <C>
1995 3.14 3.02 3.18 2.94
1996 3.25 3.20 3.30 3.08
1997 3.54 3.45 3.56 3.24
1998 4.16 3.80 4.37 3.54
1999 4.15 4.14 4.29 4.02
</TABLE>
DIVIDENDS
On July 27, 1993 we paid cash dividends of $0.0379 per share to
shareholders of record on June 30, 1993. Prior to, and subsequent to, 1993 we
did not and have not paid any cash dividends.
(Remainder of Page Intentionally left blank)
<PAGE>
Item 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth herein and in our other filings
with the Securities and Exchange Commission. In addition, the following
discussion and analysis of the Company's financial condition and results of
operations should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto which appear elsewhere in this Annual Report.
GENERAL
Aryt Industries, Ltd. is an Israeli holding company and since January
2000 we have been actively seeking investment opportunities in emerging
technology companies. We intend to be actively involved in leveraging our
business, product development and marketing experience to assist such
companies achieving their growth potential and accelerating their growth in
value. As of June 30, 2000 we have invested in three start up technology
ventures.
In addition, through our subsidiaries, Reshef and Amcoram,
("Amcoram"), we are engaged in developing, manufacturing and marketing
sophisticated electronics products for the military market.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
CONSOLIDATED INCOME STATEMENT DATA (in Thousand Except Per Share Amount)
Year ended December 31,
--------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
U.S. Dollars
--------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C>
Revenues from sales $ 7,041 $ 6,073 $ 11,731
Cost of sales 5,533 5,065 8,289
--------------- --------------- --------------
--------------
Gross profit 1,508 1,008 3,442
--------------- --------------- --------------
--------------
Research and development costs, net 845 779 1,341
Selling and marketing expenses 426 402 422
General and administrative expenses 1,452 1,631 2,046
Write-off of goodwill - - - - 4,944
Write-off of fixed assets - - - - 645
--------------- --------------- --------------
--------------
2,723 2,812 9,398
--------------- --------------- --------------
--------------
Operating loss (1,215) (1,804) (5,956)
Financial expenses, net 322 503 539
Other income (expenses), net 2,234 (9) 277
--------------- --------------- -------------
Income (loss) before taxes on income 697 (2,316) (6,218)
Taxes on income - - 27 50
--------------- --------------- --------------
Income (loss) before equity in losses of affiliate 697 (2,343) (6,268)
Equity in losses of affiliate 2,563 1,777 949
--------------- --------------- --------------
Loss from continuing operations (1,866) (4,120) (7,217)
Income (loss) from discontinued operations - - 1,054 (62)
Capital gain from early redemption of convertible
debentures - - - - 219
Capital gain from purchase of a loan - - - - 389
--------------- --------------- --------------
Loss for the year $ (1,866) $ (3,066) $ (6,671)
=============== =============== ==============
</TABLE>
Sales Our sales for year ended December 31, 1999, amounted to $7.04
million compared with $6.07 million in 1998, and $11.73 million in 1997. The
figures do not include sales from Discontinued Operations. The increase in
sales during 1999 as compared to 1998 was due to a slight increase in the
volume of orders received. The decrease in sales from 1998 to 1997 was due
primarily to a decrease in the volume of orders received.
Gross Profit Our gross profit margin was 21.4% in 1999, compared with
16.6% in 1998 and 29.3% in 1997. The increase in gross profit percentage in
1999 as compared to 1998 is due an increase in productivity. The decrease in
the gross profit percentage in 1998 as compared to 1997 resulted primarily
from our accepting a low profit margin project to maintain a relationship with
a certain customer.
Net Research and Development Net Research and Development expenses
were $845,000 in 1999 compared with $779,000 in 1998 and with $1.34 million in
1997. The net increase in 1999 as compared to 1998 is mainly attributable to
our receipt of reduced research grants from the Chief Scientist which are
recorded as an offset to research and development expenses. Such expenses
decreased in 1998 as compared to 1997 primarily due to our restricting
research and development to only those projects in which the Chief Scientist
has agreed to provide funding.
Selling And Marketing Expenses Selling and marketing expenses in 1999
amounted to $426,000 compared with $402,000 in 1998 and $422,000 in 1997. The
increase in 1999 as compared to 1998 was due mainly to salary increases offset
in part by a reduction in senior management staff in the fourth quarter of
1999.
General And Administrative ExpensesGeneral and administrative
expenses in 1999 amounted to $1.45 million compared with $1.63 million in 1998
and $2.05 million in 1997. The decrease in expense in 1999 as compared to 1998
was due to increased efficiency and reduced expenses due to cost-saving
measures. The decrease in expense in 1998 as compared to 1997 resulted from a
reduction in the workforce and the implementation of certain cost-saving
measures.
Financial Expense Our financial expenses in 1999 were $322,000,
compared with $503,000 in 1998, and $539,000 in 1997. The reduced expense in
1999 as compared to 1998 was due to a reduction of higher interest bank loans
and interest income on our bank deposits. The reduced expense in 1998 as
compared to 1997 was due to changes in the composition of our outstanding
indebtedness.
Other Income (Expenses) Other income net was $2.23 million in 1999,
compared with other expenses of $9,000 in 1998 and income of $277,000 in 1997.
The increase in other income in 1999 as compared to 1998 was due to profit
realized by us on the sale of Aryt Holdings (1998) Ltd. during 1999 and profit
from an equity offering by Telegate Ltd. to third parties. The decrease in
other income in 1998 as compared to 1997 was due to our realizing a gain on
our advance redemption of a portion of our convertible debt, gain from certain
investments and the assignment of a loan against the issuance of shares,
offset in part by a write off of certain fixed assets.
Net Loss We incurred a net loss of $1.87 million in 1999, as compared
to a loss of $3.07 million in 1998, and a loss of $6.67 million in 1997. The
decrease in net loss in 1999 as compared to 1998 resulted primarily from
increased sales and reduced expenses as discussed above. The reduced net loss
in 1998 as compared to the net loss in 1997 resulted primarily from the
reduced costs incurred in such year, as discussed above.
LIQUIDITY & CAPITAL RESOURCES
The Company has met its financial requirements primarily through
funds provided by operating activities, shareholder loans and proceeds from
issuance of convertible debentures and shares.
Liquidity and Capital Resources
Cash, cash equivalents and short-term investments were $1.62 million,
$800,000 and $28,000 at December 31, 1999, 1998 and 1997, respectively. We had
a negative cash flow from operations of $772,000 for the year ended December
31, 1999 and generated cash from operations of $155,000 and $1.09 million for
the year ended December 31, 1998 and 1997, respectively. Net cash generated
from operations in 1999, 1998 and 1997 resulted primarily from increases in
accounts payable and accrued liabilities, the issuance of Ordinary Shares and
Warrants, bank loans and shareholder loans offset by net operating losses and
increases in accounts receivable and inventories. Investing activities
reflected purchases of property and equipment of $210,000, $1.95 million and
$1.41 million in 1999, 1998 and 1997, respectively. Financing activities
provided cash of $3.49 million in 1999 and $3.51 million and $1.86 million in
each of 1998 and 1997 respectively and used $1.69 million, $952,000 and $1.54
million in 1999, 1998 and 1997 respectively. The cash generated from financing
activities was primarily generated from proceeds from the issuance of Ordinary
Shares to ASL, the issuance of convertible debentures and bank loans.
Our working capital decreased to $417,000 on December 31, 1999,
including cash and cash equivalents of $1.62 million at such date compared
with $2.37 million and $800,000, respectively, on December 31, 1998 and 1997,
respectively.
The current ratio (current assets compared with current liabilities)
decreased from 1.55 on December 31, 1998 to 0.94 on December 31, 1999.
The quick ratio (current assets less inventory, compared with current
liabilities less customers' advances) increased from 0.74 on December 31, 1998
to 0.54 on December 31, 1999.
In 1999 we raised approximately $1.5 million from the issuance of our
Series 4 Convertible Debentures and $744,000 from our issuance of shares to
ASL. In 1998 we raised $1.5 million from the issuance of our Series 5
convertible Debentures, $2 million from bank loans and approximately $500,000
from shareholder loans. In 1997 we raised approximately $2.5 million from
shareholder loans.
As a result of our sale of our interest in Telegate and our
disposition of substantially all of the Terayon shares we received in such
transaction, we received gross proceeds of approximately $40.22 million.
THE YEAR 2000
The Company's State of Readiness
Many computer systems and software products may have difficulty
functioning properly in the years starting 2000 due to a once-common
programming standard that represents years using only the last two-digits.
This is known as the Year 2000 problem.
In 1998, we began converting our internal computer systems to be Year
2000 compliant. We believe al of our computer systems are Year 2000 compliant.
The applications we use our internal IT and non-IT systems are commercially
available and certified by their respective vendors as Year 2000 compliant. To
date we have not experienced any material problems or service interruptions
due to the Year 2000 problem and we do not believe the Year 2000 problem is
likely to have a material adverse effect on our business.
The Costs to Address the Company's Year 2000 Issues
As of December 31, 1999, we spent approximately $120,000 on our Year
2000 compliance efforts. This figure includes the expense of updated software
licenses and updated application versions and has been fully expensed. The
total cost of attaining Year 2000 compliance is estimated to be $120,000 and
was being funded through operating cash flows and capital resources.
SUPPORT FOR RESEARCH AND DEVELOPMENT
We avail ourselves of several Israeli governmental programs which
support research and development activities. For a discussion of such
activities, see "Item 1 - Description of Business/Research and Development".
EFFECTIVE TAX RATE
We and Reshef qualify under the Law for the Encouragement of Capital
Investments, 1959, as an "Approved Enterprise", or as "Mixed Enterprise" for
purposes of Israeli taxation. Consequently, we and Reshef are entitled to
exceptions from taxation on income derived from the "Approved Programs" as
long as they fulfill the stipulations required under the relevant approval
certificates and under the law. Undistributed income derived from these
enterprises is entitled to a reduced tax rate of 25% for seven years. Reshef's
benefit period commenced in 1991 and 1995. Our benefit period has not yet
commenced. Dividends derived from income from "Approved Programs" are subject
to withholding tax at the rate of 15%. The Company and its subsidiaries are
also entitled to other benefits in accordance with other Israeli tax laws.
OTHER MATTERS
In February 1999 we issued our Series 4 Convertible Debentures
("Series 4 Debentures") to a group of investors led by Excellence Investments
Ltd. and Tamar Central Pension Fund directed by Israel Discount Bank Ltd. for
an amount of $1.5 million. To secure the repayment of the Series 4 Debentures,
concurrent with the issuance of such Debentures we purchased 23,678 ordinary
shares of Telegate Ltd. ("Telegate") from Aryt Holdings and registered a first
priority charge on such shares in favor of the debenture holders. During 1999
debenture holders converted 1,087,151 of their Series 4 Debentures into
1,087,151 of our Ordinary Shares. In February 2000, Amcoram purchased all the
remaining outstanding Series 4 Debentures for $1.43 million and in March 2000,
converted the debentures into 4,642,275 of our Ordinary Shares.
In September 1999, holders of our subsidiary Aryt Holdings (1998)
Ltd. ("Aryt Holdings"), exercised their right to purchase all of the shares of
our subsidiary Aryt Holdings in exchange for $1 million. We recognized a
capital gain of $968,000 on the sale.
In November 1999, we issued 3,150,000 Ordinary Shares, 3,150,000
Series 7 Warrants and 3,150,000 Series 8 Warrants through a private placement
to ASL, for aggregate consideration of NIS 3.15 million. The Series 7 Warrants
are exercisable through September 25, 2000 and have an exercise price of NIS 1
per share. The Series 8 Warrants are exercisable through September 25, 2001
and have an exercise price of NIS 1.125 per share. During February and March
2000 ASL exercised 157,500 Series 7 Warrants and purchased 157,000 of our
Ordinary Shares at a price of NIS 1 per share.
RECENT EVENTS
In January 2000, we sold our interest in Telegate to Terayon
Communication Systems, Inc. ("Terayon") in exchange for approximately 220,000
shares of Terayon common stock and approximately $160,000 in cash. Of the
Terayon shares we received, 16,000 are held in escrow by Terayon to secures
certain rights of Terayon and are to be released from escrow in January 2001,
assuming no claim is made against the escrowed shares. As a result of this
sale we realized a capital gain of $13.03 million. As of June 30, 2000, we
sold approximately 200,000 of our Terayon shares at an average price of $203
per share for aggregate proceeds of $40.06 million. As a result of this sale
we had a profit on the sale of marketable securities of $35.38 million, during
the first quarter of 2000.
In February 2000, Amcoram purchased all the remaining outstanding
Series 4 debentures for $1.43 million and in March 2000, converted the
debentures into 4,642,275 of our Ordinary Shares.
In February 2,000 we issued options to five key employees to purchase
an aggregate of 1,550,000 Ordinary Shares at an exercise price of NIS 1.35 per
share subject to vesting.
Between February and June, 2000 ASL exercised 393,750 Series 7
Warrants and purchased 393,750 of our Ordinary Shares at a price of NIS 1 per
share.
On May 31, 2000, we entered into a Memorandum of Understanding with
Ram Zur Industries Ltd. ("Ram") and certain of its shareholders pursuant to
which we are to purchase approximately 63% of Ram's share capital from Ram and
its shareholders for NIS 7.35 million (approximately U.S.$1.8 million). In
addition, at closing, the shareholders of Ram will purchase all of Ram's
operations and assets in exchange for assuming all of Ram's current
obligations. The closing of this transaction is subject to certain
contingencies, including the receipt of various Israeli regulatory approvals.
On June 19, 2000, Reshef entered into a Share Purchase Agreement with
Soltam Systems, Ltd. ("Soltam") and into an Activity Purchase Agreement with
Soltam's subsidiary, K.M. Fuzes Engineering, Ltd. ("Soltam Fuze"). Pursuant to
the agreement, Soltam will purchase from Reshef newly issued shares of Reshef,
representing 26% of Reshef, for $1.5 million and Reshef will purchase from
Soltam Fuze all of its operations relating to the development, manufacturing
and sale of electronic fuzes, for $1.5 million. The closing of this
transaction is subject to certain contingencies, including the receipt of
various Israeli regulatory approvals.
In January 2000, we purchased 10% of the issued and outstanding
shares of Voice Diary Ltd. ("Voice Diary") and received an option to purchase
an additional 10% of Voice Diary, in consideration of our providing Voice
Diary with a $150,000 line of credit to be drawn upon until January 1, 2000.
Our option is exercisable for a period of 1 year at an exercise price of
$100,000. Voice Diary is engaged in the development of a palm diary activated
by voice and intended for users with sight impairment.
In April 2000, we purchased 25% of the issued and outstanding shares
of Sensotech Ltd. ("Sensotech") for $1 million and also received warrants to
purchase an additional approximately 15% of the share capital of Sensotech.
The warrants are exercisable for a period of two years at an exercise price of
between $1 million to $1.2 million. Sensotech is engaged in the development
and marketing of patented non-contact ultrasound sensors for the car, train
and elevators industries. Sensotech has developed a novel way of using
ultrasound energy for smart sensing. We believe such technology is the most
advanced in the market. Currently, Sensotech is negotiating possible
co-operation agreements with leading firms in the automotive business.
In May 2000, we entered into a Share Purchase Agreement with
OfficeCore.com Ltd. ("OfficeCore") for the purchase of 800 to 2,932 Preferred
B Shares representing between 13% and 37% of the issued and outstanding share
capital of OfficeCore. The purchase price will be between $ 200,000 and $
800,000 depending upon the number of shares purchased. OfficeCore is an
Israeli company engaged in the development of complete internet work
environments primarily for small and medium sized businesses. Their products
include office applications, customer relationship management, e-commerce, web
site management, inventory management and certain additional modules.
OfficeCore services may be accessed from cellular devices. OfficeCore's
strategy is to enable small business users to rent applications tailored to
their needs via the internet at significant cost and human resources savings.
OfficeCore is planning to release its "beta" version of its service and
anticipates ramping up to providing full end-user services during the third
quarter of 2000.
IMPACT OF INFLATION AND EXCHANGE RATES
Our results of operations in Israel are, among other things, a
function of the inflation rate in Israel compared with the devaluation rate of
the Israeli shekel in relation to the US dollar and the timing of the
devaluation compared with the timing of inflation. Certain of our costs in
Israel, reported in dollars, will increase if the inflation rate exceeds the
devaluation rate of the shekel against the dollar, or if the timing of such
devaluation were to lag behind inflation.
We incur significant expenses in shekels. These expenses are
translated into dollars at the prevailing exchange rates for purposes of our
Financial Statements and tend to rise with local inflation. Consequently, we
are materially affected if devaluation of the shekel against the dollar is not
matched by contemporaneous devaluation of the shekel against the dollar.
The relationship between our assets and liabilities is in shekels,
and whether these are linked to a currency or price index, also impacts our
financial results. In the event that our liabilities are linked to the Israeli
Consumer Price Index and the shekel is not devaluated at the same rate, we may
be adversely affected.
We do not engage in currency speculation. We do not hold or issue
derivatives or other financial instruments for trading purposes.
<PAGE>
Item 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash, cash equivalents or short-term investment were $1.62
million, $800,000 and $28,000 at December 31, 1999, 1998 and 1997,
respectively, and we had cash flow from operations of ($772,000), $155,000 and
$1.09 million for 1999, 1998 and 1997, respectively. During those periods, we
did not hold any securities or other financial instruments or derivatives for
trading purposes, held only immaterial amounts of deposits as interim
investments pending use in our business, and did not have any material market
risk attributable to such deposits.
The results of our operations are affected by, among other things,
the inflation rate in Israel, the devaluation rate of the Shekel in relation
to the Dollar, and the timing of devaluation of the Shekel compared to the
timing of inflation. Since we incur significant expenses in Shekels, the
profitability of our sales in Dollars is reduced when the rate of devaluation
of the Shekel does not keep pace with the inflation rate in Israel (which has
been the case each year except 1997 and 1998).
As discussed under Item 1. Description of Business--Special
Considerations Applicable to Israeli Companies, through "linkages," many
obligations of or payments to Israeli companies, including us, are increased
from time to time by an amount related to changes in indices, such as a price
index or the exchange rate of a foreign currency. The relationship between our
assets and liabilities in Shekels, and whether and to what extent they are
linked to different indices and the differences in rates of change of those
indices, impacts our financial results.
For financial reporting purposes, our income and expenses are
translated into Dollars at prevailing exchange rates from time to time. Our
results of operations can be materially affected if the rate of inflation in
Israel differs materially from the rate of devaluation of the Shekel relative
to the Dollar.
Since exchange rates between the Shekel and the Dollar, and the rate
of inflation in Israel, fluctuate continuously we cannot predict the impact of
such fluctuations on future operations or reported results of operations.
As a result of our sale of our interest in Telegate and our
disposition of substantially all of the Terayon shares that we received in
that transaction, we received gross proceeds of approximately $40.2 million in
the first half of 2000. After payment of transaction expenses, debts,
provision for taxes, and application of funds to acquisitions of interests in
Voice Diary, Sensotech and OfficeCore, we have approximately $21 million
available for investment in our business. Pending application in our existing
businesses or in investment opportunities in emerging technology companies,
those funds have been invested as follows:
(a) The Shekel equivalent of an aggregate of $14 million has
been invested in saving accounts, or mutual funds investing in saving
accounts, in major Israeli banks linked to the U.S. Dollar. Those
saving accounts bear interest at a weighted average annual rate of 6%
and are available to us upon demand. Upon demand, we will receive in
Shekels the capital in the amount of $14 million, together with
interest accrued for the period from deposit until withdrawal.
(b) The Shekel equivalent of an aggregate of $4 million has
been invested in daily NIS saving accounts in major Israeli banks.
Those deposits bear interest at a weighted average rate of 9% and are
available to us upon demand, together with the interest accrued on a
daily basis.
(c) The Shekel equivalent of an aggregate of $6 million has
been invested in a portfolio of equity securities listed on the
NASDAQ and/or Tel Aviv Stock Exchanges. Over the 2-1/2 months since
the interim investment in such portfolio, the market value of the
portfolio has not materially fluctuated and at June 30, 2000 the
market value of the portfolio was $6 million.
We have not acquired any other securities or financial instruments
or any derivatives, nor have we entered into any hedging transactions (other
than the linkages in the certificates of deposit). None of our interim
investments have been made for trading purposes, although our equity
securities are traded in order to preserve capital and mitigate risk.
We believe that our interim investments have not subjected us to any
currency or inflation risks that we are not already subject to in our
business, as described above. Our NIS savings accounts subject us to
interest rate risk, to the extent that the rate of inflation in Israel from
time to time exceeds the interest rate on our savings account. However, in
1999 the rate of inflation in Israel was 1.3% and since 1995 the rate of
inflation in Israel has been less than 9% each year except 1996 (when it was
10.6%). Our investment in equity securities exposes us to equity price risks
of the equity markets generally, and of the technology sector in particular,
the timing and magnitude of which we cannot predict.
<PAGE>
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following is a list of our Directors and a executive officers as
of June 30, 2000:
<TABLE>
Name Age Position with the Company
Directors
<S> <C> <C>
Gilad Shabtai 56 Director, Chairman
Izhak Ironi 54 Director
Israel Gravinsky* 52 External Director
Micha Avnimelech* 56 External Director
Zvi Oren* 53 Director
Yoram Oron 52 Director
Officers
Shmuel Bachar 45 Chief Executive Officer
Ran Eckhaus 30 Chief Financial Officer, Secretary
Arieh Geller 52 Chief Executive Officer, Reshef
------------------------------
* Member of Audit Committee
</TABLE>
All directors hold office until their removal by the General Meeting
of our Shareholders. Officers serve at the discretion of the Board of
Directors, subject to the terms of any agreement with them. Our Articles of
Association provide for a Board of Directors of no less than six, or more than
fifteen, members.
Gilad Shabtai, has been director of Aryt since August 1997. Mr.
Shabtai is the brother of Mr. Benny Shabtai who is a major shareholder in
Channon.
Yitzhak Ironi, has been director of Aryt since August 1997. Mr. Ironi
is the brother-in-law of Gilad Shabtai and Benny Shabtai.
Micha Avnimelech, has been external director of Aryt since January
1999.
Zvi Oren, has been director since September, 1997.
Israel Gravinsky, has been external director since December 1999
Yoram Oron, has been director since May 1992
Shmuel Bachar, has served as CEO since June 1999.
Ran Eckhaus, has served as CFO since July 1998.
Arieh Geller, has served as CEO of Reshef since 1990.
Alternate Directors
Our Articles of Association provide that any director may, by written
notice to the Company, appoint another person to serve as alternate Director,
subject to the Directors' approval, and may cancel such appointment at any
time. Any person, whether or not already a Director, may act as an alternate,
and the same person may act as alternate for several Directors. 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
Board of Directors' meeting, for a specified period, or until notice of
cancellation of the appointment is given. To the Company's knowledge, no
Director currently intends to appoint any other person as an alternate
Director, except if the Director is unable to attend a Board of Directors'
meeting.
External Directors
Under the Israeli Companies Law 1999-5759, (the "Companies Law")
Israeli companies whose shares have been offered to the public, like us, are
required to appoint two people to serve as external directors on the Board of
Directors. The Companies Law provides that a person may not be appointed as an
external director if the person or the person's relative, partner, employer or
any entity has at the date of appointment, or has had at any time during the
two years preceding that date, any affiliation with us, any entity controlling
us or any entity controlled by us or by such controlling entity. The term
"affiliation" includes:
- an employment relationship;
- business or professional relationship maintained on a regular basis;
- control; or
- service as an officer.
No person can serve as an external director if the person's position
or other business creates, or may create, conflicts of interests with the
person's responsibilities as an external director or if such position or other
business may impair such director's ability to serve as an external director.
No person who is a director in one company can serve as an external director
in another company, if at that time a director of the other company serves as
an external director in the first company. The Companies Law further provides
that when, at the time of appointment of an external director, all members of
the board of directors of the company are of one gender, then the external
director appointed shall be of the opposite gender.
As of February 1, 2000 external directors are appointed by a majority
vote at a shareholders' meeting, provided that either: (1) the majority of
shares voted at the meeting, including at least one third of the shares of
non-controlling shareholders voted at the meeting, vote in favor of
appointment of the director or (2) the total number of shares of
non-controlling shareholders voted against the election of the director does
not exceed one percent of the aggregate voting rights in the company. The
initial term of an external director will be three years and may be extended
for an additional three-year period. For our external directors serving
currently, the provisions of the Companies Ordinance 1983-5743 [New Version]
apply, under which the external directors serve for a 5 year period and may
only be re-appointed two years after the term. Each committee of our board of
directors will be required to include at least one external director and all
external directors must be members of our the audit committee.
The External Directors have the same powers and duties as the regular
Directors and as such are entitled to obtain all information relating to the
company's management and assets and to receive assistance, in special cases,
from outside experts at our expense. An external director is entitled to
consideration and to the refund of expenses, only as provided in regulations
adopted under the Companies Law and is otherwise prohibited from receiving any
other consideration, directly or indirectly, in connection with service
provided as an external director. Nevertheless, the grant of an exemption from
liability for breach of fiduciary duty or duty of care, an undertaking to
indemnify, indemnification or insurance under the provisions of the Companies
Law is not deemed as consideration. Under the Companies Law, an external
director cannot be dismissed from the office unless:
- the board of directors determines that the external director no longer meets
the requirements for holding such office, as set forth in the Companies Law or
that the director is in breach of his or her fiduciary duties to the company
and the shareholders of the company vote (by the same majority required for
the appointment) to remove the external director after the external director
has been given the opportunity to present his or her position;
- an Israeli court determines, upon a request of a director or a shareholder,
that the director no longer meets the requirements for holding such office as
set forth in the Companies Law or that the director is in breach of his or her
fiduciary duties to the company; or
- the court determines, upon a request of the company or a director,
shareholder or creditor of the company, that the external director is unable
to fulfill his or her duty or has been convicted of certain crimes as
specified in the Companies Law.
Audit Committee; Approval of Certain Transactions
The Companies Law provides that public companies, such as us, must
appoint an audit committee of the board of directors. The number of members of
the audit committee is required to be not fewer than three and it must include
all of the external directors. The chairman of the board of directors, any
director who is employed by us or provides services to us, on a regular basis,
a controlling shareholder or his relative cannot be a member of the audit
committee. Our audit committee consists of Micha Avnimelech, Israel Gravinsky
and Zvi Oren.
Under the Companies Law, the board of directors must also appoint an
internal auditor in accordance with the recommendations of the audit
committee. The role of the internal auditor is to examine, among other
matters, whether the company's actions comply with the law, integrity and
orderly business procedure. The internal auditor may be an employee of the
company but not a person holding 5% or more of a company's capital, a person
who has the power to appoint one or more directors or the general manager, an
officer, or an affiliate or relative of an office holder, and may not be the
company's certified public accountant or its representative. Our internal
auditor is Rafi Tzizel. In addition, under the Companies Law, all companies
must appoint a certified public accountant to audit the company's financial
statements.
Under the Companies Law, the approval of the board of directors is
required for arrangements with respect to compensation of a company's chief
executive officer and with respect to the compensation of directors audit
committee and shareholder approval is also required.
The Companies Law requires that an officer or a controlling
shareholder in a public company, such as us, promptly disclose any personal
interest that he may have and all related material information known to him,
in connection with any existing or proposed transaction by the company (an
office holder and a controlling shareholder are under no such duty of
disclosure when the personal interest stems only from the personal interest of
a relative in a transaction that is not exceptional). In addition, if the
transaction is an exceptional transaction, as defined in the Companies Law,
the officer must also disclose any personal interest held by the officer's
spouse, siblings, parents, grandparents, descendants, spouse's descendants and
the spouse of any of the foregoing, or by a corporation in which the officer
is a 5% or greater shareholder, director or general partner or in which he or
she has the right to appoint at least one director or the general manager. The
disclosure must be made without delay and not later than the board of
directors meeting as which the transaction is first discussed. For these
purposes, the definition of a controlling shareholder under the Companies Law
includes a shareholder that holds 25% or more of the voting rights in a
company, unless another shareholder holds more than 50% of the voting rights
(if two or more shareholders are interested parties in the same transaction
their shareholdings shall be deemed cumulative).
Once the officer or controlling shareholder complies with these
disclosure requirements, the company may approve the transaction in accordance
with the provisions of the Companies Law and its articles of association.
Generally, the approval of the majority of the disinterested members of the
audit committee and the board of directors is required and, in certain
circumstances, shareholder approval may also be required. If the transaction
is with an officer or with a third party in which the officer or the
controlling shareholder has a personal interest, the approval must confirm
that the transaction is not adverse to the company's interest. Furthermore, if
the transaction is an exceptional transaction then, in addition to any
approval stipulated by the articles of association of the company, it also
must be approved by the company's audit committee and then by its board of
directors. The audit committee of a public company, shall not be entitled to
grant any such approval, unless, at the time the approval was given, two
members of the audit committee were external directors and at least one of
them was present at the meeting at which the audit committee decided to grant
the approval. An exceptional transaction is a transaction other than in the
ordinary course of business, otherwise than on market terms or that is likely
to have a material impact on the company's profitability, assets or
liabilities. Under certain circumstances, shareholder approval is also
required. For example, shareholders must approve all compensation paid to
directors in whatever capacity, company's undertaking to indemnify a director
or indemnification under a permit to indemnify and any transaction in which a
majority of the board members have a personal interest. An office holder with
a personal interest in any matter may not be present at any audit committee or
board of directors meeting where such matter is being approved, and may not
vote thereon. Shareholders' approval for an exceptional transaction must
include at least one third of the shareholders who have no personal interest
in the transaction and are present at the meeting. However, the transaction
can be approved by shareholders without this one-third approval if the total
shareholdings of those who vote against the transaction do not represent more
than one percent of the voting rights in the company, unless the Israeli
Minister of Justice shall determine a different percentage.
In addition, the issue of shares by a public company, other than by
way of a public offering, to a 5% shareholder or to someone who, as a result
of such issue, shall become a 5% shareholder, requires the approval of the
board of directors and the shareholders at the general meeting.
(Remainder of Page Intentionally left blank)
<PAGE>
Item 11. COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth with respect to our directors and
officers as a group, all compensation paid by the Company for the year ended
December 31, 1999:
<TABLE>
<CAPTION>
------------------------------------- ----------------------------------- -----------------------
Salaries and Related Benefits,
Fees, Directors' Fees, Commissions Other Benefits
and Bonuses
------------------------------------- ----------------------------------- -----------------------
<S> <C> <C>
All Directors and Executive Officers $ 314,445 (-)*
------------------------------------- ----------------------------------- -----------------------
</TABLE>
*not including Series 9 Warrants issued to key executive officers
The above compensation includes amounts set aside or accrued to
provide for pensions, retirement or similar benefits, but does not include
amounts expended by us for automobiles made available to our executive
officers, expenses (including business travel, professional and business
associations dues and expenses) reimbursed to officers, and other fringe
benefits commonly reimbursed or paid by companies in Israel.
(Remainder of Page Intentionally left blank)
<PAGE>
Item 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
As of June 30, 2000, the following options, warrants, and other
rights to purchase our shares were outstanding:
Series 3 Convertible Debentures
In February 1997, the Company issued Series 3 Convertible Debentures
(the "Series 3 Debentures") in consideration for our Series 2 Debentures. The
Debentures are convertible into Ordinary Shares at conversion rate of 297.4%.
The debentures mature in nine equal annual installments commencing
October 1997. The unconverted principal of the debentures bears interest at a
rate of 4.9% per annum payable semi-annually.
In addition, in exchange for and in consideration of the original
warrants held by the holders of Series 2 Debentures, the Company issued new
warrants in an amount equal to the amount of old warrants which were turned
over by the holders of the Series 2 Debentures. The following warrants were
issued: (i) 600,200 Series 3 Warrants, each exercisable for 1 Ordinary Share
at any time prior to February 6, 1998, at a realization price of $0.90, and
thereafter at a price of $1.1 per Ordinary Share prior to February 6, 1999;
and (ii) 600,200 Series 4 Warrants which may be exercised to purchase 1
Ordinary Share per Warrant at an exercise price of NIS 3.454 per share and
expire as of February 5, 2001. All such Series 4 Warrants are currently
outstanding.
As part of the Series 2 Debentures arrangement, the Company undertook
various commitments such as: increasing its shareholders' equity within 24
months, reports to the escrow agent for the debentures as well as setting
limits to the scope of its activities and penetrating into new business
segments. Non-compliance with these commitments results in a retroactive
change in the interest rate from January 1, 1997. In any event, however, the
Company will not be required to pay interest at a rate higher than the dollar
interest rate of 5.9% per annum. We believe that as of June 30, 2000 we comply
with these commitments.
In March 1997, the Company redeemed Series 3 Debentures of NIS
1,225,000 par value in consideration for $191,000. The Company recorded a
capital gain from the redemption of part of the series of debentures in the
amount of $219,000.
In 1998 and 1999, the Company redeemed Series 3 Debentures which were
issued to institutions in consideration for $424,000 for each of the years. As
of June 30, 2000 the Company either converted or redeemed NIS 12,409,444 par
value of debentures into shares.
As of June 30, 2000 the balance of the outstanding Series 3
Debentures was NIS 7,573,334 par value.
Series 7 Warrants and Series 8 Warrants
In November 1999 we issued 3,150,000 Series 7 Warrants and 3,150,000
Series 8 Warrants. The Series 7 Warrants are exercisable through September 25,
2000 at an exercise price of NIS 1 per share. To date 157,500 Series 7
Warrants have been exercised. The Series 8 Warrants are exercisable through
September 25, 2001 at an exercise price of NIS 1.125 per share. To date no
Series 8 Warrants have been exercised.
Series 9 Warrants
In January 2000, we issued 1,550,000 Series 9 Warrants to certain of
our key employees as set forth bellow:
<TABLE>
<CAPTION>
---------------------- ------------------ ------------------------------------------------- ------------------
Employee Number of Vesting Period Exercise Price
Warrants
---------------------- ------------------ ------------------------------------------------- ------------------
<S> <C> <C> <C>
Shmuel Bachar 700,000 200,000 Warrants fully vested as of July 1, NIS 1.35
2000. 16,662 Warrants per month from August 1,
2000, and 12,500 Warrants per month from August
1, 2001
---------------------- ------------------ ------------------------------------------------- ------------------
---------------------- ------------------ ------------------------------------------------- ------------------
Arie Geller 350,000 43,750 Warrants fully vested as of July 1, NIS 1.35
2000. 7,291 Warrants per month
---------------------- ------------------ ------------------------------------------------- ------------------
---------------------- ------------------ ------------------------------------------------- ------------------
Ran Eckhaus 200,000 25,000 Warrants fully vested as of July 1, NIS 1.35
2000. 4,166 Warrants per month
---------------------- ------------------ ------------------------------------------------- ------------------
---------------------- ------------------ ------------------------------------------------- ------------------
Yosef Reich 150,000 18,750 Warrants fully vested as of July 1, NIS 1.35
2000. 3,125 Warrants per month
---------------------- ------------------ ------------------------------------------------- ------------------
---------------------- ------------------ ------------------------------------------------- ------------------
Eitan Shemesh 150,000 18,750 Warrants fully vested as of July 1, NIS 1.35
2000. 3,125 Warrants per month
---------------------- ------------------ ------------------------------------------------- ------------------
</TABLE>
The above options fully vest as of December 31, 2003 (Mr. Bachar's
options fully vested as of June 30, 2003) and vested options must be exercised
on or before March 31, 2005.
(Remainder of Page Intentionally left blank)
<PAGE>
Item 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Yorokal's Loan - Yorokal, which owned more than 5% of the Company
shares at the time, gave the Company loans, from November 1997 through April
1998, amounting to $982,000 in NIS. The loans beard interest of prime + 3% and
were repayable immediately upon request. The loan could be converted into
Company shares upon the lender's request. The conversion rate was not to be
less than 95% of the higher of the price of the shares on the Tel-Aviv Stock
Exchange on the date of notification of the private placement, or the average
price of the shares during the 90 trading days ending on the notification
date.
In February 1998, upon request of Yorokal, the Company initiated the
process for a private offering of 3,550,460 Ordinary Shares to Yorokal, in
exchange of the above-mentioned loan. The Company made public its intention to
make such a private placement, and filed with the Securities and Exchange
Commission ("ISEC") a notification to that effect. Due to the ISEC's request
for additional details and clarifications in respect of the share issue, the
process was delayed, and the stock issue was not concluded since the
shareholders' meeting did not convene.
The loan was repaid in full in January, 2000. (See note 26 of the
Consolidated Financial Statements)
Sherwing Loan - Sherwing Investment S.A. ("Sherwing"), Yorokal's
parent Company, gave a loan of $850,000 to our subsidiary (at the time) Aryt
Holdings in the first quarter of 1997, in consideration of a convertible
debenture secured by Telegate shares purchased with the loan's money, giving
the lender the right to convert the loan into shares, which will constitute
99% of the outstanding shares of Aryt Holdings at the time of conversion. In
addition Sherwing received an option, exercisable under certain conditions, to
purchase our shares in Aryt Holdings for $1,000. Sherwing did not have any
interest holding in the Company when the loan was made.
In December 1997, Aryt Holdings received an additional loan of
$101,000 from Sherwing. In April and May 1998, Aryt Holdings received
additional loans from Sherwing in the amount of $55,000 and $1.29 million
respectively. In September 1999, holders of Aryt Holdings exercised their
right to purchase all of the shares of Aryt Holdings in exchange for $1,000.
We recognized a capital gain of $968,000 on the sale.
In February 2000, Amcoram purchased all of our outstanding Series 4
Debentures, principal amount $1.43 million, from the debenture holders at a 4%
premium.
In March 2000, Amcoram converted the Series 4 Debentures into
4,642,275 of our Ordinary Shares.
<PAGE>
PART II
Item 14. DESCRIPTION OF SECURITIES TO BE REGISTERED
Not Applicable.
PART III
Item 15. DEFAULT UPON SENIOR SECURITIES
None.
Item 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES
1. In order to secure its Series 3 debentures, we created a symbolic charge
of NIS 1 and undertook the following commitments:
1.1 To collateralize any share capital raised, if raised, by a first
class specific charge that will always secure the balance of the last
three payments of the Series 3 debentures' principal.
1.2 To collateralize one-half of the amount raised from the Series 3 and
Series 4 Warrants, if exercised, by a first class specific charge.
1.3 To assume restrictions on our business activities, including limiting new
ventures requiring new investments exceeding certain amounts.
1.4 To provide special reports to the trustee in respect of our financial and
business transactions.
1.5 Not to pay shareholders dividends until one-half of the loans secured by
the Series 3 debenture have been repaid. Thereafter, until repayment of
the second half of the balance of the loans secured by the Series 3
debentures, to limit the aggregate amount of dividends to be paid, if at
all, to one third of the sum of the current year's profits in respect of
which such dividends are paid. If the dividends exceed such rate, payment
of the surplus (namely: the payment exceeding one third of the profits)
is conditional upon an equal sum being deposited to a reserve fund which
will be charged to secure the repayment of the balance of the loans
secured by the Series 3 debentures, for the time existing.
1.5 Not to enter into any new transactions with the controlling parties of
the Company until the Trustee's consent has been previously obtained.
1.7 Failure to comply with all or any of the restrictions mentioned above
will cause the annual interest rate payable on the outstanding principal
balance of Series 3 debentures to be increased by 0.5% retroactively from
the date of their issuance. It was further agreed that the Company would
not, in any event, pay interest at a rate exceeding 5.9%
<PAGE>
PART IV
Item 17. FINANCIAL STATEMENTS Attached - See Item 19(a).
Item 18. FINANCIAL STATEMENTS
Not Applicable.
(The remainder of this page is intentionally
left blank.)
Item 19.
<PAGE>
FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
(a) FINANCIAL STATEMENTS Page
<S> <C>
1 Aryt's Financial Statements
- Index to Consolidated Financial Statements 52
- Reports of Independent Auditors 53
- Consolidated Balance Sheets at December 31, 1998, and 1999 54
- Consolidated Statements of Operations for the years ended December 31, 1997, 1998, 56
1999
- Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 57
1998 and 1999
- Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998, 58
and 1999
- Notes to Consolidated Financial Statement 61
2 Telegate's Financial Statements
- Index to Consolidated Financial Statements 104
- Reports of Independent Auditors 105
- Balance Sheets at December 31, 1997, 1998 and 1999. 106
- Statement of Operations for the years ended December 31,1997, 1998 and 1999 107
- Statements of Changes in Shareholders' Equity for the years ended December 31, 1997, 108
1998, and 1999.
- Statements of Cash Flows for the years ended December 31, 1997, 1998, and 1999 109
- Notes to Financial Statements 111
(b) EXHIBITS*
2.1 Share Purchase Agreement between Terayon Communications Inc., Telegate Ltd., Aryt
Industries and others, and Amendment No.1
2.2 Share Purchase Agreement between Terayon Communications Inc., Telegate Ltd., Aryt
Industries and others, and Amendment No.1
2.3 Summary of 7 Haplad St., Or Yehuda Lease Agreements 2.4 Sderot
Lease Agreements 2.5 Summary of Sderot Lease Agreement 2.6 Series 7
Warrant dated April 11, 1999 2.7 Series 8 Warrant dated April 11,
1999 2.8 Series 9 Warrant dated March 2, 2000
</TABLE>
<PAGE>
SIGNATURES
Pursuant to requirements of Section 12 of the Securities Exchange Act
of 1934, Registrant certifies that he meets all the requirements for filing on
Form 20-F and has duly caused the Annual Report to be signed on his behalf by
the undersigned, hereunto duly authorized.
ARYT INDUSTRIES, LTD.
Date: July 13, 2000
----------------------
Shmuel Bachar, C.E.O.
<PAGE>
ARYT INDUSTRIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
IN U.S. DOLLARS
INDEX
<TABLE>
<CAPTION>
Page
----------------
<S> <C>
Report of Independent Auditor 53
Consolidated Balance Sheets 54 - 55
Consolidated Statements of Operations 56
Statements of Changes in Shareholders' Equity (Deficiency) 57
Consolidated Statements of Cash Flows 58 - 60
Notes to Consolidated Financial Statements 61-102
List of Group Companies 103
</TABLE>
- - - - - - - - - - - - -
<PAGE>
[LOGO OMITTED] ERNST & YOUNG Kost Forer & Gabbay Phone: 972-3-6232525
2 Kremenetski St. Fax: 972-3-5622555
Tel-Aviv 67899, Israel
REPORT OF INDEPENDENT AUDITOR
To the Shareholders of
ARYT INDUSTRIES LTD.
We have audited the accompanying consolidated balance sheets of Aryt
Industries Ltd. (the "Company") and its subsidiaries as of December 31, 1999
and 1998 and the related consolidated statements of operations, changes in
shareholders' equity (deficiency) and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States and Israel, including those prescribed by the
Israeli Auditors' Regulations (Mode of Performance), 1973. 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of the Company and its subsidiaries as of December 31, 1999 and 1998 and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles in Israel which differ in certain respects from
those followed in the United States (see Note 28 to the consolidated financial
statements).
Tel-Aviv, Israel KOST FORER & GABBAY
March 30, 2000 A Member of Ernst & Young International
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------
1999 1998
---------------- ----------------
Note U.S. dollars
--------- -------------------------------------
(In thousands)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 4 $ 1,620 $ 800
Trade receivables 5 1,588 1,305
Other accounts receivable 6 171 468
Inventories 7 3,364 4,127
Investment in investee 8b(3) 680 -
---------------- ----------------
7,423 6,700
---------------- ----------------
LONG-TERM INVESTMENTS AND LOANS:
In affiliates 8 - 2,254
---------------- ----------------
PROPERTY AND EQUIPMENT, NET 9 1,857 2,124
---------------- ----------------
DEFERRED CHARGES, NET 10 51 153
---------------- ----------------
$ 9,331 $ 11,231
================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------------
1999 1998
---------------- ----------------
Note U.S. dollars
--------- -------------------------------------
(In thousands)
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Credit from banks and others 11,15 $ 4,359 $ 682
Trade payables 12 819 828
Other accounts payable and accrued expenses 13 2,364 1,989
Customer advances 14 298 835
----------------- -----------------
7,840 4,334
----------------- -----------------
LONG-TERM LIABILITIES:
Convertible debentures 15 2,122 4,047
Other long-term liabilities 16b - 3,072
Accrued severance pay 17 368 388
----------------- -----------------
2,490 7,507
----------------- -----------------
CONTINGENT LIABILITIES AND COMMITMENTS 19
COMMITMENTS TO BE CONVERTED INTO SHARES 26a - 1,021
----------------- -----------------
SHAREHOLDERS' DEFICIENCY: 20
Share capital 11,157 8,624
Additional paid-in capital 11,693 11,728
Accumulated deficit (23,849) (21,983)
----------------- -----------------
(999) (1,631)
----------------- -----------------
$ 9,331 $ 11,231
================= =================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<TABLE>
<CAPTION>
March 30, 2000
---------------------------- ---------------------------- ---------------------------
<S> <C> <C> <C>
Date of approval of the Gilad Shabtai Shmuel Bachar Ran Eckhaus
financial statements Chairman of the General Manager Chief Financial Officer
Board of Directors
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
Note U.S. dollars
--------- --------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues from sales 24a $ 7,041 $ 6,073 $ 11,731
Cost of sales 23a 5,533 5,065 8,289
-------------- -------------- --------------
--------------
Gross profit 1,508 1,008 3,442
-------------- -------------- --------------
--------------
Research and development costs, net 23b 845 779 1,341
Selling and marketing expenses 23c 426 402 422
General and administrative expenses 23d 1,452 1,631 2,046
Write-off of goodwill - - 4,944
Write-off of fixed assets - - 645
-------------- -------------- --------------
--------------
2,723 2,812 9,398
-------------- -------------- --------------
--------------
Operating loss (1,215) (1,804) (5,956)
Financial expenses, net 23e 322 503 539
Other income (expenses), net 23f 2,234 (9) 277
-------------- --------------
--------------
Income (loss) before taxes on income 697 (2,316) (6,218)
Taxes on income 18f - 27 50
-------------- -------------- --------------
Income (loss) before equity in losses of affiliate 697 (2,343) (6,268)
Equity in losses of affiliate 2,563 1,777 949
-------------- -------------- --------------
Loss from continuing operations (1,866) (4,120) (7,217)
Income (loss) from discontinued operations 23g - 1,054 (62)
Capital gain from early redemption of convertible
Debentures - - 219
Capital gain from purchase of a loan - - 389
-------------- -------------- --------------
Loss for the year $ (1,866) $ (3,066) $ (6,671)
============== ============== ==============
--------------
Earnings (loss) per NIS 1 nominal value of Ordinary shares (in dollars):
Basic earnings (loss) per share:
Loss from continuing operations 25 $ (0.05) $ (0.15) $ (0.27)
============== ============== ==============
Earnings (loss) from discontinued operations $ - $ 0.04 $ 0.02
============== ============== ==============
Loss for the year $ (0.05) $ (0.11) $ (0.25)
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
-----------------------------------------------------------------------------------------------------------------------------
Additional
Share paid-in Accumulated
capital capital deficit Total
-------------- -------------- ----------------- ---------------
U.S. dollars
-----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Balance as of January 1, 1997 $ 2,688 $ 10,127 $ (12,246) $ 569
Conversion of debentures into shares 5,638 1,439 - 7,077
Exercise of options into shares 10 7 - 17
Loss for the year - - (6,671) (6,671)
-------------- -------------- ----------------- ---------------
Balance as of December 31, 1997 8,336 11,573 (18,917) 992
Conversion of debentures into shares 288 155 - 443
Loss for the year - - (3,066) (3,066)
-------------- -------------- ----------------- ---------------
Balance as of December 31, 1998 8,624 11,728 (21,983) (1,631)
Conversion of debentures into shares 1,789 2 - 1,791
Issuance of shares, net 744 (37) - 707
Loss for the year - - (1,866) (1,866)
-------------- -------------- ----------------- ---------------
Balance as of December 31, 1999 $ 11,157 $ 11,693 $ (23,849) $ (999)
============== ============== ================= ===============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Loss for the year $ (1,866) $ (3,066) $ (6,671)
Adjustments to reconcile loss to net cash provided by
(used in) operating activities:
Gain on decrease of holdings in investees and subsidiaries (2,225) - (146)
Depreciation and amortization 577 538 6,284
Deferred taxes, net - 27 -
Decrease in accrued severance pay (20) (153) (25)
Capital loss (gain) on sale of fixed assets (9) 9 634
Capital gain on purchase of loan - - (389)
Equity in losses of affiliate 2,563 1,777 950
Gain from redemption of the part of convertible
debentures which was issued to institutions - - (219)
Erosion of loans, debentures and interest 53 289 (9)
Results of operations, net of changes in intercompany
balances and changes in cash and cash equivalents
related to discontinued operations - (1,054) 1,043
Decrease (increase) in trade receivables (283) 1,355 1,636
Decrease in other accounts receivable 292 140 273
Decrease (increase) in inventory 930 (531) (300)
Decrease in trade payables (9) (462) (1,038)
Increase (decrease) in other accounts payable
and accrued expenses (71) 767 (633)
Increase (decrease) in customer advances (704) 519 (304)
-------------- -------------- --------------
Net cash provided by (used in) operating activities (772) 155 1,086
-------------- -------------- --------------
Cash flows from investing activities:
Investment in investees and others - (1,245) (1,141)
Realization of investment in a subsidiary (a) (12) - -
Purchase of fixed assets (241) (131) (118)
Loans granted to an investee - (579) (510)
Proceeds from sale of fixed assets 43 9 59
Collection of loans granted - - 300
-------------- -------------- --------------
Net cash used in investing activities (210) (1,946) (1,410)
-------------- -------------- --------------
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Short-term credit from banks and others, net 1,269 (310) (721)
Capital issuance (net of issuance expenses) 707 - (142)
Proceeds from exercise of options into shares - - 17
Proceeds from issuance of convertible debentures, net 1,500 1,415 -
Proceeds from long-term loans 18 2,100 1,846
Principal payments of long-term loans (1,268) (218) (29)
Redemption and payment of convertible debentures (424) (424) (649)
-------------- -------------- --------------
Net cash provided by financing activities 1,802 2,563 322
-------------- -------------- --------------
Increase (decrease) in cash and cash equivalents 820 772 (2)
Cash and cash equivalents at the beginning of the year 800 28 30
-------------- -------------- --------------
Cash and cash equivalents at the end of the year $ 1,620 $ 800 $ 28
============== ============== ==============
Supplemental disclosure of cash flows information:
Cash paid during the year for interest $ 257 $ 348 $ 344
============== ============== ==============
Cash paid during the year for taxes on income $ 6 $ 14 $ 608
============== ============== ==============
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
U.S. dollars
--------------------------------------------------
(In thousands)
<S> <C> <C> <C>
(a) Realization of investment in a subsidiary:
Working capital (excluding cash) $ 571 $ - $ -
Investment in an affiliate 390 - -
Long-term liabilities (1,941) - -
Gain from realization of investment in a subsidiary 968 - -
-------------- ------------- --------------
$ (12) $ - $ -
============== ============= ==============
(b) Significant non-cash operations:
Conversion of debentures into shares $ 1,791 $ 443 $ 7,219
============== ============= ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 1:- GENERAL
a. Description of the Company:
1. The Company is a public company whose
shares are traded on both the Tel-Aviv
Stock Exchange and on the OTC-BULLETIN
Borad (NASDAQ) in the United States.
2. The Company is a holding company which is
engaged in the purchase and sell of the
companies shares and their management. The
Company's Israeli subsidiaries are engaged
in the following business segments:
a) Military segment:
Development, production and
marketing of ammunition components
and subsystems of weapons such as
electronic fuses, laser warning
systems and computerized firing
ranges.
b) Civilian segment:
Development of equipment for
transmitting sound and data over
cable television networks
infrastructure.
In January 2000, the company embarked on a
new policy of actively seeking investment,
in high technoloy companies.
3. The Company sells its products throughout
the world. For the years ended December
31, 1999, 1998 and 1997 approximately 22%,
26% and 28%, respectively, of the
Company's total sales were derived from
sales to customers outside Israel, and
approximately 0%, 0% and 10%,
respectively, of the Company's total sales
were made to customers in the United
States. Sales in Israel are mainly to the
Ministry of Defense and to the Israeli
Military Industries.
The Company's business is dependent on the
military segment, consequently, any
changes in the military marketplace could
affect the Company's operating results.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
b. Definitions:
In these financial statements:
The Company - Aryt Industries Ltd.
The Group - Aryt Industries Ltd. and its investees, as listed in the
attached list of companies.
Subsidiaries - companies over which the Company exercises control (as
defined in Opinion No. 57) and whose accounts are
consolidated with those of the Company.
Affiliates - companies that are not subsidiaries, and over which the
Company has significant influence. The Company's
investment therein is included using the equity method of
accounting.
Investees - subsidiaries and affiliates.
Related parties - as defined in Opinion No. 29 of the Institute of Certified
Public Accountants in Israel and as defined in the Israeli
Securities Regulation (Preparation of Annual Financial
Statements), 1993.
</TABLE>
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The Company's consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting
Principles in Israel ("Israeli GAAP"), which differ in
certain respects from these followed in the United States
(see Note 28).
a. Use of estimates:
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the amounts reported in
the financial statements and accompanying notes.
Actual results could differ from those estimates.
b. Financial statements in U.S. dollars:
The Company and its subsidiaries' transactions are
recorded in new Israeli shekels; however, the
majority of their sales are made outside Israel in
U.S. dollars, and a substantial portion of the
Company's costs are incurred in U.S. dollars.
Accordingly, the Company and its subsidiaries have
determined the U.S. dollar as the currency of its
primary economic environment and thus its
functional and reporting currency.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
The Company and its Israeli subsidiaries'
transactions and balances denominated in U.S.
dollars are presented at their original amounts.
Non-dollar transactions and balances have been
remeasured into U.S. dollars in accordance with
Statement No. 52 of the Financial Accounting
Standards Board ("FASB"). All transaction gains and
losses from remeasurement of monetary balance sheet
items denominated in non-dollar currencies are
reflected in the statements of operations as
financial income or expenses, as appropriate. The
financial statements of an affiliate which operate
in Israel are adjusted to the NIS according to
Israeli GAAP.
c. Principles of consolidation:
The consolidated financial statements include the
accounts of the Company and its subsidiaries listed
below. Intercompany transactions and balances,
including profits from intercompany sales not yet
realized outside the group, have been eliminated in
consolidation.
Subsidiaries included in consolidation:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------
Shares conferring
----------------------------------------
Voting Rights to
rights Profits
------------------ -----------------
% %
------------------ -----------------
<S> <C> <C>
Reshef Technologies Ltd. 100 100
Amcoram Ltd. 100 100
Amcoram Technologies (1993) Germany Ltd. 100 100
</TABLE>
d. Investments in investees:
1. The investments in investees are
presented using the equity method of
accounting. Goodwill is amortized over
10 years, commencing with the date of
acquisition.
As for write-off of goodwill in 1997, see
Note 8b.
2. As for deferred taxes, see j. below.
e. Cash equivalents:
The Company considers all highly liquid
investments, originally purchased with maturities
of three months or less to be cash equivalents.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------
f. Marketable securities:
Marketable securities invested for the short-term
and available for sale in the short-term are
presented at their market value as of balance sheet
date in accordance with Opinion No. 44 of the
Institute of Certified Public Accountants in
Israel. Changes in their value are carried to the
statement of operations in financing item.
g. Inventories:
Inventories is stated at the lower of cost or
market value. Cost is determined as follows:
Raw materials and spare parts - by the "average
cost" method.
Work in progress and finished products - on the
basis of cost which includes materials, labor and
other direct and indirect costs.
Inventories is stated net of specific advances
received in this respect.
h. Property and equipment:
1. These assets are stated at cost, net of
related investment grants.
2. Assets leased under a capital lease are
presented as purchases. Future lease
fees, excluding financial expenses not
yet accumulated, are included among
long-term liabilities.
3. Depreciation is calculated using the
straight line method at annual rates which
are deemed sufficient to depreciate the
assets over their estimated useful lives,
as follows:
<TABLE>
<CAPTION>
<S> <C>
%
--------------------------------------------
Buildings 4 - 10
Leasehold improvements Over the term of the lease agreement
Machinery and equipment 6 - 20 (mainly 10%)
Motor vehicles 15
Office furniture and equipment 6 - 33 (mainly 6%)
4. Capitalized leasehold rights are amortized over the leasehold period.
</TABLE>
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
i. Deferred charges:
1. The unallocated excess of the investment
in a subsidiary over its equity upon
acquisition is carried to goodwill which
is presented among deferred charges, and
is amortized over a period of 10 years
commencing with the date of acquisition.
As for amortized goodwill in 1997, see
Note 8b.
2. Issuance expenses of debentures are
amortized over the period from the date of
the issuance until maturity date, taking
into account the balances which were not
repaid at the end of each year.
j. Deferred taxes:
Deferred income taxes reflect the net tax effects
of temporary differences between the carrying
amounts of assets and liabilities for financial
reporting purposes and the amounts used for income
tax purposes. Significant components of the
Company's deferred tax liabilities and assets are
as follows:
The differences between the value of real estate
assets, fixed assets and inventories in the
adjusted financial statements and their value for
tax purposes (considering the determinations set
forth in statement 40 of the Institute of Certified
Public Accountants in Israel) accrued vacation pay
and accrued severance pay.
Deferred tax balances are calculated according to
the expected tax rate when these taxes are released
to the statement of operations.
Companies which incurred tax loss carryforwards did
not record tax savings resulting from tax loss
carryforwards and temporary differences between
financial reporting and the recognition for tax
purposes due to the uncertainty to utilize these
losses.
Deferred taxes were included in respect of selling
investments in investees since the Company intends
to hold these investments.
k. Revenue recognition:
Revenues from sales of products are recognized upon
delivery to the customer.
l. Provision for completion and repairs:
The provision for completion and repairs is
computed based on Company's engineers estimate.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
m. Research and development costs:
Research and development costs, net of related
grants and participations, are charged to expenses,
as incurred.
n. Adjustment of computer systems for the Year 2000:
The costs required in order to adjust and modify
the Company's existing software in order for it to
be Year 2000 compliant are recorded as a current
expenses at the time they are incurred.
o. Loss per share:
Loss per share is calculated, in accordance with
Statement No. 55 of the Institute of Certified
Public Accountants in Israel. (See Note 25).
p. Convertible debentures:
Convertible debentures are included on the basis of
the probability of conversion, in accordance with
criteria set forth in Statement No. 53 of the
Institute of Certified Public Accountants in
Israel. In the event that the conversion is not
deemed foreseeable, the debentures are stated at
their monetary liability value at balance sheet
date, and in the event that the conversion is
likely, the debentures are presented among
liabilities and shareholders' equity at the greater
of their monetary liability value or capital value.
q. Concentration of credit risk:
Financial instruments that potentially subject the
Company to concentrations of credit risk consist
principally of cash, cash equivalents and trade
receivables.
The Company's cash and cash equivalents are
invested in deposits in major Israeli banks.
Management believes that the financial institutions
that hold the Company's cash and cash equivalents
are financially sound and, accordingly, credit
risks with respect to its cash and cash equivalents
are minimal.
The Group's sales are made in Israel and abroad to
a small number of customers. Sales in Israel are
mainly to the Ministry of Defense and to the
Israeli Military Industries. The Company's business
is dependent on the military segment, consequently,
any changes in the military marketplace could
affect the Company's operating results.
Generally, there is exposure due to the
concentration of credit among a small number of
customers. The Company performs ongoing credit
evaluations of its customers and generally does not
require collateral. In many cases, the Company
requires customer advances.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
r. Advertising costs:
The Company expenses advertising costs as incurred.
Advertising expenses for the years ended December
31, 1999, 1998 and 1997 were approximately $ 22
thousand, $ 31 thousand and $ 41 thousand,
respectively.
s. Accounting for stock-based compensation:
The Company accounts for stock-based compensation
in accordance with the requirements of APB 25
"Accounting for Stock Issued to Employees". Under
APB 25 when the exercise price of the Company's
employee options is less than the fair value of the
underlying stock on the date of grant, compensation
expense is recognized.
t. Fair value of financial instruments:
The book value of cash and cash equivalents, trade
receivables, other accounts receivable, short-term
credit from banks and others, trade payables and
other accounts payable approximates or equals to
their fair value.
u. Impact of recently issued accounting standards:
In June 1998, the Financial Accounting Standards
Board issued Statement of Financial Accounting
Standards No. 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities". The
Standard 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. The Statement
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
133 is effective for fiscal years beginning after
June 15, 2000, and must be applied to instruments
issued, acquired, or substantively modified after
December 31, 1997. The Company does not expect the
adoption of the accounting pronouncement to have a
material effect on its financial position or
results of operations.
v. Segment reporting:
The Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related
Information", in 1998. SFAS No. 131 supersedes
SFAS No. 14, replacing the "industry segment
approach" with the "management approach", whereby
companies report financial and descriptive
information
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
about their operating segments. Operating segments
are revenue-producing components of the enterprise
for which separate financial information is
produced internally and are subject to evaluation
by the chief operating decision-maker in deciding
how to allocate resources to segments (see Note
24).
NOTE 3:- DISCONTINUED OPERATIONS
a. In December 1994, the Company engaged in a contract
for the sale of all its holdings (100%) in JP Mfg.
Corp. ("Jerico") to TAT Technologies Ltd. ("TAT"),
in consideration for $ 1 and extending balances
which remained to the credit of the Group as loan,
effective as of January 1, 1995.
In May 1998, following counter claims filed by the
companies, TAT and the Company signed on a
settlement agreement in connection with the above
loan and the Company's commitments to TAT which
include also options (series E and series F) which
were granted to TAT. The settlement agreement was
validated by a Court order. It was agreed that any
party of the agreement waives his claims,
allegations and rights deriving from the business
relations between the parties or any other source.
The gain recorded from the settlement with TAT in
1998 was presented as income from discontinued
operations in the statement of operations.
b. During the first quarter of 1997, the Company
decided to terminate its activities in the
communications (telephony) segment. The decision
for terminating the activities in the
aforementioned segment was made due to the low
gross profit in regard to products identified with
that segment.
The Company's operating results in the
communications (telephony) segment for the year
ended December 31, 1997 were presented as
discontinued operations in the statement of
operations.
NOTE 4:- CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
<S> <C> <C>
Cash in NIS $ 1,588 $ 315
Cash in foreign currency 32 485
---------------- ----------------
$ 1,620 $ 800
================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NOTE 5:- TRADE RECEIVABLES
Open accounts $ 1,097 $ 1,305
Accrued income 491 -
---------------- ----------------
$ 1,588 $ 1,305
================ ================
NOTE 6:- OTHER ACCOUNTS RECEIVABLE
December 31,
-------------------------------------
1999 1998
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Government authorities $ 81 $ 94
Investees (1) 9 85
Accrued income 69 268
Others 12 21
---------------- ----------------
$ 171 $ 468
================ ================
(1) Intercompany balances among the Group
companies for the current year of operations.
NOTE 7:- INVENTORIES
Raw materials $ 1,610 $ (* 1,563
Work in progress 1,902 (* 1,911
Finished products 165 1,133
---------------- ----------------
3,677 4,607
Less - customer advances 313 480
---------------- ----------------
$ 3,364 $ 4,127
================ ================
*) Reclassified.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
NOTE 8:- LONG-TERM INVESTMENTS AND LOANS
a. In affiliate:
December 31,
-------------------------------------
1999 1998
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Cost of shares $ 3,489 $ 3,745
Loans - 1,089
Post-acquisition losses (2,809) (2,580)
---------------- ----------------
$ 680 $ 2,254
================ ================
</TABLE>
b. Additional data:
1. Reshef Technologies Ltd. ("Reshef") - a
100% owned subsidiary:
In the third quarter of 1997, the Company
wrote off the balance of the goodwill on
the acquisition of Reshef in the amount of
$ 4,043 thousand and on the purchase of
Amcoram (see 2. Below) in the amount of $
901 thousand. The write off was carried
out subsequent to the sharp decline in the
orders placed with the companies,
primarily by the Ministry of Defense, the
unsuccessful bids for a number of
significant projects and the valuations
performed for the aforementioned companies
by outside parties.
Soltam and Reshef held negotiations whose
essence is the merger of the fuse
activities of both companies through the
acquisition of Soltam fuse activity by
Reshef in exchange for issuance of Reshef
shares. The parties did not yet agree to
the final structure of the transaction.
2. Amcoram Ltd. ("Amcoram"):
In November 1999, Reshef sold its holdings
(100%) to the Company.
In April 1997, an agreement was concluded
between the Company and the company from
which Amcoram had been purchased. Pursuant
to the agreement, the balance of the loan
received from Amcoram's former parent
company in the amount of $ 1,481 thousand
was to be assigned to the Company and in
order to extinguish the balance, the
Company would issue 655,000 shares and
make a cash payment of $ 25 thousand. The
difference between the value of the
consideration and the loan balance was
recorded as a capital gain in the amount
of $ 389 thousand among "Other income"
(see Note 23f). The share issuance was
effected in the second quarter of 1998.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
3. Telegate Ltd. ("Telegate"):
a) In 1997 and 1998, the Company and
Aryt Holdings Ltd. (see b) granted
shareholders' loans convertible
into Telegate's shares in the
overall amount of $ 819 thousand.
In 1997, the Company converted a
loan of $ 300 thousand into
Telegate's shares.
In May 1998, Aryt Holdings Ltd.
purchased from another shareholder
of Telegate convertible
shareholders' loan in the amount
of $ 39 thousand (of which $ 33
thousand were purchased from Aryt
Holdings by the Company in
February 1999 at cost, see b).
The loans bear an interest rate of
Libor + 1.5% and will be repaid
after three years. The loans are
convertible according to the terms
of the loan agreement.
During the third quarter of 1999,
the Company and Aryt Holdings Ltd.
converted all the balance of
convertible shareholders' loans
into Telegate's shares.
b) In 1996 and 1997, the Company
exercised its option for the
purchase of additional shares of
Telegate and has invested through
a subsidiary which it had
established - Aryt Holdings Ltd.,
$ 841 thousand in Telegate's
shares, subsequent to assigning to
the subsidiary the right of first
refusal to purchase Telegate's
shares, which were offered by
other shareholders in Telegate.
Pursuant to the establishment
agreement of Aryt Holdings Ltd.,
Aryt Holdings Ltd. will issue 49%
of its capital to the investor, at
his request, in consideration for
a loan in the amount of $ 934
thousand for the purchase of
Telegate's shares. The loan is
linked to the dollar plus interest
rate of 12%. As collateral for the
loan, the investor was granted a
debenture convertible into Aryt
Holdings shares, so that when
converted, the investor will hold
in 99.99% of Aryt Holding's issued
share capital. The debenture will
be convertible when Telegate
publishes for the first time a
Registration Statement (which
serves as a prospectus for
effecting a public issuance in the
United States) or a like document
for a public issuance or when the
restrictions on conversion, as
above, are removed by virtue of
agreements between Telegate's
investors. In addition, the
investor is obligated to pay the
Company $ 4.00 for each Telegate
share purchased by Aryt Holdings
Ltd.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
As a result of the additional
investment in Telegate, the
Company recorded a capital gain
amounting to $ 120 thousand in
respect of funds received from the
investor as outlined in the
establishment agreement detailed
above. Commencing with the second
quarter of 1997, the investment in
Telegate is presented using the
equity method of accounting.
In May 1998, the Company invested
$ 1,246 thousand through Aryt
Holdings (by a loan granted by the
investor to Aryt Holdings, with
terms similar to those
aforementioned) in consideration
for 28,408 shares of Telegate (see
a) as for the purchase of
convertible shareholders' loan).
In February 1999, following the
issuance of debentures (series 4),
the Company purchased from Aryt
Holdings 23,678 shares in
Telegate, at the same price at
which the shares were purchased by
Aryt Holdings in May 1998 (see
also Note 15).
During the third quarter of 1999,
the Company and other shareholders
of Telegate converted
shareholders' loans convertible
into Telegate's shares and, as a
result, the Company's holdings in
Telegate increased.
On September 25, 1999, the
investor announced on the exercise
of the option for the purchase of
all of the shares of Aryt Holdings
Ltd. (a subsidiary) which was
granted in connection with a
collateral for a loan that the
investor provided in consideration
for $ 1 thousand. Subsequent to
the announcement of the exercise,
the investor holds in 100% of the
shares of Aryt Holdings Ltd. As a
result, the Company recorded a
capital gain amounting to $ 968
thousand.
In October 1999, Telegate effected
a private placement. As a result,
the Company's holdings in Telegate
decreased and a capital gain
amounting to $ 1,257 thousand was
recorded.
In October 1999, the Company
approved a commitment contract
entered between Telegate and
Terayon Communication System Inc.
("Terayon") and all of Telegate
shareholders in the matter of
selling all of Telegate's shares
to Terayon in consideration for
shares in Terayon and cash
payment. The completion of the
transaction was conditioned upon
obtaining various approvals which,
as of balance sheet date, have not
yet been obtained and,
accordingly, the investment in
Telegate is reported among current
assets.
In January 2000, the transaction
was completed and the Company
received 220,000 shares of Terayon
(representing 1% of Terayon share
capital), of which 16,000 will be
deposited with a trustee for 12
months and their receipt is
pending the reasonability of the
presentations presented to Terayon
for the purpose of the
transaction. The Company is also
to receive $ 160 thousand in cash.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
Subsequent to listing the shares
for trade, the Company sold
200,000 shares of Terayon in
exchange for $ 41 million.
As a result of the transaction and
the sell of Terayon shares, the
Company will record a capital gain
of $ 12 million, before tax, and
additional gain from sale of
securities of $ 29 million, before
taxes.
NOTE 9:- PROPERTY AND EQUIPMENT, NET
a. Composed as follows:
Buildings
And Machinery Office
Leasehold And furniture
Improvements Equipment Motor and Investment
(**) (*) Vehicles equipment grant Total
---------------- ------------ ------------ ------------- ------------- -----------
U.S. dollars
------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Cost:
Balance at January 1, 1999 $ 1,751 $ 5,285 $ 450 $ 383 $ (1,576) $ 6,293
Additions during the year - 171 71 - - 242
Disposals during the year - (117) (217) - - (334)
---------------- ------------ ------------ ------------- ------------- -----------
Balance at December 31,
1999 1,751 5,339 304 383 (1,576) 6,201
---------------- ------------ ------------ ------------- ------------- -----------
Accumulated depreciation
Balance at January 1, 1999 684 3,856 267 284 (922) 4,169
Additions during the year 80 435 55 15 (110) 475
Disposals during the year - (117) (183) - - (300)
---------------- ------------ ------------ ------------- ------------- -----------
Balance at December 31,
1999 764 4,174 139 299 (1,032) 4,344
---------------- ------------ ------------ ------------- ------------- -----------
Depreciated cost at
December 31, 1999 $ 987 $ 1,165 $ 165 $ 84 $ (544) $ 1,857
================ ============ ============ ============= ============= ===========
Depreciated cost at
December 31, 1998 $ 1,067 $ 1,429 $ 183 $ 99 $ (654) $ 2,124
================ ============ ============ ============= ============= ===========
*) Including self made equipment and machinery in the amount of $ 476 thousand.
**) Including $ 5 thousand in respect of leasehold rights on 3,511 sq. m. of land until
2035. The land is registered in the name of the Company with the Israel Lands
Administration.
</TABLE>
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
b. Investment grant:
The investment grant, which was deducted from the
cost of assets, has been received by the Company
and Reshef, pursuant to the Law for the
Encouragement of Capital Investments, 1959 (see
Note 18a). Final approval for receiving the grant
is subject to the implementation of the approved
plan and compliance of the terms of the approval.
In the opinion of the Company's management and the
subsidiary's management, the companies comply with
the terms related to the receipt of the grant.
c. As for charges, see Note 21.
NOTE 10:- DEFERRED CHARGES, NET
Issuance expenses
of debentures
----------------------
U.S. dollars
----------------------
(In thousands)
Balance at January 1, 1999 $ 153
Amortization during the year 102
----------------------
Balance at December 31, 1999 $ 51
======================
NOTE 11:- CREDIT FROM BANKS AND OTHERS
a. Composition:
<TABLE>
<CAPTION>
Weighted interest rate December 31,
--------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
% U.S. dollars
--------------------------------- ---------------------------------
(In thousands)
From banks:
<S> <C> <C> <C> <C>
NIS - unlinked 15-22 16-22 $ 793 $ (* 124
Linked to the U.S. dollar Libor+1.25 Libor+1.25 725 (* 126
--------------- ---------------
1,518 250
Current maturities
of debentures and
long-term loans (1) 2,841 (* 432
--------------- ---------------
$ 4,359 $ 682
=============== ===============
</TABLE>
(1) See Notes 15 and 16.
*) Reclassified.
The Company's unused line of credit amounts to approximately $ 24
thousand.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
b. As for charges, see Note 21.
NOTE 12:- TRADE PAYABLES
December 31,
--------------------------------
1999 1998
-------------- --------------
U.S. dollars
--------------------------------
(In thousands)
<S> <C> <C>
Open accounts $ 605 $ 672
Notes payable 214 156
-------------- --------------
$ 819 $ 828
============== ==============
NOTE 13:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31,
-------------------------------------
1999 1998
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Employees and payroll accruals $ 266 $ 393
Government authorities 131 111
Accrued expenses 1,616 1,408
Related parties (1) 351 -
Others - 77
---------------- ----------------
$ 2,364 $ 1,989
================ ================
(1) Linked to the U.S. dollar.
NOTE 14:- CUSTOMER ADVANCES
December 31,
-------------------------------------
1999 1998
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
Customer advances $ 611 $ 1,315
Less - advances netted from inventory 313 480
---------------- ----------------
$ 298 $ 835
================ ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
NOTE 15:- CONVERTIBLE DEBENTURES
a. Composition
Linkage Weighted December 31,
-------------------------------------
Terms interest 1999 1998
------------ ------------- ----------------- ----------------
% U.S. dollars
------------- -------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Convertible debentures
(series 3) Dollar 4.9 $ 2,547 $ 2,971
Convertible debentures
(series 4) Dollar 7.2 1,240 -
Convertible debentures
(series 5) Dollar 7.2 - 1,500
----------------- ----------------
3,787 4,471
Less - current maturities
1,665 424
----------------- ----------------
$ 2,122 $ 4,047
================= ================
</TABLE>
Convertible debentures (series 1):
In November 1992, the Company issued debentures to
the public which were due to mature in three
consecutive annual installments commencing November
1997.
In December 1997, the holders of debentures (series
1) converted all debentures (series 1) into
14,815,305 of the Company's Ordinary shares in
consideration for $ 11 thousand.
Convertible debentures (series 3):
In February 1997, the Company issued debentures
(series 3) in consideration for debentures (series
2). The debentures are convertible into shares at
current conversion rate of 297.4%.
The debentures mature in nine equal annual
installments commencing October 1997. The
unconverted principal of the debentures bear
interest at a rate of 4.9% per annum payable
semi-annually.
In addition, in exchange for and in consideration
of the original options held by the holders of
debenture (series 2), the Company issued new
options in an amount equal to the amount of old
options which were turned over by the holders of
debenture (series 2).
600,200 options - (options series D) are
convertible up to four years from when they were
issued at an exercise increment of $ 1 per share
for the first two years after they were issued, and
$ 1.10 per share up to four years.
As of balance sheet date, no options (options
series D) were converted into shares.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
As part of the debenture (series 2) arrangement,
the Company undertook various commitments, such as:
increasing its shareholders' equity within 24
months, reports to the escrow agent for the
debentures as well as setting limits to the scope
of its activities and penetrating into new business
segments. Non-compliance with these commitments
will result in a retroactive change in the interest
rate from January 1, 1997. However, in any event
the Company will not be required to pay interest at
a rate higher than the dollar interest rate of 5.9%
per annum. According to the Company's management,
as of balance sheet date, the Company is complying
with these commitments.
In March 1997, the Company redeemed debentures
(series 3) of NIS 1,225,000 par value in
consideration for $ 191 thousand. The Company
recorded a capital gain from the redemption of part
of the series of debentures in the amount of $ 219
thousand.
In 1998 and 1999, the Company redeemed debentures
which were issued to institutions in consideration
for $ 424 for each of the years. Up to balance
sheet date, the Company either converted or
redeemed 12,409,444 par value of debentures into
shares.
As of December 31, 1999, the balance of the
outstanding debentures is NIS 7,573,334 par value.
Convertible debentures (series 4):
In November 1998, the Company entered into an
agreement to allocate NIS 6,286,500 par value of
debentures for NIS 1 per NIS 1 par value of
debentures.
The debentures were allocated in February 1999 and
the consideration amounted to $ 1,500 thousand.
The debentures are convertible into shares at
current conversion rate of 112%.
The debentures are linked to the representative
exchange rate of the dollar and are due to mature
on November 22, 2000. The unpaid balance of the
debenture principal will bear interest at a rate of
7.2% per annum payable on November 22, 2000.
During the year, 1,087,151 par value of debentures
were converted into 1,087,151 shares of NIS 1
nominal value each.
As of December 31, 1999, the balance of the
outstanding debentures is NIS 5,199,349 par value.
In February 2000, in furtherance to an offering
presented in December 1999, Amcoram purchased the
Company's debentures (series 4) in consideration
for $ 1,427 thousand. In March 2000, Amcoram (a
subsidiary) converted all the balance of the
outstanding balance of debentures (series 4) it
owned into 4,642,275 Ordinary shares of the
Company.
Convertible debentures (series 5):
In November 1998, the Company entered into an
agreement to allocate NIS 6,353,859 par value of
debentures for NIS 1 per NIS 1 par value of
debentures.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
The debentures are convertible to shares and the
conversion rate will be as follows:
For a period of one year from the issuance date -
according to a conversion rate of 100% and 112%
thereafter. The debentures are linked to the sales
rate of the dollar (transfers and checks) and are
due to mature in one payment at the end of two
years from the debenture issuance.
The debentures bear an annual interest rate of 7.2%
to be paid at the end of two years from the
debenture issuance. The debentures were allocated
in December 1998.
During the year, all the debentures were converted
into shares.
b. Aggregate maturities of the debentures are as follows:
December 31,
-------------------------------------
1999 1998
---------------- -----------------
U.S. dollars
-------------------------------------
(In thousands)
<S> <C> <C>
First year - current maturities $ 1,665 $ 424
---------------- ----------------
Second year 425 1,925
Third year 425 425
Fourth year 424 425
Fifth year 424 424
Sixth year 424 424
Seventh year - 424
---------------- ----------------
2,122 4,047
---------------- ----------------
$ 3,787 $ 4,471
================ ================
c. As for collateral provided to secure the debentures (series 3), see Note 21.
NOTE 16:- LONG-TERM BANK LOAN AND OTHER LONG-TERM LIABILITIES
a. Long-term bank loan:
December 31, 1999
Weighted
--------------------
interest Linked to CPI
--------------------
rate U.S. dollars
--------------------
----------------
% (In thousands)
----------------
Banks 17.5 $ 8
Less - current maturities 8
--------------------
$ -
====================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
b. Other long-term liabilities:
Weighted In or linked
interest Linked to foreign
rate to CPI currency Total
-------------- -------------- ------------------ --------------
% U.S. dollars
-------------- ---------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Liabilities to related
parties (1) Prime+3 $ - $ 1,167 $ 1,167
Liabilities to lessor
of equipment 5.6 1 - 1
-------------- ------------------ --------------
1 1,167 1,168
Less - current maturities 1 1,167 1,168
-------------- ------------------ --------------
$ - $ - $ -
============== ================== ==============
</TABLE>
(1) See Note 26.
NOTE 17:- ACCRUED SEVERANCE PAY
a. The liability of the Company and its subsidiaries
in respect of severance pay is computed based on
the most recent salary of employees as of balance
sheet date and pursuant to the Severance Pay Law,
and is partly covered by deposits with insurance
companies in respect of managers' insurance
policies and provident funds and by the accrual in
respect of employee rights upon retirement.
The accrued severance pay presented in the balance
sheet covers the Company's liabilities as of
December 31 , 1999.
b. The amounts deposited in managers' insurance
policies and provident funds in the name of the
employees and the related liability are not
included in the balance sheet as they are not under
the control and management of the Company.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 18:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of
Capital Investments, 1959:
- Reshef plant was granted an "approved
enterprise" status under the Law for the
Encouragement of Capital Investments, 1959
("the law"). Undistributed income derived
from the approved enterprise is entitled
to a reduced tax rate of 25% for seven
years.
The benefit period for the approved
programs of Reshef commenced in 1991 and
1996. As for the program assigned from the
Company, the benefit period has not yet
commenced and it is dependent upon the
fulfillment of the terms stipulated for
the assignment of the program.
- If a dividend is distributed out of income
attributable to revenues from an "approved
enterprise", it will be liable to tax at
the rate of 15%.
b. Law for the Encouragement of Industry (Taxation),
1969:
The Company's subsidiaries are "industrial
companies" under the Law for the Encouragement of
Industry (Taxation), 1969, and accordingly, the
companies are entitled to certain tax benefits in
accordance with this law.
c. Taxation under inflation:
In accordance with the Income Tax (Inflationary
Adjustments) Law, 1985, the results for tax
purposes are measured in real terms based on the
changes in the Israeli CPI.
d. Losses carried forward to future years:
As of December 31, 1999, carryforward tax losses
aggregate $ 18 million (31.1.2.1998 - $ 16
million). These losses may be carried forward and
offset against taxable income in the future for an
indefinite period.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
e. Deferred taxes:
Deferred tax assets (liabilities) are composed as
follows:
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Provisions for employee benefits $ 147 $ 135 $ 175
In respect of tax loss carryforward 6,115 6,388 5,600
-------------- -------------- --------------
Gross deferred tax assets 6,262 6,523 5,775
-------------- -------------- --------------
Depreciation 314 178 144
Inventory (3) 159 4
-------------- -------------- --------------
Gross deferred tax liabilities (311) (337) (148)
-------------- -------------- --------------
Net deferred tax assets 5,951 6,186 5,627
Valuation allowance for deferred
taxes (1) (5,951) (6,186) (5,600)
-------------- -------------- --------------
Net deferred tax liabilities $ - $ - $ 27
============== ============== ==============
</TABLE>
(1) Management currently believes that, due to the
history of losses history of over the past years,
it is more than likely that the deferred tax
regarding the loss carryforward and other temporary
differences will not be realized.
The deferred taxes are presented in the
consolidated balance sheet as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
---------------- ----------------
U.S. dollars
-------------------------------------
(In thousands)
<S> <C> <C>
Among current assets $ - $ -
Among long-term liabilities - -
---------------- ----------------
$ - $ -
================ ================
</TABLE>
Deferred tax balances are computed at the tax rate
expected to be in effect at the time when they will be
realized - 25%.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
f. Taxes on income included in the statements of operations:
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income (loss) before taxes on income:
Israel $ 697 $ (2,316) $ (6,218)
United States - - -
-------------- -------------- --------------
$ 697 $ (2,316) $ (6,218)
============== ============== ==============
Taxes on income included in the statements
of operations:
Deferred taxes in Israel (see e. above) $ - $ $
27 50
============== ============== ==============
</TABLE>
Current taxes during the reported year were computed at the
average tax rate of 25% expected to apply to Reshef income
due to its "approved enterprise" status (1998 - 25% and 1997
- 25%).
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
g. Reconciliation of theoretical tax expense:
A reconciliation of theoretical tax expense,
assuming all income is taxed at the statutory rate
applicable to the income of companies in Israel,
and the actual tax expense, is as follows:
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Income (loss) before taxes on income $ 697 $ (2,316) $ (5,609)
============== ============== ==============
Statutory tax rate in Israel 36% 36% 36%
============== ============== ==============
Theoretical tax expenses (benefit) $ 250 $ (834) $ (2,020)
Increase (decrease) in taxes resulting
from permanent differences - the tax
effect:
Tax benefit resulting from reduction in tax
rates for "approved enterprise" 338 141 59
Tax adjustments in respect of inflation in
Israel and others 60 40 22
Tax-exempt income (928) - -
Non-deductible expenses 21 33 104
Utilization of carryforward tax losses for
which deferred taxes were not ecorded in
the past (350) - -
Losses for tax purposes for which deferred
taxes were not recorded 609 647 1,885
-------------- -------------- --------------
Taxes on income $ - $ 27 $ 50
============== ============== ==============
Effective tax rate - 1.2% 0.9%
============== ============== ==============
</TABLE>
h. Tax assessments:
Final tax assessments, by virtue of the law, have
been received by the Company and by subsidiaries
through the 1994 tax year.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
NOTE 19:- CONTINGENT LIABILITIES AND COMMITMENTS
a. Contingent liabilities:
1. Guarantees that were provided:
As of balance sheet date, contingent
liabilities in respect of guarantees to
banks and customers are as follows:
December 31, 1999
------------------
U.S. dollars
------------------
(In thousands)
<S> <C>
Guarantees to customers in respect of advances and raw material $ 571
==================
</TABLE>
In addition, there are unlimited
guarantees in favor of subsidiaries.
2. Legal claims filed against the Group:
In November 1999, a group of the Company's
shareholders filed a claim against the
Company and certain of its directors and
related parties. The main allegations
raised in the indictment against the
Company are in respect of the Company's
assignment of its rights in Telegate Ltd.
without consideration and unlawfully,
hence, causing to the dilution of its
holdings in the affiliate.
The plaintiffs further claim that as a
result of the private placement (see Note
20a), the Company caused to the dilution
of the value of shareholding beyond that
necessary as it did not accept the
plaintiffs proposal to issue to them
shares and options at like terms plus 5%.
The Company entirely rejects the
allegations raised against it in the
indictment.
Company management is of the opinion that
the claim will not have any material
impact on the Company except for fees, for
which a provision was recorded in the
books.
3. There is a dispute between a subsidiary
and a customer in the framework of which
each party raised different arguments. At
this stage, the demands were halted under
the agreement that at a later stage the
dispute will be submitted to arbitration
procedure. The Company believes that its
prospects of the dispute are good and, as
for expenses that the Company may
reimburse, a provision was recorded in the
books.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
b. Commitments:
1. For lease of buildings:
The Company has entered into operating
lease agreements for buildings for various
periods terminating in 2008.
Future rental fees under non-cancelable
lease agreements as of December 31, 1999,
are as follows:
U.S. dollars
--------------------
(In thousands)
<S> <C>
First year $ 386
Second year 386
Third year 386
Fourth year 386
Fifth year 386
Sixth year and thereafter 1,158
--------------------
$ 3,088
====================
</TABLE>
2. Employment contract with the CEO:
The Company signed an employment contract
with its CEO according to which there is
an early notification period of four
months should one of the parties
discontinues the contract. Should the
Company notifies its CEO of the
termination of this contract, he would be
entitled to an adjustment period of three
months. Further, in the event that the
termination of the contract between the
parties is as a result of transfer of the
control over the Company, or within nine
months from the date the control over the
Company is transferred, the CEO will
receive a special compensation grant in an
amount in NIS which equals $ 75 thousand.
The Company has made a provision in its
financial statements for the amounts due
in the adjustment period.
3. Royalties:
a) A subsidiary has received
participation grants for research
and development from the
Government of Israel in
consideration for which the
subsidiary is committed to pay
royalties at the rate of 2% - 3%
on sales proceeds from products in
which the Government participated
in the research and development,
in an amount not to exceed
100%-150% of the total grants
received.
During 1998, the Company received
a demand for payment of royalties
in the amount of $ 602 thousand.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
Company's management estimates
that the total commitment for the
payment of royalties will not
exceed $ 250 thousand in respect
of which a provision was recorded
in the books.
b) A subsidiary was awarded from the
Fund for the Encouragement of
Marketing Activities grants for
participation in marketing
expenses overseas in consideration
for which the subsidiary is
committed to pay royalties at the
annual rate of 3% of the increase
in export sales from products
marketed abroad in which the Fund
participated in marketing.
c) As of December 31, 1999 and 1998,
the Company has a remaining
contingent obligation for
royalties as described in a) and
b) above of $ 2,436 thousand and $
2,888 thousand, respectively.
NOTE 20:- SHAREHOLDERS' EQUITY
a. The Company's share capital is composed as follows:
Authorized Issued and outstanding
-------------------------------- --------------------------------
December 31, December 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Number of shares
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ordinary shares of NIS 1
nominal value each 61,000,000 41,000,000 38,297,756 27,706,756
============== ============== ============== ==============
</TABLE>
The Ordinary shares confer upon their
holders the right to participate and vote
in the general meetings, to receive
dividends and to participate in the excess
of assets upon liquidation of the Company.
In February 1997, TAT converted 18,274
stock options (series E) and 18,274 stock
options (series F) into the Company
shares.
In July 1998, the Board of Directors
decided to recommend to the general
meeting to reduce the Company's capital by
converting every ten Ordinary shares of
NIS 1 nominal value each into one Ordinary
share of NIS 1 nominal value each. On July
10, 1998, in an extraordinary meeting, a
special resolution regarding the
aforementioned capital reduction was
accepted. On July 30, 1998, the Court
approved the capital reduction. As of
December 31, 1999, the capital reduction
was not effected and the Company does not
intend to implement it.
In February 1999, the Company's authorized
share capital was increased by 20 million
Ordinary shares of NIS 1 nominal value
each.
In November 1999, a private placement of
3,150,000 Ordinary shares of NIS 1 nominal
value each was completed for the proceeds
of $ 744 thousand. In addition to the
shares, the Company issued to an investor
options, see b. below.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
As for the conversion of debentures into
shares, see Note 15.
b. Stock options:
1. As for stock options (series D) which were
issued within the framework of issuance of
convertible debentures (series 3), see
Note 15.
2. Options (series G) - 3,150,000
non-marketable options which were issued
under a private placement (see a. above)
are exercisable until September 2000. Each
option confer upon its optionee the right
to purchase one Ordinary share of NIS 1
nominal value for NIS 1.
In February and March 2000, 157,500
options (series G) were exercised into
157,500 shares.
3. Options (series H) - 3,150,000
non-marketable options which were issued
under a private placement (see a. above)
are exercisable until September 2001. Each
option confer upon its optionee the right
to purchase one Ordinary share of NIS 1
nominal value for NIS 1.125.
4. As for stock options (series I) which were
issued to the Company's employees and CEO,
see Note 27f.
NOTE 21:- CHARGES
a. As a collateral for the Group's liabilities,
real estate was mortgaged and fixed charges were
placed on plant and equipment, insurance rights,
goodwill, deposits with banks and others and
receipts from customers. Floating charges were
placed on the Group's assets. In addition, part of
the shares of subsidiaries were pledged.
b. In respect of a series of NIS 8,836 thousand par
value of debentures (series 3), the Company will
place a junior in priority fixed charge of NIS 1.
In addition, the Company is committed to
collateralize any amounts raised, if so raised, by
the Company against future issuance of the
Company's shares, by a senior in priority specific
charge that will always secure the balance of the
final three payments of the principal.
As an additional collateral for payment of the
debentures, the Company has undertaken to place a
senior in priority specific charge on half of any
amount added to its shareholders' equity from the
exercise of the options (series C and series D), if
so exercised, by the holders of the debentures.
In any event, the inclusive amount pledged in favor
of holders of debentures will not exceed, in dollar
terms, the unpaid balance of the final three
payments of the principal.
c. As a collateral for complying with the terms of the
"approved enterprise" status granted to a
subsidiary pursuant to the Law for the
Encouragement of Capital Investments, 1959, the
subsidiary placed an unlimited floating charge on
all its assets in favor of the State of Israel.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
d. The balances of the secured liabilities are as follows:
December 31,
-------------------------------------
1999 1998
---------------- ----------------
U.S. dollars
-------------------------------------
(In thousands)
<S> <C> <C>
Credit from banks (see Note 11) $ 1,518 $ (* 250
Long-term liabilities (including current
maturities) (Notes 11, 15 and 16) 3,795 (* 4,479
Customer advances (see Note 14) 611 1,315
----------------- ----------------
$ 5,924 $ 6,044
================= ================
*) Reclassified.
</TABLE>
e. As a collateral for its commitments for lease fees,
the Company delivered two promissory notes to the
lessor in the overall amount of $ 310 thousand.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------------------------------------------
NOTE 22:- LINKAGE TERMS OF MONETARY BALANCES
December 31, 1999 December 31,
--------------------------------------------------------------- ----------------
In or
Linked to linked to Linked to
the Israeli foreign the Israeli
CPI currency **) Unlinked Total CPI
------------- -------------- -------------- -------------- --------------
U.S. dollars
----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents $ - $ 32 $ 1,588 $ 1,620 $ -
Trade receivables - 604 984 1,588 -
Other accounts receivable - - 159 159 131
Long-term loans - - - - -
------------ ------------- ------------- ------------- -------------
$ - $ 636 $ 2,731 $ 3,367 $ 131
============ ============= ============= ============= =============
LIABILITIES
Credit from banks and others $ - $ 725 $ 793 $ 1,518 $ -
Trade payables - 116 703 819 -
Other accounts payable and
accrued expenses - 351 2,013 2,364 -
Long-term liabilities 1 4,954 8 4,963 (* 9
------------ ------------- ------------- ------------- -------------
$ 1 $ 6,146 $ 3,517 $ 9,664 $ (* 9
============ ============= ============= ============= =============
(Table Continued)
1998
-------------------------------------------------
In or
linked to
foreign
currency** Unlinked Total
------------ ----------- ---------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 485 $ 315 $ 800
Trade receivables 788 517 1,305
Other accounts receivable 41 296 468
Long-term loans 1,089 - 1,089
------------ ------------- -------------
$ 2,403 $ 1,128 $ 3,662
============ ============= =============
LIABILITIES
Credit from banks and others $ 126 $ 124 $ (* 250
Trade payables 88 740 828
Other accounts payable and
accrued expenses 1 1,988 1,989
Long-term liabilities 7,543 - 7,552
------------ ------------- -------------
$ 7,758 $ 2,852 $ 10,619
============ ============= =============
*) Reclassified.
*) Mainly the U.S. dollar.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
NOTE 23:- SUPPLEMENTARY INFORMATION TO THE STATEMENTS OF OPERATIONS
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
a. Cost of sales:
Materials $ 2,348 $ (* 3,331 $ 3,550
Labor costs 1,289 1,306 1,681
Subcontracted work 120 128 1,863
Other manufacturing expenses 494 886 732
Deprecation 305 378 446
-------------- -------------- --------------
4,556 6,029 8,272
Decrease (increase) in inventory of
work in progress 9 (* (176) 197
Increase in inventory of finished products
968 (788) (180)
-------------- -------------- --------------
$ 5,533 $ 5,065 $ 8,289
============== ============== ==============
b. Research and development costs, net:
Materials $ 33 $ 182 $ 463
Labor costs 438 545 938
Depreciation 47 48 92
Other expenses 377 167 282
-------------- -------------- --------------
895 942 1,775
Less - Government grants 50 163 434
-------------- -------------- --------------
$ 845 $ 779 $ 1,341
============== ============== ==============
c. Selling and marketing expenses:
Wages and salaries $ 197 $ 193 $ 125
Commissions - 10 54
Advertising 41 31 41
Others 188 168 202
-------------- -------------- --------------
$ 426 $ 402 $ 422
============== ============== ==============
*) Reclassified.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
d. General and administrative expenses:
Wages and salaries $ 535 $ 547 $ 599
Maintenance expenses 320 456 367
Professional consulting 380 381 361
Depreciation and amortization 123 93 646
Other 94 154 73
-------------- -------------- --------------
$ 1,452 $ 1,631 $ 2,046
============== ============== ==============
e. Financial expenses, net:
Financial expenses in respect of
convertible debentures $ 235 $ 195 $ 331
Financial expenses in respect of
long-term loans 2 365 53
Financial expenses in respect of
short-term loans 201 -
Earnings from deposits with banks (25) (91) (15)
Interest income (124) - -
Other financial expenses including
translation differences 33 34 170
-------------- -------------- --------------
$ 322 $ 503 $ 539
============== ============== ==============
f. Other income (expenses), net:
Gain from sale of investment in
subsidiary (1) $ 968 $ - $ -
Gain from decrease of holdings in
investees (1) 1,257 - 146
Capital gain (loss) on sale of
fixed assets 9 (9) 11
Capital gain from assignment of
investment rights in Telegate (1) - - 120
-------------- -------------- --------------
$ 2,234 $ (9) $ 277
============== ============== ==============
(1) See Note 8b(3).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
g. Income (loss) from discontinued operations:
The operating results of Jerico and the Company's
operating results in the communications (telephony)
segment, which were discontinued, were reclassified
in the financial statements (see Note 3). The
effect of the discontinued operations on the
statements of operations is as follows:
Year ended December 31,
---------------------------------
1998 1997
--------------- ---------------
U.S. dollars
---------------------------------
(In thousands)
<S> <C> <C>
Revenues from sales $ - $ 448
Cost of sales - 394
-------------- --------------
Gross profit - 54
-------------- --------------
Research and development costs, net - 61
Selling expenses - 18
General and administrative expenses - 37
-------------- --------------
- 116
-------------- --------------
Operating loss - (62)
Other income, net 1,054 -
-------------- --------------
$ 1,054 $ (62)
============== ==============
</TABLE>
NOTE 24:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Summary information about geographic areas:
The Company manages its business on a basis of one
reportable segment. See Note 1 for a brief
description of the Company's business. The
Company's business is divided into four main
geographic areas: Israel, Asia, Europe and United
states. Total revenues are attributed to geographic
areas based on location of customers.
This data is presented in accordance with SFAS 131
"Disclosures about Segments of an Enterprise and
Related Information", which the Company has
retroactively adopted for all periods presented.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
The following presents total revenues for the years
ended December 31, 1999, 1998 and 1997 and
long-lived assets as of December 31, 1999 and 1998:
Long- Long- Long-
Total lived Total Lived Total lived
Revenues assets revenues Assets revenues assets
-------------- --------------- --------------- --------------- --------------- ---------------
U.S. dollars
---------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Israel $ 5,533 $ 1,908 $ 4,518 $ 4,531 $ 8,482 $ 4,824
Asia 1,083 - 837 - 1,829 -
Europe 425 - 718 - 204 -
United states - - - - 1,216 -
-------------- --------------- --------------- --------------- --------------- ---------------
$ 7,041 $ 1,908 $ 6,073 $ 4,531 $ 11,731 $ 4,824
============== =============== =============== =============== =============== ===============
</TABLE>
Total revenues are divided by the following
products:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Ammunition components $ 3,269 $ 3,459 $ 8,248
Firing ranges 1,998 2,614 3,483
Other 1,774 - -
-------------- -------------- --------------
$ 7,041 $ 6,073 $ 11,731
============== ============== ==============
b. Major customer data:
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
Sales to customer A $ 3,352 $ 2,696 $ 7,015
============== ============== ===============
Percentage of total sales 47.6% 44.4% 59.8%
============== ============== ===============
Sales to customer B $ 1,591 $ 1,621 $ 4,364
============== ============== ===============
Percentage of total sales 22.6% 26.7% 37.2%
============== ============== ===============
Sales to customer C $ 1,084 $ 838 $ 352
============== ============== ===============
Percentage of total sales 15.4% 13.8% 3%
============== ============== ===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
NOTE 25:- EARNINGS (LOSS) PER SHARE
a. Number of shares and loss used in the computation of loss per share:
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
<S> <C> <C> <C>
Basic and diluted loss (in U.S. dollars
in thousand) :
Loss, as reported in the statement
of operations $ 1,866 $ 3,066 $ 6,671
============== ============== ==============
Loss used in computation of
basic and diluted loss $ 1,777 $ 3,066 $ 6,662
============== ============== ==============
Number of shares:
Weighted average number of shares
used in the computation 28,929,461 27,514,318 6,945,643
Add -
Shares from conversion of
stock options - - 37,000
Shares from conversion of
of debentures (series 1) - - 19,669,565
Options which are likely to be
exercised 4,642,276 - 207,110
-------------- -------------- --------------
Number of shares used in the
computation of basic and diluted loss 33,571,737 27,514,318 26,859,318
============== ============== ==============
Computed interest rate used in
capitalizing payments linked
to the U.S. dollar 6% 5% 6%
============== ============== ==============
Computed interest rate used in
capitalizing NIS payments 10% 12.5% 14%
============== ============== ==============
</TABLE>
b. The diluted loss per share is not materially
different from the basic loss per share.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
NOTE 26:- TRANSACTIONS AND BALANCES WITH RELATED PARTIES
a. In November 1997 and April 1998, the Company
received loans from a then shareholder, Yorocal
Investments and Development Ltd. ("Yorocal"), in
the amount of $ 932 and $ 50 thousand,
respectively. The loans bear interest of prime + 3%
and are repayable immediately upon request. The
loans may be converted immediately into the
Company's shares upon the lender's request.
In February 1998, the Company announced the
allocation of shares to Yorocal following a request
from Yorocal to convert the loans balance into the
Company's shares. As of December 31, 1999,. The
allocation of the shares was not carried out since
the shareholders did not yet convene to approve the
transaction and all the approvals, which are
required under the law, were not yet obtained.
In view of the time that has elapsed, the Company
resolved not to carry out the above allocation.
In March 2000, the Company repaid the loan and,
therefore, the loan is reported among current
liabilities.
b. As for a loan which Aryt Holdings received from a
related party, see Note 8b(3)(b).
c. In December 1997, Aryt Holdings received a loan
from a related party in the amount of $ 101
thousand. In April and May 1998 Aryt Holdings
received loans from a related party in the amount
of $ 55 and $ 1,285 thousand, respectively. The
loans are linked to the dollar and bear interest at
the rate of 12%. A maturity date has not yet been
determined in respect thereof.
d. As for the allocation of 700,000 options (series I)
to the CEO, see Note 27f.
e. As for the employment contract of the CEO, see Note
19b(2).
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
f. Transactions with related parties:
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
1. Cost of sales, selling, general, and
administrative expenses and
financial expenses:
Management fees and rental
payments from affiliate $ (360) $ (316) $ (136)
Salary and related benefits to
the CEO of the Group 262 255 177
Directors' fees (3 directors) 26 29 28
Financial expenses to affiliates
and shareholder, net 146 (17) 20
-------------- -------------- --------------
$ 74 $ (49) $ 89
============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
-------------- --------------
U.S. dollars
--------------------------------
(In thousands)
<S> <C> <C>
2. Balances with related parties:
Debit balance (see Notes 6 and 8) $ 2 $ 1,175
============== ==============
The highest debit balance
during the year $ 891 $ 1,175
============== ==============
Credit balance
(see Notes 13, 16, 26) $ 1,518 $ 4,093
============== ==============
</TABLE>
NOTE 27:- SUBSEQUENT EVENTS
a. As for the completion of the transaction for the
sale of Telegate's shares, see Note 8b.
b. As for the exercise of options (series G), see
Note 20b.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
c. As for the purchase of debentures (series 4) by
Amcoram and their conversion, see Note 15.
d. In February 2000, the Company signed on agreement
to invest in Sensutech Ltd. ("Sensutech"), whereby
the Company will invest $1 million in
consideration for the issuance of shares which will
confer upon the Company 25% of the overall rights
in Sensutech.
The Company will be granted an option to increase
its shareholdings in Sensutech by additional 15% in
consideration for an additional investment of $ 1
million, so that after the above investment the
Company will hold in 40% of Sensutech shares.
e. In January 2000, the Company extended a line of
credit of $ 150 thousand to Voice Diary in
consideration for 10% of to Voice Diary shares.
In addition, the Company was granted an option to
make an additional investment of $ 100 thousand
until December 31, 2000 in consideration for
additional 10%.
f. In January 2000, the Company approved a stock
option plan (options series I) to its employees and
CEO for the issuance of 1,550,000 option (series
I).
The options are exercisable into Ordinary shares of
NIS 1 nominal value each at NIS 1.35 per NIS 1
Ordinary share (the market price of the Company's
shares at the date the plan was approved by the
Board was NIS 1.33).
The options vest over 4 years. The options will
expire on May 31, 2005. In March 2000, the issuance
of options was approved by the general meeting of
shareholders.
g. On January 10, 2000, the Company provided a loan of
$ 75 thousand to a start-up company. The loan is
linked to the dollar and bears annual interest at
the rate of 8%. If the Company decides to invest in
the company, the loan will became advance on
account of investment. The loan matures by June 30,
2000. A guarantee was provided for the loan.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTE 28:- DIFFERENCES BETWEEN ISRAELI AND UNITED STATES GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES ("GAAP")
The consolidated financial statements of the
Company conform with generally accepted accounting
principles in Israel ("Israeli GAAP"), which differ
in certain respects from those followed in the
United States ("U.S. GAAP"), as described below:
a. Accrued severance pay, net:
The amounts funded in regard to liabilities in
respect of employee rights upon retirement are
presented as a deduction from the liabilities in
Note 15, whereas according to U.S. GAAP, such
amounts funded would be presented in the balance
sheet as long-term assets.
The amounts funded in regard to liabilities in
respect of employee rights upon retirement as of
December 31, 1999 and 1998, are $ 488 thousand and
$ 428 thousand, respectively.
b. Treatment of deferred taxes on income:
Under the Israeli Law for Encouragement of Capital
Investments, 1959, companies which own an "approved
enterprise" and are entitled to investment grants
(see Note 9b), are generally taxed at a rate of 25%
of attributable income during "the period of
benefits".
Dividends paid to shareholders from the profits of
an "approved enterprise" are subject to income tax
at a rate of 15%. The shareholders are entitled to
a 15% tax credit, if and when this dividend is paid
to their shareholders.
Under Israeli GAAP, deferred income taxes are not
provided on the undistributed tax exempt profits
from domestic subsidiaries of an "approved
enterprise". Under U.S. GAAP, deferred income taxes
should be provided on the undistributed tax exempt
profits of domestic subsidiaries that arose in
fiscal years beginning after December 15, 1992.
The effect of providing deferred taxes on the
undistributed tax exempt profits of an "approved
enterprise", assuming either the sale of the
subsidiary or its liquidation, was in 1999 and 1998
in the amount of $ 56 thousand and $ 274 thousand,
respectively, and an increase (decrease) in tax
income in 1999, 1998 and 1997 in the amounts of $
218 thousand, $ (245) thousand and $ 2 thousand,
respectively.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
c. Earnings per share:
According to Israeli GAAP:
The dilutive effect of options and options is
included in the computation of basic earnings per
share only if their exercising is considered to be
probable, based on the ordinary relationship
between the market price of the shares stemming
from the exercise of the options and the discounted
present value of the future proceeds derived from
the exercise of the options and options.
The dilutive effect of convertible debentures is
taken into account in the computation of basic
earnings per share only if their conversion is
considered to be probable, based on the
relationship between the market price of the shares
stemming from the conversion and the discounted
present value of the convertible debentures.
Both basic earnings per share and dilutive earnings
per share are to be presented in the financial
statements.
According to U.S. GAAP:
Options and warrants are always considered as
common shares equivalents; their dilutive effect on
the dilutive earnings per share is computed by
application of the "treasury stock" method. Options
and warrants that have expired or have been
exercised during the period shall be weighted for
the portion of the period in which they were
outstanding.
d. Convertible debentures issued with option:
According to U.S. GAAP, a portion of the proceeds
from the issued convertible debentures with an
option is allocated to the option, based on
relative market prices at date of issuance and
accounted for as additional paid-in capital. Such
allocation results in the recording of a discount
in the convertible debentures that is amortized by
the interest method over the term of the debt
securities.
In accordance with Israeli accounting principles,
the proceeds received are allocated based on the
par value of the option. The effect of the material
differences between Israeli and U.S. GAAP,
concerning the increase in additional paid-in
capital is in the amount of $ 190 thousand for the
years ended December 31, 1999 and 1998 and the
increase in financial expenses in the amounts of $
13 thousand, $ 36 thousand, and $ 10 thousand for
the years ended December 31, 1999, 1998 and 1997,
respectively.
<PAGE>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
The differences in amortization of issuance
expenses for debenture according to Israeli and
U.S. GAAP is immaterial.
e. Capital gain from purchase of loan:
Under Israeli GAAP capital gain from the purchase
of loan was recorded upon signing the agreement.
According to U.S. GAAP, such gain can be recorded
only upon the issuance of the shares of the company
in consideration of the aforementioned loan.
f. Equity in affiliates:
According to U.S. GAAP, when an investment
qualifies for the use of the equity method, the
investor should adopt the equity method of
accounting. The investment, results of operations
(current and prior periods presented), and retained
earnings of the investor should be adjusted
retroactively in a manner consistent with the
accounting for a step-by-step acquisition of a
subsidiary.
According to Israeli GAAP, the equity method is
applied from the date when an investment first
qualifies.
g. Debt securities with a nondetachable conversion
feature:
Under U.S GAAP debt securities with a nondetachable
conversion feature that is "in the money" at the
date of issue ("beneficial conversion feature")
should be recognized and measured by allocating a
portion of the proceeds equal to the intrinsic
value of that feature to additional paid-in
capital. That amount should be calculated at the
date of issuance as the difference between the
conversion price and the fair value of the common
stock into which the security is convertible,
multiplied by the number of shares into which the
security is convertible. And would be amortized
over the conversion term.
As applicable to the Company's financial
statements, these differences are immaterial.
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
h. The effect of the material differences between
Israeli and U.S. GAAP of the abovementioned items
on the financial statements is as follows:
1. On consolidated statements of operations:
Year ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
U.S. dollars
---------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Loss as reported according to
Israeli GAAP $ (1,866) $ (3,066) $ (6,671)
Financial income (expenses) (13) (36) 10
Deferred taxes on income (218) 245 -
Equity in losses of affiliates 149 149 (203)
Capital gain from purchase of
a loan - - (389)
-------------- -------------- --------------
Loss according to U.S. GAAP $ (1,948) $ (2,708) $ (7,253)
============== ============== ==============
Basic and diluted earnings (losses) per Ordinary
share:
From continuing operations:
As reported according to
Israeli GAAP $ (0.05) $ (0.15) $ (0.27)
============== ============== ==============
As per U.S. GAAP $ (0.07) $ (0.14) $ (0.28)
============== ============== ==============
From discontinued operations:
As reported according to
Israeli GAAP $ - $ 0.04 $ 0.02
============== ==============
==============
As per U.S. GAAP $ - $ 0.04 $ (0.002)
============== ============== ==============
Basic and diluted loss per Ordinary shares:
As reported according to
Israeli GAAP $ 0.05 $ (0.11) $ (0.25)
============== ==============
==============
As per U.S. GAAP $ 0.07 $ (0.1) $ (0.27)
============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------------
2. On consolidated balance sheet items:
December 31,
---------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------
As per As per
As Adjustment U.S. reported U.S.
reported GAAP Adjustment GAAP
---------- ---------- ----------- -------- ---------- ---------
U.S. dollars
---------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment in affiliate 680 1,041 (361) 2,254 (1,339) 915
Severance pay fund - 488 488 - 428 428
Deferred charges, net 51 (7) 44 153 (14) 139
Total assets 9,331 (560) 8,771 11,231 (911) 10,320
Deferred taxes on income - 56 56 - 274 274
Convertible debentures 2,122 (148) 1,974 4,047 853 4,900
Commitments to be
---------------------------- - - - 1,021 (1,021) -
converted into shares
Accrued severance pay, net 368 488 856 388 428 816
Total liabilities 10,330 396 10,726 11,841 534 12,375
Additional paid-in 11,693 190 11,883 11,728 431 12,159
capital
Accumulated deficit (23,849) (1,140) (24,989) (21,983) (1,328) (23,311)
Shareholders' equity (999) (1,330) (2,329) (1,631) (897) (2,528)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ARYT INDUSTRIES LTD.
LIST OF GROUP COMPANIES
----------------------------------------------------------------------------------------------------------------------------
December 31, 1999
-------------------------------------
Shares conferring
-------------------------------------
Voting Rights to
rights Profits
----------------- ----------------
% %
----------------- ----------------
<S> <C> <C>
a. Subsidiaries:
Reshef Technologies Ltd. 100 100
Amcoram Ltd. 100 100
Amcoram Technologies (1993) Germany (through Amcoram) 100 100
b. Affiliates:
Telegate Ltd. **) (* 20 (* 20
c. Inactive companies:
G.S.T. Ltd. 100 100
D.T. Industries Inc. (through G.S.T.) 100 100
Indofinance Inc. (through G.S.T.) 100 100
</TABLE>
*) Before dilution in respect of options and convertible
securities.
**) See Note 8b3(b).
- - - - - - - - - - - - - - - - -
<PAGE>
TELEGATE LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
IN U.S. DOLLARS
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors 105
Balance Sheets 106
Statements of Operations 107
Statements of Changes in Shareholders' Deficiency 108
Statements of Cash Flows 109 - 110
Notes to Financial Statements 111 - 127
-------------------------------------------------------------------------------------------------------------------
</TABLE>
- - - - - - - - - - -
<PAGE>
[LOGO OMITTED] ERNST & YOUNG
|X| Kost Forer & Gabbay
2 Kremenetski St.
Tel-Aviv 67899, Israel
|X| Phone: 972-3-6232525
Fax: 972-3-5622555
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
TELEGATE LTD.
We have audited the accompanying balance sheets of Telegate Ltd. as of
December 31, 1998 and 1999, and the related statements of operations, changes
in shareholders' deficiency and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. 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 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 financial statements referred to above, present
fairly, in all material respects, the financial position of Telegate Ltd. as
of December 31, 1998 and 1999, and the results of its operations and cash
flows for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
March 30, 2000 A Member of Ernst & Young International
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEETS
------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
-------------------------------------------------------------------------------------------------------------------
December 31,
--------------------------------
1998 1999
-------------- --------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 385 $ 1,415
Trade receivables - related parties (Note 13) 320 5,548
Government grants receivable 331 346
Other accounts receivable 12 112
Inventories (Note 3) 1,210 3,424
-------------- --------------
2,258 10,845
-------------- --------------
SEVERANCE PAY FUNDS (Note 7) 429 595
-------------- --------------
PROPERTY AND EQUIPMENT, NET (Note 4) 1,548 1,906
-------------- --------------
Total assets $ 4,235 $ 13,346
-----
============== ==============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Short-term bank credit(Note 5) $ 21 $ -
Short-term bank loans (Note 5) 1,135 294
Trade payables 1,332 2,930
Employees and payroll accruals 791 911
Advances from a customer - related party (Note 13) 385 -
Other accounts payable (Note 6) 372 1,337
-------------- --------------
Total current liabilities 4,036 5,472
-----
-------------- --------------
ACCRUED SEVERANCE PAY (Note 7) 677 1,074
-------------- --------------
CONVERTIBLE LOANS (Note 8) 5,633 12,482
-------------- --------------
SHAREHOLDERS' DEFICIENCY (Note 9):
Share capital
Authorized: 1,100,000 Ordinary shares of NIS 0.1 par value
as of December 31, 1998, and 3,000,000 as of December 31, 1999
Issued and outstanding: 706,900 Ordinary shares of NIS 0.1 par value as of
December 31, 1998 and 1,077,339 as of December 31, 1999 23 32
Additional paid-in capital 9,569 21,110
Deferred compensation (109) (1,854)
Accumulated deficit (15,594) (24,970)
-------------- --------------
(6,111) (5,682)
-------------- --------------
Total liabilities and shareholders' deficiency $ 4,235 $ 13,346
-----
============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELEGATE LTD.
STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
Year ended
December 31,
------------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C> <C>
Sales to related parties (Note 13) $ $ 3,569 $ 9,144
-
Cost of sales to related parties - 3,737 9,445
------------ ------------ -----------
Gross loss - 168 301
------------ ------------ -----------
Operating expenses:
Research and development, net (Note 12a) 3,362 4,660 5,467
Selling and marketing, net (Note 12b) 392 489 914
General and administrative 608 716 1,982
------------ ------------ -----------
Total operating expenses 4,362 5,865 8,363
-----
------------ ------------ -----------
Operating loss 4,362 6,033 8,664
Financial income (expenses), net (Note 12c) 102 23 (712)
------------ ------------ -----------
Net loss $ 4,260 $ 6,010 $ 9,376
============ ============ ===========
Basic and diluted net loss per share $ 6.22 $ 8.50 $ 11.35
============ ============ ===========
Weighted average number of shares used in computing
basic and diluted loss per share 684,902 706,900 826,413
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELEGATE LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
-----------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Additional
paid-in Deferred
Share capital capital compensation
----------------------------- ------------- ----------------
--------------
Number of
shares Amount
------------ --------------
<S> <C> <C> <C> <C>
Balance as of January 1, 1997 665,289 $ 22 $ 9,026 $ (734)
Deferred compensation related to stock-based options
granted to employees - - (10) 10
Amortization of deferred compensation - - - 362
Conversion of a convertible loan into shares, net 41,611 1 553 -
Net loss - - - -
------------ -------------- -------------- ----------------
Balance as of December 31, 1997 706,900 23 9,569 (362)
Amortization of deferred compensation - - - 253
Net loss - - - -
------------ -------------- -------------- ----------------
Balance as of December 31, 1998 706,900 23 9,569 (109)
Conversion of convertible loans into shares, net 129,698 3 2,767 -
Issuance of shares, net 240,741 6 6,302 -
Deferred compensation related to stock-based options
granted to employees and bank - 2,472 (2,472)
Amortization of deferred compensation - - - 727
Net loss - - - -
------------ -------------- -------------- ----------------
Balance as of December 31, 1999 1,077,339 $ 32 $ 21,110 $ (1,854)
============ ============== ============== ================
(Table Continued)
Total
shareholders'
Accumulated equity
deficit (deficiency)
---------------- ----------------
<S> <C> <C>
Balance as of January 1, 1997 $ (5,324) $ 2,990
Deferred compensation related to stock-based options
granted to employees - -
Amortization of deferred compensation - 362
Conversion of a convertible loan into shares, net - 554
Net loss (4,260) (4,260)
----------------- ---------------
Balance as of December 31, 1997 (9,584) (354)
Amortization of deferred compensation - 253
Net loss (6,010) (6,010)
----------------- ---------------
Balance as of December 31, 1998 (15,594) (6,111)
Conversion of convertible loans into shares, net - 2,770
Issuance of shares, net - 6,308
Deferred compensation related to stock-based options
granted to employees and bank - -
Amortization of deferred compensation - 727
Net loss (9,376) (9,376)
----------------- ---------------
Balance as of December 31, 1999 $ (24,970) $ (5,682)
================= ===============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELEGATE LTD.
STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended
December 31,
------------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (4,260) $ (6,010) $ (9,376)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred compensation 362 253 727
Depreciation 211 411 603
Increase in accrued severance pay, net 70 109 231
Decrease in value of marketable securities 221 - -
Increase of accrued interest on convertible loans - 193 496
Increase in trade receivables - related parties - (320) (5,228)
Decrease (increase) in government grants receivable 112 (99) (15)
Decrease (increase) in other accounts receivable 18 99 (100)
Increase in inventories - (1,210) (2,214)
Increase in trade payables 455 589 1,598
Increase in employees and payroll accruals 230 250 120
Increase (decrease) in advances from a customer - related party - 385 (385)
Increase in other accounts payable 6 291 965
Other (1) (2) -
------------ ------------ -----------
Net cash used in operating activities (2,576) (5,061) (12,578)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (597) (1,110) (979)
Proceeds from sale of property and equipment 19 51 18
------------ ------------ -----------
Net cash used in investing activities (578) (1,059) (961)
------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
TELEGATE LTD.
STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended
December 31,
------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of shares, net - - 6,308
Short-term bank credit, net - 21 (21)
Short-term bank loans, net - 1,135 (841)
Proceeds from convertible loans 1,960 2,940 9,150
Issuance expenses related to conversion of convertible loan into shares (6) - (27)
----------- ------------ ------------
Net cash provided by financing activities 1,954 4,096 14,569
----------- ------------ ------------
Increase (decrease) in cash and cash equivalents (1,200) (2,024) 1,030
Cash and cash equivalents at the beginning of the year 3,609 2,409 385
----------- ------------ ------------
Cash and cash equivalents at the end of the year $ 2,409 $ 385 $ 1,415
=========== ============ ============
Non-cash transactions:
---------------------
Conversion of convertible loans into shares $ 560 $ - $ 2,797
=========== ============ ============
Supplemental disclosure of cash flows activities:
Cash paid during the year for interest $ - $ 66 $ 240
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
NOTE 1:- GENERAL
a. Telegate Ltd. ("the Company") was incorporated
on May 6, 1993, under the name of Capitec (1993)
Ltd. In 1994, the Company changed its name to
Telegate Ltd.
The Company is engaged in the research,
development, manufacturing and marketing of local
access systems that interface and transmit public
telecommunications services over existing Cable TV
infrastructures.
The Company is dependent upon sole source of
suppliers for the production of a modem, which is a
key component used in its product.
b. On January 2, 2000 the Company's shareholders
signed a share purchase agreement with Terayon
Communication Systems, Inc. ("Terayon") pursuant to
which Terayon will acquire all of their shares and
related warrants in the Company in consideration of
2,200,000 shares of Terayon plus cash equal to the
Company's net cash as of the closing date less $
2,000.
c. The Company's shareholders' deficiency as of
December 31, 1999 and net loss for the year ended
December 31, 1999 amounting to $ 5,682 and $ 9,376,
respectively. The Company's ability to continue to
operate is dependent upon additional financial
support until profitability is achieved.
Subsequent to December 31, 1999, Terayon undertook
to financially support Telegate operations.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
a. Use of estimates:
The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the amounts reported in
the financial statements and accompanying notes.
Actual results could differ from those estimates.
b. Financial statements in U.S. dollars:
Company's management believes that the U.S.
dollar is the currency of the primary
economic environment in which it operates.
Therefore, the functional and reporting
currency for the Company is the U.S. dollar.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands
The Company's transactions and balances denominated
in U.S. dollars are presented at their original
amounts. Non-dollar transactions and balances have
been remeasured to U.S. dollars in accordance with
Statement No. 52 of the Financial Accounting
Standards Board ("FASB"). All transaction gains and
losses from remeasurement of monetary balance sheet
items denominated in non-dollar currencies are
reflected in the statements of operations as
financial income or expenses, as appropriate.
Certain amounts in the dollar financial statements
may represent the dollar equivalent of other
currencies, including new Israeli shekels (NIS),
and may not be exchangeable for dollars.
c. Cash and cash equivalents:
The Company considers all highly liquid investments
originally purchased with maturities of three
months or less to be cash equivalents.
d. Marketable securities:
In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities"
("SFAS 115"), the Company has classified its
marketable debt into trading category. Under SFAS
115, traded marketable securities are stated
according to the quoted market prices as of balance
sheet date.
Gains and losses (realized and unrealized) related
to traded securities as well as interest on such
securities are included in "financial income
(expenses), net".
e. Inventories:
Inventories are valued at the lower of cost or
market value. Cost is determined as follows:
Raw materials and components - on the moving
average basis.
Work in progress and finished products:
Raw materials and components - on the moving
average basis.
Labor, overhead and subcontracted work - on the
basis of actual costs.
<PAGE>
<TABLE>
<CAPTION>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
Periodically, the Company evaluates the quantities
on hand relative to current selling prices and
historical and forecasted sales volume. Based on
these evaluations, provisions are made in each
period to write inventory down to its net
realizable value, which establishes a new cost
basis.
f. Property and equipment, net:
Property and equipment are stated at cost.
Depreciation is calculated using the straight-line
method over the estimated useful lives, at the
following annual rates:
%
---------------------------------
<S> <C>
Computers and peripheral equipment 7 - 33
Machinery and engineering equipment 15 -20
Motor vehicles 15
Office furniture and equipment 7 - 15
Leasehold improvements Over the term of the lease
</TABLE>
g. Income taxes:
The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards
(SFAS) 109, "Accounting for Income Taxes". This
statement prescribes the use of the liability
method whereby deferred tax asset and liability
account balances are determined based on
differences between financial reporting and tax
bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be
in effect when the differences are expected to
reverse. The Company provides a valuation
allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
h. Revenue recognition:
Revenues from sales are recognized upon shipment
when no significant obligations remain on the part
of the Company and the collection of the related
receivable is probable. Generally, the Company does
not have any significant obligations after
delivery.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
i. Warranty costs:
A provision for warranty costs is calculated and
provided based on a percentage of sales.
j. Research and development costs:
Research and development costs are charged to
expenses as incurred.
k. Grants:
Royalty-bearing grants from the Government of
Israel and others for funding of approved research
projects and non-royalty-bearing grants from the
Government of Israel for funding of approved
marketing activities, are recognized at the time
the Company is entitled to such grants on the basis
of the related costs incurred.
l. Concentrations of credit risk:
SFAS No. 105, "Disclosure of Information About
Financial Instruments with Off-Balance-Sheet Risk
and Financial Instruments with Concentrations of
Credit Risk", requires disclosure of any
significant Off-Balance-Sheet and credit risk
concentrations. The Company has no significant
Off-Balance-Sheet concentration of credit risk such
as foreign exchange contracts, option contracts or
other foreign hedging arrangements.
Financial instruments that potentially subject the
Company to concentrations of credit risk consist
principally of cash and cash equivalents and trade
receivables.
The Company's cash and cash equivalents are
invested in deposits with major Israeli banks.
Management believes that the financial institutions
that hold the Company's investments are financially
sound, and accordingly, minimal credit risk exists
with respect to these investments.
The Company's trade receivables are derived from
sales to a shareholder. The Company performs
ongoing credit evaluations of its shareholder's
debt, and, to date, has not experienced any
material losses.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
m. Severance pay:
The Company's liability for severance pay is
calculated pursuant to Israeli severance pay law
based on the most recent salary of the employees
multiplied by the number of years of employment, as
of the balance sheet date. Employees are entitled
to one month's salary for each year of employment
or a portion thereof. The Company's liability for
all of its employees, is fully provided by monthly
deposits with severance pay funds, insurance
policies and by an accrual.
The deposited funds include profits accumulated up
to the balance sheet date. The deposited funds may
be withdrawn only upon the fulfillment of the
obligation pursuant to Israeli severance pay law or
labor agreements. The value of the deposited funds
is based on the cash surrendered value of these
policies, and includes immaterial profits.
n. Accounting for stock-based compensation:
The Company has elected to account for stock-based
compensation in accordance with the provisions of
Accounting Principles Board Opinion No. 25
("APB-25"), "Accounting for Stock issued to
Employees". Under APB-25, when the exercise price
of the Company's stock options is equal to or above
the market price of the underlying stock on the
date of grant, no compensation expense is
recognized.
Financial Accounting Standards Board Statement
No. 123 "Accounting for Stock Based Compensation"
(SFAS 123") requires the use of option valuation
model to measure the fair value of the options at
the grant date. The proforma disclosures
required by Statement 123, are provided in Note 9c
o. Basic and diluted net loss per share:
Basic and diluted net loss per share are presented
in accordance with SFAS No. 128, "Earnings per
Share" , for all periods presented.
Basic net loss per share has been computed using
the weighted-average number of Ordinary shares
outstanding during the period. Diluted net loss per
share is computed based on the weighted average
number of Ordinary shares outstanding during each
year, plus the weighted average number of dilutive
potential Ordinary shares considered outstanding
during the year.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
All outstanding stock options, and warrants have
been excluded from the calculation of the diluted
loss per Ordinary share because all such securities
are anti-dilutive for all periods presented. The
total number of shares related to the outstanding
options excluded from the calculations of diluted
net loss per share were 88,468, 88,443, and
192,243, for the years ended December 31, 1997,
1998 and 1999, respectively. In addition warrants
exercisable into the number of Ordinary shares
totaling $ 500 (see Note 5) and warrants regarding
convertible loans (see Note 8) were excluded.
p. Fair value of financial instruments:
The following methods and assumptions were used by
the Company in estimating its fair value
disclosures for financial instruments:
Cash and cash equivalents, trade receivables,
related parties, short-term bank credit and trade
payables - The carrying amounts of these items
approximate their fair value due to the short-term
maturity of such instruments.
Short-term loans - The carrying amounts of the
Company's borrowing arrangements approximate their
fair value. Fair values were estimated using
discounted cash flow analyses, based on the
Company's incremental borrowing rates for similar
types of borrowing arrangements.
q. Impact of recently issued accounting standard:
In June 1998, the Financial Accounting Standards
Board issued SFAS No. 133, "Accounting for
Derivative instruments and Hedging Activities"
("SFAS No. 133"). This statement 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. The
statement 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. The FASB has issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective
<PAGE>
<TABLE>
<CAPTION>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------------------------------------------------------
U.S. dollars in thousands
Date of FASB Statement No. 133". The Statement
defers for one year the effective date of SFAS No.
133. The rule will apply to all fiscal quarters
of all fiscal years beginning after June 15,
2000. The Company does not expect the impact of
this new statement on the Company's balance sheets
or results of operations to be material.
r. Segment reporting:
The Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related
Information". In 1998. SFAS No. 131 supercedes SFAS
No. 14, replacing the "industry segment approach"
with the "management approach", whereby companies
report financial and descriptive information about
their operating segments. Operating segments are
revenue-producing components of the enterprise for
which separate financial information is produced
internally and are subject to evaluation by the
chief operating decision-maker in deciding how to
allocate resources to segments. The Company manages
its business on a basis of one reportable segment.
s. Adjustment of computer systems for the Year 2000:
The costs required in order to adjust and modify
the Company's existing software in order for it to
be Year 2000 Compliant are recorded as current
expenses at the time they are incurred.
NOTE 3:- INVENTORIES
December 31,
----------------------------------------
1998 1999
----------------- ----------------
<S> <C> <C>
Raw materials and components $ 937 $ 2,381
Work-in-progress 203 774
Finished products 70 269
----------------- ----------------
$ 1,210 $ 3,424
================= ================
</TABLE>
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
<TABLE>
<CAPTION>
NOTE 4:- PROPERTY AND EQUIPMENT
<S> <C> <C>
Cost:
Computers and peripheral equipment $ 1,135 $ 1,657
Machinery and engineering equipment 799 1,106
Motor vehicles 131 94
Office furniture and equipment 114 165
Leasehold improvements 131 230
----------------- ----------------
2,310 3,252
----------------- ----------------
Accumulated depreciation:
Computers and peripheral equipment 462 818
Machinery and engineering equipment 205 378
Motor vehicles 54 53
Office furniture and equipment 19 33
Leasehold improvements 22 64
----------------- ----------------
762 1,346
----------------- ----------------
Depreciated cost $ 1,548 $ 1,906
================= ================
</TABLE>
NOTE 5:- SHORT-TERM BANK CREDIT AND SHORT-TERM BANK LOANS
As of December 31, 1999, the Company has an authorized line
of credit in the amount of approximately $ 3,000, of which
dollar denominated credit bears interest at the rate of
Libor + 1% and NIS denominated credit bears interest at the
prime rate minus 0.75% to prime rate +3%.
The Company received two NIS denominated bank loans. The
loans bear annual interest rate of prime and prime minus
0.75%, and are to be repaid on an on-call basis during 2000.
The Company had an unused line of credit in the amount of
approximately $2,706 as of December 31, 1999 (there is no
fee for the unused portion of the line of credit).
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
In connection with one of the credit lines, the Company
issued on February 7, 1999, to a subsidiary of Bank Hapoalim
B.M., a warrant to purchase Ordinary shares of the Company.
The warrant is exercisable into the number of Ordinary
shares totaling $ 500 according to the price per share paid
by purchasers of the Company's securities in one of the
following events ("Liquidity Events") less a discount of
twenty percent of the event price:
1. Issuance of equity securities, excluding exercise of
options to employees.
2. An Initial Public Offering ("IPO").
3. Sale of all or substantially all of the Company's
property and assets.
4. Merger or consolidation with or into another
corporation.
If a Liquidity Event ("the event") will not occur until
February 7, 2000 the exercise price will equal to the event
price. If the event will not occur until February 7, 2001,
the exercise price will be 120% of the event price and if
the event does not occur until February 7, 2002, the warrant
can be exercised at an exercise price of $ 58 during the
following thirty days.
In respect of this warrant, the Company will record over 3
years interest expense in the total amount of $ 125,
representing the 20% discount of the event price. For the
year ended December 31, 1999, the Company recorded interest
expense in the amount of $ 37.
<TABLE>
<CAPTION>
NOTE 6:- OTHER ACCOUNTS PAYABLE
December 31,
----------------------------------------
1998 1999
---------------- -----------------
<S> <C> <C>
Office of the Chief Scientist and the BIRD-F *) $ 149 $ 246
Tax authorities 116 18
Related parties **) 32 21
Accrued expenses - 914
Provision for guarantee 75 138
---------------- -----------------
$ 372 $ 1,337
================ =================
</TABLE>
*) See Note 10a
**) See Note 13b.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- ACCRUED SEVERANCE PAY
The Company's liability for severance pay, pursuant to
Israeli law, is fully provided by an accrual. Part of the
liability is funded through insurance policies. The cash
value of these policies is recorded as an asset in the
Company's balance sheets.
Severance expenses for the three years ended December 31,
1997, 1998 and 1999, amounted to approximately $ 195, $ 322
and $ 495, respectively.
NOTE 8:- CONVERTIBLE LOANS
On July 8, 1999, the Company entered into a convertible
loans agreement ("the agreement") with one existing
shareholder and with several new investors, in the aggregate
amount of $ 11,694 (such amount includes loans which were
received prior to executing the agreement, as described
below, and accrued interest in the amount of $ 144).
The loans are denominated in dollars and bear annual
interest at the rate of 5%, payable annually on December 31,
of each calendar year commencing on December 31, 1999.
The loans shall be due on December 31, 2002 ("the repayment
date") and shall be convertible, including accrued but
unpaid interest, at any time until the repayment date. The
loans shall be converted into the number of issued and
outstanding Ordinary shares equal to the principal amount of
the loan divided by the conversion price, which is $ 40.6
per share, subject to adjustments set forth in the
agreement.
The conversion price regarding $ 2,400 received during the
fourth quarter of 1998, shall at all times and in any event
be equal to 75% of the applicable conversion price.
The aggregate principal amount of loans is composed as
follows:
1. $ 7,000 were received during the third quarter of
1999 from new investors:
2. $ 2,150 were received during the second quarter of
1999 from an existing shareholder.
3. $ 2,400 were received during the fourth quarter of
1998 from an existing shareholder.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
U.S. dollars in thousands
In addition, the Company granted options Series A, B, C and
D to the shareholder and to the new investors. The exercise
price of the options and the number of options are dependent
upon the volume of sales of the Company during the years
1999 and 2000, as determined in the agreement.
The options are exercisable upon the earlier of:
1. Series A and C: December 31, 2001; Series B and D:
December 31, 2002.
2. The initial offering of Company's shares to the
public.
3. A merger or acquisition pursuant to which the
Company is not the surviving entity.
NOTE 9:- SHARE CAPITAL
a. On July 15, 1999, shareholders' loans in the
aggregate amount of $ 2,797, including accrued
interest in the amount of $ 297 thousand, were
converted into 129,698 Ordinary shares of the
Company.
b. On October 2, 1999, the Company issued 240,741
Ordinary shares in consideration of $6,308 net.
In addition, the Company granted to the investor
warrants for the purchase of Ordinary shares,
entitling the investor to purchase 214,500 Ordinary
shares at an exercise price of $ 35 per share
during the period from date of agreement until the
earlier of:
1. The initial offering of Company's shares to
the public.
2. The sale of substantially all of the assets
or the shares of the Company.
3. December 31, 2001.
c. Stock options to employees:
1. According to the Company's stock option
plan to employees ("the plan"), 194,743
options may, from time to time, be granted
to employees of the Company. As of
December 31, 1999, 2,500 options of the
Company are still available for future
grant.
Any options which are canceled or not
exercised before expiration become
available for future grant.
An option must be granted within ten years
from the date the plan is adopted and
expires no later than January 1, 2006.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
U.S. dollars in thousands
As long as the Company's shares have not
been listed for trade, in the event one
shareholder will hold more than 80% of the
Company's issued share capital, all of the
employee options which have not yet become
exercisable, will become exercisable to
shares.
A summary of the Company's share option activity
under the Plan is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------------------------
1997 1998 1999
------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise Of exercise
options price options price Options price
----------- ------------- ------------ -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at the
beginning of the year 89,168 $ 5.99 88,468 $ 5.96 88,443 $ 5.96
Granted - - - - 107,500 14.36
Exercised - - - - - -
Forfeited (700) 10.00 (25) 10.00 (3,700) 10.00
----------- ------------- ------------- ------------- -------------- -------------
Options outstanding at the
end of the year 88,468 $ 5.96 88,443 $ 5.96 192,243 $ 10.58
=========== ============= ============== ============= ============= =============
Options exercisable 54,892 $ 4.75 76,243 $ 5.31 100,006 $ 6.62
=========== ============= ============== ============== ============ =============
</TABLE>
<TABLE>
<CAPTION>
The options outstanding as of December 31, 1999
have been separated into ranges of exercise price,
as follows:
Options Weighted
Outstanding average Options
as of remaining exercisable as of Weighted
Exercise December 31, contractual December 31, average
Price 1999 life 1999 exercise price
--------------------- ------------------ ------------------ -------------------- ------------------
<S> <C> <C> <C> <C>
$ 0.03 32,501 6.00 32,501 $ 0.03
5.00 6,667 6.00 6,667 5.00
10.00 74,975 6.00 57,638 10.00
16.00 78,100 6.00 3,200 16.00
--------------------- ------------------ ------------------ -------------------- ---------------
$ 0.03-$16.00 192,243 6.00 100,006 $ 6.62
===================== ================== ================== ==================== ==================
</TABLE>
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
2. Pro forma information regarding net loss
is required by SFAS 123, which also
requires that the information be
determined as if the Company has accounted
for its employee stock options under the
fair value method of that Statement. The
fair value for these awards was estimated
at the date of grant using the minimum
value options pricing model. The minimum
value options pricing valuation model was
developed for use in estimating the fair
value of options that have no vesting
restrictions and are fully transferable.
Option valuation models require the input
of highly subjective assumptions. Because
the Company's stock-based awards have
characteristics significantly different
from those of traded options and because
changes in the subjective input
assumptions can materially affect the fair
value estimate, in management's opinion,
the existing models do not necessarily
provide a reliable single measure of the
fair value of its stock-based awards. The
fair value of these options was estimated
at the date of grant using the minimum
value method option pricing model with the
following weighted-average assumptions:
risk-free interest rates of 6% for 1997
and 1998, and 5.75% for 1999, no dividend
yield for 1997, 1998 and 1999; and a
weighted-average expected life of the
option of approximately five years for
1997 and 1998, and one half to one and
half years for 1999.
Pro-forma information under SFAS No. 123 is
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Net loss $ 4,260 $ 6,010 $ 9,376
============= ============= ==============
Pro-forma net loss $ 4,296 $ 6,037 $ 9,420
============= ============= ==============
Pro-forma basic and diluted
net loss per share $ 6.27 $ 8.54 $ 11.40
============= ============= ==============
</TABLE>
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 10:- CONTINGENT LIABILITIES AND COMMITMENTS
a. Royalties:
(i) Under the Company's research and
development agreements with the Office of
the Chief Scientist ("OCS") and pursuant
to applicable law, the Company is required
to pay royalties at the rate of 3% to 5%
of sales of products developed with funds
provided by the OCS, up to an amount equal
to 100% of the OCS's research and
development grants related to such
projects.
Royalties regarding agreements with the
OCS ("agreements") which were signed
before 1999 are dollar-linked, as
royalties regarding agreements signed in
1999 are dollar-linked+Libor.
Repayment of such grants is not required,
in the event that there are no sales of
products with respect to such grants.
For the years ended December 31, 1997,
1998 and 1999, the Company recognized
grants in the amounts of $ 1,662, $ 2,173
and $ 2,452, respectively, which are
presented in the financial statements as
an offset to research and development
costs.
(ii) The Company is committed to pay to the
Israeli-U.S. Binational Industrial
Research and Development Foundation
("BIRD-F") royalties of 2.5% on proceeds
from sales of any product arising from the
research and development project, up to
the amount of 100%-150% of the grant. The
Company received a grant in the amount of
$ 111.
(iii) The Company has expensed royalties
relating to the repayment of such grants
in the amount of $ 0, $ 107 and $ 274 for
the years ended December 31, 1997, 1998
and 1999, respectively.
(iv) As of December 31, 1999, the Company has a
contingent obligation to pay royalties in
the amount of $ 8,509 in respect of the
aforementioned grants and participations
received from the OCS and the BIRD-F.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
b. Charges and guarantees:
The Company has placed floating charges in favor of
two banks on its property, assets and insurance
rights, and also a fixed charge on its share
capital and goodwill.
c. Lease commitments:
The Company's premises are rented from a related
party, under an operating lease, for a period until
August 31, 2003.
The future minimum lease commitment, under a
non-cancelable operating lease is $ 265, annually.
Total rent expenses for the years ended December
31, 1997, 1998 and 1999, were approximately $ 172,
$ 216 and $ 265, respectively.
NOTE 11:- TAXES ON INCOME
a. Tax benefits under the Law for the
Encouragement of Capital Investments, 1959
(hereinafter - "the law"):
According to the provisions of this law, the
Company has elected to enjoy "alternative benefits"
- waiver of grants in return for a tax exemption
and, accordingly, the Company's income is
tax-exempt for a period of two years commencing
with the year it first earns taxable income. In the
remaining five years of benefits, the Company will
be liable to a corporate tax of 25%. The period of
tax benefits has not yet commenced.
The period of tax benefits, detailed above, is
subject to limits of 12 years from the commencement
of production, or 14 years from the approval date
(which is December 29, 1996), whichever is earlier.
If a dividend is distributed out of such tax-exempt
profits, the Company will be liable for corporate
tax at the rate of 25%.
The law also grants entitlement to claim
accelerated depreciation on buildings, machinery
and equipment used by the "approved enterprise",
during five tax years.
Should the Company derive income from sources other
than the approved enterprises during the relevant
period of benefits, such income will be taxable at
regular corporate tax rate of 36%.
b. Measurement of results for tax purposes under
the Income Tax Law (Inflationary Adjustments), 1985.
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------------------
U.S. dollars in thousands
Results for tax purposes are measured in terms of
earnings in NIS after certain adjustments for
increases in the Israeli CPI. As explained in Note
2b, the financial statements are presented in US
dollars. The difference between the annual change
in the CPI and in the NIS\dollar exchange rate
causes a difference between taxable income and the
income before taxes shown in the financial
statements. In accordance with paragraph 9(f) of
SFAS No. 109, the Company has not reserved for
deferred income taxes on the difference between the
reporting currency and the tax bases of assets and
liabilities.
c. Deferred income taxes:
Deferred taxes have not been included, as it is
more likely than not that they will not be utilized
in the foreseeable future.
d. Carryforward losses:
As of December 31, 1999 the Company has
approximately $ 21,773 in losses to offset against
future taxable income, which have no expiration
date.
NOTE 12:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development cost, net:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------
1997 1998 1999
--------------- -------------- ---------------
<S> <C> <C> <C>
Total cost $ 5,024 $ 6,833 $ 7,919
Less - royalty-bearing grant (Note 10a) 1,662 2,173 2,452
--------------- --------------- ---------------
$ 3,362 $ 4,660 $ 5,467
=============== =============== ===============
b. Selling and marketing, net:
Total cost $ 392 $ 489 $ 964
Less - non-royalty-bearing grants - - 50
--------------- --------------- ---------------
$ 392 $ 489 $ 914
=============== =============== ===============
</TABLE>
<PAGE>
TELEGATE LTD.
NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------------------------
U.S. dollars in thousands
<TABLE>
<CAPTION>
<S> <C> <C> <C>
c. Financial income (expenses):
Financial expenses:
Interest $ (15) $ (258) $ (736)
Amortization of deferred compensation
to a bank - - (37)
Other expenses (4) (8) (10)
Foreign currency translation differences (66) (223) (402)
-------------- ------------- --------------
(85) (489) (1,185)
-------------- ------------- --------------
Financial income:
Interest 116 60 37
Gain from marketable securities 33 - -
Foreign currency translation differences 38 452 436
-------------- ------------- --------------
187 512 473
-------------- ------------- --------------
Financial income (expenses), net $ 102 $ 23 $ (712)
============== ============= ==============
</TABLE>
NOTE 13:- TRANSACTIONS AND BALANCES WITH RELATED PARTIES
All of the Company's sales are made to its sole customer
through a company who is also a 28% shareholder in the
Company.
a. Transactions with related parties:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales $ - $ 3,569 $ 9,144
Rent and maintenance $ 252 $ 270 $ 432
Subcontractors $ - $ 139 $ 137
Interest $ 14 $ 193 $ 496
b. Balances with related parties:
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------
1998 1999
--------------- ---------------
<S> <C> <C>
Trade receivables $ 320 $ 5,548
Advances from a customer $ 385 $ -
Other accounts payable $ 32 $ 21
</TABLE>
- - - - - - - - - - - -
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Exhibit Page
<S> <C>
2.1 Share Purchase Agreement between
Terayon Communications Systems Inc.,
Telegate Ltd. Aryt Industries Ltd. and others, and Amendment No. 1............................129
2.2 7 Haplada St., Or Yehuda Lease Agreements......................................................P*
2.3 Summary of 7 Haplada, Or Yehuda Lease Agreement...............................................177
2.4 Sderot Lease Agreements.........................................................................P
2.5 Summary of Sderot Lease Agreement.............................................................178
2.6 Series 7 Warrant dated April 11, 1999...........................................................P
2.7 Series 8 Warrant dated April 11, 1999...........................................................P
2.8 Series 9 Warrant dated March 2, 2000............................................................P
</TABLE>
(The remainder of this page is intentionally left blank.)
<PAGE>
Exhibit 2.1
Share Purchase Agreement between Terayon Communications Systems Inc.,
Telegate Ltd. Aryt Industries Ltd. and others,
and Amendment No. 1.
<PAGE>
SHARE PURCHASE AGREEMENT
among:
TERAYON COMMUNICATION SYSTEMS, INC.,
a Delaware corporation;
THE SELLERS SET FORTH ON SCHEDULE A HERETO,
and
TELEGATE LTD.,
a company organized under the laws of Israel
---------------------------
Dated as of October 14, 1999
---------------------------
<PAGE>
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of October 14, 1999, by and among: TERAYON COMMUNICATION SYSTEMS,
INC., a Delaware corporation ("Parent"); EHUD ILONI (the "Founder"); each of
the Persons set forth in Schedule A to this Agreement (each, a "Seller", and
collectively with the Founder, the "Sellers"); and TELEGATE LTD., a company
organized under the laws of Israel (the "Company"). Certain other capitalized
terms used in this Agreement are defined in Exhibit A.
RECITALS
A. The Company is engaged principally in the development,
manufacturing and marketing of local access systems for the provision of a
wide range of public telecommunication services over CATV infrastructures. The
Company has its principal office at 7 Haplada Street, Or Yehuda, Israel and
has authorized 3,000,000 Ordinary Shares, NIS 0.10 nominal value per share, of
which 1,077,339 shares are issued and outstanding (the "Ordinary Shares").
B. The Sellers collectively own all the issued and outstanding
Ordinary Shares (the "Shares"), Warrants (as defined below) and Debentures (as
defined below) of the Company (the "Securities"). Each Seller's Ordinary
Shares, Warrants and Debentures are referred to in this Agreement as such
"Seller's Securities" and collectively as the "Sellers' Securities."
C. Parent desires to acquire all of the Sellers' Securities and
each of the Sellers desires to sell such Seller's Securities to Parent.
D. The Company and Parent desire to make certain
representations and warranties and other agreements in connection with the
transactions contemplated hereby.
E. Prior to the Closing, the Company's Board of Directors shall
adopt a resolution pursuant to which the Plan for the Issuance of Options to
Directors, Executives and Senior Employees of Telegate shall be terminated
upon the Closing, and the Company shall have obtained the consent of each of
the Option Holders (as defined below) to the termination of all Options (as
defined below) held by such Option Holder upon the Closing in consideration
for the issuance by Parent to such Option Holder of Parent Options (as defined
below).
F. For accounting purposes, it is intended that the transaction
contemplated by this Agreement be treated as a "purchase."
G. This Agreement has been approved by the respective boards of
directors of Parent and the Company.
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. DESCRIPTION OF TRANSACTION.
1.1. Purchase and Sale. Subject to the terms and conditions of
this Agreement, on the Closing Date (as defined below), each Seller shall
sell, transfer, assign, convey and deliver to Parent, and Parent shall
purchase from each Seller such Seller's Securities, in each case, free and
clear of all Liens. The closing of the purchase and sale (the "Closing") shall
take place at the offices of Naschitz Brandes & Co., 5 Tuval Street, Tel Aviv,
Israel at 10:00 a.m., on November 15, 1999, or such later business day that
all the conditions set forth in Section 6 and 7 have been satisfied or waived,
or on such other date, time and place as the parties may mutually agree (the
"Closing Date"). At the Closing, the Sellers shall cause the Company to
deliver to Parent one or more instruments representing the Seller's
Securities, and Parent (i) shall issue the Initial Consideration to the
Sellers' Representative (as defined below) for distribution to the Sellers in
accordance with the column in Schedule A captioned "Initial Consideration",
(ii) shall pay the Cash Payment to the Sellers' Representative (as defined
below) for distribution to the Sellers in accordance with the column in
Schedule A captioned "Cash Payment" and (iii) shall deposit the Escrow Shares
(as defined below) with the Escrow Agent, which amounts together represent the
aggregate portion of the Purchase Consideration (as defined below) payable to
the Sellers hereunder.
1.2. Further Assurances. If, at any time after the Closing Date,
Parent shall consider or be advised that any deeds, bills of sale, assignments
or assurances or any other acts or things are reasonably necessary, desirable
or proper (a) to vest, perfect or confirm, of record or otherwise, in Parent,
its right to, and title or interest in, the Sellers' Securities or (b)
otherwise to carry out the purposes of this Agreement, Parent shall so advise
the Sellers' Representative in writing, and the Sellers thereupon shall
execute and deliver all such deeds, bills of sale, assignments and assurances
and do all such other acts and things reasonably necessary, desirable or
proper to vest, perfect or confirm its right, title or interest in, to or
under the Sellers' Securities, and otherwise to carry out the purposes of this
Agreement.
1.3. Purchase Price. The consideration for the Sellers Securities
together with the consideration to the Option Holders (as defined below),
assuming the exercise of all Parent Options (as defined below) granted to the
Option Holders pursuant to Section 1.9(b) (the "Purchase Consideration"),
shall be 2,200,000 shares of Common Stock of Parent ("Common Stock") (subject
to adjustment in the event of any stock split, stock dividend,
recapitalization, issuance of bonus shares or other adjustment of the Common
Stock) plus the Cash Payment (as defined below). In accordance with Section
1.1, on the Closing Date, Parent shall issue to the Sellers 2,200,000 shares
of Common Stock (the "Initial Consideration"), of which shares of Common Stock
with a value equal to ten million US dollars ($10,000,000) (the "Escrow
Shares") shall be deposited with the Escrow Agent to be held in the Escrow
Fund with respect to each Seller in accordance with the column in Schedule A
captioned "Escrow Shares" and shall be available to satisfy the
indemnification obligations as provided in Section 9. In addition, Parent
shall pay the Sellers' Representative cash in an aggregate amount equal to the
Company's Net Cash as of the Closing Date less two million US dollars
($2,000,000) (the "Cash Payment"), in accordance with the provisions of
Section 1.4 below. The number of the Escrow Shares shall be calculated based
on the average closing price of Parent's Common Stock as reported on the
Nasdaq National Market for the fourteen (14) trading days immediately
preceding the Closing Date.
1.4. Method of Share Transfer. The Transfer of Common Stock as
set forth in Section 1.3 above shall be made by Parent to the Sellers'
Representative on the Closing Date. All cash payments made by Parent to the
Sellers' Representative on the Closing Date shall be made by wire transfer of
immediately available funds to the accounts specified by the Sellers'
Representative in writing to Parent at least two (2) business days prior to
the Closing Date (the "Accounts"). Ten (10) days prior to the Closing, the
Company shall provide to Parent, the amount of projected Net Cash that is
expected to be available to the Company at the Closing Date. Parent shall
deduct two million US Dollars ($2,000,000) and an additional amount equal to
30% of such projected Net Cash, and pay the remainder to the Sellers'
Representative at the Closing Date (the "Initial Cash Payment"). Within twenty
(20) days following the Closing Date, Parent shall verify the actual sum of
the Company's Net Cash as of the Closing Date, upon which Parent shall
transfer to the Accounts of the Sellers' Representative an amount in
immediately available funds equal to the difference between the Initial Cash
Payment and the Company's actual Net Cash as at the Closing Date, less two
million US Dollars ($2,000,000).
1.5. Seller and Founder Waivers. Each Seller and the Founder
hereby waives and releases, effective as of the Closing, any and all rights,
claims and causes of action assertable against the Company in respect of its
ownership of any securities of the Company and any and all agreements between
such Seller or the Founder and the Company, which agreements shall
automatically terminate as of the Closing Date.
1.6. Measurement Date and Additional Consideration. Subject to
the terms below, in the event and only in the event that the Measurement Date
Share Price (as defined below) is less than $45.46, Parent shall, within seven
(7) days of the nine-month anniversary (and with respect to the Escrow Shares,
fourteen (14) trading days after the release of the Escrow Shares from escrow)
of the later of (i) Closing Date and (ii) the date on which the Registration
Statement (as defined below) is declared effective by the SEC (the
"Measurement Date"), pay to each of the Sellers additional consideration (the
"Additional Consideration") which shall be calculated for each individual
Seller as follows:
(a) Shares Held by Seller on the Measurement Date. With
respect to any shares of Common Stock that were received by the Seller as part
of the Purchase Consideration and have not been Sold (as defined below) in the
period of time between the Closing Date and the Measurement Date, Parent shall
pay to the Seller a sum equal to: (i) the aggregate number of such shares of
Common Stock held by the Seller on the Measurement Date, multiplied by (ii)
the difference between $45.46 and the Measurement Date Share Price; and
(b) Shares Sold or Otherwise Disposed of by Seller Prior to
the Measurement Date.
(i) If shares of Common Stock that were
received by the Seller as part of the Purchase Consideration are Sold prior to
the Measurement Date for an Average Price Per Share (as defined below) of
$45.46 or more, the Seller shall not be entitled to any Additional
Consideration in respect of those shares of Common Stock sold prior to the
Measurement Date.
(ii) If the aggregate consideration received
by the Seller for shares of Common Stock which were received as part of the
Purchase Consideration and that were Sold prior to the Measurement Date
(before deduction of broker or other fees and commissions) divided by the
total number of such shares of Common Stock sold by such Seller (the "Average
Price Per Share") is less than $45.46, then in respect of the shares of Common
Stock received as part of the Purchase Consideration and sold by the Seller
prior to the Measurement Date, Parent shall pay to the Seller the lesser of
the following two amounts: (i) the difference between (x) the aggregate
consideration received on the Sale of the shares of Common Stock and (y) an
amount equal to $45.46 per share of Common Stock multiplied by the number of
shares received as part of the Purchase Consideration and Sold prior to the
Measurement Date; or (ii) the amount which the Seller would have received with
respect to those shares in accordance with Subsection (a) above were the
Seller to have retained the shares until the Measurement Date.
(c) The Measurement Date Share Price. The "Measurement Date
Share Price" shall mean the average of the closing sale prices of the shares
of Common Stock as reported on the Nasdaq National Market for the fourteen
(14) consecutive trading days immediately prior to the Measurement Date.
(d) Method of Payment of Additional Compensation. Parent
shall be entitled to pay the above Additional Consideration in cash or by
issuing to the Sellers an additional number of unrestricted, registered and
freely tradable shares of Common Stock, with the form of such payment being
solely at Parent's discretion; provided, however, that Parent shall be
obligated to pay the above Additional Consideration in cash if such payment is
made pursuant to Section 1.6(f). If the payment is made in shares, the number
of additional shares issued shall be calculated based on the Measurement Date
Share Price.
(e) Automatic Release. Notwithstanding anything to the
contrary in this Agreement, if at any time during the period beginning on the
later of (i) the Closing Date and (ii) the date on which the Registration
Statement is declared effective by the SEC, and ending on the Measurement
Date, the closing sale price on each of the fourteen (14) consecutive trading
days for a share of Common Stock as reported on the Nasdaq National Market is
equal to or greater than fifty-five US Dollars ($55.00) per share, Parent
shall not be obligated to pay any Additional Consideration to the Sellers,
other than with respect to the Escrow Shares to which this Section 1.6(e)
shall not apply.
(f) Adjustment of Measurement Date. Parent may at any time
during the nine-month period following the later of (i) the Closing Date and
(ii) the date on which the Registration Statement is declared effective by the
SEC, change the date of the Measurement Date (except with respect to the
Escrow Shares, for which the Measurement Date shall remain the date fourteen
(14) trading days after such shares are actually released from escrow) from
the date set forth above to any date within such nine-month period (provided
that Parent shall give the Sellers notice of such change within two (2) days
following such changed Measurement Date). In the event of such change, the
provisions of the preamble to Sections 1.6, and Subsections 1.6(a) and 1.6(b)
above, shall be read as though each reference to $45.46 per share of Common
Stock was a reference to $55.00 per share of Common Stock.
(g) Reporting. For purposes of this Section 1.6, each Seller
shall provide Parent with a quarterly report detailing the number of shares
Sold in the previous quarter and the average sale price for the shares. At
Parent's request, the Sellers shall provide Parent with satisfactory
information to verify the quarterly reports.
(h) Deemed Sales. For the purposes of this Section 1.6 any
short sales, put options or hedges in which the Seller has the right to put or
sell his shares of Common Stock to a non-affiliated third party at a
guaranteed minimum net price, shall be deemed a Sale of the underlying shares
at the price equal to such minimum net price.
(i) Certain Definitions. For the purposes of this Section
1.6, the terms "Sold" and "Sale" shall mean any bona fide sale by a Seller to
a non-affiliated third party through a broker dealer on the Nasdaq National
Market.
1.7. Additional Consideration. At the Closing, Parent will
deposit two hundred thousand (200,000) shares of Common Stock (subject to
adjustment under Section 7.6) in an escrow fund satisfactory to the Sellers'
Representative (the "Additional Consideration Escrow Fund") as a security for
the payment of the Additional Consideration, if any. Prior to the Closing, the
parties shall agree upon the terms and conditions of such escrow, which shall
provide without limitation that (i) the shares of Common Stock held in the
Additional Consideration Escrow Fund shall not be released before the Escrow
Shares are released from escrow and all Additional Consideration is paid to
the Sellers in full and (ii) any payments made from the escrow to the Sellers
(including any release of the Escrow Shares to the Sellers) shall be allocated
among the Sellers in accordance with Schedule A.
1.8. Accounting Treatment. For accounting purposes, the
transaction contemplated by this Agreement is intended to be treated as a
"purchase."
1.9. Employee Options.
(a) There are currently outstanding and unexercised options
to acquire Ordinary Shares (the "Options") issued by the Company to employees,
directors and consultants listed in Schedule A (the "Option Holders"). The
names of all of the Option Holders and the number of Ordinary Shares covered
by each Option are set forth on Schedule A.
(b) At Closing, all Options shall be cancelled, and in
consideration of such cancellation, Parent shall grant to each Option Holder
such number of fully vested options to purchase Common Stock ("Parent
Options") indicated opposite such Option Holder's name on Schedule A. All such
options shall have an exercise price equal to the par value of the underlying
Common Stock and shall be exercisable at any time during the five (5) year
period following the Closing Date. Prior to the Closing, no Option Holder
shall exercise or transfer any Options.
(c) As soon as practicable following the date hereof and in
any event prior to the Closing, the Company shall secure the written
agreement, in the form and substance reasonably acceptable to Parent, of each
Option Holder to the terms and conditions of this Agreement (the "Option
Holder Consent Letter and Counterpart Signature Page"). Each Option Holder
shall become party to this Agreement and the Escrow Agreement immediately upon
the execution and delivery to the Company by such Option Holder of the Option
Holder Consent Letter and Counterpart Signature Page and shall be deemed a
"Seller" hereunder and thereunder. For the avoidance of doubt, the total
number of shares of Common Stock to be issued to the Sellers and the Option
Holders hereunder shall be equal to the Purchase Consideration.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants, to and for the benefit of the
Indemnitees, as follows:
2.1. Due Organization; No Subsidiaries; Etc.
(a) The Company is duly organized and validly existing under
the laws of the State of Israel. The Company has all requisite corporate power
and authority to conduct its business in the manner in which its business is
currently being conducted and to own and use its assets in the manner in which
its assets are currently owned and used.
(b) Except as set forth in Part 2.1 of the Disclosure
Schedule, the Company has not conducted any business under or otherwise used,
for any purpose or in any jurisdiction, any fictitious name, assumed name,
trade name or other name, other than the name "Telegate Ltd."
(c) The Company is not and has not been required to be
qualified, authorized, registered or licensed to do business as a foreign
corporation in any jurisdiction, except where the failure to be so qualified,
authorized, registered or licensed has not had and will not have a Material
Adverse Effect on the Company.
(d) Part 2.1 of the Disclosure Schedule accurately sets
forth (i) the names of the members of the Company's board of directors, (ii)
the names of the members of each committee of the Company's board of
directors, and (iii) the names and titles of the Company's officers.
(e) The Company does not own any controlling interest in any
Entity and the Company has never owned, beneficially or otherwise, any shares
or other securities of, or any direct or indirect equity interest in, any
Entity. The Company has not agreed and is not obligated to make any future
investment in or capital contribution to any Entity. The Company has not
guaranteed and is not responsible or liable for any obligation of any of the
Entities in which it owns or has owned any equity interest.
2.2. Articles of Association and Memorandum of Association;
Records. Except as set forth in Part 2.2 of the Disclosure Schedule, the
Company has delivered to Parent accurate and complete copies of: (1) the
Memorandum of Association and Articles of Association of the Company,
including all amendments thereto; (2) the stock records of the Company; and
(3) the minutes and other records of the meetings and other proceedings
(including any actions taken by written consent or otherwise without a
meeting) of the stockholders of the Company, the board of directors of the
Company and all committees of the board of directors of the Company. There
have been no formal meetings or other proceedings of the stockholders of the
Company, the board of directors of the Company or any committee of the board
of directors of the Company that are not fully reflected in such minutes or
other records. Except as set forth in Part 2.2 of the Disclosure Schedule,
there has not been any violation of any of the provisions of the Company's
Articles of Association or Memorandum of Association, nor has the Company
taken any action that is inconsistent with any resolution adopted by the
Company's stockholders, the Company's board of directors or any committee of
the Company's board of directors, which would have a Material Adverse Effect
on the Company. Except as set forth in Part 2.2 of the Disclosure Schedule,
the books of account, stock records, minute books and other records of the
Company are accurate, up-to-date and complete in all material respects, and
have been maintained in accordance with prudent business practices.
2.3. Capitalization. The issued and outstanding share capital of
the Company, on a fully diluted and as-converted basis taking into
consideration all convertible or exchangeable securities and other interests
in the Company is set forth in Part 2.3 of the Disclosure Schedule. Except as
set forth in Part 2.3 of the Disclosure Schedule, at the Closing Date, there
will not be any outstanding or authorized subscriptions, options, warrants,
calls, rights, commitments, convertible securities, or any other agreements of
any character directly or indirectly obligating the Company to issue any
additional shares or any securities convertible into, or exchangeable for, or
evidencing the right to subscribe for, any shares.
2.4. Financial Statements.
(a) The Company has delivered to Parent the
following financial statements and notes (collectively, the "Company Financial
Statements"):
(i) The audited balance sheets of the Company
as of December 31, 1998, 1997 and 1996, and the related audited statements of
operations, statements of stockholders' equity and statements of cash flows of
the Company for the years then ended, together with the notes thereto and the
unqualified report and opinion of a recognized firm of independent certified
accountants relating thereto; and
(ii) the unaudited balance sheet of the Company
as of June 30, 1999 (the "Unaudited Interim Balance Sheet"), and the related
unaudited statement of operations of the Company for the six months then
ended.
(b) The Company Financial Statements are accurate and
complete in all material respects and present fairly the financial position of
the Company as of the respective dates thereof and the results of operations
and (in the case of the financial statements referred to in Section 2.4(a)(i))
cash flows of the Company for the periods covered thereby. The Company
Financial Statements have been prepared in accordance with generally accepted
accounting principles consistently applied in Israel throughout the periods
covered (except that the financial statements referred to in Section
2.4(a)(ii) do not contain footnotes and are subject to normal and recurring
year-end audit adjustments, which will not, individually or in the aggregate,
be material in magnitude) and comply with the requirements of all applicable
Israeli regulations.
(c) Except as set forth in Part 2.2 of the Disclosure
Schedule, all proper and necessary books of account, minute books, registers
and records have been maintained by the Company, are in its possession and
contain accurate information relating to all material transactions to which
the Company has been a party, except where the failure to maintain such books
of account, minute books, registers and records would not have a Material
Adverse Effect on the Company.
(d) A complete list of the Company's debts and loan
facilities as of June 30, 1999, is set forth in Part 2.4(d) of the Disclosure
Schedule.
2.5. Absence of Changes. Except as set forth in Part 2.5 of the
Disclosure Schedule, since June 30, 1999:
(a) there has not been any material adverse change in the
Company's business, prospects, operations, assets, liabilities, debts, work
force or its condition (financial or otherwise) and no event has occurred that
will, or could reasonably be expected to, have a Material Adverse Effect on
the Company;
(b) there has not been any material loss, damage or
destruction to, or any material interruption in the use of, any of the
Company's assets (whether or not covered by insurance);
(c) the Company has not declared, accrued, set aside or paid
any dividend or made any other distribution in respect of any shares of
capital stock, and has not repurchased, redeemed or otherwise reacquired any
shares of capital stock or other securities;
(d) except as set forth in Part 2.3 of the Disclosure
Schedule, the Company has not sold, issued or authorized the issuance of (i)
any capital stock or other security, (ii) any option or right to acquire any
capital stock or any other security or (iii) any instrument convertible into
or exchangeable for any capital stock or other security;
(e) the Company has not amended or waived any of its rights
under, or permitted the acceleration of vesting under (except where such
accelerated vesting is permitted under the terms of an existing agreement of
option plan), (i) any provision of the Plan for the Issuance of Options to
Directors, Executives and Senior Employees of Telegate, (ii) any provision of
any agreement evidencing any outstanding Option or Warrant, or (iii) any
restricted stock purchase agreement;
(f) there has been no amendment to the Company's Articles of
Association or Memorandum of Association, and the Company has not effected or
been a party to any Acquisition Transaction, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(g) the Company has not formed any subsidiary or
acquired any equity interest or other interest in any other Entity;
(h) the Company has not made any capital expenditure which,
when added to all other capital expenditures made on behalf of the Company
since June 30, 1999, exceeds $25,000;
(i) the Company has not (i) entered into or permitted any of
the assets owned or used by it to become bound by any Contract that is or
would constitute a Material Agreement (as defined in Section 2.10(a)), or (ii)
amended or prematurely terminated, or waived any material right or remedy
under, any such Contract;
(j) the Company has not (i) acquired, leased or licensed any
right or other asset from any other Person, (ii) sold or otherwise disposed
of, or leased or licensed, any right or other asset to any other Person, or
(iii) waived or relinquished any right, except for immaterial rights or other
immaterial assets acquired, leased, licensed or disposed of in the ordinary
course of business and consistent with the Company's past practices;
(k) the Company has not written off as uncollectible,
or established any extraordinary reserve with respect to, any account
receivable or other indebtedness;
(l) the Company has not made any pledge of any of its assets
or otherwise permitted any of its assets to become subject to any Encumbrance,
except for pledges of immaterial assets made in the ordinary course of
business and consistent with the Company's past practices;
(m) the Company has not (i) lent money to any Person (other
than pursuant to routine advances made to employees in the ordinary course of
business), or (ii) incurred or guaranteed any indebtedness for borrowed money;
(n) the Company has not (i) established or adopted any
Employee Benefit Plan, (ii) other than in the ordinary course of business and
in a manner consistent with past practice, paid any bonus or made any
profit-sharing or similar payment to, or increased the amount of the wages,
salary, commissions, fringe benefits or other compensation or remuneration
payable to, any of its directors, officers or employees, or (iii) hired any
new employees;
(o) there has been no resignation or termination of
employment of any officer or key employee of the Company;
(p) the Company has not changed any of its methods of
accounting or accounting practices in any respect;
(q) the Company has not made any Tax election;
(r) the Company has not commenced or settled any Legal
Proceeding;
(s) the Company has not entered into any transaction or
taken any other action outside the ordinary course of business or inconsistent
with its past practices; and
(t) the Company has not agreed or committed to take
any of the actions referred to in clauses "(c)" through "(s)" above.
2.6. Properties and Assets. Full and accurate details of the
Company's properties and assets are contained in Part 2.6 of the Disclosure
Schedule. Except as disclosed in Part 2.6 of the Disclosure Schedule or in the
notes to the Company Financial Statements, the Company has good and marketable
title to its assets, including without limitation those reflected in the
Company Financial Statements, free and clear of any right, interest or equity
of any individual or entity (including any right to acquire, option, or right
of preemption) or any mortgage, charge, pledge, lien, or assignment, or any
other encumbrance or security interest or arrangement of whatsoever nature
over or in the relevant property ("Security Interests"). With respect to the
assets that are leased, the Company is in compliance with all material
provisions of such leases, such leases are valid and binding, and, to the best
of its knowledge, the Company holds leasehold interests in such assets free
and clear of all Security Interests, except for Security Interests that, both
individually and in the aggregate with all other exceptions to any of the
representations in this Section 2 which are not specified in the Disclosure
Schedule, would not have a material adverse effect on the Company.
2.7. Bank Accounts; Receivables.
(a) Part 2.7(a) of the Disclosure Schedule provides accurate
information with respect to each account maintained by or for the benefit of
the Company at any bank or other financial institution.
(b) Part 2.7(b) of the Disclosure Schedule provides an
accurate and complete breakdown and aging of all accounts receivable, notes
receivable and other receivables of the Company as of June 30, 1999. Except as
set forth in Part 2.7(b) of the Disclosure Schedule, all existing accounts
receivable of the Company (including those accounts receivable reflected on
the Unaudited Interim Balance Sheet that have not yet been collected and those
accounts receivable that have arisen since June 30, 1999 and have not yet been
collected) (i) represent valid obligations of customers of the Company arising
from bona fide transactions entered into in the ordinary course of business,
(ii) are current and will be collected in full when due, without any
counterclaim or set off (net of an allowance for doubtful accounts not to
exceed $25,000 in the aggregate).
2.8. Equipment; Leasehold.
(a) All material items of equipment and other tangible
assets owned by or leased to the Company are adequate for the uses to which
they are being put, are in good condition and repair (ordinary wear and tear
excepted) and are adequate for the conduct of the Company's business in the
manner in which such business is currently being conducted.
(b) The Company does not own any real property or any
interest in real property, except for the leasehold created under the real
property lease identified in Part 2.10 of the Disclosure Schedule.
2.9. Intellectual Property and Other Intangible Assets.
(a) As used herein, the term "Intellectual Property" shall
mean all registered patents, designs and trademarks, all applications for
registration thereof, and all computer programs including, but not limited to,
computer programs embodied in semiconductor chips, and related flow-charts,
programmer notes, updates and data, whether in object or source code form,
developed, or used in connection with the business of the Company, and all
hardware, algorithms, utilities flowcharts, logic, documentation, processes,
formulations, data, experimental methods, or results, descriptions, business
or scientific plans, depictions, customer lists and any other written, printed
or electronically stored materials or information, including specifications,
pricing plans, market research or data, potential marketing strategies,
prospective users and distribution channels, engineering drawings, information
concerning specialized suppliers, specifications for products and/ or
processes and/or software, test protocols, and all other materials relating
thereto, and copies thereof in any storage media, and all other works of
authorship, inventions, concepts, ideas, and discoveries developed,
discovered, conceived, created, made, reduced to practice, or used by the
Company and all intellectual property rights therein, including, without
limitation, all copyrights in the United States, Israel and elsewhere,
including all rights of registration and publication, rights to create
derivative works, and all other rights incident to copyright ownership, for
the residue now unexpired of the present term of any and all such copyrights
and any term thereafter granted during which such information is entitled to
copyright, and all inventions (patentable or unpatentable), trade secrets,
know-how, ideas and confidential information embodied or reflected in such
information, including any shop rights, for the longest period of protection
accorded to such interests under applicable law.
(b) Except as specifically set forth in Part 2.9(b) of the
Disclosure Schedule, the Company (i) owns or has the right to use, free and
clear of all liens, claims and restrictions the Intellectual Property used in
the conduct of its business, and (ii) to the best knowledge of the Company,
such Intellectual Property does not infringe upon or violate any right, lien,
or claim of others, including without limitation of its present or former
employees or the former employers of all such persons. Except as set forth in
Part 2.9(b) of the Disclosure Schedule, the Company is not currently obligated
or under any liability whatsoever to make any payments by way of royalties,
fees or otherwise to any owner or licensee of, or other claimant to, any
patent, trademark, service mark, trade name, copyright or other intangible
asset, with respect to the use thereof or in connection with the conduct of
its business or otherwise.
(c) Any and all Intellectual Property of any kind which has
been developed or, is currently being developed, by any of the Company or any
employees of the Company shall be the property solely of the Company. The
Company has taken security measures to protect the secrecy, confidentiality
and value of all the Intellectual Property, which measures are reasonable and
customary in the industry in which the Company operates. Each person who,
either alone or in concert with others, developed, invented, discovered,
derived, programmed or designed the Intellectual Property, or who has
knowledge of or access to information about the Intellectual Property, has
entered into a written non-disclosure agreement with the Company regarding
ownership and treatment of the Intellectual Property, in a form reasonably
satisfactory to the Company.
(d) Except as specifically set forth in Part 2.9(d) of the
Disclosure Schedule, neither the Company nor, to the best knowledge of the
Company, any of its directors, officers or employees has received any
communications alleging that the Company has violated or by conducting its
business as currently conducted, would violate, any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. Except as set forth in Part
2.9(d) of the Disclosure Schedule, neither the Company nor, to the best
knowledge of the Company, any of its directors, officers or employees has
received notice nor is it otherwise aware of any infringement of or conflict
with asserted rights of others, with respect to any of the Intellectual
Property, or of any facts, or assertion of any facts, which would render any
of the Intellectual Property invalid or unenforceable.
(e) To the best knowledge of the Company, none of the
Company's employees, officers or directors are obligated under any contract
(including licenses, covenants or commitments of any nature) or other
agreement, or subject to any judgment, decree or order of any court or
administrative agency, that would interfere with the use of such persons' best
efforts to promote the interests of the Company or that would conflict with
the Company's business as conducted and as proposed to be conducted. To the
best knowledge of the Company, neither the execution nor delivery of the
Agreement, nor the carrying on of the Company's business by employees of the
Company, nor the conduct of the Company's business as proposed to be
conducted, will materially conflict with or result in a material breach of the
terms, conditions or provisions of, or constitute a material default under,
any contract, covenant or instrument under which any of the Company's
employees, officers or directors is now obligated. It is not, and will not
become, necessary to utilize any inventions, and specifically, patent
applications, of any of the Company's employees (or people the Company
currently intends to hire) made prior to their employment by the Company other
than those that have been assigned to the Company pursuant to valid and
legally binding instruments of assignment.
(f) The Intellectual Property owned by the Company
constitutes all of the Intellectual Property necessary to enable the Company
to conduct its business in the manner in which such business has been and is
being conducted. Except as set forth in Part 2.9(f) of the Disclosure
Schedule, the Company has not licensed any of the Company Intellectual
Property to any Person on an exclusive basis, nor has the Company entered into
any covenant not to compete or Contract limiting its ability to exploit fully
any of its Intellectual Property or to transact business in any market or
geographical area or with any Person.
(g) The Company's products (the "Products") will not
experience fatal errors and/or invalid and/or incorrect results as a result of
the change of year from 1999 to 2000; provided, that the Products receive
correct and properly formatted date inputs from all software and hardware that
exchange data with or provide data to the Products.
2.10. Agreements and Trading.
(a) All the material agreements to which the Company is a
party (including instruments, leases, licenses, arrangements, or undertakings
of any nature, written or oral) (the "Material Agreements") are listed in Part
2.10(a) of the Disclosure Schedule.
(b) To the best of the Company's knowledge, and except as
set forth in Part 2.10(c) of the Disclosure Schedule, all the Material
Agreements are in full force and effect and the Company has no knowledge of
the invalidity of or grounds for rescission, avoidance or repudiation of any
of the Material Agreements and, except as set forth in Part 2.10(b) of the
Disclosure Schedule, the Company has not received any notice of any intention
to terminate any such agreement.
(c) To the best of the Company's knowledge and other than as
set forth in Part 2.10(c) of the Disclosure Schedule, the Company and all
third parties with whom it has transacted business have performed in all
respects all of their material obligations under the Material Agreements,
except for such non performance that, both individually and in the aggregate
with all other exceptions to any of the representations in this Section 2
which are not specified on schedules hereto, would not have a Material Adverse
Effect on the Company. To the best of the Company's knowledge, and except as
set forth in Part 2.10(c) of the Disclosure Schedule, no party to any of the
Material Agreements is in breach or in default in any respect of its material
obligations thereunder. Except as set forth in Part 2.10(c) of the Disclosure
Schedule, no party to any of the material Agreements has made a claim of which
the Company is aware to the effect that the Company has failed to perform a
material obligation thereunder.
(d) Except as set forth in Part 2.10(d) of the Disclosure
Schedule, there are no agreements, promises or understandings in force
restricting the competitive freedom of the Company to provide and take goods
and services by such means and from and to such individuals or entities as it
may from time to time think fit.
(e) The Company has delivered to Parent accurate and
complete copies of all written Material Agreements identified in Part 2.10(a)
of the Disclosure Schedule, including all amendments thereto. Part 2.10(a) of
the Disclosure Schedule provides an accurate description of the terms of each
Material Agreement that is not in written form. Except as set forth in Parts
2.10(b) and 2.10(c) of the Disclosure Schedule, each Material Agreement
identified in Part 2.10(a) of the Disclosure Schedule is valid and in full
force and effect, and, to the Company's best knowledge, is enforceable by the
Company in accordance with its terms, subject to (i) laws of general
application relating to bankruptcy, insolvency and the relief of debtors, and
(ii) rules of law governing specific performance, injunctive relief and other
equitable remedies.
(f) Except as set forth in Part 2.10(c) of the Disclosure
Schedule:
(i) the Company has not violated or breached, or
committed any material default under, any Material Agreement, and, to the
Company's best knowledge, no other Person has violated or breached, or
committed any material default under, any Material Agreement;
(ii) no event has occurred, and no circumstance or
condition exists, that (with or without notice or lapse of time) will, or
could reasonably be expected to, (A) result in a material violation or breach
of any of the provisions of any Material Agreement, (B) give any Person the
right to declare a material default or exercise any remedy under any Material
Agreement, (C) give any Person the right to accelerate the maturity or
performance of any Material Agreement, or (D) give any Person the right to
cancel, terminate or modify any Material Agreement;
(iii) since December 31, 1997, the Company has
not received any notice or other communication regarding any actual or
possible material violation or breach of, or material default under, any
Material Agreement; and
(iv) the Company has not waived any of its
material rights under any Material Agreement.
(g) Except as set forth in Part 2.10(c) of the Disclosure
Schedule, no Person is renegotiating, or has a right pursuant to the terms of
any Material Agreement to renegotiate, any amount paid or payable to the
Company under any Material Agreement or any other material term or provision
of any Material Agreement.
(h) The Material Agreements identified in Part 2.10(a) of
the Disclosure Schedule collectively constitute all of the Contracts necessary
to enable the Company to conduct its business in the manner in which its
business is currently being conducted.
(i) Part 2.10(i) of the Disclosure Schedule identifies and
provides a brief description of each proposed Contract as to which any bid,
offer, award, written proposal, term sheet or similar document has been
submitted or received by the Company regarding the business of the Company
since January 1, 1999, or which is otherwise still pending.
(j) Part 2.10(j) of the Disclosure Schedule provides an
accurate description and breakdown of the Company's backlog under Material
Agreements.
2.11. Capital Expenditure and Commitments. Except as disclosed in
Part 2.11 of the Disclosure Schedule or in the Company Financial Statements:
(a) The Company has not undertaken to make any material
capital commitment, expenditure or purchase in excess of $150,000.
(b) The Company is not a party to any material hire, hire
purchase, credit sale or conditional sale agreement or any contract providing
for payment on deferred terms in respect of assets purchased by the Company.
(c) The Company is not in breach of any material obligation
under any material deed, agreement or transaction to which it is a party, and
to the best of its knowledge, no third party that has transacted business with
the Company is in breach of any of its material obligations under any material
deed, agreement, or transaction with the Company to which it is a party.
(d) The Company is not aware of any Security Interest on,
over or affecting the issued or unissued share capital of the Company, nor is
the Company aware of any agreement or commitment to give or create any such
Security Interest and no claim has been made by any Person to be entitled to
any such Security Interest.
(e) The Company has not given any guarantee, indemnity or
security for, or otherwise agreed to become directly or contingently liable
for, any obligation of any other individual or entity, except in its ordinary
course of business, and to the best of its knowledge, no individual or entity
has given any guaranty of or security for any of the Company's obligations.
(f) There are in force no powers of attorney given by the
Company with respect to any asset or business of the Company, and no
individual or entity, as agent, representative, distributor or otherwise, is
entitled or authorized to bind or commit the Company to any obligation not in
the ordinary course of the Company's business.
(g) The Company has not applied for or received any
grant or allowance from any governmental authority.
2.12. Compliance with Legal Requirements.
(a) To the best of its knowledge, information and belief,
and except as set forth in Part 2.12(a) of the Disclosure Schedule, the
Company has carried on its business and affairs in all material respects in
accordance with all applicable laws and regulations, to the extent material to
the Company's business or assets, including, inter alia, in accordance with
the provisions of the Israel Companies Ordinance [New Version], 1983, and in
accordance with the Company's Memorandum of Association and Articles of
Association, and, the Company is not aware of any material violation or
default with respect to any statute, regulation, order, decree, or judgment of
any court or any governmental agency which could have a material adverse
effect upon the Company's assets or business, and the Company has been granted
and there are now in force all material approvals, consents, and licenses
necessary for the carrying on of its business in the places and in the manner
in which it is now carried on, and, except as set forth in Part 2.12(a) of the
Disclosure Schedule, the Company is not aware of any circumstances which
evidence or indicate that any such approvals, consents or licenses, to the
extent material to the Company's business or assets, are likely to be
suspended, canceled, revoked or not renewed.
(b) The copy of each of the Memorandum of Association and
Articles of Association of the Company provided to Parent, is complete, true
and accurate, has not been amended or repealed and the Articles of Association
will be in effect until such time as the Articles of Association are amended
under Section 17.15 of the Amended and Restated Stockholders Agreement among
the Company, the Founder and certain of the Sellers.
(c) To the best of the Company's knowledge, and except as
specifically set forth in Part 2.12(c) of the Disclosure Schedule, all
documents required to be filed with or delivered to the Registrar of Companies
in respect of the Company have been properly filed or delivered in a timely
manner, except for such non compliance that, both individually and in the
aggregate with all other exceptions to any of the representations in this
Section 2 which are not specified on schedules hereto, would not have a
Material Adverse Effect on the Company.
2.13. Governmental Authorizations. Part 2.13 of the Disclosure
Schedule identifies each material Governmental Authorization held by the
Company, and the Company has delivered to Parent accurate and complete copies
of all Governmental Authorizations identified in Part 2.13 of the Disclosure
Schedule. The Governmental Authorizations identified in Part 2.13 of the
Disclosure Schedule are valid and in full force and effect, and collectively
constitute all Governmental Authorizations necessary to enable the Company to
conduct its business in the manner in which its business is currently being
conducted. Except as set forth in Part 2.13 of the Disclosure Schedule, the
Company is, and at all times since December 31, 1997 has been, in substantial
compliance with the terms and requirements of the respective Governmental
Authorizations identified in Part 2.13 of the Disclosure Schedule. Since
December 31, 1997, the Company has not received any notice or other
communication from any Governmental Body regarding (a) any actual or possible
violation of or failure to comply with any term or requirement of any
Governmental Authorization, or (b) any actual or possible revocation,
withdrawal, suspension, cancellation, termination or modification of any
Governmental Authorization.
2.14. Tax Matters.
(a) To the best of the Company's knowledge, except as
specifically set forth in Part 2.14(a) of the Disclosure Schedule, the Company
Financial Statements make full provisions for all Taxes for which the Company
was then or thereafter became or may hereafter become liable or accountable in
respect of or by reference to any income, profit, receipt, gain, transaction,
agreement, distribution or event which was earned, accrued, received, or
realized, entered into except as specifically set forth in Part 2.14(a) of the
Disclosure Schedule, paid, made or accrued on or before December 31, 1998, and
the Company promptly paid or fully provided in its books of account for all
Taxes for which it has or may hereafter become liable or accountable in the
period from the date of its incorporation to the Closing Date.
(b) To the best of the Company's knowledge, and except as
set forth in Part 2.14(b) of the Disclosure Schedule, the Company has at all
times and within the requisite time limits promptly, fully and accurately
observed, performed and complied with all material obligations or conditions
imposed on it, or to which any claim, deduction, allowance or relief made,
claimed by or afforded to it was made subject, under any legislation relating
to Taxes, except for such non compliance that, both individually and in the
aggregate with all other exceptions to any of the representations in this
Section 2 which are not specified in the Disclosure Schedule, would not have a
Material Adverse Effect on the Company.
(c) Except as specifically set forth in Part 2.14(c) of the
Disclosure Schedule, the Company is not aware of any circumstances which will
or may, whether by lapse of time or the issue of any notice of assessment or
otherwise, give rise to any dispute with any relevant Government Body in
relation to its liability or accountability for Taxes, any claim made by it,
any relief, deduction, or allowance afforded to it, or in relation to the
status or character of the Company or any of its enterprises under or for the
purpose of any provision of any legislation relating to Taxes, except for such
dispute or claim that, both individually and in the aggregate with all other
exceptions to any of the representations in this Section 2 which are not
specified on schedules hereto, would not have a Material Adverse Effect on the
Company.
2.15. Employees.
(a) Full particulars of all the officers, employees and
consultants of the Company (each, an "Employee"), including their present
compensation packages, are disclosed in Part 2.15(a) of the Disclosure
Schedule, which particulars show all material benefits including, without
limitation, salaries, directors' fees, social benefits, bonuses, commissions,
profit shares, automobile, reimbursement of expenses and benefits in kind
("Benefits") payable or which the Company is bound to provide (whether now or
in the future) to each officer, employee and consultant of the Company and are
true, accurate and complete.
(b) Except as set forth in Part 2.15(b) of the Disclosure
Schedule, no key employee of the Company has been dismissed in the last six
months or has given notice of termination of his employment.
(c) The employment agreements of each of Ehud Iloni, E.
Levy, P. Paz, R. Karp, Y. Meiman and M. Fourier were previously provided to
Parent and its counsel. Part 2.15(c) of the Disclosure Schedule includes the
form of contracts under which substantially all the Employees of the Company
at the date hereof are engaged.
(d) Subject to the provisions of any applicable Israeli law
and binding custom and except as set forth in Part 2.15(a) of the Disclosure
Schedule, there are no agreements or arrangements (whether legally enforceable
or not) for the payment of any pensions, allowances, lump sums, or other like
benefits on retirement or on death or termination or during periods of
sickness or disablement for the benefit of any officer or former officer or
employee or former employee of the Company or for the benefit of the
dependents of any such individual in operation at the date hereof.
(e) Except as set forth in Part 2.15(e) of the Disclosure
Schedule, all the Benefits to which any officer or former officer or employee
or former employee of the Company is or may be entitled including, inter alia,
severance pay, leave and health, have been paid or adequately provided for in
the Company Financial Statements.
(f) A complete list of all of the shares and options granted
to or purchased by employees, directors, officers or consultants of the
Company, and their respective vesting schedules, is set forth in Part 2.15(f)
of the Disclosure Schedule. Except as set forth therein, the Company does not
operate any share incentive scheme, share option scheme or profit sharing
scheme for the benefit of any of its directors, officers, employees or
consultants.
(g) Neither the execution, delivery or performance of this
Agreement, nor the consummation of any of the other transactions contemplated
by this Agreement, will result in any payment (including any bonus, golden
parachute or severance payment) to any current or former Employee or director
of the Company (whether or not under any Plan), or materially increase the
benefits payable under any Plan, or result in any acceleration of the time of
payment or vesting of any such benefits, except as provided therein.
(h) Part 2.15(a) of the Disclosure Schedule contains a list
of all salaried employees of the Company as of the date of this Agreement, and
correctly reflects, in all material respects, their salaries, any other
compensation payable to them (including compensation payable pursuant to
bonus, deferred compensation or commission arrangements), their dates of
employment and their positions. The Company is not a party to any collective
bargaining contract or other Contract with a labor union involving any of its
Employees except for those provisions of general agreements between the
Federation of Labor Unions and the Coordination Bureau of Economic
Organizations which may be applicable to certain classes of employees by
virtue of Extension Orders. All of the Company's employees are "at will"
employees.
(i) Part 2.15(i) of the Disclosure Schedule identifies each
Employee who is not fully available to perform work because of disability or
other leave and sets forth the basis of such leave and the anticipated date of
return to full service.
(j) Except as set forth in Part 2.15(j) of the Disclosure
Schedule, the Company is in compliance in all material respects with all
applicable Legal Requirements and Contracts relating to employment, employment
practices, wages, bonuses and terms and conditions of employment, including
employee compensation matters.
(k) The Company is not aware of any organizational
campaigns, petitions or other unionization activities seeking recognition of a
collective bargaining unit which could affect the Company; nor is the Company
aware of any controversies, strikes, slowdowns or work stoppages pending or
threatened between the Company and any of its employees. To the Company's best
knowledge, the consummation of any of the transactions contemplated by this
Agreement will not have a material adverse effect on the Company's labor
relations, and none of the Company's key employees has notified the Company of
any intention to terminate his or her employment with the Company.
2.16. Environmental Matters. The Company is in compliance in all
material respects with all applicable Environmental Laws, which compliance
includes the possession by the Company of all permits and other Governmental
Authorizations required under applicable Environmental Laws, and compliance
with the terms and conditions thereof. The Company has not received any notice
or other communication (in writing or otherwise), whether from a Governmental
Body, citizens group, employee or otherwise, that alleges that the Company is
not in compliance with any Environmental Law, and, to the Company's best
knowledge, there are no circumstances that may prevent or interfere with the
Company's compliance with any Environmental Law in the future. To the
Company's best knowledge, no current or prior owner of any property leased or
controlled by the Company has received any notice or other communication (in
writing or otherwise), whether from a Government Body, citizens group,
employee or otherwise, that alleges that such current or prior owner or the
Company is not in compliance with any Environmental Law with respect to such
property. All Governmental Authorizations currently held by the Company
pursuant to Environmental Laws are identified in Part 2.16 of the Disclosure
Schedule. (For purposes of this Section 2.16: (i) "Environmental Law" means
any federal, state, local or foreign Legal Requirement relating to pollution
or protection of human health or the environment (including ambient air,
surface water, ground water, land surface or subsurface strata), including any
law or regulation relating to emissions, discharges, releases or threatened
releases of Materials of Environmental Concern, or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environmental Concern; and (ii)
"Materials of Environmental Concern" include chemicals, pollutants,
contaminants, wastes, toxic substances, petroleum and petroleum products and
any other substance that is now regulated by any Environmental Law or that is
otherwise a danger to health, reproduction or the environment.)
2.17. Insurance.
(a) Full and accurate details of the Company's insurance
policies are contained in Part 2.17(a) of the Disclosure Schedule, including
such policies as are required under the Company's agreements with its
customers.
(b) Except as specifically set forth in Part 2.17(b) of the
Disclosure Schedule, the Company has the benefit of adequate insurance against
all risks and losses usually insured against by companies carrying on the same
or a similar business and (without prejudice to the generality of the
foregoing) for the full replacement or reinstatement value of all its assets
of an insurable nature and against accident, damage, injury, third party loss
(including product liability) and loss of profits with a well established and
reputable insurer.
(c) Except as specifically set forth in Part 2.17(c) of the
Disclosure Schedule, the Company has not done anything or suffered any damage
which has rendered or might render any policies of insurance taken out by it
void or voidable or which might result in an increase in premiums and the
Company has complied with all conditions attached to such policies.
(d) There is no claim outstanding under any of such policies
nor, to the best of the Company's knowledge, are there any circumstances
likely to give rise to such a claim.
2.18. Related Party Transactions. Except as set forth in Part 2.18
of the Disclosure Schedule: (a) no Related Party has, and no Related Party has
at any time since December 31, 1997 had, any direct or indirect interest in
any material asset used in or otherwise relating to the business of the
Company; (b) no Related Party is, or has at any time since December 31, 1997
been, indebted to the Company; (c) since December 31, 1997, no Related Party
has entered into, or has had any direct or indirect financial interest in, any
Material Agreement, transaction or business dealing involving the Company; (d)
no Related Party is competing, or has at any time since December 31, 1997
competed, directly or indirectly, with the Company; and (e) no Related Party
has any claim or right against the Company (other than rights under Options
and rights to receive compensation for services performed as an employee of
the Company). (For purposes of this Section 2.18 each of the following shall
be deemed to be a "Related Party": (i) each of the Company Stockholders that
owns an aggregate of five percent (5%) or more of the capital stock of the
Company; (ii) each individual who is, or who has at any time since December
31, 1997 been, an officer of the Company; (iii) each member of the immediate
family of each of the individuals referred to in clauses "(i)" and "(ii)"
above; and (iv) any trust or other Entity (other than the Company) in which
any one of the individuals referred to in clauses "(i)", "(ii)" and "(iii)"
above holds (or in which more than one of such individuals collectively hold),
beneficially or otherwise, a material voting, proprietary or equity interest.)
2.19. Legal Proceedings; Orders.
(a) As of three days prior to the date hereof and three days
prior to the Closing Date, except as set forth in Part 2.19 of the Disclosure
Schedule there is no, nor will there have been any pending Legal Proceeding,
and, to the Company's best knowledge, no Person has threatened to commence any
Legal Proceeding: (i) that involves the Company or any of the assets owned or
used by the Company or any Person whose liability the Company has or may have
retained or assumed, either contractually or by operation of law; or (ii) that
challenges, or that may have the effect of preventing, delaying, making
illegal or otherwise interfering with, any of the transactions contemplated by
this Agreement. To the Company's best knowledge, no event has occurred, and no
claim, dispute or other condition or circumstance exists, that will, or that
could reasonably be expected to, give rise to or serve as a basis for the
commencement of any such Legal Proceeding.
(b) Except as set forth in Part 2.19 of the Disclosure
Schedule, no Legal Proceeding has ever been commenced by or has ever been
pending against the Company.
(c) As of three days prior to the date hereof and three days
prior to the Closing Date, there is no order, writ, injunction, judgment or
decree to which the Company, or any of the assets owned or used by the
Company, is subject. To the Company's best knowledge, no officer or other
employee of the Company is subject to any order, writ, injunction, judgment or
decree that prohibits such officer or other employee from engaging in or
continuing any conduct, activity or practice relating to the Company's
business.
2.20. Authority; Binding Nature of Agreement. Except as set forth
in Part 2.21 of the Disclosure Schedule, the Company has the absolute and
unrestricted right, power and authority to enter into and to perform its
obligations under this Agreement; and the execution, delivery and performance
by the Company of this Agreement have been duly authorized by all necessary
action on the part of the Company and its board of directors. This Agreement
constitutes the legal, valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms, subject to (i)
laws of general application relating to bankruptcy, insolvency and the relief
of debtors, and (ii) rules of law governing specific performance, injunctive
relief and other equitable remedies.
2.21. Non-Contravention; Consents. Except as set forth in Part
2.21 of the Disclosure Schedule, neither (1) the execution, delivery or
performance of this Agreement or any of the other agreements referred to in
this Agreement, nor (2) the consummation of any of the transactions
contemplated by this Agreement, will directly or indirectly (with or without
notice or lapse of time):
(a) contravene, conflict with or result in a violation of
(i) any of the provisions of the Company's Articles of Association or
Memorandum of Association, or (ii) any resolution adopted by the Company's
stockholders, the Company's board of directors or any committee of the
Company's board of directors;
(b) contravene, conflict with or result in a violation of,
or give any Governmental Body or other Person the right to challenge any of
the transactions contemplated by this Agreement or to exercise any remedy or
obtain any relief under, any Legal Requirement or any order, writ, injunction,
judgment or decree to which the Company, or any of the assets owned or used by
the Company, is subject;
(c) contravene, conflict with or result in a violation of
any of the terms or requirements of, or give any Governmental Body the right
to revoke, withdraw, suspend, cancel, terminate or modify, any Governmental
Authorization that is held by the Company or that otherwise relates to the
Company's business or to any of the assets owned or used by the Company;
(d) contravene, conflict with or result in a material
violation or breach of, or result in a material default under, any provision
of any Material Agreement that is or would constitute a Material Agreement, or
give any Person the right to (i) declare a default or exercise any remedy
under any such Material Agreement, (ii) accelerate the maturity or performance
of any such Material Agreement, or (iii) cancel, terminate or modify any such
Material Agreement; or
(e) result in the imposition or creation of any lien or
other Encumbrance upon or with respect to any asset owned or used by the
Company (except for minor liens that will not, in any case or in the
aggregate, materially detract from the value of the assets subject thereto or
materially impair the operations of the Company).
Except as set forth in Part 2.21 of the Disclosure Schedule, the Company is
not and will not be required to make any filing with or give any notice to, or
to obtain any Consent from, any Person in connection with (x) the execution,
delivery or performance of this Agreement or any of the other agreements
referred to in this Agreement, or (y) the consummation of any of the
transactions contemplated by this Agreement.
2.22. No Conflicting Interest. Except as set forth in Part 2.22 of
the Disclosure Schedule, the Company is not aware that any director, officer,
key employee or Related Party of the Company has any interest in any
corporation, partnership, or other entity that is engaged in a business which
is in competition with that of the Company, is a supplier or customer of the
Company, or is a party to any contract which may have any effect on the
business of the Company.
2.23. Full Disclosure. This Agreement (including the Disclosure
Schedule) does not, and the Company Closing Certificate will not, (i) contain
any representation, warranty or information that is false or misleading with
respect to any material fact, or (ii) to the Company's best knowledge, omit to
state any material fact necessary in order to make the representations,
warranties and information contained and to be contained herein and therein
(in the light of the circumstances under which such representations,
warranties and information were or will be made or provided) not false or
misleading.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to the Company and the Sellers as
follows:
3.1. Due Organization. Parent is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
Parent has all requisite corporate power and authority to own, lease and
operate its properties and to carry on its businesses as now conducted.
3.2. SEC Filings; Financial Statements.
(a) Parent has timely filed all required forms, reports and
documents with the SEC since August 17, 1998, each of which has complied in
all material respects with all applicable requirements of the Securities Act
and the Exchange Act and the rules and regulations promulgated thereunder,
each as in effect on the dates such forms, reports, and documents were filed.
Parent has made available to the Company and the Sellers accurate and complete
copies (excluding copies of exhibits) of each report, registration statement
(on a form other than Form S-8) and definitive proxy statement filed by Parent
with the SEC between August 17, 1998 and the date of this Agreement (the
"Parent SEC Documents"). As of the time it was filed with the SEC (or, if
amended or superseded by a filing prior to the date of this Agreement, then on
the date of such filing): (i) each of the Parent SEC Documents, including, any
financial statements or schedules included or incorporated by reference
therein, complied in all material respects with the applicable requirements of
the Securities Act or the Exchange Act (as the case may be); and (ii) none of
the Parent SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) The consolidated financial statements contained in the
Parent SEC Documents: (i) complied as to form in all material respects with
the published rules and regulations of the SEC applicable thereto; (ii) were
prepared in accordance with generally accepted accounting principles applied
on a consistent basis throughout the periods covered, except as may be
indicated in the notes to such financial statements and (in the case of
unaudited statements) as permitted by Form 10-Q of the SEC, and except that
unaudited financial statements may not contain footnotes and are subject to
year-end audit adjustments; and (iii) fairly present the consolidated
financial position of Parent and its subsidiaries as of the respective dates
thereof and the consolidated results of operations of Parent and its
subsidiaries for the periods covered thereby. Except as and to the extent
disclosed in the Parent SEC Reports, since August 17, 1998, there has not been
any event, occurrence or development which does or could reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect
on the Parent.
3.3. Authority; Binding Nature of Agreement. Parent has the
absolute and unrestricted right, power and authority to perform their
obligations under this Agreement; and the execution, delivery and performance
by Parent of this Agreement (including the contemplated issuance of Common
Stock in accordance with this Agreement) have been duly authorized by all
necessary action on the part of Parent and its board of directors. No vote of
Parent's stockholders is needed to approve any of the transactions
contemplated by this Agreement. This Agreement constitutes the legal, valid
and binding obligation of Parent, enforceable against it in accordance with
its terms, subject to (i) laws of general application relating to bankruptcy,
insolvency and the relief of debtors, and (ii) rules of law governing specific
performance, injunctive relief and other equitable remedies.
3.4. Valid Issuance. The Common Stock to be issued in the
transactions contemplated by this Agreement will, when issued in accordance
with the provisions of this Agreement, be validly issued, fully paid and
nonassessable.
3.5. Consents and Approvals. Except as set forth on Schedule 3.5
hereto, no filing or registration with, no notice to and no permit,
authorization, consent or approval of any third party or any Governmental Body
is necessary for the consummation by Parent of the transactions contemplated
by this Agreement.
3.6. No Violation. Neither the execution and delivery of this
Agreement by Parent, the performance by Parent of its obligations hereunder
nor the consummation by Parent of the transactions contemplated hereby will
(a) violate, conflict with or result in any breach of any provision of the
Certificate of Incorporation or Bylaws of Parent, (b) violate, conflict with
or result in a violation or breach of, or constitute a default (with or
without due notice or lapse of time or both) under the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license,
lease or agreement to which Parent is a party or (c) violate any order, writ,
judgment, injunction, decree, statute, rule or regulation of any court or
domestic or foreign Governmental Body applicable to Parent.
3.7. Legal Proceedings. Except as set forth in Schedule 3.7
hereto, Parent is not aware of any pending Legal Proceeding, and, to Parent's
best knowledge, no Person has threatened to commence any Legal Proceeding: (i)
that involves Parent or any of the assets owned or used by Parent or any
Person whose liability Parent has or may have retained or assumed, either
contractually or by operation of law; or (ii) that challenges, or that may
have the effect of preventing, delaying, making illegal or otherwise
interfering with, any of the transactions contemplated by this Agreement. To
Parent's best knowledge, no event has occurred, and no claim, dispute or other
condition or circumstance exists, that will, or that could reasonably be
expected to, give rise to or serve as a basis for the commencement of any such
Legal Proceeding.
3.8. Experience; Receipt of Information. Parent has such
knowledge and experience in financial and business matters as to be capable of
evaluating the merits and risks relating to the acquisition of the Company,
and has reviewed and inspected all of the data and information provided to it
by the Company in connection with this Agreement. Parent has been furnished by
the Company with all the documents and information regarding the Company which
Parent has requested, and has been afforded the opportunity to ask questions
of and receive answers from duly authorized officers or other representatives
of the Company concerning the Company's business, assets and financial
position.
3.9. Brokers. No broker, finder or investment banker, for which
the Company or the Sellers may be liable, is entitled to any brokerage,
finder's or other fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Parent or any of its directors, officers, employees or agents.
3.10. Full Disclosure. This Agreement does not, and the Parent
Closing Certificate will not, (i) contain any representation, warranty or
information that is false or misleading with respect to any material fact, or
(ii) to the Parent's best knowledge, omit to state any material fact necessary
in order to make the representations, warranties and information contained and
to be contained herein and therein (in the light of the circumstances under
which such representations, warranties and information were or will be made or
provided) not false or misleading.
SECTION 4. CERTAIN COVENANTS OF THE COMPANY.
4.1. Access and Investigation. During the period from the date of
this Agreement through the Closing, or the earlier termination hereof in
accordance with Section 8 (the "Pre-Closing Period"), the Company shall, and
shall cause its Representatives to: (a) provide Parent and Parent's
Representatives with reasonable access to the Company's Representatives,
personnel and assets and to all existing books, records, Tax Returns, work
papers and other documents and information relating to the Company; and (b)
provide Parent and Parent's Representatives with copies of such existing
books, records, Tax Returns, work papers and other documents and information
relating to the Company, and with such additional financial, operating and
other data and information regarding the Company, as Parent may reasonably
request.
4.2. Operation of the Company's Business. Other than as
contemplated hereunder, during the Pre-Closing Period:
(a) the Company shall conduct its business and operations in
the ordinary course and in substantially the same manner as such business and
operations have been conducted prior to the date of this Agreement;
(b) the Company shall use reasonable efforts to preserve
intact its current business organization, keep available the services of its
current officers and employees and maintain its relations and good will with
all suppliers, customers, landlords, creditors, employees and other Persons
having business relationships with the Company;
(c) the Company shall keep in full force all insurance
policies referred to in Part 2.17 of the Disclosure Schedule;
(d) the Company shall cause its officers to report regularly
(but in no event less frequently than weekly) to Parent concerning the status
of the Company's business;
(e) the Company shall not declare, accrue, set aside or pay
any dividend or make any other distribution in respect of any shares of
capital stock, and shall not repurchase, redeem or otherwise reacquire any
shares of capital stock or other securities
(f) the Company shall not sell, issue or authorize the
issuance of (i) any capital stock or other security, (ii) any option or right
to acquire any capital stock or other security, or (iii) any instrument
convertible into or exchangeable for any capital stock or other security
(except that the Company shall be permitted (x) to grant stock options to
employees in accordance with its past practices, and (y) to issue Ordinary
Shares to employees upon the exercise of outstanding Options);
(g) the Company shall not amend or waive any of its rights
under, or permit the acceleration of vesting under, (i) any provision of the
Plan for Issuance of Options to Directors Executives and Senior Employees of
Telegate, (ii) any provision of any agreement evidencing any outstanding
Option, or (iii) any provision of any restricted stock purchase agreement;
(h) the Company shall not amend or permit the adoption of
any amendment to the Company's Articles of Association, except to the extent
necessary to comply with Section 17.15 of the Amended and Restated
Stockholders Agreement among the Company, the Founder and certain of the
Sellers, or Memorandum of Association, or effect or permit the Company to
become a party to any Acquisition Transaction, recapitalization,
reclassification of shares, stock split, reverse stock split or similar
transaction;
(i) the Company shall not form any subsidiary or acquire any
equity interest or other interest in any other Entity;
(j) the Company shall not make any capital expenditure,
except for capital expenditures that, when added to all other capital
expenditures made on behalf of the Company during the Pre-Closing Period, do
not exceed $25,000 per month;
(k) the Company shall not, other than in the ordinary course
of business, (i) enter into, or permit any of the assets owned or used by it
to become bound by, any Contract that is or would constitute a Material
Agreement, or (ii) amend or prematurely terminate, or waive any material right
or remedy under, any such Contract;
(l) the Company shall not (i) acquire, lease or license any
right or other asset from any other Person, except for rights or other assets
acquired, leased or licensed in the ordinary course of business, including the
possible lease of additional space in the Company's current facilities, (ii)
sell or otherwise dispose of, or lease or license, any right or other asset to
any other Person, except for rights or other assets disposed of, leased or
licensed in the ordinary course of business, or (iii) waive or relinquish any
right, except for assets acquired, leased, licensed or disposed of by the
Company pursuant to Contracts that are not Material Agreements;
(m) the Company shall not (i) lend money to any Person other
than to its employees, in the ordinary course of business and consistent with
past practices, or (ii) incur or guarantee any indebtedness for borrowed money
other than in the ordinary course of business and consistent with past
practices;
(n) the Company shall not (i) establish, adopt or amend any
employee benefit plan, (ii) pay any bonus or make any profit-sharing payment,
cash incentive payment or similar payment to, or increase the amount of the
wages, salary, commissions, fringe benefits or other compensation or
remuneration payable to, any of its directors, officers or employees, or (iii)
hire any new key employee;
(o) the Company shall not change any of its methods of
accounting or accounting practices in any material respect;
(p) the Company shall not make any Tax election;
(q) the Company shall not commence or settle any material
Legal Proceeding;
(r) the Company shall not agree or commit to take any of the
actions described in clauses "(e)" through "(q)" above.
Notwithstanding the foregoing, the Company may take any action described in
clauses "(e)" through "(r)" above if Parent gives its prior written consent to
the taking of such action by the Company, which consent will not be
unreasonably withheld (it being understood that Parent's withholding of
consent to any action will not be deemed unreasonable if Parent determines in
good faith that the taking of such action would not be in the best interests
of the Company, currently and/or under the ownership of Parent).
4.3. Notification; Updates to Disclosure Schedule.
(a) During the Pre-Closing Period, the Company shall
promptly notify Parent in writing of:
(i) the discovery by the Company of any event,
condition, fact or circumstance that occurred or existed on or prior to the
date of this Agreement and that caused or constitutes an inaccuracy in or
breach of any representation or warranty made by the Company in this
Agreement;
(ii) any event, condition, fact or circumstance
that occurs, arises or exists after the date of this Agreement and that would
cause or constitute an inaccuracy in or breach of any representation or
warranty made by the Company in this Agreement if (A) such representation or
warranty had been made as of the time of the occurrence, existence or
discovery of such event, condition, fact or circumstance, or (B) such event,
condition, fact or circumstance had occurred, arisen or existed on or prior to
the date of this Agreement;
(iii) any material breach of any material covenant
or obligation of the Company; and
(iv) any event, condition, fact or circumstance
that would make the timely satisfaction of any of the conditions set forth in
Section 6 or Section 7 impossible or unlikely.
(b) If any event, condition, fact or circumstance that is
required to be disclosed pursuant to Section 4.3(a) requires any change in the
Disclosure Schedule, or if any such event, condition, fact or circumstance
would require such a change assuming the Disclosure Schedule were dated as of
the date of the occurrence, existence or discovery of such event, condition,
fact or circumstance, then the Company shall promptly deliver to Parent an
update to the Disclosure Schedule specifying such change. No such update shall
be deemed to supplement or amend the Disclosure Schedule for the purpose of
(i) determining the accuracy of any of the representations and warranties made
by the Company in this Agreement, or (ii) determining whether any of the
conditions set forth in Section 6 has been satisfied.
4.4. No Negotiation. During the Pre-Closing Period, the Company
shall not directly or indirectly:
(a) solicit or encourage the initiation of any inquiry,
proposal or offer from any Person (other than Parent) relating to a possible
Acquisition Transaction;
(b) participate in any discussions or negotiations or enter
into any agreement with, or provide any non-public information to, any Person
(other than Parent) relating to or in connection with a possible Acquisition
Transaction; or
(c) consider, entertain or accept any proposal or offer from
any Person (other than Parent) relating to a possible Acquisition Transaction.
The Company shall promptly notify Parent in writing of any material inquiry,
proposal or offer relating to a possible Acquisition Transaction that is
received by the Company or any of its Representatives during the Pre-Closing
Period.
SECTION 5. ADDITIONAL COVENANTS OF THE PARTIES.
5.1. Filings and Consents. As promptly as practicable after the
execution of this Agreement, each party to this Agreement (a) shall make all
filings (if any) and give all notices (if any) required to be made and given
by such party in connection with the transactions contemplated by this
Agreement, and (b) shall use all commercially reasonable efforts to obtain all
Consents (if any) required to be obtained (pursuant to any applicable Legal
Requirement or Contract, or otherwise) by such party in connection with the
transactions contemplated by this Agreement. Each party to this Agreement
shall (upon request) promptly deliver to the other parties a copy of each such
filing made, each such notice given and each such Consent obtained by such
party during the Pre-Closing Period. Each party shall promptly provide the
other parties with copies of all filings made by the other party with the SEC
or any other state, federal or foreign Governmental Body in connection with
this Agreement and the transactions contemplated hereby.
5.2. Public Announcements. During the Pre-Closing Period, (a) the
Company and the Sellers shall not (and the Company shall not permit any of its
Representatives to) issue any press release or make any public statement
regarding this Agreement, or regarding any of the transactions contemplated by
this Agreement, without Parent's prior written consent, and (b) Parent shall
not (and the Parent shall not permit any of its Representatives to) issue any
press release or make any public statement regarding this Agreement, or
regarding any of the transactions contemplated by this Agreement, without
Company's prior written consent Notwithstanding the provisions of the
preceding sentence, each party shall be permitted to issue any press release
or make any public statement as such party is advised by counsel is legally
required to be issued or made under any applicable laws; provided, however,
that in such event the party issuing such press release or making such public
statement will provide the other parties with prompt written notice of such
requirement and a copy of the press release to be issued or public statement
to be made, and the parties shall use reasonable commercial efforts to
coordinate the content of such press release or public statement.
5.3. Best Efforts. During the Pre-Closing Period, (a) the Company
shall use its best efforts to cause the conditions set forth in Section 6 to
be satisfied on a timely basis, and (b) Parent shall use its best efforts to
cause the conditions set forth in Section 7 to be satisfied on a timely basis.
5.4. Employment and Noncompetition Agreements. The Company shall
use all commercially reasonable efforts to cause eighty percent (80%) of the
individuals identified on Exhibit B to execute and deliver to the Company and
Parent, at the Closing, an Employment Agreement in the form to be agreed
between Parent and the Sellers' Representative and a Noncompetition Agreement
in the form to be agreed between Parent and the Sellers' Representative. Prior
to the Closing, Parent and the Sellers' Representative shall agree upon a list
of up to twenty-five (25) current employees of the Company, which shall be
attached hereto as Exhibit B and become part hereof.
5.5. Termination of Employee Plans. At the Closing and subject to
Section 1.9, the Company shall terminate its existing stock option plans, and
shall ensure that no employee or former employee of the Company has any rights
under any of such plans and that any liabilities of the Company under such
plans (including any such liabilities relating to services performed prior to
the Closing) are fully extinguished at no material cost to the Company.
5.6. Registration of Shares. Parent will, as promptly as
practicable, prepare and file with the SEC a registration statement under the
Securities Act with respect to the registration of the shares of Common Stock
issuable to the Sellers in connection with the transactions contemplated by
this Agreement (the "Registration Statement"). Parent will, and will cause its
accountants and lawyers to, cause the Registration Statement to be declared
effective as promptly as practicable after filing with the SEC, but in no
event later than the Closing and the Registration Statement shall be kept
effective continuously for a period of two years following the later of (i)
Closing or (ii) the date on which the Registration Statement is declared
effective by the SEC. None of the information supplied or to be supplied by
Parent for inclusion or incorporation by reference in the Registration
Statement will, at the time the Registration Statement is filed with the SEC
and at the time it becomes effective under the Securities Act, contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading. If at any time prior to the date on which the Registration
Statement is declared effective by the SEC any event in respect of Parent, its
officers and directors, or any of its subsidiaries should occur which is
required to be described in an amendment of, or a supplement to, the
Registration Statement, Parent shall promptly so advise the Sellers'
Representative and such event shall be so described, and any such amendment or
supplement to the Registration Statement (which the Sellers' Representative
shall have a reasonable opportunity to review) shall be promptly filed with
the SEC. The Registration Statement will comply as to form in all material
respects with the provisions of the Securities Act and the rules and
regulations thereunder.
5.7. Lock-up Restrictions. All shares of Common Stock issued to
the employees of the Company identified on Exhibit B hereto (collectively, the
"Key Employees") in connection with the transaction contemplated by this
Agreement shall be subject to restrictions upon resale. Such shares of Common
Stock shall be subject to lock-up restrictions for a one-year period from the
Closing Date. All certificates representing shares of Common Stock issued to
the Key Employees shall bear restrictive legends referencing the lock-up
periods set forth in this Section 5.7.
5.8. Employees. As soon as practicable after the Closing Date,
Parent shall provide to all employees of the Company such employee benefits
plans, programs and arrangements as are generally made available to Israeli
employees of Parent, provided, with respect to each employee, that such
employee does not voluntarily terminate his or her employment with the Company
prior to the first anniversary of the Closing Date.
5.9. Directors and Officers Insurance. For a period of seven (7)
years after the Closing Date, Parent shall cause to be maintained in effect
the current officers' and directors' liability insurance policies maintained
by the Company with respect to the directors and officers of the Company at
the date of this Agreement covering acts or omissions occurring prior to the
Closing Date, provided that Parent may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions which are
no less advantageous to such directors and officers than such existing
insurance policies.
5.10. Tax Liability. Each party shall be responsible for all its
respective tax obligations deriving from the transactions contemplated in this
Agreement.
SECTION 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PARENT.
The obligations of Parent to consummate the transactions contemplated
by this Agreement are subject to the satisfaction, at or prior to the Closing,
of each of the following conditions any or all of which may be waived in
writing by Parent:
6.1. Accuracy of Representations. Each of the representations and
warranties made by the Company in this Agreement and in each of the other
agreements and instruments delivered to Parent in connection with the
transactions contemplated by this Agreement shall have been accurate in all
material respects as of the date of this Agreement, and shall be accurate in
all material respects as of the Closing Date as if made on the Closing Date.
6.2. Performance of Covenants. All of the covenants and
obligations that the Company is required to comply with or to perform at or
prior to the Closing shall have been complied with and performed in all
material respects.
6.3. Consents. All Consents required to be obtained in connection
with the transactions contemplated by this Agreement (including the Consents
identified in Part 2.21 of the Disclosure Schedule) shall have been obtained
and shall be in full force and effect.
6.4. Agreements and Documents. Parent and the Company shall have
received the following agreements and documents, each of which shall be in
full force and effect:
(a) fully executed Escrow Agreement (the "Escrow Agreement")
in the form and substance reasonably satisfactory to counsel for Parent and
counsels for the Sellers' Representative, which shall contain, without
limitation, provisions regarding the following: (i) the allocation of the
Escrow Shares (including with respect to any payments therefrom) among the
Sellers in accordance with Schedule A, and (ii) the release of the Escrow
Shares on the first anniversary of the Closing Date, (iii) the registration of
the Escrow Shares for trading, without any restrictions, immediately upon
release from escrow, and (iv) such other terms and conditions as are standard
and customary in transactions of this nature ;
(b) Employment Agreements in the form to be agreed between
Parent and the Sellers' Representative, executed by eighty percent (80%) of
the individuals identified on Exhibit B;
(c) Noncompetition Agreements in the form to be agreed
between Parent and the Sellers' Representative, executed by eighty percent
(80%) of the individuals identified on Exhibit B;
(d) confidential invention and assignment agreements,
reasonably satisfactory in form and content to Parent, executed by all
employees of the Company and by all consultants and independent contractors to
the Company who have not already signed such agreements;
(e) a legal opinion of Yigal Arnon & Co., in form and
substance reasonably satisfactory to counsel for Parent, addressed to the
Parent and dated as of the Closing Date, as to the matters set forth in
Sections 2.1(a), 2.3 and 2.20.
(f) a certificate executed by two Officers of the Company
(but without personal liability thereto) certifying that each of the
representations and warranties set forth in Section 2 is accurate in all
material respects as of the Closing Date as if made on the Closing Date and
that the conditions set forth in Sections 6.1, 6.2 and 6.3 have been duly
satisfied (the "Company Closing Certificate"); and
(g) Lock-up agreements executed by each Key Employee in the
form and substance reasonably satisfactory to counsel for Parent and counsel
for the Company which shall contain terms and conditions standard and
customary in transactions of this nature, including a twelve-month restriction
on the sale of Common Stock by such Key Employee;
(h) written resignations of all directors of the Company,
effective as of the Closing Date;
(i) certificates representing the Shares accompanied by
share transfer deeds duly executed for transfer in blank;
(j) a fully executed Marketing Agreement in the form of
Exhibit C;
(k) certificates representing the Debentures; and
(l) Option Holder Consent Letter and Counterpart Signature
Pages, executed by all of the Option Holders.
6.5. Securities Law Requirements. All permits, licenses,
consents and approvals necessary under any laws relating to the sale of
securities have been issued or given, and all restrictions or registration
statements filed under any laws relating to the sale of securities for the
issuance of Common Stock issuable pursuant to this Agreement shall have become
effective, and no such permit, license, consent, approval, registration or
registration statement shall have been revoked, canceled, terminated,
suspended or made the subject of any stop order or proceeding thereof.
6.6. No Restraints. No temporary restraining order, preliminary
or permanent injunction or other order preventing the consummation of the
transactions contemplated by this Agreement shall have been issued by any
court of competent jurisdiction and remain in effect, and there shall not be
any Legal Requirement enacted or deemed applicable to the transactions
contemplated by this Agreement that makes consummation of the transactions
contemplated by this Agreement illegal, which Legal Requirement shall not have
been removed within thirty (30) days of enactment.
6.7. No Legal Proceedings. Other than in connection with the
matter referred to in the last bullet point of Part 2.19 of the Disclosure
Schedule, no Person shall have commenced or taken substantial steps towards
any Legal Proceeding challenging or seeking the recovery of a material amount
of damages in connection with the transactions contemplated by this Agreement
or seeking to prohibit or limit the exercise by Parent of any material right
pertaining to its ownership of stock of the Company.
6.8. Termination of Employee Plans. The Company shall have
provided Parent with evidence, reasonably satisfactory to Parent, as to the
termination of the benefit plans referred to in Section 5.5.
6.9. ISA Exemption. Parent shall have received from the Israel
Securities Authority an exemption from the obligation to publish a prospectus
in the manner required pursuant to the laws of the State of Israel in
connection with the issuance of the Common Stock to the Sellers.
SECTION 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY.
The obligations of the Sellers and the Company to consummate the
transactions contemplated by this Agreement are subject to the satisfaction,
at or prior to the Closing, of the following conditions any or all of which
may be waived in writing by the Sellers' Representative:
7.1. Accuracy of Representations. Each of the representations and
warranties made by Parent in this Agreement shall have been accurate in all
material respects as of the date of this Agreement, and shall be accurate in
all material respects as of the Closing Date as if made on the Closing Date.
7.2. Performance of Covenants. All of the covenants and
obligations that Parent is required to comply with or to perform at or prior
to the Closing shall have been complied with and performed in all respects.
7.3. Documents. The Sellers and the Company shall have received
the following agreements and documents, each of which shall be in full force
and effect:
(a) validly executed share certificates covering the Common
Stock, issued in the names of the respective Sellers;
(b) fully executed Escrow Agreement;
(c) a legal opinion of Cooley Godward LLP, in form and
substance reasonably satisfactory to counsel for the Sellers, addressed to the
Sellers and dated as of the Closing Date, as to the matters set forth in
Sections 3.1, 3.3, and 3.4;
(d) a certificate executed by the Parent's Chief Executive
Officer and Chief Financial Officer (but without personal liability thereto)
certifying that each of the representations and warranties set forth in
Section 3 is accurate in all material respects as of the Closing Date as if
made on the Closing Date and that the conditions set forth in Sections 7.1,
7.2 and 7.5 have been duly satisfied (the "Parent Closing Certificate"); and
(e) fully executed Marketing Agreement in the form of
Exhibit C.
7.4. No Restraints. No temporary restraining order, preliminary
or permanent injunction or other order preventing the consummation of the
transactions contemplated by this Agreement shall have been issued by any
court of competent jurisdiction and remain in effect, and there shall not be
any Legal Requirement enacted or deemed applicable to the transactions
contemplated by this Agreement that makes consummation of the transactions
contemplated by this Agreement illegal, which Legal Requirement shall not have
been removed within (30) days of enactment.
7.5. Consents. All Consents required to be obtained in connection
with the transactions contemplated by this Agreement (including the Consents
identified in Part 2.21 of the Disclosure Schedule) shall have been obtained
and shall be in full force and effect.
7.6. Effectiveness of Registration Statement. The Registration
Statement shall have been declared effective by the SEC and shall be effective
at the Closing Date, and no stop order suspending effectiveness shall have
been issued; there shall be no holding period or volume or timetable
restrictions applicable to the sale of the Common Stock from and after the
Closing and thereafter; no action, suit, proceeding or investigation by the
SEC to suspend the effectiveness thereof shall have been initiated and be
continuing; and all necessary approvals under state securities laws or the
Securities Act or Exchange Act relating to the issuance or trading of the
Common Stock shall have been received. The Common Stock required to be issued
hereunder shall have been approved for listing on the Nasdaq National Market,
subject only to official notice of issuance. Notwithstanding anything herein
to the contrary, if, prior to the Closing, the Sellers obtain a definitive
ruling (after having used their best efforts to do so) from the Israel Tax
Authorities, in the form and substance satisfactory to counsels for the
Sellers and counsel for Parent, which provides that the Israeli tax event for
which any of the Sellers may be liable in connection with the transactions
contemplated hereby shall be deferred until the effective date of the
Registration Statement (the "Deferral Ruling"), the effectiveness of the
Registration Statement shall not be a condition to the Closing. In the event
that Sellers obtain the Deferral Ruling, Parent shall be obligated to cause
the Registration Statement to be declared effective by the SEC within sixty
(60) days of the Closing Date. In the event that the Registration Statement is
not declared effective by the SEC within sixty (60) days of the Closing Date
(the "Registration Deadline"), Parent shall be obligated to immediately
deposit an additional fifty thousand (50,000) shares of Common Stock in the
Additional Consideration Escrow Fund. At the end of each thirty (30) day
period thereafter in which the Registration Statement is not declared
effective by the SEC, Parent shall deposit an additional fifty thousand
(50,000) shares of Common Stock in the Additional Consideration Escrow Fund.
7.7. Securities Law Requirements. All permits, licenses, consents
and approvals necessary under any laws relating to the sale of securities have
been issued or given, and all restrictions or registration statements filed
under any laws relating to the sale of securities for the issuance of Common
Stock issuable pursuant to this Agreement shall have become effective, and no
such permit, license, consent, approval, registration or registration
statement shall have been revoked, canceled, terminated, suspended or made the
subject of any stop order or proceeding thereof.
7.8. No Legal Proceedings. Other than in connection with the
matter referred to in the last bullet point of Part 2.19 of the Disclosure
Schedule, no Person shall have commenced any Legal Proceeding challenging or
seeking the recovery of a material amount of damages in connection with the
transactions contemplated by this Agreement or seeking to prohibit or limit
the exercise by Parent of any material right pertaining to its ownership of
stock of the Company.
SECTION 8. TERMINATION.
8.1. Termination Events. This Agreement may be terminated prior to
the Closing:
(a) By either the Company and the Sellers' Representative or
by Parent if a court of competent jurisdiction or Governmental Body shall have
issued an order, decree or ruling or taken any other action (which order,
decree or ruling the parties hereto shall use their best efforts to lift) and
such was not at the request of the party seeking termination of the Agreement,
in each case permanently restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree, ruling or
other action shall have become final and nonappealable; or
(b) by Parent if the Closing has not taken place on or
before January 15, 2000 (other than as a result of any failure on the part of
Parent to comply with or perform any covenant or obligation of Parent set
forth in this Agreement);
(c) by the Seller's Representative and the Company if the
Closing has not taken place on or before January 15, 2000 (other than as a
result of the failure on the part of the Sellers or the Company to comply with
or perform any covenant or obligation set forth in this Agreement or in any
other agreement or instrument delivered to Parent); or
(d) by the mutual consent of Parent, the Seller's
Representative and the Company.
8.2. Termination Procedures. If Parent wishes to terminate this
Agreement pursuant to Section 8.1(a) or Section 8.1(b), Parent shall deliver
to the Seller's Representative and the Company a written notice stating that
Parent is terminating this Agreement and setting forth a brief description of
the basis on which Parent is terminating this Agreement. If the Seller's
Representative and the Company wish to terminate this Agreement pursuant to
Section 8.1(a) or Section 8.1(c), the Seller's Representative and the Company
shall deliver to Parent a written notice stating that the Seller's
Representative and the Company are terminating this Agreement and setting
forth a brief description of the basis on which the Seller's Representative
and the Company are terminating this Agreement.
8.3. Effect of Termination. If this Agreement is terminated
pursuant to Section 8.1, all further obligations of the parties under this
Agreement shall terminate; provided, however, that: (a) neither the Company
nor Parent shall be relieved of any obligation or liability arising from any
prior breach by such party of any provision of this Agreement; (b) the parties
shall, in all events, remain bound by and continue to be subject to the
provisions set forth in Section 10; and (c) the parties shall, in all events,
remain bound by and continue to be subject to Section 5.2.
SECTION 9. INDEMNIFICATION, ETC.
9.1. Survival of Representations, Etc.
(a) The representations and warranties made by the Company
(including the representations and warranties set forth in Section 2 and the
representations and warranties set forth in the Company Closing Certificate)
shall survive the Closing and shall expire on the 12-month anniversary of the
Closing Date; provided, however, that if, at any time prior to the 12-month
anniversary of the Closing Date, any Indemnitee (acting in good faith)
delivers to the Sellers' Representative a written notice alleging the
existence of an inaccuracy in or a breach of any of the representations and
warranties made by the Company (and setting forth in reasonable detail the
basis for such Indemnitee's belief that such an inaccuracy or breach may
exist) and asserting a claim for recovery under Section 9.2 based on such
alleged inaccuracy or breach, then the claim asserted in such notice shall
survive the 12-month anniversary of the Closing until such time as such claim
is fully and finally resolved; and provided, further, that the representations
and warranties related to the second bullet point in Part 2.3 of the
Disclosure Schedule shall, for purposes of such claims by Parent, survive the
first anniversary of the Closing until the fourth anniversary of the Closing.
(b) The representations, warranties, covenants and
obligations of the Company, and the rights and remedies that may be exercised
by the Indemnitees, shall not be limited or otherwise affected by or as a
result of any information furnished to, or any investigation made by or
knowledge of, any of the Indemnitees or any of their Representatives.
(c) For purposes of this Agreement, each statement or other
item of information set forth in the Disclosure Schedule or in any update to
the Disclosure Schedule shall be deemed to be a representation and warranty
made by the Company in this Agreement.
(d) The representations and warranties made by Parent
(including the representations and warranties set forth in Section 3 and the
representations and warranties set forth in the Parent Closing Certificate)
shall survive the Closing and shall expire on the 12-month anniversary of the
Closing Date; provided, however, that if, at any time prior to the 12-month
anniversary of the Closing Date, the ECI Sellers' Representative (as defined
below) or the Other Sellers' Representative (as defined below) (acting in good
faith) delivers to the Parent a written notice alleging the existence of an
inaccuracy in or a breach of any of the representations and warranties made by
Parent (and setting forth in reasonable detail the basis for the Sellers'
Representative's belief that such an inaccuracy or breach may exist) and
asserting a claim for recovery under Section 9.2 based on such alleged
inaccuracy or breach, then the claim asserted in such notice shall survive the
12-month anniversary of the Closing until such time as such claim is fully and
finally resolved.
(e) The representations, warranties, covenants and
obligations of the Parent, and the rights and remedies that may be exercised
by the Sellers, shall not be limited or otherwise affected by or as a result
of any information furnished to, or any investigation made by or knowledge of,
any of the Sellers or any of their Representatives.
9.2. Indemnification.
(a) From and after the Closing Date (but subject to Section
9.1(a)), the Indemnitees may seek indemnification solely from the Escrow Fund
for any Damages that are directly or indirectly suffered or incurred by any of
the Indemnitees or to which any of the Indemnitees may otherwise become
subject (regardless of whether or not such Damages relate to any third-party
claim) and which arise from or as a result of, or are directly or indirectly
connected with: (i) any inaccuracy in or breach of any representation or
warranty set forth in Section 2 or in the Company Closing Certificate; (ii)
any inaccuracy in or breach of any representation or warranty set forth in
Section 2 as if such representation and warranty had been made on and as of
the Closing Date; (iii) any breach of any covenant or obligation of the
Company (including the covenants set forth in Sections 4 and 5); (iv) any
claim brought in connection with the second bullet point of Part 2.3 of the
Disclosure Schedule, or (v) any Legal Proceeding relating to any inaccuracy or
breach of the type referred to in clause "(i)" or "(ii)" above (including any
Legal Proceeding commenced by any Indemnitee for the purpose of enforcing any
of its rights under this Section 9); provided, however, that with respect to
any Damages that are directly or indirectly suffered or incurred by any of the
Indemnitees or to which any of the Indemnitees may otherwise become subject
(regardless of whether or not such Damages relate to any third-party claim)
and which arise from or as a result of, or are directly or indirectly
connected with the matter described in the second bullet point of Part 2.3 of
the Disclosure Schedule, in addition to seeking indemnification from the
Escrow Fund, but only after exhausting the full Escrow Fund, the Indemnitees
shall also be entitled to seek indemnification directly from the Sellers in an
aggregate amount not to exceed two million US dollars ($2,000,000); provided,
however, that each Seller shall only be liable for its pro rata share of such
Damages, as calculated in accordance with the allocation set forth in Schedule
A.
(b) The Sellers and the Company acknowledges and agree that,
if the Company suffers, incurs or otherwise become subject to any Damages as a
result of or in connection with any inaccuracy in or breach of any
representation, warranty, covenant or obligation, then (without limiting any
of its rights as an Indemnitee) Parent shall also be deemed, by virtue of its
ownership of the stock of the Company, to have incurred Damages as a result of
and in connection with such inaccuracy or breach.
(c) From and after the Closing Date (but subject to Section
9.1(d)), any Seller may seek indemnification from Parent for any Damages that
are directly or indirectly suffered or incurred by such Seller or to which
such Seller may otherwise become subject (regardless of whether or not such
Damages relate to any third-party claim) and which arise from or as a result
of, or are directly or indirectly connected with: (i) any inaccuracy in or
breach of any representation or warranty set forth in Section 3 or in the
Parent Closing Certificate; (ii) any inaccuracy in or breach of any
representation or warranty set forth in Section 3 as if such representation
and warranty had been made on and as of the Closing Date; or (iii) any Legal
Proceeding relating to any inaccuracy or breach of the type referred to in
clause "(i)" or "(ii)" above (including any Legal Proceeding commenced by any
Seller for the purpose of enforcing any of its rights under this Section 9);
provided, however, that the amount of indemnification sought by the Sellers
shall not exceed ten million US dollars ($10,000,000) in the aggregate.
9.3. Defense of Third Party Claims. In the event of the assertion
or commencement by any Person of any claim or Legal Proceeding (whether
against the Company, against Parent or against any other Person) with respect
to which any of the Indemnitees shall have the right to seek indemnification
pursuant to this Section 9, Parent shall have the right, at its election, to
proceed with the defense of such claim or Legal Proceeding on its own. If
Parent so proceeds with the defense of any such claim or Legal Proceeding:
(a) all reasonable expenses relating to the defense of such
claim or Legal Proceeding shall be borne and paid exclusively out of the
Escrow Fund;
(b) Parent shall have the right to settle, adjust or
compromise such claim or Legal Proceeding with the consent of the Sellers'
Representative; provided, however, that such consent shall not be unreasonably
withheld.
Parent shall give the Sellers' Representative prompt notice of the
commencement of any such Legal Proceeding against Parent or the Company;
provided, however, that any failure on the part of Parent to so notify the
Sellers' Representative shall not limit any of the rights of the Indemnitees
under this Section 9 (except to the extent such failure materially prejudices
the defense of such Legal Proceeding).
9.4. Exercise of Remedies by Indemnitees Other Than Parent. No
Indemnitee (other than Parent or any successor thereto or assign thereof)
shall be permitted to assert any indemnification claim or exercise any other
remedy under this Agreement unless Parent (or any successor thereto or assign
thereof) shall have consented to the assertion of such indemnification claim
or the exercise of such other remedy.
9.5. Limitations on Indemnification.
(a) Except as specifically set forth herein, the maximum
amount of indemnifiable Damages that may be recovered from the Sellers arising
out of or resulting from Section 9.2(a) shall be the amount equal to the
Escrow Fund, and solely from the Escrow Fund and with respect to each Seller,
the amount that may be recovered will be limited to the amount equal to the
number of shares of Common Stock set forth opposite such Sellers' name in the
column in Schedule A captioned "Escrow Shares."
(b) Notwithstanding anything to the contrary contained in
this Agreement, no Indemnitee shall be entitled to seek indemnification from
the Sellers under this Agreement with respect to any Damages arising out of or
resulting from Section 9.2(a), until the aggregate amount of such Damages
exceeds one hundred thousand US dollars ($100,000), and where such damages
exceed one hundred thousand US dollars ($100,000), the Indemnitees shall be
entitled to indemnification in full (with no deduction of the one hundred
thousand US dollars ($100,000)), subject to the provisions of Section 9.5(a).
(c) Notwithstanding anything to the contrary contained in
this Agreement, the maximum amount of indemnifiable Damages that may be
recovered from Parent arising out of or resulting from Section 9.2(c) shall be
the amount equal to ten million US dollars ($10,000,000).
(d) Notwithstanding anything to the contrary contained in
this Agreement, the Sellers shall not be entitled to seek indemnification from
Parent under this Agreement with respect to any Damages arising out of or
resulting from Section 9.2(c), until the aggregate amount of such Damages
exceeds one hundred thousand US dollars ($100,000), and where such damages
exceed one hundred thousand US dollars ($100,000), the Sellers shall be
entitled to indemnification in full (with no deduction of the one hundred
thousand US dollars ($100,000)), subject to the provisions of Section 9.5(c).
9.6. Exclusive Remedies. Parent acknowledges and agrees that its
sole and exclusive remedy (except in the case of fraud, in which case Parent
reserves all rights available to it under the law with respect to the party
committing such fraud) with respect to any and all claims relating to the
subject matter of this Agreement and the other agreements, documents and
certificates specifically contemplated by this Agreement shall be pursuant to
the indemnification provisions set forth in this Section 9 and specific
performance as contemplated by Section 10.11 below.
9.7. Prospectus Indemnification. Notwithstanding anything to the
contrary in this Agreement, in the event any shares of Common Stock are
included in a registration statement of the Company:
(a) To the extent permitted by law, Parent will indemnify
and hold harmless each Seller, the partners, officers, directors and legal
counsel of each Seller, any underwriter (as defined in the Securities Act) for
such Seller and each person, if any, who controls such Seller or underwriter
within the meaning of the Securities Act or the Exchange Act, against any
losses, claims, damages, or liabilities (joint or several) to which they may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon any of the following
statements, omissions or violations (collectively a "Violation") by Parent:
(i) any untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) the omission to state
therein a material fact required to be stated therein, or necessary to make
the statements therein not misleading, or (iii) any violation or alleged
violation by Parent of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any state securities law in connection with the offering
covered by such registration statement; and Parent will reimburse each such
Seller, partner, officer or director, underwriter or controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action;
provided however, that the indemnity agreement contained in this Section
9.7(a) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of Parent, which consent shall not be unreasonably withheld, nor shall Parent
be liable in any such case for any such loss, claim, damage, liability or
action to the extent that it arises out of or is based upon a Violation which
occurs in reliance upon and in conformity with written information furnished
expressly for use in connection with such registration by such Seller,
partner, officer, director, underwriter or controlling person of such Seller.
(b) To the extent permitted by law, each Seller will, if
Common Stock held by such Seller are included in the securities as to which
such registration qualifications or compliance is being effected, indemnify
and hold harmless Parent, each of its directors, its officers, and legal
counsel and each person, if any, who controls Parent within the meaning of the
Securities Act, any underwriter and any other Seller selling securities under
such registration statement or any of such other Seller's partners, directors
or officers or any person who controls such Seller, against any losses,
claims, damages or liabilities (joint or several) to which Parent or any such
director, officer, controlling person, underwriter or other such Seller, or
partner, director, officer or controlling person of such other Seller may
become subject under the Securities Act, the Exchange Act or other federal or
state law, insofar as such losses, claims, damages or liabilities (or actions
in respect thereto) arise out of or are based upon any Violation, in each case
to the extent (and only to the extent) that such Violation occurs in reliance
upon and in conformity with written information furnished by such Seller
specifically for use in connection with such registration; and each such
Seller will reimburse any legal or other expenses reasonably incurred by
Parent or any such director, officer, controlling person, underwriter or other
Seller, or partner, officer, director or controlling person of such other
Seller in connection with investigating or defending any such loss, claim,
damage, liability or action if it is judicially determined that there was such
a Violation; provided, however, that the indemnity agreement contained in this
Section 9.7(b) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability or action if such settlement is effected without the
consent of the Seller, which consent shall not be unreasonably withheld.
(c) Promptly after receipt by an indemnified party under
this Section 9.7 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 9.7,
deliver to the indemnifying party a written notice of the commencement thereof
and the indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other indemnifying
party similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
shall have the right to retain its own counsel, with the fees and expenses to
be paid by the indemnifying party, if representation of such indemnified party
by the counsel retained by the indemnifying party would be inappropriate due
to actual or potential differing interests between such indemnified party and
any other party represented by such counsel in such proceeding. The failure to
deliver written notice to the indemnifying party within a reasonable time of
the commencement of any such action, if materially prejudicial to its ability
to defend such action, shall relieve such indemnifying party of any liability
to the indemnified party under this Section 9.7, but the omission so to
deliver written notice to the indemnifying party will not relieve it of any
liability that it may have to any indemnified party otherwise than under this
Section 9.7.
(d) If the indemnification provided for in this Section 9.7
is held by a court of competent jurisdiction to be unavailable to an
indemnified party with respect to any losses, claims, damages or liabilities
referred to herein, the indemnifying party, in lieu of indemnifying such
indemnified party thereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such indemnified party as a result
of such loss, claim, damage or liability in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other in connection with the Violation(s) that
resulted in such loss, claim, damage or liability, as well as any other
relevant equitable considerations. The relative fault of the indemnifying
party and of the indemnified party shall be determined by a court of law by
reference to, among other things, whether the untrue statement of a material
fact or the omission to state a material fact relates to information supplied
by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information and opportunity to correct
or prevent such statement or omission.
(e) The obligations of Parent and Sellers under this Section
9.7 shall survive completion of any offering of Common Stock in a registration
statement and the termination of this Agreement. No indemnifying party, in the
defense of any such claim or litigation, shall, except with the consent of
each indemnified party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation.
SECTION 10. MISCELLANEOUS PROVISIONS.
10.1. Sellers' Representative. Israel Frieder, Shmuel Gitlin or
such other persons identified by ECI Telecom Ltd. ("ECI") in writing to the
other parities hereto are hereby designated as the representatives of ECI for
purposes of this Agreement and the Escrow Agreement and as agents and
attorneys-in-fact of ECI with respect hereto and thereto (the "ECI Sellers'
Representative"), and Zvika Schechter is hereby designated as the
representative of the Sellers (other than ECI) for purposes of this Agreement
and the Escrow Agreement and as agent and attorney-in-fact of the Sellers with
respect hereto and thereto (the "Other Sellers' Representative") (Any
reference in this Agreement to the "Sellers' Representative" shall be deemed
to refer to both the ECI Sellers' Representative on behalf of ECI, and the
Other Sellers' Representative on behalf of the Sellers (other than ECI)). Each
Sellers' Representative shall have the authority to take such actions and
exercise such discretion on behalf of its respective principals as are
required of the Sellers' Representative pursuant to the terms of this
Agreement and the Escrow Agreement (and any such actions shall be binding on
each of the Sellers represented by such Sellers' Representative), including
without limitation the following:
(i) to receive, hold and deliver to Parent the share
certificates representing the Shares, the certificates representing the
Warrants, the certificates representing the Debentures, and any other
documents relating thereto;
(ii) to execute, acknowledge, deliver, record and file all
ancillary agreements, waivers, consents, certificates and documents which the
Sellers' Representative deems necessary or appropriate in connection with the
consummation of the transactions contemplated by the terms and provisions of
this Agreement;
(iii) to receive and make any payments provided for under
this Agreement and acknowledge receipt and payment thereof;
(iv) to waive any breach or default under the Agreement, or
to waive any condition precedent to the Closing under Section 7 hereof;
(v) to amend or terminate this Agreement;
(vi) to receive service of process in connection with any
claims under this Agreement or the Escrow Agreement; and
(vii) to perform the obligations and exercise the rights
under the Escrow Agreement, including the settlement of any claims and
disputes with Parent arising thereunder; provided, however, that the Sellers'
Representative shall not be authorized to take any actions that would (x)
increase the obligations or liabilities of any of the Sellers or (y) decrease
the consideration to be received by any of the Sellers, other than in
accordance with the assumptions set forth in Schedule A. The Sellers'
Representative will at all times act in good faith toward the Sellers and will
take no action which would disproportionately impact one Seller in relation to
the other Sellers taken as a whole.
The designation and appointment of the Sellers' Representative is
irrevocable and shall not be affected by the subsequent death, incapacity,
insolvency or dissolution of any Seller. Parent shall have the right to rely
upon all actions taken or omitted by the Seller's Representative pursuant to
this Agreement, all of which actions and omissions shall be binding on each of
the Sellers represented by such Sellers' Representative. If the Other Sellers'
Representative shall die, become disabled or otherwise be unable to fulfill
his responsibilities as agent of the Sellers (other than ECI), then the
Sellers (other than ECI) holding a majority in interest of the capital stock
of the Company (assuming the exercise of all Warrants and the Conversion of
all Debentures and not including any securities of the Company held by ECI)
shall, within ten days after such death or disability, appoint a successor
agent and, promptly thereafter, shall notify Parent of the identity of such
successor. Any such successor shall become the "Other Sellers' Representative"
for purposes of this Agreement. The Sellers hereby authorize their respective
Sellers' Representative to pay all reasonable and documented legal fees and
expenses incurred by the Company and the Sellers (as further described in
Section 10.3 below) from the Purchase Consideration prior to the distribution
of the Purchase Consideration to the Sellers, except for fees and expenses
paid by the Company or included as a Current Liability in the calculation of
Net Cash. The Sellers hereby agree to transfer to the Sellers' Representative
such additional cash amounts as shall be determined by the Sellers'
Representative are necessary to pay all legal fees and expenses incurred by
the Company and the Sellers (as further described in Section 10.3 below),
except for fees and expenses paid by the Company or included as a Current
Liability in the calculation of Net Cash.
10.2 Further Assurances. Each party hereto shall execute and cause to
be delivered to each other party hereto such instruments and other documents,
and shall take such other actions, as such other party may reasonably request
(prior to, at or after the Closing) for the purpose of carrying out or
evidencing any of the transactions contemplated by this Agreement.
10.3 Fees and Expenses. Each party to this Agreement shall bear
and pay all fees, costs and expenses (including legal fees and accounting
fees) that have been incurred or that are incurred by such party in connection
with the transactions contemplated by this Agreement, including all fees,
costs and expenses incurred by such party in connection with or by virtue of
(a) the investigation and review conducted by Parent and its Representatives
with respect to the Company's business (and the furnishing of information to
Parent and its Representatives in connection with such investigation and
review), (b) the negotiation, preparation and review of this Agreement
(including the Disclosure Schedule) and all agreements, certificates, opinions
and other instruments and documents delivered or to be delivered in connection
with the transactions contemplated by this Agreement, and (c) the preparation
and submission of any filing or notice required to be made or given in
connection with any of the transactions contemplated by this Agreement, and
the obtaining of any Consent required to be obtained in connection with any of
such transactions.
10.4 Attorneys' Fees. If any action or proceeding relating to
this Agreement or the enforcement of any provision of this Agreement is
brought against any party hereto, the prevailing party shall be entitled to
recover reasonable attorneys' fees, costs and disbursements (in addition to
any other relief to which the prevailing party may be entitled).
10.5 Notices. Any notice or other communication required or
permitted to be delivered to any party under this Agreement shall be in
writing and shall be deemed properly delivered, given and received when
delivered (by hand, by registered mail, by courier or express delivery service
or by facsimile) to the address or facsimile telephone number set forth
beneath the name of such party below (or to such other address or facsimile
telephone number as such party shall have specified in a written notice given
to the other parties hereto):
if to Parent:
Terayon Communication Systems, Inc.
2952 Bunker Hill Lane
Santa Clara, CA 95054
Fax: (408) 727-6205
Attention: Chief Executive Officer
with a copy to:
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, CA 94111
Fax: (415) 951-3699
Attention: Karyn R. Smith, Esq.
and
Naschitz, Brandes & Co.
5 Tuval Street
Tel-Aviv, Israel
Fax: 972 3 623 5021
Attention: Sharon A. Amir, Adv.
if to the Company:
Telegate Ltd.
7 Haplada Street
Or Yehuda, Israel
Fax: (972-3) 533-5877
Attention: Chief Executive Officer
with a copy to:
Yigal Arnon & Co.
3 Daniel Frisch Street
Tel Aviv 64731, Israel
Fax: (972-3) 608-7714
Attention: David H. Schapiro, Esq. And
Micah Avni, Esq. And
Eric Wachstock, Esq.
if to the Other Sellers' Representative:
Zvika Schechter
ABS GE Capital Giza Fund, L.P.
Ramat Aviv Tower, 12th Floor
40 Einstein Street
POB 17672 Tel Aviv 61172 Fax: (972-3) 640-2319
if to ECI Telecom Ltd. or the ECI Sellers' Representative:
30 Hasivim Street
Petach-Tikva, Israel
Fax: (972-3) 926-6870
Attention: Israel Frieder
with a copy to:
Goldfarb, Levy, Eran & Co.
2 Ibn Gvirol Street
Tel Aviv 64077, Israel
Attn: Nechama Brin, Esq.
Fax: (972-3) 608-9909
10.6 Time of the Essence. Time is of the essence of this Agreement.
10.7 Headings. The boldface headings contained in this Agreement are
for convenience of reference only, shall not be deemed to be a part of this
Agreement and shall not be referred to in connection with the construction or
interpretation of this Agreement.
10.8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall constitute an original and all of which,
when taken together, shall constitute one agreement.
10.9 Governing Law. This Agreement shall be construed in accordance
with, and governed in all respects by, the internal laws of the State of
Israel (without giving effect to principles of conflicts of laws). Each party
to this Agreement consents to the exclusive jurisdiction and venue of the
courts of District of Tel Aviv-Jaffa in the State of Israel.
10.10 Successors and Assigns. This Agreement shall be binding upon:
the Company and its successors and assigns (if any); Parent and its successors
and assigns (if any). This Agreement shall inure to the benefit of: the
Company; the Sellers; the other Indemnitees (subject to Section 9.5); and the
respective successors and assigns (if any) of the foregoing. Neither party may
assign any of its rights under this Agreement to any other Person without
obtaining the consent or approval of the other parties hereto.
10.11 Specific Performance. The parties to this Agreement agree that,
in the event of any breach or threatened breach by any party to this Agreement
of any covenant, obligation or other provision set forth in this Agreement for
the benefit of any other party to this Agreement, such other party shall be
entitled to (a) a decree or order of specific performance or mandamus to
enforce the observance and performance of such covenant, obligation or other
provision, and (b) an injunction restraining such breach or threatened breach.
10.12 Waiver.
(a) No failure on the part of any Person to exercise any
power, right, privilege or remedy under this Agreement, and no delay on the
part of any Person in exercising any power, right, privilege or remedy under
this Agreement, shall operate as a waiver of such power, right, privilege or
remedy; and no single or partial exercise of any such power, right, privilege
or remedy shall preclude any other or further exercise thereof or of any other
power, right, privilege or remedy.
(b) No Person shall be deemed to have waived any claim
arising out of this Agreement, or any power, right, privilege or remedy under
this Agreement, unless the waiver of such claim, power, right, privilege or
remedy is expressly set forth in a written instrument duly executed and
delivered on behalf of such Person; and any such waiver shall not be
applicable or have any effect except in the specific instance in which it is
given.
10.13 Amendments. This Agreement may not be amended, modified,
altered or supplemented other than by means of a written instrument duly
executed and delivered on behalf of all of the parties hereto.
10.14 Severability. In the event that any provision of this
Agreement, or the application of any such provision to any Person or set of
circumstances, shall be determined to be invalid, unlawful, void or
unenforceable to any extent, the remainder of this Agreement, and the
application of such provision to Persons or circumstances other than those as
to which it is determined to be invalid, unlawful, void or unenforceable,
shall not be impaired or otherwise affected and shall continue to be valid and
enforceable to the fullest extent permitted by law.
10.15 Parties in Interest. Except for the provisions of Section 9,
none of the provisions of this Agreement are intended to provide any rights or
remedies to any Person other than the parties hereto and their respective
successors and assigns (if any).
10.16 Entire Agreement. This Agreement and the other agreements
referred to herein set forth the entire understanding of the parties hereto
relating to the subject matter hereof and thereof and supersede all prior
agreements and understandings among or between any of the parties relating to
the subject matter hereof and thereof; provided, however, that the Mutual
Non-Disclosure Agreement executed on behalf of Parent and the Company shall
not be superseded by this Agreement and shall remain in effect in accordance
with its terms until the earlier of (a) the Closing Date, or (b) the date on
which such Mutual Non-Disclosure Agreement is terminated in accordance with
its terms.
10.17 Construction.
(a) For purposes of this Agreement, whenever the context
requires: the singular number shall include the plural, and vice versa; the
masculine gender shall include the feminine and neuter genders; the feminine
gender shall include the masculine and neuter genders; and the neuter gender
shall include the masculine and feminine genders.
(b) The parties hereto agree that any rule of construction
to the effect that ambiguities are to be resolved against the drafting party
shall not be applied in the construction or interpretation of this Agreement.
(c) As used in this Agreement, the words "include" and
"including," and variations thereof, shall not be deemed to be terms of
limitation, but rather shall be deemed to be followed by the words "without
limitation."
(d) Except as otherwise indicated, all references in this
Agreement to "Sections," "Schedules" and "Exhibits" are intended to refer to
Sections of this Agreement and Schedules and Exhibits to this Agreement.
10.18 Founder Bring-Along. In the event that the Founder has not
executed this Agreement concurrently with the execution hereof by each of the
other Sellers, this Agreement shall nonetheless be in full force and effect
and the Company and Parent shall seek to secure, as promptly as practicable,
the Founder's joinder herein by execution of this Agreement in the space
provided for that purpose below, following which the Founder shall be bound
hereunder as a Seller. In the event that the Founder fails to execute and
deliver this Agreement prior to the Closing Date, Parent, the Company and the
Sellers nonetheless agree to consummate the transaction contemplated hereunder
including the purchase and sale of the Sellers' Securities other than those
held by the Founder. Following the consummation thereof, Parent may, but shall
not be obligated to, take such action as necessary or desirable to acquire the
Securities held by the Founder pursuant to Section 236 of the Companies
Ordinance and/or Section 8 of the Amended and Restated Stockholders Agreement,
among the Company, the Founder and certain of the Sellers, and the
transactions contemplated hereby shall, but shall not be required to, be
considered a "plan or contract" within the meaning of Section 236 of the
Companies Ordinance. All of the provisions of this Agreement shall be
interpreted to take into account the fact that the Founder may not participate
in the transaction contemplated hereunder.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
The parties hereto have caused this Share Purchase Agreement to be
executed and delivered as of the date first above written.
TERAYON COMMUNICATION SYSTEMS, INC.,
a Delaware corporation
By:_______________________________
Name:_____________________________
Title:____________________________
EHUD ILONI
___________________________________
TELEGATE LTD.,
a company organized under the laws of Israel
By:_______________________________
Name:_____________________________
Title:____________________________
ECI TELECOM LTD.
By:_______________________________
Name:_____________________________
Title:____________________________
ABS GE CAPITAL GIZA FUND, L.P.
By:_______________________________
Name:_____________________________
Title:____________________________
<PAGE>
EXHIBIT A
CERTAIN DEFINITIONS
For purposes of the Agreement (including this Exhibit A):
Acquisition Transaction. "Acquisition Transaction" shall mean any
transaction involving:
(a) the sale, license, disposition or acquisition of all or a
material portion of the Company's business or assets;
(b) the issuance, disposition or acquisition of (i) any capital
stock or other equity security of the Company (other than Ordinary Shares
issued to employees of the Company, upon exercise of Options or Warrants, the
conversion of the Debentures or otherwise, in routine transactions in
accordance with the Company's past practices), (ii) any option, call, warrant
or right (whether or not immediately exercisable) to acquire any capital stock
or other equity security of the Company (other than stock options granted to
employees of the Company in routine transactions in accordance with the
Company's past practices), or (iii) any security, instrument or obligation
that is or may become convertible into or exchangeable for any capital stock
or other equity security of the Company; or
(c) any merger, consolidation, business combination,
reorganization or similar transaction involving the Company.
Agreement. "Agreement" shall mean the Agreement to which this Exhibit
A is attached (including the Disclosure Schedule), as it may be amended from
time to time.
Consent. "Consent" shall mean any approval, consent, ratification,
permission, waiver or authorization (including any Governmental
Authorization).
Contract. "Contract" shall mean any written, oral or other agreement,
contract, subcontract, lease, understanding, instrument, note, warranty,
insurance policy, benefit plan or legally binding commitment or undertaking of
any nature.
Damages. "Damages" shall include any loss, damage, injury, liability,
claim, demand, settlement, judgment, award, fine, penalty, Tax, fee (including
reasonable attorneys' fees), charge, cost (including costs of investigation)
or expense of any nature.
Debentures. "Debentures" shall mean the convertible debentures,
numbered 1 through 15, that have been previously issued pursuant to the Loan
Agreement, dated July 8, 1999, among the Company, the Founder and certain of
the Sellers.
Disclosure Schedule. "Disclosure Schedule" shall mean the schedule
(dated as of the date of the Agreement) delivered to Parent on behalf of the
Sellers.
Encumbrance. "Encumbrance" shall mean any lien, pledge,
hypothecation, charge, mortgage, security interest, encumbrance, claim,
infringement, interference, option, right of first refusal, preemptive right,
community property interest or restriction of any nature (including any
restriction on the voting of any security, any restriction on the transfer of
any security or other asset, any restriction on the receipt of any income
derived from any asset, any restriction on the use of any asset and any
restriction on the possession, exercise or transfer of any other attribute of
ownership of any asset).
Entity. "Entity" shall mean any corporation (including any non-profit
corporation), general partnership, limited partnership, limited liability
partnership, joint venture, estate, trust, company (including any limited
liability company or joint stock company), firm or other enterprise,
association, organization or entity.
Exchange Act. "Exchange Act" shall mean the Securities Exchange Act
of 1934, as amended.
Escrow Fund. "Escrow Fund" shall have the meaning ascribed to it in
the Escrow Agreement.
Governmental Authorization. "Governmental Authorization" shall mean
any: (a) permit, license, certificate, franchise, permission, clearance,
registration, qualification or authorization issued, granted, given or
otherwise made available by or under the authority of any Governmental Body or
pursuant to any Legal Requirement; or (b) right under any Contract with any
Governmental Body.
Governmental Body. "Governmental Body" shall mean any: (a) nation,
state, commonwealth, province, territory, county, municipality, district or
other jurisdiction of any nature; (b) federal, state, local, municipal,
foreign or other government; or (c) governmental or quasi-governmental
authority of any nature (including any governmental division, department,
agency, commission, instrumentality, official, organization, unit, body or
Entity and any court or other tribunal).
Indemnitees. "Indemnitees" shall mean the following Persons: (a)
Parent; (b) Parent's current and future affiliates (including the Company);
(c) the respective Representatives of the Persons referred to in clauses "(a)"
and "(b)" above; and (d) the respective successors and assigns of the Persons
referred to in clauses "(a)", "(b)" and "(c)" above; provided, however, that
the Sellers shall not be deemed to be "Indemnitees."
Liens. "Liens" shall mean all mortgages, pledges, liens, security
interests, conditional and installment sale agreements, encumbrances, charges
or other claims of third parties of any kind.
Legal Proceeding. "Legal Proceeding" shall mean any action, suit,
litigation, arbitration, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry,
audit, examination or investigation commenced, brought, conducted or heard by
or before, or otherwise involving, any court or other Governmental Body or any
arbitrator or arbitration panel.
Legal Requirement. "Legal Requirement" shall mean any federal, state,
local, municipal, foreign or other law, statute, constitution, principle of
common law, resolution, ordinance, code, edict, decree, rule, regulation,
ruling or requirement issued, enacted, adopted, promulgated, implemented or
otherwise put into effect by or under the authority of any Governmental Body.
Material Adverse Effect. A violation or other matter will be deemed
to have a "Material Adverse Effect" on the Company if such violation or other
matter (considered together with all other matters that would constitute
exceptions to the representations and warranties set forth in the Agreement or
in the Company Closing Certificate but for the presence of "Material Adverse
Effect" or other materiality qualifications, or any similar qualifications, in
such representations and warranties) would have a material adverse effect on
the Company's business, condition, assets, liabilities, operations or
financial performance or prospects.
Net Cash. "Net Cash" shall mean the Company's Current Assets minus
its Current Liabilities, as determined by Ernst & Young (Kost, Forer and
Gabbay) in accordance with Israeli general accepted accounting principles. For
purposes hereof, Current Liabilities shall be deemed to include any unaccrued
expenses associated with the acquisition transaction contemplated herein.
Options. "Options" shall mean options to purchase Ordinary Shares
under the Plan for Issuance of Options to Directors, Executives and Senior
Employees of Telegate.
Person. "Person" shall mean any individual, Entity or Governmental
Body.
Representatives. "Representatives" shall mean officers, directors,
employees, agents, attorneys, accountants, advisors and representatives.
SEC. "SEC" shall mean the United States Securities and Exchange
Commission.
Securities Act. "Securities Act" shall mean the Securities Act of
1933, as amended.
Tax. "Tax" shall mean any tax (including any income tax, franchise
tax, capital gains tax, gross receipts tax, value-added tax, surtax, excise
tax, ad valorem tax, transfer tax, stamp tax, sales tax, use tax, property
tax, business tax, withholding tax or payroll tax), levy, assessment, tariff,
duty (including any customs duty), deficiency or fee, and any related charge
or amount (including any fine, penalty or interest), imposed, assessed or
collected by or under the authority of any Governmental Body.
Tax Returns. "Tax Returns" shall mean returns, reports and
information statements with respect to Tax required to be filed by or on
behalf of the Company with the Israel Income Tax Commission, the Israel Value
Added Tax Authority and any other taxing authority domestic or foreign.
Vested Options. "Vested Options" shall mean options to purchase
Ordinary Shares that vest prior to or at the Closing.
Warrants. "Warrants" shall mean the Series A Warrants, numbered 1
though 14, the Series B Warrants, numbered 1 through 14, the Series C Warrant,
numbered 1, and the Series D Warrant, numbered 1, all of which have been
previously issued pursuant to the Loan Agreement, dated July 8, 1999, among
the Company, the Founder and certain of the Sellers; and the warrant issued to
Hapoalim Nechasim (Menayot) Ltd.
SCHEDULES AND EXHIBITS
Schedules
Schedule A - Sellers
Disclosure Schedule
Schedule 3.5 - Parent Consents and Approvals
Schedule 3.7 - Parent Legal Proceedings
Exhibits
Exhibit A - Certain definitions
Exhibit B - Persons to sign Employment and Noncompetition
Agreements
Exhibit C - Marketing Agreement
<PAGE>
AMENDMENT NO. 1. TO SHARE PURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO SHARE PURCHASE AGREEMENT (this "Amendment No.
1 to the Share Purchase Agreement") is made and entered into as of December
16, 1999, by and among: TERAYON COMMUNICATION SYSTEMS, INC., a Delaware
corporation ("Parent"); EHUD ILONI (the "Founder"); each of the Persons whose
names appear on the signature pages to this Amendment No. 1 to the Share
Purchase Agreement (each, a "Seller", and collectively with the Founder, the
"Sellers"); and TELEGATE LTD., a company organized under the laws of Israel
(the "Company").
RECITALS
A. The Parent, the Company and certain of the Sellers have, as of
October 14, 1999, entered into a Share Purchase Agreement (the "Share Purchase
Agreement"), pursuant to which, at Closing, each of the Sellers shall sell and
the Parent shall purchase each Seller's respective Securities in the Company.
All capitalized terms used but not defined herein shall have the meanings set
forth in the Share Purchase Agreement.
B. To date, the Founder has not executed the Share Purchase
Agreement.
C. Certain promises were made to the Founder pursuant to the First
Iloni Letter and on October 11, 1999, the Founder delivered to the Company the
Second Iloni Letter.
D. The Founder, the Parent, the Company and each of the Sellers
desire that the Founder, pursuant to Section 10.18 of the Share Purchase
Agreement, become a party to the Share Purchase Agreement.
E. The Board of Directors of the Company has determined to grant
options to employees of the Company in an amount which exceeds the number of
options granted to employees as set forth in the Share Purchase Agreement.
F. The parties hereto desire to amend the terms of Section 1.6 of the
Share Purchase Agreement.
AGREEMENT
The parties to this Agreement agree as follows:
SECTION 1. FOUNDER JOINDER. Upon the execution of this
Amendment No. 1 to the Share Purchase Agreement by the Founder, the Founder
shall become a party to the Share Purchase Agreement and shall be deemed to be
a Seller thereunder and as such, among other things, (i) pursuant to Section
1.1 of the Share Purchase Agreement, at the Closing, the Founder shall sell,
transfer, assign, convey and deliver to Parent, and Parent shall purchase from
the Founder the Founder's Securities, free and clear of all Liens, and (ii)
the Founder hereby waives and releases, effective as of the Closing, any and
all rights, claims and causes of action assertable against the Company, the
Parent or any of the Sellers in respect of the Founder's ownership of any
securities of the Company and any and all agreements between the Founder and
the Company, which agreements shall automatically terminate as of the Closing
Date. Without limiting the generality of the above waiver and release, the
Founder hereby waives any and all claims relating to the First Iloni Letter
and the Second Iloni Letter and agrees that the terms and conditions of the
Share Purchase Agreement and this Amendment No. 1 to the Share Purchase
Agreement represent the full and final amount payable to the Founder from the
Company, the Parent or the Sellers.
SECTION 2. AMENDED AND RESTATED SCHEDULE A. Pursuant to
Section 10.13 of the Share Purchase Agreement, the parties hereto agree to
replace Schedule A to the Share Purchase Agreement with the Amended and
Restated Schedule A attached hereto as Exhibit A.
SECTION 3. AMENDED AND RESTATED ATTACHMENT 9. Pursuant to
Section 10.13 of the Share Purchase Agreement, the parties hereto agree to
replace Attachment 9 to the Disclosure Schedule with the Amended and Restated
Attachment 9 to the Disclosure Schedule attached hereto as Exhibit B.
SECTION 4. ESCROW SHARES.
(A) Notwithstanding anything to contrary in the preamble to Section
1.6 of the Share Purchase Agreement and Sections 1.6(e) and 1.6(f) of the
Share Purchase Agreement, the Measurement Date for the Escrow Shares shall not
be fourteen (14) trading days after the release of the Escrow Shares from
escrow but rather shall be the nine-month anniversary of the later of (i)
Closing Date and (ii) the date on which the Registration Statement is declared
effective by the SEC and the provisions of Section 1.6(e) and Section 1.6(f)
shall apply to the Escrow Shares.
(B) Notwithstanding anything to the contrary in the Share Purchase
Agreement, at any time after the Closing, each of the Sellers (other than ECI)
(through the Sellers' Representative) and ECI may deliver a written
instruction to the escrow agent (the "Escrow Agent") appointed pursuant to the
Escrow Agreement to sell a specified number of the Escrow Shares of such party
and specifying a broker to effect the transaction. The Escrow Agent shall,
through such broker and subject to the limitations set forth in such
instructions, sell the number of Escrow Shares specified in such instructions.
The expenses incurred in effecting any such sale shall be borne by the Seller
that ordered such sale. The proceeds received from such sale, net of the costs
of effecting the sale, shall be held by the Escrow Agent as part of the Escrow
Fund and be subject to the terms of the Escrow Agreement; provided, however,
that each Seller shall be entitled to receive all funds from the Escrow Agent,
subject to compliance with applicable tax rulings, in excess of its dollar Pro
Rata Share of the Escrow Fund, as set forth in the Amended and Restated
Schedule A, resulting from the sale of its portion of the Escrow Shares as set
forth in the Amended and Restated Schedule A. For the purpose of calculating
the amount of funds in excess of each Seller's dollar Pro Rata Share of the
Escrow Fund, those Escrow Shares that such Seller has not sold shall be deemed
to have a dollar value equal to forty five US Dollars and forty six cents
($45.46).
SECTION 5. OTHER TERMS AND CONDITIONS. Other than the
amendments to the Share Purchase Agreement set forth in Sections 1, 2, 3 and 4
above, the Share Purchase Agreement shall continue to be in full force and
effect, and the provisions of sections 10.1-10.17 of the Share Purchase
Agreement shall apply, mutatis mutandis, to this Amendment No 1. to the Share
Purchase Agreement.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
The parties hereto have caused this Amendment No. 1 to the Share
Purchase Agreement to be executed and delivered as of the date first above
written.
TERAYON COMMUNICATION SYSTEMS, INC.,
a Delaware corporation
By:______________________________
Name:____________________________
Title:____________________________
EHUD ILONI
__________________________________
TELEGATE LTD.,
a company organized under the laws of Israel
By:__________________________________________
Name:________________________________________
Title:_______________________________________
ECI TELECOM LTD.
By:__________________________________________
Name:________________________________________
Title:_______________________________________
<PAGE>
Exhibit 2.3
Summary of 7 Haplada, Or Yehuda Lease Agreement
Third Floor, 7 Haplada, Or Yehuda
Lessor: Mordechai Yaron and Joseph Silberminz
Lessee: Aryt Industries Ltd.
Size: approximately 600 square meters
Signing Date: March 19, 2000
Term of agreement: from April 1, 2000 until March 31, 2005
Monthly Lease fees: $8,000, linked to the Israeli Consumer Price
Index and the exchange rate for the
Dollar shall not be less than 4.25 NIS per Dollar
Options: Three additional periods of one year each, from April 1,
2005 until March 31, 2008
<PAGE>
Exhibit 2.5
Summary of Sderot Lease Agreement
Commercial Structure in the industrial area, Sderot:
Lessor: Oshrit Real Estate, Ltd.
Lessee: Reshef Technologies, Ltd. (a subsidiary)
Area: approximately 1,000 square meters
Signing Date: February 28, 2000
Term of agreement: from March 1, 2000 until February 28, 2001
Options: Seven additional periods of 12 months each and one
additional period of 11 months Monthly Lease Fees: from March 1, 2000
until August 31, 2000 6.4 NIS per square meter, 50% linked to the
Israeli Consumer Price Index From September 1, 2000 until February
28, 2001, 6.4 NIS per square meter, 75% linked to the Israeli
Consumer Price Index From March 1, 2001 until the end of the lease,
extensions inclusive, 6.4 NIS per square meter linked to the Israeli
Consumer Price Index
