UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2000
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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 0-30189
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VYYO INC.
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(Exact name of registrant as specified in its charter)
Delaware 94-3241270
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
20400 Stevens Creek Boulevard, 8/th/ Floor, Cupertino, California 95014
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (408) 863-2300
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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 ___
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As of October 31, 2000, there were 37,595,199 shares of Common Stock ($0.0001
par value) outstanding.
INDEX
VYYO INC.
Page No.
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PART I. FINANCIAL INFORMATION
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Item 1. Condensed Condolidated Financial Statements (Unaudited)
Condensed consolidated balance sheets-September 30, 2000
and December 31, 1999................................................ 3
Condensed consolidated statements of operations-three and nine
months ended September 30, 2000 and 1999............................. 4
Condensed consolidated statements of cash flows-nine months
ended September 30, 2000 and 1999.................................... 5
Notes to condensed consolidated financial statements.................. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 22
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings...................................................... 23
Item 2. Changes in Securities and Use of Proceeds.............................. 23
Item 3. Defaults upon Senior Securities........................................ 24
Item 4. Submission of Matters to a Vote of Security Holders.................... 24
Item 5. Other Information...................................................... 24
Item 6. Exhibits and Reports on Form 8-K....................................... 24
SIGNATURE...................................................................... 25
2
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Vyyo Inc.
Condensed Consolidated Balance Sheets
(In Thousands)
December 31, September 30,
------------ -------------
1999 2000
---- ----
(Note 1) (Unaudited)
Assets
- ------
Current Assets
- --------------
Cash and cash equivalents $ 5,036 $ 78,299
Short-term investments - 58,992
Accounts receivable, net 583 2,351
Inventory 1,132 3,754
Other current assets 517 1,968
-------- --------
Total current assets 7,268 145,364
Property and equipment, net 1,095 2,646
-------- --------
$ 8,363 $148,010
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities
- -------------------
Short term debt obligations $ 2,371 $ -
Accounts payable 895 3,119
Accrued liabilities 3,153 10,422
Deferred income 639 -
-------- --------
Total current liabilities 7,058 13,541
Commitments and Contingencies
- -----------------------------
Stockholders' Equity
- --------------------
Convertible preferred stock 15,369 --
Common stock 66,412 238,427
Notes receivable from stockholders (920) (75)
Deferred stock compensation (13,400) (10,100)
Other comprehensive income - 8
Accumulated deficit (66,156) (93,791)
-------- --------
Total stockholders' equity 1,305 134,469
-------- --------
$ 8,363 $148,010
======== ========
See Notes to Condensed Consolidated Financial Statements
Note 1: The condensed consolidated balance sheet at December 31, 1999, has
been derived from audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
3
Vyyo Inc.
Condensed Consolidated Statements of Operations
(In Thousands Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, September 30,
------------- -------------
1999 2000 1999 2000
---- ---- ---- ----
Net revenues $ 1,110 $ 4,465 $ 3,076 $ 9,321
Cost of revenues 1,111 3,086 3,122 6,576
------- ------- -------- --------
Gross profit (loss) (1) 1,379 (46) 2,745
Operating Expenses
- ------------------
Research and development 842 3,957 2,495 8,589
Sales and marketing 574 2,350 1,328 5,893
General and administrative 597 2,095 1,441 5,914
Amortization of deferred stock compensation 400 2,670 800 12,607
------- ------- -------- --------
Total operating expenses 2,413 11,072 6,064 33,003
------- ------- -------- --------
Operating loss (2,414) (9,693) (6,110) (30,258)
Charge for amended financing arrangements (5,200) - (5,200) -
Interest and other income (expense), net (163) 1,446 (556) 2,623
------- ------- -------- --------
Net loss $(7,777) $(8,247) $(11,866) $(27,635)
======= ======= ======== ========
Net Loss Per Share:
Basic and diluted $ (0.66) $ (0.23) $ (1.76) $ (0.89)
======= ======= ======== ========
Shares used in per share computation -
basic and diluted 11,798 35,707 6,732 30,949
======= ======= ======== ========
See Notes to Condensed Consolidated Financial Statements
4
Vyyo Inc.
Condensed Consolidated Statements of Cash Flows
(In Thousands)
(Unaudited)
Nine Months Ended
-----------------
September 30,
-------------
1999 2000
---- ----
Operating Activities:
- --------------------
Net loss for the period $(11,866) $(27,635)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 344 824
Charge for amended financing arrangements 5,200 -
Amortization of deferred stock compensation 800 12,607
Changes in operating assets and liabilities:
Accounts receivable (541) (1,768)
Inventory 738 (2,622)
Other current assets 172 (1,451)
Accounts payable (331) 2,224
Accrued liabilities 843 7,269
Deferred income 339 (639)
-------- --------
Net cash used in operating activities (4,302) (11,191)
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Investing Activities:
- ---------------------
Purchases of property and equipment (437) (2,383)
Purchases of short term investments - (61,026)
Proceeds from sale of short term investments 2,042
Proceeds from sale of property and equipment 16 8
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Net cash used in investing activities (421) (61,359)
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Financing Activities:
- ---------------------
Repayment of short-term debt obligations (315) (2,371)
Proceeds from short- term debt obligations 290 -
Proceeds from loans from stockholder 1,385 -
Proceeds from stockholder note 2,080 1,170
Issuance of common and preferred stock for cash 4,976 147,014
-------- --------
Net cash provided by financing activities 8,416 145,813
-------- --------
Increase in cash and cash equivalents 3,693 73,263
Cash and cash equivalents at beginning of period 131 5,036
-------- --------
Cash and cash equivalents at end of period $ 3,824 $ 78,299
======== ========
Noncash Financing Activities
Conversion of stockholders' note into common stock $ 3,515 $ -
Issuance of common stock for note receivable ======== ========
$ 3,000 $ -
Conversion of convertible preferred stock upon initial public ======== ========
offering $ - $ 15,369
======== ========
See Notes to Condensed Consolidated Financial Statements
5
Vyyo Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Vyyo
Inc. ("Vyyo" or the "Company") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
interim period are not necessarily indicative of the results that may be
expected for the full year. For further information, refer to the consolidated
financial statements and notes thereto for the year ended December 31, 1999,
included in the Company's Registration Statement on Form S-1 (File No. 333-
45132), filed with the Securities and Exchange Commission.
Net Revenues:
- -------------
Net revenues are comprised of product revenues, and in the nine months ended
September 30, 2000, also included $480,000 of technology development revenues.
Sales to a related party, ADC Telecommunications, Inc., for the nine months
ended September 30, 2000, amounted to $3,147,000.
2. Cash Equivalents and Short-Term Investments
The Company considers all money market funds and all highly liquid investments
with maturity of three months or less, when purchased, to be cash equivalents.
Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the Company's debt securities have been designated as available-
for-sale. Available-for-sale securities are carried at fair value, which is
determined based upon the quoted market prices of the securities, with
unrealized gains and losses reported in accumulated other comprehensive income,
a component of shareholders' equity. Realized gains and losses and declines in
value judged to be other than temporary on available-for-sale securities are
included in interest income. The Company views its available-for-sale portfolio
as available for use in its current operations. Accordingly, the Company has
classified all investments as short term, even though the stated maturity date
may be one year or more from beyond the current balance sheet date. Interest and
dividends on securities classified as available-for-sale are included in
interest income.
The fair value and the amortized cost of available-for-sale securities at
September 30, 2000, are presented in the following tables (in thousands):
September 30, 2000
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Unrealized Unrealized Estimated Fair
Amortized Holding Holding Market
Cost Gains Losses Value
----------- -------------- --------------- ----------------
Corporate debt securities $ 64,189 $ 61 $ (64) $ 64,186
United States obligations 62,444 18 (7) 62,455
Money market 2,138 - - 2,138
-------- -------- -------- --------
Total $128,771 $ 79 $ (71) $128,779
======== ======== ======== ========
Reported as:
Cash equivalents $ 69,788 $ 1 $ (2) 69,787
Short-term investments $ 58,983 $ 78 $ (69) $ 58,992
-------- -------- -------- --------
Total $128,771 $ 79 $ (71) $128,779
======== ======== ======== ========
6
The contractual maturities of available for sales debt securities classified as
short-term investments at September 30, 2000 are as follows (in thousands):
Amortized Cost Fair Value
-------------- ----------
Due in one year or less $100,204 $100,195
Due after one year through three years 28,567 28,584
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$128,771 $128,779
======== ========
3. Inventory
Inventory is comprised of the following (in thousands):
December 31, September 30,
1999 2000
---- ----
Raw material $ 631 $2,409
Work in process 351 659
Finished goods 150 686
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$1,132 $3,754
====== ======
4. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
December 31, September 30,
1999 2000
---- ----
Compensation and benefits $1,192 $ 4,833
Suppliers and subcontractors
111 926
Warranty 475 910
Withholding tax 370 653
Other 1,005 3,100
------ -------
$3,153 $10,422
====== =======
5. New Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 - Revenue Recognition in Financial Statements ("SAB 101"),
which among other things clarifies certain conditions to be met in order to
recognize revenue. The Company is currently in the process of assessing the
impact of SAB 101 and expects to complete its assessment prior to December 31,
2000.
6. Initial Public Offering and Follow-On Offering
On April 10, 2000, Vyyo sold of 6,750,000 shares of its common stock in an
underwritten public offering at a per share price of $13.50 and on May 2, 2000,
sold an additional 1,012,500 shares through the exercise of the underwriters'
over allotment option for aggregate net proceeds after deducting underwriting
discounts and commission and issuance costs of approximately $94.9 million.
Upon the closing of the initial public offering, all of the outstanding shares
of Series A, Series B and Series C Preferred Stock were converted into common
stock.
On September 19, 2000, Vyyo sold 1,750,000 shares of its common stock in an
underwritten public offering at a per share price of $31.5625. The net proceeds
to Vyyo after deducting underwriting discounts and commission and issuance costs
were approximately $51.3 million.
7
7. Contingency - Patent Matter
In early 1999, the Company received a written notice from Hybrid Networks, Inc.
("Hybrid"), a competitor, in which Hybrid claimed to have patent rights in
certain technology and requested that the Company review its products in light
of six of Hybrid's issued patents. The Company, with the advice of counsel,
believes the patents are invalid or are not infringed by the Company's products.
On April 11, 2000, the Company received an additional letter from Hybrid,
requesting that the Company review its products in connection with various
patents of Hybrid, including the previously identified patents. The Company
intends to evaluate the additional patents with the advice of counsel. Hybrid
may pursue litigation with respect to these or other claims. The results of any
litigation are inherently uncertain. Any successful infringement claim or
litigation against the Company could have a significant adverse impact on the
Company's operating results and financial condition.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following information should be read in conjunction with the condensed
consolidated interim financial statements and the notes thereto in Part I, Item
1 of this Quarterly Report and with Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1999, contained in Vyyo's Registration Statement on Form S-1 (File No. 333-
45132), filed with the Securities and Exchange Commission. The matters
addressed in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, with the exception of the historical information
presented, contain forward-looking statements involving risks and uncertainties.
Vyyo's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including, without
limitation, those set forth under the heading "Certain Factors That May Affect
Future Results" following this Management's Discussion and Analysis section, and
elsewhere in this report.
Overview
We supply broadband wireless access systems used by telecommunications service
providers to deliver wireless, high-speed data connections to business and
residential subscribers. We sell our systems directly to service providers, as
well as to system integrators that deploy our systems as part of their end-to-
end network solutions for service providers. We have incurred significant
losses since our inception, and we expect to continue to incur net losses for
the foreseeable future. We incurred net losses of approximately $27.6 million
for the nine months ended September 30, 2000. As of September 30, 2000, our
accumulated deficit was approximately $93.8 million.
We were incorporated in 1996 in Delaware, and succeeded to the business of Vyyo
Ltd., formerly PhaseCom Ltd., an Israeli company, under a reorganization. As a
result, Vyyo Ltd. became our wholly-owned subsidiary. Prior to our introduction
of broadband wireless access systems, we developed and marketed cable broadband
communication systems. Our first-generation broadband wireless system was
commercially deployed during the first quarter of 1999, for the local multipoint
distribution system, or LMDS, and the multichannel multipoint distribution
system, or MMDS, frequency bands. Our second-generation, DOCSIS-based,
broadband wireless access system was commercially deployed during the first
quarter of 2000, for the LMDS and MMDS frequency bands.
Results of Operations
Net Revenues.
Net revenues include product revenues and technology development revenues.
Product revenues are derived primarily from sales of hubs and modems to
telecommunications service providers and to system integrators. Product
revenues are generally recorded when products are shipped, provided there are no
customer acceptance requirements and we have no additional performance
obligations. We accrue for estimated sales returns or exchanges and product
warranty and liability costs upon recognition of product revenues. Technology
development revenues consist of license and development fees under a license and
development agreement, and are recognized when the applicable customer
milestones are met, including deliverables, but not in excess of the
8
estimated amount that would be recognized using the percentage-of-completion
method. Deferred revenues represent the gross profit on product revenues subject
to return or exchange and total payments on technology development not yet
recognized.
Our revenue is concentrated among relatively few customers. Though our
principal revenue-generating customers are likely to vary on a quarterly basis,
we anticipate that our revenues will remain concentrated among a few customers
for the foreseeable future.
Net revenues increased by 302% from $1.1 million in the third quarter of
1999, to $4.5 million in the third quarter of 2000, and by 203% from $3.1
million in the nine months ended September 30, 1999, to $9.3 million in the nine
months ended September 30, 2000. This increase primarily reflects the increase
in unit sales of our systems, the recognition of previously deferred revenues of
$724,000 upon completion of all our obligations to a customer, and the
technology development activities in the nine months ended September 30, 2000.
We began commercial shipments of our first-generation broadband wireless access
system in the first quarter of 1999, and we began commercial shipments of our
second-generation DOCSIS-based wireless access system in the fourth quarter of
1999. All of our product revenues in 1999, relate to sales of cable modem
products that we are no longer developing and to sales of our first-generation
wireless modem products, which we phased out with the launch of our second-
generation, DOCSIS-based, wireless access systems in the fourth quarter of 1999.
Technology development revenues were $480,000 and $240,000 in the nine months
ended September 30, 2000, and 1999, respectively.
Cost of Revenues.
Cost of revenues consists of costs of product revenues. Costs of technology
development revenues in the first nine months of 2000, were immaterial. Cost of
product revenues consists of component and material costs, direct labor costs,
warranty costs, royalties in connection with Israeli government incentive
programs and overhead related to manufacturing our products. Cost of technology
development consists of direct labor costs and materials for the engineering
efforts related to the technology development arrangement.
Cost of revenues increased from $1.1 million in the third quarter of 1999,
to $3.1 million in the third quarter of 2000, and from $3.1 million in the first
nine months of 1999, to $6.6 million in the first nine months of 2000. These
increases were attributable primarily to increased shipments of our products
and, in the first nine months of 2000, to inventory write down of approximately
$300,000 for excess and obsolete cable products we are no longer deploying in
2000. Gross margins increased from negative margins in 1999, to 31% in the third
quarter of 2000, and 29% in the nine months ended September 30, 2000. The
increase in gross margin reflects the cost effectiveness of the second-
generation DOCSIS-based wireless broadband systems, recognition of revenues
previously deferred offset by inventory write down and to a lesser extent the
impact of technology development revenues. Gross margins in the first nine
months of 1999, were negatively affected by the high fixed costs associated with
the first generation wireless modem products. We expect that our gross margins
will continue to fluctuate.
Prior to 1997, we participated in several Israeli government research and
development incentive programs under which we received research and development
participation of approximately $3.7 million. We are obligated to pay royalties
at rates that generally range from 2.5% to 5% of revenues resulting from the
funded projects up to maximum amounts of 100% or 150% of the funded amount. As
of September 30, 2000, we had repaid or provided for the repayment of grants
amounting to $917,000. As we currently intend to gradually decrease the
manufacture and sale of products developed within any of the projects funded by
the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade
or by the Israel-United States Binational Industrial Research and Development
Foundation, we believe that the remaining contingent royalty liability is
approximately $565,000.
Research and Development Expenses.
Research and development expenses consist primarily of personnel,
facilities, equipment and supplies for our research and development activities.
Substantially all of our research and development activities are carried
9
out in our facility in Israel. These expenses are charged to operations as
incurred. Our research and development expenses increased from $842,000 in the
third quarter of 1999, to $4.0 million in the third quarter of 2000, and from
$2.5 million in the first nine months of 1999, to $8.6 million in the first nine
months of 2000. These increases were due to increases in the number of research
and development personnel and related activities, related costs of facilities
and in the third quarter of 2000, a one time fee of $450,000 paid to ADC
Telecommunications for development services. We believe continued significant
investment in research and development is essential to our future success and
plan on continuing to increase our research and development activities including
recruiting and hiring additional personnel and expanding our research and
development facility to accommodate the additional personnel, which will result
in increased expenses in absolute dollars. Accordingly, we expect that research
and development expenses will continue to increase in future periods.
Sales and Marketing Expenses.
Sales and marketing expenses consist of salaries and related costs of sales
and marketing employees, consulting fees and expenses for travel, trade shows
and promotional activities. Selling and marketing expenses increased from
$574,000 in the third quarter of 1999, to $2.4 million in the third quarter of
2000, and from $1.3 million in the first nine months of 1999, to $5.9 million in
the first nine months of 2000. The increase in sales and marketing expenses was
primarily due to an increase in the number of sales and marketing personnel and
related activities. In the second and third quarters of 2000, we began to
expand our sales and marketing activities in worldwide locations such as South
East Asia, South America and Europe. We plan to continue to increase our sales
and marketing activities, including recruiting and hiring additional sales
personnel inside and outside of the US, which will result in increased expenses
in absolute dollars. Accordingly, we expect that sales and marketing expenses
will increase in future periods.
General and Administrative Expenses.
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
strategic and business development, human resources and legal. General and
administrative expenses increased from $597,000 in the third quarter of 1999, to
$2.1 million in the third quarter of 2000, and from $1.4 million in the first
nine months of 1999, to $5.9 million in the first nine months of 2000. We hired
additional senior management personnel in the first quarter of 2000, and are
planning to expand operational and corporate activities, including support of
our operations as a public company. We expect that general and administrative
expenses will continue to increase in future periods.
Amortization of Deferred Stock Compensation.
Deferred stock compensation represents the aggregate differences between
the respective exercise price of stock options or purchase price of stock at
their dates of grant or sale and the deemed fair market value of our common
stock for accounting purposes. Deferred stock compensation is presented as a
reduction of stockholders' equity and is amortized over the vesting period of
the underlying options. Amortization expense was $2.7 million in the third
quarter of 2000, and $12.6 million the nine months ended September 30, 2000,
compared to $400,000 in the third quarter of 1999, and $800,000 in the nine
months ended September 30, 1999. We currently expect to record amortization of
deferred stock compensation expense of approximately $2.0 million in the
remainder of 2000, $5.1 million in 2001, $2.4 million in 2002, and $600,000 in
2003, for options issued through the completion of the initial public offering
on May 2, 2000.
Interest and Other Income (Expense), Net.
Interest income and other (expense) includes interest and investment
income, foreign currency remeasurement gains and losses offset by interest
expense related to bank loans and convertible notes. In the second quarter of
2000, we repaid all of our outstanding loans. Net interest expense for the third
quarter of 1999 was $163,000, compared to net interest income of $1.4 million in
the third quarter of 2000, and net interest expense of $556,000 in the first
nine months of 1999, compared to $2.6 million net interest income in the first
nine months of 2000. Substantially all of the interest and other income in the
third quarter of 2000, are represented by interest
10
income on our cash and short-term investment balances. Interest and other income
increased in the nine months ended September 30, 2000, as compared with the
corresponding period in 1999, because of the increase in the average balance of
invested cash equivalents and short-term investments relating to the proceeds
from completion of our public offerings in April and September of 2000.
Income Taxes.
As of December 31, 1999, we had approximately $19 million of Israeli net
operating loss carryforwards and $6 million of United States federal and state
net operating loss carryforwards. The Israeli net operating loss carryforwards
have no expiration date and have not been recorded as tax assets because the
losses are expected to be utilized during a tax exempt period. The United States
net operating loss carryforwards expire in various amounts between the years
2004 and 2019. We have provided a full valuation allowance against our United
States deferred tax assets, as the future realization of the tax benefit is not
sufficiently assured.
LIQUIDITY AND CAPITAL RESOURCES
From our inception through the first quarter of 2000, we funded operations
primarily through the private placement of our equity securities and borrowings
from stockholders and banks. On April 10, 2000, we completed our initial public
offering of 6,750,000 shares of common stock at a price of $13.50 per share, and
on May 2, 2000, we sold an additional 1,012,500 shares at a price of $13.50 per
share, pursuant to the underwriters' exercise of the over-allotment option. The
total net proceeds from the initial public offering were approximately $94.9
million. On September 19, 2000, we sold 1,750,000 shares of our common stock in
an underwritten public offering at a per share price of $31.5625.The net
proceeds for Vyyo were approximately $51.3 million after deducting underwriting
discounts and commission and issuance costs. As of September 30, 2000, we had
$137.3 million of cash, cash equivalents and short-term investments.
Cash used in operations includes expenditures associated with development
activities, marketing efforts, and working capital expansion related to
commercialization of our products. In the first nine months of 2000, cash used
in operations was $11.2 million, comprised of our net loss of $27.6 million,
partially offset by a non-cash charge of $12.6 million for deferred stock
compensation and changes in other working capital accounts. In the first nine
months of 1999, cash used in operations was $4.3 million, comprised of our net
loss of $11.9 million, partially offset by non-cash charges of $6.0 million and
changes in working capital accounts.
We have made investments in property and equipment of approximately $2.4 million
in the first nine months of 2000. Financing activities in the first nine months
of 2000, generated $145.8 million and relate to proceeds from our public
offerings, payment of a stockholder promissory note and proceeds from stock
option exercises, net of repayment of all of our short-term obligations.
Our capital requirements depend on numerous factors, including market acceptance
of our products, the resources we devote to developing, marketing, selling and
supporting our products, the timing and extent of establishing additional
international operations and other factors. We expect to devote substantial
capital resources to hire and expand our research and development and our sales
and marketing organizations, to expand marketing programs and for other general
corporate activities. We expect that our cash and investment balances will be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds for
a number of uses. We may not be able to obtain additional funds on acceptable
terms, or at all.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Form 10-Q contains forward-looking statements concerning our existing and
future products, markets, expenses, revenues, liquidity, performance and cash
needs as well as our plans and strategies. These forward-looking statements
involve risks and uncertainties and are based on current management
expectations. Many factors could cause actual results and events to differ
significantly from the results anticipated by us and described in these forward
looking statements, including but not limited to the following risk factors.
11
We have a limited operating history in the broadband point-to-multipoint
wireless access market, which may limit an investor's ability to evaluate our
business.
The broadband wireless access market is only beginning to emerge. We began
commercial shipments of our first-generation broadband wireless access system in
the first quarter of 1999, and we began commercial shipments of our second-
generation wireless access system in the fourth quarter of 1999. All of our
product revenues in 1997 and 1998, and a substantial portion of our product
revenues in 1999, relate to sales of cable modem products that we are no longer
developing. Virtually all of the remaining revenues in 1999, relate to sales of
our first-generation wireless modem products, which we phased out with the
launch of our second-generation wireless access system in the fourth quarter of
that year. Our second-generation wireless access system is based on the cable
industry's standard set of communications rules, or protocols, that we have
adopted for use in wireless applications. Therefore, the success of our business
will be entirely dependent upon the success of our wireless products generally,
and our new wireless products in particular. We have a very limited operating
history in the broadband wireless access market upon which to evaluate our
future prospects, and the revenue and income potential of our business and
market are unproven. Our limited operating history in this market may limit an
investor's ability to evaluate our prospects due to:
. our limited historical financial data from our wireless products;
. our unproven potential to generate profits; and
. our limited experience in addressing emerging trends that may affect our
business.
As a young company, we face risks and uncertainties relating to our ability to
implement our business plan successfully.
We have a history of losses, expect future losses and may never achieve or
sustain profitability.
We have incurred significant losses since our inception, and we expect to
continue to incur net losses for the foreseeable future. We incurred net losses
of approximately $43.6 million in 1999, and approximately $27.6 million in the
nine months ended September 30, 2000. As of September 30, 2000, our accumulated
deficit was approximately $93.8 million. We intend to significantly increase our
operating expenses, especially our marketing and selling expenses, and our
research and development expenses. However, our revenues may not grow or even
continue at their current level. If our revenues do not rapidly increase or if
our expenses increase at a greater pace than our revenues, we will never become
profitable.
Our quarterly operating results fluctuate, which may cause our share price to
decline.
Our quarterly operating results have varied significantly in the past and are
likely to vary significantly in the future. These variations result from a
number of factors, including:
. the uncertain timing and level of market acceptance for our systems;
. the effectiveness of our system integrator customers in marketing and
selling their network systems equipment;
. reductions in pricing by us or our competitors;
. the mix of systems sold by us and the mix of sales channels through which
they are sold; and
. changes in the prices or delays in deliveries of the components we
purchase or license.
A delay in the recognition of revenue, even from one customer, may have a
significant negative impact on our results of operations for a given period. We
have experienced such delays in the past, and our results of operations for
those periods were negatively impacted. Also, because only a small portion of
our expenses vary with our revenues, if revenue levels for a quarter fall below
our expectations, we will not be able to timely
12
adjust expenses accordingly, which would harm our operating results in that
period. We believe that period-to-period comparisons of our results of
operations are not meaningful and should not be relied upon as indicators of
future performance. If our operating results fall below the expectations of
investors in future periods, our share price will likely decline.
If broadband wireless technology or our implementation of this technology is not
broadly accepted, we will not be able to sustain or expand our business.
Our future success depends on high-speed wireless communications products
gaining market acceptance as a means to provide voice and data communications
services. Because these markets are relatively new, it is difficult to predict
which market segments will develop or expand. We have recently invested and
expect to continue to invest significant time and resources in the development
of new products for this market. In the event that service providers adopt
technologies other than the high-speed access and other wireless technologies
that we offer or delay in their deployment of high speed wireless communication
products, we will not be able to sustain or expand our business.
Service providers continually evaluate alternative technologies, including
digital subscriber line, fiber and cable. The failure of service providers to
accept our products would seriously harm our business.
We depend on one of our system integrators for a significant portion of our
revenues and if this system integrator does not promote or purchase our
products, our business will be seriously harmed.
Sales to ADC Telecommunications accounted for approximately 34% of our net
revenues in the nine months ended September 30, 2000, 20% of our net revenues
for 1999, and approximately 31% of our net revenues for 1998. The loss of ADC
Telecommunications as a customer, or the delay of significant orders from it,
even if only temporary, could, among other things:
. reduce or delay our revenues;
. harm our reputation with major service providers, particularly if ADC
Telecommunications were to replace our products with a competitor's
products; or
. reduce our ability to predict our cash flow accurately.
There are a limited number of system integrators that have the financial
resources or technical expertise to sell or integrate our systems globally. If
ADC Telecommunications will not sell, service or integrate our products, and we
cannot secure other system integrators as replacements, we would be limited in
our ability to sell our products. Our August 1999 collaboration agreement with
ADC Telecommunications provided that ADC Telecommunications had exclusive rights
to sell our products to certain customers. We amended this agreement with ADC
Telecommunications in the third quarter of 2000, to, among other things, remove
the exclusivity clause. Notwithstanding this amendment, we believe that should
ADC Telecommunications cease to emphasize systems that include our products,
choose to emphasize alternative technologies or promote systems of our
competitors, our business would be seriously harmed.
The loss of one or more of our key customers would result in a loss of a
significant amount of our revenues.
A relatively small number of customers account for a large percentage of our
revenues. In 1999, ADC Telecommunications accounted for approximately 20% of our
revenues, Aster City Cable accounted for approximately 14% of our revenues,
Shanghai Bell accounted for approximately 13% of our revenues and Philips
Semiconductor accounted for approximately 12% of our revenues. Revenues
attributable to Aster City Cable and Shanghai Bell relate to sales of cable
products that we are no longer developing. Accordingly, we do not anticipate
recognizing material amounts of revenue from these products in the future.
Revenues attributable to Philips Semiconductor relate to a joint technology
development arrangement that we expect to complete in the second half of 2000,
and no similar arrangements are contemplated.
13
We expect that we will continue to depend on a relatively limited number of
customers for a substantial portion of our revenues in future periods. The loss
of a major customer or the reduction, delay or cancellation of orders from one
or more of our customers could seriously harm our ability to sustain revenue
levels, which would seriously harm our operating results.
Competition may decrease our market share, net revenues and gross margins, which
may cause our stock price to decline.
The market for broadband access systems is intensely competitive, rapidly
evolving and subject to rapid technological change. Many of our competitors and
potential competitors have substantially greater financial, technical,
distribution, marketing and other resources than we have and, therefore, may be
able to respond more quickly to new or changing opportunities, technologies and
other developments. In addition, many of our competitors have longer operating
histories, greater name recognition and established relationships with system
integrators and service providers. Our primary competitor is Hybrid Networks,
Inc., and other companies, such as Adaptive Broadband Corporation and BreezeCOM
Ltd., have announced plans to enter the MMDS market. In addition, well-
capitalized companies such as Cisco Systems, Lucent Technologies, Alcatel and
other vendors have announced plans to enter, or are potential entrants into, the
broadband wireless market. Most of these competitors have existing relationships
with one or more of our prospective customers. We also face competition from
technologies such as digital subscriber line, fiber and cable. We may not be
able to compete successfully against our current and future competitors, and
competitive pressures may seriously harm our business.
If we do not develop new systems and system features in response to customer
requirements or in a timely way, customers may not buy our products, which would
seriously harm our business.
The broadband wireless access industry is rapidly evolving and subject to
technological change and innovation. We may experience design or manufacturing
difficulties that could delay or prevent our development, introduction or
marketing of new systems and enhancements, any of which could cause us to incur
unexpected expenses or lose revenues. If we are unable to comply with diverse,
new or varying governmental regulations or industry standards in each of the
many worldwide markets in which we compete, we may not be able to respond to
customers in a timely manner, which would harm our business.
We depend on contract manufacturers and these manufacturers may be unable to
fill our orders on a timely basis, which would result in delays that could
seriously harm our results of operations.
We currently have relationships with three contract manufacturers for the
manufacturing of our systems, two of which are located in Israel and one of
which is located in Taiwan. These relationships may be terminated by either
party with little or no notice. If our manufacturers are unable or unwilling to
continue manufacturing our systems in required volumes, we would have to
identify qualified alternative manufacturers, which would result in delays that
could cause our results of operations to suffer. Our limited experience with
these manufacturers does not provide us with a reliable basis on which to
project their ability to meet delivery schedules, yield targets or costs. If we
are required to find alternative manufacturing sources, we may not be able to
satisfy our production requirements at acceptable prices and on a timely basis,
if at all. Any significant interruption in supply would affect the allocation of
systems to customers, which in turn could seriously harm our business.
We obtain some of the components included in our systems from a single source or
a limited group of suppliers, and the loss of any of these suppliers could cause
production delays and a substantial loss of revenue.
We currently obtain key components from a limited number of suppliers. Some of
these components, such as semiconductor components for our wireless hubs, are
obtained from a single source supplier. We generally do not have long-term
supply contracts with our suppliers. These factors present us with the following
risks:
14
. delays in delivery or shortages in components could interrupt and delay
manufacturing and result in cancellation of orders for our systems;
. suppliers could increase component prices significantly and with
immediate effect;
. we may not be able to develop alternative sources for system components,
if or as required in the future;
. suppliers could discontinue the manufacture or supply of components used
in our systems. In such event, we might need to modify our systems, which
may cause delays in shipments, increased manufacturing costs and
increased systems prices; and
. we may hold more inventory than is immediately required to compensate for
potential component shortages or discontinuation.
The occurrence of any of these or similar events would harm our business.
Delays and shortages in the supply of components from our suppliers could reduce
our revenues or increase our cost of revenue.
Delays and shortages in the supply of components are typical in our industry. We
have experienced minor delays and shortages on more than one occasion in the
past. In addition, any failure of necessary worldwide manufacturing capacity to
rise along with a rise in demand could result in our subcontract manufacturers
allocating available capacity to larger customers or to customers that have
long-term supply contracts in place. Our inability to obtain adequate
manufacturing capacity at acceptable prices, or any delay or interruption in
supply, could reduce our revenues or increase our cost of revenue and could
seriously harm our business.
Competition may result in lower average selling prices and we may be unable to
reduce our costs at offsetting rates, which may impair our ability to achieve or
maintain profitability.
We expect that price competition among broadband wireless access systems
suppliers will reduce our gross margins in the future. We anticipate that the
average selling prices of broadband wireless access systems will continue to
decline as product technologies mature. Since we do not manufacture our own
systems, we may be unable to reduce our manufacturing costs in response to
declining average per unit selling prices. Our competitors may be able to
achieve greater economies of scale and may be less vulnerable to the effects of
price competition than we are. These declines in average selling prices will
generally lead to declines in gross margins and total profitability for these
systems. If we are unable to reduce our costs to offset declines in average
selling prices, we may not be able to achieve or maintain profitability.
If we do not effectively manage our expansion, our revenues may not increase,
our costs may increase and our business could be seriously harmed.
We are continuing to actively expand our operations. This growth has placed, and
will continue to place, a significant strain on our managerial, operational and
financial resources. We also need to implement sophisticated inventory and
control systems.
To manage growth effectively, we must, among other things:
. improve and expand our information and financial systems, and managerial
procedures and controls;
. hire, train, manage and retain qualified employees; and
. effectively manage relationships with our customers, suppliers and other
third parties.
We may not have made adequate allowances for the costs and risks associated with
this expansion, our systems, procedures or controls may not be adequate to
support our operations, and our management may be unable to offer and expand our
product categories successfully. Any delay in implementing, or transitioning to,
new or enhanced systems, procedures or controls may seriously harm our ability
to record and report financial and
15
management information on a timely and accurate basis or otherwise manage our
expanding operations. If we are unable to do so effectively, our business may be
seriously harmed.
Because we operate in international markets, we are exposed to additional risks
which could cause our international sales to decline and our foreign operations
to suffer.
Sales outside of North America accounted for approximately 23% of our revenues
in the nine months ended September 30, 2000, 39% of our revenues in 1999, and
55% of our revenues in 1998. We expect that international sales will continue to
account for a significant portion of our revenues. In addition, we maintain
research and development facilities in Israel. Our reliance on international
sales and operations exposes us to foreign political and economic risks, which
may impair our ability to generate revenues. These risks include:
. economic and political instability;
. changes in regulatory requirements and licensing frequencies to service
providers;
. import or export licensing requirements and tariffs;
. trade restrictions; and
. more limited protection of intellectual property rights.
Any of the foregoing difficulties of conducting business internationally could
seriously harm our business.
Because we do not have long-term contracts with our customers, our customers can
discontinue purchases of our systems at any time.
We sell our systems based on individual purchase orders. Our customers are
generally not obligated by long-term contracts to purchase our systems. Our
customers can generally cancel or reschedule orders on short notice and can
discontinue using our systems at any time. Further, having a successful system
trial does not necessarily mean that the customer will order large volumes of
our systems. The inability to retain our customers and increase their orders
would seriously harm our business.
If our senior management team is unable to work together effectively, our
business may be seriously harmed.
Our Chief Executive Officer, John O'Connell, joined us in October 2000, and
several of our existing senior management personnel, including Eran Pilovsky,
our Chief Financial Officer, and Arnon Kohavi, our Senior Vice President of
Strategic Relations, joined us in the last twelve months. As a result, our
senior management team has had a limited time to work together. If they are
unable to work together effectively to manage our organization as a public
company, our business may be seriously harmed.
If we are unable to attract, train and retain qualified engineers, marketing,
sales and technical support personnel, we may not be able to develop our
business.
We will need to hire additional engineers and highly trained technical support
personnel in Israel and in Northern California in order to succeed. We will need
to increase our technical staff to support new customers and the expanding needs
of existing customers, as well as for our continued research and development
operations.
Hiring engineers, marketing, sales and technical support personnel is very
competitive in our industry due to the limited number of people available with
the necessary skills and understanding of our products. This is particularly
true in Israel and Northern California, where competition for such personnel is
intense.
Our systems require a sophisticated marketing and sales effort targeted at
several levels within a prospective customer's organization. We have recently
expanded our sales force and we plan to hire additional sales
16
personnel, particularly in the United States. Competition for qualified sales
personnel is intense, and we may not be able to hire sufficient sales personnel
to support our marketing efforts. If we are unable to hire and retain necessary
personnel in each of these rapidly expanding areas, our business will not
develop, and our operating results will be harmed.
We depend on our key personnel, in particular Davidi Gilo, our Chairman of the
Board, John O'Connell, our Chief Executive Officer, and Menashe Shahar, our Vice
President, Engineering and Chief Technical Officer, the loss of any of whom
could seriously harm our business.
Our future success depends in large part on the continued services of our senior
management and key personnel. In particular, we are highly dependent on the
service of Davidi Gilo, our Chairman of the Board, John O'Connell, our Chief
Executive Officer, and Menashe Shahar, our Chief Technical Officer. We do not
carry key person life insurance on our senior management or key personnel. Any
loss of the services of Davidi Gilo, John O'Connell, Menashe Shahar, other
members of senior management or other key personnel could seriously harm our
business.
Third parties may bring infringement claims against us which could harm our
ability to sell our products and result in substantial liabilities.
We expect that we will increasingly be subject to license offers and
infringement claims as the number of products and competitors in our market
grows and the functionality of products overlaps. In this regard, in early 1999,
and again in April 2000, we received written notices from Hybrid Networks in
which Hybrid claimed to have patent rights in certain technology. Hybrid
requested that we review our products in light of 11 of Hybrid's issued patents.
Third parties, including Hybrid, could assert, and it could be found, that our
technologies infringe their proprietary rights. We could incur substantial costs
to defend any litigation, and intellectual property litigation could force us to
do one or more of the following:
. obtain licenses to the infringing technology;
. pay substantial damages under applicable law;
. cease the manufacture, use and sale of infringing products; or
. expend significant resources to develop non-infringing technology.
Accordingly, any infringement claim or litigation against us could significantly
harm our business, operating results and financial condition.
If we fail to adequately protect our intellectual property, we may not be able
to compete.
Our success depends in part on our ability to protect our proprietary
technologies. We rely on a combination of patent, copyright and trademark laws,
trade secrets and confidentiality and other contractual provisions to establish
and protect our proprietary rights. Our pending or future patent applications
may not be approved and the claims covered by such applications may be reduced.
If allowed, our patents may not be of sufficient scope or strength, others may
independently develop similar technologies or products, duplicate any of our
products or design around our patents, and the patents may not provide us
competitive advantages. Litigation, which could result in substantial costs and
diversion of effort by us, may also be necessary to enforce any patents issued
or licensed to us or to determine the scope and validity of third-party
proprietary rights. Any such litigation, regardless of outcome, could be
expensive and time consuming, and adverse determinations in any such litigation
could seriously harm our business.
17
Undetected hardware defects or software errors may increase our costs and impair
the market acceptance of our systems.
Our systems may contain undetected defects or errors. This may result either
from defects in components supplied by third parties or from errors in our
software that we have failed to detect. These defects or errors are likely to be
found from time to time in new or enhanced products and systems after
commencement of commercial shipments. Our customers integrate our systems into
their networks with components from other vendors. Accordingly, when problems
occur in a network system it may be difficult to identify the component that
caused the problem. Regardless of the source of these defects or errors, we will
need to divert the attention of our engineering personnel from our product
development efforts to address the defect or error. We may incur significant
warranty and repair costs related to defects or errors, and we may also be
subject to liability claims for damages related to these defects or errors. The
occurrence of defects or errors, whether caused by our systems or the components
of another vendor, may result in significant customer relations problems and
injury to our reputation and may impair the market acceptance of our systems.
Because of our long product development process and sales cycle, we may incur
substantial expenses without anticipated revenues which could cause our
operating results to fluctuate.
A customer's decision to purchase many of our systems typically involves a
significant technical evaluation, formal internal procedures associated with
capital expenditure approvals and testing and acceptance of new systems that
affect key operations. For these and other reasons, the sales cycle associated
with our systems can be lengthy and subject to a number of significant risks
over which we have little or no control. Our next-generation systems may have
even longer sales cycles and involve demonstrations, field trials and other
evaluation periods, which will further lengthen the sales cycle. Because of the
growing sales cycle and the possibility that we may rely on a concentrated
number of customers for our revenues, our operating results could be seriously
harmed if such revenues do not materialize when anticipated, or at all.
If we choose to acquire new and complementary businesses, products or
technologies, we may not be able to successfully integrate an acquired business
in a cost-effective and non-disruptive manner and realize anticipated benefits.
We may make investments in complementary companies, products or technologies. If
we acquire a company, we may have difficulty integrating that company's
personnel, operations, products and technologies. These difficulties may disrupt
our ongoing business, distract our management and employees and increase our
expenses. Moreover, the anticipated benefits of any acquisition may not be
realized. Future acquisitions could result in dilutive issuances of equity
securities, the incurrence of debt, contingent liabilities or amortization
expenses related to goodwill and other intangible assets and the incurrence of
large and immediate write-offs, any of which could seriously harm our business.
If the communications and Internet industries do not continue to grow and evolve
in a manner favorable to us or our business strategy, our business may be
seriously harmed.
Our future success is dependent upon the continued growth of the communications
industry and, in particular, the Internet. The global communications and
Internet industries are evolving rapidly, and it is difficult to predict growth
rates or future trends in technology development. In addition, the deregulation,
privatization and economic globalization of the worldwide communications market,
that have resulted in increased competition and escalating demand for new
technologies and services, may not continue in a manner favorable to us or our
business strategies. In addition, the growth in demand for Internet services and
the resulting need for high-speed or enhanced communications products may not
continue at its current rate or at all.
18
We may need to raise additional capital in the future, and if we are unable to
secure adequate funds on terms acceptable to us, we may not be able to execute
our business plan.
We expect that the net proceeds from our initial public offering completed in
May 2000, and our secondary public offering completed in September 2000, and
cash from operations, will be sufficient to meet our working capital and capital
expenditure needs for at least the next 12 months. After that, we may need to
raise additional funds for a number of uses, including:
. expanding research and development programs;
. hiring additional qualified personnel;
. implementing further marketing and sales activities; and
. acquiring complementary technologies or businesses.
We may have to raise funds even sooner in order to fund more rapid expansion, to
respond to competitive pressures or to otherwise respond to unanticipated
requirements. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of our existing
stockholders will be reduced. We may not be able to obtain additional funds on
acceptable terms, or at all. If we cannot raise needed funds on acceptable
terms, we may not be able to increase our ongoing operations and complete our
planned expansion, take advantage of acquisition opportunities, develop or
enhance systems or respond to competitive pressures. This potential inability to
raise funds on acceptable terms could seriously harm our business.
Government regulation and industry standards may increase our costs of doing
business, limit our potential markets or require changes to our business model.
The emergence or evolution of regulations and industry standards for broadband
wireless products, through official standards committees or widespread use by
operators, could require us to modify our systems, which may be expensive and
time-consuming, and to incur substantial compliance costs. Radio frequencies are
subject to extensive regulation under the laws of the United States, foreign
laws and international treaties. Each country has different regulations and
regulatory processes for wireless communications equipment and uses of radio
frequencies. Failure by the regulatory authorities to allocate suitable,
sufficient radio frequencies to potential customers in a timely manner could
result in the delay or loss of potential orders for our systems and seriously
harm our business.
We are subject to export control laws and regulations with respect to all of our
products and technology. We are subject to the risk that more stringent export
control requirements could be imposed in the future on product classes that
include products exported by us, which would result in additional compliance
burdens and could impair the enforceability of our contract rights. We may not
be able to renew our export licenses as necessary from time to time. In
addition, we may be required to apply for additional licenses to cover
modifications and enhancements to our products. Any revocation or expiration of
any requisite license, the failure to obtain a license for product modifications
and enhancements, or more stringent export control requirements could seriously
harm our business.
If the Wireless Digital Subscriber Line Consortium is not successful in its
efforts or we are not able to otherwise influence industry standards, we will
not benefit from our contributions to the Consortium and our products may not be
accepted in the marketplace.
In July 2000, we and five other industry participants announced the formation of
a Wireless Digital Subscriber Line Consortium to accelerate the deployment of
broadband wireless solutions to the marketplace. The goal of the Consortium is
to provide the industry with standardized, timely, multi-vendor solutions for
broadband wireless access. If the Wireless Digital Subscriber Line Consortium is
not successful or we are not able to otherwise influence industry standards, we
will not benefit from our contributions to the Consortium and our products may
not be accepted in the marketplace.
19
Because our principal stockholders and management have the ability to control
stockholder votes, the premium over market price that an acquirer might
otherwise pay may be reduced and any merger or takeover may be delayed.
Our management and ADC Telecommunications collectively own approximately
54% of our outstanding common stock. As a result, these stockholders, acting
together, will be able to control the outcome of all matters submitted for
stockholder action, including:
. electing members to our board of directors;
. approving significant change-in-control transactions;
. determining the amount and timing of dividends paid to themselves and to
our public stockholders; and
. controlling our management and operations.
This concentration of ownership may have the effect of impeding a merger,
consolidation, takeover or other business consolidation involving us, or
discouraging a potential acquirer from making a tender offer for our shares.
This concentration of ownership could also negatively affect our stock's market
price or decrease any premium over market price that an acquirer might otherwise
pay.
Because the Nasdaq National Market is likely to continue to experience extreme
price and volume fluctuations, the price of our stock may decline.
The market price of our shares has been and likely will continue to be
highly volatile and could be subject to wide fluctuations in response to
numerous factors, including the following:
. actual or anticipated variations in our quarterly operating results or
those of our competitors;
. announcements by us or our competitors of new products or technological
innovations
. introduction and adoption of new industry standards;
. changes in financial estimates or recommendations by securities analysts;
. changes in the market valuations of our competitors;
. announcements by us or our competitors of significant acquisitions or
partnerships; and
. sales of our common stock.
Many of these factors are beyond our control and may negatively impact the
market price of our common stock, regardless of our performance. In addition,
the stock market in general, and the market for technology companies in
particular, has been highly volatile. Our common stock may not trade at the same
levels of shares as that of other technology companies and shares of technology
companies, in general, may not sustain their current market prices. In the past,
securities class action litigation has often been brought against a company
following periods of volatility in the market price of its securities. We may be
the target of similar litigation in the future. Securities litigation could
result in substantial costs and divert management's attention and resources,
which could seriously harm our business and operating results.
20
Provisions of our governing documents and Delaware law could discourage
acquisition proposals or delay a change in control.
Our amended and restated certificate of incorporation and bylaws contain
anti-takeover provisions that could make it more difficult for a third party to
acquire control of us, even if that change in control would be beneficial to
stockholders. Specifically:
. our board of directors has the authority to issue common stock and
preferred stock and to determine the price, rights and preferences of any
new series of preferred stock without stockholder approval;
. our board of directors is divided into three classes, each serving three-
year terms;
. super-majority voting is required to amend key provisions of our
certificate of incorporation and by-laws;
. there are limitations on who can call special meetings of stockholders;
. stockholders are not able take action by written consent; and
. advance notice is required for nominations of directors and for
stockholder proposals.
In addition, provisions of Delaware law and our stock option plans may also
discourage, delay or prevent a change of control or unsolicited acquisition
proposals.
Conditions in Israel affect our operations and may limit our ability to produce
and sell our systems.
Our final testing and assembly and research and development facilities are
located in Israel. Political, economic and military conditions in Israel
directly affect our operations. Since the establishment of the State of Israel
in 1948, a number of armed conflicts have taken place between Israel and its
Arab neighbors and a state of hostility, varying in degree and intensity, has
led to security and economic problems for Israel. Hostilities within Israel have
recently escalated, which could disrupt our operations. We could be adversely
affected by any major hostilities involving Israel, the interruption or
curtailment of trade between Israel and its trading partners, a significant
increase in inflation, or a significant downturn in the economic or financial
condition of Israel. As a result of the hostilities and unrest presently
occurring within Israel, the future of the peace efforts between Israel and its
Arab neighbors is uncertain. Moreover, several countries still restrict business
with Israel and with Israeli companies. We could be adversely affected by
restrictive laws or policies directed towards Israel or Israeli businesses.
Some of our directors, officers and employees are currently obligated to perform
annual reserve duty and are subject to being called to active duty at any time
under emergency circumstances. Our business cannot assess the full impact of
these requirements on our workforce or business if conditions should change and
we cannot predict the effect on us of any expansion or reduction of these
obligations.
Because substantially all of our revenues are generated in U.S. dollars while a
portion of our expenses are incurred in New Israeli shekels, our results of
operations may be seriously harmed if the rate of inflation in Israel exceeds
the rate of devaluation of the New Israeli shekel against the U.S. dollar.
We generate substantially all of our revenues in U.S. dollars, but we incur a
substantial portion of our expenses, principally salaries and related personnel
expenses related to research and development, in New Israeli shekels, or NIS. As
a result, we are exposed to the risk that the rate of inflation in Israel will
exceed the rate of devaluation of the NIS in relation to the dollar or that the
timing of this devaluation lags behind inflation in Israel. If the dollar costs
of our operations in Israel increase, our dollar-measured results of operations
will be seriously harmed.
21
The government programs and benefits we receive require us to satisfy prescribed
conditions. These programs and benefits may be terminated or reduced in the
future, which would increase our costs and taxes and could seriously harm our
business.
Several of our capital investments have been granted "approved enterprise"
status under Israeli law providing us with tax benefits. The benefits available
to an approved enterprise are conditioned upon the fulfillment of conditions
stipulated in applicable law and in the specific certificate of approval. If we
fail to comply with these conditions, in whole or in part, we may be required to
pay additional taxes for the period in which we benefited from the tax benefits
and would likely be denied these benefits in the future. From time to time, the
Government of Israel has discussed reducing or eliminating the benefits
available under the approved enterprise program. These tax benefits may not be
continued in the future at their current levels or at all. This termination or
reduction of these benefits would increase our taxes and could seriously harm
our business.
In May 2000, a committee chaired by the Director General of the Israeli Ministry
of Finance issued its report recommending a major reform in the Israeli tax
system. The proposed tax reform, which could become effective as of January 1,
2001, provides for material changes in the current Israeli structure. Some of
the committee's proposals may have adverse tax consequences for us and for
certain of our stockholders. For example, the committee proposes to eliminate
the existing initial tax exemption granted with respect to income generated from
any Approved Enterprise facilities that we have. Because we cannot predict
whether, and to what extent, this committee's proposals, or any of them, will
eventually be adopted and enacted into law, we and our stockholders face
uncertainties as to the potential consequences of these tax reform proposals.
In the past, we received grants from the government of Israel for the financing
of a portion of our research and development expenditures in Israel. The
regulations under which we received these grants restrict our ability to
manufacture products or transfer technology outside of Israel for products
developed with this technology. We believe that most of our current products are
not based on Chief Scientist funded technology and therefore are not subject to
this restriction.
It may be difficult to enforce a U.S. judgment against us and our nonresident
officers, directors and experts.
Our Chief Technology Officer and one of our directors are nonresidents of the
United States, and a substantial portion of our assets and the assets of these
persons are located outside the United States. Therefore, it may be difficult to
enforce a judgment obtained in the United States based upon the civil
liabilities provisions of the United States federal securities laws against us
or any of those persons or to effect service of process upon these persons in
the United States.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks including changes in interest
rates and foreign currency exchange rates. Substantially all of our revenue and
capital spending is transacted in U.S. dollars, although a substantial portion
of the cost of our operations, relating mainly to our personnel and facilities
in Israel, is incurred in New Israeli shekels, or NIS. We have not engaged in
hedging transactions to reduce our exposure to fluctuations that may arise from
changes in foreign exchange rates. In the event of an increase in inflation
rates in Israel, or if appreciation of the NIS occurs without a corresponding
adjustment in our dollar-denominated revenues, our results of operation and
business could be materially harmed.
As of September 30, 2000, we had cash, cash equivalents and short term
investments of $137.3 million. Substantially all of these amounts consisted of
corporate and government fixed income securities and money market funds that
invest in corporate and government fixed income securities which are subject to
interest rate risk. We place our investments with high credit quality issuers
and by policy, limit the amount of the credit exposure to any one issuer.
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Our general policy is to limit the risk of principal loss and ensure the
safety of invested funds by limiting market and credit risk. All highly liquid
investments with a maturity of less than three months at the date of purchase
are considered to be cash equivalents; all investments with maturities of three
months or greater are classified as held-to-maturity and considered to be short-
term investments. If market interest rates were to increase immediately and
uniformly by 10 percent from the levels at September 30, 2000, the fair value of
the portfolio would decline by an immaterial amount primarily because of the
short-term nature of the investments. While all our cash equivalents and short-
term investments are classified as "available-for-sale," we generally have the
ability to hold our fixed income investments until maturity and therefore we
would not expect our operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates on
our securities portfolio. We do not hedge any interest rate exposures.
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On May 2, 2000, we completed an initial public offering of shares of our
common stock, $0.0001 par value. The shares of common stock sold in the offering
were registered under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-1 (No. 333-96129). The Registration Statement was declared
effective by the Securities and Exchange Commission on April 3, 2000.
The initial public offering price was $13.50 per share for an aggregate
initial public offering of $104.8 million. After deducting the underwriting
discounts and commissions of $7.3 million and the offering expenses of
approximately $2.6 million, the net proceeds to us from the offering were
approximately $94.9 million.
From April 3, 2000, until September 30, 2000, we used approximately $2.3
million of the net offering proceeds for purchases of property, plant and
equipment, approximately $2.4 million of the net proceeds for repayment of short
term debt obligations, and approximately $8.8 million of the net offering
proceeds for working capital. Our temporary investments of the net proceeds from
the offering have been in cash, cash equivalents and investment grade, short-
term interest bearing securities.
On September 19, 2000, we completed an underwritten public offering of our
common stock in which we sold 1,750,000 shares and certain stockholders sold
2,250,000 shares. The managing underwriters in the offering were Banc of America
Securities LLC, CIBC World Markets Corp., Dain Rauscher Incorporated, Needham &
Company, Inc. and W.R. Hambrecht + Co., LLC. The shares of common stock sold in
the offering were registered under the Securities Act of 1933, as amended, on a
Registration Statement on Form S-1 (No. 333-45132). The Registration Statement
was declared effective by the Securities and Exchange Commission on September
13, 2000.
The public offering price was $31.5625 per share for an aggregate public
offering price of the shares we sold of $55.2 million and an aggregate public
offering price of the shares sold by the selling stockholders of $71.0 million.
After deducting the underwriting discounts and commissions of $6.6 million and
the offering expenses of approximately $1.0 million, the net proceeds to us from
the offering were approximately $51.3 million and the net proceeds to the
selling stockholders were approximately $67.3 million.
On September 14, 2000, we commenced the offering. The offering terminated on
October 16, 2000, upon expiration of the underwriters' over-allotment option to
purchase up to an additional 600,000 shares. We and the selling stockholders
sold an aggregate of 4,000,000 shares of the 4,600,000 shares of common stock
registered under the Registration Statement. The 600,000 shares subject to the
underwriters' over-allotment option were not sold in the offering.
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From September 13, 2000, until September 30, 2000, we used none of the net
proceeds from this offering. Our temporary investments of the net proceeds from
the offering have been in cash, cash equivalents and investment grade, short-
term interest bearing securities.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
On October 12, 2000, John O'Connell joined Vyyo as our Chief Executive
Officer. Davidi Gilo intends to remain as Chairman of the Board.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.34(1) Addendum # 2 to Collaboration Agreement, dated September 19, 2000,
by and among Vyyo Inc., Vyyo Ltd., and ADC Telecommunications,
Inc.
27.1 Financial Data Schedule (Quarter Ended September 30, 2000)
27.2 Financial Data Schedule (Quarter Ended September 30, 1999)
___________________
(1) We have sought confidential treatment from the Securities and Exchange
Commission for selected portions of this exhibit. The omitted portions will
be separately filed with the Commission.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2000. On October 16, 2000, we filed a report on Form 8-K reporting
that John O'Connell had been appointed as our Chief Executive Officer.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 7, 2000
VYYO INC.
By: /s/ Eran Pilovsky
----------------------------------------
Eran Pilovsky, Vice President, Finance
and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
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