-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QuS90Y6N01fApYV3BQMqKgRwhL0ylMrInQgF8eeA6Z/3s7mtBf9QT2Yltlo/Uwrx D4qAQrBVQpIo4PK2tfDyaQ== 0001156973-02-000352.txt : 20020715 0001156973-02-000352.hdr.sgml : 20020715 20020715101733 ACCESSION NUMBER: 0001156973-02-000352 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MARNETICS BROADBAND TECHNOLOGIES LTD CENTRAL INDEX KEY: 0001062447 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL WORK [1731] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-14886 FILM NUMBER: 02702461 BUSINESS ADDRESS: STREET 1: 10 HAYETZIRA STREET STREET 2: PO BOX 2640 CITY: RA ANANA ISRAEL STATE: L3 FORMER COMPANY: FORMER CONFORMED NAME: STAV ELECTRICAL SYSTEMS LTD DATE OF NAME CHANGE: 19980526 20-F 1 u45188e20vf.txt FORM 20-F MARNETICS SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F (Mark One) [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 000-29736 MARNETICS BROADBAND TECHNOLOGIES LTD. ------------------------------------------------------ (Exact Name of Registrant as specified in its charter) Not applicable ---------------------------------------------- (Translation of Registrant's name into English ISRAEL ----------------------------------------------- (Jurisdiction of incorporation or organization) 10 HAYEZIRA STREET RA'ANANA 43000 ISRAEL ---------------------------------------- (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each Name of each exchange Class on which registered ------------- --------------------- None Securities registered to or to be registered pursuant to Section 12(g) of the Act. ORDINARY SHARES, NOMINAL VALUE NIS 0.08 PER SHARE ------------------------------------------------- (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. NONE ---------------- (Title of Class) Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. AS OF DECEMBER 31, 2001, 7,362,390 OF THE REGISTRANT'S ORDINARY SHARES, PAR VALUE NIS 0.08 PER SHARE, WERE ISSUED AND OUTSTANDING. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- Indicate by check mark which financial statement item the registrant has elected to follow Item 17 Item 18 X --- --- TABLE OF CONTENTS PART I PAGE Item 1: Identity of Directors, Senior Management and Advisers.. Not Applicable Item 2: Offer Statistics and Expected Timetable................ Not Applicable Item 3: Key Information........................................ 3 Item 4: Information on the Company............................. 11 Item 5: Operating and Financial Review and Prospects........... 19 Item 6: Directors, Senior Management and Employees............. 25 Item 7: Major Shareholders and Related Party Transactions...... 33 Item 8: Financial Information.................................. 37 Item 9: The Offer and Listing.................................. 38 Item 10: Additional Information................................. 39 Item 11: Quantitative and Qualitative Disclosures about Market Risk................................... 44 Item 12: Description of Securities Other than Equity Securities. Not Applicable PART II Item 13: Defaults, Dividend Arrearages and Delinquencies........ Not Applicable Item 14: Material Modifications to the Rights of Security Holders and Use of Proceeds................... Not Applicable Item 15: [Reserved]............................................. 45 Item 16: [Reserved]............................................. 45 PART III Item 17: Financial Statements.................................. Not Applicable Item 18: Financial Statements.................................. 45 Item 19: Exhibits.............................................. 45 Reference herein to the (1) "COMPANY", is to Marnetics Broadband Technologies Ltd., which may be referred to as "WE," "US" OR "OUR" and unless context indicates otherwise, includes its wholly-owned subsidiary, Marnetics, Ltd. and Marnetics Ltd.'s wholly-owned subsidiary Marnetics, Inc., and (2) referenced herein to "MARNETICS" unless context indicates otherwise, refers to Marnetics Ltd. and Marnetics Ltd.'s wholly- owned subsidiary Marnetics, Inc.. BITmax(TM), Prospera(TM), Prospera Megalink(TM), and Prospera Expert(TM), are trademarks of the Company. This annual report also contains trademarks of other companies. NOTE REGARDING FORWARD-LOOKING STATEMENTS Our disclosure and analysis in this report contains statements relating to results including certain projections and business trends that are considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Without limiting the foregoing, the words "believes," "anticipates," "plans," "intends," "expects" and similar expressions are intended to identify forward-looking statements. Such risks and uncertainties include, but are not limited to the risks detailed under "Item 3: Key Information -Risk Factors". Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to, changes in economic conditions and competitive pressures within the Company's markets, as well as other risks and uncertainties detailed from time to time in the filings of the Company with the Securities and Exchange Commission. In addition, any forward-looking statements represent estimates only as of the date this annual report was first filed with the Securities Exchange Commission and should not be relied upon as representing the Company's estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligations to do so, even if its estimates change. 2 PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not Applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not Applicable. ITEM 3. KEY INFORMATION. A. SELECTED FINANCIAL DATA The following selected summary of financial information was derived from our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. Effective December 31, 2000, Marnetics Ltd. was acquired by the Company (formerly named Stav Electrical Systems (1994) Ltd.) in exchange for which the Company issued to the shareholders and option holders of Marnetics Ltd. shares and options in the Company representing approximately 75% of its outstanding shares, on a fully diluted basis. The acquisition of Marnetics Ltd. by the Company was accounted for as a reverse acquisition. Marnetics Ltd. was determined to be the "accounting acquirer" in the transaction since the former shareholders and option holders of Marnetics Ltd., as a group, received the largest ownership interest in the Company. As a result, the historical financial statements of the Company prior to December 31, 2000 were replaced with the historical financial statements of Marnetics. The statement of operations for 2001 includes the operations of the Company and of Marnetics. The statements of operations for 2000, and 1999 include only the results of operations of Marnetics. The December 31, 2001 and December 31, 2000 balance sheet includes the consolidated accounts of the Company and Marnetics. The selected summary data should be read in conjunction with ITEM 5: "OPERATING AND FINANCIAL REVIEW AND PROSPECTS", and as qualified in their entirety by our Consolidated Financial Statements and Related Notes, and ITEM 18 - FINANCIAL STATEMENTS, including General - Note 1b, presented in United States dollars in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"), and audited and prepared by Brightman Almagor & Co., Certified Public Accountants (Israel), a member of Deloitte Touche Tohmatsu, independent public accountants in Israel, 1 Azrieli Center, Tel Aviv 67201, Israel. 3
CUMULATIVE FROM JUNE 1, 1998 YEAR ENDED YEAR ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, (1) ----------------------------- ------------ ---------------- 2001 2000 1999 2001 ---------- ---------- ------------ ---------------- US$ IN THOUSANDS Research and development costs 812 252 33 1,228 Sales and marketing expenses, net 310 142 -- 452 General and administrative expenses 1,128 722 44 2,075 Provision of legal claims 750 -- -- 750 Impairment of goodwill 9,309 -- -- 9,309 Loss allowance on loan to related party 1,228 -- -- 1,228 Non-cash compensation expenses 805 2,408 -- 3,213 ---------- ---------- ---------- ---------- OPERATING LOSS (14,342) (3,524) (77) (18,255) Financial income, net 175 167 9 359 Loss on sale of property and equipment -- -- (28) (28) Share in losses of affiliate -- (639) (21) (660) ---------- ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS (14,167) (3,996) (117) (18,584) DISCONTINUED OPERATIONS: Loss from operations of electrical division (450) -- -- (450) Loss on sale of electrical division (2,278) -- -- (2,278) ---------- ---------- ---------- ---------- LOSS FOR THE PERIOD (16,895) (3,996) (117) (21,312) ========== ========== ========== ========== PER SHARE DATA Basic and diluted: LOSS PER SHARE FROM CONTINUING OPERATIONS $ (2.11) $ (4.15) $ (0.20) ---------- ---------- ---------- LOSS FROM DISCONTINUED OPERATIONS $ (0.40) $ -- $ -- ---------- ---------- ---------- NET LOSS $ (2.51) $ (4.15) $ (0.20) ========== ========== ========== SHARES USED IN COMPUTING LOSS PER ORDINARY SHARE Basic and diluted 6,725,685 962,553 575,234 ========== ========== ==========
AT DECEMBER 31, ------------------------------------------------ BALANCE SHEET DATA 2001 2000 1999 ---------- ---------- ---------- Working capital ...................... 1,596 4,925 282 Total assets ......................... 3,507 25,376 418 Short term credits and current maturities of long-term debt ......... 50 3,337 -- Long-term debt ....................... -- 213 -- Shareholders' equity ................. 2,437 18,527 408
- ------------------- (1) Marnetics Ltd. was established and commenced its operations in June 1998 B. Not Applicable C. Not Applicable D. RISK FACTORS The Company's operations during 2001 consisted of two lines of business: (1) core business of developing and marketing broadband Internet fortification solutions which shifted to the development and marketing of network capacity enhancement and network information analysis solutions for IP networks (the "NETWORK BUSINESS"), which is handled through our wholly-owned subsidiary, Marnetics Ltd., and (2) historical business of electrical and lighting contracting and engineering business (the "ELECTRICAL BUSINESS"), which was sold during 2001. See "ITEM 8B - SIGNIFICANT CHANGES." 4 RISKS RELATING TO NETWORK BUSINESS TECHNOLOGICAL FACTORS; UNCERTAINTY OF PRODUCT DEVELOPMENT Despite the fact that the Company is in the initial steps of commercializing its products, no assurances can be given that our investment in research and development will be translated into marketable products. There can be no assurance that any of our products in development will satisfactorily perform all of the functions for which they have been designed or that they will be reliable or durable in extensive applications. Such efforts remain subject to all of the risks inherent in development of new products, including unanticipated delays, expenses and technical problems or difficulties, as well as the possible insufficiency of funds to implement efforts, which could result in abandonment or substantial change in product development. Our success will depend upon our products meeting targeted cost and performance objectives and the timely introduction of products into the marketplace. In order to obtain a strong market position, we must continue to allocate substantial resources to research and development and there is no guarantee that we will have the necessary funds to be able to keep pace with the rate of technological change. INTELLECTUAL PROPERTY RIGHTS Our success is substantially dependent upon our proprietary software technology. We do not yet hold any patents related to our software technology and currently rely or, in the future, expect to rely on a combination of contractual rights, copyrights, trademarks, and non-disclosure agreements with our employees, suppliers, distributors and customers. Marnetics submitted patent applications on December 13, 2000 (US Patent Application No. 09/734,921), for a method of data transfer acceleration in a TCP network environment, which is the core engine in BITmax(TM), and on December 20, 2001 (US Patent Application No. 10/022,912), for a method for enhancing physical bandwidth capacity in packet-switched network (Discrete State Driven Queuing ("DSDQ") technology), which is the core technology to the Prospera(TM) family of products. The patent applications are still pending. We intend to file additional patent applications in Israel and the United States for new technologies currently under development. The methods used and proposed for the protection of our intellectual property rights, however, may not afford complete protection and there can be no assurance that third parties will not independently develop such know-how or obtain access to our know-how, ideas, concepts and documentation. Although we believe that our products have been developed independently and do not infringe on the proprietary rights of others, there can be no assurances that the technology does not and will not so infringe or that third parties will not assert infringement claims against us in the future. In the case of infringement, we could, under certain circumstances, be required to modify our products or obtain a license. There can be no assurance that we would be able to do either in a timely manner, upon acceptable terms and conditions, or at all, or that we will have the financial or other resources necessary to defend successfully a patent infringement or other proprietary rights infringement action. Failure to do any of the foregoing could have a material adverse effect on us. Furthermore, if our products or technologies are deemed to infringe upon the rights of others, we could become liable for damages, which would have a material adverse effect on us. RISKS ASSOCIATED WITH MERGER AND ACQUISITION STRATEGY General. As part of its operating history and growth merger and acquisition strategy, the Company seeks to merge with or acquire other businesses. The Company continually seeks merger and acquisition candidates in selected and, if possible, synergetic markets and from time to time engages in exploratory discussions with potential merger and acquisition candidates. There can be no assurance, however, that the Company will be able to identify and merge with or acquire targeted businesses or obtain financing for such mergers or acquisitions on satisfactory terms. Furthermore, there can be no assurance that competition for merger and acquisition candidates will not escalate, thereby increasing the costs of making mergers and acquisitions or making suitable mergers and acquisitions unattainable. Limited Knowledge and Operating History. Notwithstanding its own due diligence investigation, management may have limited knowledge about the specific operating history, trends and customers of businesses merged with or acquired in future acquisitions. Consequently, no assurance can be given that the Company will be able to make future mergers and acquisitions at favorable prices, that 5 merged with or acquired lines of business will perform as well as they had performed historically or that the Company will have sufficient information to analyze accurately the markets in which it elects to merge with or make acquisitions. Furthermore, additions by the Company of new products present certain risks and uncertainties resulting from the Company's relative unfamiliarity with these new products, the market for such new products, and the financial and operating controls required to manage such new product offerings. There can be no assurance that the Company will be successful in marketing these or other additions to its product offering or that its existing customers will accept such additions to the products currently purchased from the Company. Integration. The process of integrating future merged with or acquired businesses into the Company's operations may result in unforeseen difficulties and may require a disproportionate amount of resources and management attention. Although the Company will endeavor to integrate and assimilate the operations of merged or acquired lines of business in an effective and timely manner, no assurance can be given that the Company will be successful in such integration attempts or that the Company will be able to hire, train, retain and assimilate individuals employed at the merged or acquired businesses. Further, no assurance can be given that the Company will successfully integrate its recent acquisitions or any other future merged or acquired businesses into the Company's purchasing, marketing and management information systems, or that the Company's management and financial controls, personnel, computer systems and other corporate support systems will be adequate to manage the increase in the size and scope of the Company's operations and merger and acquisition activity. Integration of mergers or acquisitions is often a complex process which may entail material, non-recurring expenditures, including facility closing costs, warehouse assimilation expenses, asset write- downs and severance payments. Significant Future Charges to Earnings. Future merger and acquisitions may involve the recording of a significant amount of intangible assets, particularly goodwill, on the Company's balance sheet, which will be amortized over varying periods of time. LIMITED RELEVANT OPERATING HISTORY OF MARNETICS Marnetics, which is the operating entity for the Network Business, has been in operation since June 1998. Accordingly, the Marnetics Subsidiary has a limited relevant operating history upon which an evaluation of the Marnetics Subsidiary's performance and prospects can be made. The Marnetics Subsidiary is subject to all of the risks, expenses, delays, problems, and difficulties typically encountered in the establishment of a new business, especially a development stage company Marnetics is in the initial commercialization stage. In early 2001, the global telecommunications markets experienced a major decline. As a result of the downturn, the deployment of broadband Internet access slowed dramatically, putting in jeopardy Marnetics Ltd.'s business plan, which primarily targeted the broadband market. As a result thereof, Marnetics Ltd. shifted its technological focus and is developing products, the Prospera(TM) family of products, that intend to provide network capacity enhancement solutions for a bottleneck that may occur when Local Area Network ("LAN") access meets the congested Wide Area Network ("WAN") (the WAN Access Link) as well as network traffic analysis and capacity planning. MARKET FOR THE TECHNOLOGY The market for network capacity enhancement solutions is in an early stage of development and its success is not guaranteed. Therefore, we cannot accurately assess the size of the market, the products needed to address the market, the optimal distribution strategy, or the competitive environment that will develop. In order for us to be successful, our potential customers must recognize the value of our new approach to network management solutions, and decide to invest in the management of their networks and the performance of mission critical applications. The growth of the network management solutions market also depends upon a number of factors, including the availability of inexpensive bandwidth, especially international links, and the growth in complexity of WAN, and the CapEx budgets of enterprises. 6 COMPETITION; PRICING; TECHNOLOGICAL OBSOLESCENCE Our products may compete directly with, or be rendered obsolete, by products developed and marketed by numerous well-established companies in the communications and networks industries, including traffic management developers, network optimization solution developers and system integrators. Many of these competitors have substantially greater financial, technical, personnel and other resources than the Company and have established reputations for success in the development, licensing, and sale of their products and technology. Certain of these competitors are industry leaders with the financial resources necessary to enable them to withstand substantial price competition or downturns in the market. Thus, our products may come under competitive pressure in terms of feasibility and price with a negative impact on future performance. The Company forecasts that the prices of bandwidth will not go down lower substantially, but if the prices were in actuality to go lower substantially, this would have a negative impact upon the products of Marnetics Ltd. There are also numerous other companies that have developed or may be expected to develop technologies or products that may be functionally similar to some or all of those being developed by us. There can be no assurance that other companies with greater financial resources and expertise do not have or are not currently developing functionally equivalent or superior products, or that functionally equivalent or superior products will not become available in the near future. In addition, the markets for our technology, products and proposed products are characterized by rapid changes and evolving industry standards, often resulting in product obsolescence or shortened product life span. Accordingly, our ability to compete will be dependent upon our ability continually to enhance and improve our future products and technologies, and to complete development of new products. There can be no assurance that we will be able to compete successfully, that our competitors or future competitors will not develop technologies or products that will render our products and technology obsolete or less marketable, or that the Company will be able to successfully enhance or satisfactorily adapt our existing technology or develop new products. PROPOSED EXPANSION The Company intends to pursue a strategy of growth. We have, however, limited experience in effectuating rapid expansion or in managing operations that are geographically dispersed. We intend to pursue our growth strategy by entering into strategic alliances for the marketing of our products or technology (OEM agreements), hiring and retaining skilled management, as well as financial, marketing, technical, and other personnel and successfully managing growth (including monitoring operations and controlling costs and maintaining effective quality controls). Our prospects could be adversely affected by unfavorable general economic conditions, including any downturns in the Israeli or international economies, or a decline in the economic prospects of particular governmental or commercial customers or segments or targeted markets, which could result in reduction or deferral of expenditures by prospective customers. There can be no assurance that we will be able to achieve significant market acceptance of future products, successfully introduce new products, or achieve significant penetration in new geographic markets. Our products may require a sophisticated marketing and sales effort targeted at several levels within a prospective customer's organization. We have recently expanded our marketing and sales staff and plan to further increase our staff, including sales, technical and customer support personnel. Competition for qualified sales personnel is intense and we may not be able to hire sufficient and skilled sales personnel to support our sales and marketing efforts. As the Company grows, we will need to increase our staff to support new customers, as well as our continued research and development operations. The installation of network traffic management solutions, the integration of these solutions into existing networks and ongoing support can be complex. Accordingly, the Company needs highly trained technical and customer support personnel. Hiring technical and customer support personnel is very competitive in this industry, due to the limited number of people available with the necessary technical skills and understanding of our products. This is particularly true in Israel, where competition for such personnel is intense. Our success depends upon our ability to attract, train and retain highly qualified technical and customer support personnel. 7 SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING; DEPENDENCE ON FINANCING TO IMPLEMENT EXPANSION The Company's capital requirements have been and will continue to be significant and our cash requirements have historically exceeded and will likely exceed cash flow from operations. As a result, we may need to depend upon bank credit lines and sales of the Company's securities to fund our development and marketing activities. The Company's ability to obtain additional financing, and the terms of any such financing, could be adversely affected by a variety of existing circumstances. No assurance can be given that the Company will be able to obtain such financing or that the financing obtained will be on terms satisfactory or favorable to the Company. LIMITED MARKETING CAPABILITIES; DEPENDENCE ON THIRD PARTY MARKETING ARRANGEMENTS The Company through Marnetics Ltd. has commenced marketing activities relating to product commercialization and has limited marketing experience and limited financial, personnel and other resources to undertake extensive marketing activities independently. Accordingly, we will rely on arrangements with third parties for the marketing and distribution of our products, including arrangements with distributors. There can be no assurance that we or any third parties will be able to market our products successfully or that their efforts will result in any significant revenue. The Company could also be dependent upon such dealers and distributors and other third parties to provide installation and support services. To the extent that such third parties provide inadequate services and support, over which we will not have direct control, our reputation and our ability to continue to sell additional products through such distributors or dealers would be adversely affected. While we believe that any independent distributors or other strategic partners with which it enters into such arrangements will have an economic motivation to sell our products, the time and resources devoted to these activities generally will be contributed and controlled by such entities and not by us. A decline in the financial prospects of particular distributors or other strategic partners or of any of their customers, could have an adverse effect on the Company. Moreover, joint ventures or similar arrangements may require financial or other commitments by us. There can be no assurance that we will be able, for financial or other reasons, to continue to finalize any additional third party distribution, marketing, or joint venture arrangements or such arrangements, if finalized, will result in the successful commercialization of any of our products. RELIANCE ON INTERNATIONAL SALES The Company anticipates having sales in Israel and in international markets, but there can be no assurance that we will be able to do so or that such international markets will be viable. To the extent we are able to expand successfully, it will become increasingly subject to the risks associated with international sales, including economic and political instability, shipping delays, customs duties, export quotas, and other trade restrictions, any of which could have a significant impact on our ability to deliver products on a competitive and timely basis and exacerbate the risks inherent in our business. In addition, we may encounter significant difficulties in connection with the sales of our products in international markets, future imposition of, or significant increases in, the level of custom duties, export quotas, or other trade restrictions that may have an adverse effect on us. CURRENCY EXCHANGE RISKS ASSOCIATED WITH INTERNATIONAL SALES It is anticipated that most of our revenues will be derived in United States dollars, while a significant portion of our expenses are currently incurred in NIS. Therefore, the Company may be adversely affected by fluctuations in currency exchange rates. We have not engaged in currency-hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. Even if we were to determine that it was in our best interests to enter into any such hedging transactions in the future, there can be no assurance that we will be able to do so or that such transactions, if entered into, will materially reduce the effect of fluctuations in foreign currency exchange rates on our results of operations. In addition, the imposition of exchange or price controls or other restrictions on the conversion of foreign currencies into NIS may have a material adverse effect on our results of operations. 8 POTENTIAL PRODUCT LIABILITY; WARRANTY EXPENSE Despite the fact that the company performs on routine basis tests of its products, new products may contain errors after commencement of commercial shipment. Additionally, the company's products, in order to perform, depend upon certain third party hardware and software, which may contain errors and defects that could reduce the performance of the company's products. As a result, the Company may be exposed to potential product liability claims, experience future material warranty expense, by our customers, distributors and users of our products. DEPENDENCE ON KEY PERSONNEL The success of the Company will be largely dependent on the abilities and continued personal efforts of Marnetics Ltd.'s senior management, particularly those of Menachem Reinschmidt, Founder of Marnetics Ltd. and CEO of the Company, David Sheetrit, Chief Operating Officer, Ilan Hadar, Chief Financial Officer, and Hanoch Newman, Vice President of Research and Development. Although some of the officers have entered into employment/consulting agreements with the Company, these employment/consulting agreements are terminable on relatively short notice. The loss of the services of these key personnel would have a material effect on our ability to manage the on-going operations, and to develop or commercialize our products and technologies. REGULATION We intend to provide the Company's products to customers located throughout the United States and in several foreign countries. As a result, the Company may be required to qualify to do business, or be subject to tax or other laws and regulations, in these jurisdictions even if it does not have a physical presence or employees or property in these jurisdictions. The application of these multiple sets of laws and regulations is uncertain, but we could find the Company is subject to regulation, taxation, enforcement or other liability in unexpected ways, which could materially adversely affect our business, financial condition and results of operations. CONTROL BY PRINCIPAL SHAREHOLDERS As of June 30, 2002, our Executive Officers and Directors and principal shareholders beneficially own an aggregate of 68.6% of the Company's Ordinary Shares on a fully diluted basis (based on vested option, not taking into account unallocated options and options granted but not vested). Such Shareholders, if voting together, would likely have sufficient voting power to elect a majority of the Board of Directors, exercise control of the business, policies and affairs of the Company and, in general, determine the outcome of any corporate transaction or other matter submitted to Shareholders for approval such as: (i) any amendment to the Company's Articles of Association, (ii) any merger, consolidation, sale of all or substantially all of the assets of the Company and (iii) any privatization transaction, and in general prevent or cause a change in control of the Company, all of which may adversely affect the Company and its Shareholders. In addition, certain shareholders have the right to appoint members of the Board of Directors. Although certain shareholders are contractually obligated to vote for certain director nominees, there is no joint ownership of the shares held by such shareholders under Israeli law and such shareholders do not constitute a "controlling group" under Israel corporate and securities laws. See "ITEM 6A - DIRECTORS AND SENIOR MANAGEMENT" and "ITEM 7-MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS." RISKS RELATING TO COLLECTION OF DEBT BY THE COMPANY Effective March 31, 2001, the Company sold to Idan Millenium Investments and Assets Ltd. ("IDAN"), a company under the control of Dov Strikovsky, a major shareholder and former CEO of the Company, all the fixed assets, inventories, goodwill and other assets and liabilities related to the electrical operations for a consideration of $597,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. There can be no assurance that the Company will collect the consideration owed to it from the sale. At December 31, 2001 a loan, linked to the Israeli CPI and bore interest of 2% per annum and is repayable in eight annual installments each comprised of 1/8 of the principal and the 9 accrued interest thereon commencing December 31, 2001, was granted, during the year 1998, to a major shareholder and former director and officer, Mr. Strikovsky. The Company reassessed the collectibility of the loan, in the amount of $1,228,000 in accordance with provisions of SFAS No. 114 "Accounting by Creditors for Impairment of a Loan", and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. There can be no assurance that the Company will collect the consideration owed to it from the loan. During the year 2001, the Company entered into an agreement with Bank Hapoalim Ltd in respect to the Company's short-term credit borrowed from the Bank in the amount of $3,127,000. In accordance with the Bank agreement, the Bank has agreed to release the Company from its obligation and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, the Company shall pay $954,000 to the Bank on account of the Debt and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount. In addition, the Company has provided the bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon. See "ITEM 8A - LEGAL PROCEEDINGS". Failure to collect the total amounts, or part of it, from Idan Millenium Investments and Assets Ltd, Mr. Dov Strikovsky and the municipality of Hod Hasharon could have a negative impact on the company future cash flow and liquidity. RISKS RELATING TO MARNETICS' LOCATION IN ISRAEL Risk of Political Instability. Our principal offices and the research and development facilities of the Company are located in Israel and, thus, are directly affected by economic, political and military conditions in Israel. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and various Arab countries. In addition, Israel and companies doing business with Israel have been the subject of an economic boycott by the Arab countries since Israel's establishment. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority and various declarations have been signed in connection with efforts to resolve some of the aforementioned problems, no prediction can be made as to whether a full resolution of these problems will be achieved or as to the nature of any such resolution. Since October 2000, there has been a substantial deterioration in the relationship between Israel and the Palestinians, which has resulted in increased violence. The future effect of this deterioration and violence on the Israeli economy and our operations is unclear. Ongoing violence between Israel and Palestinians may have a material adverse effect on our business, financial conditions and results of operations. History of Inflation. In the early to mid-1980s, Israel's economy was subject to a period of very high inflation. However, inflation was significantly reduced by the late 1980s due primarily to government intervention. The annual rate of inflation in Israel was 7.0% for 1997, 8.6% for 1998, 1.3% for 1999, 0% for 2000, 1.4 % for 2001, and from January 2002 to May 2002 was 4.9%. The dollar "carrying value" of certain assets and liabilities of the Company, which are denominated or payable in NIS, are influenced by the rate of inflation in Israel compared with that of the United States and prevailing NIS/dollar exchange rates. Increases in inflation in Israel could have an adverse impact on our results of operations if the rate of inflation increases without a corresponding devaluation of the NIS against the dollar. Military Reserve Duty. Certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time. We have operated effectively under these requirements since our inception. No prediction can be made as to the effect on the Company of any expansion of these obligations. Income Taxation. Non-residents of Israel are subject to income tax on certain income (including cash dividends) derived from sources in Israel. The convention between the State of Israel and the federal government of the United States with respect to taxes on income provides for a maximum tax of 25% on dividends paid to residents of the United States. 10 ITEM 4. INFORMATION ON THE COMPANY A. HISTORY AND DEVELOPMENT OF THE COMPANY The Company was formed in 1994 as Stav Electrical Systems (1994) Ltd., a State of Israel corporation. From 1994 through 2000, the Company was an electrical and lighting contracting and engineering firm engaged in the installation and maintenance of infrastructure works located in the State of Israel. During December 1998, the Company consummated an initial public offering pursuant to which the Company sold 800,000 ordinary shares (including 100,000 ordinary shares sold by Mr. Dov Strikovsky, a former director and officer of the Company) for net proceeds of approximately $3.6 million. On June 1, 2000 a share exchange agreement was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company's shareholders on December 20, 2000, whereby the Company completed a combination transaction with Marnetics whereby the Company changed its name to Marnetics Broadband Technologies Ltd. The Company acquired all of the outstanding share capital of Marnetics, an Israeli company formed in 1998, and Marnetics' shareholders received Ordinary Shares and options representing approximately 75% of the Company's outstanding Ordinary Shares and options on a fully-diluted basis. Marnetics became a wholly owned subsidiary of Marnetics Broadband Technologies Ltd. as a result of this transaction. The Company issued 4,993,048 Ordinary Shares and 1,761,236 options (including 308,300 newly unvested options to employees of Marnetics) in connection with the transaction, and decided to reserve for the Employee Stock Option Plan 1,000,000 options. As a result of this transaction, the Company changed its focus from electrical contracting to the development and marketing of broadband Internet fortification solutions, designed to enhance performance and infrastructure utilization in the broadband Internet environment. In June 2001, due to changes in the broadband Internet market, the Company subsequently changed its technological focus as described in subsection B below. In February 2000, Marnetics issued 130,719 ordinary shares of NIS 0.01 par value to ECI Telecom Ltd. for $ 2,000,000. In October 2000 Marnetics reached an agreement with a group of new investors (the "Investors"). In accordance with the agreement, the Company issued to the Investors 221,200 ordinary shares in consideration of $5,076,000. During December 2001, the Company nominated Mr. Menachem Reinschmidt to the position of CEO of the Company. Our principal executive offices are located at 10 Hayezira St., Ra'anana 43000 Israel, and our telephone number is 972-9-761-6868. B. BUSINESS OVERVIEW The Company's operations during 2001 consisted of two lines of business: (1) core business of developing and marketing broadband Internet fortification solutions which shifted to the development and marketing of network capacity enhancement and network information analysis solutions for IP networks (the "NETWORK BUSINESS"), which is handled through our wholly-owned subsidiary, Marnetics Ltd., and (2) historical business of electrical and lighting contracting and engineering business (the "ELECTRICAL BUSINESS"), which was sold during 2001. See "ITEM 8B - SIGNIFICANT CHANGES." As of April 1, 2001, the Company through Marnetics is engaged only in the Network Business. 11 NETWORK BUSINESS GENERAL The Company's operating subsidiary, Marnetics Ltd., is in the stage of commercialization of its products developed in the year 2001 until today. In early 2001, the global telecommunications markets experienced a major decline. As a result of the downturn, the deployment of broadband Internet access slowed dramatically, putting in jeopardy Marnetics' business plan, which primarily targeted the broadband market. As a result thereof, Marnetics Ltd. shifted its focus and developed a platform of products which it called the Prospera(TM) family of products, which are intended to provide network capacity enhancement and analysis solutions for bottlenecks that may occur especially when local area networks ("LAN") meet the congested wide area network (WAN) (the WAN Access Link), thereby decreasing the usability and productivity of revenue generating mission critical applications. INDUSTRY BACKGROUND AND MARKET OPPORTUNITY Current priorities in networks management are focusing on better utilization of existing infrastructure, improvement in performance and providing value-added service that can generate revenues or reduce costs. The Company's objective is to utilize its existing technology and integrate it into a platform of solutions that addresses these current market priorities. Enterprises expect mission-critical applications to run quickly and reliably, with predefined performance. Many applications running simultaneously can often cause congestion within the network, leading to variations in network availability that range from slow performance to denial of service. In such instances enterprises require that revenue generating mission-critical applications be allowed to function without delays created by less significant traffic and bandwidth-hogging Internet applications such as heavy downloads, music files, streaming media, and other non-critical applications. The advent of the Internet and the explosive growth of time-sensitive and revenue generating mission-critical applications such as ERP, CRM, Databases, etc., as well as Intranets, Extranets and the Web, are creating intense strain on IP networks. This is particularly prevalent at the interface links between the very fast 100Mbps-1Gbps Ethernet LAN and the much slower channels of frame relay, ATM, leased lines and VPN's of the WAN (usually holds a bandwidth of up to 2Mbps). Heavily congested networks cause a deterioration in the end-user experience, with peak traffic conditions and the unbalanced use of resources creating a snowball effect, resulting in compromised mission-critical application availability and causing events such as insufficient response time, server slowdown, bottlenecks and poor overall network performance. Whilst the network and bandwidth management mechanism are of importance, it should be recognized that a network's architecture is designed to serve applications and users and not to deal with bandwidth-hungry applications, peak-time congestion packet losses or other adverse symptoms created by the unbalanced use of its resources. When considering the problem of how to improve mission-critical application performance it is necessary to concentrate on network congestion and those resources that have the greatest impact on the network when under intense strain or failure. The busy interface between the WAN and LAN affects network capacity, performance and availability more than any other point on the network, as it is through this point that those bandwidth-hungry, non-critical applications impact network resources. At this interface, there are typically frequent congestion and capacity problems, as heavy downloads and surfing congest routers, saturate links, exhaust buffers and flood servers - compromising both the health and availability of the network and those applications running over it. To adequately address this, the objective of any solution should not be just to improve the overall performance of the network, but to fortify and accelerate those mission critical applications that require precedence over resource-consuming applications while maintaining acceptable economical cost effective ratios. 12 EXISTING ALTERNATIVE SOLUTIONS Because of the congested WAN access links, enterprises tend to add infrastructure until over-provisioning the network. This requires expensive upgrades to LAN and WAN infrastructure and associated network equipment. Moreover, incremental increases in infrastructure only temporarily alleviate network congestion, leaving the following problems unresolved: over-provisioning results in under-utilization of the network during non-peak periods; deployment costs and increased recurring service charges can be expensive, especially for networks with many remote sites and for international networks; and there is no application performance visibility to enable effective capacity planning. There are several distinctly different types of solutions currently available that attempt to address application and network performance issues, such as: Caching - Web Caching is the act of storing copies of Web pages on a `local' system. If the same pages are requested at a later time, and the cached copy is still valid, there is no need to contact the origin server again. These cache hits can reduce latencies and network bandwidth, although there is no congestion handling or control of oversubscription as caching is designed mainly to reduce link traffic. The main drawback, however, is that most of the caching devices are HTTP oriented by design and do not support other significant high volume applications such as FTP and email. In addition to that, the cache algorithm is based on statistical algorithm, therefore limited to the actual "hit ratio" for every type of traffic. The efficiency for software downloading, music files, video streaming and cryptic files would be very limited. Bandwidth Management - Bandwidth management is, in essence, discrimination between session and user types to assist in delivering higher quality of service for specific users or applications. Although this can provide limited relief to congested networks the initial implementation is highly problematic, requiring labor-intensive tailoring to exact individual network specifications. Ongoing maintenance is similarly cumbersome as this type of solution is highly-sensitive to changes on the network, requiring re-configuration and re-building whenever network modifications or upgrades are carried out. Compression/Decompression - Data compression was very effective in the past, specifically with certain types of files, such as text files. However, data compression has lost it's value in today's corporate environment, as it is not effective when it comes to "random" data such as the documents used by enterprises today - wording files, presentations, spreadsheets, images, and zip files. When porting data compression to real-life packet-based networks, vendors, as well as users, have found that data compression is less effective. The reason behind this is that corporate networks and Internet technologies, usually carry pre-compressed material, and packets usually carry very little resemblance to prior packets. Implementing of compression products requires two sides installation, thus complicating the installation process. The cost of such solution would be very high, since installation would have to be not only in the data center but also in the remote branches. Purchasing Additional Bandwidth - Until recently certain network slow-down symptoms have been interpreted as an indication of bandwidth shortage, resulting in additional, extremely costly, WAN trunk bandwidth being purchased as an appropriate solution to the problem. Although increasing bandwidth can provide marginal relief to a network, accumulated experience has shown that additional bandwidth does not fundamentally change the situation as increasing bandwidth only serves to allow aggressive users/applications to disproportionately consume the additional resources, compounding both the problem and the relative costs involved. OUR PRODUCTS AND SERVICES - PROSPERA(TM) FAMILY OF PRODUCTS Prospera(TM), Marnetics' product line, is an innovative Capacity Enhancement Platform, which improves bandwidth utilization and enables more subscribers to be served simultaneously over the Wide Area Network. Prospera(TM) addresses one of the fundamental problems of communication networks: capacity and scalability, especially in high-volume traffic situations. Prospera(TM) solves the problem of mission-critical application performance on congested IP networks by fortifying and 13 accelerating applications such as ERP and CRM in a fully adaptive and automatic manner. The product is intended to better manage over-subscription situations in Internet and Intranet networks. As a result, users of Prospera(TM) save money by delaying additional bandwidth purchases, while improving service level and customer satisfaction. As of today, the Prospera(TM) family of products comprises two main products: o The Prospera MegaLink(TM) - A Network Capacity Enhancement solution aimed towards service providers and enterprises. It introduces a new, comprehensive approach to IP network capacity challenges, mission critical application protection and maximizes network infrastructure utilization by increasing the effective capacity, enabling enterprises and Service Providers to provide better service to their customers at lower costs. o The Prospera Expert(TM) - A Network Information System that brings a new approach to network performance and capacity monitoring and analysis for service providers and enterprises. PROSPERA MEGALINK(TM) Marnetics has developed a cost-effective, enterprise-class application-acceleration and network capacity enhancement technology based on the patent pending DSDQ (Discrete State Driven Queuing) technology that offers a new and comprehensive approach to the challenges of saturated IP Networks and the performance of mission-critical applications. Aimed at enterprises, Internet related service providers and cellular carriers of all types, Prospera MegaLink(TM) is a technology that protects both the user and mission-critical application in peak-load times, dynamically adapting to the various network conditions to enable mission-critical applications to run significantly faster, smoother, and with greater availability. Through protecting key network resources in over-subscription situations, Prospera MegaLink(TM) delivers streamlined capacity and performance distribution that allows more users and applications to simultaneously share network resources as well as improving the overall health and stability of the network. It is a scalable, software-based solution that reflects as a standard network device, making it easy to install, manage and upgrade configurations, as well as system management and traffic analysis functionality. Market Positioning To the best knowledge of the Company, Marnetics' technology stands apart from other solutions in that it specifically addresses the problem of capacity and mission-critical application performance on congested IP networks. It uniquely fortifies and accelerates those specific applications that are vital to the smooth running of the enterprise's operations by increasing the number of concurrent sessions. In fact, in instances where mission-critical applications, such as CRM, are an inherent part of the enterprises core business, Marnetics solution can provide a significant performance advantage over the competition as well as greater user satisfaction and operational profitability. In addition, Prospera MegaLink(TM) is software-based and scalable to large traffic volume, allowing for quick and easy deployment that does not present the configuration problems seen in many other solutions. The Technology Prospera MegaLink(TM) is built on a patent-pending, state-of-the-art and intelligent traffic and application-optimization engine, DSDQ that actively monitors and manages resources and applications on a per-session basis. DSDQ dynamically adapts to different traffic patterns (states) and end-to-end session conditions, enabling streamlined performance and availability of mission-critical applications and network resources. 14 Designed to effectively handle different dynamic mixtures of traffic, DSDQ offers real-time session optimization, relief and recovery from extreme congestion situations, fast recovery from packet-loss and dynamic balancing between sessions, bandwidth-consumption and other network events that influence the utilization and efficiency of mission-critical applications and network resources. Prospera MegaLink(TM) is independent of upper layer protocols and physical trunk line infrastructure and supports multi link and multi channel environments, within the WAN topology, from a single box. Installed at the site of the network data center (typically housed at the enterprise headquarters) it supports all trunks from this focal point to the other locations/remote branches. Mission-critical application protection and capacity enhancement are achieved through the employment of Prospera MegaLink(TM). Deploying Prospera MegaLink(TM) on the network assures the smooth operation and streamlining of ERP and CRM applications, even in peak time situations, by applying dynamic bandwidth balancing between all active connections. Once installed, Prospera MegaLink(TM) allows more users to share the congested WAN access links through its traffic algorithm optimization. In addition, mission critical applications are fortified and protected from performance degradation, improving their availability, and response time. PROSPERA EXPERT(TM) Prospera Expert(TM) enables enterprises, ISP's, and cellular operators to obtain a detailed overall panoramic picture of their traffic over Wide Area Network (WAN), to help manage their network resources effectively. Users receive comprehensive traffic reports both in real time and in an historical mode by a simple click and view operation in an executive format. Prospera Expert(TM) is specially designed to operate over a large variety of different networks, independent of physical infrastructure and can be deployed easily and quickly at central locations on the network. Prospera Expert(TM) is an advanced Network Information Systems tool. Traditional network management systems focus on monitoring and troubleshooting. Prospera Expert(TM) shifts the center of gravity to issues such as network economy, service level analysis, congestion analysis and future capacity planning. It complements the Prospera MegaLink(TM) product that maximizes network infrastructure utilization by increasing the effective capacity and protection of mission critical applications. Prospera Expert(TM) was created to meet the need of executives, IT managers and network administrators for a high level tool that focuses on performance provided to the users or subscribers. It also provides a profile of network utilization through a large variety of predefined reports, as well as customized, user defined queries, which are accessible through any standard browser by multiple users. Most important, Prospera Expert(TM) provides a new level of network insight without the need to understand the underlying technologies or protocols. NETQA SERVICES During 2002, Marnetics launched a new service to be offered to its customers. The service aims the needs of enterprises to better design their network for capacity and performances optimization. Marnetics uses its expertise in IP networks combined with its advanced Network Information Systems tool, the Prospera Expert(TM), to perform a comprehensive network performance analysis. The outcome of the analysis is in-depth reports and recommendations to the IT managers and network managers how to better utilize their enterprise network infrastructure and how to plan ahead their network infrastructure. Marnetics intends to implement the service using its own resources or, in some other cases, together with its qualified distributors. CUSTOMERS AND DISTRIBUTORS Management hopes that the Prospera(TM) family of products and future development of products will offer increased functionality while reducing costs and improving performance and total Cost of Network Ownership. Prospera(TM) family of products is likely to be adapted by three main market segments: enterprises, Internet related service providers and cellular carriers. These target audiences will 15 be reached either through direct contact or, through qualified distributors or, marketing channels, such as Value-Added Resellers or, System Integrators. The Company is focusing its initial marketing efforts in the Middle East, United States, Europe and the Far East. In early July 2001, Marnetics also signed an OEM agreement with Speedwise Technologies Ltd., a company in which Marnetics Ltd. owns a 13.12% interest as of June 30, 2002, to enable Marnetics to sell its products for cellular customers (which are currently in development), whether integrated into Speedwise's products or as stand-alone products, to Speedwise's installed base of approximately 40 cellular companies worldwide and a much broader network of contacts. Pursuant to this agreement, Speedwise was to pay Marnetics 30% of the income generated by the sale and maintenance of the Marnetics products. This agreement had a one-year term with automatic renewal. As of November 1, 2001, the OEM agreement was cancelled between the parties. In March 2002, Marnetics signed a distribution agreement with Magalcom Communications & Computers Ltd. to become a non-exclusive distributor of Marnetics products in Israel. In April 2002, Marnetics signed a distribution agreement with TNN Networks Ltd. to become a non-exclusive distributor of Marnetics products in Israel. In May 2002, Marnetics signed a distribution agreement with IP Tech S.A. de C.V. to become a non-exclusive distributor of Marnetics products in Mexico. During 2002, Marnetics completed tests to its products and started to install beta sites as well as trial in selected customers. LICENSING ARRANGEMENTS In April 2001, Marnetics Ltd. entered into a software license agreement with Speedwise Technologies Ltd., a company in which Marnetics Ltd. owns a 13.12% interest as of June 30, 2002. Under this license agreement, Marnetics granted Speedwise a non-exclusive license to use certain programs and software products owned by Marnetics which Speedwise is using to develop other software products. Marnetics is entitled to receive a fee based on the sale of this derivative software product of either (a) US $25 per concurrent user if sold bundled with other Speedwise products, or (b) 15% of net revenues from the product. The agreement has a perpetual term. Marnetics is negotiating with Speedwise to alter the terms of the software license agreement. COMPETITION We compete in a new, rapidly evolving and highly competitive sector. We expect competition to persist and intensify in the future from a number of different sources. Increased competition could result in reduced prices and gross margins for our products and could require increased spending by us on research and development, any of which could harm our business. We compete with products of Packeteer, Allot, Expand, Cisco, Check Point and several small private companies that sell products that utilize competing technologies to provide bandwidth management and network monitoring systems. In addition, our products and technology compete for information technology budgets (CapEx) allocations with services that offer network analysis offered by IT service providers. Lastly, we face indirect competition from companies that offer enterprises and service providers' increased bandwidth and infrastructure upgrades that increase the capacity of their networks, and thereby may lessen or delay the need for capacity enhancement. We believe the principal competitive factors in the capacity enhancement solutions market are: o expertise and in-depth knowledge of IP networks structure, networks traffic and infrastructure behavior; o timeliness of new product introductions; o ability to integrate easily into the existing network infrastructure; 16 o ability to ensure end-user productivity and mission critical application performance; o compatibility with industry standards; o products that decrease latency and packet loss; o products that demonstrate short Return on Investment (ROI); o size and scope of distribution network; o brand name; and o access to customers and size of installed customer base. While various such solutions and technologies exist which address the network management problem, there is, to the best of our knowledge, no similar product based on a similar technology like that developed by Marnetics to increase capacity of traffic flow over IP networks. In the future, competing products may be developed and marketed by numerous well-established, well-financed companies, including traffic management vendors, network optimization solutions developers, cellular application providers and cellular vendors. In addition, our products will compete indirectly with other network capacity enhancement solutions and other queuing schemes, although we believe that our new product line will enhance rather than conflict with these products. Marnetics has sufficient cash to finance the anticipated costs of development activities of its product line through year-end 2002. The decision to modify the Marnetics' technology road map following the broadband Internet market decline accordingly did delay the commercialization of the Company's products and services from what was previously reported by the Company. RESEARCH AND DEVELOPMENT Our current research and development plan is aimed at leveraging the Company's current technology and developing the Prospera(TM) family of product and related products. In May 2002, Marnetics Ltd. submitted an application to obtain research and development funding in the sum of $250,000 from the Office of the Chief Scientist, of the Ministry of Industry of Trade, of the State of Israel ("OCS"). There is no certainty that the application will be approved, and if approved, what conditions the OCS will demand of Marnetics Ltd., and if this would be acceptable to the Company. TRADE SHOW Marnetics exhibited at CommunicAsia 2002, Asia's premier international information and communications technology forum that took place June 17-21, 2002 in Singapore, continuing to introduce the Prospera(TM) line of products. The Company chose to introduce the product line at CommunicAsia 2002 because it is a large INFOCOMM show in Asia. By exhibiting alongside other international technology leaders who showcase their products to business professionals looking for the latest IT products and services the Company hopes to make potential distributors aware of its new product line. GROWTH STRATEGY - MERGERS AND ACQUISITIONS As part of its growth strategy, the Company seeks to merge with or acquire other businesses. The Company is seeking merger and acquisition candidates in selected markets and from time to time engages in exploratory discussions with potential merger and acquisition candidates, although it has not entered into any definitive agreement to do so. There can be no assurance, however, that the Company will be able to identify and merge with or acquire targeted businesses or obtain financing for mergers and acquisitions on satisfactory terms. Furthermore, there can be no assurance that competition for merger and acquisition candidates will not escalate, thereby increasing the costs of making mergers and acquisitions or making suitable mergers and acquisitions unattainable. 17 MARKETING, PROMOTIONAL, AND CONSULTANTS In January 2002, Marnetics Ltd. entered into promotional agreement with Karif Communications Ltd. to provide to Marnetics public relations services, subject to extension during June, 2002. In February 2002, Marnetics Ltd. entered into a services agreement with Expenion LLC, to provide to Marnetics, primarily in the United States but not limited to such, on a non-exclusive basis, business development services for the sale of its products. In February 2002, the Company entered into a non-exclusive finder's agreement with Gentech Holdings SA and Opus Holdings SA to assist in raising equity investment during year 2002 for fees and securities. In March 2002, Marnetics entered into a services agreement with Levi Zelkind, to provide to Marnetics in the Territories of Russia, Kazakhstan, Poland, Yugoslavia, Slovenia, Czech Republic, and Greece, on a non-exclusive basis, business development services for the sale of its products. In April 2002, Marnetics Ltd. entered into a services agreement with Menachem Sharron to provide to Marnetics in the Territory of Southern Africa, on a non-exclusive basis, business development services for the sale of its products. In June 2002, the Company entered into a letter of intent with PortfolioPR, a New York based company, for public relation and investor relations services. PortfolioPR has already begun providing services to the Company. ELECTRICAL BUSINESS Prior to December 2000, the Company's sole business was as an electrical and lighting contracting and engineering firm engaged in the installation and maintenance of infrastructure works located in the State of Israel. The Electrical Business has been characterized by intense competition and pricing pressures over the past several years. The results of operation of the Electrical Business have also been materially adversely affected by the economic slowdown and political instability in Israel. As a result and in order to enable the Company to focus on the Network Business, the Company sold the Electrical Business, effective as of March 31, 2001. See "ITEM 8B - SIGNIFICANT CHANGES." C. ORGANIZATIONAL STRUCTURE The following is a list of the Company's direct and indirect significant subsidiaries as of June 30, 2002:
NAME OF SIGNIFICANT PERCENTAGE OF OWNERSHIP INTEREST SUBSIDIARY/AFFILIATE COUNTRY OF INCORPORATION AND VOTING (1) Marnetics, Ltd. Israel 100% Marnetics, Inc. (a subsidiary of Marnetics Ltd.) Delaware, USA 100% Speedwise Technologies Ltd. (an Israel 13.12% affiliate of Marnetics Ltd.)(2)
18 (1) On fully diluted basis. (2) The Company holds 450,000 Ordinary Shares of Speedwise Technologies Ltd. Nulan Technologies, Ltd., an Israeli subsidiary of the Company, was transferred to the purchaser of the Electrical Business as of March 31, 2001. D. PROPERTY, PLANTS AND EQUIPMENT During the year 2000, our offices were located at a leased facility in Moshav Batzra, Israel. The facility consisted of a building of approximately 469 square meters and a parking lot of approximately 543 square meters. A portion of the building served as the Company's offices and the remaining portion served as a warehouse for storing tools and inventory. The rent expense for the facility throughout the year 2000 was approximately $2,175 per month, plus Israeli value added tax. As of December 20, 2000, we relocated our headquarters to a facility in Ra'anana, Israel, leased by the subsidiary - Marnetics Ltd. The facility consists of approximately 232 square meters. The lease expired on May 30, 2002 and was renewed until April 30, 2003. The rent expense for the facility is currently approximately US $2,436 per month, plus Israeli value added tax. As part of sale of the Company's electrical operations as described in "Item 8B - Significant Changes", all rights and obligations of the Company regarding the facility in Batzra were assigned to the purchaser of the Company's Electrical Business, Idan Millennium Investments and Assets Ltd., as of March 31, 2001. ITEM 5. OPERATIONS AND FINANCIAL REVIEW AND PROSPECTS The following contains forward-looking statements, which involve risks and uncertainties. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors. The following discussion and analysis of financial condition and results of operations should be read along with the accompanying Consolidated Financial Statements for the year ended December 31, 2001. See "ITEM 8A - - FINANCIAL INFORMATION". These reports are presented in United States dollars and have been prepared in accordance with US GAAP. A. OPERATING RESULTS OVERVIEW Marnetics Broadband Technologies Ltd. (formerly Stav Electrical Systems (1994) Ltd.) (the "Company" or "Stav") was engaged in the manufacture, installation and maintenance of electrical and lighting systems, mainly for public institutions and in the development of Internet performance enhancement solutions through its wholly owned subsidiary Marnetics Ltd. The Company's operations during 2001 consisted of two lines of business: (1) core business of developing and marketing broadband Internet fortification solutions which shifted to the development and marketing of network capacity enhancement and network information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd., and (2) historical business of electrical and lighting contracting and engineering business or the Electrical Business, which was sold during 2001 On June 1, 2000, a share exchange agreement was signed between the Company and Marnetics Ltd. The agreement was consummated after final approval of the Company's shareholders on December 31, 2000. The fair value of Stav shares, US$ 11,314,280 was determined on the basis of the average market price of its outstanding shares US$ 8.00. Goodwill in the amount of $11,309,000 was recorded accordingly. The acquisition of Marnetics by the Company was accounted for as a reverse acquisition. As the shareholders of Marnetics (as a group) received the largest ownership interest in the Company, Marnetics was determined to be the "accounting acquirer" in the reverse acquisition. As a 19 result, the historical financial statements of the Company (prior to December 31, 2000) were replaced with the historical financial statements of Marnetics. The statement of operations for 2001 includes the operations of the Company and of Marnetics. The statements of operations for 2000, and 1999 include only the results of operations of Marnetics. The December 31, 2001 and December 31, 2000 balance sheet includes the consolidated accounts of the Company and Marnetics. Marnetics has a limited operating history and is subject to risks, expenses and uncertainties frequently encountered by companies in the new and rapidly evolving markets for network capacity enhancement products and services. During 2000, Marnetics raised US$ 7.04 million from new investors and recruited additional employees. During 2001, Marnetics continued to increase its research and development activities and shifted its core business from developing and marketing Internet performance enhancement solutions to the development and marketing of IP network, capacity analysis solutions. Marnetics has a limited operating history and has sustained losses since its inception. Marnetics anticipates that both the losses and negative operating cash flow will continue to increase during the foreseeable future until Marnetics develops a customer base that will generate sufficient revenues to fund operating expenses. Since its inception in June 1998, through December 31, 2001, Marnetics has incurred cumulative losses of $21,312,000 and cumulative negative operating cash flows of $5,353,000. During 2001, in view of the markets downstream, the Company assessed the value and future benefit of its enterprise level goodwill pursuant to Accounting Principles Board Opinion No. 17, "Intangible Assets" ("APB 17"). The result of the assessment was a full write-off of the goodwill in the amount of $9,309,000. On June 10, 2001, the Company executed an agreement, effective March 31, 2001, to sell, it's Electrical Business, including certain related liabilities, to Idan Millenium Investments and Assets Ltd, wholly-owned by the Company's former chief executive officer and current major stockholder, Dov Strikovsky. Mr. Strikovsky was the sole bidder in a public request for proposals, which was announced on May 15, 2001 and ended on May 30, 2001. The Board of Directors considered the purchase offer and authorized the Company's acceptance of the Purchaser's bid. The sale was for all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000, commencing February 1, 2002. In May 2002 the Company signed an addendum with Idan Millenium Investments and Assets Ltd to change the terms of payments to such that the first 11 installments will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. As of July, 2002, Idan Millenium Investments and Assets Ltd. paid the first four installments. The loss from operation of the discontinued activities in the Electrical Business was $450,000. The loss on the sale of the Electrical Business was $2,278,000. As of June 30, 2002, Marnetics Ltd. holds 13.12% of the outstanding shares of Speedwise Technologies Ltd. ("Speedwise"), an Israeli hi-tech company established in July 1999. The holdings in Speedwise do not currently impose any obligations on Marnetics. Speedwise is actively seeking additional funds to enable it to continue its operations through the end of the year. If such additional funds will not be available for Speedwise or if a business combination is effected with Speedwise reflecting a lower value for Speedwise than the carrying amount, some or all of the Company's investment may not be recoverable. Further, the Company executed on March 24, 2002 an anti dilution agreement as a result of a proposed investment by an investor which would significantly dilute the holdings of the Company in Speedwise Technologies. The investment did not take place. Speedwise is negotiating new alternatives of fund raising or business combination that could result, if effected, a significant dilution to Marnetics holding in Speedwise. Marnetics decided not to participate in the current fund raising made by Speedwise. 20 YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 Operating Revenues Company had no sales in either the years ending December 31, 2000 or December 31, 2001. Commercialization of the products started in second quarter of 2002. Operating Expenses Research and Development expenses consisted primarily of salaries and related expenses. Research and Development expenses increased from $252,000 in the year ending December 31, 2000 to $812,000 in the year ending December 31, 2001. The increase was primarily due to Company's expansion of its research and development activities. Selling and Marketing expenses consisted mostly of salaries and rose from $142,000 at the end of December 31, 2000 to $310,000 at the end of December 31, 2001, due to initialization of business development efforts. General and Administrative expenses consisted primarily of salaries and related expenses for administrative and executive staff, fees for professional services, and general office and rent expenses. General and Administrative expenses increased from $722,000 in the year ending December 31, 2000, to $1,128,000 in the year ending December 31, 2001. The increase was primarily due to the recruiting and hiring of additional employees and due to increased professional and consulting fees. The Company established a provision for legal claims in the amount of $750,000 to provide for its possible legal exposure. The Company was named as a defendant in a claim for specific performance of an agreement, allegedly entered into by the Company and the plaintiff in April 1999, as well as damages as a result of a breach of this alleged agreement. On July 2, 2001, due to the fact that no defense and/or reply were provided by the Company, judgment was entered against the Company in the amount of $725,000. On February 7, 2002 the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company is in the process of filing an appeal on the court decision. See "ITEM 8A - LEGAL PROCEEDINGS". On June 1, 2000, a share exchange agreement was signed between the Company and Marnetics Ltd. The fair value of Stav shares, US$ 11,314,280 was determined on the basis of the average market price of its outstanding shares at US$ 8.00 per share. Goodwill in the amount of $11,309,000 was recorded accordingly. During 2001, in view of the markets downstream, the Company assessed the value and future benefit of its enterprise level goodwill pursuant to Accounting Principles Board Opinion No. 17, "Intangible Assets" ("APB 17"). See "ITEM 18 FINANCIAL STATEMENTS - NOTE 1 & 3B". The result of the assessment was a full write-off of the goodwill in the amount of $9,309,000. At December 31, 2001 the Company reassessed the collectibility of the loan given to Mr. Dov Strikovsky, a major shareholder and former CEO of the Company, in the amount of $1,228,000 in accordance with provisions of SFAS No. 114 "Accounting by Creditors for Impairment of a Loan", and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. See "ITEM 7B - RELATED PARTY TRANSACTIONS - LOANS TO SIGNIFICANT SHAREHOLDER AND FORMER DIRECTOR AND CEO". Non-cash Compensation includes the amortization of unearned employee stock-based compensation and expenses for options granted to a related party. Stock-based compensation expenses are amortized over the vesting schedule of the option, typically four years, using the straight-line approach. During the year ending December 31, 2001, Company recorded an aggregate unearned stock-based compensation of $60,000. Stock-based compensation included in operating expenses totaled 21 $805,000 in the year ending December 31, 2001 compared to $2,408,000 in the year ending December 31, 2000. Financial Income Net financial income in the year ending December 31, 2000 and the year ending December 31, 2001 was $167,000 and $175,000, respectively. These items consist of interest earned on bank deposits and gains and losses from a re-measurement of monetary balance sheet items resulting from transactions in non-dollar currencies. Share in losses of Affiliate Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd ("Speedwise"). In September 2000, Speedwise issued shares to a third party resulting in a decrease in the Company's holdings in Speedwise to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 15%. During the year ending December 31, 2000 the Company followed the equity method and shared in the losses of the affiliate in the amount of $639,000. Effective January 1, 2001, the investment is carried at cost, and therefore, the Company does not share in any losses of the affiliate in the year ending December 31, 2001. Discontinued Operations On June 10, 2001, the Company executed an agreement, effective March 31, 2001, to sell, it's Electrical Business, including certain related liabilities, to Idan Millenium Investments and Assets Ltd, wholly-owned by the Company's former chief executive officer and current major stockholder, Dov Strikovsky. The company recorded a loss on the sale in the sum of $2,278,000. The company recorded the loss from the Electrical Business for the first quarter of 2001 as a discontinued operation resulting in a loss of $450,000. Net Loss Net loss in the year ending December 31, 2000 and the year ending December 31, 2001 was $3,996,000 and $16,895,000, respectively. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 Operating Revenues As Marnetics' products were still in the development phase and had not begun commercialization, Marnetics had no sales in either the years ending December 31, 1999 or December 31, 2000. Operating Expenses Research and Development expenses consisted primarily of salaries and related expenses and sub-contractor expenses. Research and Development expenses increased from $33,000 in the year ending December 31, 1999, to $252,000 in the year ending December 31, 2000. The increase was primarily due to Marnetics resumption of its research and development activities after Marnetics obtained equity financing in the first quarter of 2000. Selling and Marketing expenses consisted mostly of salaries and rose to $142,000 at the end of December 31, 2000, due to initialization of business development efforts. General and Administrative expenses consisted primarily of salaries and related expenses for administrative and executive staff, fees for professional services, and general office and rent expenses. General and Administrative expenses increased from $44,000 in the year ending December 31, 1999, to $722,000 in the year ending December 31, 2000. The increase was primarily due 22 to the recruiting and hiring of additional employees and due to increased professional and consulting fees. Non-cash Compensation includes the amortization of unearned employee stock-based compensation and expenses for options granted to a related party. Stock-based compensation expenses are amortized over the vesting schedule of the option, typically four years, using the straight-line approach. During the year ending December 31, 2000, Marnetics recorded an aggregate unearned stock-based compensation of $1,836,000. Stock-based compensation included in operating expenses totaled $2,408,000 in the year ending December 31, 2000, compared to no such expenses in the year ended December 31, 1999. Financial Income Net financial income in the year ending December 31, 1999 and the year ending December 31, 2000 was $9,000 and $167,000, respectively. These items consist of interest earned on bank deposits and gains and losses from a re-measurement of monetary balance sheet items resulting from transactions in non-dollar currencies. Share in Losses of Affiliates Until September 2000, the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd ("Speedwise"). In September 2000, Speedwise issued shares to a third party resulting in a decrease in the Company's holdings in Speedwise to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 15%. During the years ending December 31, 2000 and December 31, 1999 the Company followed the equity method and shared in the losses of the affiliate in the amount of $639,000 and $21,000 respectively. Net Loss Net loss in the year ending December 31, 1999 and the year ending December 31, 2000 was $117,000 and $3,996,000, respectively. B. LIQUIDITY AND CAPITAL RESOURCES To date, the Company has funded its operations through equity investments and bank credit lines. During the year 2000 Marnetics issued shares in consideration of $7,298,000. On December 31, 2001, the Company had $2.4 million of cash and cash equivalents compared to $6.5 million at December 31, 2000. The decrease is mostly due to cash used to finance the operation activities in the amount of $4.1 million. As of December 31, 2001, the Company had no significant bank credit lines and is financing its activity based only on equity resources. The Company's capital requirements have been, and will continue to be, significant and its cash requirements could exceed cash flow from operations. As a result, the Company may become dependent on bank credit lines and sales of its securities to fund its development and activities. Net cash used in operating activities in 1999, 2000, and 2001 was $124,000, $872,000, and $4,120,000, respectively. Since the Company has not generated any revenues to date, it must use its working capital to fund its research and development, marketing, sales general and administrative expenses. The Company had as of December 31, 2001 a working capital of $1,596,000, compared to a working capital of $4,925,000 as of December 31, 2000. The Company's cash and cash equivalents are generally held in short term bank deposits. 23 During the year 2001 the Company entered into an agreement with Bank Hapoalim Ltd in respect to the Company's short-term credit borrowed from the Bank in the amount of $3,127,000. In accordance with the Bank agreement, the Bank has agreed to release the Company from its obligation and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, the Company shall pay $954,000 to the Bank on account of the Debt and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount. See "ITEM 7B - ASSIGNMENT OF BANK DEBT". Failure to collect the total amounts, or part of it, from Idan Millenium Investments and Assets Ltd., Mr. Dov Strikovsky and the municipality of Hod Hasharon could have a negative impact on the company future cash flow and liquidity. See "ITEM 3D - RISK FACTORS - RISKS RELATING TO COLLECTION OF DEBT BY THE COMPANY". C. RESEARCH AND DEVELOPMENT As the Company is in the stage of commercialization of products developed in years 2001 and 2002, it anticipates that a significant amount of its operating expenses will be expended in the area of research and development. Research and Development expenses increased from $33,000 in the year ending December 31, 1999, to $252,000 in the year ending December 31, 2000, to $812,000 in the year ending December 31, 2001. The increase was primarily due to Marnetics expansion of its research and development activities, hiring additional staff, and purchase of equipment and software. The main targets of the research and development department for the year 2002 are to commercialize new versions of the Prospera(TM) platform and to develop additional network related solutions. In May 2002, Marnetics Ltd. submitted to the OCS a request to obtain research and development funding in the sum of $250,000 from the Office of the Chief Scientist, of the Ministry of Industry of Trade, of the State of Israel ("OCS") for development of products for the Prospera(TM) platform. There is no certainty that the application will be approved, and if approved, what conditions the OCS will demand of Marnetics Ltd. and if this would be acceptable to management. D. TREND INFORMATION The market for network capacity enhancement solutions is in an early stage of development and its success is not guaranteed. Therefore, we cannot accurately assess the size of the market, the products needed to address the market, the optimal distribution strategy, or the competitive environment that will develop. In order for us to be successful, our potential customers must recognize the value of our new approach to bandwidth management solutions, and decide to invest in the management of their networks and the performance of mission critical applications. The growth of the network capacity enhancement solutions market also depends upon a number of factors, including the availability of inexpensive bandwidth, especially in international markets, and the growth in complexity of WAN and the CapEx of enterprises. RECENTLY ISSUED ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for transitional goodwill 24 impairment test six months from the date of adoption. The Company does not believe that the adoption of SFAS 142 will have a significant impact on its financial statements. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"), which is effective for years beginning after June 15, 2002, which will be the Company's fiscal year 2003. FAS 143 addresses legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Any associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset and expensed over the life of the asset. The Company does not believe that the adoption of SFAS 143 will have a significant impact on its financial statements. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company has not yet determined what the effect of FAS 144 will be on the earnings and financial position of the Company. ITEM 6. DIRECTORS, SENIOR MANAGERS AND EMPLOYEES A. DIRECTORS AND SENIOR MANAGEMENT The following is list of our directors and senior management, as of June 30, 2002, followed by a description of their business background: NAME AGE POSITION* ---- --- --------- Moshe Kessner...................52 Director Pekka Roine.....................57 Director Moshe Rubin.....................50 External Director Yossi Shelly....................44 External Director Menachem Reinschmidt............42 Director, CEO Joshua Piasetzky................54 Director David Sheetrit..................40 Chief Operating Officer Ilan Hadar......................37 Chief Financial Officer Hanoch Newman...................37 Vice President - Research and Development Todd Kedes......................36 Regional Sales and Marketing Director Ofer Chermesh...................36 Regional Sales and Marketing Director * Jacob Ben-Gur, Chairman of the Board of the Company, announced his resignation from the position of Chairman of the Board of Director at a Company board meeting on January 31, 2002, due to his heavy work load and other duties other than as Chairman and Director of the Company. He officially resigned on June 5, 2002. Since the resignation of Mr. Ben-Gur, the Company does not have a permanent Chairman of the Board. MOSHE KESSNER, Director of the Company since December 2001, and a Director of Marnetics Ltd. since July 2002. Mr. Kessner is VP Technology of Kardan Communication Ltd. a company investing in the area of telecommunications. Prior to joining Kardan Communications, Mr. Kessner was Associate Vice President Business Development, ECI Telecom Ltd. (NASDAQ: ECIL), a telecom equipment vendor, which holds a 12.84% stake in the Company. In this capacity, he was involved in the investment strategy and investment companies of ECI Telecom. Prior to joining ECI in 1999, Mr. Kessner was Vice President Technology and Business Development of Tadiran Telecommunications Ltd. He served as Lieutenant Colonel in the Israel Defense Forces as Chief Research Engineer in the Signal Corp, involved in developing the computer security standards and 25 several strategic and tactical communication systems. He learned the courses needed for a M.Sc. in Computer Science and holds a B.Sc. in Electrical Engineering. PEKKA ROINE, Director of the Company and Director of Marnetics Ltd. since July 2002, joined Prime Technology Ventures in 1999 as a General Partner. Pekka has served as chairman or director of numerous technology companies, including Solid, VistaCom, Metorex, AudioSoft, Buscom, Idesco, and Tunturi. He is also a founder of the Health On the Net foundation. Previously, Pekka held senior executive positions at Digital Equipment Corporation for 22 years including General Manager Finland, and he was the corporate director worldwide for the Travel and Transportation Industry. He holds an M.Sc and a B.Sc in Physics from the University of Helsinki in Finland. He is also a graduate of the Stanford Executive Program. MOSHE RUBIN, External Director of the Company since 1999, currently serves as a Financing Consultant for the Jerusalem branch of Pama Car Financing. For 15 years, he operated the Dihatsu car dealership, which he opened in Herzliya. He has also sold used cars, car parts and accessories, as well as worked in car maintenance. YOSSI SHELLY, External Director of the Company since 1999, is Managing Director of S. Alexander Ltd. Investment & Consulting firm, based in Beer-Sheva, Israel. During Mr. Shelly's career, he has served on many boards of directors of corporations and organizations. For nearly a decade, he held various posts within the Municipality of Beer-Sheva as well as being Chairman, and is currently acting COB of the Israeli Postal Authority. Prior to his career in management and consulting, Mr. Shelly served in the Israel Defense Forces for 17 years, dedicating most of his service as the commander of the Computerized Recruitment Center and concluding his service as a Personnel Officer in the Armored Corps. He retired as a Major. He holds a B.Sc. in Industrial Engineering and Management and is currently studying for a degree in law. MENACHEM REINSCHMIDT, Director of the Company since 2001, Director of Marnetics Ltd., and Director of Marnetics, Inc, is currently Chief Executive Officer of the Company and currently oversees all technology development activities of the Company. Mr. Reinschmidt established Marnetics in 1998, and was the first Chief Executive Officer of Marnetics. One of the leading data communication experts in Israel, Mr. Reinschmidt has 17 years of experience in the most advanced fields of computer networks, including design, analysis, integration and development. His expertise incorporates advanced networking topics, including frame relay, TCP/IP, Internet architecture, ATM, Local Area Networks, routers and switches, voice-over IP, etc. Prior to founding Marnetics, from 1993 to 1997 Mr. Reinschmidt was President of ATLan, a software development company located in Tel Aviv. He is a lecturer and the author of the Hebrew bestseller Local Area Networks for PC and Compatibles. JOSHUA PIASETZKY, Director of the Company since 2001 and a Director of Marnetics Ltd. since July 2002, is Senior Vice President and Chief Technical Officer of ECI Telecom Ltd. (NASDAQ: ECIL), a telecom equipment vendor, which holds a 12.84% stake in the Company. He is also a director in several of the subsidiaries of ECI Telecom Ltd. and co-founder of AxONLink. Joshua has been one of the key contributors to the growth and success of ECI Telecom - from annual sales of about 2M$ when he joined the company in 1975, to over 1B$ at present. He conceived several of ECI Telecom's most successful products. Joshua has actively participated in several ITU and ETSI Committees. He is also one of the founders and the chairman of the Broadband MAGNET Consortium in Israel, which developed various advanced technologies, in the area of broadband telecommunications. Joshua holds a B.Sc. and M.Sc. degree in Electrical Engineering from the Technion - Israel Institute of Technology - Haifa. He is also an Israel Patent Attorney and a number of United States, European and Israeli patents are registered in his name. In 1982, Joshua won the Rothschild Prize for Innovation and Export. DAVID SHEETRIT, Chief Operating Officer, has served as the Company's Acting Chief Executive Officer and Chief Operating Officer during 2001, and also served as Director of Marnetics Ltd. Mr. Sheetrit serves also as a Director of Marnetics Inc. Before joining Marnetics, Mr. Sheetrit was Head of the Tel Aviv Branch of the College of Management since 1995. In this capacity he supervised the operations, investments, marketing activities and academic programs of the College, which is comprised of 3,000 students and 200 faculty and staff. Mr. Sheetrit has lectured at various 26 colleges and academies and served as an independent organizational and business consultant to various organizations and institutions. ILAN HADAR, Chief Financial Officer of the Company and serves as Director of Marnetics, Inc. Mr. Hadar is responsible for financial management and control and has been with the Company since May 2002. Mr. Hadar possesses ten years of experience in financial management positions with particular expertise in facilitating IPOs, M & A and maintaining shareholder and investor relationships. Additionally, Mr. Hadar has extensive experience in managing the operations of publicly traded enterprises in various operating sectors. Prior to joining the Company, Mr. Hadar served as the CFO of Kardan Technologies Ltd (TASE: KRTC) where he participated in the team that led the IPO of the company. Mr. Hadar was also a member of the investment activities team of the company in the e-commerce sector. Prior to Kardan Technologies Mr. Hadar spent several years with Nessuah Zannex Ltd. (TASE: NESU), a leading Israeli full service brokerage house, the Israeli representative of US Bancorp Piper Jaffray and Invesco. Mr. Hadar led the merger between Nessuah and Zannex to form the current structure of that company. Mr. Hadar is a Certified Public Accountant (Israel and USA) and holds M.B.A. in Finance and B.A. in Economics & Accounting from the Hebrew University in Jerusalem. HANOCH NEWMAN, Vice President Research and Development, joined Marnetics in June 2000 as its Vice President of Research and Development. He is a specialist in real-time systems, embedded systems, UNIX/WIN, C++/C communication, and device drivers. He also has vast experience in computer programming, with expertise in TCP/IP and other Internet and Communication protocols, as well as system management. His past experience includes serving as Project Manager at Elron Software NCC from 1999 to 2000, R&D Manager at CT Motion (start-up) from 1998 to 1999, and CTO and MIS in the Israeli Air Force for five years prior thereto. He holds a B.A. in Computer Sciences. TODD KEDES, Regional Sales and Marketing Director. Mr. Kedes joined the Company in May 2002 brings to Marnetics an experienced international business development, marketing and sales background combining over twelve years diverse and progressive responsibilities in hi-tech datacom, telecom, hardware and software products and services, as well as consumer products. Prior to Marnetics, Mr. Kedes worked with Tel Aviv-based Magna Capital, a management-consulting group, where he played key roles in myriad international business development projects for clients such as Tnuva, Rabintex and Shrem Fudim Kellner. Mr. Kedes also provided independent marketing and sales consulting services to Nicosia Cyprus-based Net Planet Earth, a satellite backbone service provider. Prior to Magna Capital and independent management consulting, Mr. Kedes successfully pursued a hi-tech career in Israel, including: most recently, Director of Sales at Harmonic Data Systems for EMEA territories; International Sales Manager at Comverse Network Systems (later known as StarHome); Tegrity, as Regional Sales Manager; and, Executive Marketing Director at Geo Interactive Media Group, Ltd. (later known as Emblaze). Prior to Israel, Mr. Kedes ran his own business, TRGA, as President and Founder, importing and distributing consumer products from China, Italy and France and distributing them to retailers and wholesale distributors in Southern California and Nevada. Mr. Kedes holds an MSBA (Dean's List) - 1993 - and MBA (Dean's List) - - 1992 - in International Marketing, Operations Management and Venture Management from the University of Southern California and a BA - 1988 - in General and Cultural Anthropology from the University of Pennsylvania. Mr. Kedes is business-level proficient in five languages. OFER CHERMESH, Regional Sales and Marketing Director. Mr. Chermesh joined the Company in April 2002, and has over 10 years of experience in Sales, Marketing and Business Development. In his previous position Mr. Chermesh was part of Comverse's Advanced Solution Group (ASG), where he was responsible for selling new Comverse products to existing and potential new customers. Prior to Comverse, Mr. Chermesh was a co-founder of an Israeli-start up company, where he played a key managerial role and was responsible for overall Sales, Marketing & Business Development activities. Mr. Chermesh holds a B.A. in Statistics from Haifa University in Israel. 27 TERM AND RIGHTS TO DESIGNATE BOARD MEMBERS The Articles of Association of the Company provide that each director is elected for a period of one year at the Company's annual meeting of shareholders and serves until the next such meeting or until his or her successor is duly elected and qualified. Directors may be re-elected annually without limitation. The Company's directors, with the exception of two external directors representing the public (who are paid in accordance with the provisions of the Companies Law, as defined below), do not currently receive any compensation for their services as directors. Certain shareholders and option-holders of the Company the right to nominate and, pursuant to shareholder agreements, have elected their designees for the Company's Board of Directors. Until November 25, 2001, ISG Solid Capital Markets, LLC, the representative of several investors in our initial public offering, had the right, at its option, to designate one director to the Board of Directors, which director will be reasonably acceptable to the Board of Directors. The Company had agreed to pay such director or non-voting advisor an attendance fee of $1,500 per meeting of the Board of Directors. There currently is no such designated member of the Board and accordingly the right has expired. The former Marnetics Subsidiary shareholders agreed that they will vote in favor of certain nominees for Director of the Company as follows: (i) two nominees designated by ECI Telecommunications Ltd., (ii) one nominee designated by STI Ventures Investments No. 2 B.V. and (iii) one nominee designated collectively by Prime Technology Ventures NV, Docor International BV and Ronchal Investments NV. To date, STI Ventures Investments No. 2 B.V. has not yet designated a nominee for the Company's board and ECI has only designated one director nominee. ALTERNATE DIRECTORS The Articles of Association of the Company provide that any director may, by written notice to the Company, appoint another director or any other person to serve as an alternate director, and may cancel such appointment. An alternate director has the number of votes equivalent to the number of directors who appointed him. The term of appointment of an alternate director may be for one meeting of the Board of Directors or for a specified period. EXTERNAL DIRECTORS Under the Israel Companies Law (the "COMPANIES LAW"), public companies are required to elect two external directors who must meet specified standards of independence. Companies that are registered under the laws of Israel and whose shares are listed for trading on a stock exchange external of Israel, such as the Company, are defined as public companies and under such definition are subject to the requirement of electing two external directors. An external director may not have had during the previous two years any economic relationship with the Company. Controlling shareholders of a company, 50% shareholders, and their relatives or employees cannot serve as external directors. External directors are elected by shareholders. No individual shall be appointed as an external director if his other positions or affairs create or are liable to create a conflict of interest with his position as director, or if they are liable to constrain his ability to serve as director. The shareholders voting in favor of their election must include at least one-third of the shares of the non-controlling shareholders of the Company who are present at the meeting. This minority approval requirement need not be met if the total shareholdings of the non-controlling shareholders who vote against their election represent 1% or less of all of the voting rights in the Company. Under the Companies Law, external directors serve for a three-year term, which may be renewed for only one additional three-year term. Our two external directors Messrs. Rubin and Shelly were appointed on October 4, 1999 before the adoption of the Companies Law and under the previous Israeli corporate laws. Pursuant to the provisions of the Companies Law an external director appointed in accordance with the provisions of the former corporate governance law shall be deemed an external director appointed in accordance with the provisions of the Companies Law however the term of appointment shall be for a five-year period therefore the external directors of the Company shall remain in office until 2004. 28 Under the Companies law, external directors can be removed from office only by the same special percentage of shareholders as can elect them, or by a court, and then only if the external directors cease to meet the statutory qualifications with respect to their appointment or if they violate their duty of loyalty to the Company. If, when an external director is elected, all members of the board of directors of a company are of one gender, the external director to be elected must be of the other gender. Any committee of the board of directors must include at least one external director. An external director is entitled to compensation as provided in regulations adopted under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service. LIABILITY OF OFFICERS AND DIRECTORS The Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his duty of loyalty, but may exculpate in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care. The Company's Articles of Association provide that, subject to any restrictions imposed by corporate law, the Company may enter into a contract for the insurance of the liability of any of the Company's office holders with respect to an act performed by him in his capacity as an office holder and regarding: o a breach of his duty of care to the Company or to another person; o a breach of his duty of loyalty to the Company, provided that the office holder acted in good faith and had a reasonable basis to assume that his act would not prejudice the Company's interests; or o a financial liability imposed upon him in favor of another person. In addition, the Company may indemnify an office holder against: o a financial liability imposed on him in favor of another person by any judgment, including a settlement or an arbitrator's award approved by a court in respect of an act performed in his capacity as an office holder; and o reasonable litigation expenses, including attorneys' fees, expended by such office holder or charged to him by a court, in proceedings the Company institutes against him or instituted on the Company's behalf or by another person, or in a criminal charge from which he was acquitted, or a criminal charge for which he was convicted, providing such charge does not require proof of criminal intent. These provisions are specifically limited in their scope by the Companies Law, which provides that a company may not indemnify an office holder, nor enter into an insurance contract, which would provide coverage for any monetary liability incurred as a result of any of the following: o a breach by the office holder of his duty of loyalty unless the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company; o a breach by the office holder of his duty of care if such breach was done intentionally or in disregard of the circumstances of the breach or our consequences; o any act or omission done with the intent to derive an illegal personal benefit; or o any fine levied against the office holder. 29 Under the Companies Law, the Company's shareholders may amend the Articles of Association to include either of the following provisions: o A provision authorizing the Company to grant in advance an undertaking to indemnify an office holder, provided that the undertaking is limited to types of events which the board of directors deems to be anticipated and limited to an amount determined by the board of directors to be reasonable under the circumstances; or o A provision authorizing the Company to retroactively indemnify an office holder. In addition, pursuant to the Companies Law, approval of the Company's audit committee and the Company's Board of Directors and, in specified circumstances, by the Company's shareholders, must be obtained for the indemnification of, and procurement of insurance coverage for, the Company's office holders for the following actions: o breach of duty of care by any office holder owed to the Company or any other person; o breach of fiduciary duty by any office holder owed to the extent that such office holder acted in good faith and had a reasonable basis to assume that the action would not prejudice the Company; and o any financial liability imposed on any office holder for the benefit of a third party as a result of any act or omission such office holder committed as an office holder of the Company. As a result of a Shareholders Resolution dated September 14, 2001, the Company has entered into an indemnification agreement with the officers and directors of the Company as of December 2001 and intends to enter into an agreement with each new director, subject to shareholder approval. Such agreements contain provisions which endeavor to limit the personal liability of the officers and directors, both to the Company and to our shareholders, for monetary damages resulting from breaches of certain of their fiduciary duties as directors and officers of the Company. In particular, such agreements provide that the Company will indemnify such individuals to the fullest extent permitted by the Companies Law, as such rights shall from time to time be amended or limited, against all expense, liability, and loss reasonably incurred or suffered by the indemnitee as a result of serving as an officer or director or employee of the Company, or any affiliate thereof or any other entity at the request of the Company. In addition, the Company has obtained reimbursement indemnity insurance to reimburse directors and officers of the Company for losses sustained as a result of any claim arising from a wrongful act, individually or collectively, in the discharge of their duties or in breach of their fiduciary duties solely in their capacity as officers and directors of the Company, and to reimburse the Company for losses sustained as a result of any claim arising from any such wrongful act where an indemnity has been given or lawfully is required to be given to officers or directors of the Company. Consequently, under the Company's Amended Articles of Association, the Company may indemnify its officers and directors for financial obligations imposed on them in favor of a third party by a court judgment, including a compromise judgment or a court-approved arbitrator's decision, as well as for concomitant reasonable legal expenses, including attorney's fees, as a result of any claim arising from a wrong act in the discharge of their duties in their capacity as officers or directors of the Company which could materially adversely affect the business, prospects, financial condition, or results of operations of the Company. Furthermore, the ability of United States shareholders to recover monetary damages from officers and directors of the Company for certain breaches of their fiduciary duties may be significantly limited. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to officers, directors, and controlling persons of the Company pursuant to the foregoing provisions or otherwise, the Company has been advised that in the opinion of the U.S. Securities and 30 Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable in the United States. B. COMPENSATION The Company's directors do not currently receive any compensation for their services as directors. In addition, under the Companies Law, external directors are entitled to annual compensation plus per meeting attendance fee. The Company currently pays its external directors an annual fee of US $3,000 and per meeting attendance fee of US $185. Every two telephone conference calls are considered one meeting. Mr. Yossi Shelly also receives travel expenses of fifty cents per kilometer. The Company intends to grant Mr. Moshe Kessner, who is a member of the board of directors of the Company and in light of his services to the Company, options to purchase 36,000 Ordinary Shares of the Company, which shall vest over a period of 12 months from the date of his nomination. C. BOARD PRACTICES See "ITEM 6A - DIRECTOR AND SENIOR MANAGEMENT" for period that our directors and senior management are serving. COMMITTEES OF THE BOARD OF DIRECTORS - AUDIT COMMITTEE The Companies Law also provides that public companies must appoint an audit committee. The responsibilities of the audit committee include identifying irregularities in the management of the Company's business and approving related-party transactions as required by law. An audit committee must consist of at least three members, and include all of the Company's external directors. However, the chairman of the board of directors, any director employed by the Company or providing services to the Company on a regular basis, any controlling shareholder and any relative of a controlling shareholder may not be a member of the audit committee. An audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two external directors are serving as members of the audit committee and at least one of the external directors was present at the meeting in which an approval was granted. In addition, the Companies Law requires the board of directors of a public company to appoint an internal auditor nominated by the audit committee. A person who does not satisfy the Companies Law's independence requirements may not be appointed as an internal auditor. The role of the internal auditor is to examine, among other things, the compliance of the Company's conduct with applicable law and orderly business practice. Following the combination transaction between the Company and Marnetics, Ltd., the Company has decided to appoint a new internal auditor whose candidacy will be recommended by the Audit Committee and approved by the Company's Board of Directors. The Company has an audit committee that consists of Yossi Shelly, Chairman, Moshe Rubin and Pekka Roine. The audit committee exercises the powers of the Board of Directors with respect to the Company's accounting, reporting and financial control practices. ADVISORY COMMITTEE In order to further the Company's progress in both marketing and technology, an Advisory Committee comprised of the following persons that represent both the technology and the investments made in the Company: Erez Aluf, representing STI Ventures Investments No. 2 B.V., Moshe Kessner, Joshua Piasetzky representing ECI Telecom Ltd, and Michael Schlesinger representing Docor International BV. These representatives do not have the power of board of director members but are advisory in nature to the management of the Company. D. EMPLOYEES As of June 30, 2002, the Company employed approximately 14 persons full-time and 2 persons part-time. 31 Israeli law, as well as collective bargaining agreements and orders of the Israeli Ministry of Labor and Welfare, contain provisions regarding conditions of employment, including, among other things, the length of the workday, minimum wages, insurance for work-related accidents, the determination of severance pay, and adjustments of wages in accordance with inflation. The Company generally provides our employees with benefits and working conditions at or above the required minimums. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Since January 1, 1995, such amounts have included payments for national health insurance. The payments to the National Insurance Institute are approximately 14.6% of wages, of which 4.9% are contributed by the Company pursuant to Israeli law requirements, and the rest, 9.7%, by the employee. Most of the Company's employees are insured through a Managers' Insurance Policy, which offers a combination of pension plans, insurance in cases of death and injury, and retirement and severance pay benefits. An amount equal to 5% of an employee's gross salary is contributed to the Managers' Insurance Policy by the Company and an additional 5% by the employee. Another component of up to 2.5% paid by the Company covers insurance for damages sustained by employees due to loss of work capability. An additional amount equal to 8.3% is funded by the Company to cover severance liability. In addition, most of the Company's employees have a "Keren Hishtalmut" saving plan pursuant to which the Company contributes an amount equal to 7.5% of the employee's salary and the employee contributes an amount equal to 2.5% of his salary. Obligations of the Company resulting from the termination of employer-employee relationships are primarily accounted for through allocations made on behalf of the employees to various compensation funds, pension funds, and insurance companies within the framework of Mivtahim and Managers' Insurance Policies. The wages of most of the Company's employees are linked to changes of the Israeli standard of living price index (CPI) as determined by the Israeli Bureau of Statistics. The total overhead expenses for wages in Israel are approximately 30%. As of June 30, 2002, the Company had no outstanding loans to employees and officers of the Company except to Mr. Dov Strikovsky, the former CEO, who is no longer employed by the Company but is a significant shareholder of the Company. See "ITEM 7B-RELATED PARTY TRANSACTIONS." E. SHARE OWNERSHIP See ITEM 7: "MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS." STOCK OPTION PLAN In connection with the June 1, 2000 share exchange agreement ("the agreement") signed between the Company and Marnetics, the Board of Directors of the Company adopted an unwritten Option Plan (the "Option Plan"). The Option Plan provides for the grant of options to purchase up to an aggregate of 1,000,000 Ordinary Shares to directors, key employees and consultants of the Company. The Board of Directors of the Company will determine the terms of the grants. Under the Option Plan, the Company granted, to a company under the control of the former CEO and chairman of the board of the Company, 400,000 fully vested options to purchase shares at the exercise price of $3. With respect to these options non-cash compensation expenses totaling $2,000,000 were recorded and charged to earnings in accordance with APB 25 "Accounting for Stock Issued to Employees". The Company's board of directors adopted a written stock option plan in its meeting of June 17, 2001. As of June 30, 2002, 397,208 options are allocated to employees on a fully diluted basis. In addition, former employees of Stav, have been allocated 157,143 options, which are fully vested. There remain 453,222 options that are unallocated. 32 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS A. MAJOR SHAREHOLDERS The following table identifies, as of June 30, 2002, certain information with respect to the beneficial ownership of securities of the Company of each person or entity by the Company to be the beneficial owner of five percent (5%) or more of the Ordinary Shares of the Company: NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER PERCENT(1) - ---------------- ------ ---------- Linkware Ltd.................................. 1,740,575(2) 18.82% 3 Hadror Street P.O. Box 73 Hod Hasharon 45100 Israel Dov Strikovsky................................ 1,015,714(3) 10.98% 83 Akiva Street Ra'anana, Israel ECI Telecommunications Ltd.................... 1,187,439(4) 12.84% 34 Hasivim Street Kiryat Aryeh Industrial Park Petach Tikva Israel STI Ventures Investments No. 2 B.V............ 1,180,907 12.77% Hullenbergweg 379 1101 Cr. Amsterdam Zuide - Oost The Netherlands Prime Technology Ventures NV.................. 630,550 6.82% Stroombaan 6-8 1181 VX Amstelveen, The Netherlands (1) The number of shares beneficially owned is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares that the individual has the right to acquire within 60 days after June 30, 2002, through the exercise of any stock option or other right. The inclusion herein of such shares, however, does not constitute an admission that the named shareholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares such power with his or her spouse, with respect to all shares of capital stock listed as owned by such person or entity. This does not include an unallocated pool (including prior to merger) of 453,222 options in the calculation of the percentages. (2) Includes 302,266 shares that may be acquired pursuant to options that are presently or will become exercisable within 60 days at an exercise price of par value per share. (3) Includes 580,000 shares that may be acquired pursuant to options with an exercise price of $3.00 per share, which are presently or will become exercisable within 60 days by O.S.I Limited which is controlled by a trust, the beneficiaries of which are family members of Dov Strikovsky. 33 (4) Does not include 567,500 shares that could have been acquired pursuant to an option with an exercise price of $2.992 per share that expired on August 30, 2001. There was no extension to the option. As of June 30, 2002, 1,008,809 Ordinary Shares of the Company were held of record in the United States. Such Ordinary Shares were held by five (5) record holders and represented 13.7% of the total Ordinary Shares then outstanding (10.9% on fully diluted basis). On June 30, 2002, 6,353,581 of the Ordinary Shares were held of record outside of the United States. Such shares were held by seventeen (17) record holders and represented 86.3% (89.1% on a fully diluted basis) of the total Ordinary Shares outstanding. Since 927,546 of these Ordinary Shares were held by brokers or other nominees, the number of record holders in the United States may not be representative of the number of beneficial holders or where the beneficial holders are resident. During 2001, 1,084,500 options granted to Marnetics certain shareholder were expired unexercised. According to the agreement such options have to be divided between the formers shareholder of Marnetics. The Company issued without consideration 955,057 shares and 129,433 options that were divided according to the agreement. B. RELATED PARTY TRANSACTIONS SALE OF ELECTRICAL BUSINESS Effective March 2001 the Company sold to Idan Millenium Investments and Assets Ltd., a company under the control of Mr. Strikovsky, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with Idan Millenium Investments and Assets Ltd to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. In addition, the Purchaser has also assumed approximately $715,000 of liabilities related to the Electrical Business. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. See "ITEM 8B - SIGNIFICANT CHANGES." SPEEDWISE TECHNOLOGIES LTD. In April 2001, Marnetics Ltd. entered into a software license agreement with Speedwise Technologies Ltd., a company in which Marnetics Ltd. owns 13.12% interest. See "ITEM 4B - LICENSING ARRANGEMENTS." In July 2001, Marnetics Ltd. entered into an OEM agreement with Speedwise Technologies Ltd., a company in which Marnetics owns 13.12% of its outstanding shares. See "ITEM 4B - CUSTOMERS." The OEM agreement was cancelled in November 2001. NETLOGIC LTD. In February 2002, Marnetics Ltd. entered into a services agreement with Netlogic Ltd., a company under the control of Menachem Reinschmidt, Director and CEO of the Company, and provides on a non-exclusive basis, executive managerial and other related services with respect to the Company, Marnetics Ltd. and any of its affiliated companies, as may be prescribed from time to time by the board of directors of Marnetics. 34 COMBINATION TRANSACTION Effective December 31, 2000, Stav Electrical Systems (1994) Ltd. acquired Marnetics Ltd. pursuant to the terms of that certain share exchange agreement among the Company, Marnetics Ltd. and the security holders of Marnetics Ltd. Upon the closing of that transaction, certain entities and individuals affiliated with the Company, including Dov Strikovsky, a principal shareholder and the former Chief Executive Officer of the Company or entities affiliated with Mr. Strikovsky, received options to purchase up to 400,000 Ordinary Shares of the Company. ASSIGNMENT OF BANK DEBT On May 9, 2001 an agreement was signed between the Company and Bank Hapoalim Ltd. ("Bank") with respect to the Company's debt to the Bank in the amount of $3,127,000 (the "Debt"). In accordance with the Bank agreement, the Bank has agreed to release the Company from its obligation to repay the Debt and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, by May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt (the "Repaid Amount") and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount. In addition, the Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon. Until May 31, 2002, the Bank committed not to claim the guaranty from the Company, but if legal procedures to collect the debt from the municipality of Hod Hasharon were to begin, the Bank has committed not to claim the guarantee from the Company until November 30, 2002. The Company will have to assess the financial impact on its financial statements in case the payment will not be done on time by the municipality of Hod Hasharon. INDEMNIFICATION BY SIGNIFICANT SHAREHOLDER 1. Following the Bank agreement, on June 30, 2001 an agreement was signed between Mr. Strikovsky and the Company pursuant to which Strikovsky agreed to reimburse the Company for the Repaid Amount and any additional amount that the Company may have to pay to the Bank if the Bank exercises the guarantee related to the debt of Hod Hasharon. The reimbursement amount of $954,000 is due and payable to the Company and will be paid in monthly installments of $48,000 commencing on June 1, 2004 until paid in full. All amounts due and payable to the Company are linked to the Israeli CPI and bear interest of 4% per annum. The reimbursement amount of $954,000 was not yet recognized as the probability of its realization is in doubt. 2. In connection with the Stav/Marnetics transaction and pursuant to an amendment to the share exchange agreement, Mr. Strikovsky granted an indemnification to the former shareholders of Marnetics Ltd. against certain losses or damages related to the Electrical Business and had deposited 200,000 shares of the Company held by him in escrow as security for his indemnification obligations. 3. During the audit of the financial statements of Stav Electrical Systems (1994) Ltd. for the year ended December 31, 2000, it was discovered that excess advances were paid to certain suppliers in the amount of $0.5 million. On June 30, 2001, Mr. Strikovsky, the Company and the former shareholders of Marnetics Ltd. entered into a separate indemnification agreement that further defined, clarified and expanded the terms of the initial indemnification, added indemnification obligations related to the bank debt assignment (as described above) and provided for an additional 100,000 shares of the Company held by Mr. Strikovsky to be held in escrow as security for such indemnification obligations. Under this indemnification agreement, Mr. Strikovsky agreed to: 35 o Reimburse the Company for US $954,000 which is the amount the Company has paid to the bank pursuant to the debt assignment described above, to be paid in monthly installments of US $48,000 commencing June 1, 2004 until paid in full. All amounts due and payable to the Company are linked to the Israeli CPI and bear interest of 4% per annum. The reimbursement amount of $954,000 was not yet recognized as the probability of its realization is in doubt; and o Guaranty the repayment of $0.5 million to the Company by certain suppliers of the Company in connection with excess advances made to such suppliers by the Company in the year-ended December 31, 2000. Such sum was paid to the Company in July 2001 by realization of bank guarantees in favor of the Company. o To indemnify the Company for any amount it may pay to Bank Hapoalim in the future under the guarantee granted by the Company in favor of the bank under the debt assignment or for any losses the Company may incur in connection with such debt assignment documents. 4. The Company, under its former name, and Mr. Dov Strikovsky were named as co-defendants in a claim for specific performance of an agreement allegedly entered into by the Company and the plaintiff, Ananda Capital Partners, Inc., in April 1999 as well as damages as a result of a breach of the agreement. The Company did not appear or defend the law suit because it did not receive notice of its commencement or any of the subsequent proceedings. On July 2, 2001, due to the fact that no defense and/or reply were provided by the co-defendants, judgment was entered against the Company and Mr. Dov Strikovsky in the amount of $725,000. On February 7, 2002, the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed the appropriate papers to bring an appeal to the rejection of the motion to vacate the judgment. These papers will be filed on or before July 8, 2002. It is expected that decision on the appeal will be issued by the court in or about October 2002. On December 5, 2001, Mr. Dov Strikovsky gave an undertaking to indemnify the Company for all legal fees, expenses and court costs arising out or in connection with this claim. The Company has established an allowance in the amount of $750,000 to provide for its possible exposure. LOANS TO SIGNIFICANT SHAREHOLDER AND FORMER DIRECTOR AND CEO The Company has, from time-to-time, made loans to Dov Strikovsky during the period of time he was Chairman of the Board of Directors, President, and Chief Executive Officer of the Company. At December 31, 1997, 1998, and 1999 the amount of such loans outstanding was US $1,151,000, US $1,443,000 and US $1,570,000 respectively. Such loans did not bear interest through December 31, 1997. (Such loans currently linked to the Israeli Consumer Price Index and bear interest at the rate per annum equal to LIBOR plus 2 %.) In addition, during 1999 and 2000, the Company inadvertently made excess advances to Mr. Strikovsky. Upon discovery of this error, Mr. Strikovsky started to repay to the Company the amount of such excess advances. In preparation for its initial public offering, in April 1998, the Company entered into an agreement with Mr. Strikovsky which provided that he would pay interest only on such loans through October 1, 1998 and will amortize the principal amount, and pay interest thereon, commencing on January 1, 2000 and terminating on December 31, 2003. In September 1998, such agreement was superceded by an agreement pursuant to which Mr. Strikovsky agreed to repay such loans together with the interest thereon, on or prior to November 25, 2000, subject to extension in the sole discretion of the disinterested members of the Board of Directors of the Company. Mr. Strikovsky applied the net proceeds of the sale in the Company's initial public offering of a number of his Ordinary Shares, approximately US $522,000, and also agreed to apply 50% of all dividends paid, net of taxes, on the Ordinary Shares owned by him to the prepayment of such loans. Pursuant to the September 1998 agreement, in 1999, the disinterested members of the Company's Board of Directors voted to extend the repayment terms of the net loan. The loan is currently payable in eight annual installments, which commenced in December 31, 2000 and shall be repaid in full by December 31, 2007. First payment was made by way of applying Mr. Strikovsky's net proceeds of the sale in the Company's initial public 36 offering in the amount of $522,000. In September, 1999 a dividend that was paid to Mr. Strikovsky in the sum of $90,000, and he applied half of this amount, $45,000 towards repayment of the loan. Mr. Strikovsky did not make further payments towards this loan. The Company notified Mr. Strikovsky of its default and is considering its future legal actions. At December 31, 2001 the Company reassessed the collectibility of the net loan, in the amount of $1,228,000 granted to Mr. Strikovsky in previous years, in accordance with provisions of SFAS No. 114 "Accounting by Creditors for Impairment of a Loan", and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. C. Not Applicable ITEM 8. FINANCIAL INFORMATION A. FINANCIAL INFORMATION See "ITEM 18-FINANCIAL STATEMENTS". LEGAL PROCEEDINGS 1. The Company, under its previous name, and Mr. Dov Strikovsky were named as co-defendants in a claim for specific performance of an agreement allegedly entered into by the Company and the plaintiff, Ananda Capital Partners, Inc., in April 1999 as well as damages as a result of a breach of the alleged agreement. The Company did not appear or defend the law suit because it did not receive notice of its commencement or any of the subsequent proceedings. On July 2, 2001, due to the fact that no defense and/or reply were provided by the co-defendants, judgment was entered, by the Supreme Court of the State of New York, against the Company and Mr. Dov Strikovsky in the amount of $725,000. On February 7, 2002, the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company filed the appropriate papers to bring an appeal to the rejection of the motion to vacate the judgment. These papers will be filed on or before July 8, 2002. It is expected that decision on the appeal will be issued by the court in or about October 2002. On December 5, 2001, Mr. Dov Strikovsky gave an undertaking to indemnify the Company for all legal fees, expenses and court costs arising out or in connection with this claim. The Company has established an allowance in the amount of $750,000 to provide for its possible exposure. During June 2002 the plaintiff filed a request of enforcement with the District Court of Tel Aviv, Israel, asking to enforce the judgment against the Company and Mr. Dov Strikovsky in the amount of $725,000 in Israel. 2. On May 9, 2001 an agreement was signed between the Company and Bank Hapoalim, Ltd. with respect to the Company's debt to the Bank in the amount of $3,127,000. See ITEM 7 - RELATED PARTY TRANSACTIONS - ASSIGNMENT OF BANK DEBT. After the consummation of the Bank Agreement, the Company was informed that the municipality of Hod Hasharon is delaying the payments due to the Bank. As a consequence the Company is carrying out negotiation with the municipality of Hod Hasharon for the repayment of the debt including interest accrued thereon. The legal advisor of the Company in a letter dated June 6, 2002 wrote that the present negotiations by the lawyers of the Company with the lawyers representing the municipality of Hod Hasharon can be considered to be legal procedures and that the guaranty can be considered extended under the Bank agreement until November 30, 2002. 3. On December 4, 2001, Yossi Tessler and Lavni Krasni, shareholders in the Company sent to Menachem Reinschmidt, CEO of the Company, a demand letter with claims regarding information published by the Company regarding the BITmax Line of Products, in the Proxy Statement filed in November 17, 2000. Menachem has rejected these claims and the so-called damages being claimed. As of the date of June 30, 2002, to the best of the knowledge of the Company no action has been taken by the proposed claimants. On September 14, 2001, by way of a Shareholders Meeting, Marnetics Ltd.'s shareholders approved a resolution to indemnify Menachem Reinschmidt in respect to 37 the demand letter sent by Advocate Yori Nehustan on behalf of Yossi Tessler and Lavie Krasni, in accordance with the provisions and limitations set out in the Companies Law 5759-1999. DIVIDEND POLICY Although in 1999 we declared a cash dividend on our Ordinary Shares, we do not anticipate declaring a dividend for the foreseeable future. In addition, the payment of cash dividends in the future (if ever declared by the Board) is limited by the Israeli law to the profits of the Company and could potentially be limited or prohibited by the terms of financing agreements we may enter into (e.g., a bank line of credit or an agreement relating to the issuance of debt securities of the Company). Marnetics has never paid any cash dividends to date on its ordinary shares. B. SIGNIFICANT CHANGES SALE OF ELECTRICAL BUSINESS On June 10, 2001, the Company executed an agreement, effective March 31, 2001, to sell it's Electrical Business, including certain related liabilities, to Idan Millenium Investments and Assets Ltd, wholly-owned by the Company's former chief executive officer and current major stockholder, Dov Strikovsky. Mr. Strikovsky was the sole bidder in a public request for proposals that was announced on May 15, 2001 and ended on May 30, 2001. The Board of Directors considered the purchase offer and authorized the Company's acceptance of the Purchaser's bid. The sale was for all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with Idan Millenium Investments and Assets Ltd to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. The first four installments were paid. This summary highlights selected information about the Electrical Business purchase agreement and may not contain all of the information that is important to you. To understand the sale of the Electrical Business more fully and for a more complete description of the legal terms, you should read "ITEM 7B - RELATED TRANSACTIONS", and the agreements, which are attached as Exhibits 10.6 and 10.7 hereto and the other documents referred to herein. The Company's operations during 2001 consisted of two lines of business: (1) core business of developing and marketing broadband Internet fortification solutions which shifted to the development and marketing of capacity enhancement and information analysis solutions for IP networks or the Network Business, which is handled through our wholly-owned subsidiary, Marnetics Ltd., and (2) historical business of electrical and lighting contracting and engineering business or the Electrical Business, which was sold during 2001. During the year 2001, due to the shift of the technology focus of Marnetics, a new CEO was brought into the Company. Menachem Reinschmidt established Marnetics in 1998 and was its first Chief Executive Officer, and oversees all technology development activities of the Company. One of the leading data communication experts in Israel, Mr. Reinschmidt has 17 years of experience in the most advanced fields of computer networks, including design, analysis, integration and development. His expertise incorporates advanced networking topics, including frame relay, TCP/IP, Internet architecture, ATM, Local Area Networks, routers and switches, and voice-over IP. ITEM 9. THE OFFER AND LISTING A. LISTING DETAILS The following are the high and low sales prices by fiscal quarter for the quarterly periods in which the Ordinary Shares have been traded on the American Stock Exchange. 38 ORDINARY SHARES TRADING PRICES --------------------- HIGH LOW --------- --------- 1998 Fourth Quarter (from November, 25, 1998)....... US $6.125 US $4.875 1999 First Quarter ................................. 5.250 4.000 Second Quarter ................................ 4.125 1.750 Third Quarter ................................. 2.500 1.500 Fourth Quarter ................................ 3.500 1.33 2000 First Quarter ................................. 24.750 2.500 Second Quarter ................................ 15.750 6.750 Third Quarter ................................. 17.500 14.063 Fourth Quarter ................................ 14.500 6.313 2001 First Quarter ................................. 7.250 4.200 Second Quarter ................................ 4.600 1.100 Third Quarter ................................. 2.200 .300 Fourth Quarter................................. .900 .350 2002 First Quarter.................................. .890 .300 Second Quarter ................................ .440 .200 B. Not applicable C. MARKETS The Company's Ordinary Shares are quoted on the American Stock Exchange under the symbol "MXB." The Company has no present intention to list or quote its securities on any markets outside of the United States. However, the Company may seek such listings in the future if its Board of Directors determines that it is in the best interest of the Company. Possibility of De-Listing At present, the Company may not be in compliance with certain continued listing standards required by the American Stock Exchange, although no assertion has been made by the American Stock Exchange as such, nor has the American Stock Exchange contacted the Company whatsoever about any de-listing. Any such de-listing of the shares would result in a possible absence of a liquid trading market for the Company's Ordinary Shares. D. Not applicable E. Not applicable ITEM 10. ADDITIONAL INFORMATION A. Not applicable B. MEMORANDUM AND ARTICLES OF ASSOCIATION Marnetics Broadband Technologies Ltd. is an Israeli company registered with the Israel Registrar of Companies, registration no. 520004389-4. On September 14, 2001 the shareholders of the Company amended Article 29 of the Articles of Association of the Company regarding the timeframe for the fixing of the record date by 39 the Board of Directors to at least four (4) but not more than forty (40) days prior to a shareholders meeting, or such other timeframe, as allowed by the Regulations under Companies Law (Allowances from Public Companies Whose Shares are Listed for Trade Outside of Israel) - 2000 (the "Regulations") there under or its successor statute. This amendment to the Articles of Association is included as an exhibit as revised articles of association to this annual report on Form 20-F. See "ITEM 19 - EXHIBITS". PURPOSES AND OBJECTS OF THE COMPANY Pursuant to Section 3 of our Articles of Association, the Company's purpose is to operate according to business considerations for the production of profits. POWERS OF THE DIRECTORS The Directors shall formulate the Company's policy and shall supervise the exercise of the General Manager's office and his acts, including, but not limited to the determination of the Company's plans of activity, the principles for financing such plans and the organizational structure of the Company. The power of our directors to vote on a proposal, arrangement or contract in which the director is materially interested is limited by the relevant provisions of the Companies Law. RIGHTS ATTACHED TO SHARES Our registered share capital consists of a single class of 25,000,000 Ordinary Shares, par value NIS 0.08 per share, of which 7,362,390 Ordinary Shares were issued and outstanding as of June 30, 2002. All outstanding Ordinary Shares are validly issued, fully paid and non-assessable. The rights attached to the Ordinary Shares are as follows: DIVIDEND RIGHTS Subject to the permitted distribution provisions of the Companies Law, the Board of Directors may declare a dividend to be paid to the shareholders according to their rights and interests in the profits, and may fix the record date for eligibility and the time for payment. Subject to any preferential, deferred, qualified or other rights, privileges or conditions attached to any special class of shares with regard to dividends, the profits of the Company available for dividend and resolved to be distributed shall be applied in payment of dividends upon the shares of the Company in proportion to the amount paid up or credited as paid up per the nominal value thereon respectively. The Board of Directors may from time to time pay to the shareholders on account of the next forthcoming dividend such interim dividends as, in their judgment, the position of the Company justifies. VOTING RIGHTS Holders of our Ordinary Shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The quorum required for any meeting of shareholders consists of at least two shareholders present in person or by proxy who hold or represent, in the aggregate, at least one third of the voting rights of the issued share capital. In the event that a quorum is not present within fifteen minutes of the scheduled time, the shareholders' meeting will be adjourned to the same day in the following week, or such time and place as the board of directors may determine. If at such reconvened meeting a quorum is not present within half an hour from the time appointed for holding the meeting, any two shareholders present in person or by proxy will constitute a quorum. 40 Notwithstanding the aforesaid, if a General Meeting was convened at the demand of shareholders as permitted by Section 63(b) of the Companies Law, then a quorum at such adjourned meeting shall be present only if one or more shareholders are present who held in the aggregate at least 5% of the issued share capital of the Company and at least 1% of the voting rights in the Company or one or more shareholders who hold in the aggregate at least 5% of the voting rights in the Company. Subject to the Companies Law, except decisions regarding the amendment of Article 101 of our Articles Association and/or the approval of transactions with interested parties (as listed in our Articles of Associations), any resolution at a General Meeting shall be deemed adopted if approved by the holders of a majority of the voting rights in the Company represented at the meeting in person or by proxy and voting thereon. The Directors of the Company are appointed by the Annual General Meeting, unless appointed by the Board to fill a vacancy, and shall serve as Directors from the time of appointment until the next Annual General Meeting, unless such Director is disqualified for whatever reason. RIGHTS IN THE EVENT OF LIQUIDATION If the Company shall be liquidated, whether voluntarily or otherwise, the liquidators may, subject to the provision of the Statutes, divide among the shareholders any part of the assets of the Company and may vest any part of the assets of the Company in trustees upon such trusts, for the benefit of the shareholders, as the liquidators deem appropriate. CHANGING RIGHTS ATTACHED TO SHARES If, at any time, the share capital is divided into different classes of shares, the rights attached to any class may be varied with the sanction of a majority vote at a meeting of the shareholders passed at a separate meeting of the holders of the shares of the class. GENERAL MEETINGS An Annual General Meeting shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding Annual General Meeting, and at such time and place as may be determined by the Board of Directors. Such Annual General Meetings shall be called "Annual Meetings", and all other Meetings of the shareholders shall be called "Extraordinary Meetings". The Annual Meeting shall receive and consider the Directors' Report, the Financial Statements, appoint auditors, elect Directors, and transact any other business which, under these Articles or by the Companies Law, may be transacted at a General Meeting of the Company, provided that notice of such other business was given to shareholders in accordance with the provisions of the Articles. At least twenty-one (21) days and not more than sixty (60) days notice of any General Meeting shall be given, specifying the place, the day and the hour of meeting and, in the case of special business, the nature of such business, shall be given in the manner hereinafter mentioned, to such shareholders as are under the provisions of the Articles, entitled to receive notices from the Company. An Extraordinary Meeting may be convened by the Board of Directors, whenever they think fit or upon a demand in writing by members holding at least 10% of our issued capital. INCREASE IN OUR CAPITAL The Company may from time to time by a majority vote at a meeting of shareholders, whether all the shares for the time being authorized shall have been issued or all the shares for the time being issued shall have been fully called up or not, increase its share capital by the creation of new shares. 41 C. MATERIAL CONTRACTS Software license agreement by and between Marnetics Ltd. and Speedwise Technologies Ltd. dated as of April 17, 2001. See "ITEM 4B - BUSINESS OVERVIEW - LICENSING ARRANGEMENTS." Indemnification agreement between Dov Strikovsky, the Company and the former shareholders of Marnetics Ltd. dated as of June 30, 2001. See "ITEM 7B - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY TRANSACTIONS - INDEMNIFICATION BY SIGNIFICANT SHAREHOLDER." Services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, Director and CEO of the Company, dated February 11, 2002. See "ITEM 7B - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY TRANSACTIONS." Asset purchase agreement between the Company and Idan Millennium Investments and Assets dated as of June 10, 2001 (Effective March 31, 2001). See "ITEM 8B - SIGNIFICANT CHANGES - SALE OF ELECTRICAL BUSINESS." Amendment to the asset purchase agreement between the Company and Idan Millennium Investments and Assets dated as of May 6, 2002. See "ITEM 8B - - SIGNIFICANT CHANGES - SALE OF ELECTRICAL BUSINESS." Agreements to the assignment of debt by and among the Company, Bank Hapoalim Ltd. and Shlavor Systems Ltd. dated as of May 9, 2001. See "ITEM 7B - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS - RELATED PARTY TRANSACTIONS - ASSIGNMENT OF BANK DEBT." D. CURRENCY EXCHANGE CONTROLS The Israeli Currency Control Law, 1978, imposes certain limitations concerning foreign currency transactions and transactions between Israeli and non-Israeli residents, which limitations may be regulated or waived by the Controller of Foreign Exchange at the Bank of Israel, through "general" and "special" permits. In May 1998, a new "general permit" was issued pursuant to which substantially all transactions in foreign currency are permitted. Any dividends or other distributions paid in respect of Ordinary Shares and any amounts payable upon the dissolution, liquidation or winding up of our affairs, as well as the proceeds of any sale in Israel of our securities to an Israeli resident are freely repatriable into non-Israeli currencies at the rate of exchange prevailing at the time of conversion, provided that Israeli income tax has been paid on (or withheld from) such payments. Neither our Memorandum of Association, Articles of Association nor the laws of the State of Israel restrict in any way the ownership or voting of shares by non-residents, except with respect to subjects of countries that in a state of war with Israel. E. TAXATION ISRAELI TAXATION The following is a short summary of certain Israeli tax consequences to persons holding our ordinary shares. 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. Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel or received in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. The Company is required to withhold income tax at the rate of 25% (15% for dividends generated by an Approved Enterprise) on all distributions of dividends other than bonus shares (stock dividends), unless a different rate is provided in a treaty between Israel and the shareholder's country of residence. Under the income tax treaty between the United States and Israel (the "Treaty"), the maximum tax on dividends paid to a holder of ordinary shares who is a U.S. resident (as defined in the Treaty) is 25%. 42 Israeli law imposes a capital gains tax on the sale of securities and other capital assets. Under current law, however, gains from sales of the ordinary shares of the Company are exempt from Israeli capital gains tax for so long as (i) the shares are quoted on Nasdaq or listed on a stock exchange recognized by the Israeli Ministry of Finance and (ii) the Company qualifies as an Industrial Company or Industrial Holding Company under the Law for Encouragement of Industry (Taxes), 1969. In addition, under the Treaty, a holder of ordinary shares who is a U.S. resident will be exempt from Israeli capital gains tax on the sale, exchange or other disposition of such ordinary shares unless such holder owns, directly or indirectly, 10% or more of the voting power of the Israeli tax consequences to persons purchasing or holding Ordinary Shares. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, there can be no assurance that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Prospective purchasers and holders of Ordinary Shares should consult their own tax advisors as to the U.S., Israeli, or other tax consequences of the purchase, ownership, and disposition of the Ordinary Shares, including, in particular, the effect of any foreign, state, or local taxes. GENERAL CORPORATE TAX STRUCTURE Currently, the regular rate of corporate tax to which Israeli companies are subject is 36%. TAXATION UNDER INFLATIONARY CONDITIONS The Income Tax (Inflationary Adjustments) Law, 1985 (the "INFLATIONARY ADJUSTMENTS LAW"), was designed to neutralize the erosion of capital investments in business and to prevent tax benefits resulting from deduction of inflationary expenses. This law applies a supplementary set of inflationary adjustments to the normal taxable profits computed under regular historical cost principles. The Inflationary Adjustments Law introduced a special tax adjustment for the preservation of equity based on changes in the Israeli consumer price index, whereby certain corporate assets are classified broadly into fixed (inflation-resistant) assets and non-fixed assets. Where a corporation's equity (as defined in the Inflationary Adjustments Law) exceeds the depreciated cost of fixed assets, a tax deduction that takes into account the effect of the annual rate of inflation on such excess is allowed (up to a ceiling of 70% of taxable income for companies in any single year, with the unused portion carried forward on a linked basis, without limit). For income derived from state bonds or funds invested above 75% in state bonds, such ceiling is not used (100% is deducted). If the depreciated cost of fixed assets exceeds shareholders' equity, then such excess, multiplied by the annual inflation rate, is added to taxable income. CAPITAL GAINS TAX Israeli law imposes a capital gains tax on the sale of capital assets by both residents and non-residents of Israel. The gains generated by an Israeli company, which is subject to the Inflationary Adjustments Law on the disposition of securities, will be taxed according to the provisions of such Law. Pursuant to the Convention Between the Government of the United States of America and the Government of Israel with Respect to Taxes on Income (the "U.S.-ISRAEL TAX TREATY"), the sale, exchange or disposition of Ordinary Shares or redeemable warrants by a person who qualifies as a resident of the United States within the meaning of the U.S.-Israel Tax Treaty and who is entitled to claim the benefits afforded to such resident by the U.S.-Israel Tax Treaty ("TREATY U.S. RESIDENT") will not be subject to the Israeli capital gains tax unless such Treaty U.S. Resident holds, directly or indirectly, shares representing 10% or more of our voting power during any part of the 12-month period preceding such sale, exchange or disposition. A sale, exchange or disposition of Ordinary Shares or redeemable warrants by a Treaty U.S. Resident who holds, directly or indirectly, shares representing 10% or more of our voting power at any time during such preceding 12-month period would be subject to such Israeli tax; however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be 43 permitted to claim a credit for such taxes against the U.S. income tax imposed with respect to such sale, exchange or disposition, subject to the limitations applicable to foreign tax credits. TAXATION OF NON-RESIDENTS Non-residents of Israel are subject to income tax on income derived from sources in Israel. On distributions of dividends other than bonus shares (stock dividends), income tax at the rate of 25% is withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder's country of residence. The U.S.-Israel Tax Treaty provides for a maximum tax of 25% on dividends paid to a Treaty U.S. Resident, and for a rate of 12.5% on dividends paid to a United States corporation that holds 10% or more of the shares of the Israeli company. PROPOSED TAX REFORM On June 12, 2002, the recommendations of a tax reform committee (the "Rabinovich Committee") were published. The Government of Israel decided in a meeting on June 16, 2002 to adopt the recommendations of the Rabinovich Committee. The Israeli Ministry of Finance announced its intentions to bring the recommendations for approval by the Israeli Parliament by the end of July 2002. The recommendations deal with a number of subjects: reduction of the direct tax rate of individual income, tax on the capital markets, tax on income from outside Israel, cancellation of exemptions and encouragement of business and technology entrepreneurship. We cannot be certain whether the proposed reform will be adopted, when it will be adopted or what form any reform will ultimately take. F. Not applicable G. Not applicable H. DOCUMENTS ON DISPLAY The Company (formerly named Stav Electrical Systems (1994) Ltd.) is subject to certain of the informational requirements of the Securities Exchange Act of 1934 and the rules and regulations promulgated there under and in accordance therewith files reports, proxy statements and other information with the Securities and Exchange Commission. Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N. W., Washington, D. C. 20549 and at the Regional Offices thereof at 233 Broadway, New York, New York and at 175 West Jackson Boulevard, Suite 900, Chicago, Illinois. Copies of such information can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N. W., Washington, D. C. 20549 at prescribed rates. In addition, beginning in July 2001 the Company began filing its reports with the Commission electronically and any reports, proxy statements and other information filed by the Company after such date may also be inspected the Commission's web site at www.sec.gov. I. SUBSIDIARY INFORMATION Not Applicable ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to various market risks, including but not limited to risks deriving from changes in interest rates and inflation rates and changes in the exchange rate of the NIS against foreign currencies. Interest Rate Risk. At December 31, 2001, the Company had cash and cash equivalents in the aggregate amount of $2.4 million, deposited primarily in major Israeli banks. These amounts accrue or bear nominal interest based on U.S. dollar interest rate and NIS interest rate. Foreign Currency Exchange Risks. At December 31, 2001, 93% of the cash and cash equivalent were deposits denominated in NIS and linked to the US dollar exchange rate. Only 15% of the Company's current assets were cash deposits denominated in NIS in the aggregate amount of $0.4 44 million. These amounts as presented in U.S. dollars may be affected by changes in the exchange rate between NIS and the U.S. dollars. Fair value of financial instruments. The financial instruments of the Company consist primarily of cash and cash equivalents and accounts payable. In view of their nature, the fair value of the financial instruments included in the Company's working capital is usually identical or close to their carrying amount. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGE AND DELINQUENCIES Not applicable ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS Not applicable ITEM 15. [RESERVED] ITEM 16. [RESERVED] PART III ITEM 17. FINANCIAL STATEMENTS. Not applicable. The Company has elected to furnish financial statements pursuant to Item 18 below. ITEM 18. FINANCIAL STATEMENTS. The Consolidated Financial Statements and related notes required by this item are contained on pages F-1 through F-18.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page - ------------------------------------------ ------------ Report of Independent Public Accountants................................... F-2 Consolidated Balance Sheets as of December 31, 2001 and 2000............... F-3 Consolidated Statements of Operations or the years ended December 31, 2001, 2000 and 1999 and for the cumulative period from June 1, 1998 to December 31, 2001........................................ F-4 Statements of Changes in Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999......................................... F-5 Statements of Consolidated Cash Flows for the years ended December 31, 2001, 2000 and 1999 and for the cumulative period from June 1, 1998 to December 31, 2001..... F-6 to F-8 Notes to the Financial Statements ......................................... F-9 to F-18
45 ITEM 19. EXHIBITS 1.1 Memorandum of Association of the Registrant (filed as Exhibit 3.1 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 1.2 Amended and Restated Articles of Associations of the Registrant (including revision for Amendment from September 14, 2001 reflected in amended wording to Article 29). 4.1 2001 Share Option Plan (incorporated by reference to Exhibit 4.1 to the Company's annual report on Form 20-F for year ended December 31, 2000). 4.2 Services agreement with Netlogic Ltd., a company under the control of Mr. Menachem Reinschmidt, Director and CEO of the Company, dated February 11, 2002. 8 List of subsidiaries (incorporated by reference to "Item 4 - Information on the Company - Organizational Structure" in this annual report on Form 20-F). 10.1 Form of officers' and directors' indemnification agreement (filed as Exhibit 10.3 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.2 Loan agreement between Bank Hapoalim Ltd. and the Registrant (filed as Exhibit 10.4 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.3 Promissory Note issued by Dov Strikovsky to the Company (filed as Exhibit 10.5 to Form F-1 Registration Statement No. 333-8800 and by this reference incorporated herein). 10.4 Share exchange agreement among Marnetics Ltd., its Shareholders and the Registrant dated as of May 31, 2000, as amended (filed as Exhibit 10.6 to Form 20-F for the year-ended December 31, 2000 and by this reference incorporated herein). 10.5 Indemnification agreement between Dov Strikovsky, the Company and the former shareholders of Marnetics Ltd. dated as of June 30, 2001 (incorporated by reference to Exhibit 10.5 to the Company's annual report on Form 20-F for year ended December 31, 2000). 10.6 Asset purchase agreement between the Company and Idan Millennium Investments and Assets Ltd. dated as of June 10, 2001 (incorporated by reference to Exhibit 10.7 to the Company's annual report on Form 20-F for year ended December 31, 2000). 10.7 Amendment to the asset purchase agreement between the Company and Idan Millennium Investments and Assets Ltd. dated as of May 6, 2002. 10.8 Agreements to the assignment of debt by and among the Company, Bank Hapoalim Ltd. and Shlavor Systems Ltd. dated as of May 9, 2001 (incorporated by reference to Exhibit 10.9 to the Company's annual report on Form 20-F for year ended December 31, 2000). 10.9 OEM agreement by and between Marnetics Ltd. and Speedwise Technologies Ltd. dated as of July 8, 2001 (incorporated by reference to Exhibit 10.10 to the Company's annual report on Form 20-F for year ended December 31, 2000). 46 SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. MARNETICS BROADBAND TECHNOLOGIES LTD. By: /s/ Menachem Reinschmidt ------------------------------------- Menachem Reinschmidt, CEO By: /s/ Ilan Hadar ------------------------------------- Ilan Hadar, CFO Date: July 11, 2002 47 MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2001 MARNETICS BROADBAND TECHNOLOGIES LTD. CONSOLIDATED FINANCIAL STATEMENTS CONTENTS Page REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 2 CONSOLIDATED BALANCE SHEETS as at December 31, 2001 and 2000 3 CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 2001, 2000 and 1999 and for the cumulative period from June 1, 1998 to December 31, 2001 4 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY for the years ended December 31, 2001, 2000 and 1999 5 CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 2001, 2000 and 1999 and for the cumulative period from June 1, 1998 to December 31, 2001 6 NOTES TO THE FINANCIAL STATEMENTS 9 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SHAREHOLDERS OF MARNETICS BROADBAND TECHNOLOGIES LTD. We have audited the accompanying consolidated balance sheets of MARNETICS BROADBAND TECHNOLOGIES LTD. ("the Company") (a development-stage company) as of December 31, 2001 and 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 2001, 2000 and 1999 and the cumulative period from June 1, 1998 (date of commencement of operations) to December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Company's management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company (a development-stage company) as of December 31, 2001 and 2000, and its consolidated results of operations, changes in shareholders' equity and cash flows for the years ended December 31, 2001, 2000 and 1999 and the cumulative period from June 1, 1998 (date of commencement of operations) to December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1b to the financial statements, the Company's recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1b. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. BRIGHTMAN ALMAGOR & CO. CERTIFIED PUBLIC ACCOUNTANTS (ISRAEL) A MEMBER OF DELOITTE TOUCHE TOHMATSU Tel Aviv, Israel May 30, 2002 -2- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) (U.S.$ IN THOUSANDS) CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- 2001 2000 -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 2,418 $ 6,546 Receivables: Trade -- 723 Related parties (Note 3) -- 690 Other (Note 6a) 248 123 Inventories -- 224 Recoverable costs and estimated earnings- not yet billed -- 3,255 -------- -------- TOTAL CURRENT ASSETS 2,666 11,561 -------- -------- LONG-TERM LOAN TO RELATED PARTIES (Note 3) -- 1,272 -------- -------- INVESTMENT IN AFFILIATE (NOTE 4 & 13) 582 582 -------- -------- FIXED ASSETS (Notes 2e & 5) Cost 267 1,065 Less - accumulated depreciation 8 413 -------- -------- 259 652 -------- -------- OTHER ASSETS (NOTE 1&12) -- 11,309 -------- -------- $ 3,507 $ 25,376 ======== ======== CURRENT LIABILITIES: Short-term bank credit (Note 6b) $ 50 $ 3,337 Payables: Trade 135 1,553 Other (Note 6c) 885 1,746 -------- -------- TOTAL CURRENT LIABILITIES 1,070 6,636 -------- -------- LONG-TERM LIABILITIES (Note 7) -- 65 -------- -------- ACCRUED SEVERANCE PAY -- 148 -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 8) SHAREHOLDERS' EQUITY (Note 9) Share capital: Ordinary shares of NIS 0.08 par value (Authorized, 25,000,000 shares, issued and outstanding at December 31, 2000 and 2001 6,407,333 and 7,362,390 respectively) 130 130 Additional paid-in capital 25,203 25,143 Deferred stock based compensation (1,584) (2,329) Accumulated deficit (21,312) (4,417) -------- -------- 2,437 18,527 -------- -------- $ 3,507 $ 25,376 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS -3- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) (U.S.$ IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) CONSOLIDATED STATEMENTS OF OPERATIONS
CUMULATIVE FROM JUNE 1, 1998 (DATE OF COMMENCEMENT YEAR ENDED DECEMBER 31, OF OPERATIONS) -------------------------------------- TO DECEMBER 31, 2001 2000 1999 2001 ---------- ---------- ---------- --------------- Research and development costs (excluding $745 and $883 of non-cash compensation for the year ended December 31, 2001 and cumulative from June 1, 1998 to December 31, 2001, respectively) (Note 11a) $ 812 $ 252 $ 33 $ 1,228 Sales and marketing expenses, net (Note 11b) 310 142 -- 452 General and administrative expenses (excluding $60 and $2,330 of non-cash compensation for the year ended December 31, 2001 and cumulative from June 1, 1998 to December 31, 2001, respectively) (Note 11c) 1,128 722 44 2,075 Provision for legal claim (Note 8d) 750 -- -- 750 Impairment of goodwill (Note 12) 9,309 -- -- 9,309 Loss allowance on loan to related party (Note 3) 1,228 -- -- 1,228 Non-cash compensation expenses 805 2,408 -- 3,213 ---------- ---------- ---------- ---------- OPERATING LOSS (14,342) (3,524) (77) (18,255) Financial income, net 175 167 9 359 Loss on sale of property and equipment -- -- (28) (28) Share in losses of affiliate -- (639) (21) (660) ---------- ---------- ---------- ---------- LOSS FROM CONTINUING OPERATIONS (14,167) (3,996) (117) (18,584) DISCONTINUED OPERATIONS: Loss from operations of electrical division (450) -- -- (450) Loss on sale of electrical division (2,278) -- -- (2,278) ---------- ---------- ---------- ---------- LOSS FOR THE PERIOD $ (16,895) $ (3,996) $ (117) $ (21,312) ========== ========== ========== ========== PER SHARE DATA (NOTE 2G) Basic and diluted: LOSS PER SHARE FROM CONTINUING OPERATIONS $ (2.11) $ (4.15) $ (0.20) ========== ========== ========== LOSS FROM DISCONTINUED OPERATIONS $ (0.40) $ -- $ -- ========== ========== ========== NET LOSS $ (2.51) $ (4.15) $ (0.20) ========== ========== ========== SHARES USED IN COMPUTING LOSS PER ORDINARY SHARE Basic and diluted 6,725,685 962,553 575,234 ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS -4- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) (U.S.$ IN THOUSANDS) STATEMENTS OF SHAREHOLDERS' EQUITY
DEFICIT ACCUMULATED ADDITIONAL DURING THE NUMBER OF SHARE PAID-IN DEFERRED DEVELOPMENT SHARES CAPITAL CAPITAL COMPENSATION STAGE TOTAL --------- ---------- ---------- ------------ ----------- ---------- BALANCE AT JANUARY 1, 1999 266,000 $ 1 $ 682 $ -- $ (304) $ 379 Issuance of shares for no consideration 559 Adjustment due to issuance of shares of a development - stage affiliate to a third party 146 146 Loss for the year (117) (117) --------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 1999 266,559 1 828 -- (421) 408 --------- ---------- ---------- ---------- ---------- ---------- Issuance of share capital 388,237 1 7,297 7,298 Adjustments due to issuance of shares of a development - stage affiliate to a third party 1,095 1,095 Issuance of options to a related party 270 270 Deferred compensation related to employee stock option grants 631 (631) -- Adjustments due to reverse merger - additional compensation due to a new measurement date 1,836 (1,836) -- Amortization of deferred compensation 138 138 Adjustments due to reverse merger 759,489 30 30 Issuance of shares in a reverse merger 4,993,048 98 11,186 11,284 Compensation relating to options granted to former CEO and chairman of the board 2,000 2,000 Loss for the period (3,996) (3,996) --------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 2000 6,407,333 130 25,143 (2,329) (4,417) 18,527 --------- ---------- ---------- ---------- ---------- ---------- Amortization of deferred compensation 745 745 Compensation related to options granted to service providers 60 60 Issuance of shares for no consideration 955,057 Loss for the year (16,895) (16,895) --------- ---------- ---------- ---------- ---------- ---------- BALANCE AT DECEMBER 31, 2001 7,362,390 $ 130 $ 25,203 $ (1,584) $ (21,312) $ 2,437 ========= ========== ========== ========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS -5- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) (U.S.$ IN THOUSANDS) STATEMENTS OF CONSOLIDATED CASH FLOWS
CUMULATIVE FROM JUNE 1, 1998 (DATE OF COMMENCEMENT OF YEAR ENDED DECEMBER 31, OPERATIONS) TO -------------------------------- DECEMBER 31, 2001 2000 1999 2001 -------- -------- -------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Loss for the period $(16,895) $ (3,996) $ (117) $(21,312) Adjustments to reconcile loss for the period to cash used in operating activities (Appendix A): 12,775 3,124 (7) 15,959 -------- -------- -------- -------- Net cash used in operating activities (4,120) (872) (124) (5,353) -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Cash acquired in a non-cash reverse merger (Appendix B) -- 22 -- 22 Purchase of fixed assets (85) (186) -- (318) Proceeds from sale of fixed assets -- -- 10 10 -------- -------- -------- -------- Net cash provided by (used in) investing activities (85) (164) 10 (286) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term debt, net (751) -- -- (751) Repayment of long-term loan 828 -- -- 828 Issuance of share capital -- 7,298 -- 7,981 Investment in affiliate -- -- (1) (1) -------- -------- -------- -------- Net cash provided by (used in) financing activities 77 7,298 (1) 8,057 -------- -------- -------- -------- Increase (decrease) in cash and cash equivalents (4,128) 6,262 (115) 2,418 Cash and cash equivalents at the beginning of the period 6,546 284 399 -- -------- -------- -------- -------- Cash and cash equivalents at the end of the period $ 2,418 $ 6,546 $ 284 $ 2,418 ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS -6- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) (U.S.$ IN THOUSANDS) APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FROM JUNE 1, 1998 (DATE OF COMMENCEMENT OF YEAR ENDED DECEMBER 31, OPERATIONS) TO -------------------------------- DECEMBER 31, 2001 2000 1999 2001 -------- -------- -------- --------------- APPENDIX A ADJUSTMENTS TO RECONCILE LOSS FOR THE PERIOD TO NET CASH USED IN OPERATING ACTIVITIES: Depreciation $ 53 $ 8 $ 2 $ 70 Loss on sale of fixed assets -- -- 28 28 Share in losses of affiliate -- 639 21 660 Loss on sale of discontinued operations (Appendix C) 2,278 -- -- 2,278 Impairment of goodwill 9,309 -- -- 9,309 Loss allowance on loan to related party 1,228 -- -- 1,228 Non cash compensation expenses 805 2,408 -- 3,213 Changes in assets and liabilities: Decrease (increase) in accounts receivable 303 (61) (1) 235 Increase in other receivables (235) -- -- (235) Decrease in inventories 684 -- -- 684 (Decrease) increase in trade payables (1,342) 34 (20) (1,307) (Decrease) Increase in other payables and accrued expenses (308) 96 (37) (204) -------- -------- -------- -------- $ 12,775 $ 3,124 $ (7) $ 15,959 ======== ======== ======== ======== SUPPLEMENTAL CASH FLOW DATA APPENDIX B: PURCHASE OF A SUBSIDIARY IN A REVERSE MERGER: Current assets $ 4,947 $ 4,947 Non-current assets 1,272 1,272 Fixed assets 474 474 Goodwill 11,309 11,309 Current liabilities (6,497) (6,497) Long-term liabilities (213) (213) Cash acquired 22 22 -------- -------- Total non-cash consideration $ 11,314 $ 11,314 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS -7- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) (U.S.$ IN THOUSANDS) APPENDICES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
CUMULATIVE FROM JUNE 1, 1998 (DATE OF COMMENCEMENT OF YEAR ENDED DECEMBER 31, OPERATIONS) TO -------------------------------- DECEMBER 31, 2001 2000 1999 2001 -------- -------- -------- --------------- APPENDIX C: SALE OF ELECTRICAL DIVISION: Current assets $ 1,076 $ 1,076 Fixed assets 425 425 Goodwill 2,000 2,000 Current liabilities (867) (867) Long-term liabilities (356) (356) -------- -------- Loss on sale of electrical division (see Note 3b) $ 2,278 $ 2,278 ======== ======== INFORMATION ON NON-CASH TRANSACTIONS EXTINGUISHMENTS OF A SHORT-TERM DEBT TO BANK IN EXCHANGE FOR ASSIGNMENT OF A RECEIVABLE (SEE NOTE 3b) Short-term debt $ 2,173 $ 2,173 Assignment of a receivable (2,173) (2,173) -------- -------- $ -- $ -- ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS -8- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - GENERAL A. MARNETICS BROADBAND TECHNOLOGIES LTD. (FORMERLY STAV ELECTRICAL SYSTEMS (1994) LTD.) ("the Company or Stav") is engaged in the development of capacity enhancement and fortification solutions for IP networks through its wholly owned subsidiary Marnetics Ltd. ("Marnetics") and was engaged in the manufacture, installation and maintenance of electrical and lighting systems, mainly for public institutions (see below). On June 1, 2000 a share exchange agreement ("the agreement") was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company's shareholders on December 31, 2000. Pursuant to the agreement, the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 respectively, representing 75% of its outstanding shares and options, on a fully diluted basis, in exchange for all shares in Marnetics. The merger between Marnetics and the Company was accounted for as a reverse merger. As the shareholders of Marnetics (as a group) received the largest ownership interest in the Company, Marnetics was determined to be the "accounting acquirer" in the reverse acquisition. As a result, the historical financial statements of the Company (prior to December 31, 2000) were replaced with the historical financial statements of Marnetics. The statements of operations for 2000 and 1999 include the operations of Marnetics. The December 31, 2000 balance sheet includes the accounts of the Company and Marnetics. The fair value of Stav shares, US$ 11,314,280 was determined on the basis of the average market price of its outstanding shares US$ 8.00 per share. Goodwill in the amount of $11,309,000 was recorded accordingly. The following unaudited pro forma summary presents information as if the acquisition of Stav occurred at the beginning of the periods presented. The pro forma information, which is provided for informational purposes only, is based on historical information and does not necessarily reflect the results that would have occurred, nor is it necessarily indicative of future results of operations of the consolidated entities.
(UNAUDITED) -------------------------- YEAR ENDED DECEMBER 31, -------------------------- 2000 1999 -------- -------- Revenues $ 4,498 $ 5,152 Net income (10,751) (1,227) Earnings per share: Basic (1.68) (0.19) Diluted $ (1.68) $ (0.19)
Effective March 2001 the Company sold to Idan Millennium Investments and Assets Ltd ("IDAN") , a company under the control of Mr. Strikovsky, former CEO and former chairman of the board, all the fixed assets, inventories, other assets and liabilities and goodwill related to the electrical operations for a consideration of $597,000. The balance of $597,000 was not recognized as the probability of its realization is in doubt (See also Note 3). B. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a limited operating history and has sustained losses since its inception. As shown in the accompanying financial statements, the Company incurred a net loss of $16,895,000 for the year ended December 31, 2001 and as of that date has accumulated loss of $ 21,312,000. The future of the Company is dependent upon future profitable operations from the commercial success of its operations. Management is actively seeking additional capital that will provide funds needed to fund its operations in order to fully implement its business plans. There is no assurance, however, that additional capital will be available to the Company and the inability to obtain such financing would have a material adverse effect on the Company. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty and these adjustments may be material. -9- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES A. DEVELOPMENT-STAGE ENTERPRISE Since planned principal operations have not yet begun to generate any revenues, the Company is a development-stage company. All pre-operating costs have been expensed as incurred. B. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. C. FINANCIAL STATEMENTS IN U.S. DOLLARS The reporting currency of the Company is the U.S. dollar. The currency of the primary economic environment in which the operations of the Company are conducted is the dollar, and the dollar has been determined to be the Company's functional currency. Transactions and balances originally denominated in dollars are presented at their original amounts. Non-dollar transactions and balances have been remeasured into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards ("SFAS") No. 52 "Foreign Currency Translation". All exchange gains and losses from remeasurement of monetary balance sheet items resulting from transactions in non-dollar currencies are reflected in the statement of operations as they occur. D. CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid investments that are readily convertible into cash with original maturities when purchased of three months or less. E. FIXED ASSETS Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, as follows: Computers and software 3 years Furniture and fixtures 10-15 years In accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," management reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on estimated future cash flows. An impairment loss is recognized when the undiscounted future cash flows are less than the carrying value of the assets. The loss recognized would be equal to the difference between the carrying value and the fair value of the asset. -10- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (cont.) F. RESEARCH AND DEVELOPMENT COSTS Research and development costs are expensed as incurred. G. EARNINGS PER SHARE The Company has adopted Statement No. 128 of the FASB "Earnings Per Share" ("SFAS 128"). Basic and diluted earnings per ordinary share are computed using the weighted average number of shares outstanding. H. DEFERRED INCOME TAXES Deferred income taxes are provided for temporary differences between the assets and liabilities, as measured for financial statement purposes and for tax purposes, at tax rates expected to be in effect when these differences reverse. I. FAIR VALUE OF FINANCIAL INSTRUMENTS The financial instruments of the Company consist mainly of cash and cash equivalents, current accounts receivable, accounts payable and accruals. Due to the relatively short period to maturity, the fair value of the financial instruments included in the working capital of the Company approximates their carrying amounts. J. RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued statement of Financial Accounting Standards No. 141 ("SFAS 141"), Business Combinations." SFAS 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The Company does not believe that the adoption of SFAS 141 will have a significant impact on its financial statements. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets", which is effective January 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization. In addition, the standard includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the identification of reporting units for transitional goodwill impairment test six months from the date of adoption. The Company does not believe that the adoption of SFAS 142 will have a significant impact on its financial statements. In June 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("FAS 143"), which is effective for years beginning after June 15, 2002, which will be the Company's fiscal year 2003. FAS 143 addresses legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development or normal operation of a long-lived asset. The standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. Any associated asset retirement costs are to be capitalized as part of the carrying amount of the long-lived asset and expensed over the life of the asset. The Company does not believe that the adoption of SFAS 143 will have a significant impact on its financial statements. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (FAS 144), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a segment of a business. FAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company has not yet determined what the effect of FAS 144 will be on the earnings and financial position of the Company. -11- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 3 - RELATED PARTIES
DECEMBER 31, --------------------------- 2001 2000 ------- ------- MR. DOV STRIKOVSKI (FORMER CEO AND FORMER CHAIRMAN OF THE BOARD): Loan a.(1) $ -- $ 1,484 ------- ------- Current account a.(2) $ -- $ 478 ======= =======
a.(1) The loan was linked to the Israeli CPI and bore interest of 2% per annum and was repayable in eight annual installments each comprised of 1/8 of the principal and the accrued interest thereon commencing January 2001. At December 31, 2001 the Company reassessed the collectibility of the loan, in the amount of $1,228,000 in accordance with provisions of SFAS No. 114 "Accounting by Creditors for Impairment of a Loan", and resolved, considering the probability of its collectibility, to establish a loan loss allowance for the entire amount. Income from impaired loan will be recorded using the cash method. (2) In prior years advances were paid to certain suppliers in the amount of $478,000. In accordance with the share exchange agreement (see Note 1) the Company asked Mr. Strikovsky for the repayment of such amounts. The excess advances were paid during 2001. b.(1) On May 9, 2001 an agreement (the "Bank Agreement") was signed between the Company and Bank Hapoalim, Ltd.(the "Bank") with respect to the Company's debt to the Bank in the amount of $3,127,000 (the "Debt"). In accordance with the Bank Agreement, the Bank has agreed to release the Company from its obligation to repay the Debt and to cancel the floating charge and liens registered in favor of the Bank on properties of the Company provided that, by May 31, 2001 the Company shall pay $954,000 to the Bank on account of the Debt (the "Repaid Amount") and in addition the Company shall have assigned to the Bank all its rights with respect to the debt of the municipality of Hod Hasharon to the Company in the amount of $2,173,000. The Company paid the $954,000 and made the assignment in the aforesaid amount. In addition, the Company has provided the bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon. (2) Following the Bank Agreement, on June 30, 2001 an agreement (the "Agreement") was signed between Mr. Strikovsky and the Company pursuant to which Strikovsky agreed to reimburse the Company for the Repaid Amount and any additional amount that the Company may have to pay to the Bank if the Bank exercises the guarantee related to the debt of Hod Hasharon. The reimbursement amount of $954,000 is due and payable to the Company and will be paid in monthly installments of $48,000 commencing on June 1, 2004 until paid in full. All amounts due and payable to the Company are linked to the Israeli CPI and bear interest of 4% per annum. The reimbursement amount of $954,000 was not yet recognized as the probability of its realization is in doubt. (3) Effective March 2001 the Company sold to IDAN, a company under the control of Strikovsky, all the fixed assets, inventories, other assets and liabilities and related goodwill, in the amount of $2,000,000, relating to the electrical operations for a consideration of $597,000. The consideration is payable in 25 monthly installments of $24,000 commencing February 1, 2002. In May 2002 the Company signed an addendum with IDAN to change the terms of payments to such that the first 11 installment will be reduced to $7,000 each and the remaining 14 installments will be of $37,000. The Company, considering the collectibility probability, decided to establish an allowance on the amount not yet collected. (4) To secure his obligations under the various agreements Mr. Strikovsky has collateralized 300,000 shares that he owns of the Company. -12- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - INVESTMENT IN AFFILIATE Until September 2000 the Company held 33.6% of the outstanding shares of Speedwise Technologies Ltd ("Speedwise"). In September 2000, Speedwise issued shares to a third party resulting in a decrease in the Company's holdings in Speedwise to 19.19% and during February 2001 additional shares were issued to third parties resulting in a further dilution to 15%. Effective January 1, 2001 the investment is carried at cost (see also Note 13). NOTE 5 - FIXED ASSETS
DECEMBER 31, ------------------------- 2001 2000 ------- ------- Cost: Computers and software $ 178 $ 304 Leasehold improvements 50 116 Motor vehicles -- 610 Furniture and fixtures 39 35 ------- ------- $ 267 $ 1,065 ======= ======= Accumulated depreciation: Computers and software $ (6) $ (100) Leasehold improvements (1) (55) Motor vehicles -- (257) Furniture and fixtures (1) (1) ------- ------- $ (8) $ (413) ======= =======
NOTE 6 - SUPPLEMENTARY BALANCE SHEET INFORMATION A. OTHER RECEIVABLES
DECEMBER 31, -------------------------- 2001 2000 ------- -------- Prepaid expenses $ 13 $ 77 Restricted cash 30 24 Advances to suppliers -- 14 Government authorities 102 -- Others 103 8 ------- ------- $ 248 $ 123 ======= ========
B. SHORT-TERM BANK CREDIT
DECEMBER 31, INTEREST RATES ------------------------- % 2001 2000 -------------- ------ ------------ UNLINKED SHEKEL CREDIT Overdraft 13.7-10.2 $ 50 $2,609 Short-term loans 6.2-10.2 -- 680 ------ ------ 50 3,289 Current maturities of long-term loans -- 48 ------ ------ $ 50 $3,337 ====== ======
Liens - see Note 8c -13- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - SUPPLEMENTARY BALANCE SHEET INFORMATION (cont.) C. OTHER PAYABLES:
DECEMBER 31, --------------------- 2001 2000 ------ ------ Wages and related accruals $ 52 $ 508 Government authorities 27 834 Accrued expenses (see also Note 8d) 806 284 Other -- 120 ------ ------ $ 885 $1,746 ====== ======
NOTE 7 - LONG-TERM LIABILITIES
DECEMBER 31, --------------------- 2001 2000 ------ ------ Long-term loan $ -- $ 44 Finance leases -- 85 Less - current maturities -- 48 ------ ------ -- 81 Less - deposit -- 16 ------ ------ $ -- $ 65 ====== ======
-14- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - COMMITMENTS AND CONTINGENT LIABILITIES A. LEASE AGREEMENT The facilities of the subsidiary are rented under an operating lease for a period of one year commencing May 14, 2000 and include a two-year lease extension option to extend the lease for one year periods upon prior written notice. The Company exercised the option and extended the lease term for additional year. The rent expenses under the operating lease for the year ended December 31, 2001 totaled $ 35,000. B. EMPLOYMENT AGREEMENT In June 1999, the Company entered into an employment agreement with Mr. Strikovsky providing that, through December 31, 2002, Mr. Strikovsky will serve as President and Chief Executive Officer of the Company at a base salary of $15,000 per month payable in New Israeli Shekels. The contract was terminated effective March 31, 2001, the date on which Mr. Strikovsky resigned from his duties. C. LIENS, SECURITY AND GUARANTEES 1. The Company has provided the Bank with a guarantee of up to $716,000, which decreases in the ratio of NIS 1:2 paid on account of the outstanding debt of Hod Hasharon. (see also Note 3b). The Company was informed that Hod-Hashron is delaying its payments due to the Bank. According to the Bank Agreement the Bank was entitled to exercise the guarantee no earlier than May 31, 2002, or if legal procedures are carried out against Hod-hasharon no earlier than November 30, 2002. The legal advisors of the Company are of the opinion that legal procedures have been commenced against Hod-Hasharon and the Bank can exercise the guarantee no earlier than November 30, 2002. 2. As of December 31, 2001, the Company was contingently liable for bank guarantees under performance obligations to customers totaling US$ 184,000. D. LEGAL CLAIM The Company was named as a defendant in a claim for specific performance of an agreement allegedly entered into by the Company and the plaintiff in April 1999 (the "Agreement") as well as damages as a result of a breach of the agreement. On July 2, 2001, due to the fact that no defense and/or reply was provided by the Company, judgment was entered against the Company in the amount of $725,000. On February 7, 2002 the Company filed a motion to vacate the judgment and on February 27, 2002 the court rejected the motion. The Company is in the process of filing an appeal on the court decision. The Company has established an allowance in the amount of $750,000 to provide for its possible exposure. -15- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 9 - SHARE CAPITAL a. In December 1998 the Company consummated an Initial Public Offering (IPO). Subsequent to the IPO, the Company's ordinary shares are quoted and listed on the American Stock Exchange (AMEX). b. In January 2000, Marnetics issued 36,318 ordinary shares of NIS 0.01 par value to an investor in consideration for $295,000. In addition, Marnetics granted the investor options to purchase 10,465 outstanding shares of the Company at $8.12 per share. c. In February 2000, Marnetics issued 130,719 ordinary shares of NIS 0.01 par value to ECI Communications Ltd. for $2,000 thousand. d. Through September 30, 2000, Marnetics has agreed to grant to specific employees options to purchase 40,437 ordinary shares of the Company pursuant to their employment agreements. The exercise price of the options is $1. Most of the options vest over four years. As part of the share exchange agreement such options were replaced with 308,300 options to purchase ordinary shares of the Company (see also Note 9(g) below). e. In October 2000 Marnetics reached an agreement with a group of new investors (the "Investors"). In accordance with the agreement, the Company issued to the Investors 221,200 ordinary shares in consideration of $5,076 thousand. f. On June 1, 2000 a share exchange agreement ("the agreement") was signed between the Company and Marnetics. The agreement was consummated after final approval of the Company's shareholders on December 20, 2000. Pursuant to the agreement the Company issued to the shareholders of Marnetics shares and options in the amounts of 4,993,048 and 1,761,236 (including 308,300 options to employees of Marnetics - see 9(g) below) respectively, representing 75% of its outstanding shares and options, on a fully diluted basis, in exchange for all shares in Marnetics. g. Pursuant to the agreement the Company issued newly unvested options to purchase 308,300 ordinary shares of the Company to the employees of Marnetics for their unvested options in Marnetics. In connection with this issuance, the Company recorded a deferred stock compensation expense totaling $1,836,000. h. In connection with the agreement, the Board of Directors of the Company adopted an Option Plan (the "Option Plan"). The Option Plan provides for the grant of options to purchase up to an aggregate of 1,000,000 Ordinary Shares to directors, key employees and consultants of the Company. The Board of Directors of the Company will determine the terms of the grants. Under the Option Plan, the Company granted, to a company under the control of the former CEO and chairman of the board of the Company, 400,000 fully vested options to purchase shares at the exercise price of $3. With respect to these options non-cash compensation expenses totaling $2,000,000 were recorded and charged to earnings in accordance with APB 25 "Accounting for Stock Issued to Employees". The amount of options outstanding is 1,978,101 of which 390,351 were granted to employees. i. During 2001, option granted to Marnetics certain shareholder in connection with the merger, were expired unexercised. According to the merger agreement such options have to be divided pro-ratably between the formers shareholder of Marnetics. The Company issued 955,057 shares which were divided pro-ratably according to the agreement. -16- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - TAXES ON INCOME The Company is assessed under the provisions of the Israeli Income Tax Law (Inflationary Adjustments) 1985, pursuant to which results for tax purposes are measured in new Israeli shekels in real terms in accordance with changes in the Israeli consumer price index. Income is taxable at the ordinary corporate tax rate of 36%. DEFERRED TAXES The main components of the Company's deferred tax assets are as follows:
DECEMBER 31, -------------------- 2001 2000 ------- ------- Deferred tax assets: Net operating loss carryforwards in Israel $(3,507) $(1,786) Accrued severance pay, inventory adjustments, accrued vacation pay and allowances for doubtful debts -- (96) Less - Valuation allowance 3,507 1,882 ------- ------- Balance $ -- $ -- ======= =======
Under SFAS No. 109, deferred tax assets are to be recognized for the anticipated tax benefits associated with net operating loss carryforwards and deductible temporary differences, unless it is more likely than not that some or all of the deferred tax assets will not be realized. The adjustment is made by a valuation allowance. Since the realization of the net operating loss carryforwards is less likely than not, a valuation allowance has been established for the amounts of the related tax benefits. Tax loss carryforwards of the Company and its subsidiary company totalling US$ 9,700 thousand are unlimited in duration, denominated in NIS and linked to the Israeli consumer price index. TAX ASSESSMENTS The Company has not been assessed for income tax purposes since incorporation. NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION A. RESEARCH AND DEVELOPMENT COSTS
CUMULATIVE FROM JUNE 1, 1998 (DATE OF COMMENCEMENT YEAR ENDED DECEMBER 31, OF OPERATIONS) TO ------------------------------ DECEMBER 31, 2001 2000 1999 2001 ------ ------ ------ ----------------- Salaries and related expenses $ 670 $ 217 $ 11 $ 998 Sub-contractors -- 17 20 60 Depreciation -- 6 2 16 Other 142 12 -- 154 ------ ------ ------ ------ $ 812 $ 252 $ 33 $1,228 ====== ====== ====== ======
-17- MARNETICS BROADBAND TECHNOLOGIES LTD. (A DEVELOPMENT STAGE COMPANY) NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 11 - SUPPLEMENTARY STATEMENT OF OPERATIONS INFORMATION (cont.) B. SALES AND MARKETING EXPENSES, NET
CUMULATIVE FROM JUNE 1, 1998 (DATE OF COMMENCEMENT YEAR ENDED DECEMBER 31, OF OPERATIONS) TO ---------------------------- DECEMBER 31, 2001 2000 1999 2001 ------ ------ ------ ----------------- Salaries and related expenses $ 251 $ 95 $ -- $ 346 Advertising and marketing Costs 75 61 -- 136 ------ ------ ------ ------ Gross sales and marketing Costs 326 156 -- 482 Less-participation from the Government of Israel (16) (14) -- (30) ------ ------ ------ ------ $ 310 $ 142 $ -- $ 452 ====== ====== ====== ======
C. GENERAL AND ADMINISTRATIVE EXPENSES
CUMULATIVE FROM JUNE 1, 1998 (DATE OF COMMENCEMENT YEAR ENDED DECEMBER 31, OF OPERATIONS) TO ---------------------------- DECEMBER 31, 2001 2000 1999 2001 ------ ------ ------ ----------------- Salaries and related expenses $ 472 $ 242 $ 11 $ 826 Professional services 321 305 8 660 Management fee -- 43 -- 43 Others 335 132 25 546 ------ ------ ------ ------ $1,128 $ 722 $ 44 $2,075 ====== ====== ====== ======
NOTE 12 - IMPAIRMENT OF GOODWILL During 2001, in view of the markets downstream, the Company assessed the value and future benefit of its enterprise level goodwill pursuant to Accounting Principles Board Opinion No. 17, "Intangible Assets" ("APB 17") (see Note 1 & 3b). The result of the assessment was a full write-off of the goodwill in the amount of $9,309,000. NOTE 13 - SUBSEQUENT EVENTS - UNAUDITED Speedwise is actively seeking additional funds to enable it to continue its operations through the end of the year. If such additional funds will not be available for Speedwise or if a business combination is effected with Speedwise reflecting a lower value for Speedwise than the carrying amount, some or all of the Company's investment may not be recoverable. (see Note 4) -18- EX-1.2 3 u45188exv1w2.txt ARTICLES OF ASSOCIATION EXHIBIT 1.2 ARTICLES OF ASSOCIATION OF MARNETICS BROADBAND TECHNOLOGIES LTD. [HEBREW PHRASE] AMENDED AND RESTATED AS OF 8 DECEMBER, 2000 ARTICLES OF ASSOCIATION OF MARNETICS BROADBAND TECHNOLOGIES LTD. [HEBREW PHRASE] - -------------------------------------------------------------------------------- 1. INTERPRETATION In these Articles, the words in the first column of the following table shall bear the meanings set opposite them respectively in the second column thereof, if not inconsistent with the subject or context: Words Meanings The Company Marnetics Broadband Technologies Ltd. The Board The Board of Directors of the Company Companies Law The Companies Law 1999 (the "Companies Law") and all orders and regulations issued thereunder as amended from time to time, including any law or statute replacing it. The Statutes The Companies Law, the Securities Law of 1968 and every other ordinance or law for the time being in force concerning companies and affecting the Company. These Articles These Articles of Association, as shall be amended from time to time. Officer A "NOSEH MISRA", as defined in the Companies Law, to wit, a Director, General Manager, chief business manager, deputy General Manager, vice General Manager, or any other manager directly subordinate to the managing director or any other person assuming the responsibilities of any of the foregoing positions without regard to such person's title. Audit Committee As defined in the Companies Law. The Office The registered office of the Company. The Seal Any of (i) the rubber stamp of the Company, (ii) the facsimile signature of the Company, or (iii) the electronic signature of the Company as approved by the Board. Shareholders Register The shareholders register required to be kept according to the Companies Law and any other shareholders register permitted to be kept by the Company according to the Companies Law. Month A Gregorian month. NIS New Israeli Shekel Writing Printing, lithography, photography and any other mode or modes of representing or reproducing words in a visible form. Words denoting the singular number shall include the plural number and vice versa; words denoting the masculine gender shall include the feminine and neuter genders; words denoting persons shall include any individual, company, corporation, partnership, trust, unincorporated association or other entity or any combination of the foregoing. Subject as aforesaid, any words or expressions defined in the Statutes shall, except where the subject or context forbids, bear the same meanings in these Articles. 2. PUBLIC COMPANY The Company is a public company which may have an unlimited number of Shareholders and may offer Securities to the public. The liability of a Shareholder for debts of the Company is limited to the unpaid portion of the consideration (including any premium) in exchange for which the Shareholder's Ordinary Shares were issued. The Company may not alter the liability of a Shareholder or require the acquisition of Securities without his consent. THE COMPANY'S PURPOSE 3. The Company's purpose is to operate according to business considerations for the production of profits. 4. SHARE CAPITAL -3- (a) The registered share capital of the Company is NIS 2,000,000 (Two Million New Israeli Shekel), divided into 25,000,000 (Twenty-five Million) Ordinary Shares of NIS 0.08 nominal value each (the "Ordinary Shares"). (b) Each Ordinary Share shall rank pari passu. The Ordinary Shares shall entitle their holders the right to participate and vote in all General Meetings of the Company, the right to receive dividends and the right to participate in the distribution of surplus assets of the Company in the event of the winding up of the Company, and all other rights generally conveyed to the holders of ordinary shares. AMENDMENT OF ARTICLES 5. These Articles (with the exception of Article 101 which may be amended as provided therein) may be amended by a majority vote at a meeting of shareholders of the Company, with the exception of Article 101 which may be amended only by the affirmative vote of two-thirds of the shareholders present (in person or by proxy) and voting on such resolution at a General Meeting. Notwithstanding the provisions of this Article 5, a change of these Articles that obligates a shareholder to acquire additional shares or to increase the extent of his liability shall not obligate the shareholder without his consent. SHARES 6. Subject to these Articles or to the terms of any resolution creating new shares, the unissued shares in the registered share capital of the Company from time to time shall be under the control of the Board, which shall have the power to allot shares or otherwise dispose of them to such persons, on such terms and conditions, and either at par or at a premium or, subject to the provisions of the Statutes, at a discount, and at such times as the Board may think fit, and the power to give to any person the option to acquire from the Company any shares, either at nominal value or at a premium or, subject as aforesaid, at a discount, during such time and for such consideration as the Board may determine. 7. If two or more persons are registered as joint holders of any share, any one of such persons may give effectual receipts for any dividends or other monies in respect of such share. A share certificate registered in the names of two or more persons shall be delivered to the person first named in the Register of Members in respect of such co-ownership. 8. Every shareholder registered in the Shareholders' Register shall be entitled, without payment, to receive within thirty days after allotment or registration of transfer (unless the conditions of issuance provide for a longer interval), one certificate under the Seal for all the shares registered in his name, and if the Board so approves, several certificates, each for one or more of such shares. Each certificate shall specify the number and denoting numbers of the shares in respect of which it is issued and may also specify the amount paid up thereon; provided that, in the case of joint holders, the Company shall not be bound to -4- issue more than one certificate to all the joint holders, and delivery of such certificate to one of them shall be sufficient delivery to all. Every certificate shall be signed by one Director and countersigned by the Secretary or some other person nominated by the Board for this purpose. 9. If any share certificate shall be defaced, worn out, destroyed or lost, it may be renewed on such evidence being produced, and such indemnity (if any) being given as the Board shall require and (in the case of defacement or wearing out) upon delivery of the old certificate and, in any case, upon payment of such sum not exceeding NIS 50 (Fifty New Israeli Shekels) as the Board may from time to time require. 10. The Company may, directly or indirectly, purchase its own shares subject to the provisions of the Companies Law. If the Company purchases its own shares, such shares will not have any rights as long as they are owned by the Company. 11. (a) A subsidiary or some other corporate body under the Company's control in this Article: "ACQUIRING CORPORATE BODY") may acquire shares of the Company subject to the provisions of the Companies Law, on condition that the subsidiary's Board or the Directors of the acquiring corporate body determined that - had the acquisition been made by the Company - it would have been permitted by the provisions of the Companies Law. (b) If the Company's shares are acquired by a subsidiary or by an acquiring corporate body, such shares shall not grant voting rights so long as they are owned by the subsidiary or by the acquiring corporate body. (c) If a prohibited distribution (as defined in Section 301 to the Companies Law) was made, then the refund specified in Section 310 to the Companies Law shall be made to the subsidiary or to the acquiring body corporate and the provisions of Section 311 shall apply, mutatis mutandis, to the Directors of the subsidiary and to the Directors of the acquiring body corporate. However, if the Company's Board determined that the distribution is permitted, then the responsibility shall be that of the Company's Directors, as provided in Section 311 to the Companies Law. (d) Notwithstanding the provisions of Sub-article (a), acquisition by a subsidiary or by an acquiring corporate body that is not wholly owned by the Company constitutes a distribution in an amount equal to the amount of the acquisition, multiplied by the proportion of rights in the subsidiary's capital or in the capital of the acquiring corporate body held by the Company. TRANSFER OF SHARES 12. No transfer of shares shall be registered unless a proper writing or instrument of transfer (in any customary form or any other form satisfactory to the Board) has been submitted to the Company (or its transfer agent), together with the share certificate(s) and such other evidence of title as the Board may reasonably require. Until the transferee has been registered in the Shareholders Register (which the Company shall perform promptly from submission to it of the -5- foregoing) in respect of the shares so transferred, the Company may continue to regard the transferor as the owner thereof. 13. The Board may refuse, without giving any reasons therefor, to register any transfer of shares where the Company has a lien on the shares, constituting the subject matter of the transfer, but fully paid-up shares may be transferred freely and such transfers do not require the approval of the Board. All instruments of transfer shall remain in the custody of the Company, but any such instrument which the Board refused to register shall be returned to the person from whom it was received, if such request be made by him. 14. The Transfer Records and the Shareholders Register and Debenture Holders (if any) Register and Debenture Stock Holders (if any) Register and other securities (if any) Register of the Company may be closed during such time as the Board may deem fit, not exceeding, in the aggregate, thirty (30) days in each year. TRANSMISSION OF SHARES 15. In the case of the death of a shareholder, or a holder of a debenture, the survivor or survivors, where the deceased was a joint holder, and the executors and/or administrators and/or the legal heirs of the deceased where he was a sole or only surviving holder, shall be the only persons recognized by the Company as having any title to his shares or his debentures, but nothing herein contained shall release the estate of a deceased joint holder from any liability in respect of any share or any debenture jointly held by him. 16. Any person who becomes entitled to a share or a debenture in consequence of the death or bankruptcy or any shareholder may, upon producing such evidence of title as the Board shall require, with the consent of the Board, be registered himself as holder of the share or the debenture or, subject to the provisions as to transfers herein contained, transfer the same to some other person. 17. A person entitled to a share or a debenture by transmission shall be entitled to receive, and may give a discharge for, any dividends or interest or other monies payable in respect of the share or debenture, but he shall not be entitled in respect of it to receive notices of, or to attend or vote at meetings of the Company or, save as aforesaid, to exercise any of the rights or privileges of a shareholder or a holder of a debenture unless and until he shall become a shareholder in respect of the share or a holder of the debenture. ALTERATIONS OF CAPITAL 18. Subject to the provisions of the Companies Law, the Company may from time to time by a majority vote at a General Meeting of shareholders of the Company: (a) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; or -6- (b) cancel registered share capital that has not yet been issued, on condition that there are no undertakings of the Company - including conditional undertakings - to issue such shares; or (c) divide its share capital or any part thereof into shares of smaller amount than is fixed by its Articles of Association by sub-division of its existing shares or any of them , and so that as between the resulting shares, one or more of such shares may, by the Resolution by which such sub-division is effected, be given any preference or advantage as regards dividend, return of capital, voting or otherwise over the others or any other shares; or (d) reduce its share capital and any capital redemption reserve fund in any way that may be considered expedient. 19. The Company may, subject to the Companies Law, issue redeemable shares and redeem the same according to the terms and conditions which the Company shall determine. INCREASE IN CAPITAL 20. The Company may from time to time by a majority vote at a meeting of shareholders, whether all the shares for the time being authorized shall have been issued or all the shares for the time being issued shall have been fully called up or not, increase its share capital by the creation of new shares; such new capital to be of such amount and to be divided into shares of such respective amounts and (subject to any special rights for the time being attached to any existing class of shares) to carry such preferential, deferred or other special rights (if any) or to be subject to such conditions or restrictions (if any) in regard to dividend, return of capital, voting or otherwise as the General Meeting deciding upon such increase directs. 21. Except so far as otherwise provided by or pursuant to these Articles or by the conditions of issuance, any new share capital shall be considered as part of the original ordinary share capital of the Company, and shall be subject to the same provisions with reference to liens, transfer, transmission and otherwise as the original share capital. MODIFICATION OF CLASS RIGHTS 22. If, at any time, the share capital is divided into different classes of shares, the rights attached to any class (unless otherwise provided by the terms of issuance of the shares of that class) may be varied with the sanction of a majority vote at a meeting of the shareholders passed at a separate meeting of the holders of the shares of the class. The provisions of these Articles relating to General Meetings shall apply, mutatis mutandis, to every such separate General Meeting. Any holder of shares of the class present in person or by proxy may demand a secret poll. 23. Unless otherwise provided by the conditions of issuance, the enlargement of an existing class of shares, or the issuance of additional shares thereof, shall not be -7- deemed to modify or abrogate the rights attached to the previously issued shares of such class or of any other class. BORROWING POWERS 24. The Board may from time to time, in its discretion, cause the Company to borrow or secure the payment of any sum or sums of money for the purposes of the Company, and may secure or provide for the repayment of such sum or sums in such manner, at such times and upon such terms and conditions in all respects as it sees fit and, in particular, by the issuance of bonds, perpetual or redeemable debentures, debenture stock, or any mortgages, charges or other securities on the undertaking, or the whole or any part of the property of the Company, both present and future, including units uncalled or called but unpaid capital for the time being. POWERS OF THE GENERAL MEETING 25. Without derogating from the authority of the General Meeting pursuant to these Articles, the Company's decisions on the following matters shall be adopted at a General Meeting: (1) any changes in these Articles; (2) exercise of the powers of the Board in accordance with the provisions of Section 52(a) of the Companies Law; (3) appointment of the Company's Auditor; (4) appointment of External Directors, in accordance with the provisions of the Companies Law; (5) approval of acts and transactions that require approval by the General Meeting under the provisions of Articles 255 and 268 to 275 of the Companies Law; (6) the increase and reduction of the registered share capital, in accordance with the provisions of Articles 286 and 287 to the Companies Law; (7) a merger, as specified in Article 320(a) to the Companies Law. GENERAL MEETING 26. (a) An Annual General Meeting shall be held at least once in every calendar year at such time, not being more than fifteen months after the holding of the last preceding Annual General Meeting, and at such time and place as may be determined by the Board. Such Annual General Meetings shall be called "Annual Meetings", and all other Meetings of the shareholders shall be called "Extraordinary Meetings". The Annual Meeting shall receive and consider the Directors' Report, the Financial Statements, appoint -8- auditors, elect directors, and transact any other business which, under these Articles or by the Companies Law, may be transacted at a General Meeting of the Company, provided that notice of such other business was given to shareholders in accordance with the provisions of these Articles. At a General Meeting, decisions shall be adopted only on matters that were specified on the agenda. (b) Any reference in these Articles to a "General Meeting" will be either a Annual General Meeting or a Extraordinary Meeting, according to the context. 27. The Board may, whenever it deems necessary, and shall upon such requisition in writing as is provided by Section 63(b) of the Companies Law, convene a General Meeting. Any such request must state the purposes for which the meeting is to be called, be signed by the requesting shareholders, and must be deposited at the Office. Such request may consist of several documents in like form, each signed by one or more requesting shareholder. 28. Except as otherwise prescribed by the Companies Law, at least ten (10) days and not more than sixty (60) days notice of any General Meeting shall be given, specifying the place, the day and the hour of meeting and, in the case of special business, the nature of such business, shall be given in the manner hereinafter mentioned, to such shareholders as are under the provisions of these Articles, entitled to receive notices from the Company. Notices shall be given by mail or by personal delivery to every registered shareholder of the Company, to his address as described in the Shareholders Register of the Company or such other address as designated by him in writing for this purpose. Provided that the accidental omission to give such notice to, or the non-receipt of such notice by, any such shareholder shall not invalidate any resolution passed or proceeding held at any such meeting and, with the consent of all the shareholders for the time being entitled to receive notice of meetings, a meeting may be convened upon a shorter notice or without notice, and generally in such manner as such shareholders may approve. Such consent may be given at the meeting or retrospectively after the meeting. If the shareholder did not provide the Company any address for the delivery of notices, the shareholder shall be deemed to have waived his right to receive notices. 29. Only shareholders of record as reflected on the Company's Share Register at the close of business on the date fixed by the Board as the record date determining the then shareholders who will be entitled to vote, shall be entitled to notice of, and to vote, in person or by proxy, at a General Meeting and any postponement or adjournment thereof. The Board will fix the record date of not less than four (4) nor more than forty (40) days before the date of the General Meeting, or such other timeframe, as allowed under the Companies Law and regulations thereunder, as may be amended from time to time. PROCEEDINGS AT GENERAL MEETINGS 30. No business shall be transacted at any General Meeting, or at an adjournment thereof, unless a quorum is present when the meeting proceeds to business. The -9- quorum at any Meeting shall be two shareholders present in person or by proxy, holding or representing at least thirty three and a third percent (33 1/3%) of the total voting rights in the Company. A company being a shareholder shall be deemed to be personally present for the purpose of this Article if represented by its representative duly authorized in accordance with Article 42. 31. If, within fifteen minutes from the time appointed for the holding of a General Meeting, a quorum is not present, the meeting shall stand adjourned to the same day in the next week at the same time and place, or any time and hour as the Board shall designate and state in a notice to the shareholders entitled to vote at the original meeting, and if, at such adjourned meeting, a quorum is not present within half an hour from the time appointed for holding the meeting any two shareholders present in person or by proxy shall constitute a quorum. Notwithstanding the aforesaid, if a General Meeting was convened at the demand of shareholders as permitted by Section 63(b) of the Companies Law, then a quorum at such adjourned meeting shall be present only if one or more shareholders are present who held in the aggregate at least 5% of the issued share capital of the Company and at least 1% of the voting rights in the Company or one or more shareholders who hold in the aggregate at least 5% of the voting rights in the Company. 32. The President of the Company or in his absence any other person nominated for that purpose by the Board, shall preside as chairman at every General Meeting of the Company. If there is no such President or other person, or if at any General Meeting neither the President nor the other person is present, or if at any General Meeting neither the President nor the other person is present within fifteen (15) minutes after the time fixed for holding the General Meeting or is willing to act as Chairman of the General Meeting, the Directors present shall choose one of themselves or if no Director is present, or if all the Directors present decline to take the chair, the members present shall choose one of themselves to be chairman of the General Meeting. The chairman of the General Meeting shall have no second or casting vote (without derogating from the rights of such chairman to vote as a shareholder or proxy of a shareholder if, in fact, he is also a shareholder or such proxy). 33. The chairman may, with the consent of any meeting at which a quorum is present, and shall, if so directed by the meeting, adjourn any meeting from time to time and from place to place as the meeting shall determine. Whenever a meeting is adjourned pursuant to the provisions of this Article for more than seven days, notice of the adjourned meeting shall be given in the same manner as in the case of an original meeting. Save as aforesaid, no shareholder shall be entitled to any notice of an adjournment, or of the business to be transacted at an adjourned meeting. No business shall be transacted at any adjourned meeting other than the business which might have been transacted at the meeting from which the adjournment took place. VOTES OF THE SHAREHOLDERS 34. Except as otherwise provided in these Articles, any resolution at a General Meeting shall be deemed adopted if approved by the holders of a majority of the -10- voting rights in the Company represented at the meeting in person or by proxy and voting thereon. In the case of an equality of votes, either on a show of hands or a poll, the chairman of the meeting shall not be entitled to a further or casting vote. 35. At all General Meetings, a resolution put to a vote at the meeting shall be decided on a show of hands unless, before or upon the declaration of the result of the show of hands, a poll in writing be demanded by the chairman (being a person entitled to vote), or by at least two shareholders present, in person or by proxy, holding at least 5% of the issued share capital of the Company and, unless a poll be so demanded, a declaration by the chairman of the meeting that a resolution has been carried, or has been carried unanimously or by a particular vote, or lost, or not carried by a particular vote, shall be conclusive, and an entry to that effect in the Minute Book of the Company shall be conclusive evidence thereof, without proof of the number or proportion of the votes recorded in favor of or against such resolution. 36. If a poll be demanded in manner aforesaid, it shall be taken forthwith, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded. The demand of a poll shall not prevent the continuance of a meeting for the transaction of any business other than the question on which a poll has been demanded. 37. Any shareholder which is not a natural person may, by resolution of its directors or other governing body, authorize such person as it thinks fit to act as its representative at any General Meeting, and the person so authorized to the satisfaction of the Company shall be entitled to exercise the same powers on behalf of such company, which he represents as that company could exercise if it were an individual shareholder. 38. Subject to any rights or restrictions for the time being attached to any class or classes of shares, every shareholder shall have one vote for each share of which he is the holder, whether on a show of hands or on a poll. 39. If any shareholder be a lunatic, idiot, or non compos mentis, he may vote by his committee, receiver, curator bonis or other legal curator, and such last-mentioned persons may give their votes either personally or by proxy. 40. If two or more persons are jointly entitled to a share then, in voting upon any question, the vote of the senior person who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other registered holders of the share and, for this purpose, seniority shall be determined by the order in which the names stand in the Shareholders Register. 41. Votes may be given either personally or by proxy. A proxy need not be a shareholder of the Company. 42. (a) The instrument appointing a proxy shall be in writing in the usual common form, or such form as may be approved by the Board, and shall be signed by the appointor or by his attorney duly authorized in writing or, if the appointor is a -11- corporation, the corporation shall vote by its representative, appointed by an instrument duly signed by the corporation. (b) The instrument appointing a proxy shall be deemed to include authorization to demand a poll or to vote on a poll on behalf of the appointor. 43. A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or insanity of the principal, or revocation of the proxy, or transfer of the share in respect of which the vote is given, unless an intimation in writing of the death, revocation or transfer shall have been received at the Office before the commencement of the meeting or adjourned meetings at which the proxy is used. 44. The instrument appointing a proxy shall be deposited at the Office or at such other place or places, whether in Israel or elsewhere, as the Board may from time to time, either generally or in a particular case or class of cases prescribe, at least twenty-four (24) hours before the time appointed for holding the meeting or adjourned meeting at which the person named in such instrument proposes to vote; otherwise, the person so named shall not be entitled to vote in respect thereof; but no instrument appointing a proxy shall be valid after the expiration of twelve months from the date of its execution. 45. A shareholder will be entitled to vote at the Meetings of the Company by several proxies appointed by him, provided that each proxy shall be appointed with respect to different shares held by the appointing shareholder. Every proxy so appointed on behalf of the same shareholder shall be entitled to vote as he sees fit. 46. No person shall be entitled to vote at any General Meeting (or be counted as a part of the quorum thereof) unless all calls then payable by him in respect of his shares in the Company shall have been paid. DIRECTORS POWERS AND RESPONSIBILITIES OF THE BOARD 47. (a) Without derogating from the authority of the General Meeting pursuant to these Articles and the Companies Law, the Board shall formulate the Company's policy and shall supervise the exercise of the General Manager's office and his acts, and as part thereof it - (1) shall determine the Company's plans of activity, the principles for financing such plans and the order of priority among them; (2) shall examine the Company's financial situation and set the framework of credit which the Company may take; (3) shall determine the organizational structure and the compensation policy of employees; (4) may decide to issue a series of debentures; (5) is responsible for the preparation and approval of the financial reports according to Section 171 to the Companies Law; -12- (6) shall report to the Annual Meeting about the state of the Company's affairs and on its business results, as required by Section 173 to the Companies Law; (7) shall appoint and dismiss the General Manager, as provided by Section 250 to the Companies Law; (8) shall decide on the acts and transactions that require its approval in accordance with these articles or under the provisions of Sections 255 and 268 to 275 to the Companies Law; (9) may issue shares and securities convertible into shares up to the limit of the Company's registered share capital, under the provisions of Section 288 to the Companies Law; (10) may decide on a distribution according to Sections 307 and 308 to the Companies Law; (11) shall express its opinion on a special purchase offer, according to Section 329 to the Companies Law. (b) The powers of the Board under this Article cannot be delegated to the General Manager. DIRECTORS 48. The Board of the Company shall consist of a minimum of two (2) and a maximum of eleven (11) Directors. Each Director shall be appointed by the Annual General Meeting unless appointed according to Section 57, and shall serve as Director from the time of appointment until the next Annual General Meeting unless such Director is disqualified for whatever reason. 49. (a) Any director or directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of the majority of the Ordinary Shares present in person or by proxy and voting thereon. For purposes of this clause (a): "cause" shall mean the willful and continuous failure of a director substantially to perform such director's duties to the Company (other than any such failure resulting from incapacity due to physical or mental illness) or the willful engaging by a director in gross misconduct materially and demonstrably injurious to the Company. (b) The General Meeting shall appoint External Directors as and to the extent required by, and they shall hold office according to, the Companies Law, as long as the Company is required by the Companies Law to appoint such External Directors. 50. A Director may appoint, dismiss and/or replace an individual as a substitute for himself as a Director (an "ALTERNATE DIRECTOR"). The person appointed as an Alternate Director must be qualified to serve as a Director and may not already be acting as a Director or an Alternate Director. The appointment, replacement and/or dismissal of an Alternate Director shall be by written notice by the appointing Director either to the Company or to the Chairman of the Board. Upon expiration or termination of the term of an appointing Director, the term of his Alternate Director will also expire. An Alternate Director will not be entitled to participate or vote at a Board Meeting at which the appointing -13- Director is present. An Alternate Director shall have all the powers and obligations of the appointing Director, except the power to appoint an Alternate Director. 51. (a) No person shall be nominated for the office of a director at a General Meeting except for persons nominated for the office of a director as provided for in Article 51(b). (b) Any shareholder entitled to receive notice of and vote at a General Meeting desiring to propose a nominee for director to be elected at an Annual General Meeting of Shareholders has to deliver notice to the Secretary, at the Company's principal offices, not later than forty-five (45) days prior to the date of the annual General Meeting at which meeting such election is to occur, whichever date is later. The notice shall set forth: (i) the name and address, as they appear on the Company's share register, of the shareholder proposing such nominee, (ii) the identity and background of the nominee, (iii) the class and number of shares of the Company beneficially owned by such shareholder, (iv) a representation that such shareholder is a shareholder of record and intends to appear by person or by proxy at such General Meeting to bring the General Meeting the nominee specified in the notice, (v) a brief description of the reasons for wanting to nominate such nominee as a director, (vi) any material interest that the shareholder has in the election of such nominee and (vii) the written consent of the nominee to be elected as a director of the Company. 52. The Directors in their capacity as such, shall be entitled to receive remuneration and reimbursement of expenses incurred by them in the course of carrying out their duties as Directors. 53. The office of a Director shall be vacated, ipso facto: (a) upon his resignation by written notice signed by him and delivered to the Office; (b) if he becomes bankrupt or enters into an arrangement with his creditors; (c) if he is or becomes of unsound mind; (d) if he be relieved of his office as provided in Article 50(b) hereof; (e) if he is prevented by applicable law from serving as a director of the Company. (f) if the Board terminate his office according to Section 231 of the Companies Law; (g) if court order is given according to Section 233 of the Companies Law. 54. (a) Subject to the provisions of the Companies Law, no Director shall be disqualified by virtue of his office from holding any office, or deriving any -14- profit from any other office in the Company or from any company in which the Company shall be a shareholder or otherwise interested, or from contracting with the Company as a vendor, purchaser or otherwise. (b) Transactions entered into by the Company in which an Officer of the Company has a personal interest, directly or indirectly, will be valid in respect of the Company and the Officer only if approved by the Company's Board in accordance with the requirements of the Companies Law. 55. A Director who has a personal interest in a matter which is brought for discussion before the Board may participate in said discussion, provided that he shall neither vote in nor attend discussions concerning the approval of the activities or the arrangements. If said Director did vote or attend as aforesaid, the approval given to the aforesaid activity or arrangements shall be invalid. 56. In the event of one or more vacancies on the Board, the continuing Directors may continue to act as long as the Board consists of at least a majority of the total number of Directors elected. However, in the event that the remaining Directors are not a majority of the total number of Directors elected, the remaining Director or Directors may call for the convening of a General Meeting for the purpose of the election of Directors. 57. Subject to the limitation on the number of Directors as specified in Article 49, the Board may, at any time and from time to time, appoint any other person as a Director, whether to fill a vacancy or to add to their number. Any Director so appointed shall hold office until the next Annual Meeting at which the term of the class to which they have been elected expires, and may be re-elected. 58. In case of any increase in the number of directors, the additional director or directors, and in case of any vacancy in the Board due to a death, resignation, removal, disqualification or any other cause, the successors appointed according to Article 57 to fill the vacancies shall be elected by a majority of the directors then in office. CONVENING THE BOARD 59. (a) The Chairman of the Board may convene a meeting of the Board at any time. (b) The Board shall hold a meeting on a specified subject on the demand of two Directors, or if the Board consists of up to five Directors - one Director; (c) The Chairman of the Board shall convene the Board upon a demand said in Sub-article (b) of this Article 59 or if Section 122(d) to the Companies Law applies, due to a notice or report from the General Manager or due to a notice from the Auditor of the Company under Section 169 to the Companies Law. (d) If a meeting of the Board was not convened within 14 days after the date of a demand pursuant to Sub-article (b) of this Article 59, or after the date of a notice or report of the General Manager according to Section 122(d) to the Companies -15- Law, or after notice of the Auditor under Section 169 to the Companies Law, then each of those persons enumerated in Sub-articles (b) and (c) may convene a meeting of the Board, which shall discuss the subject specified in the demand, notice or report, as the case may be. MEETINGS OF THE BOARD AND THEIR CONDUCT 60. The agenda of a meeting of the Board shall be set by the Chairman of the Board, and it shall include: (1) subjects determined by the Chairman of the Board; (2) subjects determined as said in Section 98 to the Companies Law; (3) any subject which a Director or the General Manager requested at a reasonable time before the meeting was convened - of the Chairman of the Board to include in the agenda 61. Notice of a meeting of the Board shall be delivered to all its members at a reasonable time before the meeting, but not later than forty eight (48) hours prior to the time set for any such meeting. 62. A notice under Section 61 may be given orally, by telephone, in writing or by mail, electronic mail, telex or facsimile. Notwithstanding anything to the contrary herein, failure to deliver notice to a Director of any such meeting in the manner required hereby may be waived by such Director, and a meeting shall be deemed to have been duly convened notwithstanding such defective notice if such failure or defect is waived prior to action being taken at such meeting by all Directors entitled to participate at such meeting to whom notice was not duly given as aforesaid. 63. Any person, either a Director or not, may be substitute member of the Board, and one person may substitute several members of the Board. Any substitute member of the Board who is also a member of the Board shall have, in addition to his own vote, a number of votes equal to the number of members of the Board that he substitutes. A substitute member of the Board shall have, subject to his letter of appointment, all authorities vested to the member of the Board he substitutes, and if and as long as such substitute member is, for himself, a member of the Board, the aforesaid authorities as substitute member shall be in addition to his authorities as a member of the Board. The tenure of office of a substitute member of the Board shall automatically be terminated upon the dismissal of such member, or upon the office of the member of the Board he substitutes being vacated for any reason, or upon the occurrence of one of the situations stated in Article 53 above in relation with such substitute member. GENERAL MANAGER -16- 64. The Board will appoint one or more persons as General Manager, and they will be titled as President or Chief Executive Officer (CEO) or Chief Operating Officer (COO). The Board may from time to time remove or discharge him or them from office (subject to the provisions of any agreement between any such person and the Company) and appoint another or others in his or their place or places. 65. The Board may from time to time appoint one or more Vice Presidents for certain functions, to carry out duties delegated to him (them) by the President, CEO or COO. 66. To the extent permitted by the Companies Law, the Board may from time to time confer upon and delegate to a President, CEO, COO or other Executive Officer then holding office, such authorities and duties of the Board as they may deem fit, and they may delegate such authorities and duties for such period and for such purposes and subject to such conditions and restrictions which they consider in the bests interests of the Company, and they may delegate such authorities and duties without waiving the authorities of the Board with respect thereto and it may from time to time revoke, cancel and alter such authorities and duties in whole or in part. 67. The remuneration of a President, CEO, COO or other Executive Officer shall be fixed by the Board, taking into consideration any agreement between him and the Company, and it may be in whole or in part, in the form of salary, share options, or commissions or profit sharing or a combination thereof. DIRECTOR'S ACTS AND AUTHORITIES 68. The management of the business of the Company shall be vested in the Board, which may exercise all such powers and do all such acts and things as the Company is authorized to exercise and do, and are not hereby or by law required to be exercised or done by the Company in a General Meeting. The authority conferred on the Board by this Article 68 shall be subject to the provisions of the Companies Law, of these Articles and any regulation or resolution consistent with these Articles adopted from time to time by the Company in a General Meeting, provided, however that no such regulation or resolution shall invalidate any prior act done by or pursuant to a decision of the Board which would have been valid if such regulation or resolution had not been adopted. 69. The Directors may postpone their meetings and otherwise regulate them as they shall deem fit. The quorum for the dispatch of business by the Board shall be determined by the Directors and, if not so determined, shall be the majority of the Directors then holding office. 70. A resolution in writing signed or otherwise approved in writing (by letter, telegram, telex, facsimile, electronic mail or otherwise) by all the Directors then in office shall be as valid and as effectual as a resolution adopted by the Board at a meeting of the Board duly convened and held. 71. Members of the Board, or of any committee designated by the Board, may participate in a meeting of the Board, or of any committee, by means of a -17- telephone conference or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute attendance in person at the meeting. 72. (a) The Board shall elect a Chairman for the meeting and fix the term of his office. The CEO shall not serve as Chairman of the Board and vice versa unless the holders of two thirds of the voting rights in the Company represented in person or by proxy and voting on such resolution at a General Meeting, who are not controlling shareholders of the Company or their representatives and who are present at the vote, adopt a decision to appoint the Chairman of the Board as the CEO, for a period not exceeding three years after the date of the adoption of the decision. (b) In the event that a Chairman was not elected or if the Chairman should fail to be present at a meeting fifteen (15) minutes after the time set for its convening, the remaining Directors shall elect one of those present to be Chairman of the meeting. (c) All questions that arise at meetings of the Board shall be decided by a majority of votes. In the event of a tie vote, the Chairman of the Board shall not have a casting vote. 73. Any meeting of the Board at which a quorum is present shall have the authority to exercise all or part of the authorities, powers of attorney and discretion invested at such time in the Directors or regularly exercised by them. 74. Subject to the Companies Law, the Board may delegate its authorities in whole or in part to committees as it shall deem fit, and it may from time to time revoke such delegation. Any committee so created must, in exercising the authorities granted to it, adhere to all the instructions of the Board given from time to time and/or to the provisions of the Companies Law. 75. All acts done bona fide at any meeting of the Board, or of a committee of the Board or by any person(s) acting as Director(s) shall, notwithstanding that it may afterwards be discovered that there was some defect in the appointment of the participants in such meeting or any of them or any person(s) acting as aforesaid, or that they or any of them or any person(s) acting as aforesaid, or that they or any of them were disqualified, be as valid as if there were no such defect or disqualification. 76. The Board shall cause proper Minutes to be kept of the following: (a) the names of all the Directors present at any meeting of the Board and at any meeting of a committee of the Board; (b) all proceedings and resolutions of General Meetings of the Company, Board meetings and Committees of the Board meetings. -18- Any Minutes as aforesaid, if purporting to be signed by the Chairman of such meeting or by the Chairman of the next succeeding meeting, shall be accepted as prima facie evidence of the matters therein recorded. 77. [Reserved.] SHAREHOLDER REGISTERS 78. Subject to, and in accordance with, the provisions of the Companies Law, the Company may cause the Shareholder Register to be kept at any place in Israel and may cause a copy of the Shareholder Register to be kept outside Israel as the Board may think fit and, subject to all applicable legal requirements, the Board may from time to time adopt such rules and procedures as it may think fit in connection with the keeping of such registers. In addition to the Shareholders Register, the Company shall also keep a Register of Substantial Shareholders as defined in the Companies Law. SECRETARY 79. The Board may from time to time appoint a Secretary to the Company as it deems fit, and may appoint a temporary Assistant Secretary who shall act as Secretary for the term of his appointment. RIGHTS OF SIGNATURE - STAMP AND SEAL 80. (a) Authorization to sign on behalf of the Company and thereby bind it shall be made and granted from time to time by the Board. The Company shall have at least one rubber stamp. The Company shall be bound by the signature of the aforesaid appointees if appearing together after its stamp or printed name. (b) The Board may provide for a seal. If the Board so provides, it shall also provide for the safe custody thereof. Such seal shall not be used except by the authority of the Board and in the presence of the person(s) authorized to sign on behalf of the Company, who shall sign every instrument to which such seal is affixed. DIVIDENDS 81. Subject to any preferential, deferred, qualified or other rights, privileges or conditions attached to any special class of shares with regard to dividends, the profits of the Company available for dividend and resolved to be distributed shall be applied in payment of dividends upon the shares of the Company in proportion to the amount paid up or credited as paid up per the nominal value thereon respectively. Unless not otherwise specified in the conditions of issuance of the shares, all dividends with respect to shares which were not fully paid up within a certain period, for which dividends were paid, shall be paid proportionally to the amounts paid or credited as paid on the nominal value of the shares during any portion of the above-mentioned period. -19- 82. The Board may declare a dividend to be paid to the shareholders according to their rights and interests in the profits, and may fix the record date for eligibility and the time for payment. 83. The Directors may from time to time pay to the shareholders on account of the next forthcoming dividend such interim dividends as, in their judgment, the position of the Company justifies. 84. A transfer of shares shall not pass the right to any dividend declared thereon after such transfer and before the registration of the transfer. 85. Notice of the declaration of any dividend, whether interim or otherwise, shall be given to the holders of registered shares in the manner hereinafter provided. 86. Unless otherwise directed, any dividend may be paid by check, bank transfer or warrant, sent through the post to the registered address of the shareholder or person entitled or, in the case of joint registered holders, to that one of them first named in the register in respect of the joint holding. Every such check shall be made payable to the order of the person to whom it is sent. The receipt by the person whose name, at the date of the declaration of the dividend, appears in the register of shareholders as the owner of any share or, in the case of joint holders, of any one of such joint holders, shall be a good discharge to the Company of all payments made in respect of such share. All dividends unclaimed for one year after having been declared may be invested or otherwise used by the Directors for the benefit of the Company until claimed. No unpaid dividend or interest shall bear interest as against the Company. 87. The Board may determine that, a dividend may be paid, wholly or partly, by the distribution of specific assets of the Company or by distribution of paid-up shares, debentures or debenture stock or any other securities of the Company or of any other companies or in any one or more of such ways in the manner and to the extent permitted by the Companies Law. PROHIBITED DISTRIBUTION 88. (a) If the Company made a prohibited distribution as defined in the Companies Law, then the shareholder must return to the Company whatever he received, unless he did not know and did not need to know that the distribution carried out was prohibited. (b) It is assumed that a shareholder in the Company, who at the time of the distribution is not a Director, General Manager or controlling member of the Company, did not know and did not need to know that the distribution carried out was a prohibited distribution. 89. If the Company carried out a prohibited distribution, then every person who was a Director at the time of the distribution shall be treated as a person who thereby committed breach of trust against the Company, unless he proved one of the following: -20- (1) that he opposed the prohibited distribution and took all reasonable steps to prevent it; (2) that he exercised reasonable reliance on information under which - had it not been misleading - the distribution would have permitted; (3) that under the circumstances of the case he did not know and did not need to know of the distribution. MERGER 90. A merger requires approval by the Board and by the General Meeting, in accordance with the provisions of the Companies Law. 91. (a) The Board of the Company, while considering whether to approve the merger, shall discuss and determine taking the Company's financial situation into account - whether in its opinion there is a reasonable suspicion that in consequence of the merger the merged Company will not be able to meet the Company's obligations to its creditors. (b) If the Board determined that there is a suspicion as said in Sub-article (a), then it shall not approve the merger. 92. If each of the Boards of Directors of the merging companies approved the merger, then they shall jointly draw up a proposal for the approval of the merger (hereafter: merger proposal) and sign it. 93. (a) The Company shall deliver the merger proposal to the Companies Registrar within three days after the General Meeting was called. (b) The Company shall inform the Companies Registrar of the General Meetings decision within three days after the decision was adopted, shall inform him that the notice was given to the creditors under Section 318 to the Companies Law, and shall also deliver to the Registrar a copy of the Court decision under Sections 319 to 321 to the Companies Law within three days after the said decision was given. ACCOUNTS 94. The Board shall cause accurate books of account to be kept in accordance with the provisions of the Companies Law and of any other applicable law. Such books of account shall be kept at the Registered Office of the Company, or at such other place or places as the Board may think fit, and they shall always be open to inspection by all Directors. No shareholder not being a Director shall have any right to inspect any account or book or other similar document of the Company, except as conferred by law or authorized by the Board of the Company. -21- 95. At least once in every fiscal year the accounts of the Company shall be audited and the correctness of the profit and loss account and balance sheet certified by one or more duly qualified auditors. 96. The appointment, authorities, rights and duties of the auditor(s) of the Company shall be regulated by the applicable law. NOTICES 97. (a) A notice or any other document may be served by the Company upon any shareholder either personally or by sending it by prepaid mail in Israel (by prepaid air mail if sent to a place outside Israel other than the U.S, or by first class mail if sent within the U.S.) addressed to such shareholder at his address as recorded in the Company's Shareholder Register or such other address as he may have designated in writing for the receipt of notices and other documents. Any written notice or other document shall be deemed to have been served forty-eight (48) hours after it has been mailed (seven (7) days if mailed to a place outside of Israel or forty-eight (48) hours if mailed from within the U.S. to a location within the U.S.), or when actually received by the addressee if sooner than forty-eight (48) hours or seven (7) days, as the case may be, after it has been mailed, or when actually tendered in person to such shareholder (or to the Secretary or the President of the Company, as the case may be); provided, however, that such notice or other document mentioned above may be sent by facsimile and confirmed by registered mail as aforesaid, and such notice shall be deemed to have been given twenty-four (24) hours after such facsimile has been sent or when actually received by such shareholder (or by the Company), whichever is earlier. If a notice is, in fact, received by the addressee, it shall be deemed to have been duly served when received, notwithstanding that it was defectively addressed or failed in some respect to comply with the provisions of this Article. (b) Unless otherwise specified in bearer share warrants, the holders of such warrants shall not be entitled to receive notice of any General Meeting of the Company, and the Company is under no obligation to give notice of General Meetings to a person entitled to a share by virtue of its delivery to him, unless he is duly registered as a shareholder. (c) All notices to be given to the shareholders shall, with respect to any shares to which persons are jointly entitled, be given to whichever of such persons is named first in the Shareholders Register, and any notice so given shall be sufficient notice to the holders of such shares. (d) Any shareholder whose address is not described in the Shareholders Register, and who shall not have designated in writing an address for the receipt of notices, shall not be entitled to receive any notice from the Company. (e) Any notice or other document served upon or sent to any shareholder by publication in accordance with these Articles shall, notwithstanding that he be then deceased or bankrupt, and whether or not the Company has notice of his death or bankruptcy, be deemed to be duly served or sent in respect of any -22- shares held by him (either alone or jointly with others) until some other person is registered in his stead as the holder or joint holder of such shares, and such service or sending shall be a sufficient service on or sending to his heirs, executors, administrators or assigns and all other persons (if any) interested in such share. (f) Where a given number of days' notice, or notice extending over any period, is required to be given, the day of service shall be counted in such number of days or other period. RECONSTRUCTION 98. On any sale of the undertaking of the Company, the Board or the liquidators on a winding-up may, if authorized by a majority vote at a meeting of shareholders, accept fully paid up shares, debentures or securities of any other company, whether Israeli or foreign, either then existing or to be formed, for the purchase, in whole or in part, of the property of the Company, and the Board (if the profits of the Company permit), or the liquidators (on a winding-up), may distribute such shares or securities, or any other property of the Company, amongst the shareholders without realization, or vest the same in trustees for them, and the shareholders of the Company at any General Meeting may provide for the distribution or appropriation of the cash, shares or other securities, benefits or property, in accordance with the legal rights of the shareholders or contributors of the Company, and for the valuation of any such securities or property at such price and in such manner as the meeting may approve, and all holders of shares shall be bound to accept and shall be bound by any valuation or distribution so authorized, and waive all rights in relation thereto, save only in the case the Company is proposed to be, or is, in the course of being wound up, such statutory rights (if any) under the provisions of the Statutes as are incapable of being varied or excluded by these presents. INDEMNITY AND INSURANCE OF OFFICERS 99. The Company may, to the maximum extent permitted by the Companies Law: (a) enter into a contract for the insurance of the liability, in whole or in part, of any of its Officers, (b) may indemnify an Officer of the Company post factum; and (c) may indemnify an Officer of the Company in advance for the following events: (i) Any financial obligation imposed on an Officer in favor of a third party by a court judgment, including a compromise judgment approved by court (provided that the Company approved the compromise in advance) or an arbitrator's award approved by court (provided that it was given pursuant to arbitration agreed to by the Company in advance), for an act or omission performed by an Officer in his capacity as an Officer.; and -23- (ii) reasonable legal expenses, including attorneys' fees, expended by or charged to an Officer or adjudicated against an Officer by a court in a proceeding commenced against an Officer by the Company or on its behalf or by another person, or in a criminal charge from which an Officer was acquitted, or in a criminal charge that does not require intent, in which an Officer was convicted, all for an act or omission performed in his capacity as an Officer . Such indemnity shall apply in certain forseeable events and up to a feasible amount under the circumstances, as determined by the Board. WINDING-UP 100. If the Company shall be wound up, whether voluntarily or otherwise, the liquidators may, subject to the provision of the Statutes, divide among the shareholders in specie any part of the assets of the Company and may, with like sanction, vest any part of the assets of the Company in trustees upon such trusts, for the benefit of the shareholders, as the liquidators with like sanction shall think fit. BUSINESS COMBINATIONS WITH INTERESTED SHAREHOLDERS 101. Notwithstanding any other provision of these Articles, the Company shall not engage in any business combination with any interested shareholder for a period of three years following the time that such shareholder became an interested shareholder, unless: (a) prior to such time the Board of the Company approved either the business combination or the transaction which resulted in the shareholder becoming an interested shareholder, or (b) upon consummation of the transaction which resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85% of the voting shares of the Company outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned (i) by persons who are directors and also officers and (ii) employee share plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer, or (c) at or subsequent to such time the business combination is approved by the Board and authorized at a General Meeting, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting shares which is not owned by the interested shareholder. (d) A shareholder becomes an interested shareholder inadvertently and (i) as soon as practicable diverts itself of ownership of sufficient shares so that the shareholder ceases to be an interested shareholder; and (ii) would not, at any time within the three-year period immediately prior to a business combination -24- between the Company and such shareholder, have been an interested shareholder but for the inadvertent acquisition of ownership; or (e) The business combination is proposed prior to consummation or abandonment of and subsequent to the earlier of the public announcement or the notice required hereunder of a proposed transaction which (i) constitutes one of the transactions described in the second sentence of this paragraph; (ii) is with or by a person who either was not an interested shareholder during the previous three years or who became an interested shareholder with the approval of the Company's Board; and (iii) is approved or not opposed by a majority of the members of the Boards of Directors then in office who were directors prior to any person becoming an interested shareholder during the previous three years or were recommended for election or were elected to succeed such directors by a majority of such directors. The proposed transactions referred to in the preceding sentences are limited to (x) a merger or consolidation of Company (except for merger in respect of which no vote of shareholders of the Company is required according to the Companies Law); (y) a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether as part of a dissolution or otherwise of assets of the Company or of any direct or indirect majority-owned subsidiary of the Company (other than to any direct or indirect wholly owned subsidiary or to the Company) having an aggregate market value equal to 50% or more of either that aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market of all the outstanding shares of the Company; or (z) a proposed tender or exchange offer for 50% or more of the outstanding voting shares of the Company. The Company shall give not less than 20 days notice to all interested shareholders prior to the consummation of any of the transaction described in clause (x) or (y) of the second sentence of this paragraph. As used in this Article only, the term: (1) "affiliate" means a person that directly, or indirectly through one or more intermediaries, controls, is controlled by or is under common control with another person. (2) "associate" when used to indicate a relationship with any person, means (I) any corporation, partnership, unincorporated association or other entity of which such person is a director, officer or partner or is, directly or indirectly, the owner of 20% or more of any class of voting shares, (ii) any trust or other estate in which such person has at least a 20% beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such person, or any relative of such spouse, who has the same residence as such person. (3) "business combination" when used in reference to the Company and any interested shareholder of the Company, means: -25- (i) any merger or consolidation of the Company or any direct or indirect majority owned subsidiary of the Company with (A) an interested shareholder, or (B) with any other corporation, partnership, unincorporated association or other entity if the merger or consolidation is caused by an interested shareholder and as a result of such merger or consolidation Sub-article (a) of this Article 101 is not applicable to the surviving entity; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except proportionately as a shareholder of such Company to or with the interested shareholder, whether as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority owner subsidiary of the Company, which assets have an aggregate market value equal to 10% or more of either the aggregate market value of all of the assets of the Company determined on a consolidated basis or the aggregate market value of all of the outstanding shares of the Company. (iii) any transaction which results in the issuance or transfer by the Company or by any direct or indirect majority-owned subsidiary of the Company of any shares of the Company or of such subsidiary to the interested shareholder, except (A) pursuant to the exercise, exchange or conversion of securities exercisable for or convertible into shares of the Company or any such subsidiary, which securities were outstanding prior to the time that the interested shareholder became such, (B) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into shares of the Company or any such subsidiary, which security is distributed pro rata to all holders of a class or series of shares of the Company subsequent to the time the interested shareholder became such, (C) pursuant to an exchange offer by the Company to purchase shares made on the same terms to all holders of said shares or (D) any issuance or transfer of shares by the Company; provided, that in no case under (B)-(D) above shall there be an increase in the interested shareholder's proportionate share of the shares of any class or series of the Company or of the voting shares of the Company. (iv) any transaction involving the Company or any direct or indirect majority owned subsidiary of the Company which has the effect directly or indirectly of increasing the proportionate share of the shares of any class or series or -26- securities convertible into the shares of any class or series of the Company or of any such subsidiary which is owned by the interested shareholder except as a result of immaterial changes due to fractional share adjustments or as a result of any purchase or redemption of any shares not caused, directly or indirectly, by the interested shareholder; or (v) any receipt by the interested shareholder of the benefit, directly or indirectly (except proportionately as a shareholder of such Company), of any loans, advances, guarantees, pledges or any other financial benefits (other than those expressly permitted in subparagraphs (i)-(iv) above) provided by or through the Company or any direct or indirect majority owned subsidiary. (4) "control" including the term "controlling," "controlled by" and "under common control with," means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting shares, by contract or otherwise. A person who is the owner of 20% or more of the outstanding voting shares of any company, partnership, unincorporated association or other entity shall be presumed to have control of such entity. Notwithstanding the foregoing, a presumption of control shall not apply where such person holds voting shares in good faith and not for the purpose of circumventing this Article as an agent, bank, broker, nominee, custodian or trustee for one or more owners who do not individually or as a group have control of such entity. (5) "interested shareholder" means any person (other than the Company and any direct or indirect majority owner subsidiary of the Company) that (i) is the owner of 15% or more of the outstanding voting shares of the Company, or (ii) is an affiliate or associate of the Company and was the owner of 15% or more of the outstanding voting shares of the Company at any time within the three year period immediately prior to that date on which it is sought to be determined whether such person is an interested shareholder and the affiliates and associates of such person, or (iii) any person whose ownership of shares in excess of the 15% limitation set forth herein is the result of action taken solely by the Company provided that such person shall be an interested shareholder if thereafter such person acquires additional voting shares of the Company, except as a result of further corporate action not caused, directly or indirectly, by such person. For the purpose of determining whether a person is an interested shareholder, the voting shares of the Company deemed to be outstanding shall include shares deemed to be owned by the person through application of paragraph (8) of this Sub-article but shall not include any other unissued shares of the Company which -27- may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (6) "share" means with respect to the Company shares of its capital and with respect to any other entity any equity interest. (7) "voting shares" means any class or series entitled to vote generally in the election of directors of the Company and generally. (8) "owner" including the terms "own" and "owned," when used with respect to any share, means a person that individually or with or through any of its affiliates or associates: (i) beneficially owns such share, directly or indirectly; or (ii) has (A) the right to acquire such share (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, warrants or options, or otherwise, provided, however, that a person shall not be deemed the owner of share tendered pursuant to a tender or exchange; or (B) the right to vote such share pursuant to any agreement, arrangement or understanding; provided, however, that a person shall not be deemed the owner of any share because of such person's right to vote such share if the agreement, arrangement, or understanding to vote such share arises solely from a revocable proxy or consent given in response to a proxy or consent solicitation made to 10 or more persons: or (iii) has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting (except voting pursuant to a revocable proxy or consent as described in item (b) of clause (ii) of this paragraph) or disposing of such share with any other person that beneficially owns or whose affiliates or associates beneficially own, directly or indirectly, such share. ********************** -28- EX-4.2 4 u45188exv4w2.txt SERVICES AGREEMENT EXHIBIT 4.2 - -------------------------------------------------------------------------------- SERVICES AGREEMENT - -------------------------------------------------------------------------------- This Services Agreement (the "Agreement") is made and entered into as of the 11th day of February 2002, by and between Marnetics Ltd., formed under and existing in accordance with the laws of Israel (the "Company") and Netlogic Ltd., formed under and existing in accordance with the laws of Israel (the "Consultant"). WHEREAS the Company is wholly owned by Marnetics Broadband Technologies Ltd. ("MXB") whose shares are registered for trade on the American Stock Exchange and engages in the development and marketing of network capacity solutions; and WHEREAS the Company wishes to obtain executive managerial and other related services with respect to the Company, MXB and any of its Affiliated companies (the "Services") as may be prescribed from time to time by the Board of Directors of the Company (the "Board") in accordance with the terms of this Agreement; and WHEREAS the Consultant has the skills, experience, expertise and resources required in order to ensure the provision of the Services required pursuant to this Agreement by qualified and competent individuals (the "Representative"); and WHEREAS the parties wish to set forth in writing the terms and conditions whereby the Company engages the Consultant. NOW, WHEREFORE, THE PARTIES HERETO HAVE AGREED AS FOLLOWS: 1. INTRODUCTION 1.1 The preamble and all Schedules attached hereto form an integral part hereof. 1.2 The paragraph headings used herein are for convenience purposes only, and shall not be used or applied in construing any of the provisions hereof. 1.3 For purposes of this Agreement and all Schedules attached hereto: 1.3.1 The term "person" shall mean any individual, company, corporation, partnership, association, joint venture, trust, organization or other incorporated or unincorporated entity or any combination of the foregoing. 1.3.2 The term "Affiliate" shall mean any person controlling, controlled by or under common control with the Company. 2. ENGAGEMENT 2.1 The Company hereby engages the Consultant, and the Consultant hereby agrees to act, as an independent non-exclusive consultant of the Company. In such capacity, the Consultant shall arrange for rendition of the Services to the Company in a diligent, conscientious and professional manner, pursuant to guidelines and procedures set forth by the Company from time to time and at such places as may be determined by the Board. The above notwithstanding, it is agreed that the Consultant shall receive and act in accordance with instructions provided by the MXB's Executive Committee (consisting of MXB's Chairman of the Board, MXB's director from Prime Technology Ventures and MXB's External Director serving as Chairman of the Executive Committee, or, in the event that MXB's External Director is not serving as the Chairman of such Committee, as determined by the Board of Directors of MXB) with respect to all matters concerning the current and former operations of Stav Electrical Systems (1994) Ltd., including without limitation with respect to its assets, liabilities, employees, obligations and rights. 2.2 The Company and the Consultant acknowledge that that the provision of the Services is based on the good faith of the parties and that the position of Consultant and the Representative is of a fiduciary nature. The Consultant guarantees that performance of the Services shall be to the satisfaction of the Company, as determined in the unrestricted discretion of the Board. The provisions of Schedule 2.2 shall apply with respect to the Representative and the Consultant. The Consultant represents and warrants that, except as set forth in Section 5 of Schedule 2.2, there are no restrictions limiting its ability to perform this Agreement in accordance with the terms hereof. 2.3 On ___________, 2001 the Consultant entered into a Confidentiality, Invention Transfer and Non-Competition Undertaking (the "NDA"), a copy of which is attached hereto as Schedule 2.3 and whose terms are hereby incorporated to this Agreement. The Consultant and all officers, directors, shareholders, employees, contractors, consultants and/or whom ever on behalf, of the -2- Consultant, including, without limitation, the Representative, that shall have access to confidential and proprietary information of the Company shall be deemed to have signed the NDA and shall act in accordance with its terms and conditions. 2.4 The Consultant represents and warrants that during the course of its engagement with the Company, neither it nor any of its employees, consultants or contractors shall disclose or use any confidential or proprietary information of any third party in breach of any obligations which may exist with respect to such information. 2.5 Until otherwise mutually agreed by the parties to this Agreement, the representative of the Consultant shall be Mr. Menachem Reinschmidt. The Representative shall sign a confirmation concerning this Agreement substantially in the form attached hereto as Schedule 2.5. 2.6 The Consultant shall supervise the Representative and shall maintain accurate records of the Services provided hereunder including (without limitation) contacts made, third parties contacted, correspondence, documents and information received from and given to third parties in connection with the Services. The Consultant shall require the Representative to provide such reports as may be requested by the Board from time to time. The Consultant shall keep all such records at a mutually agreed location and shall otherwise keep the Company fully informed of all actions hereunder. 2.7 The Consultant shall produce upon request such documentation and authorization concerning corporate matters as may be reasonably requested by the Company from time to time. 3. TERM AND TERMINATION 3.1 The term of this Agreement shall commence on December 2, 2001 (the "Effective Date") and be in effect for a period of twelve (12) months, unless terminated earlier in accordance with this Agreement. One (1) month prior to the expiration of this Agreement, the parties shall commence negotiations with respect to any future relationship. 3.2 Either party may terminate this Agreement without cause upon an advance written notice of at least 30 days. In such event, the Consultant shall be entitled to all compensation due for such period and the Consultant shall assist as -3- necessary with respect to the transfer of responsibilities to a person designated by the Company. 3.3 In the event of a material breach of this Agreement that is not cured within 15 days after the Consultant has provided written notice to the Company specifying the breach, the Consultant may terminate this Agreement upon written notice to the Company. 3.4 In the event of a failure by the Consultant or the Representative to abide by the obligations set forth herein for any reason (including death or disability), the Board may terminate this Agreement on behalf of the Company upon five (5) days written notice to the Consultant unless during such five day period the Consultant presents a compelling explanation in writing to the Board concerning such matter. For purposes hereof, a "compelling explanation" shall be as determined by the Board in its unrestricted discretion. In addition, the term "disability" shall mean any physical or psychological impairment that prevents the Representative from providing the Services in a reasonable and businesslike manner for a period exceeding 30 days in any consecutive 120 day period. 3.5 The Company may terminate this Agreement immediately for cause. For purposes hereof, the term "cause" shall mean the Board's declaration that: 3.5.1 The Consultant or the Representative is suspected of an illegal or dishonest act involving the Company or any of its assets; 3.5.2 The Consultant or the Representative is suspected of any criminal offense which is punishable by incarceration in excess of six (6) months; 3.5.3 The Consultant or the Representative is suspected of an intentional action to harm the Company; 3.5.4 The Consultant or Representative has filed for bankruptcy or a petition for involuntary dissolution has been filed against the Consultant or the Representative and has not been dismissed within sixty (60) days of filing. -4- 3.5.5 The Consultant ceased to provide the Services hereunder through the Representative as detailed in Section 2.5 above. 3.6 Upon termination of this Agreement for any reason, the Consultant shall immediately return to the Company all equipment, information and other property of the Company (or otherwise provided by the Company) that is in the possession of the Consultant or any agent, consultant, contractor or employee of the Consultant. 3.7 Upon termination of this Agreement, the non-terminating party shall have no claim against the terminating party in connection with such termination. 4. INDEPENDENT CONTRACTOR 4.1 The relationship between the parties under this Agreement is strictly that of independent parties, where the Consultant, acting solely as an independent contractor, shall supply the Services to the Company and shall supervise the Representative. Nothing herein shall be deemed to create the relationship of employer-employee, agency, joint venture or partnership between the parties or between either of the parties and any third person. 4.2 The Consultant shall be solely responsible for all fees, payments, salaries and other benefits of its agents, consultants, contractors and employees, including, without derogation, the Representative. 4.3 The Consultant shall indemnify and hold the Company harmless from all amounts payable or expenses incurred (including reasonable legal fees) arising from or in connection with any breach by Consultant of its undertakings in accordance with Section 4.2 above. The Consultant shall indemnify and pay to the Company all such amounts within seven (7) days of the first written demand therefor by the Company. 4.4 If for any reason whatsoever a competent authority, including a judicial body, determines that the Consultant and/or the Representative and/or any one on their behalf is the Company's employee, the following provisions shall apply: 4.4.1 In lieu of the Consideration (as defined below) that was paid to the Consultant, the Consultant shall be deemed to have been entitled only to a reduced consideration (gross) of -5- 70% of the consideration actually paid to the Service Provider (the "Reduced Consideration"), and in such event the Consultant shall be deemed only entitled to the Reduced Consideration. 4.4.2 The Consultant shall immediately refund to the Company any amount that was paid in excess of the Reduced Consideration, linked to the Israeli consumer price index from the date of each payment to the date of actual refund. 5. CONSIDERATION AND EXPENSES 5.1 In consideration for the Services, the Consultant shall receive the compensation designated in Schedule 5.1 (the "Consideration"). The Consideration constitutes the full and complete consideration payable with respect to the Services. 5.2 The Consultant shall not be entitled to any additional payments with respect to medical, life or disability insurance, Managers Insurance, retirement benefits, or any amounts with respect to severance, recuperation, sickness or vacation or any other amounts whatsoever. 6. INSURANCE The Company will include the Consultant and the Representative in the Company's officers and directors liability insurance policy, and cause that the Consultant and the Representative to be included in such insurance policy of MXB, subject to the following: (i) the Company's discretion regarding the extent, terms and conditions of such insurance coverage; (ii) that the inclusion of the Consultant and the Representative in such insurance policy will not materially effect the Company's and/or MXB's insurance expenditure or materially adversely effect the terms and conditions of such insurance policy. In the event that the Company is not able to include the Representative in the Company's officers and Directors liability insurance policy as provided for in this Section 6, then the Consultant shall have the right to terminate this Agreement upon 10 days prior written notice to the Company. The provisions of Section 3 of this Agreement shall apply to such termination mutatis mutandis. 7. MISCELLANEOUS 7.1 In the event that any provision hereof is not enforceable, such provision shall be interpreted in a reasonable fashion -6- in order to satisfy the intent of the parties. Alternatively, the provision shall be severed from this Agreement and the remaining provisions shall be enforceable in accordance with their terms. 7.2 The Representative shall have the authority to sign reports, returns, contracts and other documents and binding commitments on behalf of the Company as may be determined by the Board from time to time. 7.3 Each payment to be made under this Agreement shall be made against a detailed invoice issued by the Consultant, to the full satisfaction of the Company. The Consultant shall present to the Company an exemption from the payment of income taxes and the payments to be made by the Company to the Consultant hereunder are inclusive of all taxes, levies and other compulsory payments of any kind, all of which shall be borne by the Consultant solely. To the extent required under any applicable law, the Company may withhold any tax from any payment to the Consultant hereunder and remit the balance to the Consultant. The Consultant shall be exclusively responsible for reporting all amounts received from the Company and paying all taxes due in accordance with applicable law (including value-added tax). The Consultant is responsible for all taxes that may be imposed on all transfers (whether in cash, in kind or in securities) by the Company to the Consultant in accordance with the terms of this Agreement. The Consultant shall indemnify and hold the Company harmless from all losses, costs and expenses (including reasonable legal fees) due to any claim or demand by any governmental agency or other body with respect to the payment of any taxes or other amounts imposed on (or due and unpaid as a result of) amounts paid to the Consultant pursuant to this Agreement. The Consultant shall indemnify and hold the Company harmless from all losses, costs and expenses (including reasonable legal fees) due to any claim by any person (including the Representative) concerning amounts owed by the Consultant to any agent, consultant, contractor or employee of the Consultant for any reason. The Consultant shall indemnify and pay to the Company all such amounts within seven (7) days of the first written demand therefor by the Company. 7.4 All notices required pursuant to this Agreement shall be in writing and sent by (i) registered or certified mail, postage prepaid, or by (ii) facsimile with simultaneous mailing of a copy thereof by prepaid courier or prepaid registered mail, or by (iii) hand delivery. Notices hereunder shall become effective four business days after mailing by registered airmail, or one business day after sending by facsimile with simultaneous sending by courier or mail as provided above, or one business days -7- after hand delivery. Upon execution of this Agreement, the parties shall provide each other with addresses and facsimile numbers for rendition of notices. 7.5 This Agreement, together with all the Schedules attached hereto, contains all of the terms and conditions agreed upon by the parties hereto with reference to the subject matter hereof and supersedes all prior agreements, understandings or drafts exchanged between the parties regarding this matter, whether oral or written. This Agreement may only be modified or changed by an instrument signed by both parties hereto. The failure or delay by either party to enforce its rights hereunder shall not operate as a waiver of such right unless in writing and signed by the waiving party. 7.6 The Consultant and the Company have each had access to legal counsel, have participated jointly in the preparation of this Agreement and have voluntarily entered into this Agreement. No rule of interpretation shall apply to construe any provision hereof against either party as a result of the preparation of this Agreement. 7.7 This Agreement shall be governed by and construed under the laws of Israel. All disputes between the parties arising in connection with this Agreement shall, failing amicable settlement, be resolved by binding arbitration in accordance with the Arbitration Law, 1968 to be held in Tel Aviv or at an alternative location designated by the Company. The parties hereto irrevocably submit to the personal jurisdiction of courts in Tel Aviv-Yaffo for enforcement of any award or to enforce the provisions of this Agreement. Each party shall bear its costs with respect to any arbitration or litigation. This Agreement shall be deemed to constitute an agreement for arbitration as set forth in the Arbitration Law, 1968. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first mentioned above. Marnetics Broadband Technologies Ltd. Netlogic Ltd. By: /s/ Menachem Reinschmidt By: /s/ Menachem Reinschmidt ------------------------ ------------------------ Menachem Reinschmidt Menachem Reinschmidt /s/ David Sheetrit ------------------------ David Sheetrit -8- SCHEDULE 2.2 General Guidelines Regarding the Consultant and the Representative 1. The Services shall be rendered with respect to such activities, matters and projects as the Board may designate from time to time commencing with the Effective Date. In light of the Company's parent company's (MXB) status on the American Stock Exchange, the Services will include responsibility of the Representative for preparation of and signature on a variety of reports to Israeli and United States tax authorities, the relevant securities regulatory authorities, AMEX and other entities responsible for supervision and regulation of the activities of the Company and any of its Affiliated companies. 2. During the term of the Agreement, the Representative shall be a full time employee of the Consultant. The Representative shall be subject to the exclusive control and supervision of the Consultant. 3. The Representative shall report regularly to the Board or to such person designated by the Board from time to time. 4. Except as set forth in Section 5 below, the Consultant shall require the Representative to dedicate his entire working time to provision of the Services. The Representative shall be entitled to 21 vacation days per year and the Consultant shall advise the Company of all vacation days that are utilized by the Representative and shall coordinate such days with the Board. 5. The Consultant shall be entitled, for the benefit of the Representative, to one cellular phone, for which the Company shall pay all related expenses. 6. The Company acknowledges that the Consultant and the Representative have existing obligations to third parties and that the framework of such activities (i.e., their form and substance as well as the time required for such activities) has been disclosed to the Company (the "Activities"). The Consultant and the Representative shall be entitled to continue the Activities within such framework but neither the Consultant nor the Representative shall deviate from such framework (by increasing such activities or rendering additional services to any third party) except with the prior written consent of the Company. The Consultant and the Representative represent and warrant to the Company that the Activities do not and shall not impair and/or conflict in any manner their ability to render the Services to the Company or any of their undertakings under the Agreement. -9- SCHEDULE 2.5 Confirmation/Undertaking by the Representative I hereby confirm that I am fully familiar with the terms and conditions of the Services Agreement entered into by and between Marnetics Ltd. (the "Company") and Netlogic Ltd. ("Consultant") on the 11th day of February 2002 (the "Agreement"). I agree to abide by the provisions of the Agreement as if I (and not the Consultant) have personally entered into the Agreement with the Company. I agree not to take any action that may adversely affect the Consultant's performance or ability to perform its undertakings under the Agreement. I personally guarantee the full performance by the Consultant of its obligations under the Agreement. Signed this ___ day of ________ 2002. /s/ Menachem Reinschmidt ---------------------------- Menachem Reinschmidt -10- SCHEDULE 5.1 Compensation As full and complete compensation for the Services, the Company agrees as follows: 1. To pay a monthly amount in NIS equivalent to US$11,000 (the "Service Fee"), plus value added tax, if applicable, and subject to withholding of taxes at source. Such amount shall be paid within seven (7) days of the submission of a valid tax receipt with respect to services rendered in the previous calendar month. The "NIS equivalent" shall be determined in accordance with the Representative Rate known as of the last day of the month prior to payment. Due to the high level of personal trust and the substantial management skills and discretion required with respect to rendition of the Services, the parties agree that no additional amounts shall be payable to the Representative apart from those detailed below. 2. To provide an automobile (the "Vehicle") for use by the Representative in accordance with the prevailing procedures of the Company. The Representative shall ensure that the Vehicle shall be driven cautiously with due concern for persons and properties. The use of the Vehicle shall be in accordance with all traffic laws and regulations. The Representative shall ensure the proper maintenance of the Vehicle. The Company shall reimburse all actual expenses incurred by the Representative directly in connection with use of the Vehicle, excluding any fines which are the sole obligation of the Representative to pay in a timely fashion. All tax consequences of the benefits of use of the Vehicle pursuant to this provision shall be borne by the Consultant. The Company is authorized to withhold at source such amounts of income tax as it deems appropriate in connection therewith. 55496-1/0/69/(symbol) 55496-4/0/68/(symbol) -11- EX-10.7 5 u45188exv10w7.txt ADDITION TO SALE OF BUSINESS AGREEMENT EXHIBIT 10.7 ADDITION TO SALE OF BUSINESS AGREEMENT That was agreed to and signed on May 6, 2002 Between MARNETICS BROADBAND TECHNOLOGIES LTD. Company No. 52-004389-4 12 Hayesira St. Industrial Area, Ra'anana (henceforth: the "Company") and IDAN MILLENIUM INVESTMENTS AND ASSETS LTD. Moshav Batsara (henceforth: the "Purchaser") WHEREAS On June 10, 2001 an agreement was signed between the Company and the Purchaser, regarding the sale of the electronic activities of the Company to the Purchaser (henceforth: the "Sale of Business Agreement"); AND WHEREAS The sides ask to amend the terms of the Sale of Business Agreement in the manner stated in this Agreement; AND WHEREAS The sides agree that, except for the terms of the Sale of Business Agreement which are specifically changed in this agreement, the remaining terms in the Sale of Business Agreement remain in force and obligate both parties in every detail, also after the signing of this Agreement; ACCORDINGLY IT IS SWORN, WARRANTED, AND AGREED BETWEEN THE PARTIES AS FOLLOWS: 1. INTRODUCTION 1.1 The introduction of this Agreement will be an inseparable part of the agreement and will be understood to be part of its conditions. 1.2 The titles of the sections of this Agreement are for ease of reading alone and have no bearing on the understanding of this Agreement or any of its sections. 1.3 There is nothing in this Agreement that alters the Sale of Business Agreement, unless specifically stated otherwise in this Agreement. In order to remove any doubt, it is stated that the terms of the Sale of Business Agreement are in force and binding, unless specifically changed in this Agreement. 1.4 From the date of signature of the sides to this Agreement, this Agreement will be considered an inseparable part of the Sale of Business Agreement. 1.5 The following phrases used in this Agreement will be understood as follows: "STRIKOVSKY" Mr. Dov Strikovsky; "INDEMNITY AGREEMENT" Indemnity Agreement, including its appendices, from June 30, 2001, between the Company and its shareholders and Strikovsky; "THE ENTRUSTED SHARES" 300,000 regular shares of the company, which are owned by Strikovsky and held in trust by Advocate Menachem Gorman (henceforth: the "Trustee"), in accordance with the Indemnity Agreement; 2. THE REMUNERATION Section 6.2 of the Sale of Business Agreement will be replaced by: "The remuneration paid will be paid by the Purchaser starting from February 1, 2002 and will be paid in 25 monthly payments, regularly and one after the other. Each of the monthly payments during the year of 2002, specifically until and including December 1, will be in the amount of 30,000 NIS. The remaining payments will be in the amount of 155,000 NIS (henceforth: the "Monthly Payments" or the "Monthly Payment", as appropriate). The Monthly Payments will be linked to the consumer price index in a manner that means that the payments will be adjusted according to the last known consumer price index at the moment of payment, in relation to the known consumer price index at the time of this signature." 3. SECURITIES AND CONDITIONS TO THEIR IMPLEMENTATION 3.1 To secure the obligations of the Purchaser in the Sale of Business Agreement and in this addition, and without detracting from the terms of Section 10 in the Activity Sale Agreement, it is agreed between the parties that if the Purchaser misses the deadline for more than one payment, in full or partially, (henceforth: "The Breach"), the Company will have the right, but not be required, to order the Trustee to sell to third parties up to 75,000 company shares of the entrusted shares, as required to fully cover the remainder of the remuneration still owed to the Company (henceforth: the "Sold Shares"), in full coordination with Mr. Dov Strikovsky. 3.2 With the sale of the Sold Shares, the trustee will transfer the remuneration, reduced by the cost of the sale, including all relevant taxes, to the Company, and this will be credited against the remaining remuneration still due. In order to remove all doubt, it is stated that if the value of the Sold Shares which is transferred to the Company is less than the remaining remuneration owing to the Company, the Purchaser will immediately pay the remaining remuneration due. 3.3 The Company will have the right to order the Trustee to sell up to 75,000 of the entrusted shares, all or part of them, only after serving notice to the Purchaser and Strikovsky notice regarding the Breach, and if the Breach is not remedied within seven business days from the date of serving notice. 4. In all cases of contradiction between the terms of this Agreement and the Indemnity Agreement and/or the terms of the Sale of Business Agreement, the sides will be obligated by the terms of this Agreement. In witness hereof the parties signed below /s/ Dov Strikovsky /s/ Menachem Reinschmidt - --------------------------------- --------------------------------- Dov Strikovsky Menachem Reinschmidt Idan Millenium Investments and Assets Ltd. /S/ David Sheetrit --------------------------------- David Sheetrit Marnetics Broadband Technologies Ltd. I hereby agree that the Company shares owned by me, which are being held in trust by Advocate Menachem Gorman, will be used, in addition to all that is stated in the Indemnity Agreement, as a security against the monthly payments to which the Purchaser has obligated himself in the Sale of Business Agreement, as described in Section 3. /s/ Dov Strikovsky - --------------------------------- Dov Strikovsky -----END PRIVACY-ENHANCED MESSAGE-----