-----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, Q3ZYI1PwzWv0WxBWtaOcUD33GlLubbO4XIOEl2qrOcOpcy0gkGRNh6y5YshDhpLh /m3tM7dBC7bSEK1IJ3neZQ== /in/edgar/work/20000913/0001012870-00-004759/0001012870-00-004759.txt : 20000922 0001012870-00-004759.hdr.sgml : 20000922 ACCESSION NUMBER: 0001012870-00-004759 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20000913 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VYYO INC CENTRAL INDEX KEY: 0001104730 STANDARD INDUSTRIAL CLASSIFICATION: [3669 ] IRS NUMBER: 943241270 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-45132 FILM NUMBER: 721694 BUSINESS ADDRESS: STREET 1: 20400 STEVENS CREEK BLVD STREET 2: 8TH FL CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4088632300 MAIL ADDRESS: STREET 1: 20400 STEVENS CREEK BLVD 8TH FL STREET 2: C/O VYYO INC CITY: CUPERTINO STATE: CA ZIP: 95014 S-1/A 1 0001.txt AMENDMENT #2 TO FORM S-1 As filed with the Securities and Exchange Commission on September 13, 2000 Registration Statement No. 333-45132 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- VYYO INC. (Exact name of Registrant as specified in its charter) --------------- Delaware 3670 94-3241270 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Classification Identification Number) incorporation or Code Number) organization) 20400 Stevens Creek Boulevard, 8th Floor Cupertino, California 95014 (408) 863-2300 (Address, including zip code, and telephone number including area code, of Registrant's principal executive offices) Davidi Gilo Chief Executive Officer Vyyo Inc. 20400 Stevens Creek Boulevard, 8th Floor Cupertino, California 95014 (408) 863-2300 (Name, address, including zip code, and telephone number including area code, of agent for service) --------------- Copies to: GREGORY C. SMITH, ESQ. DONALD C. REINKE, ESQ. NORA L. GIBSON, ESQ. Skadden, Arps, Slate, Meagher & Flom LLP BRUCE D. WHITLEY, ESQ. Wilson, Sonsini, Goodrich & Rosati 525 University Avenue, Suite 220 Bay Venture Counsel, LLP One Market Plaza, Spear Street Tower Palo Alto, California 94301 1999 Harrison Street, Suite 1300 San Francisco, California 94105 (650) 470-4500 Oakland, California 94612 (415) 947-2000 (510) 273-8750
--------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement. --------------- If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 of the Securities Act of 1933, check the following box. [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED SEPTEMBER 13, 2000 4,000,000 Shares [LOGO OF VYYO INC.] Common Stock ------------ We are offering 2,000,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 2,000,000 shares. ------------ Our common stock is quoted on the Nasdaq National Market under the symbol "VYYO." The last reported sale price of the common stock on September 1, 2000 was $29.00 per share. ------------ Investing in our common stock involves a high degree of risk. See "Risk Factors" beginning on page 5. ------------
Per Share Total --------- --------- Public offering price..................................... $ $ Discounts and commissions to underwriters................. $ $ Proceeds, before expenses, to Vyyo Inc.................... $ $ Proceeds, before expenses, to the selling stockholders.... $ $
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. We have granted the underwriters the right to purchase up to an additional 300,000 shares, and certain selling stockholders have granted the underwriters the right to purchase up to an additional 300,000 shares, to cover any over- allotments. The underwriters can exercise this right at any time within 30 days after the offering. Banc of America Securities LLC expects to deliver the shares of common stock to investors on , 2000. Banc of America Securities LLC CIBC World Markets Dain Rauscher Wessels Needham & Company, Inc. WR Hambrecht + Co ------------ The date of this prospectus is , 2000 The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell securities, and we are not soliciting offers to buy these securities, in any state where the offer or sale is not permitted. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdiction where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 5 Cautionary Note on Forward-Looking Statements............................ 17 Use of Proceeds.......................................................... 18 Dividend Policy.......................................................... 18 Price Range of Common Stock.............................................. 18 Capitalization........................................................... 19 Dilution................................................................. 20 Selected Consolidated Financial Data..................................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 23 Business................................................................. 30 Management............................................................... 42 Certain Relationships and Related Transactions........................... 54 Principal and Selling Stockholders....................................... 60 Description of Capital Stock............................................. 63 Shares Eligible for Future Sale.......................................... 65 Underwriting............................................................. 66 Legal Matters............................................................ 68 Experts.................................................................. 68 Available Information.................................................... 68 Index to Consolidated Financial Statements............................... F-1
---------------- Our principal executive offices are located at 20400 Stevens Creek Boulevard, 8th Floor, Cupertino, California 95014, and our telephone number is (408) 863-2300. Our World Wide Web site address is www.vyyo.com. The information on our Web site does not constitute part of this prospectus. i PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the risk factors and consolidated financial statements and related notes appearing elsewhere in this prospectus. Vyyo We supply broadband wireless access systems used by communications service providers to deliver wireless, high-speed data connections to business and residential subscribers. Our systems enable data transmission between a service provider's central location and multiple subscribers, based on the networking standard used to deliver voice and data over the Internet. Our systems are designed to allow service providers to rapidly and cost-effectively bridge the segment of the network that connects the service providers' systems directly to subscribers, commonly referred to as the last mile. Our first-generation broadband wireless access system has been commercially deployed at 19 domestic and international sites and our second-generation system has been commercially deployed at three domestic and international sites. Internet and data network traffic growth has created demand for cost- effective, high-speed communications, as subscribers increasingly rely on content-rich applications and remote access to data networks. In the United States and abroad, the communications industry is in varying stages of deregulation, which has created the opportunity for new competitors to use existing and emerging broadband technologies to offer multiple communications services directly to subscribers. There are a number of broadband wire-based technologies that do not utilize airwaves for data transport, but instead use copper wire, fiber optic cable or other physical wires to transport voice and data to and from points on a network. These wire-based technologies deliver high-speed connections at transmission rates comparable to or, in the case of fiber optic cable, faster than those delivered by most broadband wireless technologies, but performance, cost, time for deployment or service availability may limit the use of these alternative technologies to satisfy the needs of service providers and subscribers. Broadband wireless technologies deliver high-speed connections and offer service providers the ability to rapidly and cost-effectively expand their current market coverage or to enter new markets while avoiding the limitations of the existing wire-based infrastructure. Our systems are deployed for use at the frequencies licensed for two-way broadband communication at transmission rates comparable to most wire-based technologies. Our second-generation system, which is based on the cable industry's standard set of communications rules, or protocols, that we have adopted for use in wireless applications, consists of a wireless hub, network management system software and wireless subscriber modems. Each hub transmits, receives and manages data traffic to and from our wireless modems, which are installed at multiple subscriber locations. We sell our systems directly to service providers and system integrators, who provide network planning and integration services and integrate our systems with other components to provide their customers with end-to-end network solutions. As key elements of our strategy, we intend to: . use existing commercially deployed systems to demonstrate our capabilities; . broaden our product offerings; . improve cost-effectiveness and performance of our systems; . leverage key strategic relationships; and . participate in the development of industry standards. 1 We began commercial shipments of our first-generation broadband wireless access systems in the first quarter of 1999. We have a very limited operating history in the broadband wireless access market upon which to evaluate our future prospects. We have incurred significant losses since our inception. We incurred net losses of approximately $43.6 million in 1999 and $19.4 million in the first six months of 2000. As of June 30, 2000, our accumulated deficit was approximately $85.5 million. We expect to continue to incur net losses for the foreseeable future. In July 2000, Vyyo and five other industry participants--ADC, Conexant, Gigabit Wireless, Intel and Nortel Networks--announced the formation of a wireless digital subscriber line consortium to accelerate the deployment of broadband wireless solutions to the marketplace. The goal of the consortium is to provide the industry with standardized, timely, multi-vendor solutions for broadband wireless access. Vyyo's DOCSIS+(TM) air interface was selected as the initial reference point for the Consortium's definition of an open standard. We are also active in the various standards bodies, such as the Institute of Electrical and Electronic Engineers, or IEEE, subcommittee to develop wireless industry standards. We were incorporated in 1996 in Delaware under the name PhaseCom, Inc. In January 2000, we changed our name to Vyyo Inc. Our principal executive offices are located at 20400 Stevens Creek Boulevard, 8th Floor, Cupertino, California 95014, and our telephone number is (408) 863-2300. 2 The Offering Common stock offered by Vyyo......... 2,000,000 shares Common stock offered by the selling 2,000,000 shares stockholders........................ Common stock to be outstanding after 37,788,682 shares this offering....................... Use of proceeds...................... We expect to use the net proceeds of the shares offered by Vyyo in this offering for working capital and other general corporate purposes, including research and development activities. We may use a portion of the net proceeds to acquire complementary products, technologies or businesses. We will not receive any proceeds from the sale of the shares by the selling stockholders. Nasdaq National Market symbol........ VYYO The common stock to be outstanding after this offering is based on shares outstanding as of June 30, 2000. The common stock outstanding excludes: . 5,137,265 shares of common stock issuable as of August 31, 2000 upon the exercise of outstanding stock options issued under our option plans at a weighted average exercise price of $5.74 per share; . 2,760,272 additional shares of common stock reserved as of August 31, 2000 for issuance under our stock option plans; . 750,000 shares of common stock initially reserved for issuance under our employee stock purchase plan; and . 147,110 shares of common stock issuable as of August 31, 2000 upon the exercise of outstanding warrants with a weighted average exercise price of $1.32 per share. ---------------- Except as otherwise indicated, information in this prospectus assumes no exercise of the underwriters' over-allotment option. 3 SUMMARY CONSOLIDATED FINANCIAL DATA (in thousands, except per share data)
Six Month Ended Year Ended December 31, June 30, -------------------------- ----------------- 1997 1998 1999 1999 2000 ------- ------- -------- ------- -------- (Unaudited) Statement of Operations Data: Net revenues.................... $ 1,537 $ 2,449 $ 4,230 $ 1,966 $ 4,856 Cost of revenues................ 1,556 2,568 4,316 2,011 3,490 ------- ------- -------- ------- -------- Gross profit (loss)............. (19) (119) (86) (45) 1,366 Operating expenses: Research and development...... 2,398 3,252 3,678 1,653 4,632 Sales and marketing........... 1,484 2,413 1,972 754 3,543 General and administrative.... 1,200 1,363 2,148 844 3,819 Amortization of deferred stock compensation................. -- -- 9,300 400 9,937 ------- ------- -------- ------- -------- Total operating expenses........ 5,082 7,028 17,098 3,651 21,931 ------- ------- -------- ------- -------- Operating loss.................. (5,101) (7,147) (17,184) (3,696) (20,565) Charge for amended financing arrangements................. -- -- (25,700) -- -- Interest and other income (expense), net............... (244) (524) (717) (393) 1,177 ------- ------- -------- ------- -------- Net loss........................ $(5,345) $(7,671) $(43,601) $(4,089) $(19,388) ======= ======= ======== ======= ======== Net loss per share: Basic and diluted............. $ (5.91) $ (5.43) $ (5.40) $ (0.97) $ (0.68) ======= ======= ======== ======= ======== Pro forma basic and diluted (unaudited)(1)............... $ (4.30) $ (0.69) $ (0.31) ======== ======= ======== Shares used in per share computations: Basic and diluted............. 905 1,412 8,078 4,199 28,570 ======= ======= ======== ======= ======== Pro forma basic and diluted (unaudited).................. 10,137 5,338 30,740 ======== ======= ========
(1) Pro forma net loss per share (A) reflects the conversion of the outstanding preferred shares into common shares, upon the completion of our initial public offering in April 2000, and (B) excludes the amortization of deferred stock compensation and the charge for amended financing arrangements.
June 30, 2000 ------------------- Actual As Adjusted ------- ----------- Balance Sheet Data: Cash, cash equivalents and short term investments........... $91,540 $145,495 Working capital............................................. 87,028 140,983 Total assets................................................ 98,004 151,959 Total stockholders' equity.................................. 88,709 142,664
This balance sheet data is presented on an as adjusted basis to give effect to the sale of the shares of common stock by Vyyo in this offering at the assumed public offering price of $29.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses. 4 RISK FACTORS Any investment in our common stock involves a high degree of risk. You should carefully consider the following risks before making an investment decision. Risks Related to Our Business We have a limited operating history in the broadband point-to-multipoint wireless access market, which may limit your ability to evaluate our business and increase the risk of your investment. The broadband wireless access market is only beginning to emerge. We began commercial shipments of our first-generation broadband wireless access system in the first quarter of 1999, and we began commercial shipments of our second- generation wireless access system in the fourth quarter of 1999. All of our product revenues in 1997 and 1998, and a substantial portion of our product revenues in 1999, relate to sales of cable modem products that we are no longer developing. Virtually all of the remaining revenues in 1999 relate to sales of our first-generation wireless modem products, which we phased out with the launch of our second-generation wireless access system in the fourth quarter of that year. Our second generation wireless access system is based on the cable industry's standard set of communications rules, or protocols, that we have adopted for use in wireless applications. Therefore, the success of our business will be entirely dependent upon the success of our wireless products generally, and our new wireless products in particular. We have a very limited operating history in the broadband wireless access market upon which to evaluate our future prospects, and the revenue and income potential of our business and market are unproven. Our limited operating history in this market may limit your ability to evaluate our prospects due to: . our limited historical financial data from our wireless products; . our unproven potential to generate profits; and . our limited experience in addressing emerging trends that may affect our business. As a young company, we face risks and uncertainties relating to our ability to implement our business plan successfully. You should consider our prospects in light of the risks, expenses and difficulties we may encounter. We have a history of losses, expect future losses and may never achieve or sustain profitability. We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $43.6 million in 1999 and approximately $19.4 million in the six months ended June 30, 2000. As of June 30, 2000, our accumulated deficit was approximately $85.5 million. We intend to significantly increase our operating expenses, especially our marketing and selling expenses, and our research and development expenses. However, our revenues may not grow or even continue at their current level. If our revenues do not rapidly increase or if our expenses increase at a greater pace than our revenues, we will never become profitable. Our quarterly operating results fluctuate, which may cause our share price to decline. Our quarterly operating results have varied significantly in the past and are likely to vary significantly in the future. These variations result from a number of factors, including: . the uncertain timing and level of market acceptance for our systems; . the effectiveness of our system integrator customers in marketing and selling their network systems equipment; . reductions in pricing by us or our competitors; 5 . the mix of systems sold by us and the mix of sales channels through which they are sold; and . changes in the prices or delays in deliveries of the components we purchase or license. A delay in the recognition of revenue, even from one customer, may have a significant negative impact on our results of operations for a given period. We have experienced such delays in the past, and our results of operations for those periods were negatively impacted. Also, because only a small portion of our expenses vary with our revenues, if revenue levels for a quarter fall below our expectations, we will not be able to timely adjust expenses accordingly, which would harm our operating results in that period. We believe that period- to-period comparisons of our results of operations are not meaningful and should not be relied upon as indicators of future performance. If our operating results fall below the expectations of investors in future periods, our share price will likely decline. If broadband wireless technology or our implementation of this technology is not broadly accepted, we will not be able to sustain or expand our business. Our future success depends on high-speed wireless communications products gaining market acceptance as a means to provide voice and data communications services. Because these markets are relatively new, it is difficult to predict which market segments will develop or expand. We have recently invested and expect to continue to invest significant time and resources in the development of new products for this market. In the event that service providers adopt technologies other than the high-speed access and other wireless technologies that we offer or delay in their deployment of high speed wireless communication products, we will not be able to sustain or expand our business. Service providers continually evaluate alternative technologies, including digital subscriber line, fiber and cable. The failure of service providers to accept our products would seriously harm our business. We depend on one of our system integrators for a significant portion of our revenues and if this system integrator does not promote or purchase our products, our business will be seriously harmed. The loss of ADC Telecommunications as a customer, or the delay of significant orders from it, even if only temporary, could, among other things: . reduce or delay our revenues; . harm our reputation with major service providers, particularly if ADC Telecommunications were to replace our products with a competitor's products; or . reduce our ability to predict our cash flow accurately. Sales through ADC Telecommunications accounted for approximately 40% of our net revenues in the six months ended June 30, 2000, 20% of our net revenues for 1999 and approximately 31% of our net revenues for 1998. There are a limited number of system integrators that have the financial resources or technical expertise to sell or integrate our systems globally. If ADC Telecommunications will not sell, service or integrate our products, and we cannot secure other system integrators as replacements, we would be limited in our ability to sell our products. We recently amended our August 1999 collaboration agreement with ADC to, among other things, remove the exclusivity clause. Should ADC Telecommunications cease to emphasize systems that include our products, choose to emphasize alternative technologies or promote systems of our competitors, our business would be seriously harmed. The loss of one or more of our key customers would result in a loss of a significant amount of our revenues. A relatively small number of customers account for a large percentage of our revenues. In 1999, ADC Telecommunications accounted for approximately 20% of our revenues, Aster City Cable accounted for approximately 14% of our revenues, Shanghai Bell accounted for approximately 13% of our revenues and 6 Philips Semiconductor accounted for approximately 12% of our revenues. Revenues attributable to Aster City Cable and Shanghai Bell relate to sales of cable products that we are no longer developing. Accordingly, we do not anticipate recognizing material amounts of revenue from these products in the future. Revenues attributable to Philips Semiconductor relate to a joint technology development arrangement that we expect to complete in the second half of 2000 and no similar arrangements are contemplated. We expect that we will continue to depend on a relatively limited number of customers for a substantial portion of our revenues in future periods. The loss of a major customer or the reduction, delay or cancellation of orders from one or more of our customers could seriously harm our ability to sustain revenue levels, which would seriously harm our operating results. Competition may decrease our market share, net revenues and gross margins, which may cause our stock price to decline. The market for broadband access systems is intensely competitive, rapidly evolving and subject to rapid technological change. Many of our competitors and potential competitors have substantially greater financial, technical, distribution, marketing and other resources than we have and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and other developments. In addition, many of our competitors have longer operating histories, greater name recognition and established relationships with system integrators and service providers. Our primary competitor is Hybrid Networks, Inc., and other companies, such as Adaptive Broadband Corporation and BreezeCOM Ltd., have announced plans to enter the MMDS market. In addition, well- capitalized companies such as Cisco Systems, Lucent Technologies, Alcatel and other vendors have announced plans to enter, or are potential entrants into, the broadband wireless market. Most of these competitors have existing relationships with one or more of our prospective customers. We also face competition from technologies such as digital subscriber line, fiber and cable. We may not be able to compete successfully against our current and future competitors and competitive pressures may seriously harm our business. If we do not develop new systems and system features in response to customer requirements or in a timely way, customers may not buy our products, which would seriously harm our business. The broadband wireless access industry is rapidly evolving and subject to technological change and innovation. We may experience design or manufacturing difficulties that could delay or prevent our development, introduction or marketing of new systems and enhancements, any of which could cause us to incur unexpected expenses or lose revenues. If we are unable to comply with diverse, new or varying governmental regulations or industry standards in each of the many worldwide markets in which we compete, we may not be able to respond to customers in a timely manner, which would harm our business. We depend on contract manufacturers and these manufacturers may be unable to fill our orders on a timely basis, which would result in delays that could seriously harm our results of operations. We currently have relationships with three contract manufacturers for the manufacturing of our systems, two of which are located in Israel and one of which is located in Taiwan. These relationships may be terminated by either party with little or no notice. If our manufacturers are unable or unwilling to continue manufacturing our systems in required volumes, we would have to identify qualified alternative manufacturers, which would result in delays that could cause our results of operations to suffer. Our limited experience with these manufacturers does not provide us with a reliable basis on which to project their ability to meet delivery schedules, yield targets or costs. If we are required to find alternative manufacturing sources, we may not be able to satisfy our production requirements at acceptable prices and on a timely basis, if at all. Any significant interruption in supply would affect the allocation of systems to customers, which in turn could seriously harm our business. 7 We obtain some of the components included in our systems from a single source or a limited group of suppliers, and the loss of any of these suppliers could cause production delays and a substantial loss of revenue. We currently obtain key components from a limited number of suppliers. Some of these components, such as semiconductor components for our wireless hubs, are obtained from a single source supplier. We generally do not have long-term supply contracts with our suppliers. These factors present us with the following risks: . delays in delivery or shortages in components could interrupt and delay manufacturing and result in cancellation of orders for our systems; . suppliers could increase component prices significantly and with immediate effect; . we may not be able to develop alternative sources for system components, if or as required in the future; . suppliers could discontinue the manufacture or supply of components used in our systems. In such event, we might need to modify our systems, which may cause delays in shipments, increased manufacturing costs and increased systems prices; and . we may hold more inventory than is immediately required to compensate for potential component shortages or discontinuation. The occurrence of any of these or similar events would harm our business. Delays and shortages in the supply of components from our suppliers could reduce our revenues or increase our cost of revenue. Delays and shortages in the supply of components are typical in our industry. We have experienced minor delays and shortages on more than one occasion in the past. In addition, any failure of necessary worldwide manufacturing capacity to rise along with a rise in demand could result in our subcontract manufacturers allocating available capacity to larger customers or to customers that have long-term supply contracts in place. Our inability to obtain adequate manufacturing capacity at acceptable prices, or any delay or interruption in supply, could reduce our revenues or increase our cost of revenue and could seriously harm our business. Competition may result in lower average selling prices and we may be unable to reduce our costs at offsetting rates, which may impair our ability to achieve or maintain profitability. We expect that price competition among broadband wireless access systems suppliers will reduce our gross margins in the future. We anticipate that the average selling prices of broadband wireless access systems will continue to decline as product technologies mature. Since we do not manufacture our own systems, we may be unable to reduce our manufacturing costs in response to declining average per unit selling prices. Our competitors may be able to achieve greater economies of scale and may be less vulnerable to the effects of price competition than we are. These declines in average selling prices will generally lead to declines in gross margins and total profitability for these systems. If we are unable to reduce our costs to offset declines in average selling prices, we may not be able to achieve or maintain profitability. If we do not effectively manage our expansion, our revenues may not increase, our costs may increase and our business could be seriously harmed. We are continuing to actively expand our operations. This growth has placed, and will continue to place, a significant strain on our managerial, operational and financial resources. We also need to implement sophisticated inventory and control systems. To manage growth effectively, we must, among other things: . improve and expand our information and financial systems, and managerial procedures and controls; 8 . hire, train, manage and retain qualified employees; and . effectively manage relationships with our customers, suppliers and other third parties. We may not have made adequate allowances for the costs and risks associated with this expansion, our systems, procedures or controls may not be adequate to support our operations, and our management may be unable to offer and expand our product categories successfully. Any delay in implementing, or transitioning to, new or enhanced systems, procedures or controls may seriously harm our ability to record and report financial and management information on a timely and accurate basis or otherwise manage our expanding operations. If we are unable to do so effectively, our business may be seriously harmed. Because we operate in international markets, we are exposed to additional risks which could cause our international sales to decline and our foreign operations to suffer. Sales outside of North America accounted for approximately 31% of our revenues in the six months ended June 30, 2000, 39% of our revenues in 1999 and 55% of our revenues in 1998. We expect that international sales will continue to account for a significant portion of our revenues. In addition, we maintain research and development facilities in Israel. Our reliance on international sales and operations exposes us to foreign political and economic risks, which may impair our ability to generate revenues. These risks include: . economic and political instability; . changes in regulatory requirements and licensing frequencies to service providers; . import or export licensing requirements and tariffs; . trade restrictions; and . more limited protection of intellectual property rights. Any of the foregoing difficulties of conducting business internationally could seriously harm our business. Because we do not have long-term contracts with our customers, our customers can discontinue purchases of our systems at any time. We sell our systems based on individual purchase orders. Our customers are generally not obligated by long-term contracts to purchase our systems. Our customers can generally cancel or reschedule orders on short notice and can discontinue using our systems at any time. Further, having a successful system trial does not necessarily mean that the customer will order large volumes of our systems. The inability to retain our customers and increase their orders would seriously harm our business. If our senior management team is unable to work together effectively, our business may be seriously harmed. Several of our existing senior management personnel, including Michael Corwin, our Chief Operating Officer, Eran Pilovsky, our Chief Financial Officer, and Arnon Kohavi, our Senior Vice President of Strategic Relations, joined us in the last twelve months. As a result, our senior management team has had a limited time to work together. If they are unable to work together effectively to manage our organization as a public company, our business may be seriously harmed. If we are unable to attract, train and retain qualified engineers, marketing, sales and technical support personnel, we may not be able to develop our business. We will need to hire additional engineers and highly trained technical support personnel in Israel and in Northern California in order to succeed. We will need to increase our technical staff to support new customers and the expanding needs of existing customers, as well as for our continued research and development operations. 9 Hiring engineers, marketing, sales and technical support personnel is very competitive in our industry due to the limited number of people available with the necessary skills and understanding of our products. This is particularly true in Israel and Northern California, where competition for such personnel is intense. Our systems require a sophisticated marketing and sales effort targeted at several levels within a prospective customer's organization. We have recently expanded our sales force and we plan to hire additional sales personnel, particularly in the United States. Competition for qualified sales personnel is intense, and we may not be able to hire sufficient sales personnel to support our marketing efforts. If we are unable to hire and retain necessary personnel in each of these rapidly expanding areas, our business will not develop, and our operating results will be harmed. We depend on our key personnel, in particular Davidi Gilo, our Chairman and Chief Executive Officer, and Menashe Shahar, our Vice President, Engineering and Chief Technical Officer, the loss of any of whom could seriously harm our business. Our future success depends in large part on the continued services of our senior management and key personnel. In particular, we are highly dependent on the service of Davidi Gilo, our Chairman and Chief Executive Officer, and Menashe Shahar, our Chief Technical Officer. We do not carry key person life insurance on our senior management or key personnel. Any loss of the services of Davidi Gilo, Menashe Shahar, other members of senior management or other key personnel could seriously harm our business. Third parties may bring infringement claims against us which could harm our ability to sell our products and result in substantial liabilities. We expect that we will increasingly be subject to license offers and infringement claims as the number of products and competitors in our market grows and the functionality of products overlaps. In this regard, in early 1999, and again in April 2000, we received written notices from Hybrid Networks in which Hybrid claimed to have patent rights in certain technology. Hybrid requested that we review our products in light of 11 of Hybrid's issued patents. Third parties, including Hybrid, could assert, and it could be found, that our technologies infringe their proprietary rights. We could incur substantial costs to defend any litigation, and intellectual property litigation could force us to do one or more of the following: . obtain licenses to the infringing technology; . pay substantial damages under applicable law; . cease the manufacture, use and sale of infringing products; or . expend significant resources to develop non-infringing technology. Accordingly, any infringement claim or litigation against us could significantly harm our business, operating results and financial condition. If we fail to adequately protect our intellectual property, we may not be able to compete. Our success depends in part on our ability to protect our proprietary technologies. We rely on a combination of patent, copyright and trademark laws, trade secrets and confidentiality and other contractual provisions to establish and protect our proprietary rights. Our pending or future patent applications may not be approved and the claims covered by such applications may be reduced. If allowed, our patents may not be of sufficient scope or strength, others may independently develop similar technologies or products, duplicate any of our products or design around our patents, and the patents may not provide us competitive advantages. Litigation, which could result in substantial costs and diversion of effort by us, may also be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. Any such litigation, regardless of outcome, could be expensive and time consuming, and adverse determinations in any such litigation could seriously harm our business. 10 Undetected hardware defects or software errors may increase our costs and impair the market acceptance of our systems. Our systems may contain undetected defects or errors. This may result either from defects in components supplied by third parties or from errors in our software that we have failed to detect. These defects or errors are likely to be found from time to time in new or enhanced products and systems after commencement of commercial shipments. Our customers integrate our systems into their networks with components from other vendors. Accordingly, when problems occur in a network system it may be difficult to identify the component that caused the problem. Regardless of the source of these defects or errors, we will need to divert the attention of our engineering personnel from our product development efforts to address the defect or error. We may incur significant warranty and repair costs related to defects or errors, and we may also be subject to liability claims for damages related to these defects or errors. The occurrence of defects or errors, whether caused by our systems or the components of another vendor, may result in significant customer relations problems and injury to our reputation and may impair the market acceptance of our systems. Because of our long product development process and sales cycle, we may incur substantial expenses without anticipated revenues which could cause our operating results to fluctuate. A customer's decision to purchase many of our systems typically involves a significant technical evaluation, formal internal procedures associated with capital expenditure approvals and testing and acceptance of new systems that affect key operations. For these and other reasons, the sales cycle associated with our systems can be lengthy and subject to a number of significant risks over which we have little or no control. Our next-generation systems may have even longer sales cycles and involve demonstrations, field trials and other evaluation periods, which will further lengthen the sales cycle. Because of the growing sales cycle and the possibility that we may rely on a concentrated number of customers for our revenues, our operating results could be seriously harmed if such revenues do not materialize when anticipated, or at all. If we choose to acquire new and complementary businesses, products or technologies, we may not be able to successfully integrate an acquired business in a cost-effective and non-disruptive manner and realize anticipated benefits. We may make investments in complementary companies, products or technologies. If we acquire a company, we may have difficulty integrating that company's personnel, operations, products and technologies. These difficulties may disrupt our ongoing business, distract our management and employees and increase our expenses. Moreover, the anticipated benefits of any acquisition may not be realized. Future acquisitions could result in dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other intangible assets and the incurrence of large and immediate write-offs, any of which could seriously harm our business. If the communications and Internet industries do not continue to grow and evolve in a manner favorable to us or our business strategy, our business may be seriously harmed. Our future success is dependent upon the continued growth of the communications industry and, in particular, the Internet. The global communications and Internet industries are evolving rapidly, and it is difficult to predict growth rates or future trends in technology development. In addition, the deregulation, privatization and economic globalization of the worldwide communications market, that have resulted in increased competition and escalating demand for new technologies and services, may not continue in a manner favorable to us or our business strategies. In addition, the growth in demand for Internet services and the resulting need for high-speed or enhanced communications products may not continue at its current rate or at all. 11 We may need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may not be able to execute our business plan. We expect that the net proceeds from this offering and cash from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that, we may need to raise additional funds for a number of uses, including: . expanding research and development programs; . hiring additional qualified personnel; . implementing further marketing and sales activities; and . acquiring complementary technologies or businesses. We may have to raise funds even sooner in order to fund more rapid expansion, to respond to competitive pressures or to otherwise respond to unanticipated requirements. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our existing stockholders will be reduced. We may not be able to obtain additional funds on acceptable terms, or at all. If we cannot raise needed funds on acceptable terms, we may not be able to increase our ongoing operations and complete our planned expansion, take advantage of acquisition opportunities, develop or enhance systems or respond to competitive pressures. This potential inability to raise funds on acceptable terms could seriously harm our business. Government regulation and industry standards may increase our costs of doing business, limit our potential markets or require changes to our business model. The emergence or evolution of regulations and industry standards for broadband wireless products, through official standards committees or widespread use by operators, could require us to modify our systems, which may be expensive and time-consuming, and to incur substantial compliance costs. Radio frequencies are subject to extensive regulation under the laws of the United States, foreign laws and international treaties. Each country has different regulations and regulatory processes for wireless communications equipment and uses of radio frequencies. Failure by the regulatory authorities to allocate suitable, sufficient radio frequencies to potential customers in a timely manner could result in the delay or loss of potential orders for our systems and seriously harm our business. We are subject to export control laws and regulations with respect to all of our products and technology. We are subject to the risk that more stringent export control requirements could be imposed in the future on product classes that include products exported by us, which would result in additional compliance burdens and could impair the enforceability of our contract rights. We may not be able to renew our export licenses as necessary from time to time. In addition, we may be required to apply for additional licenses to cover modifications and enhancements to our products. Any revocation or expiration of any requisite license, the failure to obtain a license for product modifications and enhancements, or more stringent export control requirements could seriously harm our business. If the Wireless Digital Subscriber Line Consortium is not successful in its efforts or we are not able to otherwise influence industry standards, we will not benefit from our contributions to the Consortium and our products may not be accepted in the marketplace. In July 2000, we and five other industry participants announced the formation of a Wireless Digital Subscriber Line Consortium to accelerate the deployment of broadband wireless solutions to the marketplace. The goal of the Consortium is to provide the industry with standardized, timely, multi-vendor solutions for broadband wireless access. If the Wireless Digital Subscriber Line Consortium is not successful or we are not able to otherwise influence industry standards,we will not benefit from our contributions to the Consortium and our products may not be accepted in the marketplace. 12 Risks Relating to this Offering Because our principal stockholders and management have the ability to control stockholder votes, the premium over market price that an acquirer might otherwise pay may be reduced and any merger or takeover may be delayed. Upon completion of this offering, our management and ADC Telecommunications will collectively own approximately 54% of our outstanding common stock. As a result, these stockholders, acting together, will be able to control the outcome of all matters submitted for stockholder action, including: . electing members to our board of directors; . approving significant change-in-control transactions; . determining the amount and timing of dividends paid to themselves and to our public stockholders; and . controlling our management and operations. This concentration of ownership may have the effect of impeding a merger, consolidation, takeover or other business consolidation involving us, or discouraging a potential acquirer from making a tender offer for our shares. This concentration of ownership could also negatively affect our stock's market price or decrease any premium over market price that an acquirer might otherwise pay. Because the Nasdaq National Market is likely to continue to experience extreme price and volume fluctuations, the price of our stock may decline. The market price of our shares has been and will likely continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, including the following: . actual or anticipated variations in our quarterly operating results or those of our competitors; . announcements by us or our competitors of new products or technological innovations; . introduction and adoption of new industry standards; . changes in financial estimates or recommendations by securities analysts; . changes in the market valuations of our competitors; . announcements by us or our competitors of significant acquisitions or partnerships; and . sales of our common stock. Many of these factors are beyond our control and may negatively impact the market price of our common stock, regardless of our performance. In addition, the stock market in general, and the market for technology companies in particular, has been highly volatile. Our common stock may not trade at the same levels of shares as that of other technology companies and shares of technology companies, in general, may not sustain their current market prices. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may be the target of similar litigation in the future. Securities litigation could result in substantial costs and divert management's attention and resources, which could seriously harm our business and operating results. Our management has broad discretion in using the proceeds from this offering, which might not be used in ways that improve our operating results or increase our market value. Our management will have broad discretion as to how the net proceeds of this offering will be used, including uses which may not improve our operating results or increase our market value. Investors will be relying on the judgment of management regarding the application of the proceeds of this offering. The results and the effectiveness of the application of the proceeds are uncertain and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. 13 Provisions of our governing documents and Delaware law could discourage acquisition proposals or delay a change in control. Our amended and restated certificate of incorporation and bylaws contain anti-takeover provisions that could make it more difficult for a third party to acquire control of us, even if that change in control would be beneficial to stockholders. Specifically: . our board of directors has the authority to issue common stock and preferred stock and to determine the price, rights and preferences of any new series of preferred stock without stockholder approval; . our board of directors is divided into three classes, each serving three- year terms; . super-majority voting is required to amend key provisions of our certificate of incorporation and by-laws; . there are limitations on who can call special meetings of stockholders; . stockholders are not able to take action by written consent; and . advance notice is required for nominations of directors and for stockholder proposals. In addition, provisions of Delaware law and our stock option plans may also discourage, delay or prevent a change of control or unsolicited acquisition proposals. Future sales of our common stock could depress our stock price. We cannot predict if future sales of our common stock, or the availability of our common stock for sale, will depress the market price for our common stock or our ability to raise capital by offering equity securities. Sales of substantial amounts of common stock, or the perception that these sales could occur, may depress prevailing market prices for the common stock. After this offering, 37,788,682 shares of common stock will be outstanding, based on shares outstanding as of June 30, 2000. All of the shares sold in this offering as well as the 7,762,500 shares sold in our initial public offering will be freely tradeable except for any shares purchased by affiliates of Vyyo. The remaining shares of common stock outstanding after this offering will be restricted as a result of securities laws or lock-up agreements. These remaining shares will be available for sale in the public market as follows:
Number of Date of Availability for Sale Shares ----------------------------- ---------- Presently available............................................. 37,760 October 2, 2000................................................. 2,649,171 December 15, 2000............................................... 21,665,913 At various times thereafter upon expiration of applicable holding periods................................................ 1,673,338
The shares available for sale on October 2 and December 15, 2000 are currently subject to lock-up agreements with Banc of America Securities LLC. Banc of America Securities LLC may release all or a portion of the shares subject to these lock-up agreements at any time without notice. See "Underwriting" and "Shares Eligible for Future Sale." 14 Risks Relating to our Location in Israel Conditions in Israel affect our operations and may limit our ability to produce and sell our systems. Our final testing and assembly and research and development facilities are located in Israel. Political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. We could be adversely affected by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation, or a significant downturn in the economic or financial condition of Israel. Despite the progress towards peace between Israel and its Arab neighbors, the future of these peace efforts is uncertain. Moreover, several countries still restrict business with Israel and with Israeli companies. We could be adversely affected by restrictive laws or policies directed towards Israel or Israeli businesses. Some of our directors, officers and employees are currently obligated to perform annual reserve duty and are subject to being called to active duty at any time under emergency circumstances. Our business cannot assess the full impact of these requirements on our workforce or business if conditions should change and we cannot predict the effect on us of any expansion or reduction of these obligations. Because substantially all of our revenues are generated in U.S. dollars while a portion of our expenses are incurred in New Israeli shekels, our results of operations may be seriously harmed if the rate of inflation in Israel exceeds the rate of devaluation of the New Israeli shekel against the U.S. dollar. We generate substantially all of our revenues in U.S. dollars, but we incur a substantial portion of our expenses, principally salaries and related personnel expenses related to research and development, in New Israeli shekels, or NIS. As a result, we are exposed to the risk that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar or that the timing of this devaluation lags behind inflation in Israel. If the dollar costs of our operations in Israel increase, our dollar-measured results of operations will be seriously harmed. The government programs and benefits we receive require us to satisfy prescribed conditions. These programs and benefits may be terminated or reduced in the future, which would increase our costs and taxes and could seriously harm our business. Several of our capital investments have been granted "approved enterprise" status under Israeli law providing us with tax benefits. The benefits available to an approved enterprise are conditioned upon the fulfillment of conditions stipulated in applicable law and in the specific certificate of approval. If we fail to comply with these conditions, in whole or in part, we may be required to pay additional taxes for the period in which we benefitted from the tax benefits and would likely be denied these benefits in the future. From time to time, the Government of Israel has discussed reducing or eliminating the benefits available under the approved enterprise program. These tax benefits may not be continued in the future at their current levels or at all. This termination or reduction of these benefits would increase our taxes and could seriously harm our business. On May 4, 2000,a committee chaired by the Director General of the Israeli Ministry of Finance issued its report recommending a major reform in the Israeli tax system. The proposed tax reform, which could become effective as of January 1, 2001, provides for material changes in the current Israeli tax structure. Some of the committee's proposals may have adverse tax consequences for us and for certain of our shareholders. For example, the committee proposes to eliminate the existing initial tax exemption granted with respect to income generated from any future Approved Enterprise facilities that we have. Because we cannot predict whether, and to what extent, this committee's proposals, or any of them, will eventually be adopted and enacted into law, we and our shareholders face uncertainties as to the potential consequences of these tax reform proposals. 15 In the past, we received grants from the government of Israel for the financing of a portion of our research and development expenditures in Israel. The regulations under which we received these grants restrict our ability to manufacture products or transfer technology outside of Israel for products developed with this technology. We believe that most of our current products are not based on Chief Scientist funded technology and therefore are not subject to this restriction. It may be difficult to enforce a U.S. judgment against us and our nonresident officers, directors and experts. Our Chief Technology Officer, one of our directors and some of the experts named in this prospectus are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States based upon the civil liabilities provisions of the United States federal securities laws against us or any of those persons or to effect service of process upon these persons in the United States. 16 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS Some of the matters discussed under the captions "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and elsewhere in this prospectus include forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events, including, among other things: . implementing our business strategy; . attracting and retaining customers and employees; . obtaining and expanding market acceptance of the products we offer and developing new products; . forecasts of Internet usage and the size and growth of relevant markets; . rapid technological changes in our industry and relevant markets; and . competition in our market. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "predicts," "potential," "continue," "expects," "anticipates," "future," "intends," "plans," "believes," "estimates" and similar expressions. These statements are based on our current beliefs, expectations and assumptions and are subject to a number of risks and uncertainties. Actual results, levels of activity, performance, achievements and events may vary significantly from those implied by the forward-looking statements. A description of risks that could cause our results to vary appears under the caption "Risk Factors" and elsewhere in this prospectus. 17 USE OF PROCEEDS We estimate that we will receive net proceeds from the sale of the 2,000,000 shares of our common stock offered by us in this offering of approximately $54.0 million, or $62.2 million if the underwriters exercise their over- allotment option in full, based upon the assumed public offering price of $29.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses. We will not receive any portion of the proceeds from the sale of shares by the selling stockholders. We expect to use the net proceeds from this offering for working capital and other general corporate purposes, including research and development. We may also use a portion of the net proceeds to invest in or acquire complementary products, technologies, or businesses; however, we currently have no commitments or agreements relating to any such transactions. We will have significant discretion in the use of the net proceeds of this offering. Investors will be relying on the judgment of our management regarding the application of the proceeds of this offering. Pending use of the net proceeds as discussed above, we intend to invest these funds in short-term, interest-bearing, investment-grade obligations. DIVIDEND POLICY We have never declared or paid any dividends on our capital stock. We intend to retain any future earnings to fund the development and expansion of our business. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future. Through our subsidiary, Vyyo Ltd., we participate in the "alternative benefits program" under the Israeli law for the Encouragement of Capital Investments, 1959, under which we realize certain tax exemptions. If Vyyo Ltd. distributes a cash dividend to Vyyo Inc. from income which is tax exempt, it would have to pay corporate tax at the rate of up to 25% on an amount equal to the amount distributed and the corporate tax which would have been due in the absence of the tax exemption. PRICE RANGE OF COMMON STOCK Our common stock has been quoted on the Nasdaq National Market under the symbol "VYYO" since our initial public offering on April 5, 2000. The following table shows the high and low sales prices of our common stock as reported by the Nasdaq National Market for periods indicated:
Year Ending December 31, 2000 High Low - ----------------------------- ------- ------ Second Quarter (beginning April 5, 2000)......................... $35.375 13.250 Third Quarter (through August 31, 2000).......................... $44.625 20.875
On September 1, 2000, the last reported sale price for our common stock was $29.00 per share. As of August 31, 2000, we estimate that there were approximately 135 stockholders of record of our common stock. This does not include the number of persons whose stock is in nominee or "street name" accounts through brokers. 18 CAPITALIZATION The following table sets forth as of June 30, 2000: . our actual capitalization; and . our capitalization, as adjusted to give effect to the sale of the shares of common stock in this offering at the assumed public offering price of $29.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses. This information should be read in conjunction with our consolidated financial statements and the related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere in this prospectus.
As of June 30, 2000 ------------------ As Actual Adjusted -------- -------- (in thousands, except share data) Stockholders' equity: Preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued and outstanding, actual and as adjusted............................................. $ -- $ -- Common stock, $0.0001 par value at amounts paid in; 200,000,000 shares authorized, 35,788,682 shares issued and outstanding, actual; 37,788,682 shares issued and outstanding as adjusted................................. 187,011 240,966 Note receivable from stockholder......................... (75) (75) Deferred stock compensation.............................. (12,700) (12,700) Other comprehensive loss................................. 17 17 Accumulated deficit...................................... (85,544) (85,544) -------- -------- Total stockholders' equity................................. 88,709 142,664 -------- -------- Total capitalization....................................... $ 88,709 $142,664 ======== ========
The shares of common stock outstanding in the actual and as adjusted columns exclude: . 5,137,265 shares of common stock issuable as of August 31, 2000 upon the exercise of outstanding stock options issued under our option plans at a weighted average exercise price of $5.74 per share; . 2,760,272 additional shares of common stock reserved as of August 31, 2000 for issuance under our stock option plans; . 750,000 shares of common stock initially reserved for issuance under our employee stock purchase plan; and . 147,110 shares of common stock issuable as of August 31, 2000 upon the exercise of outstanding warrants with a weighted average exercise price of $1.32 per share. 19 DILUTION Our net tangible book value as of June 30, 2000 was approximately $88.7 million, or $2.48 per share of common stock. Net tangible book value per share represents the amount of total tangible assets less total liabilities, divided by 35,788,682, the number of shares of common stock treated as outstanding. After giving effect to the sale of the shares of common stock offered by Vyyo in this offering at the assumed public offering price of $29.00 per share, after deducting the underwriting discounts and commissions and estimated offering expenses, our net tangible book value at June 30, 2000 would have been $142.7 million, or $3.78 per share. This represents an immediate increase in net tangible book value to existing stockholders of $1.30 per share and an immediate dilution of $25.22 per share to new investors. The following table illustrates the per share dilution: Assumed offering price per share:............................. $29.00 ------ Pro forma net tangible book value per share before this offering as of June 30, 2000................................. $2.48 Increase per share attributable to new investors.............. 1.30 ----- Pro forma net tangible book value per share after this offering..................................................... 3.78 ------ Dilution per share to new investors........................... $25.22 ======
The foregoing discussions and table assume no exercise of any stock options or warrants outstanding. There were options outstanding to purchase 5,137,265 shares of common stock as of August 31, 2000 at a weighted average exercise price of $5.74 per share, 2,760,272 shares of common stock reserved for issuance under our stock option and purchase plans, and warrants outstanding to purchase 147,110 shares of common stock at a weighted average exercise price of $1.32 per share. To the extent that any of these options or warrants are exercised, there will be further dilution to the new investors. 20 SELECTED CONSOLIDATED FINANCIAL DATA The statements of operations data for each of the years in the three-year period ended December 31, 1999 and the balance sheet data at December 31, 1998 and 1999 are derived from our audited financial statements included elsewhere in this prospectus. The statements of operations data for the year ended December 31, 1996 and the balance sheet data at December 31, 1996 and 1997, are derived from our audited financial statements that are not included in this prospectus. The statements of operations data for the year ended December 31, 1995 and the balance sheet data at December 31, 1995 are derived from our unaudited financial statements that are not included in this prospectus. The statements of operations data for the six months ended June 30, 1999 and 2000 and the balance sheet at June 30, 2000 are derived from our unaudited financial statements included elsewhere in this prospectus. The following selected consolidated financial data should be read in conjunction with our consolidated financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this prospectus.
Six Months Ended Year Ended December 31, June 30, -------------------------------------------- ----------------- 1995 1996 1997 1998 1999 1999 2000 ------- ------- ------- ------- -------- ------- -------- (in thousands, except per share data) Statement of Operations Data: Net revenues............ $ 759 $ 478 $ 1,537 $ 2,449 $ 4,230 $ 1,966 $ 4,856 Cost of revenues........ 658 896 1,556 2,568 4,316 2,011 3,490 ------- ------- ------- ------- -------- ------- -------- Gross profit (loss)..... 101 (418) (19) (119) (86) (45) 1,366 Operating expenses: Research and development.......... 649 1,444 2,398 3,252 3,678 1,653 4,632 Sales and marketing... 527 929 1,484 2,413 1,972 754 3,543 General and administrative....... 854 1,180 1,200 1,363 2,148 844 3,819 Amortization of deferred stock compensation......... -- -- -- -- 9,300 400 9,937 ------- ------- ------- ------- -------- ------- -------- Total operating expenses........... 2,030 3,553 5,082 7,028 17,098 3,651 21,931 ------- ------- ------- ------- -------- ------- -------- Operating loss.......... (1,929) (3,971) (5,101) (7,147) (17,184) (3,696) (20,565) Charge for amended financing arrangements......... -- -- -- -- (25,700) -- -- Interest and other income (expense), net.................. (750) (131) (244) (524) (717) (393) 1,177 ------- ------- ------- ------- -------- ------- -------- Net loss................ $(2,679) $(4,102) $(5,345) $(7,671) $(43,601) $(4,089) $(19,388) ======= ======= ======= ======= ======== ======= ======== Net loss per share: Basic and diluted..... $ (5.91) $ (5.43) $ (5.40) $ (0.97) $ (0.68) ======= ======= ======== ======= ======== Pro forma basic and diluted (unaudited)(1)....... $ (4.30) $ 0.69 $ (0.31) ======== ======= ======== Shares used in per share computations: Basic and diluted..... 905 1,412 8,078 4,199 28,570 ======= ======= ======== ======= ======== Pro forma basic and diluted (unaudited).... 10,137 5,338 30,740 ======== ======= ========
(1) Pro forma net loss per share (A) reflects the conversion of the outstanding preferred shares into common shares upon the completion of our initial public offering in April 2000 and (B) excludes the amortization of deferred stock compensation and the charge for amended financing arrangements. 21
December 31, June 30, ----------------------------------------- -------- 1995 1996 1997 1998 1999 2000 ------ ------ ------- -------- ------ -------- (in thousands) Balance Sheet Data: Cash, cash equivalents and short term investments.... $ 695 $1,459 $ 510 $ 131 $5,036 $91,540 Working capital (deficiency).............. (658) 785 (4,497) (10,581) 210 87,028 Total assets............... 2,309 3,074 2,976 3,380 8,363 98,004 Long-term obligations, net of current portion........ 71 2,328 394 -- -- -- Total shareholders' equity (net capital deficiency).. (470) (560) (3,811) (9,571) 1,305 88,709
22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview We supply broadband wireless access systems used by telecommunications service providers to deliver wireless, high-speed data connections to business and residential subscribers. We sell our systems directly to service providers, as well as to system integrators that deploy our systems as part of their end- to-end network solutions for service providers. We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $43.6 million for the year ended December 31, 1999 and $19.4 million for the six months ended June 30, 2000. As of June 30, 2000, our accumulated deficit was approximately $85.5 million. We were incorporated in 1996 in Delaware and succeeded to the business of Vyyo Ltd., formerly PhaseCom Ltd., an Israeli company, under a reorganization. As a result, Vyyo Ltd. became our wholly-owned subsidiary. Prior to our introduction of broadband wireless access systems, we developed and marketed cable broadband communication systems. Our first-generation broadband wireless system was commercially deployed during the first quarter of 1999 for the local multipoint distribution system, or LMDS, and the multichannel multipoint distribution system, or MMDS, frequency bands. Our second-generation, DOCSIS- based, broadband wireless access system was commercially deployed during the first half of 2000 for the LMDS and MMDS frequency bands. Our first-generation broadband wireless access system has been commercially deployed at 19 domestic and international sites and our second-generation system has been commercially deployed at three domestic and international sites. Net revenues include product revenues and technology development revenues. Product revenues are derived primarily from sales of hubs and modems to telecommunications service providers and to system integrators. Product revenues are generally recorded when products are shipped, provided there are no customer acceptance requirements and we have no additional performance obligations. We accrue for estimated sales returns or exchanges and product warranty and liability costs upon recognition of product revenues. Technology development revenues consist of license fees paid by Philips Semiconductor under a license and development agreement, and are recognized when the applicable customer milestones are met, including deliverables, but not in excess of the estimated amount that would be recognized using the percentage- of-completion method. We expect to complete this arrangement in the second half of 2000. Deferred revenues represent the gross profit on product revenues subject to return or exchange and total payments on technology development not yet recognized. Results of Operations Six months ended June 30, 1999 and 2000 Net Revenues. Net revenues increased by 147% from $2.0 million in the six months ended June 30, 1999 to $4.9 million in the six months ended June 30, 2000. This increase primarily reflects the increase in unit sales of our systems, recognition of $724,000 revenues previously deferred and the technology development activities in the six months ended June 30, 2000. Technology development revenues were $480,000 in the six months ended June 30, 2000. There were no technology development revenues in the comparable period of 1999. Cost of Revenues. Cost of revenues increased by 74% from $2.0 million in the six months ended June 30, 1999 to $3.5 million in the six months ended June 30, 2000. These increases were attributable primarily to increased shipments of our products and by a write down of excess and obsolete inventory of approximately $300,000. Gross margins increased from negative margins in the six months ended June 30, 1999 to 28% in the six months ended June 30, 2000. The increase in gross margin reflects the cost effectiveness of the second-generation DOCSIS- based wireless broadband systems, recognition of revenue previously deferred without related costs, offset by inventory write down, and to a lesser extent the impact of technology development revenues. Gross margins in the first half of 1999 were negatively affected by the high fixed costs 23 associated with the first generation wireless modem products. We expect that our gross margins will continue to fluctuate. Prior to 1997, we participated in several Israeli government research and development incentive programs under which we received research and development participation of approximately $3.7 million. We are obligated to pay royalties at rates that generally range from 2.5% to 5% of revenues resulting from the funded projects up to maximum amounts of 100% or 150% of the funded amount. As of June 30, 2000, we had repaid or provided for the repayment of grants amounting to $783,000. As we currently intend to gradually decrease the manufacture and sale of products developed within any of the projects funded by the Office of the Chief Scientist in the Israeli Ministry of Industry and Trade or by the Israel-United States Binational Industrial Research and Development Foundation, we believe that the remaining contingent royalty liability is approximately $700,000. Research and Development Expenses. Research and development expenses consist primarily of personnel, facilities, equipment and supplies for our research and development activities. Substantially all of our research and development activities are carried out in our facility in Israel. These expenses are charged to operations as incurred. Our research and development expenses increased from $1.7 million in the six months ended June 30, 1999 to $4.6 million in the six months ended June 30, 2000. This increase was due to an increase in the number of research and development personnel and related activities and related costs of facilities. We believe continued significant investment in research and development is essential to our future success and plan to continue increasing our research and development activities including recruiting and hiring additional personnel and expanding our research and development facility to accommodate the additional personnel, which will result in increased expenses in absolute dollars. Accordingly, we expect that research and development expenses will continue to increase in future periods. Sales and Marketing Expenses. Sales and marketing expenses consist of salaries and related costs of sales and marketing employees, consulting fees and expenses for travel, trade shows and promotional activities. Selling and marketing expenses increased from $754,000 in the six months ended June 30, 1999 to $3.5 million in the six months ended June 30, 2000. The increase in sales and marketing expenses was primarily due to increases in the number of sales and marketing personnel and related activities. In the second quarter of 2000 we began to expand our sales and marketing activities in worldwide locations such as South East Asia. We plan to continue to increase our sales and marketing activities, including recruiting and hiring additional sales personnel inside and outside of the US, which will result in increased expenses in absolute dollars. Accordingly, we expect that sales and marketing expenses will increase in future periods. General and Administrative Expenses. General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, strategic and business development, human resources and legal. General and administrative expenses increased from $844,000 in the six months ended June 30, 1999 to $3.8 million in the six months ended June 30, 2000. We hired additional senior management personnel in the first six months of 2000 and are planning to expand operational and corporate activities, including support of our operations as a public company. We expect that general and administrative expenses will continue to increase in future periods. Amortization of Deferred Stock Compensation. Deferred stock compensation represents the aggregate differences between the respective exercise price of stock options or purchase price of stock at their dates of grant or sale and the deemed fair market value of our common stock for accounting purposes. Deferred stock compensation is presented as a reduction of stockholders' equity and is amortized over the vesting period of the underlying options. Amortization expense was $9.9 million in the six months ended June 30, 2000. We currently expect to record amortization of deferred stock compensation expense of approximately $4.6 million in the remainder of 2000, $5.1 million in 2001 and $2.4 million in 2002 and $600,000 in 2003 for options issued through the completion of the initial public offering on May 2, 2000. 24 Interest and Other Income (Expense), Net. Interest income and other (expense) includes interest and investment income, foreign currency remeasurement gains and losses offset by interest expense related to bank loans and convertible notes. In the second quarter of 2000, we repaid all of our outstanding loans. Net interest income for the six months ended June 30, 2000 was $1.2 million compared to expenses of $393,000 income in the six months ended June 30, 2000. Substantially all of the interest and other income in 2000 is represented by interest income on our cash and short-term investment balances. Interest and other income increased in the six months ended June 30, 2000, as compared with the corresponding period in 1999, because of the increase in the average balance of invested cash equivalents and short term investments relating to the proceeds from completion of our initial public offering in April of 2000. Years Ended December 31, 1997, 1998 and 1999 Net Revenues. Net revenues increased 59% from $1.5 million in 1997 to $2.4 million in 1998 and 73% to $4.2 million in 1999. This increase primarily reflects the increase in unit sales of our systems in 1998 and 1999 and the technology development activities in 1999. We began commercial shipments of our first-generation broadband wireless access system in the first quarter of 1999, and we began commercial shipments of our second-generation DOCSIS-based wireless access system in the fourth quarter of 1999. All of our product revenues in 1997 and 1998, and a substantial portion of our product revenues in 1999, relate to sales of cable modem products that we are no longer developing. Virtually all of the remaining revenues in 1999 relate to sales of our first- generation wireless modem products, which we phased out with the launch of our second-generation, DOCSIS-based, wireless access systems in the fourth quarter of that year. Therefore, the success of our business will be entirely dependent upon the success of our wireless products generally, and our new DOCSIS-based wireless products in particular. We do not anticipate recognizing material amounts of revenue from cable modem or first-generation wireless products in subsequent periods. Technology development revenues were $480,000 in 1999. There were no technology development revenues in either 1997 or 1998. We began commercial shipments of our first-generation broadband wireless access system in the first quarter of 1999, and we began commercial shipments of our second-generation DOCSIS-based wireless access system in the fourth quarter of 1999. All of our product revenues in 1999 relate to sales of cable modem products that we are no longer developing and to sales of our first- generation wireless modem products, which we phased out with the launch of our second-generation, DOCSIS-based, wireless access systems in the fourth quarter of 1999. In 1999, approximately 61% of our revenues were derived from customers in North America, 22% from customers in Europe, 13% from customers in Asia and 4% from other regions. Our revenue is concentrated among relatively few customers. In 1999, four customers collectively represented approximately 59% of our net revenues. In 1999, revenues from each of four customers represented approximately 20%, 14%, 13% and 12% of net revenues. In 1998, revenues from each of three customers represented approximately 31%, 23% and 15% of net revenues. In 1997, revenue from each of three customers represented approximately 27%, 12% and 11% of total revenues. Though our principal revenue-generating customers are likely to vary on a quarterly basis, we anticipate that our revenues will remain concentrated among a few customers for the foreseeable future. In August 1999, ADC Telecommunications, Inc., one of our major customers, made an approximately 10% equity investment in Vyyo. Cost of Revenues. Cost of revenues in 1999 included $313,000 of costs of technology development revenues. There were no costs of technology development revenues in either 1997 or 1998. Cost of technology development revenues consist of component and material costs, direct labor costs, warranty costs, royalties in connection with Israeli government incentive programs and overhead related to manufacturing our products. Cost of technology development consist of direct labor costs and materials for the engineering efforts related to the technology development arrangement. Cost of revenues increased from $1.6 million in 1997 to $2.6 million in 1998 and to $4.3 million in 1999. These increases were attributable primarily to increased shipments of our products in each of the three years 25 and in 1999 included the technology development activities. Gross margins were negative in each year. Gross margins in 1997 and 1998 were negatively affected by the high initial fixed costs and low volumes associated with our proprietary cable modem products. In addition, gross margins in 1999 were negatively affected by the high fixed costs associated with the first generation wireless modem products and inventory write-offs associated with the discontinuation of in-house cable modem assembly, as well as the replacement of a modem system for a key customer with next-generation technology. Research and Development Expenses. Our research and development expenses increased from $2.4 million in 1997 to $3.3 million in 1998 and to $3.7 million in 1999. These increases were due to increased levels of activities and related costs of personnel and facilities. We believe significant investment in research and development is essential to our future success and plan on increasing our research and development activities. We expect to spend between $9 million and $12 million on research and development activities in 2000. This includes recruiting and hiring additional personnel and expanding our research and development facility to accommodate the additional personnel, which will result in increased expenses in absolute dollars. Sales and Marketing Expenses. Selling and marketing expenses increased from $1.5 million in 1997 to $2.4 million in 1998 and decreased to $2.0 million in 1999. The fluctuation in sales and marketing expenses in each of the years was primarily due to changes in the number of sales and marketing personnel. We plan to increase our sales and marketing activities, including recruiting and hiring additional sales personnel, which will result in increased expenses in absolute dollars. Accordingly, we expect that sales and marketing expenses will increase in future periods. General and Administrative Expenses. General and administrative expenses increased from $1.2 million in 1997 to $1.4 million in 1998 and to $2.1 million in 1999. We recently hired additional senior management personnel and are planning to expand operational and corporate activities, including support of our operations as a public company. Amortization of Deferred Stock Compensation. Amortization expense was $9.3 million in 1999. We currently expect to record amortization of deferred stock compensation expense of approximately $8.1 million in 2000, $3.3 million in 2001 and $2.0 million thereafter for options issued through December 31, 1999, and to record additional expenses for options granted subsequent to that date. Charge for amended financing arrangement. Charge for amended financing arrangement represents the aggregate differences between the amended notes payable conversion price per share or the related amended warrants exercise price and the deemed fair market value of our common stock for accounting purposes. Interest Income (Expense), Net. Net interest expense increased from $244,000 in 1997 to $524,000 in 1998 to $717,000 in 1999 due to increased borrowings. Income Taxes. As of December 31, 1999, we had approximately $19.0 million of Israeli net operating loss carryforwards and $6.0 million of United States federal and state net operating loss carryforwards. The Israeli net operating loss carryforwards have no expiration date and have not been recorded as tax assets because the losses are expected to be utilized during a tax exempt period. The United States net operating loss carryforwards expire in various amounts between the years 2004 and 2019. We have provided a full valuation allowance against our United States deferred tax assets as the future realization of the tax benefit is not sufficiently assured. Quarterly Results of Operations The table below sets forth statement of operations data for the most recent six consecutive quarters. This information has been derived from our unaudited consolidated financial statements. We have prepared the unaudited consolidated financial statements on the same basis as our audited consolidated financial statements contained elsewhere in this prospectus and include all adjustments, consisting only of normal recurring 26 adjustments, that we consider necessary for a fair presentation of such information. You should read this information in conjunction with our consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus. Our limited operating history makes the prediction of future operating results difficult or impossible. We do not believe that period-to-period comparisons of our operating results are meaningful or should be relied upon as an indication of future performance.
Quarter Ended ------------------------------------------------------------------ March 31, June 30, September 30, December 31, March 31, June 30, 1999 1999 1999 1999 2000 2000 --------- -------- ------------- ------------ --------- -------- (in thousands) Statements of Operations Data: Net revenues............ $ 942 $ 1,024 $ 1,110 $ 1,154 $ 1,841 $ 3,015 Cost of revenues........ (864) (1,147) (1,111) (1,194) (1,392) (2,098) ------- ------- ------- -------- -------- ------- Gross profit (loss)..... 78 (123) (1) (40) 449 917 Operating expenses: Research and development.......... 785 868 842 1,183 1,903 2,729 Sales and marketing... 378 376 574 644 1,450 2,093 General and administrative....... 429 415 597 707 1,783 2,036 Amortization of deferred compensation......... -- 400 400 8,500 6,500 3,437 ------- ------- ------- -------- -------- ------- Total operating expenses........... 1,592 2,059 2,413 11,034 11,636 10,295 ------- ------- ------- -------- -------- ------- Operating loss.......... (1,514) (2,182) (2,414) (11,074) (11,187) (9,378) Charge for amended financing arrangements......... -- -- (5,200) (20,500) -- -- Interest and other income (expense), net.................. (198) (195) (163) (161) (68) 1,245 ------- ------- ------- -------- -------- ------- Net loss................ $(1,712) $(2,377) $(7,777) $(31,735) $(11,255) $(8,133) ======= ======= ======= ======== ======== =======
Revenues for the second quarter of 2000 include $724,000 revenues previously deferred. Cost of revenues in the third quarter of 1999 and the second quarter of 2000 reflect approximately $200,000 and $300,000, respectively, in inventory write-downs associated with discontinuation of in-house cable modem production. Operating expenses in the first and second quarters of 2000 reflect higher sales and marketing and general and administrative expenses due primarily to the general increase in personnel and the increase in sales and marketing and corporate activities. Our quarterly operating results have varied significantly in the past and are likely to vary significantly in the future. These variations result from a number of factors, many of which are beyond our control. In addition, our operating results may be below the expectations of securities analysts and investors in future periods. Our failure to meet these expectations will likely cause our share price to decline. Liquidity and Capital Resources Since our inception, we have funded operations primarily through the private placement of our equity securities and borrowings from stockholders and banks. We raised approximately $4.2 million in 1997, $6.8 million in 1998, $11.7 million in 1999 and $96.8 million in the six months ended June 30, 2000 in convertible debt from stockholders and equity. On April 10, 2000, we completed our initial public offering of 6,750,000 shares of common stock at a price of $13.50 per share and on May 2, 2000, we issued an additional 1,012,500 shares pursuant to the underwriters' exercise of the over-allotment option, also at $13.50 per share. The total net proceeds from the initial public offering were approximately $94.9 million. As of June 30, 2000, we had $91.5 million of cash, cash equivalents and short-term investments. Cash used by operations include expenditures associated with development activities and marketing efforts related to commercialization of our products. In the six months ended June 30, 2000, cash used in operations 27 was $6.8 million, which was comprised of our net loss of $19.4 million, partially offset by a non-cash charge of $9.9 million for deferred stock compensation and other working capital account changes. In the six months ended June 30, 1999, cash used in operations was $2.2 million, which was comprised of our net loss of $4.1 million, partially offset by changes in working capital accounts. In 1999, cash used in operations was $6.2 million comprised of our net loss of $43.6 million, an increase in accounts receivable of $336,000, partially offset by non-cash charges of $35 million for deferred stock compensation and amended financing agreements, a decrease in inventories of $512,000 and increase in accounts payable and accrued liabilities of $1.5 million. In 1998, cash used in operations was $6.7 million comprised of our net loss of $7.7 million, an increase in inventory of $638,000, partially offset by a $1.1 million increase in accounts payable and accrued liabilities. In 1997, cash used in operations was $4.7 million comprised of our net loss of $5.3 million, an increase in inventory of $639,000, partially offset by a $1.1 million increase in accounts payable and accrued liabilities. We have made investments in property and equipment of approximately $2.5 million from 1997 through June 30, 2000. Our capital requirements depend on numerous factors, including market acceptance of our products, the resources we devote to developing, marketing, selling and supporting our products, the timing and extent of establishing additional international operations and other factors. We expect to devote substantial capital resources to hire and expand our research and development and our sales and marketing organizations, to expand marketing programs and for other general corporate activities. We expect that the net proceeds from this offering and cash from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that, we may need to raise additional funds for a number of uses. If we raise additional funds through the issuance of equity or convertible debt securities, the price paid for such securities may be substantially less than the price paid for the common stock sold in this offering and, in any event, the percentage ownership of our existing stockholders will be reduced. We may not be able to obtain additional funds on acceptable terms, or at all. If we cannot raise needed funds on acceptable terms, we may not be able to increase our ongoing operations and complete our planned expansion, take advantage of acquisition opportunities, develop or enhance systems or respond to competitive pressures. Effective Corporate Tax Rates Our tax rate will reflect a mix of the United States federal and state tax on our United States income and Israeli tax on non-exempt income. The majority of our Israeli subsidiary's income is derived from our company's capital investment program with "Approved Enterprise" status under the Law for the Encouragement of Capital Investments, and is eligible therefore for tax benefits. Because of these benefits, we will enjoy a tax exemption on income derived from this investment program for a period of six years commencing in the first year in which the Israeli subsidiary will have taxable income, provided that we do not distribute such income as a dividend, and a reduced tax rate of 10 to 15% for up to four subsequent years. All of these tax benefits are subject to various conditions and restrictions. There can be no assurance that we will obtain approval for additional Approved Enterprises Programs or that the provisions of the law will not change. Under a proposed tax reform in Israel, tax benefits with respect to future programs may be reduced. Since we have incurred tax losses through December 31, 1999, we have not yet used the tax benefits for which we are eligible. Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS No. 133, which establishes accounting and reporting standards for derivative instruments and hedging activities. The statement requires recognition of all derivatives at fair value in the financial statements. FASB Statement No. 137, Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133, an amendment of FASB Statement No. 133, defers implementation of SFAS No. 133 until fiscal years beginning after June 15, 2000. We believe that upon implementation the standard will not have a significant effect on our financial statements. 28 In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101--Revenue Recognition in Financial Statements ("SAB 101"), which among other things clarifies certain conditions to be met in order to recognize revenue. The Company is currently in the process of assessing the impact of SAB 101 and expects to complete its assessment prior to December 31, 2000. Disclosures About Market Risk We are exposed to financial market risks including changes in interest rates and foreign currency exchange rates. Substantially all of our revenue and capital spending is transacted in U.S. dollars, although a substantial portion of the cost of our operations, relating mainly to our personnel and facilities in Israel, is incurred in New Israeli shekels, or NIS. We have not engaged in hedging transactions to reduce our exposure to fluctuations that may arise from changes in foreign exchange rates. In the event of an increase in inflation rates in Israel, or if appreciation of the NIS occurs without a corresponding adjustment in our dollar-denominated revenues, our results of operation and business could be materially harmed. As of June 30, 2000, we had cash, cash equivalents and short term investments of $91.5 million. Substantially all of these amounts consisted of corporate and government fixed income securities and money market funds that invest in corporate and government fixed income securities which are subject to interest rate risk. We place our investments with high credit quality issuers and by policy, limit the amount of the credit exposure to any one issuer. Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk. All highly liquid investments with a maturity of less than three months at the date of purchase are considered to be cash equivalents; all investments with maturities of three months or greater are classified as held-to-maturity and considered to be short-term investments. If market interest rates were to increase immediately and uniformly by 10 percent from the levels at June 30, 2000, the fair value of the portfolio would decline by an immaterial amount primarily because of the short-term nature of the investments. While all our cash equivalents and short- term investments are classified as "available-for-sale," we generally have the ability to hold our fixed income investments until maturity and therefore we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio. We do not hedge any interest rate exposures. 29 BUSINESS Overview We supply broadband wireless access systems used by telecommunications service providers to deliver wireless, high-speed data connections to business and residential subscribers. Our systems are deployed in point-to-multipoint applications at the radio frequencies licensed for two-way broadband communication. Point-to-multipoint technology refers to the ability of a central, wireless hub to transmit and receive network traffic to and from multiple subscriber modems. Our systems are based on the Internet protocol, or IP, which is the networking standard used to deliver voice and data over the Internet. Networking standards are the special set of rules for communicating that the end points in a telecommunication connection use when they send signals back and forth. Our system is designed to allow service providers to support rapid and cost-effective broadband service roll-outs directly to business and residential subscribers. Service providers use our system to bridge the segment of the network that connects the service providers' systems directly to the subscribers, commonly referred to as the last mile. In recent years, the volume of high-speed data traffic across worldwide communications networks has grown dramatically as the public Internet and private corporate intranets have been broadly adopted for communications and e- commerce. This traffic growth has created demand for cost-effective, high-speed communications, as subscribers increasingly rely on numerous applications and data-intensive content, such as full-streaming video where subscribers watch video clips with sound over the Internet, voice over IP where subscribers conduct voice calls over the Internet instead of their telephones, and remote access to corporate networks where telecommuters can access corporate networks from locations other than their offices. In the United States and abroad, the communications industry is in varying stages of deregulation. Deregulation has created the opportunity for new competitors to use existing and emerging broadband technologies to offer multiple communications services directly to subscribers. There are a number of broadband wire-based technologies that do not utilize airwaves for data and voice transport, but instead use copper wire, fiber optic cable, or other physical wires to transport voice and data. These wire-based technologies deliver high-speed connections, but performance, cost, time for deployment or service availability may limit the use of these alternative technologies to satisfy the needs of service providers and subscribers. Broadband wireless technologies deliver high-speed connections and offer service providers the ability to rapidly and cost-effectively expand their subscriber base or to enter new markets while avoiding the limitations of the existing wire-based infrastructure. Our system consists of a wireless hub, which serves as a point of convergence for data traffic in a network, network management system software and wireless subscriber modems. Each wireless hub is located at a base station, which houses the components in the network. Our system is designed to allow service providers to rapidly deploy cost-effective, high-speed data connections directly to business and residential subscribers. Each hub transmits and receives network traffic to and from our wireless modems, which are installed at multiple subscriber locations. Our integrated network management system, which manages the traffic over the network, optimizes how quickly and efficiently the system operates by allocating bandwidth, or the amount of data which can travel over the wireless signal. These system characteristics allow service providers to maximize the number of simultaneous subscribers on their networks. Using our point-to-multipoint system, service providers can roll out network service quickly and with a minimal initial investment and can then expand their networks by adding more wireless hubs and subscriber wireless modems as the number of subscribers grows. We sell our systems directly to service providers and system integrators, who provide network planning and integration services and integrate our systems with other components in the network and provide their customers with end-to- end network solutions. We also provide system integration services to some of our service provider customers to more effectively implement our systems. As of June 30, 2000, our first-generation system has been commercially deployed at 19 domestic and international sites and our second-generation system has been commercially deployed at three domestic and international sites. Our second- generation systems use our enhanced version of the cable industry's Data Over Cable Service Integration Specification, or DOCSIS, standard. 30 We have applied for federal registration of our trademarks DOCSIS+ and LMDS Lite. Other service marks, trademarks and trade names referred to in this prospectus are the property of their respective owners. Industry Background Use of the Internet and private communications networks has expanded and continues to expand rapidly. International Data Corporation estimates that there were 142 million Internet subscribers at the end of 1998, and projects that this number will grow to over 500 million subscribers by 2003. Businesses increasingly depend upon data networks, not only for communication within the office, but also to exchange information among corporate sites, remote locations, telecommuting employees, business partners, suppliers and customers. Consumers are also accessing the Internet to communicate, collect and publish information and conduct retail purchases. The growth in data traffic is resulting in an increase in the demand for high-speed access. In light of this demand, the FCC has taken steps to increase the availability of frequencies and bandwidth that may be used by wireless carriers in the United States for such data transmission. The FCC has increased the availability of various frequencies within the bands of 24 to 40 Gigahertz, or GHz, frequencies often referred to as the local multipoint distribution system, or LMDS. In addition, an FCC ruling in September 1998 allowed license holders of the multichannel multipoint distribution system, or MMDS, or various frequencies within the band of 2.15 to 2.68 GHz, to offer two-way broadband wireless data services. Previously, these frequencies had been restricted to one-way video transmissions. The FCC has also adopted orders to allocate additional spectrum through auctions during 2000, which can be used by high- speed data transmission service providers. Opportunities in broadband wireless access are increasing globally as Europe, Latin America, Asia Pacific and Canada join the United States in promoting competition in the local communications services market by allocating frequencies and bandwidth and issuing transmission licenses. In this regard, at least 26 countries have allocated broadband wireless frequency bands for use or trials in the last mile, according to Global Telephony. Deregulation has been a significant catalyst for increased competition in the long-haul segment of the market and massive spending on network infrastructure, as incumbent and emerging carriers have sought to address the growing demand for bandwidth. In the local access segment of the market, deregulation has also been a significant catalyst for the growing interest in providing broadband access directly to subscribers. Data services that historically were offered only by a single provider for a region now may be offered by a number of competing service providers. This increased competition has given local service providers compelling incentives to improve data transmission rates in order to offer additional value-added services to subscribers. However, bandwidth limitations of the existing last mile infrastructure have constrained service providers from exploiting these opportunities. Last mile links to subscribers typically consist of copper wires that operate at substantially lower transmission speeds than those offered in the long-haul segment of a network, or by some available broadband alternatives. These copper wires were originally intended to carry only analog circuit-switched, voice signals. As a result, the last mile has become a bottleneck that limits high-speed data transmission. Alternative technologies for broadband access include: . Digital Subscriber Line. Digital subscriber line, or DSL, technology improves the data transmission rates of a telephone company's existing copper wire network. . Cable Modems. Cable modems are designed to provide broadband Internet access and are targeted primarily at the residential market. . Fiber-based Solutions. Fiber-based solutions and high-capacity leased lines offer the highest data transmission rate of any of the alternative technologies for broadband access. . Point-to-Point Wireless Technology. Point-to-point wireless technology enables data transmission using a dedicated radio link between two locations. . Broadband Point-to-Multipoint Wireless Technology. Broadband point-to- multipoint wireless networks consist of a wireless hub that communicates over radio frequencies to transmit and receive network traffic to and from wireless modems installed at multiple subscriber locations. 31 Broadband wireless technology is being utilized by both incumbent and emerging service providers. The established carriers are expected to use broadband wireless technology to reach new customers to whom they previously could not provide access, fill coverage gaps in their existing networks and deploy value-added services in a cost-effective manner. For example, International Data Corporation reported that in 1999, Sprint and WorldCom spent over $1.5 billion to purchase companies holding MMDS licenses. Emerging carriers may use this technology to bypass existing wire-based infrastructure and to compete with incumbent carriers. In addition, this technology may be used to deploy broadband services in regions where there is no wire-based communications infrastructure. International Data Corporation estimates that revenue generated by basic services delivered via fixed wireless technologies will grow from $767 million last year to $7.4 billion in 2003. The Vyyo Solution Our systems are designed to provide the following benefits: Cost-effectiveness. Service providers worldwide are beginning to use wireless access technologies as a cost-effective alternative to wire-based communications, such as cable modems and digital subscriber lines. Our wireless system avoids many of the high costs associated with wire-based solutions, such as costs of installing copper wire, cable or fiber and obtaining access rights- of-way and digging up streets to lay wire. We believe that our systems are more cost-effective than other wireless access systems because our IP-based systems are easy to operate and less expensive to install and maintain. Our second- generation systems use our enhanced version of the DOCSIS standard, which also contributes to cost-effectiveness. DOCSIS-based Systems. We use our enhanced version of the DOCSIS standard, which we call DOCSIS+(TM), in our second-generation wireless access systems. Because different manufacturers may use different protocols or rules for communicating and sending signals back and forth in their products, these products are often unable to communicate with one another or with products from other manufacturers. By designing systems with communication rules based on the DOCSIS standard, our systems can be more easily adapted to new standards and rules and make them easier to integrate with other manufacturers' equipment. Widely-available key components make our DOCSIS-based systems less expensive to use than most other currently available systems. Commercial Deployments. Our product is one of the first commercially available wireless hub and modem systems for MMDS, and LMDS, frequency bands. Our first-generation system has been commercially deployed at 19 domestic and international sites and our second-generation, DOCSIS-based, system has been commercially deployed at three domestic and international sites. Flexible Platform. Our systems are highly scalable which allows additional users and hubs to be added quickly and easily, so our customers can establish a wireless broadband access network with a relatively low initial investment and later expand the geographic coverage area of the network and increase the number of users who can be served on the network as subscriber demand increases. Our integrated network management system is designed to allow new system features and benefits to be added without costly replacements of existing hardware. Service providers also use the integrated network management system to manage the traffic over the network and optimize how quickly and efficiently the system operates by efficiently allocating bandwidth, or the amount of data which can travel over the wireless signal. These system characteristics allow service providers to maximize the number of simultaneous end-users served by a hub while preserving the speed and quality of data transmission. Strategy Our objective is to be a leading worldwide supplier to service providers and system integrators of broadband wireless access systems used in point-to- multipoint applications. Our strategy to accomplish this objective is to: . Use Existing Commercially Deployed Systems to Demonstrate our Capabilities. We intend to use the early acceptance of our systems to demonstrate our capabilities to potential customers as we seek to expand our customer base. 32 . Broaden Our Product Offerings. We intend to develop products with additional features and benefits and new systems for use in additional wireless frequency bands worldwide as these frequencies become available. We expect to make relatively minor modifications in our transmission components to enable our systems to operate in different frequency bands. We do not expect to redesign our entire system architecture. . Improve Cost-effectiveness and Performance. We intend to continue improving the performance and quality of our systems, while reducing costs by integrating advanced components. We are developing additional software code, which is intended to enhance the functions of the system and allocate frequencies more efficiently. . Leverage Key Strategic Relationships. We have established strategic relationships with several service providers, radio companies, semiconductor manufacturers and system integrators. We expect to strengthen our existing relationships and establish new relationships with other system integrators and service providers, to increase product distribution and expand into additional geographic markets. . Participate in Developing Industry Standards. We expect that our technological expertise will allow us to play an integral role in the development of the wireless DOCSIS standard. In July 2000, Vyyo and other industry participants--ADC, Conexant, Gigabit Wireless, Intel and Nortel Networks--announced the formation of a Wireless Digital Subscriber Line Consortium to accelerate the deployment of broadband wireless solutions to the marketplace. The goal of the Consortium is to provide the industry with standardized, timely, multi-vendor solutions for broadband wireless access. Vyyo's DOCSIS+(TM) air interface was selected as the initial reference point for the Consortium's definition of an open standard. Vyyo is also active in the various standards bodies, such as the Institute of Electrical and Electronic Engineers, or IEEE, subcommittee to develop wireless industry standards. Products Our systems are deployed in point-to-multipoint applications at the frequencies licensed for these applications. Our system is comprised of wireless hubs and wireless subscriber modems. The following diagram depicts our broadband wireless access system: [The graphic is a base station connected to an antenna that transmits to a modem located in residences and businesses.] 33 . Point-to-multipoint wireless hubs are located in base stations and send and receive data traffic to and from up to 8,000 wireless subscriber modems at very high speeds. Our network management system manages and controls the traffic transmitted over our broadband wireless system. . Our wireless modems connected to PCs or LANs are located in residences, small/home offices, and medium-sized businesses. These modems send and receive data traffic and provide access to the Internet. . Our wireless hub interfaces with a router located in the base station that sends data traffic to the Internet and, in the future, will send voice traffic to the gateway that connects with the public telephone network. . System integrators or service providers add additional network equipment, such as antennae to transmit wireless radio frequency signals, and complete the network infrastructure. Wireless Hub. Our wireless hub manages data communications between wireless modems located at subscribers' locations and network devices such as routers located at a central office or base station. The primary role of the wireless hub is to manage the upstream traffic from the subscriber toward the public telephone and data networks, and the downstream traffic from the networks toward the subscriber. Our wireless hub can support up to 8,000 wireless modems. Our wireless hub employs a unique open physical layer architecture that allows us to easily replace the circuit boards in the hub as more sophisticated technology becomes available. Our wireless hub is designed to support a variety of channel capacities by using any combination of six upstream receivers and four downstream transmitters. For example, our system can provide, among other combinations, 60 upstream channels and 8 downstream channels or 48 upstream channels and 16 downstream channels. A channel is a subdivision of a frequency band used to transmit radio frequency signals. This flexibility allows the system engineer to configure a system for each specific situation. Several frequency bands may be used within the same wireless hub. Our wireless hub may be accessed for modification or transmitter or receiver module replacement by the operator while maintaining continuous operation. Most of the modules are identical, which is intended to reduce maintenance and inventory requirements. When used in combination with our wireless modems, our wireless hub enables radio frequency performance in any of the currently licensed point-to-multipoint frequency bands. Multiple wireless hubs may be controlled through the same network management system operator interface, either locally or from a remote location. Our integrated network management system is a Windows NT-based software package that manages overall system operations. The system features graphical views of all parts of the network, subscribers, modems and traffic patterns. The network management system allows network operators to configure, maintain and troubleshoot hubs and modems from a central workstation. Our network management system also enables the network operator to work at a location remote from the public telephone network or the data network, thereby increasing the system's operational flexibility. In addition, our systems can adjust automatically to more efficiently utilize available bandwidth. This utilization can translate into increased potential revenue for service providers as compared to other currently available wireless products. Wireless Modem. Our wireless subscriber modem is designed for residential, home office or small office deployment. It supports up to 15 individual users simultaneously through a separate Ethernet hub or switch. We introduced our first-generation broadband wireless access system during the third quarter of 1998, for the LMDS frequency band, and during the first quarter of 1999, for the MMDS frequency band. We introduced our second- generation broadband wireless access system during the fourth quarter of 1999, for the MMDS and LMDS frequency bands. Currently, the primary frequency bands for broadband data services in the United States or other countries are various frequencies within these bands: . WCS--Wireless Communications Service--2.305 to 2.320 GHz and 2.345 to 2.360 GHz; . MMDS--Multichannel Multipoint Distribution Service--2.150 to 2.680 GHz (3.5GHz in Europe); and 34 . LMDS--Local Multipoint Distribution Service--24 to 40 GHz. We began commercial shipments of our first-generation broadband wireless access system in the first quarter of 1999, and we began commercial shipment of our second-generation, DOCSIS-based, wireless access system in the fourth quarter of 1999. All of our product revenues in 1997 and 1998, and a substantial portion of our product revenues in 1999, relate to sales of cable modem products that we are no longer developing. Virtually all of the remaining revenues in 1999 relate to sales of our first-generation wireless modem products, which we phased out with the launch of our second-generation, DOCSIS- based, wireless access systems in the fourth quarter of that year. Therefore, the success of our business will be entirely dependent upon the success of our wireless products generally, and our new DOCSIS-based wireless products in particular. Technology Our experience in designing shared bandwidth communications systems using time division multiple access technology is the foundation of our expertise in the point-to-multipoint broadband wireless access market. "Time division multiple access" is a wireless technology that allows multiple users to share available bandwidth. We believe that we have extensive expertise in system design, as well as modem and broadband radio frequency technology. We have developed media access controller, or MAC, layer algorithms, or software code, that maximize the number of subscribers that can share a single upstream channel. Internet Protocol Expertise. Our system architecture supports Internet Protocol communications traffic, and our primary systems component, the media access controller, is optimized for Internet Protocol communications traffic. We have designed our systems to support variable-length Internet Protocol packets, which carry the data being transmitted, including the most common packet size of 64 bytes. DOCSIS+(TM) Standard. Our second-generation systems are based on the cable industry's DOCSIS standard that we have adapted and enhanced for use in the wireless environment. Our DOCSIS+(TM) standard provides for comprehensive support of all Internet Protocol-based services. We believe that we are the first company to modify the DOCSIS standard to suit the wireless environment. We have developed media access controller layer algorithms, or software code, based on DOCSIS+(TM) for our wireless hubs and modems and have made additional enhancements to facilitate reliable communication over the MMDS and LMDS frequency bands. Enhanced MAC Layer Algorithms. Our enhanced media access controller layer software code, combined with select physical layer software code, provide robust performance under adverse conditions and effectively utilize the limited frequency and bandwidth allocations of the MMDS band. Signal Processing Technology. We develop, deploy and support the networking architecture for the multiple modules required in our systems. Specifically, we have developed technology that is designed to correct transmission errors and prevent unauthorized access to the data being transmitted. We believe that our ability to rapidly develop and integrate such modules into our systems provides us with a competitive advantage. Scheduling Algorithms. We develop scheduling software code for time division multiple access-based point-to-multipoint systems. Our network management system is designed to predict user behavior and automatically adjust allocation of frequencies to more efficiently utilize bandwidth. The ability to control and modify the characteristics of the network management system allows us to further optimize them for changing environments and future services. Customers We sell our systems directly to service providers and system integrators that deploy our systems as part of their end-to-end network solutions for service providers. We also provide system integration services to some of our service provider customers to more effectively implement our systems. We sell our systems based on individual purchase orders. Our customers are not obligated by long-term contracts to purchase our systems. Our customers can generally cancel or reschedule orders upon short notice and can discontinue using our systems at any time. A relatively small number of customers account for a large percentage of our revenues. In 1999, ADC Telecommunications accounted for approximately 20% of our revenues, Aster City Cable accounted for 35 approximately 14% of our revenues, Shanghai Bell accounted for approximately 13% of our revenues and Philips Semiconductor accounted for approximately 12% of our revenues. Sales in 1999 to Aster City Cable and Shanghai Bell relate to cable products that we are no longer developing, and we do not expect sales to Philips to continue beyond 2000. Collaboration Agreement. In August 1999, we entered into a collaboration agreement with ADC Telecommunications, under which we agreed to sell our hubs and modems to ADC for resale and distribution to ADC's customers at a market price to be established by good faith negotiation between ADC and us. This agreement provided that ADC had exclusive rights to market, sell and distribute our products to certain customers. We also agreed to grant to ADC a non- exclusive license to use specified software embedded in or provided with our products. We recently amended our agreement with ADC to, among other things, remove the exclusivity clause. In the first half of 2000, we established a relationship with Nortel Networks under which we expect Nortel Networks to sell our products on an OEM basis. In the second quarter of 2000, we generated revenues from sales of our products to Nortel Networks. We also have agreements to collaborate with several radio companies including California Amplifier, REMEC and others, to develop radio products that will interoperate with our equipment. In connection with the collaboration agreement, ADC made about a 10% equity investment in Vyyo. ADC is expected to sell a substantial portion of its equity investment in this offering. Additional information regarding ADC's investment is contained in this prospectus under the heading "Certain Relationships and Related Transactions." License and Development Agreement. In December 1999, we entered into a license and development agreement with Philips Semiconductor relating to cable modem systems. Under this contract, we agreed to license two versions of our DOCSIS MAC system to Philips. We have given Philips a non-exclusive, royalty- free right to use our DOCSIS 1.0 MAC in exchange for a one-time license fee. In addition, we have given Philips a non-exclusive, royalty-bearing right to use our DOCSIS 1.1 MAC in exchange for a license fee, a percentage of which is paid upon the achievement of specified milestones related to the development of the DOCSIS 1.1 MAC. Sales and Marketing The global telecommunications industry is dominated by a limited number of network system integrators. We focus our marketing efforts on network system integrators that have the means to provide vendor financing in situations where our equipment is purchased as part of the total network. For some service providers, this financing is a necessary part of the total network solution. We support our system integrator customers with site demonstrations for their service provider customers. The objective of a site demonstration is to promote the adoption of our systems for deployment within the service provider's network. We also sell our systems directly to service providers. In determining which accounts to service directly, we focus on those service providers that prefer to work with a vendor directly and serve as their own system integrator. In some instances, we may serve as a system integrator and provide, through third parties, the other components of the network system. Our direct sales force maintains contact with the service provider and the system integrator account team, regardless of the actual distribution channel. This contact keeps us informed of the evolving needs of the service providers and helps strengthen our relationship with each customer. In some markets, we have established distribution relationships with local resellers that also provide support and maintenance to their service provider customers. Our marketing group provides marketing support services for our executive staff, direct sales force, system integrators and resellers. Through our marketing activities, we provide technical and strategic sales support to 36 our direct sales personnel and system integrators or resellers, including in- depth product presentations, technical manuals, sales tools, pricing, marketing communications, marketing research, trademark administration and other support functions. Our marketing group is also responsible for product management activities throughout each product's lifecycle. These activities include the definition of product features, approval of product releases, specification of enhancements to our product and service offerings, and determination of future product platforms. Manufacturing We outsource manufacturing to contract manufacturers that have the expertise and ability to reduce costs associated with volume manufacturing and to respond quickly to customer orders while maintaining high quality standards. We outsource printed circuit board assembly and manufacturing of our wireless hubs to contract manufacturers located in Israel. We outsource manufacturing of our wireless modems to a contract manufacturer located in Taiwan. Any inability of these manufacturers to provide the necessary capacity or output could result in significant production delays which could harm our business. Our wireless hubs and modems are currently purchased on a purchase order basis. We have no guaranteed supply or long-term contractual agreements with any of our suppliers. In addition, some of the components included in our systems are obtained from a single source or limited group of suppliers. The partial or complete loss of such suppliers could increase our costs, delay shipments or require redesigns of our products. We assemble our wireless hubs and perform final tests on our systems at our facility located in Jerusalem, Israel. Our facility is ISO 9002-certified. ISO 9002 is a set of international quality assurance standards for companies involved in the design, development, manufacturing, installation and servicing of products or services. These standards are set by the International Organization for Standardization, or ISO, an international federation of national standards bodies. To be recommended for ISO 9002 certification, a company must be audited by an ISO-accredited auditing company and must meet or surpass ISO standards. Research and Development The goal of our research and development activities is to continue the development and introduction of next-generation products for our customers. Our efforts are also focused on reducing the cost and increasing the functionality of our systems, while adapting them to the frequency and interface specifications required for new markets. Our ongoing new product development program assesses service providers' needs and technological changes in the communications market. We are pursuing new generations of many of our products. We believe that our extensive experience designing and implementing high quality network and radio components and system software allows us to develop high-value integrated systems solutions. As a result of these development efforts, we believe that we have created an industry-leading platform for cost- effective broadband wireless voice and data delivery with dynamic bandwidth allocation. Our future success depends on our continued investment in research and development in radio, networking and software technologies, and we expect to continue to invest a significant portion of revenues in this area. Our research and development expenditures were $2.4 million for 1997, $3.3 million for 1998, $3.7 million for 1999, and $4.6 million for the six months ended June 30, 2000. We are currently investing significant resources to enhance our network management system software, integrate base station components and extend the capabilities, frequencies and transmission capacity of our systems. As of June 30, 2000, our research and development staff consisted of 94 employees, all of whom are located in Israel. 37 Competition The market for broadband wireless access systems is intensely competitive, rapidly evolving and subject to rapid technological change. The principal competitive factors in this market include: . product performance and features; . price of competitive products; . reliability and stability of operation; . ability to develop and implement new services and technologies; . ability to support newly allocated frequencies; and . sales capability, technical support and service. The primary competing alternative technologies for broadband access include: Digital Subscriber Line. Digital subscriber line, or DSL, technology today transmits data approximately 50 times faster than a conventional dial-up modem using the existing copper wire network. DSL transmission rates are limited, however, by the length and quality of the available copper wires. Various implementations of DSL are being developed and deployed. Service providers deploying DSL technology include incumbent local exchange carriers, such as SBC Communications, Inc. and Bell Atlantic Corporation, as well as numerous competitive local exchange carriers. Cable Modems. Cable modems are designed to provide broadband Internet access and are targeted primarily at the residential market. Cable lines pass by 100 million homes in North America, but only a portion of those homes currently have access to two-way cable modem service. Several cable companies are currently offering broadband access services across two-way cable, including Excite@Home and Time Warner. In addition, we believe that as a result of AT&T's acquisition of Tele-Communications, Inc. and the proposed merger of America Online, Inc. and Time Warner, cable TV networks will be used increasingly for voice and high-speed data services. Fiber-based Solutions. Fiber-based solutions and high-capacity leased lines offer the highest data transmission rate of any of the alternative technologies for broadband access. Fiber optic cables use pulses of light to transmit digital information. Because fiber optic cables support thousands of high- speed, local digital connections onto a single higher-speed connection to the central office or the central side of the cable TV network where all the video signals emanate, they offer virtually unlimited bandwidth capacity. Due to their high capacity, fiber optic cables are increasingly being used in the access network in both telecommunications and cable TV applications. However, these solutions are costly to deploy for small business and residential subscribers. DSL and cable modem technologies offer data transmission speeds comparable to our broadband wireless technology at comparable modem costs. Fiber optic cable provides faster transmission rates than our broadband wireless technology, though at significantly higher costs. Many of our competitors and potential competitors have substantially greater financial, technical, distribution, marketing and other resources than we have and, therefore, may be able to respond more quickly to new or changing opportunities, technologies and other developments. In addition, many of our competitors have longer operating histories, greater name recognition and established relationships with system integrators and service providers. These competitors may also be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote substantially more resources to developing new products. Our primary competitor is Hybrid Networks, Inc., and other companies, such as Adaptive Broadband Corporation and BreezeCOM Ltd., have announced plans to enter the MMDS market. In addition, well-capitalized companies such as Cisco Systems, Lucent Technologies, Alcatel and other vendors have announced plans to enter, or are potential entrants into, the broadband wireless market. These vendors have been attracted by recent 38 investments by WorldCom, Sprint and other service providers in wireless operations. Most of these competitors have existing relationships with one or more of our prospective customers. We may not be able to compete successfully against our current and future competitors and competitive pressures may seriously harm our business. Government Regulation Our business depends on the availability of certain radio frequencies for broadband two-way communications. Radio frequencies are subject to extensive regulation under the laws of the United States, foreign laws and international treaties. Each country has different regulation and regulatory processes for wireless communications equipment and uses of radio frequencies. The regulatory environment in which we operate is subject to significant change, the results and timing of which are uncertain. Historically, in many countries the unavailability of radio frequencies for two-way broadband communications has inhibited the growth of such networks. The process of establishing new regulations for broadband wireless frequencies and allocating such frequencies to operators is complex and lengthy. Our customers and potential customers may not be able to obtain sufficient frequencies for their planned uses of our systems. Failure by the regulatory authorities to allocate suitable, sufficient radio frequencies for such uses in a timely manner could deter potential customers from ordering our systems and seriously harm our business. Our systems must conform to a variety of domestic, foreign and international regulatory requirements established to, among other things, avoid interference among users of radio frequencies and permit interconnection of equipment. Regulatory bodies worldwide have adopted and are adopting or revising standards for wireless communications products. The emergence or evolution of regulations and industry standards for broadband wireless products, through official standards committees or widespread use by operators, could require us to modify our systems, which may be expensive and time-consuming, and incur substantial compliance costs and seriously harm our business. We are subject to export control laws and regulations with respect to all of our products and technology. We are subject to the risk that more stringent export control requirements could be imposed in the future on product classes that include products exported by us, which would result in additional compliance burdens and could impair the enforceability of our contract rights. Some of our products contain encryption technologies to enable the transfer of data in a manner that preserves the privacy of the parties communicating such data. United States law requires that we obtain an export license for our systems and that we comply with various restrictions on exporting our systems to certain countries. Our United States license expires October 31, 2000. Under Israeli Law, means of encryption and encryption equipment are controlled commodities within the meaning of the Control of Commodities and Services Law, 5718-1957, and are therefore subject to the prohibitions, restraints, supervision and control governing it by virtue of such law and regulations and orders thereunder. Such law and regulation prohibit the engagement in means of encryption otherwise than pursuant to a license from the authorized person appointed by the Minister of Defense. Vyyo Ltd.'s license to engage in encryption expires on February 28, 2001. We may not be able to renew these licenses as necessary from time to time. In addition, we may be required to apply for additional licenses to cover modifications and enhancements to our products. Any revocation or expiration of any requisite license, the failure to obtain a license for product modifications, or more stringent export control requirements could seriously harm our business. Intellectual Property We have 22 patent applications pending in the United States. We rely on a combination of patent, copyright and trademark laws, trade secrets and confidentiality and other contractual provisions to establish and protect our proprietary rights, each of which is important to our business. Our success depends in part on our ability to protect our proprietary technologies. Our pending or future patent applications may not be approved and the claims covered by such applications may be reduced. If allowed, our patents may not be of sufficient scope or strength, others may independently develop similar 39 technologies or products, duplicate any of our products or design around our patents, and the patents may not provide us competitive advantages. Further, patents held by third parties may prevent the commercialization of products incorporating our technologies or third parties may challenge or seek to narrow, invalidate or circumvent any of our pending or future patents. We also believe that foreign patents, if obtained, and the protection afforded by such foreign patents and foreign intellectual property laws, may be more limited than that provided under United States patents and intellectual property laws. Litigation, which could result in substantial costs and diversion of effort by us, may also be necessary to enforce any patents issued or licensed to us or to determine the scope and validity of third-party proprietary rights. Any such litigation, regardless of outcome, could be expensive and time-consuming, and adverse determinations in any such litigation could seriously harm our business. We also rely on unpatented trade secrets and know-how and proprietary technological innovation and expertise which are protected in part by confidentiality and invention assignment agreements with our employees, advisors and consultants and non-disclosure agreements with certain of our suppliers and distributors. These agreements may be breached, we may not have adequate remedies for any breach or our unpatented proprietary intellectual property may otherwise become known or independently discovered by competitors. Further, the laws of certain foreign countries may not protect our products or intellectual property rights to the same extent as do the laws of the United States. From time to time, third parties, including our competitors, may assert patent, copyright and other intellectual property rights to technologies that are important to us. We expect that we will increasingly be subject to license offers and infringement claims as the number of products and competitors in our market grows and the functionality of products overlaps. In this regard, in early 1999, we received a written notice from Hybrid Networks in which Hybrid claimed to have patent rights in certain technology. Hybrid requested that we review our products in light of six of Hybrid's issued patents. In April 2000, Vyyo received an additional letter from Hybrid Networks requesting that we review our patents in connection with various patents of Hybrid. These patents included patents Hybrid had previously requested in 1999 that we review, as well as six additional patents. Vyyo believes, based on the advice of counsel, that the Hybrid patents noted in 1999 are invalid or are not infringed by its products. Vyyo is evaluating the other patents noted in the letter. Others' patents, including Hybrid's, may be determined to be valid, or some or all of our products may ultimately be determined to infringe the Hybrid patents or those of other companies. Hybrid or other companies may pursue litigation with respect to these or other claims. The results of any litigation are inherently uncertain. In the event of an adverse result in any litigation with respect to intellectual property rights relevant to our products that could arise in the future, we could be required to obtain licenses to the infringing technology, pay substantial damages under applicable law, to cease the manufacture, use and sale of infringing products or to expend significant resources to develop non-infringing technology. Licenses may not be available from third parties, including Hybrid, either on commercially reasonable terms or at all. In addition, litigation frequently involves substantial expenditures and can require significant management attention, even if we ultimately prevail. Accordingly, any infringement claim or litigation against us could significantly harm our business, operating results and financial condition. Employees As of June 30, 2000, we had 161 full-time employees, of whom 35 were employed in the United States and 126 were employed in Israel. Of these full- time employees, 94 were principally dedicated to research and development, 18 were dedicated to sales, marketing and customer support and 24 were involved in manufacturing and operations. None of our U.S. employees is represented by a union. Our Israeli subsidiary is subject to Israeli labor laws and regulations with respect to our Israeli employees. These laws principally concern matters such as paid annual vacation, paid sick days, length of work day and 40 work week, minimum wages, pay for overtime, insurance for work related accidents, severance pay and other conditions of employment. Our Israeli subsidiary and our Israeli employees are subject to provisions of the collective bargaining agreements between the Histadrut, the General Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations, including the Industrialists Associations, by order of the Israeli Ministry of Labor and Welfare. These provisions principally concern cost of living expenses, recreation pay and other conditions of employment. Our Israeli subsidiary provides our Israeli employees with benefits and working conditions above the required minimums. Our employees are not represented by a labor union. We have not experienced any work stoppages. Facilities We are headquartered in Cupertino, California, where we lease approximately 9,000 square feet of commercial space under a month-to-month sublease. These facilities are used for executive office space, including sales and marketing and finance and administration. We also lease approximately 27,000 square feet of commercial space in Jerusalem, Israel under a term lease that expires on December 31, 2003, subject to one five-year extension at our option. We intend to move all of our Israeli operations to a new 43,120 square foot facility in January 2001 and to sublease our current facility to another tenant. In June 2000, we entered into a term lease for this new facility. The new lease has a term of four years commencing on January 1, 2001, and is subject to six extensions of two years each. These facilities are used for research and development activities and for product assembly and testing. Vyyo is seeking additional space in the United States for its executive, sales and marketing and finance and administration departments. Legal Proceedings We may from time to time become a party to various legal proceedings arising in the ordinary course of our business. However, we are not currently a party to any material legal proceedings. In addition, see "Intellectual Property" for a description of certain intellectual property claims. 41 MANAGEMENT Executive Officers and Directors The following table sets forth information regarding the executive officers and directors of Vyyo as of June 30, 2000:
Name Age Position - ---- --- -------- Davidi Gilo............. 43 Chairman of the Board and Chief Executive Officer Michael Corwin.......... 43 Chief Operating Officer Eran Pilovsky........... 39 Vice President, Finance and Chief Financial Officer Arnon Kohavi............ 35 Senior Vice President, Strategic Relations Menashe Shahar.......... 49 Vice President, Engineering and Chief Technical Officer Stephen P. Pezzola...... 43 General Counsel and Secretary Lewis S. Broad.......... 42 Director Neill H. Brownstein..... 56 Director Avraham Fischer......... 43 Director John P. Griffin......... 50 Director Samuel L. Kaplan........ 64 Director Alan L. Zimmerman....... 57 Director
Davidi Gilo has served as Vyyo's Chairman of the Board of Directors since its inception in 1996. Mr. Gilo was appointed as Chief Executive Officer of Vyyo in April 1999. From October 1998 until November 1999, Mr. Gilo also served as Chairman of the Board of DSP Communications, Inc., a developer of chip sets for wireless personal communications applications, and from June 1999 until November 1999, he served as DSP Communications' Chief Executive Officer. Mr. Gilo also served as the Chairman of the Board of DSP Communications from its founding in 1987 through November 1997. Mr. Gilo also served as Chairman of the Board of Zen Research N.V., a developer of technology and intellectual property for use in CD and DVD optical storage devices, between July 1995 and December 1999, and was appointed as Zen Research plc's chairman in April 2000. Since 1996, Mr. Gilo has also been the manager of the Gilo Group, LLC, an investment company he founded in 1996. Between 1987 and 1993 he was the President and Chief Executive Officer of DSP Group, Inc., a developer of telephony and speech compression components, and he served as Chairman of the Board of DSP Group from 1987 until April 1995. Michael Corwin was appointed as Chief Operating Officer of Vyyo in August 1999. From August 1995 until August 1999, Mr. Corwin served as Vice President, Operations of Harmony Management, Inc., a private investment company. From June 1994 until August 1995, he served as Vice President of Operations of Nogatech, Inc. and from 1986 until 1994, he was Vice President of Purchasing and Production of DSP Group. Eran Pilovsky joined Vyyo as Vice President, Finance and Chief Financial Officer in January 2000. Prior to joining Vyyo, Mr. Pilovsky spent over 14 years in various positions with Ernst & Young LLP's advisory and assurance business service group, and became a partner at Ernst & Young in October 1997. Mr. Pilovsky is a certified public accountant in California. Arnon Kohavi joined Vyyo in November 1999 as Senior Vice President, Strategic Relations. From July 1994 until October 1995, he served as Director of Strategic Planning of DSP Communications, and from October 1995 until January 1999, he was Vice President of Business Development of DSP Communications. From January 1999 until November 1999 he served as Senior Vice President, Strategic Relations of DSP Communications. From May 1994 until July 1994, Mr. Kohavi was Manager of Business Development of DSP Group, Inc. Menashe Shahar has served as Vyyo's Vice President, Engineering since July 1994 and as Chief Technical Officer since May 1999. Prior to joining Vyyo, Mr. Shahar served as Chief Engineer for the Data Communications Department of Tadiran Telecommunications Group, where he spent five years in the development of products in the area of packet switching, frame relay and ISDN. Prior to joining Tadiran, 42 Mr. Shahar served for eight years as a design engineer in the Israeli Defense Force, where he was involved in designing modems and other data communications products. Stephen P. Pezzola joined Vyyo in September 1996 as General Counsel and Secretary. From September 1996 until November 1999, Mr. Pezzola also served as General Counsel and Corporate Secretary of DSP Communications. Since September 1996, Mr. Pezzola has also been a member of Gilo Group. From September 1996 until January 2000 he also served as General Counsel and Secretary of Zen Research plc, and from January through April 2000, he served as Chairman of the Board of Zen Research. In April 2000, Mr. Pezzola became Executive Vice Chairman of the Board of Zen Research. From May 1986 until September 1996, Mr. Pezzola was a founding shareholder and president of the law firm of Pezzola & Reinke, APC, of Oakland, California. Lewis S. Broad has been a member of the board of directors since November 1999. Since May 1, 2000 Mr. Broad has served as Chief Executive Officer of Portfab LLC, a manufacturer of heating enclosures. He is also a member of the board of directors of Carrier Services, Inc., a company specializing in payment processing and fraud prevention for telephone and Internet transactions. From November 1994 until November 1999, Mr. Broad also served as a director of DSP Communications. Mr. Broad is also a private investor. Neill H. Brownstein was appointed as a member of the board of directors in December 1999. Mr. Brownstein is President of Neill H. Brownstein Corporation, a strategic investment management consulting firm which he founded in 1976. From June 1970 to January 1995, Mr. Brownstein was associated with Bessemer Securities Corporation and Bessemer Venture Partners, and during that period he served as a founding general partner of three affiliated venture capital funds. Mr. Brownstein also serves on the board of directors of Giga Information Group. From November 1994 until November 1999, Mr. Brownstein also served as a director of DSP Communications. Avraham Fischer has been a member of the board of directors since April 1996. Mr. Fischer is a managing partner in the law firm of Fischer, Behar, Chen & Co., of Tel Aviv, Israel, where he has served since 1982. Since January 1998, Mr. Fischer has served as co-chairman of the Board of Isra-air Aviation and Tourism, and since January 1997, he has been co-chairman of the board of Ganden Investment Ltd. which has holdings in a group of Israeli tourism and aviation companies. Since January 1995, he has served as a director on the board of Nogatech, Inc., a developer of computer chips for telecommunications. From 1996 until November 1999, Mr. Fischer also served as a director of DSP Communications. John P. Griffin has been a member of the board of directors since November 1999. From September 1996 through April 1998, Mr. Griffin served as Vice President of Marketing for the Network Services Division of ADC Telecommunications. In April 1998, Mr. Griffin was appointed as General Manager of the Loop Transport Division of ADC Telecommunications. In May 1999, he was appointed President of the Broadband Wireless Group of ADC Telecommunications. From March 1995 through September 1996, Mr. Griffin served as Vice President of Marketing of RSI Systems, a manufacturer of desktop video conferencing equipment. Prior to that, he served for nine years with ADC Telecommunications, the first year as Manager of Technical Support and the remaining eight years in various marketing positions. Samuel L. Kaplan has been a member of the board of directors since July 1999. Mr. Kaplan has been a partner in the law firm of Kaplan, Strangis and Kaplan, P.A. of Minneapolis, Minnesota, since October 1978. Mr. Kaplan also serves as a director of USP Real Estate Investment Trust, a real estate investment trust. From 1991 until June 1999, Mr. Kaplan also served as a director of DSP Group. Alan L. Zimmerman has been a member of the board of directors since July 1999. Since November 1994, Mr. Zimmerman has served as President of Law Finance Group, Inc., a provider of financing in connection with anticipated awards in legal proceedings. From 1992 through December 1999, he was Vice President of Inheritance Funding Company, LLC, a provider of financing to heirs in connection with anticipated inheritance payments. 43 Board of Directors Our certificate of incorporation provides for a classified board of directors consisting of three classes of directors, each serving staggered three-year terms. As a result, a portion of our board of directors is elected each year. Class I directors' terms will expire at the annual meeting of stockholders to be held in 2001, Class II directors' terms will expire at the annual meeting of stockholders to be held in 2002 and Class III directors' terms will expire at the annual meeting of stockholders to be held in 2003. Messrs. Fischer, Gilo and Griffin have been designated Class I directors, Messrs. Broad and Brownstein have been designated Class II directors, and Messrs. Kaplan and Zimmerman have been designated Class III directors. There are no family relationships among any of our directors, officers or key employees. Board Committees We have established an audit committee and a compensation committee. The audit committee reviews our internal accounting procedures and considers and reports to the board of directors with respect to other auditing and accounting matters, including the selection of our independent auditors, the scope of annual audits, fees to be paid to our independent auditors and the performance of our independent auditors. The audit committee currently consists of Messrs. Broad, Brownstein and Kaplan. The compensation committee reviews and recommends to the board of directors the salaries, benefits and stock option grants for all employees, consultants, directors and other individuals compensated by us. The compensation committee also administers our stock option and other employee benefit plans. The compensation committee currently consists of Messrs. Broad and Zimmerman. Compensation Committee Interlocks and Insider Participation Prior to establishing the compensation committee, the board of directors as a whole performed the functions delegated to the compensation committee. No member of the board of directors or the compensation committee serves as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving as a member of our board of directors or compensation committee. Director Compensation Directors serving on the board of directors do not currently receive any compensation for serving on the board. Directors are reimbursed for their out- of-pocket expenses incurred in attending board and committee meetings. In addition, all directors are eligible to participate in our 2000 Employee and Consultant Equity Incentive Plan. In December 1999, the board of directors granted options to purchase 15,000 shares of our common stock to each of Messrs. Broad and Brownstein and an option to purchase 75,000 shares of our common stock to Mr. Fischer, in each case at an exercise price of $0.83 per share. In June 1999, the board of directors granted an option to purchase 75,000 shares of our common stock to Mr. Zimmerman and an option to purchase 66,000 shares of our common stock to Mr. Fischer, in each case at an exercise price of $0.50 per share. In February 2000, the board of directors granted options to purchase 22,500 shares of our common stock to each of Messrs. Broad, Brownstein, Fischer, Griffin, Kaplan and Zimmerman, in each case at an exercise price of $1.87 per share. 44 Executive Compensation The following table sets forth the compensation earned, awarded or paid for services rendered to us in all capacities for the fiscal year ended December 31, 1999, by our Chief Executive Officer, our former Chief Executive Officer and our two next most highly compensated executive officers who earned more than $100,000 in salary and bonus during the fiscal year ended December 31, 1999. These executives are referred to collectively as the named executive officers elsewhere in this prospectus. Summary Compensation Table
Annual Compensation Long-Term Compensation -------------------------------------- ---------------------------- Securities Name and Principal Salary All Other Annual Underlying All Other Position ($) Bonus ($) Compensation ($) Options (#) Compensation ($) - ------------------ -------- --------- ---------------- ----------- ---------------- Davidi Gilo............. $175,000(1) -- -- 975,000 -- Chairman of the Board and Chief Executive Officer Stephen P. Pezzola...... 140,000(2) -- -- 193,500 -- General Counsel Menashe Shahar.......... 122,370 $20,420 $17,739(3) 255,000 $28,043(4) Vice President, Engineering and Chief Technical Officer Shaul Berger(5)......... 96,200 -- -- -- -- Former Chief Executive Officer
- -------- (1) Mr. Gilo's salary for services performed in 1999 has been accrued, and was paid to Mr. Gilo in 2000. (2) $52,500 of this amount was paid to Mr. Pezzola in 1999, and $87,500 has been accrued by Vyyo and was paid to Mr. Pezzola in 2000. (3) Includes (i) $4,761 reimbursed to Mr. Shahar for taxes on a company automobile, (ii) $9,978 paid to Mr. Shahar for accrued but unused vacation time and (iii) $3,000 paid to Mr. Shahar for travel expenses incurred by Mr. Shahar's wife. (4) Includes a total of $28,043 paid on behalf of Mr. Shahar to a severance fund, a pension fund and a risk/disability fund. The amounts held in such funds on Mr. Shahar's behalf are, generally, payable to him upon the termination of his employment with Vyyo. (5) Mr. Berger resigned as Chief Executive Officer in April 1999. 45 Option Grants in Last Fiscal Year The following table provides information concerning grants of options to purchase our common stock made during the fiscal year ended December 31, 1999 to the named executive officers.
Potential Realizable Potential Value at Assumed Number of Realizable Annual Rates of Stock Securities Percent of Value at Appreciation for Underlying Total Options Initial Public Option Term(3) Options Granted During Exercise Expiration Offering Price ---------------------- Name Granted(1) Fiscal 1999(2) Price Date of $13.50 5% 10% - ---- ---------- -------------- -------- ---------- -------------- ---------- ----------- Davidi Gilo............. 585,000 12.38% $0.50 06/01/04 $7,605,000 $9,786,934 $12,426,503 390,000 8.25 0.83 11/23/04 4,941,300 6,395,922 8,155,635 Stephen P. Pezzola...... 193,500 4.10 0.50 06/01/04 2,515,000 3,237,217 4,110,305 Menashe Shahar.......... 255,000 5.40 0.50 06/01/04 3,315,000 4,266,099 5,416,681 Shaul Berger............ -- -- -- -- -- -- --
- -------- (1) All options were granted pursuant to the 1999 Employee and Consultant Equity Incentive Plan or the 2000 Employee and Consultant Equity Incentive Plan. (2) Based on an aggregate of 4,726,050 options granted to employees, officers, directors and consultants in fiscal 1999. (3) All options were granted at an exercise price that was equal to or greater than the fair market value of our common stock, as determined by the board of directors on the date of grant. The assumed 5% and 10% rates of stock appreciation are based on a price of $13.50 per share, which was the price at which we sold shares of common stock in our initial public offering in April 2000. Amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the term. The assumed 5% and 10% rates of stock price appreciation are provided in accordance with the rules of the Securities and Exchange Commission and do not represent our estimate or projection of the future stock price. Actual gains, if any, are contingent upon the continued employment of the named executive officer through the expiration date, as well as being dependent upon the general performance of the common stock. The potential realizable values have not taken into account amounts required to be paid for federal income taxes. Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values The following table describes for the named executive officers the number and amount of stock options exercised during fiscal 1999 and securities underlying unexercised options held at December 31, 1999.
Number of Securities Shares Underlying Unexercised Options at Value of Unexercised In-the-Money Acquired on December 31, 1999 Options at December 31, 1999 Exercise Value --------------------------------- --------------------------------- Name (#) Realized ($) Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($) - ---- ----------- ------------ --------------- ----------------- --------------- ----------------- Davidi Gilo............. 585,000 195,000 -- -- -- -- 390,000 -- -- -- -- -- Stephen P. Pezzola...... 120,000 40,000 73,500 -- 24,500 -- 46,500 23,250 -- -- -- -- Menashe Shahar.......... -- -- 30,563 269,438 15,281 92,219 Shaul Berger............ 123,899 61,949 -- -- -- --
The value realized on exercised options and the value of unexercised in-the- money options at December 31, 1999 is based on a value of $0.83 per share, the fair market value of our common stock at December 31, 1999, as determined by our board of directors, minus the per share exercise price, multiplied by the number of shares underlying the options. 46 Stock Option Plans Amended and Restated 2000 Employee and Consultant Equity Incentive Plan. The 2000 Employee and Consultant Equity Incentive Plan, or 2000 Plan, was adopted by our board of directors and approved by our stockholders on November 22, 1999 for the benefit of our officers, directors, employees, advisors and consultants. The 2000 Plan provides for the issuance of stock-based incentive awards, including stock options, stock appreciation rights, limited stock appreciation rights, restricted stock, deferred stock, and performance shares. An award may consist of one arrangement or benefit or two or more of them in tandem or in the alternative. Under the 2000 Plan, awards covering no more than 80% of the shares reserved for issuance under the plan may be granted to any participant in any one year. An aggregate of 4,050,000 shares of common stock was initially reserved for issuance under the 2000 Plan. On February 2, 2000 our board of directors approved an amendment to the 2000 Plan to increase the total number of shares reserved for issuance under the plan from 4,050,000 shares to 7,500,000 shares, plus an annual increase to be added automatically on the first day of each fiscal year, commencing in 2001, equal to the lesser of (1) 1,350,000 shares or (2) 5% of the number of outstanding shares on the last day of the immediately preceding fiscal year. This amendment was approved by our stockholders on February 2, 2000. Each of our non-employee directors elected to the board of directors for the first time after February 2, 2000 will receive, upon such election, an initial grant of options to purchase 75,000 shares of common stock at fair market value on the date of grant. These options will have a 10-year term and will vest over a four-year period. In addition, each of our non-employee directors will receive an annual grant of options to purchase 22,500 shares for each year during such director's term. These options will have a 10-year term and will vest immediately upon the date of grant. The foregoing award of options will be granted automatically under the 2000 Plan. The 2000 Plan may be administered by either our board of directors or any committee of our board of directors. The board or committee is sometimes referred to in this prospectus as the plan administrator. The plan administrator may interpret the 2000 Plan and may prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the 2000 Plan. The 2000 Plan permits the plan administrator to select the officers, directors, employees, advisors and consultants, including directors who are also employees, who will receive awards and generally to determine the terms and conditions of those awards. We may issue two types of stock options under the 2000 Plan: incentive stock options which are intended to qualify under the Internal Revenue Code, and non- qualified stock options. The option price of each incentive stock option granted under the 2000 Plan must be at least equal to the fair market value of a share of common stock on the date the incentive stock option is granted. Stock appreciation rights and limited stock appreciation rights may be granted under the 2000 Plan either alone or in conjunction with all or part of any stock option granted under the 2000 Plan. A stock appreciation right granted under the 2000 Plan entitles its holder to receive, at the time of exercise, an amount per share equal to the excess of the fair market value at the date of exercise of a share of common stock over a specified price fixed by the plan administrator. A limited stock appreciation right granted under the 2000 Plan entitles its holder to receive, at the time of exercise, an amount per share equal to the excess of the change in control price of a share of common stock over a specified price fixed by the plan administrator. A limited stock appreciation right may only be exercised within the 30-day period following a change in control. Restricted stock, deferred stock and performance shares may be granted under the 2000 Plan. The plan administrator will determine the purchase price, performance period and performance goals, if any, with respect to the grant of restricted stock, deferred stock and performance shares. Participants with restricted stock and performance shares generally have all of the rights of a stockholder. With respect to deferred stock, during the deferral period, subject to the terms and conditions imposed by the plan administrator, the deferred stock units may be credited with dividend equivalent rights. If the performance goals and other restrictions are not attained, the participant will forfeit his or her shares of restricted stock, deferred stock and/or performance shares. 47 In the event we merge or consolidate with another entity in which we are not the surviving corporation, dissolve or liquidate or sell substantially all of our assets, outstanding awards under the 2000 Plan may be assumed or replaced by the successor corporation, if any, or its parent. If the successor corporation or its parent does not assume outstanding awards or substitute equivalent awards, such awards will automatically become fully vested and exercisable and be released from any restrictions on transfer and repurchase or forfeiture right. The terms of the 2000 Plan provide that the plan administrator may amend, suspend or terminate the 2000 Plan at any time, provided, however, that some amendments require approval of our stockholders. Further, no action may be taken which adversely affects any rights under outstanding awards without the holder's consent. The 2000 Plan will terminate in 2010. 1999 Employee and Consultant Equity Incentive Plan. The 1999 Employee and Consultant Equity Incentive Plan, or 1999 Plan, was adopted by our board of directors on June 4, 1999 and approved by our stockholders on July 15, 1999 for the benefit of our officers, directors, employees, advisors and consultants. The 1999 Plan provides for the issuance of stock-based incentive awards, including stock options, restricted stock and stock bonuses. An aggregate of 2,400,000 shares of common stock has been reserved for issuance under the 1999 Plan. As of August 31, 2000, options to purchase an aggregate of 1,011,750 shares of common stock were outstanding under the 1999 Plan with a weighted- average exercise price of $0.50. We do not intend to grant any further options pursuant to the 1999 Plan. The 1999 Plan will automatically terminate in 2009. The 1999 Plan may be administered by our board of directors or committee of the board. The board of directors or committee of the board may interpret the 1999 Plan and may prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the 1999 Plan, except that some amendments require stockholder approval. In addition, the board of directors or committee of the board may not take any action which would harm the rights previously granted under the 1999 Plan without the holders' consent. If we merge or consolidate with another entity or if we dissolve, liquidate or sell substantially all of our assets, outstanding awards under the 1999 Plan may be assumed or replaced by the successor corporation or its parent. If the successor corporation or its parent does not assume outstanding awards or substitute equivalent awards, the awards will terminate. 1996 Equity Incentive Plan. The 1996 Equity Incentive Plan, or 1996 Plan, was adopted by our board of directors on March 25, 1996 and approved by our stockholders on April 5, 1996 for the benefit of our officers, directors, employees, advisors and consultants. The 1996 Plan provides for the issuance of stock-based incentive awards, including stock options, restricted stock and stock bonuses. An aggregate of 330,000 shares of common stock was initially reserved for issuance under the 1996 Plan. On May 13, 1998, our board of directors adopted, and on June 23, 1998 our stockholders approved, an amendment to the 1996 Plan to increase the total number of shares reserved for issuance under the plan from 330,000 to 480,000 shares. As of August 31, 2000, options to purchase an aggregate of 209,115 shares of common stock with a weighted- average exercise price of $0.33 were outstanding under the 1996 Plan. We do not intend to grant any further options pursuant to the 1996 Plan. The 1996 Plan will automatically terminate in 2006. The 1996 Plan may be administered by our board of directors or a committee of the board. The board of directors or committee of the board may interpret the 1996 Plan and may prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the 1996 Plan, except that some amendments require stockholder approval. In addition, the board of directors or committee of the board may not take any action which would harm the rights previously granted under the 1996 Plan without the holders' consent. If we merge or consolidate with another entity or if we dissolve, liquidate or sell substantially all of our assets, outstanding awards under the 1996 Plan may be assumed or replaced by the successor corporation or its 48 parent. If the successor corporation or its parent does not assume outstanding awards or substitute equivalent awards, the awards will terminate. 2000 Employee Stock Purchase Plan On February 2, 2000, the board of directors adopted and our stockholders approved our 2000 Employee Stock Purchase Plan, or Purchase Plan, which allows eligible employees to purchase our common stock at a discount from fair market value. A total of 750,000 shares of our common stock, plus an annual increase to be added automatically on the first day of our fiscal year, commencing in 2001, equal to the lesser of (a) 300,000 shares or (b) 1% of the number of outstanding shares on the last trading day of the immediately preceding fiscal year has been reserved for issuance under the Purchase Plan. The Purchase Plan will be administered by our board of directors, or a specifically designated committee of the board of directors. The board or committee is sometimes referred to in this prospectus as the plan administrator. The plan administrator may interpret the Purchase Plan and, subject to its provisions, may prescribe, amend and rescind rules and make all other determinations necessary or desirable for the administration of the Purchase Plan. The Purchase Plan contains consecutive, overlapping 24-month offering periods. Each offering period includes four purchase periods. The offering periods generally commence on the first trading day on or after May 15 and November 15 of each year and end on the last trading day on the date twenty- four months later; provided, however, that the first offering period under the Purchase Plan commenced on April 10, 2000 and ends on the last trading day on or before May 14, 2002. Employees are eligible to participate if they are employed by us or any participating subsidiary for at least 20 hours per week and more than five months in any calendar year. However, an employee may not be granted the right to purchase stock under the Purchase Plan if the employee (a) immediately after the grant would own stock possessing 5% or more of the total combined voting power or value of all classes of our capital stock, or (b) holds rights to purchase stock under any of our employee stock purchase plans that together accrue at a rate which exceeds $25,000 worth of stock for each calendar year. The Purchase Plan permits each employee to purchase common stock through payroll deductions of up to 15% of the employee's compensation. The maximum number of shares an employee may purchase during a single offering period is 15,000 shares. Amounts deducted and accumulated by the employee are used to purchase shares of common stock at the end of each purchase period. The price of the common stock offered under the Purchase Plan is an amount equal to 85% of the lower of the fair market value of the common stock at the beginning of each offering period or at the end of each purchase period. In the event the fair market value at the end of a purchase period is less than the fair market value at the beginning of the corresponding offering period, the participants of the affected offering period will be withdrawn from such offering period following exercise of their options and automatically re-enrolled in a new offering period. Employees may end their participation in the Purchase Plan at any time during an offering period, in which event, any amounts withheld through payroll deductions and not otherwise used to purchase shares will be returned to them. Participation ends automatically upon termination of employment with us. Rights granted under the Purchase Plan are not transferable by an employee other than by will or the laws of descent and distribution. The Purchase Plan provides that, in the event of a merger, consolidation, reorganization, recapitalization, stock dividend or other change in corporate structure affecting the number of issued shares of our common stock, the plan administrator will conclusively determine the appropriate equitable adjustments. The Purchase Plan will terminate in 2010. Our board of directors has the authority to amend or terminate the Purchase Plan, except that no amendment or termination may adversely affect any outstanding rights under the Purchase Plan. 49 Employment Agreements We have entered into employment agreements with each of Messrs. Gilo, Corwin, Shahar, Pezzola, Pilovsky and Kohavi. Each of the agreements with Messrs. Gilo, Corwin, Shahar and Pezzola became effective as of January 1, 2000, and provide for three-year terms that will automatically renew for consecutive one-year extensions, unless terminated by either party upon written notice. Mr. Pilovsky's agreement became effective on January 16, 2000 and provides for a three-year term that will automatically renew for consecutive one-year extensions, unless terminated by either party upon written notice. Under Mr. Gilo's agreement, he is entitled to receive an annual base salary equal to $350,000 and an annual bonus, payable according to the following schedule: . if we meet 80% of our annual business plan, Mr. Gilo's bonus payment will be equal to 15% of his annual base salary; . if we meet 100% of our annual business plan, Mr. Gilo's bonus payment will be equal to 50% of his annual base salary; and . if we meet 120% of our plan, Mr. Gilo's bonus payment will be equal to 90% of his annual base salary. In addition, Mr. Gilo will also be entitled to a discretionary bonus, as determined by our board of directors or the compensation committee. Mr. Gilo is required to devote at least 30 hours per week to the business of Vyyo under his employment agreement. If Mr. Gilo's employment is terminated by us without cause, he will be entitled to a severance payment equal to the greater of (a) the full amount of the compensation that he would have been paid under his employment agreement or (b) 18 months of his then-current base salary. If Mr. Gilo's employment is terminated by us with cause, in exchange for a release of any claims Mr. Gilo may have against us, he will be entitled to a severance payment equal to three months of his then-current base salary. If Mr. Gilo terminates his employment with us, he will be entitled to a severance payment equal to nine months of his then-current base salary. If after the initial three-year term Mr. Gilo's employment is not renewed, he will be entitled to severance payments equal to 18 months of his then current base salary in exchange for a release of any claims he may have against us. Mr. Gilo will remain as a full-time employee during any period he is receiving severance pay and his options will continue to vest during that period. Under Mr. Corwin's agreement, he is entitled to receive an annual base salary equal to $225,000 and an annual bonus, payable according to the following schedule: . if we meet 80% of our annual business plan, Mr. Corwin's bonus payment will be equal to 15% of his annual base salary; . if we meet 100% of our annual business plan, Mr. Corwin's bonus payment will be equal to 50% of his annual base salary, with the bonus pro rated if the plan is met between 80% and 100% or between 100% and 120%; and . if we meet 120% of our plan, Mr. Corwin's bonus payment will be equal to 90% of his annual base salary. In addition, Mr. Corwin will also be entitled to a discretionary bonus, as determined by our board of directors or the compensation committee. If Mr. Corwin's employment is terminated by us without cause, he will be entitled to a severance payment equal to the greater of (a) the full amount of the compensation that he would have been paid under his employment agreement or (b) six months of his then-current base salary. If Mr. Corwin's employment is terminated by us with cause, in exchange for a release as to any and all claims Mr. Corwin may have against us, he will be entitled to a severance payment equal to three months of his then-current base salary. If 50 Mr. Corwin terminates his employment with us, he will be entitled to a severance payment equal to three months of his then-current base salary. If after the initial three-year term, Mr. Corwin's employment is not renewed, he will be entitled to a severance payment equal to 18 months of his then current base salary in exchange for a release of any claims he may have against us. Mr. Corwin will remain as a full-time employee during any period he is receiving severance pay and his options will continue to vest during that period. Under Mr. Shahar's agreement, he is entitled to receive a monthly salary equal to 50,000 NIS, or approximately $12,500, with adjustments every six months based on increases in the Israeli consumer price index. Mr. Shahar is also entitled to receive an annual bonus, payable according to the following schedule: . if we meet 80% of our annual business plan, Mr. Shahar's bonus payment will be equal to 15% of his annual base salary; . if we meet 100% of our annual business plan, Mr. Shahar's bonus payment will be equal to 50% of his annual base salary, with the bonus pro rated if the plan is met between 80% and 100% or between 100% and 120%; and . if we meet 120% of our plan, Mr. Shahar's bonus payment will be equal to 90% of his annual base salary. In addition, Mr. Shahar will also be entitled to a discretionary bonus, as determined by our board of directors or the compensation committee. We also contribute to a "Manager's Insurance" policy on behalf of Mr. Shahar in an amount equal to 15.83% of his salary and to a continuing education fund in an amount equal to 7.5% of his salary. If Mr. Shahar's employment is terminated by us without cause, he is entitled to the amounts accumulated in his Manager's Insurance policy and education fund. In addition, if Mr. Shahar's employment is terminated by us without cause, or if after the initial three year term, Mr. Shahar's employment is not renewed, he will be entitled to a prior notice payment equal to the greater of (a) the full amount of the compensation that he would have been paid under his employment agreement or (b) six months of his then-current base salary. If Mr. Shahar's employment is terminated by us with cause, in exchange for a release as to any and all claims Mr. Shahar may have against us, he will be entitled to a prior notice payment equal to three months of his then-current base salary. If Mr. Shahar terminates his employment with us, he will not be entitled to any prior notice payment. Mr. Shahar will remain as a consultant during any period he is receiving prior notice pay. Under Mr. Pezzola's agreement, he is entitled to receive an annual base salary equal to $202,500, a bonus in the amount of $25,000 upon the successful completion of this offering and an annual bonus, payable according to the following schedule: . if we meet 80% of our annual business plan, Mr. Pezzola's bonus payment will be equal to 15% of his annual base salary; . if we meet 100% of our annual business plan, Mr. Pezzola's bonus payment will be equal to 50% of his annual base salary; and . if we meet 120% of our plan, Mr. Pezzola's bonus payment will be equal to 90% of his annual base salary, with the bonus pro rated if the plan is met between 80% and 100% or between 100% and 120%. In addition, Mr. Pezzola will also be entitled to a discretionary bonus, as determined by our board of directors or the compensation committee. Mr. Pezzola is required to devote at least 30 hours per week to the business of Vyyo under his employment agreement. If Mr. Pezzola's employment is terminated by us without cause, he will be entitled to a severance payment equal to the greater of (a) the full amount of the compensation that he would have been paid under his employment agreement or (b) nine months of his then-current base salary. If Mr. Pezzola's employment is terminated by us with cause, in exchange for a release as to any and all claims Mr. Pezzola may have against 51 us, he will be entitled to a severance payment equal to three months of his then-current base salary. If Mr. Pezzola terminates his employment with us, he will be entitled to a severance payment equal to three months of his then- current base salary. If after the initial three-year term, Mr. Pezzola's employment is not renewed, he will be entitled to a severance payment equal to nine months of his then current base salary in exchange for a release of any claims he may have against us. Mr. Pezzola will remain as a full-time employee during any period he is receiving severance pay and his options will continue to vest during that period. Under Mr. Pilovsky's agreement, he is entitled to receive an annual base salary equal to $250,000, and an annual bonus, payable according to the following schedule: . if we meet 80% of our annual business plan, Mr. Pilovsky's bonus payment will be equal to 15% of his annual base salary; . if we meet 100% of our annual business plan, Mr. Pilovsky's bonus payment will be equal to 50% of his annual base salary; and . if we meet 120% of our plan, Mr. Pilovsky's bonus payment will be equal to 90% of his annual base salary, with the bonus prorated if the plan is met between 80% and 100% or between 100% and 120%. In addition, Mr. Pilovsky will also be entitled to a discretionary bonus, as determined by our board of directors or the compensation committee. If Mr. Pilovsky's employment is terminated by us without cause, he will be entitled to a severance payment equal to the greater of (a) the full amount of the compensation that he would have been paid under his employment agreement or (b) six months of his then-current base salary. If Mr. Pilovsky's employment is terminated by us with cause, in exchange for a release as to any and all claims Mr. Pilovsky may have against us, he will be entitled to a severance payment equal to three months of his then-current base salary. If Mr. Pilovsky terminates his employment with us, he will not be entitled to a severance payment. If after the initial three-year term, Mr. Pilovsky's employment is not renewed, he will be entitled to a severance payment equal to six months of his then current base salary in exchange for a release of any claims he may have against us. Mr. Pilovsky will remain as a full-time employee during any period he is receiving severance pay and his options will continue to vest during that period. We have also entered into an employment agreement with Mr. Kohavi. His agreement became effective on November 22, 1999, and provides for an 18 month term that will automatically renew for consecutive six-month extensions, unless terminated by either party by written notice. Under Mr. Kohavi's agreement, he is entitled to receive an annual base salary equal to $155,000 and an annual bonus, payable according to the following schedule: . if we meet 80% of our annual business plan, Mr. Kohavi's bonus payment will be equal to 25% of his annual base salary; . if we meet 100% of our annual business plan, Mr. Kohavi's bonus payment will be equal to 75% of his annual base salary; and . if we meet 120% of our plan, Mr. Kohavi's bonus payment will be equal to 125% of his annual base salary, with the bonus prorated if the plan is met between 80% and 100% or between 100% and 120%. In addition, Mr. Kohavi will also be entitled to participate in each bonus plan adopted by our board of directors. If Mr. Kohavi's employment is terminated by us without cause, he will be entitled to a severance payment equal to the lesser of (a) the full amount of the compensation that he would have been paid under his employment agreement or (b) six months of his then-current base salary. If after the initial 18-month term, Mr. Kohavi's employment is not renewed, he will be entitled to a severance payment equal to six months of his then current base salary in exchange for a release of any claims he may have against us. 52 Limitation of Liability and Indemnification Our certificate of incorporation limits the liability of our directors to the maximum extent permitted by Delaware law. Delaware law provides that directors will not be personally liable for monetary damages for breach of their fiduciary duties as directors, except liability for: . any breach of their duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . unlawful payments of dividends or unlawful stock repurchases or redemptions; or . any transaction from which the director derived an improper personal benefit. This provision will have no effect on any non-monetary remedies that may be available to us or our stockholders, nor will it relieve us or other officers or directors from compliance with federal or state securities laws. Our certificate of incorporation and bylaws also generally provide that we will indemnify, to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, investigation, administrative hearing or any other proceeding by reason of the fact that he or she is or was a director or officer of ours, or is or was serving at our request as a director, officer, employee or agent of another entity, against expenses incurred by him or her in connection with that proceeding. An officer or director will not be entitled to indemnification by us if: . the officer or director did not act in good faith and in a manner reasonably believed to be in, or not opposed to, our best interests; or . with respect to any criminal action or proceeding, the officer or director had reasonable cause to believe his or her conduct was unlawful. In addition, we have entered into indemnification agreements with our directors containing provisions which may require us, among other things, to indemnify our directors against various liabilities that may arise by virtue of their status or service as directors and to advance their expenses incurred as a result of any proceeding against them as to which they could be indemnified. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Vyyo pursuant to the foregoing provisions or otherwise, Vyyo has been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. At the present time, there is no pending litigation or proceeding involving any director, officer, employee or agent of Vyyo which indemnification will be required or permitted. We are not aware of any threatened litigation or proceeding which may result in a claim for such indemnification. 53 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Since February 1, 1997, there has not been, nor is there currently proposed, any transaction or series of similar transactions to which we were or are to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer or holder of more than 5% of our common stock, or an immediate family member of any of the foregoing, had or will have a direct or indirect interest other than: . compensation arrangements that are described where required under "Management," and . the transactions described below. All references to shares of common stock reflect our 1-for-5 reverse stock split effected on January 3, 2000 and our 3-for-2 stock split effected on March 14, 2000. Preferred share amounts have not been adjusted for stock splits. All outstanding shares of preferred stock were automatically converted upon the closing of our initial public offering in April 2000, on the basis of 0.6 of a share of common stock for each share of Series A preferred stock and 0.3 of a share of common stock for each share of Series B and Series C preferred stock. Sales of Stock In December 1999, we sold 60,000 shares of common stock at a purchase price of $0.83 per share in cash, to each of our directors, Lewis Broad, Neill Brownstein, Avraham Fischer, Davidi Gilo, John Griffin, Samuel Kaplan and Alan Zimmerman. On December 28, 1999, we sold 178,571 shares of Series C convertible preferred stock, at a purchase price of $0.56 per share in cash, to Arnon Kohavi, our Senior Vice President, Strategic Relations. On December 27, 1999, we sold 30,000 shares of common stock at $0.50 per share to Avraham Fischer upon exercise of a warrant. On August 31, 1999, we sold 9,172,010 shares of Series C convertible preferred stock at a purchase price of $0.54 per share in cash, to ADC Telecommunications, Inc., a principal stockholder of Vyyo. On May 31, 1999, we sold 8,929,656 shares of common stock, at a purchase price of $0.50 per share, to the Gilo Family Partnership, of which 2,929,656 shares were purchased in exchange for the cancellation of promissory notes issued by us to the partnership, in the aggregate principal amount of $1,435,000 plus accrued interest, and 6,000,000 shares were purchased in exchange for the issuance by the partnership of a promissory note in the principal amount of $3,000,000. The note was due on the earlier of demand or April 22, 2000, and bore interest at a rate of 9% per annum. The note was secured by the purchased shares. The note was repaid in full and cancelled in February 2000. On May 31, 1999, we sold 50,001 shares of common stock, at a purchase price of $0.50 per share in cash, to the Samuel Kaplan/Ralph Strangis Investment Partnership, an affiliate of Samuel L. Kaplan. On December 1, 1998, we sold shares of Series B preferred stock, at a purchase price of $1.00 per share in cash, to the following investors, among others:
Number of Name Shares ---- ------- Gilo Family Partnership.............................................. 50,000 Adi, Elad and Yael Gilo DSP Tel Trusts............................... 150,000 Kaplan/Strangis Investment Partnership............................... 7,632 Michael Corwin....................................................... 8,104 Pezzola-Foster Trust................................................. 4,000 Alan Zimmerman....................................................... 12,000
54 In connection with this offering, we issued warrants to purchase up to the number of shares of common stock equal to the sum of the number of shares of Series B preferred stock each of these investors purchased multiplied by 0.6. These warrants have terminated in accordance with their terms. On September 28, 1998, we sold common stock, at a purchase price of $0.67 per share in cash, to the following investors, among others:
Name Number of Shares ---- ---------------- Pezzola-Foster Trust........................................ 11,250 Alan Zimmerman.............................................. 30,000
On September 28, 1998, we sold 1,517,741 shares of common stock, at a purchase price of $0.67 per share, to the Gilo Family Partnership. All of this common stock was purchased in exchange for cancellation of promissory notes issued by us to the partnership. In March and April 1997, we sold shares of common stock at a price of $1.63 per share in cash, and Series A preferred stock at a price of $8.97 in cash, to the following persons.
Number of Number of Name Common Shares Preferred Shares ---- ------------- ---------------- The Davidi and Shamaya Gilo Trust........... 1,556 2,593 Pezzola-Foster Trust........................ 1,500 2,500 PhaseCom Investor Group Limited Partnership No. 2...................................... 79,749 132,913 Avraham Fischer............................. 2,250 3,750
Convertible Note and Warrant Financings On June 30, 1998, we issued unsecured promissory notes, which were convertible into shares of common stock, and warrants to purchase common stock, to the following investors, among others. The notes were due on June 30, 1999 and bore interest at a rate of 8% per annum. The notes were convertible into shares of common stock at a conversion price equal to $5.00 if the note converted before September 15, 1998, or if converted after September 15, 1998, the greater of $5.00 or one third of the per share price of our common stock resulting from either an initial public offering of our common stock or a merger with another entity. In August 1999, we amended these notes so that they became convertible into common stock at $0.83 per share. The warrants were originally convertible into the number of shares of common stock equal to the sum of the principal amount of the noteholder's note that we issued to it on June 30, 1998 multiplied by .35 divided by the conversion price of the note. In November 1999, the warrants were amended to fix the exercise price at $5.00 per share and to fix the number of shares for which the warrants were exercisable into the number of shares set forth below. In December 1999, the warrants were amended to reduce the exercise price to $1.87 per share. In consideration for the note issued to the Gilo Family Partnership, the Partnership paid us $500,000 in cash, and we canceled the promissory notes dated September 30, 1997, April 3, 1998 and May 8, 1998 in the aggregate principal amount of $1,799,117, previously issued by us to the Partnership.
Name Principal Amount of Note Warrant Shares ---- ------------------------ -------------- Gilo Family Partnership............ $2,875,556 201,290 Samuel Kaplan/Ralph Strangis Investment Partnership............ $ 34,201 2,394 Alan Zimmerman..................... $ 26,052 1,824 Michael Corwin..................... $ 36,772 2,574 Pezzola-Foster Trust............... $ 15,000 1,050 Avraham Fischer.................... $ 21,723 1,521
In November 1999, all of these notes were converted into an aggregate of 3,611,162 shares of common stock at a conversion rate of $0.83 per share. In December 1999, all of these warrants were exercised for a total of 210,651 shares of common stock at an exercise price of $1.87 per share. 55 On February 26, 1998, we issued unsecured promissory notes, which were convertible into shares of Series A preferred stock at $15.00 per share, and warrants to purchase common stock at an exercise price of $9.50 per share, to the following investors, among others. The notes were due on February 26, 1999 and bore interest at a rate of 8% per annum. In November 1999, these notes were amended such that they were convertible into shares of common stock at a conversion rate of $0.83 per share. In December 1999, these warrants were amended to have an exercise price of $1.87 per share.
Name Principal Amount of Note Warrant Shares ---- ------------------------ -------------- Gilo Family Partnership............ $417,600 64,800 Adi, Elad and Yael Gilo DSP Tel Trusts............................ $ 83,520 12,960 Samuel Kaplan/Ralph Strangis Investment Partnership............ $ 27,840 4,320 Alan Zimmerman..................... $ 27,840 4,320 Michael Corwin..................... $ 27,840 4,320 Neill Brownstein................... $ 55,680 8,640 Pezzola-Foster Trust............... $ 9,280 1,440
In November 1999, all of these notes were converted into an aggregate of 779,520 shares of common stock at a conversion rate of $0.83 per share. In December 1999, all of these warrants were exercised for a total of 100,800 shares of common stock at an exercise price of $1.87 per share. On February 3, 1998, we issued promissory notes, which were convertible into shares of Series A preferred stock at $15.00 per share, and warrants to purchase common stock at an exercise price of $9.50 per share, to the following investors, among others. The notes bore interest at a rate of 8% per annum and were due on January 31, 1999. In November 1999, these notes were amended such that they were convertible into shares of common stock at a conversion rate of $0.83 per share. In December 1999, these warrants were amended to have an exercise price of $1.87 per share.
Name Principal Amount of Note Warrant Shares ---- ------------------------ -------------- Gilo Family Partnership............ $129,920 20,160 Adi, Elad and Yael Gilo DSP Tel Trusts............................ $ 27,840 4,320 Samuel Kaplan/Ralph Strangis Investment Partnership............ $ 9,280 1,440 Alan Zimmerman..................... $ 9,280 1,440 Michael Corwin..................... $ 9,280 1,440 Neill Brownstein................... $ 37,120 5,760 Pezzola-Foster Trust............... $ 9,280 1,440
In November 1999, all of these notes were converted into an aggregate of 278,400 shares of common stock at a conversion rate of $0.83 per share. In December 1999, all of these warrants were exercised for a total of 36,000 shares of common stock at an exercise price of $1.87 per share. On December 29, 1997, we issued promissory notes, which were convertible into shares of Series A preferred stock at $15.00 per share, and warrants to purchase common stock at an exercise price of $9.50 per share, to the following investors, among others. The notes bore interest at a rate of 8% per annum and were due on December 31, 1998. In November 1999, these notes were amended such that they were convertible into shares of common stock at a conversion rate of $0.83 per share. In December 1999, these warrants were amended to have an exercise price of $1.87 per share.
Name Principal Amount of Note Warrant Shares ---- ------------------------ -------------- Gilo Family Partnership............ $148,480 23,040 Adi, Elad and Yael Gilo DSP Tel Trusts............................ $ 27,840 4,320 Samuel Kaplan/Ralph Strangis Investment Partnership............ $ 9,280 1,440 Alan Zimmerman..................... $ 9,280 1,440 Michael Corwin..................... $ 9,280 1,440 Avraham Fischer.................... $ 9,280 1,440
56 In November 1999, all of these notes were converted into an aggregate of 256,128 shares of common stock at a conversion rate of $0.83 per share. In December 1999, all of these warrants were exercised for a total of 33,120 shares of common stock at an exercise price of $1.87 per share. On April 9, 1997, we issued a warrant to purchase 30,750 shares of common stock, at an exercise price of $1.63 per share, to the Gilo Family Partnership. Grants of Options We have granted the following options to our officers and directors:
Name Number of Options Exercise Price Date of Grant ---- ----------------- -------------- ------------- Michael Corwin................ 240,000 $0.50 06/99 120,000 $0.83 11/99 Menashe Shahar................ 12,000 $2.09* 11/97 30,000 $0.33 12/98 3,000 $1.63* 07/97 Eran Pilovsky................. 300,000 $0.83 01/00 Arnon Kohavi.................. 240,000 $0.83 11/99 Stephen Pezzola............... 22,500 $0.33 10/98 24,000 $1.00* 02/97 Avraham Fischer............... 24,000 $1.00* 02/97
- -------- * In October 1998, these options were repriced to have an exercise price of $0.33 per share. Gilo-Related Transactions In March 1997, the Gilo Family Partnership loaned $250,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 9% per annum. This note was paid in full on April 15, 1997. On June 25, 1997, the Gilo Family Partnership loaned $200,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at rate of 9% per annum. On July 9, 1997, the Gilo Family Partnership loaned $200,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at rate of 9% per annum. On July 28, 1997, the Gilo Family Partnership loaned $200,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at rate of 9% per annum On August 14, 1997, the Gilo Family Partnership loaned $200,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at rate of 9% per annum. On September 30, 1997, the demand promissory notes dated June 25, 1997, July 9, 1997, July 28, 1997 and August 14, 1997, were canceled in exchange for (i) an unsecured promissory note in the principal amount of $799,117, bearing interest at a rate of 9% per annum and due on March 31, 1998, and (ii) a warrant to purchase 158,400 shares of our Common Stock at an exercise price of $7.92 per share. On June 30, 1998, the September 30, 1997 promissory note was canceled as partial payment for issuance of an unsecured promissory note in the principal amount of $2,875,555.50, as described above in this prospectus. In December 1999, this warrant was amended to have an exercise price of $1.87 per share. This warrant was exercised in December 1999. On April 3, 1998, the Gilo Family Partnership loaned $500,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8% per annum. On June 30, 1998, this promissory note was canceled as partial payment for issuance of the $2,875,555.50 note. 57 On May 8, 1998, the Gilo Family Partnership loaned $500,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8% per annum. On June 30, 1998, this note was canceled as partial payment for issuance of the $2,875,555.50 note. On August 4, 1998, the Gilo Family Partnership loaned $500,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8% per annum. On September 28, 1998, this note was canceled in exchange for 758,871 shares of our common stock at a price of $0.67 per share. On August 28, 1998, the Gilo Family Partnership loaned $500,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8% per annum. On September 28, 1998, this note was canceled in exchange for 758,871 shares of our common stock at a price of $0.67 per share. On November 12, 1998, the Gilo Family Partnership loaned $100,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On November 24, 1998, the Gilo Family Partnership loaned $50,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On December 1, 1998, the promissory notes dated November 12, 1998 and November 24, 1998, in the aggregate principal amount of $150,000, plus accrued interest, were canceled in exchange for the issuance of 150,404 shares of our Series B preferred stock at a price of $1.00 per share. On December 4, 1998, the Gilo Family Partnership loaned $50,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On January 5, 1999, the Gilo Family Partnership loaned $250,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On January 25, 1999, the Gilo Family Partnership loaned $50,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On February 12, 1999, the Gilo Family Partnership loaned $100,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On February 28, 1999, the Gilo Family Partnership loaned $60,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On March 1, 1999, the Gilo Family Partnership loaned $225,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On March 11, 1999, the Gilo Family Partnership loaned $150,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On March 31, 1999, the Gilo Family Partnership loaned $300,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On April 8, 1999, the Gilo Family Partnership loaned $50,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On April 15, 1999, the Gilo Family Partnership loaned $200,000 to us. The loan was evidenced by an unsecured demand promissory note bearing interest at a rate of 8.5% per annum. On May 31, 1999, the promissory notes dated December 4, 1998, January 5, 1999, January 25, 1999, February 12, 1999, February 28, 1999, March 1, 1999, March 11, 1999, March 31, 1999, April 8, 1999 and 58 April 15, 1999, in the aggregate principal amount of $1,435,000, plus accrued interest, were canceled in exchange for 2,929,656 shares of our common stock at a price of $0.50 per share. Other Avraham Fischer is a senior partner of the law firm of Fischer, Behar, Chen & Co., which represents us on matters relating to Israeli law. We paid approximately $109,500 in legal fees to this firm in 1999. In January 2000, in connection with an exercise of options to purchase common stock, we lent $249,980 to Eran Pilovsky. Mr. Pilovsky issued a full- recourse promissory note to us. This note was due on the earlier of January 16, 2003 or the time at which Mr. Pilovsky sells the shares or leaves Vyyo and bore interest at rate of 6% per annum. The note was secured by the purchased shares. In June 2000, Mr. Pilovsky repaid to us the full amount of $256,472.63 of principal and accrued interest under this note. We sublease our headquarters in Cupertino, California from Zen Research, Inc. on a month-to-month basis. Zen Research is a wholly owned subsidiary of a corporation of which Mr. Gilo is a controlling shareholder and the Chairman of the Board. In addition, Mr. Pezzola is the Vice Chairman of the Board of Zen Research's parent corporation. The monthly rent under our sublease was $12,000 during 1999 and has been approximately $40,000 during 2000. In addition, in April 2000, we purchased office furniture and equipment from Zen Research in the amount of $115,000 in cash. 59 PRINCIPAL AND SELLING STOCKHOLDERS The following table indicates information as of June 30, 2000 regarding the beneficial ownership of our common stock by: . each person known to the board of directors to own beneficially 5% or more of our common stock; . each of our directors; . the named executive officers; . all of our directors and executive officers as a group; and . other selling stockholders. Information with respect to beneficial ownership has been furnished by each director, officer, 5% or more stockholder or selling stockholder, as the case may be. Except as otherwise noted below, the address for each person listed on the table who is a 5% or more stockholder is c/o Vyyo Inc., 20400 Stevens Creek Boulevard, 8th Floor, Cupertino, California 95014. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and includes shares of common stock issuable pursuant to the exercise of stock options or warrants that are immediately exercisable or exercisable within 60 days. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to applicable community property laws. Percentage ownership calculations are based on 35,788,682 shares of common stock outstanding as of June 30, 2000. To the extent that any shares are issued upon exercise of options, warrants or other rights to acquire our capital stock that are presently outstanding or granted in the future or reserved for future issuance under our stock plans, there will be further dilution to new public investors. 60 PRINCIPAL AND SELLING STOCKHOLDERS-(CONTINUED)
Percent of Shares Outstanding Number of Number of -------------------- Shares Shares Before Beneficially Being the After the Name Owned Offered(1) Offering Offering(1) - ---- ------------ ---------- -------- ----------- Directors, Officers and 5% Stockholders Davidi Gilo(2)................... 15,417,478 -- 43.1% 40.8% ADC Telecommunications, Inc...... 2,751,603 275,000 7.7 6.6 P.O. Box 1101 Minneapolis, MN 55440 Stephen P. Pezzola(3)............ 248,203 -- * * Lewis S. Broad(4)................ 127,665 -- * * Neill H. Brownstein(5)........... 226,645 -- * * Avraham Fischer(6)............... 394,740 39,474 1.1 * John Griffin(7).................. 2,834,103 -- 7.9 6.8 Samuel Kaplan(8)................. 173,118 -- * * Alan Zimmerman(9)................ 302,143 30,215 * * Shaul Berger(10)................. 136,523 -- * * Menashe Shahar(11)............... 113,552 30,080 * * Michael Corwin................... 313,652 43,366 * * Eran Pilovsky(12)................ 300,000 30,000 * * Arnon Kohavi..................... 173,572 29,358 * * All directors and executive officers As a group (12 persons)(13)..... 20,624,871 202,493 56.7 53.8 Other Selling Stockholders Tom Holdings and Properties (1993) Ltd...................... 1,015,047 403,762 2.8 1.6 Galran Properties (1993) Ltd..... 1,015,047 403,762 2.8 1.6 Eichut Capital Markets and Investments (1993) Ltd.......... 676,701 269,176 1.9 1.1 Y. Atai Investments Ltd.......... 253,577 196,267 * * Hargrave Houston Holdings Limited......................... 107,265 58,605 * * Harel Hamishmar Investments Ltd............................. 86,471 86,471 * * Arie Zimmerman................... 66,251 12,000 * * Itzhak and Esther Hoffi.......... 38,856 9,714 * * David Jaroslawicz................ 36,697 36,697 * * Yotam Financing Technologies Ltd............................. 25,792 25,792 * * Joel and Elizabeth Brauser....... 15,077 5,000 * * Al-Ben Ltd....................... 11,256 10,002 * * Meir Leiberman .................. 4,799 4,799 * * David Gidron..................... 802 201 * * Mordechai Gazit.................. 259 259 * *
- -------- * Less than 1% of the outstanding shares of common stock. (1) Assumes no exercise of the underwriters' over-allotment option. The Gilo Family Foundation, a private not-for-profit charitable foundation, of which Davidi Gilo and Shamaya Gilo are trustees, intends to grant the underwriters the right to purchase an additional 100,000 shares to cover any over-allotments. The number of shares is subject to change as the allocation between Vyyo and the selling stockholders, and among the selling stockholders, is not finalized. 61 (2) Includes (a) 14,362,995 shares held by The Gilo Family Trust, of which Davidi Gilo and his wife Shamaya Gilo are the trustees, (b) 16,260 shares held by Harmony Management, Inc. of which Mr. Gilo is the president and of which Davidi and Shamaya Gilo are the sole stockholders, (c) 3,223 shares held by the Gilo Group, LLC, a limited liability company of which Mr. Gilo is a principal owner, and (d) 1,000,000 shares held by the Gilo Family Foundation, a private not-for-profit charitable foundation of which Davidi Gilo and Shamaya Gilo are trustees. Davidi and Shamaya Gilo are not beneficiaries of the Gilo Family Foundation. Excludes 237,998 shares held in three trusts for the benefit of Mr. Gilo's children, Adi, Elad and Yael Gilo, as to which Mr. Gilo has no voting or investment power. Mr. Gilo disclaims beneficial ownership of such shares. (3) Includes 50,203 shares held in the Pezzola-Foster Trust, of which Stephen Pezzola and his wife Twila Foster are the trustees. Excludes 42,000 shares held in two trusts for the benefit of Mr. Pezzola's children, Genevieve and David Pezzola, as to which Mr. Pezzola has no voting or investment power. Mr. Pezzola disclaims beneficial ownership of such shares. (4) Includes 22,500 shares of common stock issuable pursuant to stock options exercisable within 60 days of June 30, 2000. (5) Includes 37,500 shares of common stock issuable pursuant to stock options exercisable within 60 days of June 30, 2000. (6) Includes 25,152 shares held by Rashifa Management and Holdings Ltd., of which Mr. Fischer and his wife Vered Fischer are the sole stockholders. Also includes 247,500 shares of common stock issuable pursuant to stock options exercisable within 60 days of June 30, 2000. Excludes shares held by I. Fischer & Co. as trustee, or Fischer, Behar & Co., as trustee, on behalf of stockholders of Vyyo that are residents of Israel. (7) Includes 22,500 shares of common stock issuable pursuant to stock options exercisable within 60 days of June 30, 2000. Also includes 2,751,603 shares held by ADC Telecommunications, of which 275,000 shares are being offered hereby. Mr. Griffin may be deemed to share voting and investment power will respect to the shares held and being offered by ADC Communications. Mr. Griffin disclaims beneficial ownership of these shares. (8) Includes 22,500 shares of common stock issuable pursuant to stock options exercisable within 60 days of June 30, 2000. (9) Includes 97,500 shares of common stock issuable pursuant to stock options exercisable within 60 days of June 30, 2000. (10) Includes 392 shares of common stock issuable pursuant to warrants. (11) Includes 112,750 shares of common stock issuable pursuant to stock options exercisable within 60 days of June 30, 2000. (12) Includes 226,562 shares that are subject to a right of repurchase held by Vyyo as of August 31, 2000. Also includes 30,000 shares held by the Pilovsky Children's Trust, of which Mr. Pilovsky and his wife are the trustees. (13) Includes 562,750 shares of common stock issuable pursuant to stock options exercisable within 60 days of June 30, 2000. The number of shares being offered does not include the shares being sold by ADC Telecommunications. 62 DESCRIPTION OF CAPITAL STOCK The following description summarizes information regarding our capital stock. This information is subject in all respects to the applicable provisions of the Delaware General Corporation Law, our amended and restated certificate of incorporation and bylaws. The authorized capital stock of Vyyo consists of 200,000,000 shares of common stock, $0.0001 par value per share, and 5,000,000 shares of preferred stock, $0.001 par value per share. Common Stock Voting Rights. Each outstanding share of common stock is entitled to one vote on all matters submitted to a vote of Vyyo's stockholders, including the election of directors. There are no cumulative voting rights, and therefore the holders of a plurality of the shares of common stock voting for the election of directors may elect all of Vyyo's directors standing for election. Dividends. Holders of common stock are entitled to receive dividends at the same rate if and when dividends are declared by our board of directors out of assets legally available for the payment of dividends, subject to preferential rights of any outstanding shares of preferred stock. Through our subsidiary, Vyyo Ltd., we participate in the "alternative benefits program" under the Israeli law for the Encouragement of Capital Investments, 1959, under which we realize certain tax exemptions. If Vyyo Ltd. distributes a cash dividend to Vyyo Inc. from income which is tax exempt, it would have to pay corporate tax at the rate of up to 25% on an amount equal to the amount distributed and the corporate tax which would have been due in the absence of the tax exemption. Liquidation. In the event of a liquidation, dissolution or winding up of the affairs of Vyyo, whether voluntary or involuntary, after payment of the debts and other liabilities of Vyyo and making provisions for the holders of any outstanding shares of preferred stock, the remaining assets of Vyyo will be distributed ratably among the holders of shares of common stock. Rights and Preferences. The common stock has no preemptive, redemption, conversion or subscription rights. The rights, powers, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. Preferred Stock The board of directors has the authority, without action by the stockholders, to provide for the issuance of preferred stock in one or more classes or series and to designate the rights, preferences and privileges of each such class or series, which may be greater than the rights of the common stock. We cannot predict the effect of the issuance of any shares of preferred stock upon the rights of holders of the common stock until the board of directors determines the specific rights of the holders of the preferred stock. However, the effects could include one or more of the following: . restricting dividends on the common stock; . diluting the voting power of the common stock; . impairing the liquidation rights of the common stock; or . delaying or preventing a change in control of us without further action by the stockholders. We have no present plans to issue any shares of preferred stock. 63 Registration Rights Upon completion of the offering, the holders of a substantial portion of our outstanding shares of common stock will be entitled to rights with respect to the registration of these shares under the Securities Act of 1933, as amended, or the Securities Act. Under the terms of the registration rights agreements, if Vyyo proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, these holders are entitled to notice of this registration and are entitled to include shares of common stock in the registration. The rights are subject to conditions and limitations, among them the right of the underwriters of an offering subject to the registration to limit the number of shares included in the registration. Holders of these rights may also require Vyyo to file a registration statement under the Securities Act at its expense with respect to their shares of common stock, and Vyyo is required to use its best efforts to effect this registration, subject to conditions and limitations. Furthermore, stockholders with registration rights may require Vyyo to file additional registration statements on Form S-3, subject to conditions and limitations. Delaware Anti-Takeover Law We are subject to Section 203 of the Delaware General Corporation Law, an anti-takeover law. Generally, Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless: . prior to the date of the business combination, the transaction is approved by the board of directors of the corporation; . upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owns at least 85% of the outstanding voting stock of the corporation; or . on or after the date of the business combination, such business combination is approved by the board of directors of the corporation and by the affirmative vote of at least 66 2/3% of the outstanding voting stock which is not owned by the interested stockholder. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the stockholder. An "interested stockholder" is a person who, together with affiliates and associates, owns (or within the three-year period immediately prior to the relevant date, did own) 15% or more of the corporation's outstanding voting stock. The existence of this provision would be expected to have an anti-takeover effect with respect to transactions not approved in advance by our board of directors, including discouraging attempts that might result in a premium over the market price for the shares of common stock held by stockholders. Transfer Agent and Registrar EquiServe Trust Company serves as Transfer Agent and Registrar for our common stock. Its telephone number is (781) 575-2000. Listing Our common stock is quoted on the Nasdaq National Market under the trading symbol "VYYO." 64 SHARES ELIGIBLE FOR FUTURE SALE We cannot predict if future sales of our common stock, or the availability of our common stock for sale, will depress the market price for our common stock or our ability to raise capital by offering equity securities. Sales of substantial amounts of common stock, or the perception that these sales could occur, may depress prevailing market prices for the common stock. After this offering, approximately 37,788,682 shares of common stock will be outstanding, based on shares outstanding as of June 30, 2000. All of the shares sold in this offering as well as the 7,762,500 shares sold in our initial public offering will be freely tradeable except for any shares purchased by affiliates of Vyyo. The remaining shares of common stock outstanding after this offering, will be restricted as a result of securities laws or lock-up agreements. These remaining shares will be available for sale in the public market as follows:
Number of Date of Availability for Sale Shares ----------------------------- ---------- Presently available............................................. 37,760 October 2, 2000................................................. 2,649,171 December 15, 2000............................................... 21,665,913 At various times afterwards upon expiration of applicable holding periods................................................ 1,673,338
The shares available for sale on October 2 and December 15, 2000 are currently subject to a lock-up agreement with Banc of America Securities LLC. Banc of America Securities LLC may release all or a portion of the shares subject to these lockup agreements at any time without notice. See "Underwriting." In general, under Rule 144, as currently in effect, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed the greater of: . 1% of the number of shares of common stock then outstanding, which will equal approximately 336,973 shares immediately after this offering; or . the average weekly trading volume of the common stock on the Nasdaq National Market during the four calendar weeks preceding the filing of a notice on Form 144 with respect to the sale. Sales under Rule 144 are also subject to manner of sales provisions and notice requirements and to the availability of current public information about us. Under Rule 144(k), a person who is not deemed to have been one of our affiliates at any time during the 90 days preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years, including the holding period of any prior owner other than an affiliate, is entitled to sell the shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701, as currently in effect, permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions, including the holding period requirement, of Rule 144. Any of our employees, officers, directors or consultants who purchased shares under a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell their shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling their shares. However, substantially all Rule 701 shares are subject to lock-up agreements and will only become eligible for sale at the earlier of the expiration of the 180-day lock-up agreements or no sooner than 90 days after the offering upon obtaining the prior written consent of Banc of America Securities LLC. We filed a registration statement registering shares of common stock subject to outstanding options or reserved for future issuance under our stock plans. As of June 30, 2000, options to purchase a total of 3,201,109 shares were outstanding under our stock option plans of which 320,938 are issued shares that are subject to a right of repurchase held by Vyyo. Common stock issued upon exercise of outstanding vested options, other than common stock issued to our affiliates, is available for immediate resale in the open market. 65 UNDERWRITING We and the selling stockholders are offering the shares of common stock described in this prospectus through a number of underwriters. Banc of America Securities LLC, CIBC World Markets Corp., Dain Rauscher Incorporated, Needham & Company, Inc. and WR Hambrecht + Co., LLC are the representatives of the underwriters. We and the selling stockholders will enter into an underwriting agreement with the representatives. According to the terms and conditions of the underwriting agreement, we and the selling stockholders have agreed to sell to the underwriters, and each of the underwriters has agreed to purchase, the number of shares of common stock listed next to its name in the following table:
Number of Underwriter Shares ----------- --------- Banc of America Securities LLC..................................... CIBC World Markets Corp............................................ Dain Rauscher Incorporated......................................... Needham & Company, Inc............................................. WR Hambrecht + Co., LLC............................................ --------- Total.......................................................... 4,000,000 =========
The underwriters initially will offer shares to the public at the price specified on the cover page of this prospectus. The underwriters may allow to some dealers a concession of not more than $ per share. The underwriters also may allow, and any other dealers may reallow, a concession of not more than $ per share to some other dealers. If all the shares are not sold at the initial public offering price, the underwriters may change the offering price and the other selling terms. The common stock is offered under a number of conditions, including: . receipt and acceptance of our common stock by the underwriters, and . the right to reject orders in whole or in part. We have granted an option to the underwriters to buy up to 300,000 additional shares of common stock, and certain of the selling stockholders have granted an option to the underwriters to buy up to 300,000 additional shares of common stock. These additional shares would cover sales of shares by the underwriters which exceed the number of shares specified in the table above. The underwriters have 30 days to exercise this option. If the underwriters exercise this option, they will each purchase additional shares approximately in proportion to the amounts specified in the table above. The expenses of the offering that are payable by us are estimated to be $1,000,000. We, the selling stockholders, and our officers and directors have entered into lock-up agreements with the underwriters. Under those agreements, we and those holders of stock and options may not dispose of or hedge any common stock or securities convertible into or exchangeable for shares of common stock. These restrictions will be in effect for a period of 90 days after the date of this prospectus for our officers and directors, and until December 15, 2000 for the selling stockholders. At any time and without notice, Banc of America Securities LLC may, in its sole discretion, release all or some of the securities from these lock-up agreements. We and the selling stockholders will indemnify the underwriters against some liabilities, including some liabilities under the Securities Act and the selling stockholders. If we are unable to provide this indemnification, we will contribute to payments the underwriters may be required to make in respect of those liabilities. The shares of common stock are listed on the Nasdaq National Market under the symbol "VYYO." 66 In connection with this offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include: . short sales, . stabilizing transactions, and . purchase to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in this offering. Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of the common stock while this offering is in progress. The underwriters also may impose a penalty bid. This means that if the representatives purchase shares in the open market in stabilizing transactions or to cover short sales, the representatives can require the underwriters that sold those shares as part of this offering to repay the underwriting discount received by them. The underwriters may engage in activities that stabilize, maintain or otherwise affect the price of the common stock, including: . over-allotment, . stabilization, . syndicate covering transactions, and . imposition of penalty bids. As a result of these activities, the price of the common stock may be higher than the price that otherwise might exist in the open market. If the underwriters commence these activities, they may discontinue them at any time. The underwriters may carry out these transactions on the Nasdaq National Market, in the over-the-counter market or otherwise. A limited number of shares allocated to W.R. Hambrecht + Co., LLC will be distributed in this offering through the use of the Internet. W.R. Hambrecht + Co., LLC will post on its Web site (www.wrhambrecht.com) a brief description of the offering. Visitors to this Web site will have access to the preliminary prospectus by links on the Web site. W.R. Hambrecht + Co., LLC will accept conditional offers to purchase shares from account holders that are determined eligible to participate. In the event that the demand for shares exceeds the amount of shares allocated to it, W.R. Hambrecht + Co., LLC will allocate shares to individual and institutional account holders in accordance with the following criteria: trading history of the account with respect to public offerings, post-offering activity in previous offerings and tenure of the account. W.R. Hambrecht + Co., LLC is an investment banking firm formed as a limited liability company in February 1998. In addition to this offering, W.R. Hambrecht + Co., LLC has engaged in the business of public and private equity investing and financial advisory services since its inception. The chairman and chief executive officer of W.R. Hambrecht + Co., LLC, William R. Hambrecht, has 40 years of experience in the securities industry. From time to time, Banc of America Securities LLC has provided financial advisory services to Vyyo and may continue to do so in the future. 67 LEGAL MATTERS The validity of the shares of common stock being offered will be passed upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, Palo Alto, California. A partner at Skadden, Arps beneficially owns 65,342 shares of common stock. Certain other legal matters in connection with this offering will be passed upon for us by Bay Venture Counsel, LLP. Three partners and one of counsel at Bay Venture Counsel beneficially own an aggregate of 206,828 shares of common stock. Certain matters of Israeli law will be passed upon for us by Fischer, Behar, Chen & Co., Tel Aviv, Israel. Avraham Fischer, a partner at Fischer, Behar, Chen and a director of Vyyo, beneficially owns 394,740 shares of common stock and is offering 39,474 of these shares in this offering. Certain legal matters in connection with this offering will be passed upon for the underwriters by Wilson, Sonsini, Goodrich & Rosati, San Francisco, California. EXPERTS Ernst & Young LLP, independent auditors, have audited our consolidated financial statements at December 31, 1998 and 1999, and for the three years in the period ended December 31, 1999, as set forth in their report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Ernst & Young LLP's report, given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION We filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock being offered. This prospectus does not contain all of the information described in the registration statement and the related exhibits and schedules. For further information with respect to Vyyo and the common stock being offered, reference is made to the registration statement and the related exhibits and schedule. A copy of the registration statement and the related exhibits and schedule may be inspected without charge at the public reference facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048, and copies of all or any part of the registration statement may be obtained from these offices upon the payment of the fees prescribed by the Commission. Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is http: //www.sec.gov. Vyyo intends to provide its stockholders with annual reports containing combined financial statements audited by an independent accounting firm and quarterly reports containing unaudited combined financial data for the first three quarters of each year. 68 VYYO INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999 Report of Ernst & Young LLP, Independent Auditors......................... F-2 Consolidated Balance Sheets as of December 31, 1998 and 1999.............. F-3 Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999...................................................... F-4 Consolidated Statements of Stockholders' Equity (Net Capital Deficiency) for the years ended December 31, 1997, 1998 and 1999..................... F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999...................................................... F-6 Notes to Consolidated Financial Statements................................ F-7 SIX MONTHS ENDED JUNE 30, 1999 AND 2000 Condensed Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000 (Unaudited)......................................................... F-18 Condensed Consolidated Statements of Operations for the six months ended June 30, 1999 and 2000, (Unaudited)...................................... F-19 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 2000 (Unaudited)....................................... F-20 Notes to Condensed Consolidated Financial Statements -- June 30, 2000 (unaudited).............................................................. F-21
F-1 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Board of Directors and Stockholders Vyyo Inc. We have audited the accompanying consolidated balance sheets of Vyyo Inc. as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (net capital deficiency) and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vyyo Inc. at December 31, 1998 and 1999, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles in the United States. /s/ Ernst & Young LLP San Jose, California January 28, 2000 F-2 VYYO INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
December 31, ------------------ 1998 1999 -------- -------- ASSETS CURRENT ASSETS: Cash and cash equivalents................................ $ 131 $ 5,036 Accounts receivable (including a related party customer balance of $237 in 1999), net of allowance for doubtful accounts of $187 and $176 in 1998 and 1999, respectively............................................ 247 583 Inventory................................................ 1,644 1,132 Other.................................................... 348 517 -------- -------- Total current assets................................... 2,370 7,268 PROPERTY AND EQUIPMENT, net................................ 1,010 1,095 -------- -------- $ 3,380 $ 8,363 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) CURRENT LIABILITIES: Bank line of credit...................................... $ 1,970 $ 2,280 Accounts payable......................................... 1,219 895 Accrued liabilities...................................... 2,313 3,153 Notes payable to stockholders............................ 6,882 -- Deferred income.......................................... 140 639 Equipment financing obligations.......................... 427 91 -------- -------- Total current liabilities.............................. 12,951 7,058 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (net capital deficiency): Convertible preferred stock, $0.001 par value at amounts paid in; 100,000,000 shares authorized at December 31, 1999; 2,213,688 and 11,564,269 shares issued and outstanding at December 31, 1998 and 1999 convertible into 3,944,553 shares of common stock at December 31, 1999; aggregate liquidation preference of $14,243 at December 31, 1999....................................... 10,335 15,369 Common stock, $0.0001 par value at amounts paid in; 200,000,000 shares authorized at December 31, 1998 and 1999; 2,718,903 and 23,002,733 shares issued and outstanding at December 31, 1998 and 1999, respectively; 26,947,286 shares issued and outstanding pro forma...... 2,649 66,412 Note receivable from stockholder......................... -- (920) Deferred stock compensation.............................. -- (13,400) Accumulated deficit...................................... (22,555) (66,156) -------- -------- Total stockholders' equity (net capital deficiency).... (9,571) 1,305 -------- -------- $ 3,380 $ 8,363 ======== ========
See accompanying notes. F-3 VYYO INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts)
Years ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- Net revenues(1).................................... $ 1,537 $ 2,449 $ 4,230 Cost of revenues................................... 1,556 2,568 4,316 ------- ------- -------- Gross loss....................................... (19) (119) (86) Operating expenses: Research and development(2)...................... 2,398 3,252 3,678 Sales and marketing(3)........................... 1,484 2,413 1,972 General and administrative(4).................... 1,200 1,363 2,148 Amortization of deferred stock compensation...... -- -- 9,300 ------- ------- -------- Total operating expenses....................... 5,082 7,028 17,098 ------- ------- -------- Operating loss..................................... (5,101) (7,147) (17,184) Charge for amended financing arrangements.......... -- -- (25,700) Interest income.................................... 41 10 36 Interest expense and other......................... (285) (534) (753) ------- ------- -------- Net loss........................................... $(5,345) $(7,671) $(43,601) ======= ======= ======== Net loss per share: Basic and diluted................................ $ (5.91) $ (5.43) $ (5.40) ======= ======= ======== Number of shares used in per share computation: Basic and diluted................................ 905 1,412 8,078 ======= ======= ========
- -------- (1) Includes $654 of 1999 revenues from a related party customer. See Note 1. (2) Excludes $100 in amortization of deferred stock compensation in 1999. (3) Excludes $300 in amortization of deferred stock compensation in 1999. (4) Excludes $8,900 in amortization of deferred stock compensation in 1999. See accompanying notes. F-4 VYYO INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (In thousands, except share and per share data)
Total Convertible Note Stockholders' Preferred Stock Common Stock Receivable Deferred Equity (Net ------------------- ------------------- from Stock Accumulated Capital Shares Amount Shares Amount Stockholder Compensation Deficit Deficiency) ---------- ------- ---------- ------- ----------- ------------ ----------- ------------- BALANCE AT DECEMBER 31, 1996................... 1,380,851 $ 7,996 828,510 $ 983 $ -- $ -- $ (9,539) $ (560) Exchange of stock for subsidiary............ 1,092 -- 656 -- -- -- -- -- Issuance of preferred and common shares for cash, net of issuance costs................. 202,167 1,736 121,300 193 -- -- -- 1,929 Issuance of warrants to purchase common stock................. -- -- -- 165 -- -- -- 165 Net loss............... -- -- -- -- -- -- (5,345) (5,345) ---------- ------- ---------- ------- ----- -------- -------- -------- BALANCE AT DECEMBER 31, 1997................... 1,584,110 9,732 950,466 1,341 -- -- (14,884) (3,811) Issuance of common stock net of issuance costs................. -- -- 263,292 171 -- -- -- 171 Issuance of Series A preferred stock net of issuance costs........ 21,123 15 -- -- -- -- -- 15 Issuance of Series B preferred stock net of issuance costs........ 629,447 603 -- -- -- -- -- 603 Conversion of notes payable to stockholders into common stock.......... -- -- 1,517,741 1,012 -- -- -- 1,012 Repurchase of preferred stock and common stock................. (20,992) (15) (12,596) (5) -- -- -- (20) Issuance of warrants to purchase common stock................. -- -- -- 130 -- -- -- 130 Net loss............... -- -- -- -- -- -- (7,671) (7,671) ---------- ------- ---------- ------- ----- -------- -------- -------- BALANCE AT DECEMBER 31, 1998................... 2,213,688 10,335 2,718,903 2,649 -- -- (22,555) (9,571) Issuance of common stock, net of issuance costs................. -- -- 6,626,000 3,481 (920) -- -- 2,561 Issuance of Series C preferred stock, net of issuance costs..... 9,350,581 5,034 -- -- -- -- -- 5,034 Issuance of common stock upon exercise of warrants, net of issuance costs........ -- -- 1,091,921 1,947 -- -- -- 1,947 Conversion of notes payable to shareholders into common stock.......... -- -- 11,128,254 9,090 -- -- -- 9,090 Issuance of common stock upon exercise of options............... -- -- 1,437,655 845 -- -- -- 845 Deferred stock compensation.......... -- -- -- 22,700 -- (22,700) -- -- Amortization of deferred stock compensation.......... -- -- -- -- -- 9,300 -- 9,300 Charge for amended financing arrangements.......... -- -- -- 25,700 -- -- -- 25,700 Net loss............... -- -- -- -- -- -- (43,601) (43,601) ---------- ------- ---------- ------- ----- -------- -------- -------- BALANCE AT DECEMBER 31, 1999................... 11,564,269 $15,369 23,002,733 $66,412 $(920) $(13,400) $(66,156) $ 1,305 ========== ======= ========== ======= ===== ======== ======== ========
See accompanying notes. F-5 VYYO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Years ended December 31, -------------------------- 1997 1998 1999 ------- ------- -------- OPERATING ACTIVITIES Net loss.......................................... $(5,345) $(7,671) $(43,601) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and other.......................... 343 368 454 Amortization of deferred stock compensation..... -- -- 9,300 Charge for amended financing arrangements....... -- -- 25,700 Changes in assets and liabilities: Accounts receivable........................... (132) (8) (336) Prepaid expenses and other current assets..... 17 34 (169) Inventory..................................... (639) (638) 512 Other assets.................................. 4 7 -- Accounts payable.............................. 287 636 (246) Accrued liabilities........................... 813 455 1,663 Deferred income............................... -- 140 499 ------- ------- -------- Net cash used in operating activities......... (4,652) (6,677) (6,224) INVESTING ACTIVITIES Purchases of property and equipment............... (430) (305) (581) Proceeds from sales of property and equipment..... -- -- 42 ------- ------- -------- Net cash used in investing activities......... (430) (305) (539) FINANCING ACTIVITIES Proceeds from notes payable to stockholders....... 2,126 5,834 1,385 Proceeds from note receivable from stockholders... -- -- 2,080 Proceeds from debt................................ 300 1,970 310 Repayments of capital lease obligations........... -- -- (336) Repayments of debt and capital lease obligations.. (321) (2,100) -- Repurchase of preferred stock and common stock.... -- (20) -- Issuance of preferred stock and common stock...... 1,929 789 8,229 Issuance of warrants to purchase common stock..... 99 130 -- ------- ------- -------- Net cash provided by financing activities..... 4,133 6,603 11,668 ------- ------- -------- Increase (decrease) in cash and cash equivalents.................................... (949) (379) 4,905 Cash and cash equivalents at beginning of period.. 1,459 510 131 ------- ------- -------- Cash and cash equivalents at end of period........ $ 510 $ 131 $ 5,036 ======= ======= ======== NONCASH FINANCING ACTIVITIES Conversion of loan from stockholder into warrant to purchase common stock......................... $ 66 $ -- -- ======= ======= ======== Conversion of stockholders' notes into common stock............................................ $ -- $ 1,012 $ 9,090 ======= ======= ======== Issuance of common stock for note receivable...... -- -- $ 3,000 ======= ======= ======== SUPPLEMENTAL CASH FLOW INFORMATION Interest paid..................................... $ 158 $ 143 $ 141 ======= ======= ========
See accompanying notes. F-6 VYYO INC. NOTES TO FINANCIAL STATEMENTS December 31, 1999 1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Organization and Basis of Presentation Vyyo Inc. was incorporated as a Delaware corporation in 1996. In January 2000, the Company changed its name from PhaseCom, Inc. to Vyyo Inc. and its subsidiary (collectively, "Vyyo" or the "Company") is a global provider of broadband wireless access systems used by telecommunications service providers to deliver wireless high-speed data connections to businesses and residential subscribers. The Company sells its products directly to service providers and to system integrators. The majority of the Company's revenues are generated from sales to customers in North America. The Company's consolidated financial statements reflect the operations of Vyyo Inc. and its wholly owned Israeli subsidiary, Vyyo Ltd. All significant intercompany transactions and balances have been eliminated in consolidation. Revenue Recognition Net revenues include product revenues and in 1999 also include $480,000 of technology development revenues. Product revenues are derived primarily from sales of hubs and modems to telecommunications service providers and to system integrators. Product revenues are generally recorded when products are shipped, provided there are no customer acceptance requirements and the Company has no additional performance obligations. The Company accrues for estimated sales returns and exchanges and product warranty and liability costs upon recognition of product revenues. Technology development revenues are related to a best efforts arrangement with a customer. Due to technology risk factors, the costs of the technology development efforts are expensed when incurred and the revenues are recognized when the applicable customer milestones are met, including deliverables, but not in excess of the estimated amount that would be recognized using the percentage-of completion method. We expect to complete this arrangement in fiscal year 2000. Deferred revenues represent amounts received from customers for products subject to return or exchange and payments on technology development contracts not yet recognized as revenue. Risk Factors and Concentrations The Company is subject to various risks similar to other companies in a comparable stage of growth, including dependence on key individuals, competition from substitute products and larger companies, the need to obtain additional financing, and the continued successful development and marketing of its products. The Company used over $17 million in operating activities in 1997, 1998 and 1999. The Company will require additional financing to continue its operations and execute its business plan. The Company believes adequate additional debt or equity financing is available to fund planned operations through fiscal 2000. Financial instruments that subject the Company to credit risk consist primarily of uninsured cash and cash equivalents, most of which is held at high-quality financial institutions in the United States and trade receivables. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. The Company provides reserves for estimated credit losses. Provisions for bad debts in 1997, 1998 and 1999 were $0, $11,000 and $198,000, respectively. Write-offs of uncollectible accounts in 1999 was $209,000 and none in 1997 and 1998. F-7 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Sales to one customer represented 12%, 31% and 20% of total revenues for the years ended December 31, 1997, 1998 and 1999. Sales to two other customers represented 11% and 27% of total revenues for the year ended December 31, 1997. Sales to another customer represented 15% and 13% of total revenues for the years ended 1998 and 1999. Sales to two other customers represented 14% and 12%, respectively, of total revenues for the year ended December 31, 1999. Sales to one other customer represented 23% of revenues for the year ended December 31, 1998. In August 1999, ADC Telecommunications, Inc. ("ADC"), one of the Company's major customers made an approximately 10% equity investment in the Company. Revenues from ADC for the period from August 1999 through fiscal year end 1999 amounted to $654,000. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. Research and Development Research and development costs are expensed as incurred and consist primarily of personnel, facilities, equipment and supplies for our research and development activities. Property and Equipment Property and equipment are recorded at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the assets (generally from three to five years), or the life of the lease, whichever is shorter. Foreign Currency Transactions The U.S. dollar is the functional currency for the Company's foreign subsidiary operations. Substantially all of the Company's foreign subsidiary's sales are made in U.S. dollars. In addition, a substantial portion of the foreign subsidiary's costs are incurred in U.S. dollars. Since the U.S. dollar is the primary currency in the economic environment in which the foreign subsidiary operates, and, accordingly, monetary accounts maintained in currencies other than the U.S. dollar (principally cash and liabilities) are remeasured using the foreign exchange rate at the balance sheet date. Operational accounts and nonmonetary balance sheet accounts are measured and recorded at the rate in effect at the date of the transaction. The effects of foreign currency remeasurement are reported in current operations and have not been material to date. Cash Equivalents The Company considers all highly liquid investments with maturity of three months or less, at the date of purchase, to be cash equivalents. Net Loss Per Share Basic and diluted net loss per share are presented in accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Pursuant to the Securities and Exchange Commission Staff Accounting Bulletin No. 98, common shares and convertible preferred shares issued or granted for nominal consideration prior to the anticipated effective date of the Company's initial public offering (the "Offering", see F-8 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Note 12) must be included in the calculation of basic and diluted net loss per share as if they had been outstanding for all periods presented. To date, the Company has not had any issuances or grants for nominal consideration. Pro forma basic and diluted net loss per share have been computed using the weighted-average number of common shares outstanding during the period. Pro forma basic and diluted pro forma net loss per share, as presented in the statements of operations, have been computed as described above and also give effect to the conversion of all preferred shares that will convert automatically upon completion of the Offering (using the as-if converted method) from original date of issuance. Share and Per Share Data On January 3, 2000 and March 14, 2000, the Company effected a 1-for-5 reverse stock split and a 3-for-2 stock split of its common stock, respectively. Common share, per common share data, and the preferred stock conversion rates retroactively reflect the stock splits. As a result of the stock split, the preferred stock is convertible to common stock at the following ratios: Series A at 1 for 0.6, Series B at 1 for 0.3, and Series C at 1 for 0.3. Unaudited Pro forma Stockholders' Equity All of the preferred shares will automatically be converted into common shares upon completion of the Offering (see Note 8). The preferred stock is convertible to common stock at the following split-adjusted ratios: Series A at 1 for 0.6, Series B at 1 for 0.3, and Series C at 1 for 0.3. Unaudited pro forma stockholders' equity at December 31, 1999, as adjusted for the assumed conversion of such shares, is disclosed on the balance sheet. Accounting for Stock-Based Compensation The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under the Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, when the exercise price of the Company's employee stock or options equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. During 1999, in connection with the grant of certain stock options and the issuance of certain shares, the Company recorded deferred compensation expense representing the difference between the option exercise price or the share purchase price and the deemed fair value of the Company's common stock on the date of grant. The deferred compensation costs are being amortized based on the graded vesting method over the vesting period of the options. New Accounting Pronouncements In June 1998, the Financial Accounting Standard Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133) which establishes accounting and reporting standard for derivatives instruments and hedging activities. The statement requires recognition of all derivatives at fair value in the financial statements. FASB Statement No. 137 "Accounting for Derivative Instruments and Hedging Activities Deferral of the Effective Date of FASB Statement No. 133" an amendment of FASB Statement No. 133, defers implementation of SFAS No. 133 until fiscal years beginning after June 15, 2000. The Company believes that, upon implementation, the standard will not have a significant effect on its financial condition or results of operations. F-9 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 2. INVENTORY Inventory is stated at the lower of weighted-average actual cost or market. Inventory is comprised of the following:
December 31, ------------- 1998 1999 ------ ------ (In thousands) Raw materials................................................. $ 516 $ 631 Work in process............................................... 774 351 Finished goods................................................ 354 150 ------ ------ $1,644 $1,132 ====== ======
3. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
December 31, ---------------- 1998 1999 ------- ------- (In thousands) Machinery and equipment.................................... $ 939 $ 1,101 Computers.................................................. 729 1,084 Furniture and fixtures..................................... 240 259 Vehicles and other......................................... 156 91 ------- ------- 2,064 2,535 Accumulated depreciation and amortization.................. (1,054) (1,440) ------- ------- Property and equipment, net................................ $ 1,010 $ 1,095 ======= ======= Property and equipment under lease: Cost..................................................... $ 524 502 Accumulated depreciation and amortization................ (370) (418) ------- ------- Property and equipment under lease (net):.................. $ 154 $ 84 ======= =======
4. ACCRUED LIABILITIES Accrued liabilities consist of the following:
December 31, ------------- 1998 1999 ------ ------ (In thousands) Compensation and benefits..................................... $ 749 $1,192 Warranty...................................................... 250 475 Withholding tax............................................... 78 370 Other......................................................... 1,236 1,116 ------ ------ $2,313 $3,153 ====== ======
5. BANK LINE OF CREDIT The Company has a line of credit arrangement with a bank for an aggregate amount of $2,500,000. The loans under the line of credit bear interest at a rate of LIBOR plus 1.5% (7.25% at December 31, 1999). Borrowings and bank guarantees under the line of credit amounted to $2,280,000 and $220,000, respectively, at December 31, 1999. F-10 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) As of December 31, 1999, all assets of the Company's Israeli subsidiary are subject to fixed and floating liens pursuant to certain loan agreements. Also, the Company's property and equipment are subject to floating liens in connection with investment grants received from the Israeli government and the borrowings under the line of credit. 6. NOTES PAYABLE TO STOCKHOLDERS Notes payable to stockholders were issued in 1997 through 1999. The notes bore interest at rates varying from 8% to 9% and, in accordance with their amended terms were due in various dates through 1999. The Convertible Notes Payable and related accrued interest in the aggregate amount of $10.1 million were converted in accordance with their amended terms into 1,517,741 and 11,128,254 shares of the Company's common stock in 1998 and 1999, respectively. Financing conversion charge recorded in 1999, represents the aggregate differences between the amended notes payable conversion price per share or the related amended warrants exercise price and the deemed fair market value of the common stock at the date of the amendment. 7. COMMITMENTS AND CONTINGENCIES Purchase Commitments From time to time, the Company enters into short term supply agreements with its vendors. Pursuant to these agreements, the Company may be subject to penalties and charges for quantities not purchased by agreed-upon dates. Operating Leases The Company leases its operating facility in Israel under a noncancelable operating lease that expires in 2003. As of December 31, 1999, future minimum lease payments under operating leases were $422,000, $392,000, $370,000 and $370,000 for 2000, 2001, 2002 and 2003 respectively. The Company's headquarters facility in California is leased month-to-month from a company under common control of a major stockholder. Rent and related payments to this company amounted to $44,000 and $343,000 in 1998 and 1999, respectively. The gross rental payments under all operating leases were $251,000, $381,000 and $494,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Rental expense, net of reimbursements from subleases, was $33,000, $127,000 and $434,000 for the years ended December 31, 1997, 1998 and 1999, respectively. Aggregate future minimum rentals to be received under noncancelable subleases are $86,000 as of December 31, 1999. Accrued Severance Liabilities The Company's liability for severance pay pursuant to Israeli law is covered by deposits with financial institutions and by accrual. The accrued severance pay liability included in accrued compensation and benefits and the amount funded included in other current assets is as follows:
December 31, ------------ 1998 1999 ----- ----- (in thousands) Accrued severance pay.......................................... $ 330 $ 348 Less amount funded............................................. (241) (202) ----- ----- Unfunded portion, net accrued severance pay.................... $ 89 $ 146 ===== =====
F-11 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Customer Claim In 1997, a customer filed a claim against the Company in the amount of approximately $300,000 alleging damages resulting from certain products being delivered which did not meet product specifications. The Company no longer sells or supports these products. The Company believes it has meritorious defenses against these allegations and it plans to vigorously defend against them. Patent Matter In early 1999, the Company received a written notice from Hybrid Networks, Inc. ("Hybrid"), a competitor, in which Hybrid claimed to have patent rights in certain technology and requested that the Company review its products in light of six of Hybrid's issued patents. The Company, with the advice of counsel, believes the patents are invalid or are not infringed by the Company's products. However, Hybrid may pursue litigation with respect to these or other claims. The results of any litigation are inherently uncertain. Any successful infringement claim or litigation against the Company could have a significant adverse impact on operating results and financial condition. Research Grants Prior to 1997, the Company participated in the following research and development incentive programs: a. The Office of the Chief Scientist in the Israeli Ministry of Industry and Trade (the "Chief Scientist) The Company has obtained grants from the Chief Scientist totaling approximately $2 million. These grants were received through 1996. The terms of the grants from the Chief Scientist prohibit the transfer of technology developed pursuant to the terms of these grants to any person, without prior written consent of the Chief Scientist. These grants are repayable to the Chief Scientist generally at the rate of 3% of the sales of the products developed out of the projects funded, up to an amount equal to 100% of the grant received. b. Binational Industrial Research and Development Foundation (the "BIRD Foundation") The Company has participated in programs sponsored by the BIRD Foundation, which funds joint US-Israeli teams in the development of technological products. The Company received grants totaling approximately $1.7 million from the BIRD Foundation for various projects. Grants received from the BIRD Foundation are paid back at the rate of 2.5% to 5% of revenues shown from the projects funded, up to a maximum amount equal to 150% of the grants received. As of December 31, 1999, the Company has repaid or provided for the repayment of grants amounting to $651,000. F-12 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) 8. STOCKHOLDERS' EQUITY Preferred Stock As of December 31, 1999, the board of directors had the authority, without any further vote or action by the stockholders, to provide for the issuance of up to 100,000,000 shares of preferred stock from time to time in one or more series with such designations, rights, preferences, and limitations as the board of directors may determine, including the consideration received therefore, the number of shares comprising such series, dividend rights, redemption provisions, liquidation preferences, redemption fund provisions, conversion rights, and voting rights.
Common Shares Shares Issued and Designated for Shares Authorized Outstanding Conversion ---------------------- -------------------- ------------------- 1998 1999 1998 1999 1998 1999 ---------- ----------- --------- ---------- --------- --------- Series A....... 6,000,000 6,000,000 1,584,241 1,584,241 950,546 950,546 Series B....... 15,000,000 40,000,000 629,447 629,447 188,833 188,833 Series C....... -- 40,000,000 -- 9,350,581 -- 2,805,174 Undesignated... 14,000,000 14,000,000 -- -- -- -- ---------- ----------- --------- ---------- --------- --------- 35,000,000 100,000,000 2,213,688 11,564,269 1,139,379 3,944,553 ========== =========== ========= ========== ========= =========
The holders of Series A, B, and C preferred stock are entitled to receive, when and if declared by the board of directors, noncumulative dividends at the annual rate of $0.0432, $0.08 and $0.0216 per share, respectively, and in that order of preference, in preference to payment of dividends on common stock. No dividends have been declared to date. Each share of Series A, B, and C preferred stock is convertible, at the holders' option or automatically as set forth below, into 0.6 share, 0.3 share and 0.3 share, respectively, of common stock (as adjusted from time to time for stock splits, stock dividends, and like events). Each share of Series A, B and C preferred stock will automatically be converted into shares of common stock upon either (i) the closing of an underwritten public offering of the Company's common stock resulting in aggregate gross proceeds in excess of $12,500,000 with a common stock per share purchase price of at least $3.33, or (ii) in a business combination in which the common stock equivalent value of the Company's stock as a result of such event is $3.33 or more per share (as adjusted from time to time for stock splits, stock dividends, and like events). The holders of preferred stock are entitled to one vote for each share of common stock into which such preferred shares can be converted. In the event of any liquidation, dissolution, or winding up of the Company ("Liquidation Event"), the holders of Series B preferred stock are entitled to receive, in preference to holders of Series A preferred stock, Series C preferred stock and common stock, the amount of $1.50 per share plus any declared but unpaid dividends. Before the payment of any portion of the Series A liquidation preference price, the holders of Series C preferred stock are entitled to receive $0.54 per share plus cumulative dividends of four percent per year in excess of dividends actually paid or (ii) declared and unpaid dividends. Before payment of any portion of the Series A liquidation preference price and after payment of the Series B liquidation preference price and the Series C liquidation preference price, in the event of a Liquidation Event, the holders of Series A and Series B preferred stock and common stock are entitled to receive an amount of $0.40 per share ("Series B to Common Stock Liquidation Price"). After payment of the Series B to Common Stock Liquidation Price, the holders of Series A preferred stock are entitled to receive, in preference to holders of common stock, the amount of $4.60 per share plus any declared but unpaid dividends. Warrants From 1997 through 1998, the Company issued warrants to purchase an aggregate of 1,746,447 shares of common stock to investors in connection with equity and convertible note financing transactions. As of F-13 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) December 31, 1999, 187,785 warrants remained outstanding with an average exercise price of $1.26 per share. These warrants are exercisable through March 2002. Common Stock As of December 31, 1999, the Company has reserved approximately 4,133,000 shares of common stock for issuance on the conversion of the Series A, B and C convertible preferred stock and the warrants and 5,492,000 shares of common stock for issuance of options granted under the stock-based compensation plan. Stock Option Plans The Company has the following stock option plans: (i) 1996 Equity Incentive Plan, (ii) 1999 Employee and Consultant Equity Incentive Plan and (iii) 2000 Employee and Consultant Equity Incentive ("the Plans"). The plans as amended provide for the grant to employees of incentive stock options ("ISOs"), the grant to employees, directors, and consultants of nonstatutory stock options, and the grant of stock options which comply with the applicable requirements of Israeli law to the extent granted to persons who may be subject to income tax in Israel. The Plans also provide for the awards of restricted stock and stock bonuses. ISOs granted under the Plans have an exercise price equal to the fair value as determined by the board of directors of the common stock on the date of grant. Nonstatutory stock options may not be granted with an exercise price less than 85% of the fair value as determined by the board of directors of the common stock on the date of grant. The period within which the option may be exercised is determined at the time of grant, provided that no term is longer than ten years. Options generally vest over a four-year period. In October 1998, the Company adopted an option exchange program to allow employees to exchange their options for new options with an exercise price of $0.33. The program resulted in a total of approximately 295,800 options with exercise price ranging from $1.00 to $2.10 being exchanged for the new options. The terms of the repriced options remain the same. A summary of stock option activity, and related information, under the Plans for the years ended December 31, 1997, 1998 and 1999 is as follows (in thousands, except per share data):
Options Outstanding Options Exercisable -------------------------- ------------------------ Weighted Weighted Weighted Shares Number Average Average Number Average Available of Exercise Fair of Exercise for Grant Shares Price Value Shares Price --------- ------ -------- -------- ------ -------- Balance at December 31, 1996..................... 285 44 $1.00 Granted................. (280) 280 $1.63 ------ ------ Balance at December 31, 1997..................... 5 324 $1.57 0.35 ------ ------ ----- Authorized.............. 149 -- -- Granted................. (512) 512 $0.33 Canceled................ 299 (299) $1.43 ------ ------ Balance at December 31, 1998..................... (59) 537 $0.53 0.05 ------ ------ ----- Authorized.............. 6,451 -- -- Granted................. (4,727) 4,727 $0.70 Exercised............... -- (1,437) $0.60 Canceled................ 153 (153) $1.03 ------ ------ Balance at December 31, 1999..................... 1,818 3,674 $0.69 0.09 727 $0.55 ====== ====== ===== ==== === =====
F-14 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The weighted-average remaining contractual life of those options is 5.21 years. Pro forma information regarding net loss is required by SFAS 123 and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS 123. The fair value for the stock options was estimated at the date of grant using a minimum value pricing model and a graded vesting approach with the following weighted-average assumptions for 1997, 1998 and 1999: risk-free interest rate of 6.5%, 6.5% and 6.0%; dividend yields of zero; and a weighted-average expected life of the option of approximately 3.6, 2.79 and 2.46 years. Option valuation models require the input of highly subjective assumptions. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma SFAS 123 disclosures, the estimated fair value of the options is amortized to expense over the option vesting periods. The Company pro forma information follows:
1997 1998 1999 ------- ------- -------- Net loss As reported................................... $(5,345) $(7,671) $(43,601) ======= ======= ======== Pro forma..................................... $(5,369) $(7,731) $(43,691) ======= ======= ======== Basic and diluted loss per share As reported................................... $ (5.91) $ (5.43) $ (5.40) ======= ======= ======== Pro forma..................................... $ (5.93) $ (5.48) $ (5.41) ======= ======= ========
9. NET LOSS PER SHARE The following table presents the calculation of basic and diluted and pro forma basic and diluted net loss per share (in thousands, except per share data):
Year ended December 31, 1999 ------------ Net loss.......................................................... $(43,601) ======== Shares used in computing basic and diluted net loss per share..... 8,078 ======== Basic and diluted net loss per share.............................. $ (5.40) ======== Pro forma Shares used above............................................... 8,078 Pro forma adjustment to reflect weighted effect of assumed conversion of convertible preferred stock (unaudited).......... 2,059 -------- Shares used in computing pro forma basic and diluted net loss per share (unaudited).......................................... 10,137 ======== Pro forma basic and diluted net loss per share (unaudited)...... $ (4.30) ========
All preferred stock, outstanding stock options, and warrants have been excluded from the calculation of the diluted loss per common share because all such securities are antidilutive for all periods presented. The total F-15 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) number of common shares related to preferred stock, outstanding options and warrants excluded from the calculations of diluted net loss per share were 2,381,466, 2,776,391, and 7,806,387 for the years ended December 31, 1997, 1998 and 1999. 10. INCOME TAXES U.S. Income Taxes As of December 31, 1999, the Company has U.S. federal and state net operating loss carryforwards of approximately $6 million. The net operating loss carryforwards will expire beginning in 2004 through 2019, if not utilized. The utilization of net operating loss carryforwards may be subject to substantial annual limitations if there has been a significant "change in ownership." Such a "change in ownership," as described in Section 382 of the Internal Revenue Code, may substantially limit the Company's utilization of the net operating loss carryforwards. Israeli Income Taxes The Company's Israeli subsidiary has been granted "Approved Enterprise" status for several investment programs, of which two are currently in effect. Benefits pursuant to such investment plans include grants on a portion of the costs of fixed assets, reduced tax rates, and, in certain cases, a full tax exemption for certain periods. The entitlement to these benefits is conditional upon the Company's fulfilling the conditions stipulated by the Investment Law, regulations published thereunder, and the instruments of approval for the specific investments in Approved Enterprises. In the event of a failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, with the addition of inflation adjustment differences and interest. The 1988 Investment Plan will expire in 2001 and no benefits are expected to be realized under this Plan. The 1996 Investment Plan entitles the Israeli subsidiary to a full tax exemption ending 6 years after the year in which it utilizes its remaining operating loss carryforwards and a reduced corporate tax rate of 10% to 15% for the remaining period of the Plan's benefits, which will expire in 2009. As of December 31, 1999, the Company has Israeli net operating loss carryforwards of approximately $19 million. The Israeli loss carryforwards have no expiration date and are expected to offset certain future Israeli subsidiary earnings during the tax exempt period. Management intends to re-evaluate its tax holiday status and related tax asset at each balance sheet date. Pretax losses from foreign (Israeli) operations was approximately $5 million and $6 million for the years ended December 31, 1998 and 1999, respectively. Deferred Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets are as follows:
December 31, ---------------- 1998 1999 ------- ------- (In thousands) Deferred tax assets: Net operating loss carryforwards......................... $ 2,000 $ 2,400 Valuation allowance........................................ (2,000) (2,400) ------- ------- Net deferred tax assets.................................... $ -- $ -- ======= =======
The valuation allowance increased by $400,000 for the year ended December 31, 1999. F-16 VYYO INC. NOTES TO FINANCIAL STATEMENTS--(Continued) FASB Statement No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. Based upon the weight of available evidence, which includes our historical operating performance and the reported cumulative net losses in all prior years, we have provided a full valuation allowance against our net deferred tax assets as the future realization of the tax benefit is not sufficiently assured. 11. SEGMENTS AND GEOGRAPHIC INFORMATION Vyyo operates in one industry segment, the design and marketing of broadband wireless access systems. The following is a summary of operations within geographic areas based on the location of the entity purchasing the products:
Years ended December 31, -------------------- 1997 1998 1999 ------ ------ ------ Revenues from sales to unaffiliated customers: North America........................................ $ 295 $1,102 $2,587 Europe............................................... 560 533 919 Asia................................................. 613 731 552 Rest of the world.................................... 69 83 172 ------ ------ ------ $1,537 $2,449 $4,230 ====== ====== ====== Property and Equipment, Net Israel............................................... $ 914 $ 992 United States........................................ 96 103 ------ ------ $1,010 $1,095 ====== ======
12. SUBSEQUENT EVENTS (Unaudited) On February 2, 2000, the board of directors authorized the Company to file a registration statement with the U.S. Securities and Exchange Commission for an initial public offering of its common shares. Also on February 2, 2000, the board of directors approved the following: (1) an amendment to the 2000 option plan to increase the number of shares reserved for issuance under the plan by 3,450,000 shares; (2) an automatic annual increase to the shares reserved under the plan equal to the lesser of 1,350,000 shares or 5% of the outstanding shares; (3) the adoption of the 2000 Employee Stock Purchase Plan, under which 750,000 shares have been reserved. On February 2, 2000, the note from shareholders in the amount of $920,000 has been repaid. F-17 VYYO INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, June 30, 1999 2000 ------------ ---------- (Note 1) (Unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents............................. $ 5,036 $68,550 Short-term investments................................ -- 22,990 Accounts receivable, net.............................. 583 1,702 Inventory............................................. 1,132 1,576 Other current assets.................................. 517 1,505 ------- ------- Total current assets................................ 7,268 96,323 Property and equipment, net........................... 1,095 1,681 ------- ------- $ 8,363 $98,004 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt obligations........................... $ 2,371 $ -- Accounts payable...................................... 895 1,993 Accrued liabilities................................... 3,153 7,302 Deferred income....................................... 639 -- ------- ------- Total current liabilities........................... 7,058 9,295 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY Convertible preferred stock, $0.001 per value at amounts paid in; 100,000,000 and 5,000,000 shares authorized at December 31, 1999 and June 30, 2000; 11,564,269 shares issued and outstanding at December 31, 1999 and no shares outstanding at June 30, 2000.. 15,369 -- Common stock, $0.0001 par value at amounts paid in; 200,000,000 shares authorized at December 31, 1999 and June 30, 2000; 23,002,733 and 35,788,682 shares issued and outstanding at December 31, 1999 and June 30, 2000............................................. 66,412 187,011 Notes receivable from stockholders.................... (920) (75) Deferred stock compensation........................... (13,400) (12,700) Other comprehensive income............................ -- 17 Accumulated deficit................................... (66,156) (85,544) ------- ------- Total stockholders' equity.......................... 1,305 88,709 ------- ------- $ 8,363 $98,004 ======= =======
- -------- Note 1: The balance sheet at December 31, 1999 has been derived from audited financial statements at that date. See accompanying notes. F-18 VYYO INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (Unaudited)
Six Months Ended ----------------- June 30, June 30, 1999 2000 ------- -------- Net revenues................................................ $ 1,966 $ 4,856 Cost of revenues............................................ 2,011 3,490 ------- -------- Gross profit (loss)......................................... (45) 1,366 OPERATING EXPENSES Research and development.................................... 1,653 4,632 Sales and marketing......................................... 754 3,543 General and administrative.................................. 844 3,819 Amortization of deferred compensation....................... 400 9,937 ------- -------- 3,651 21,931 ------- -------- Operating loss.............................................. (3,696) (20,565) Interest and other income (expense), net.................... (393) 1,177 ------- -------- Net loss.................................................... $(4,089) $(19,388) ======= ======== Net loss per share: Basic and diluted......................................... $ (0.97) $ (0.68) ======= ======== Shares used in per share computation: Basic and diluted......................................... 4,199 28,570 ======= ========
See accompanying notes. F-19 VYYO INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
Six Months Ended June 30, ----------------- 1999 2000 ------- -------- OPERATING ACTIVITIES: Net loss for the period.................................... $(4,089) $(19,388) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................ 220 586 Amortization of deferred stock compensation.............. 400 9,937 Changes in operating assets and liabilities: Accounts receivable.................................... (373) (1,119) Inventory.............................................. 691 (444) Other assets........................................... 192 (988) Accounts payable....................................... (104) 1,098 Accrued liabilities.................................... 527 4,149 Deferred income........................................ 334 (639) ------- -------- Net cash used in operating activities...................... (2,202) (6,808) ------- -------- INVESTING ACTIVITIES: Purchases of property and equipment........................ (130) (1,180) Purchases of short-term investments........................ -- (22,973) Proceeds from sale of property and equipment............... 8 8 ------- -------- Net cash used in investing activities...................... (122) (24,145) ------- -------- FINANCING ACTIVITIES: Repayment of short-term debt obligations................... (319) (2,371) Proceeds from short-term debt obligations.................. 290 -- Proceeds from loans from stockholder....................... 1,385 -- Proceeds from stockholder note............................. 1,430 1,170 Issuance of common stock for cash.......................... 26 95,668 ------- -------- Net cash provided by financing activities.................. 2,812 94,467 ------- -------- Increase in cash and cash equivalents...................... 488 63,514 Cash and cash equivalents at beginning of period........... 131 5,036 ------- -------- Cash and cash equivalents at end of period................. $ 619 $ 68,550 ======= ======== NONCASH FINANCING ACTIVITIES Conversion of stockholders' note into common stock......... $ 3,515 $ -- ======= ======== Issuance of common stock for note receivable............... $ 3,000 $ 325 ======= ======== Conversion of convertible preferred stock upon initial public offering........................................... $ -- $ 15,369 ======= ========
See accompanying notes. F-20 VYYO INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of Vyyo Inc. ("Vyyo" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 1999, included in this prospectus. Net Revenues Net revenues are comprised of product revenue, and in the six months ended June 30, 2000, also include $480,000 of technology development revenues. Sales to a related party, ADC Telecommunications, Inc., for the six months ended June 30, 2000, amounted to $1,945,000. 2.CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS The Company considers all money market funds and all highly liquid investments with maturity of three months or less, when purchased, to be cash equivalents. Pursuant to SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," the Company's debt securities have been designated as available-for-sale. Available-for-sale securities are carried at fair value, which is determined based upon the quoted market prices of the securities, with unrealized gains and losses reported in accumulated other comprehensive income, a component of shareholders' equity. Realized gains and losses and declines in value judged to be other than temporary on available-for-sale securities are included in interest income. The Company views its available-for-sale portfolio as available for use in its current operations. Accordingly, the Company has classified all investments as short-term, even though the stated maturity date may be one year or more from beyond the current balance sheet date. Interest and dividends on securities classified as available-for-sale are included in interest income. The fair value and the amortized cost of available-for-sale securities at June 30, 2000 are presented in the following tables (in thousands):
June 30, 2000 ----------------------------------------- Estimated Unrealized Unrealized Fair Amortized Holding Holding Market Cost Gains Losses Value --------- ---------- ---------- --------- Corporate debt securities............. $60,808 $10 $(13) $60,805 United States obligations............. 16,551 22 (2) 16,571 Money market.......................... 11,039 -- -- 11,039 ------- --- ---- ------- $88,398 $32 $(15) $88,415 ======= === ==== ======= Reported as: Cash equivalents...................... $65,428 $ 1 $ (4) $65,425 Short-term investments................ 22,970 31 (11) 22,990 ------- --- ---- ------- $88,398 $32 $(15) $88,415 ======= === ==== =======
F-21 VYYO INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) The contractual maturities of available for sales debt securities classified as short term investments at June 30, 2000 are as follows (in thousands):
Amortized Cost Fair Value --------- ---------- Due in one year or less, including money market funds............................................... $86,850 $86,858 Due after one year through two years................. 1,548 1,557 ------- ------- $88,398 $88,415 ======= =======
3.INVENTORY Inventory is comprised of the following (in thousands):
December 31, June 30, 1999 2000 ------------ -------- Raw material........................................... $ 631 $ 695 Work in process........................................ 351 576 Finished goods......................................... 150 305 ------ ------ $1,132 $1,576 ====== ======
4.ACCRUED LIABILITIES Accrued liabilities consist of the following (in thousands):
December 31, June 30, 1999 2000 ------------ -------- Compensation and benefits.............................. $1,192 $3,172 Suppliers and subcontractors........................... 111 696 Warranty............................................... 475 686 Withholding tax........................................ 370 494 Other.................................................. 1,005 2,254 ------ ------ $3,153 $7,302 ====== ======
5.NEW ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101--Revenue Recognition in Financial Statements ("SAB 101"), which among other things clarifies certain conditions to be met in order to recognize revenue. The Company is currently in the process of assessing the impact of SAB 101 and expects to complete its assessment prior to December 31, 2000. 6.STOCKHOLDERS' EQUITY Initial Public Offering On April 10, 2000, Vyyo sold of 6,750,000 shares of its common stock in an underwritten public offering at a per share price of $13.50 and on May 2, 2000 sold an additional 1,012,500 shares through the exercise of the underwriters' over allotment options for net proceeds of approximately $94.9 million after deducting underwriting discounts and commission and issuance costs. Upon the closing of the initial public offering, all of the outstanding Series A, Series B and Series C Preferred Stock were converted into common stock. F-22 VYYO INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) Stock Option Plans A summary of stock activity, and related information, under the plans for the six-month period ended June 30, 2000 is as follows (in thousands, except per share data):
Options Options Outstanding Exercisable ------------------------------- ---------------- Weighted- Weighted- Shares Number Average Number Average Available for Of Exercise Of Exercise Grant Shares Price Shares Price ------------- ------ --------- ------ --------- Balance at December 31, 1999................... 1,818 3,674 $0.69 Authorized.............. 3,450 -- -- Granted................. (2,130) 2,130 $7.31 Exercised............... -- (1,038) $0.99 Cancelled............... 63 (63) $4.15 ------ ------ ----- Balance at June 30, 2000................... 3,201 4,703 $3.57 1,110 $1.99 ====== ====== ===== ===== =====
7.CONTINGENCY--PATENT MATTER In early 1999, the Company received a written notice from Hybrid Networks, Inc. ("Hybrid"), a competitor, in which Hybrid claimed to have patent rights in certain technology and requested that the Company review its products in light of six of Hybrid's issued patents. The Company, with the advice of counsel, believes the patents are invalid or are not infringed by the Company's products. On April 11, 2000, the Company received an additional letter from Hybrid, requesting that the Company review its products in connection with various patents of Hybrid, including the previously identified patents. The Company is evaluating the additional patents with the advice of counsel. Hybrid may pursue litigation with respect to these or other claims. The results of any litigation are inherently uncertain. Any successful infringement claim or litigation against the Company could have a significant adverse impact on the Company's operating results and financial condition. F-23 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 4,000,000 Shares [LOGO OF VYYO INC.] ---------------- Prospectus , 2000 ---------------- Banc of America Securities LLC CIBC World Markets Dain Rauscher Wessels Needham & Company, Inc. WR Hambrecht + Co - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution. The following table indicates the expenses to be incurred in connection with the offering described in this Registration Statement, all of which will be paid by Vyyo. All amounts are estimates, other than the registration fee, the NASD filing fee, and the Nasdaq National Market listing fee. SEC Registration fee................................................ $ 38,254 NASD Filing fee..................................................... 14,990 Accounting fees and expenses........................................ 100,000 Legal fees and expenses............................................. 350,000 Printing and engraving expenses..................................... 125,000 Transfer agent fees and expenses.................................... 25,000 Blue sky fees and expenses.......................................... 5,000 Miscellaneous fees and expenses..................................... 341,756 ---------- Total............................................................. $1,000,000 ==========
Item 14. Indemnification of Directors and Officers. Section 102 of the Delaware General Corporation Law, or the DGCL, as amended, allows a corporation to eliminate the personal liability of directors of a corporation to the corporation or its stockholders for monetary damages for a breach of fiduciary duty as a director, except where the director breached his duty of loyalty, failed to act in good faith, engaged in intentional misconduct or knowingly violated a law, authorized the payment of a dividend or approved a stock repurchase in violation of Delaware corporate law or obtained an improper personal benefit. Section 145 of the DGCL provides, among other things, that we may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right of Vyyo) by reason of the fact that the person is or was a director, officer, agent or employee of Vyyo or is or was serving at our request as a director, officer, agent, or employee of another corporation, partnership, joint venture, trust or other enterprise, against expenses, including attorneys' ties, judgment, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with the action, suit or proceeding. The power to indemnify applies (a) if the person is successful on the merits or otherwise in defense of any action, suit or proceeding, or (b) if the person acted in good faith and in a manner he reasonably believed to be in the best interest, or not opposed to the best interest, of Vyyo, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The power to indemnify applies to actions brought by or in the right of Vyyo as well, but only to the extent of defense expenses (including attorneys' fees but excluding amounts paid in settlement) actually and reasonably incurred and not to any satisfaction of judgment or settlement of the claim itself, and with the further limitation that in these actions no indemnification shall be made in the event of any adjudication of negligence or misconduct in the performance of his duties to Vyyo, unless the court believes that in light of all the circumstances indemnification should apply. Section 174 of the DGCL provides, among other things, that a director, who willfully or negligently approves of an unlawful payment of dividends or an unlawful stock purchase or redemption, may be held liable for these actions. A director who was either absent when the unlawful actions were approved or dissented at the time, may avoid liability by causing his or her dissent to these actions to be entered in the books containing the II-1 minutes of the meetings of the board of directors at the time the action occurred or immediately after the absent director receives notice of the unlawful acts. Our certificate of incorporation includes a provision that eliminates the personal liability of its directors for monetary damages for breach of fiduciary duty as a director, except for liability: . for any breach of the director's duty of loyalty to Vyyo or its stockholders; . for acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; . under the section 174 of the DGCL regarding unlawful dividends and stock purchases; or . for any transaction from which the director derived an improper personal benefit. These provisions are permitted under Delaware law. Our bylaws provide that: . we must indemnify our directors and officers to the fullest extent permitted by Delaware law; . we may indemnify our other employees and agents to the same extent that we indemnified our officers and directors, unless otherwise determined by our board of directors; and . we must advance expenses, as incurred, to our directors and executive officers in connection with a legal proceeding to the fullest extent permitted by Delaware Law. The indemnification provisions contained in our certificate of incorporation and bylaws are not exclusive of any other rights to which a person may be entitled by law, agreement, vote of stockholders or disinterested directors or otherwise. In addition, we maintain insurance on behalf of our directors and executive officers insuring them against any liability asserted against them in their capacities as directors or officers or arising out of this status. We intend to enter into agreements to indemnify our directors and executive officers, in addition to indemnification provided for in our bylaws. These agreements, among other things, will provide for indemnification of our directors and executive officers for expenses, judgments, fines and settlement amounts incurred by any such person in any action or proceeding arising out of the person's services as a director or executive officer or at our request. We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. Item 15. Recent Sales of Unregistered Securities. Since February 1, 1997, the Registrant has sold and issued the following unregistered securities. The share numbers and per share prices below reflect (1) the two-for-one stock split of the outstanding common stock effected on February 13, 1998, (2) the one-for-five reverse stock split of the outstanding common stock effected on January 3, 2000, and (3) the three-for-two stock split of the outstanding common stock effected on March 14, 2000: (1) Between February 1, 1997 and October 26, 1998, the Registrant granted stock options under the Registrant's 1996 Equity Incentive Plan to a total of 45 officers, employees, directors and consultants of the Registrant, to purchase an aggregate of 282,216 shares of common stock, at a weighted average exercise price of $1.64 per share. On October 27, 1998, the Registrant amended these options to have an exercise price of $0.33 per share. Since October 27, 1998, the Registrant granted stock options under the Registrant's 1996 Equity Incentive Plan to a total of 38 officers, employees, directors and consultants of the Registrant, to purchase an aggregate of 218,209 shares of common stock, at a weighted average exercise price of $0.33 per share. II-2 (2) Since February 1, 1997, the Registrant has granted stock options under the Registrant's 1999 Employee and Consultant Equity Incentive Plan to a total of 26 officers, employees, directors and consultants of the Registrant, to purchase an aggregate of 2,079,000 shares of common stock, at a weighted average exercise price of $0.50 per share. (3) Since February 1, 1997, the Registrant has granted stock options under the Registrant's 2000 Employee and Consultant Equity Incentive Plan to a total of 118 officers, employees, directors and consultants of the Registrant, to purchase an aggregate of 3,546,899 shares of common stock, at a weighted average exercise price of $1.02 per share. (4) At various times from March 31, 1997 through July 17, 1997, the Registrant sold and issued 85,395 shares of common stock at $1.63 per share for an aggregate cash consideration of $139,478.50, and 142,325 shares of Series A Convertible Preferred Stock at $8.79 per share for an aggregate cash consideration of $1,251,036.75, to the PhaseCom Investor Group Limited Partnership No. 2, the Davidi and Shamaya Gilo Trust, the Pezzola-Foster Trust and Shaul Berger. (5) At various times from April 1, 1997 through August 28, 1997, the Registrant sold and issued 35,904 shares of common stock at $1.63 per share for an aggregate cash consideration of $58,645.16, and 59,842 shares of Series A Convertible Preferred Stock at $8.79 per share for an aggregate cash consideration of $526,011.18, to the following persons: Galran Properties (1993) Ltd., Tom Holdings and Properties (1993) Ltd., Eichut Capital Markets & Investments Ltd., Itzhak and Esther Hoffi, Chim-Nir Ltd., Harel-Hamishmar Investments Ltd., Reuven and Naomi Ashkenazy, Al-Ben Ltd., Miri Lent, Ilan Selah, Aryeh and Yval Ezyoni, Mordechai Gazit and Avraham Fischer. (6) From April 9, 1997 through April 16, 1997, the Registrant sold and issued warrants to purchase an aggregate of 61,500 shares of common stock (the "1997 Warrants") to the Davidi and Shamaya Gilo Trust and Suzon Financial, S.A. at an exercise price of $1.63 with an aggregate exercise price of $100,450. (7) On June 17, 1997, the Registrant sold and issued 510 shares of common stock and 850 shares of Series A Convertible Preferred Stock to Joseph Gorodnick in exchange for all of his ordinary shares in Vyyo Ltd. (8) From September 30, 1997 through November 10, 1997, the Registrant sold and issued warrants to purchase an aggregate of 367,346 shares of common stock (the "1997 Warrants") to the Gilo Family Partnership, David Fox, Misha Renclair, Eichut Capital Markets and Investments (1993) Ltd., Galran Properties (1993) Ltd. and Tom Holdings and Properties (1993) Ltd. at an exercise price of $7.92 with an aggregate exercise price of $2,908,154.25 (9) On November 18, 1997, the Registrant sold and issued an aggregate of 146 shares of common stock and 242 shares of Series A Convertible Preferred Stock to for Y.Atai Investments Ltd., Galran Properties (1993) Ltd., Tom Holdings and Properties (1993) Ltd. and Eichut Capital Markets and Investments (1993) Ltd. in exchange for all of their ordinary shares in Vyyo Ltd. (10) On December 29, 1997, the Registrant sold and issued 1997 Series A- 2 Promissory Notes (the "Registrant 1997 Series A-2 Notes") in the aggregate principal amount of $278,400, which were convertible into 18,560 shares of Series A Convertible Preferred Stock at a conversion price of $15.00 per share, to the following persons: Maurice Filister 1996 Trust for the benefit of Darlene Stillpass, Maurice Filister 1996 Trust for the benefit of Harvey Filister, Samuel Kaplan/Ralph Strangis Investment Partnership, Alan Zimmerman, David Fox, ARC Investors, Yael Gilo DSP Tel Trust, Adi Gilo DSP Tel Trust, Elad Gilo DSP Tel Trust, M.S.I. Investments Ltd., Robert Melamed, Michael Corwin and Gilo Family Partnership. (11) On December 29, 1997, Vyyo Ltd. sold and issued 1997 Series A-2 Promissory Notes (the "Ltd 1997 Series A-2 Notes" to Chim-Nir Ltd., Eichut Capital Markets and Investments (1993) Ltd., Galran Properties (1993) Ltd., Harel-Hamishar Investments Ltd., Avraham Fischer and Tom Holdings and Properties (1993) Ltd. in the aggregate principal amount of $176,320, which were convertible into II-3 11,754 shares of Registrant's Series A Convertible Preferred Stock at a conversion price of $15.00 per share. (12) On December 22, 1997, the Registrant sold and issued 1997 Series A- 2 Warrants (the "1997 Series A-2 Warrants") to purchase an aggregate of 72,000 shares of Common stock to the purchasers of the 1997 Series A-2 Notes at an exercise price of $9.50 with an aggregate exercise price of $684,000. (13) On February 3, 1998, the Registrant sold and issued 1998 Series A-1 Promissory Notes (the "Registrant 1998 Series A-1 Notes") in the aggregate principal amount of $259,840, which were convertible into 17,322 shares of Series A Convertible Preferred Stock at a conversion price of $15.00 per share, to the following persons: Maurice Filister 1996 Trust for the benefit of Darlene Stillpass, Maurice Filister 1996 Trust for the benefit of Harvey Filister, Samuel Kaplan/Ralph Strangis Investment Partnership, Eli David, Alan Zimmerman, ARC Investors, Yael Gilo DSP Tel Trust, Adi Gilo DSP Tel Trust, Elad Gilo DSP Tel Trust, Robert Melamed, Michael Corwin, Gilo Family Partnership and Neill & Linda Brownstein. (14) On February 3, 1998, Vyyo Ltd. sold and issued 1998 Series A-1 Promissory Notes (the "Ltd 1998 Series A-1 Notes") to Chim-Nir Ltd., Eichut Capital Markets and Investments (1993) Ltd., Galran Properties (1993) Ltd., Harel-Hamishar Investments Ltd., Reshifa Management Holdings, Ltd. and Tom Holdings and Properties (1993) Ltd. in the aggregate principal amount of $157,760, which were convertible into 10,517 shares of Registrant's Series A Convertible Preferred Stock at a conversion price of $15.00 per share. (15) On February 3, 1998, the Registrant sold and issued 1998 Series A-1 Warrants (the "1998 Series A-1 Warrants") to purchase an aggregate of 64,800 shares of Common stock to the purchasers of the 1998 Series A-1 Notes at an exercise price of $9.50 with an aggregate exercise price of $615,600. (16) On February 6, 1998, pursuant to a settlement agreement, the Registrant sold and issued 12,447 shares of common stock and 20,744 of Series A Convertible Preferred Stock to Yotam Financing Technological Ventures Ltd. for an aggregate cash consideration of $20,744. (17) On February 26, 1998, the Registrant sold and issued 1998 Series A- 2 Promissory Notes (the "Registrant 1998 Series A-2 Notes") in the aggregate principal amount of $765,600, which were convertible into 51,040 shares of Series A Convertible Preferred Stock at a conversion price of $15.00 per share, to the following persons: Maurice Filister 1996 Trust for the benefit of Darlene Stillpass, Maurice Filister 1996 Trust for the benefit of Harvey Filister, Samuel Kaplan/Ralph Strangis Investment Partnership, Eli David, Alan Zimmerman, ARC Investors, Yael Gilo DSP Tel Trust, Adi Gilo DSP Tel Trust, Elad Gilo DSP Tel Trust, Michael Corwin, Gilo Family Partnership, Neill & Linda Brownstein, Pezzola-Foster Trust U/T/D 4/3/87, Donald C. Reinke and Dean Witter Reynolds, Custodian for Bruce A. Mann Rollover IRA. (18) On February 26, 1998, Vyyo Ltd sold and issued 1998 Series A-2 Promissory Notes (the "Ltd 1998 Series A-2 Notes") to Chim-Nir Ltd., Eichut Capital Markets and Investments (1993) Ltd., Galran Properties (1993) Ltd., Marel-Hamishar Investments Ltd., Reshifa Management Holdings, Ltd. and Tom Holdings and Properties (1993) Ltd. in the aggregate principal amount of $473,280, which were convertible into 31,552 shares of Registrant's Series A Convertible Preferred Stock at a conversion price of $15.00 per share. (19) On February 26, 1998, the Registrant sold and issued 1998 Series A- 2 Warrants (the "1998 Series A-2 Warrants") to purchase an aggregate of 192,240 shares of Common stock to the purchasers of the 1998 Series A-2 Notes at an exercise price of $9.50 with an aggregate exercise price of $1,826,280. (20) On June 30, 1998, the Registrant sold and issued 1998 Series B-1 Promissory Notes (the "Registrant 1998 Series B-1 Notes") in the aggregate principal amount of $3,679,329.09, to the following persons: Maiss Family Partnership, Alan Zimmerman, Andrew Schonzeit, ARC Investors, Darlene Stillpass, David Fox, David Jaroslawicz, Dean Witter Reynolds, Custodian for Bruce A. Mann Rollover II-4 IRA, Donald C. Reinke, Gilo Family Partnership, Hargrave Houston Holdings Limited, Harvey Filister, Herbert Drower, Hindy Taub, Irwin Zalcberg, M.S.I. Investments Ltd., Maurice Filister, Maurice Filister 1996 Trust for the benefit of Darlene Stillpass, Maurice Filister 1996 Trust for the benefit of Harvey Filister, Michael & Merlyn Corwin, Misha Renclair, Pezzola-Foster Trust, Pezzola & Foster, Trustees, Samuel Kaplan/Ralph Strangis Investment Partnership, Selawi Business S.A., Shaul Berger, Shoham Investments Ltd. and Victor Halpert. These notes were convertible into shares of Common stock at a conversion price equal to $5.00 if the notes convert before September 15, 1998, or after September 15, 1998 the greater of $5.00 or one third of the per share price of Registrant's Common stock resulting from either an initial public offering of its common stock or a merger of Registrant with another entity. (21) On June 30, 1998, Vyyo Ltd. sold and issued 1998 Series B-1 Promissory Notes (the "Ltd 1998 Series B-1 Notes") to Avraham Fischer, Ilan Selah, Aryeh and Yuval Ezyoni, Chim-Nir Ltd. Eichut Capital Markets and Investments (1993) Ltd., Galran Properties (1993) Ltd. and Tom Holdings and Investments (1993) Ltd. in the aggregate principal amount of $1,032,355.20. These notes were convertible into shares of Registrant's common stock at a conversion price equal to $5.00 if the notes convert before September 15, 1998, or after September 15, 1998 the greater of $5.00 or one third of the per share price of Registrant's common stock resulting from either an initial public offering of Registrant's common stock or a merger of Registrant with another entity. (22) On June 30, 1998, the Registrant sold and issued 1998 Series B-1 Warrants (the "1998 Series B-1 Warrants") to the purchasers of the 1998 Series B-1 Notes to purchase the number of shares of common stock equal to the sum of the principal amount of each investor's Registrant 1998 Series B-1 Note or Ltd 1998 Series B-1 Note multiplied by .35 divided by the conversion price of each investors applicable 1998 Series B-1 Note. (23) On September 28, 1998, the Registrant sold and issued 1,798,359 shares of common stock at $0.67 per share to the Bruce Mann IRA, the Maiss Family Partnership, L.P., Selawi Business, S.A., the Yost Family Trust, Gilo Family Partnership, the Pezzola Foster Trust and Alan Zimmerman for an aggregate cash consideration of $1,198,906. (24) On November 11, 1998, the Registrant sold and issued 228 shares of common stock and 379 shares of Series A Convertible Preferred Stock to Shlomo Rachiv in exchange for all of his ordinary shares in Vyyo Ltd. (25) On December 1, 1998, the Registrant sold and issued 629,447 shares of Series B Convertible Preferred Stock at $1.00 per share for an aggregate cash consideration of $629,447, to the following persons: ARC Investors, Shaul Berger, Michael and Merlyn Corwin, Dean Witter Reynolds, Custodian for Bruce Mann Rollover IRA, Harvey Filister, Maurice Filister 1996 Trust for the benefit of Harvey Filister, Maurice Filister, Gilo Family Partnership, The Adi Gilo DSP Tel Trust, The Elad Gilo DSP Tel Trust, The Yael Gilo DSP Tel Trust, Mark Gross, David Jaroslawicz, Kaplan/Strangis Investment Partnership, Maiss Family Partnership, Robert L. Melamed, M.S.I. Investments Ltd., Pezzola-Foster Trust U/T/D 4/3/87, Andrew W. Schonzeit, Shoham Investments Ltd., Darlene Stillpass, Maurice Filister 1996 Trust for the benefit of Darlene Stillpass, Hindy Taub, Yost Family Trust and Alan Zimmerman. (26) On December 1, 1998, the Registrant sold and issued 1998 Series B-3 Warrants (the "1998 Series B-3 Warrants") to the purchasers of the Series B Convertible Preferred Stock to purchase up to the number of shares of common stock equal to the sum of the number of shares of Series B Convertible Preferred Stock each investor purchased multiplied by 0.6. The 1998 Series B-3 Warrants would not be exercisable for any shares if the Registrant obtained financing in the amount of $2,000,000 on or before June 30, 1999. (27) On December 1, 1998, the Registrant amended the 1997 Series A-2 Notes, 1998 Series A-1 Notes, 1998 Series A-2 Notes and 1998 Series B-1 Notes in the aggregate principal amount of $4,477,369.77 held by 23 of the purchasers of the Series B Convertible Preferred Stock such that these notes became convertible into an aggregate of 4,477,369 shares of Series B Convertible Preferred Stock at a conversion price of $1.00 per share at the election of the purchasers (the "1998 Amended Notes"). II-5 (28) On May 31, 1999, the Registrant sold and issued 8,979,656 shares of common stock at $0.50 per share to the Gilo Family Partnership and the Sam Kaplan/Ralph Strangis Investment Partnership for an aggregate cash consideration of $4,489,828.05. (29) On June 2, 1999, the Registrant sold and issued a warrant to purchase an aggregate of 127,500 shares of common stock to Biblica Investment Limited at an exercise price of $0.50 per share with an aggregate exercise price of $63,750. (30) On July 1, 1999, the Registrant sold and issued 96,000 shares of common stock at $0.83 per share to Pezzola & Reinke, APC for the cancellation of debt in the aggregate amount of $80,000. (31) On August 31, 1999, the Registrant sold and issued 9,172,010 shares of Series C Convertible Preferred Stock at $0.54 per share to ADC Telecommunications, Inc. for an aggregate cash consideration of $4,950,000. (32) On November 19, 1999, the Registrant amended the 1998 Amended Notes such that they became convertible into an aggregate of 5,372,843 shares of common stock at a conversion price of $0.83 per share at the election of the holders of the notes. (33) On December 6, 1999 the Registrant amended for a limited period of time the exercise price of the 1997 Warrants, 1997 Series A-2 Warrants, 1998 Series A-1 Warrants, 1998 Series A-2 Warrants and 1998 Series B-1 Warrants to $1.87 per share. (34) At various times from December 28, 1999 through January 31, 2000, the Registrant sold and issued 1,100,049 shares of common stock to 58 warrant holders of the Registrant upon exercise of warrants at a weighted average exercise price of $1.79 per share. (35) On December 28, 1999, the Registrant sold and issued 8,187,461 shares of common stock to 42 note holders of the Registrant upon conversion of an aggregate principal amount of $6,822,884.29 of promissory notes at a conversion price of $0.83 per share. (36) On December 27, 1999, the Registrant sold and issued 178,571 shares of Series C Convertible Preferred Stock at $0.56 per share to Arnon Kohavi for an aggregate cash consideration of $100,000. (37) On December 28, 1999, the Registrant sold and issued a total of 480,000 shares of common stock at $0.83 per share to John Fredericks and each of the seven directors of the Registrant for an aggregate cash consideration of $400,000. The sales of the above securities were deemed to be exempt from registration under the Securities Act of 1933, as amended (the "Act") in reliance on Section 4(2) of the Act, Regulation D promulgated under the Act, Regulation S promulgated under the Act, or Rule 701 promulgated under Section 3(b) of the Act. In each such transaction, the recipients of securities represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were affixed to the securities issued in such transactions. Item 16. Exhibits and Financial Statement Schedules. Exhibits
Exhibit Number Description ------- ----------- 1.1 Form of Underwriting Agreement 3.1(1) Third Amended and Restated Certificate of Incorporation of the Registrant 3.2(1) Amended and Restated Bylaws of the Registrant 4.1(1) Specimen common stock certificate 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP 5.2 Opinion of Bay Venture Counsel, LLP
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Exhibit Number Description ------- ----------- 10.1(1) Form of Indemnification Agreement 10.2(1) 1996 Equity Incentive Plan 10.3(1) 1999 Employee and Consultant Equity Incentive Plan 10.4(1) Amended and Restated 2000 Employee and Consultant Equity Incentive Plan 10.5(2) 2000 Employee Stock Purchase Plan 10.6(1) Form of Stock Purchase Agreement, dated as of December 28, 1999, by and between the Registrant and each of Lewis Broad, Neill Brownstein, Avraham Fischer, Davidi Gilo, John Griffin, Samuel Kaplan, Alan Zimmerman 10.7(1) Form of D97 Series A Preferred Stock Purchase Agreement by and between the Registrant and each of the purchasers of the Series A Preferred Stock. 10.8(1) Form of D98 Series B Preferred Stock Purchase Agreement by and between the Registrant and each of the purchasers of the Series B Preferred Stock 10.9(1) Series C Preferred Stock Purchase Agreement, dated as of August 13, 1999, by and between the Registrant and ADC Telecommunications, Inc. 10.10(1) Series C Preferred Stock Purchase Agreement, dated as of December 27, 1999, by and between the Registrant and Arnon Kohavi 10.11(1) Registration Rights and Lock-Up Agreement dated as of April 21, 1996, by and among the Registrant and certain holders of the Series A Preferred Stock and Series C Preferred Stock 10.12(1) Amendment to Registration Rights and Lock-Up Agreement, dated as of August 13, 1999, by and among the Registrant and certain holders of the Series A Preferred Stock and Series C Preferred Stock 10.13(1) Employment Agreement with Davidi Gilo 10.14(1) Employment Agreement with Eran Pilovsky 10.15(1) Employment Agreement with Stephen P. Pezzola 10.16(1) Employment Agreement with Michael Corwin 10.17(1) Employment Agreement with Arnon Kohavi 10.18(1) Unprotected Lease Agreement, dated as of March 7, 1999 between Vyyo Ltd. and Ayalot Investments in Properties (Har Hotzvim) 1994 Ltd. 10.19(1)+ Collaboration Agreement, dated August 6, 1999, between Vyyo Ltd. and ADC Telecommunications, Inc. 10.20(1)+ License and Development Agreement, dated as of December 1999, by and between Philips Semiconductor, Inc., Vyyo Ltd., and the Registrant 10.21(1) Secured Promissory Note, dated January 16, 2000, of Eran Pilovsky for the benefit of the Registrant 10.22(1) Employment Agreement with Menashe Shahar 10.23(1) Amendment No. 2 to Registration Rights and Lock-Up Agreement dated as of February 4, 2000, by and among the Registrant and certain holders of the Series A Preferred Stock and Series C Preferred Stock 10.24(1) Warrant, dated April 23, 1996, issued by the Registrant to PhaseCom Investor Group Limited Partnership 10.25(1) 1997 Series A-2 Warrant, dated December 29, 1997, issued by the Registrant to Eli David 10.26(1) 1998 Series A-2 Warrant, dated February 26, 1998, issued by the Registrant to Eli David 10.27(1) Form of 1998 Series B-1 Warrant, dated June 30, 1998, issued by the Registrant to Selawi Business, S.A. and Shaul Berger
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Exhibit Number Description ------- ----------- 10.28(1) Warrant, dated June 2, 1999, issued by the Registrant to Biblica Investment Limited 10.29(1) 1998 Series A-1 Warrant, dated February 3, 1998, issued by the Registrant to Eli David. 10.30(3)+ Addendum #1 to Collaboration Agreement, dated July 14, 2000, by and among Vyyo Inc., Vyyo Ltd. and ADC Telecommunications, Inc. 10.31 Form of Amendment No. 3 to Registration Rights and Lock-Up Agreement dated as of September 11, 2000, by and among the Registrant and certain holders of the Series A Preferred Stock and Series C Preferred Stock 10.32* Israeli Lease Agreement (translated from Hebrew), dated as of June 13, 2000 between Vyyo Ltd. and Har Hotzvim Properties Ltd. 10.33 Indemnification Agreement among the Registrant and certain selling stockholders 21.1* Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1) 23.3 Consent of Bay Venture Counsel, LLP (included in Exhibit 5.2) 24.1* Power of Attorney (included on original signature page) 27.1* Financial Data Schedule-Six Months ended June 30, 2000 27.2* Financial Data Schedule-Six Months ended June 30, 1999
- -------- * Previously filed. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (file no. 333-96129). (2) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (file no. 333-37804). (3) Incorporated by reference to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2000. + We have been granted confidential treatment from the Commission for selected portions of this exhibit. The omitted portions were separately filed with the Commission. Financial Statement Schedules Item 17. Undertakings. The undersigned Registrant hereby undertakes to provide to the Underwriters at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the provisions described in Item 14, or otherwise, the registrant has been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-8 The undersigned registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b) (1) or (4) or 497 (h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bonafide offering thereof. II-9 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cupertino, State of California, on September 12, 2000. VYYO INC. /s/ Davidi Gilo By: _________________________________ Davidi Gilo, Chief Executive Officer and Chairman of the Board Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Davidi Gilo Chief Executive Officer and September 12, 2000 ____________________________________ Chairman of the Board Davidi Gilo (Principal Executive Officer) /s/ Eran Pilovsky* Vice President, Finance and September 12, 2000 ____________________________________ Chief Financial Officer Eran Pilovsky (Principal Financial and Accounting Officer) /s/ Lewis S. Broad* Director September 12, 2000 ____________________________________ Lewis S. Broad /s/ Neill H. Brownstein* Director September 12, 2000 ____________________________________ Neill H. Brownstein /s/ John P. Griffin* Director September 12, 2000 ____________________________________ John P. Griffin
II-10
Signature Title Date --------- ----- ---- /s/ Avraham Fischer* Director September 12, 2000 ____________________________________ Avraham Fischer /s/ Samuel L. Kaplan* Director September 12, 2000 ____________________________________ Samuel L. Kaplan /s/ Alan L. Zimmerman* Director September 12, 2000 ____________________________________ Alan L. Zimmerman
/s/ Davidi Gilo *By:___________________________ Davidi Gilo (Attorney-in-fact) II-11 EXHIBIT INDEX
Number Description ------ ----------- 1.1 Form of Underwriting Agreement 3.1(1) Third Amended and Restated Certificate of Incorporation of the Registrant 3.2(1) Amended and Restated Bylaws of the Registrant 4.1(1) Specimen common stock certificate 5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP 5.2 Opinion of Bay Venture Counsel, LLP 10.1(1) Form of Indemnification Agreement 10.2(1) 1996 Equity Incentive Plan 10.3(1) 1999 Employee and Consultant Equity Incentive Plan 10.4(1) Amended and Restated 2000 Employee and Consultant Equity Incentive Plan 10.5(2) 2000 Employee Stock Purchase Plan 10.6(1) Form of Stock Purchase Agreement, dated as of December 28, 1999, by and between the Registrant and each of Lewis Broad, Neill Brownstein, Avraham Fischer, Davidi Gilo, John Griffin, Samuel Kaplan, Alan Zimmerman 10.7(1) Form of D97 Series A Preferred Stock Purchase Agreement by and between the Registrant and each of the purchasers of the Series A Preferred Stock. 10.8(1) Form of D98 Series B Preferred Stock Purchase Agreement by and between the Registrant and each of the purchasers of the Series B Preferred Stock 10.9(1) Series C Preferred Stock Purchase Agreement, dated as of August 13, 1999, by and between the Registrant and ADC Telecommunications, Inc. 10.10(1) Series C Preferred Stock Purchase Agreement, dated as of December 27, 1999, by and between the Registrant and Arnon Kohavi 10.11(1) Registration Rights and Lock-Up Agreement dated as of April 21, 1996, by and among the Registrant and certain holders of the Series A Preferred Stock and Series C Preferred Stock 10.12(1) Amendment to Registration Rights and Lock-Up Agreement, dated as of August 13, 1999, by and among the Registrant and certain holders of the Series A Preferred Stock and Series C Preferred Stock 10.13(1) Employment Agreement with Davidi Gilo 10.14(1) Employment Agreement with Eran Pilovsky 10.15(1) Employment Agreement with Stephen P. Pezzola 10.16(1) Employment Agreement with Michael Corwin 10.17(1) Employment Agreement with Arnon Kohavi 10.18(1) Unprotected Lease Agreement, dated as of March 7, 1999 between Vyyo Ltd. and Ayalot Investments in Properties (Har Hotzvim) 1994 Ltd. 10.19(1)+ Collaboration Agreement, dated August 6, 1999, between Vyyo Ltd. and ADC Telecommunications, Inc. 10.20(1)+ License and Development Agreement, dated as of December 1999, by and between Philips Semiconductor, Inc., Vyyo Ltd., and the Registrant 10.21(1) Secured Promissory Note, dated January 16, 2000, of Eran Pilovsky for the benefit of the Registrant 10.22(1) Employment Agreement with Menashe Shahar
Number Description ------ ----------- 10.23(1) Amendment No. 2 to Registration Rights and Lock-Up Agreement dated as of February 4, 2000, by and among the Registrant and certain holders of the Series A Preferred Stock and Series C Preferred Stock 10.24(1) Warrant, dated April 23, 1996, issued by the Registrant to PhaseCom Investor Group Limited Partnership 10.25(1) 1997 Series A-2 Warrant, dated December 29, 1997, issued by the Registrant to Eli David 10.26(1) 1998 Series A-2 Warrant, dated February 26, 1998, issued by the Registrant to Eli David 10.27(1) Form of 1998 Series B-1 Warrant, dated June 30, 1998, issued by the Registrant to Selawi Business, S.A. and Shaul Berger 10.28(1) Warrant, dated June 2, 1999, issued by the Registrant to Biblica Investment Limited 10.29(1) 1998 Series A-1 Warrant, dated February 3, 1998, issued by the Registrant to Eli David. 10.30(3)+ Addendum #1 to Collaboration Agreement, dated July 14, 2000, by and among Vyyo Inc., Vyyo Ltd. and ADC Telecommunications, Inc. 10.31 Form of Amendment No. 3 to Registration Rights and Lock-Up Agreement dated as of , 2000, by and among the Registrant and certain holders of the Series A Preferred Stock and Series C Preferred Stock 10.32* Israeli Lease Agreement (translated from Hebrew), dated as of June 13, 2000 between Vyyo Ltd. and Har Hotzvim Properties Ltd. 10.33 Indemnification Agreement among the Registrant and certain selling stockholders 21.1* Subsidiaries of the Registrant 23.1 Consent of Ernst & Young LLP, Independent Auditors 23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 5.1) 23.3 Consent of Bay Venture Counsel, LLP (included in Exhibit 5.2) 24.1* Power of Attorney (included on original signature page) 27.1* Financial Data Schedule-Six Months ended June 30, 2000 27.2* Financial Data Schedule-Six Months ended June 30, 1999
- -------- * Previously filed. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-1 (file no. 333-96129). (2) Incorporated by reference to the Registrant's Registration Statement on Form S-8 (file no. 333-37804). (3) Incorporated by reference to the Registrant's quarterly report on Form 10-Q for the quarter ended June 30, 2000. + We have been granted confidential treatment from the Commission for selected portions of this exhibit. The omitted portions were separately filed with the Commission. EX-1.1 2 0002.txt FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 BANC OF AMERICA SECURITIES LLC FINAL UNDERWRITING AGREEMENT 4,000,000 Shares Vyyo Inc. Common Stock Underwriting Agreement dated September _____, 2000 Table of Contents Section 1. Representations and Warranties of the Company and the Selling Stockholders................ 2 A. Representations and Warranties of the Company and Certain of the Selling Stockholders..... 2 (a) Compliance with Registration Requirements................................................. 2 (b) Offering Materials Furnished to Underwriters.............................................. 3 (c) Distribution of Offering Material By the Company.......................................... 3 (d) The Underwriting Agreement................................................................ 3 (e) Authorization of the Common Shares........................................................ 3 (f) No Applicable Registration or Other Similar Rights........................................ 3 (g) No Material Adverse Change................................................................ 3 (h) Independent Accountants................................................................... 4 (i) Preparation of the Financial Statements................................................... 4 (j) Incorporation and Good Standing of the Company and its Subsidiary......................... 4 (k) Capitalization and Other Capital Stock Matters............................................ 4 (l) Stock Exchange Listing.................................................................... 5 (m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required 5 (n) No Material Actions or Proceedings........................................................ 6 (o) Intellectual Property Rights.............................................................. 6 (p) All Necessary Permits, etc................................................................ 6 (q) Title to Properties....................................................................... 6 (r) Tax Law Compliance........................................................................ 6 (s) Company Not an "Investment Company."...................................................... 7 (t) Insurance................................................................................. 7 (u) Labor Matters............................................................................. 7 (v) Related Party Transactions................................................................ 7 (w) No Unlawful Contributions or Other Payments............................................... 7 (x) Company's Accounting System............................................................... 7 (y) Compliance with Environmental Laws........................................................ 8 (z) ERISA Compliance.......................................................................... 8 (aa) Office of Chief Scientist................................................................. 9 (bb) Israeli Employment Agreements............................................................. 9 B. Representations and Warranties of the Selling Stockholders................................ 9 (a) The Underwriting Agreement................................................................ 9 (b) The Custody Agreement and Power of Attorney............................................... 10 (c) Title to Common Shares to be Sold; All Authorizations Obtained............................ 10 (d) Delivery of the Common Shares to be Sold.................................................. 10 (e) Non-Contravention; No Further Authorizations or Approvals Required........................ 10 (f) No Registration of Other Similar Rights................................................... 11 (g) No Further Consents, etc. ................................................................ 11 (h) Disclosure Made by Such Selling Stockholder in the Prospectus............................. 11 (i) No Price Stabilization or Manipulation.................................................... 11 Section 2. Purchase, Sale and Delivery of the Common Shares.......................................... 11 (a) The Firm Common Shares.................................................................... 11 (b) The First Closing Date.................................................................... 12 (c) The Optional Common Shares; the Second Closing Date....................................... 12 (d) Public Offering of the Common Shares...................................................... 12 (e) Payment for the Common Shares............................................................. 13 (f) Delivery of the Common Shares............................................................. 13 (g) Delivery of Prospectus to the Underwriters................................................ 14 Section 3. Additional Covenants of the Company....................................................... 14 A. Covenants of the Company.................................................................. 14
i. (a) Representatives' Review of Proposed Amendments and Supplements............................ 14 (b) Securities Act Compliance................................................................. 14 (c) Amendments and Supplements to the Prospectus and Other Securities Act Matters............. 14 (d) Copies of any Amendments and Supplements to the Prospectus................................ 15 (e) Blue Sky Compliance....................................................................... 15 (f) Use of Proceeds........................................................................... 15 (g) Transfer Agent............................................................................ 15 (h) Earnings Statement........................................................................ 15 (i) Periodic Reporting Obligations............................................................ 15 (j) Agreement Not To Offer or Sell Additional Securities...................................... 16 (k) Future Reports to the Representatives..................................................... 16 B. Covenants of the Selling Stockholders..................................................... 16 (a) Agreement Not to Offer or Sell Additional Securities...................................... 16 (b) Delivery of Forms W-8 and W-9............................................................. 17 Section 4. Payment of Expenses....................................................................... 17 Section 5. Conditions of the Obligations of the Underwriters......................................... 17 (a) Accountants' Comfort Letter............................................................... 18 (b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD.......... 18 (c) No Material Adverse Change or Ratings Agency Change....................................... 18 (d) Opinion of Counsel for the Company........................................................ 18 (e) Opinion of Counsel for the Selling Stockholders........................................... 19 (f) Opinion of Foreign Counsel for the Company................................................ 19 (g) Opinion of Patent Counsel for the Company................................................. 19 (h) Opinion of Counsel for the Underwriters................................................... 19 (i) Officers' Certificate..................................................................... 19 (j) Bring-down Comfort Letter................................................................. 20 (k) Selling Stockholder's Certificate......................................................... 20 (l) Selling Stockholders' Documents........................................................... 20 (m) Lock-Up Agreement......................................................................... 21 (n) Additional Documents...................................................................... 21 Section 6. Reimbursement of Underwriters' Expenses................................................... 21 Section 7. Effectiveness of this Agreement........................................................... 21 Section 8. Indemnification........................................................................... 22 (a) Indemnification of the Underwriters....................................................... 22 (b) Indemnification of the Company, its Directors and Officers................................ 24 (c) Notifications and Other Indemnification Procedures........................................ 25 (d) Settlements............................................................................... 26 (e) Settlements............................................................................... 26 Section 9. Contribution.............................................................................. 27 Section 10. Default of One or More of the Several Underwriters........................................ 28 Section 11. Termination of this Agreement............................................................. 29 Section 12. Representations and Indemnities to Survive Delivery....................................... 29 Section 13. Notices................................................................................... 29 Section 14. Successors................................................................................ 30 Section 15. Partial Unenforceability.................................................................. 31 Section 16. (a)....................................................................................... 31 (a) Governing Law Provisions.................................................................. 31
ii. (b) Consent to Jurisdiction................................................................. 31 (c) Waiver of Immunity...................................................................... 31 Section 17. Failure of One or More of the Selling Stockholders to Sell and Deliver Common Shares.... 31 Section 18. General Provisions...................................................................... 32
iii. Underwriting Agreement September____, 2000 BANC OF AMERICA SECURITIES LLC CIBC WORLD MARKETS CORP. DAIN RAUSCHER INCORPORATED NEEDHAM & COMPANY, INC. W.R. HAMBRECHT + CO., LLC As Representatives of the several Underwriters c/o BANC OF AMERICA SECURITIES LLC 600 Montgomery Street San Francisco, California 94111 Ladies and Gentlemen: Introductory. Vyyo Inc., a Delaware corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule A (the ---------- "Underwriters") an aggregate of 2,000,000 shares of its Common Stock, par value $0.0001 per share (the "Common Stock"); and the Stockholders of the Company named in Schedule B (collectively, the "Selling Stockholders") severally ---------- propose to sell to the underwriters an aggregate of 2,000,000 shares of Common Stock. The 2,000,000 shares of Common Stock to be sold by the Company and the 2,000,000 shares of Common Stock to be sold by the Selling Stockholders are collectively called the "Firm Common Shares". In addition, the Company has granted to the Underwriters an option to purchase up to an additional 300,000 shares of Common Stock and certain of the Selling Stockholders have severally granted to the Underwriters an option to purchase up to an additional 300,000 shares of Common Stock, each Selling Stockholder selling up to the amount set forth opposite such Selling Stockholder's name in Schedule B, as provided in ----------- Section 2 (collectively, the "Optional Common Shares"). The Firm Common Shares and, if and to the extent such options are exercised, the Optional Common Shares are collectively called the "Common Shares." Banc of America Securities LLC ("BAS"), CIBC World Markets Corp., Dain Rauscher Incorporated, Needham & Company, Inc. and W.R. Hambrecht + Co., LLC have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Common Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-45132), which contains a form of prospectus to be used in connection with the public offering and sale of the Common Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement." Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) 1. Registration Statement," and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Common Shares, is called the "Prospectus;" provided, however, if the Company has, with the consent of BAS, elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated September 6, 2000 (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to (i) the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company hereby confirms its agreements with the Underwriters as follows: Section 1. Representations and Warranties of the Company and the Selling Stockholders. A. Representations and Warranties of the Company and Certain of the Selling Stockholders. The Company and Eran Pilovsky, Arnon Kohavi and Michael Corwin (the "Company Selling Stockholders") hereby represent, warrant and covenant, severally and not jointly, to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S- T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the 2. Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) Offering Materials Furnished to Underwriters. The Company has delivered to the Representatives a manually signed copy of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives has reasonably requested for each of the Underwriters. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Common Shares. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company and paid for by the Underwriters pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived. (g) No Material Adverse Change. Except as otherwise disclosed in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that would reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiary, considered as one entity (any such change is called a "Material Adverse Change"); (ii) the Company and its subsidiary, considered as one entity, have not 3. incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiary, its subsidiary on any class of capital stock or repurchase or redemption by the Company or its subsidiary of any class of capital stock. (h) Independent Accountants. Ernst & Young LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act. (i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly in all material respects the consolidated financial position of the Company and its subsidiary as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles in the United States applied on a consistent basis throughout the periods involved. No other financial statements are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Consolidated Financial Data," "Selected Consolidated Financial Data" and "Capitalization" fairly present in all material respects the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) Incorporation and Good Standing of the Company and its Subsidiary. Each of the Company and its subsidiary has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, in the case of the Company, to enter into and perform its obligations under this Agreement. Each of the Company and each subsidiary is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. All of the issued and outstanding capital stock of each subsidiary has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiary listed in Exhibit 21 to the Registration Statement. (k) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to 4. employee benefit plans described in the Prospectus or upon exercise of outstanding options or warrants described in the Prospectus). The Common Stock (including the Common Shares) conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and have been issued in compliance with the registration or exemption provisions of the federal securities laws. None of the outstanding shares of Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or its subsidiary other than those described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents in all material respects the information required to be disclosed with respect to such plans, arrangements, options and rights. (l) Stock Exchange Listing. The Common Shares have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance. (m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor its subsidiary is in violation of its charter or by-laws or is in default (or, with the giving of notice or lapse of time, would be in default) ("Default") under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which the Company or its subsidiary is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or its subsidiary is subject (each, an "Existing Instrument"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the charter or by-laws of the Company or its subsidiary, (ii) will not conflict with or constitute a breach of, or Default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or its subsidiary pursuant to, or require the consent of any other party to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or its subsidiary, except for any violations that would not, individually or in the aggregate, result in a Material Adverse Change. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the National Association of Securities Dealers, Inc. (the "NASD"). 5. (n) No Material Actions or Proceedings. Except as disclosed in the Prospectus, there are no legal or governmental actions, suits or proceedings pending or, to the best of the Company's knowledge, threatened (i) against or affecting the Company or its subsidiary, (ii) which has as the subject thereof any officer or director of, or property owned or leased by, the Company or its subsidiary or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company or such subsidiary and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or to materially and adversely affect the ability of the Company to consummate the transactions contemplated by this Agreement. (o) Intellectual Property Rights. Except as disclosed in the Prospectus, the Company and its subsidiary own or possess sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their businesses as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Except as disclosed in the Prospectus, neither the Company nor its subsidiary has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Change. (p) All Necessary Permits, etc. Except as disclosed in the Prospectus, the Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (q) Title to Properties. Except as disclosed in the Prospectus, the Company and each of its subsidiary has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(A) (i) above, in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. Except as disclosed in the Prospectus, the real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (r) Tax Law Compliance. The Company and its consolidated subsidiary have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or 6. similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1 (A) (i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its consolidated subsidiary has not been finally determined. (s) Company Not an "Investment Company." The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (t) Insurance. Each of the Company and its subsidiary are insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiary against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither of the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (u) Labor Matters. To the best of the Company's knowledge, no labor disturbance by the employees of the Company or its subsidiary exists or is imminent; and, to the Company's knowledge, there are no existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, value added resellers, subcontractors, original equipment manufacturers, authorized dealers or international distributors that might be expected to result in a Material Adverse Change. (v) Related Party Transactions. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. (w) No Unlawful Contributions or Other Payments. Neither the Company nor its subsidiary nor, to the best of the Company's knowledge, any employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (x) Company's Accounting System. The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in 7. conformity with generally accepted accounting principles in the United States and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (y) Compliance with Environmental Laws. Except as would not, individually or in the aggregate, result in a Material Adverse Change (i) neither the Company nor its subsidiary is in violation of any federal, state, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products (collectively, "Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environment Concern (collectively, "Environmental Laws"), which violation includes, but is not limited to, noncompliance with any permits or other governmental authorizations required for the operation of the business of the Company or its subsidiary under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the Company or its subsidiary received any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company or its subsidiary is in violation of any Environmental Law; (ii) there is no claim, action or cause of action filed with a court or governmental authority, no investigation with respect to which the Company has received written notice, and no written notice by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorneys' fees or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern at any location owned, leased or operated by the Company or its subsidiary, now or in the past (collectively, "Environmental Claims"), pending or, to the best of the Company's knowledge, threatened against the Company or its subsidiary or any person or entity whose liability for any Environmental Claim the Company or its subsidiary has retained or assumed either contractually or by operation of law; and (iii) to the best of the Company's knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that reasonably could result in a violation of any Environmental Law or form the basis of a potential Environmental Claim against the Company or its subsidiary or against any person or entity whose liability for any Environmental Claim the Company or its subsidiary has retained or assumed either contractually or by operation of law. (z) ERISA Compliance. The Company and its subsidiary and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiary or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. 8. "ERISA Affiliate" means, with respect to the Company or a subsidiary, any member of any group of organizations described in Sections 414(b),(c),(m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, its subsidiary or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, its subsidiary or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company, its subsidiary nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, its subsidiary or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. (aa) Office of Chief Scientist. Except as described in the Prospectus, the Company is not in material violation of any conditions or requirements stipulated by the instruments of approval granted to any of them by the Office of Chief Scientist in the Ministry of Industry & Trade and any applicable laws and regulations, with respect to any research and development grants given to it by such office, which violation, individually or in the aggregate, could have a Material Adverse Effect. All information supplied by the Company with respect to such applications was true, correct and complete in all material respects when supplied to the appropriate authorities. (bb) Israeli Employment Agreements. The Company's employment agreements in Israel do not differentiate between compensation paid to employees for a 43 hour work week or for maximum daily hours, and compensation for overtime work. The Company believes that it does not have any material exposure by reason of claims by the employees due to (i) the fact that most of the employees of the Company are in a position of "special trust," (ii) the agreement by the employees to be compensated on a fixed basis, (iii) the payment by the Company of higher salaries, which take into account payments for additional hours, (iv) the distribution of bonuses and stock options by the Company, which come in part as compensation for additional hours, (v) the fact that a non-material number of overtime hours has been reported, and (vi) the fact that most employees sign a "waiver of claims" letter upon termination of employment. B. Representations and Warranties of the Selling Stockholders. Each Selling Stockholder, severally and not jointly, represents, warrants and covenants to each Underwriter as follows: (a) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof my be limited by bankruptcy, insolvency, 9. reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (b) The Custody Agreement and Power of Attorney. Each of the (i) Custody Agreement signed by such Selling Stockholder and [____], as custodian (the "Custodian"), relating to the deposit of the Common Shares to be sold by such Selling Stockholder (the "Custody Agreement") and (ii) Power of Attorney appointing certain individuals named therein as such Selling Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth therein relating to the transactions contemplated hereby and by the Prospectus (the "Power of Attorney"), of such Selling Stockholder has been duly authorized, executed and delivered by such Selling Stockholder and is a valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (c) Title to Common Shares to be Sold; All Authorizations Obtained. Such Selling Stockholder has, and on the First Closing Date and the Second Closing Date (as defined below) will have, good and valid title to all of the Common Shares which may be sold by such Selling Stockholder pursuant to this Agreement on such date and the legal right and power, and all authorizations and approvals required by law and under its charter or by- laws, to enter into this Agreement and its Custody Agreement and Power of Attorney, to sell, transfer and deliver all of the Common Shares which may be sold by such Selling Stockholder pursuant to this Agreement and to comply with its other obligations hereunder and thereunder. (d) Delivery of the Common Shares to be Sold. Delivery of the Common Shares which are sold by such Selling Stockholder pursuant to this Agreement and upon receipt of payment therefor will pass good and valid title to such Common Shares, free and clear of any security interest, mortgage, pledge, lien, encumbrance or other claim, provided that the Underwriters purchase such Common Shares without notice of adverse claims. (e) Non-Contravention; No Further Authorizations or Approvals Required. The execution and delivery by such Selling Stockholder of, and the performance by such Selling Stockholder of its obligations under, this Agreement, the Custody Agreement and the Power of Attorney will not contravene or conflict with, result in a breach of, or constitute a Default under, or require the consent of any other party to, the charter or by- laws, or other organizational documents of such Selling Stockholder or any other agreement or instrument to which such Selling Stockholder is a party or by which it is bound or under which it is entitled to any right or benefit, any provision of applicable law or any judgment, order, decree or regulation applicable to such Selling Stockholder of any court, regulatory body, administrative agency, governmental body or arbitrator having jurisdiction over such Selling Stockholder. No consent, approval, authorization or other order of, or registration or filing with any court or other governmental authority or agency, is required for the consummation by such Selling Stockholder of the transactions 10. contemplated in the Agreement, except such as have been obtained or made and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the NASD. (f) No Registration or Other Similar Rights. Such Selling Stockholder does not have any registration or other similar rights to have any equity or debt securities registered for sale by the Company under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as are described in the Prospectus under "Shares Eligible for Future Sale." (g) No Further Consents, etc. No consent, approval or waiver is required under any instrument or agreement to which such Selling Stockholder is a party or by which it is bound or under which it is entitled to any right or benefit, in connection with the offering, sale or purchase by the Underwriters of any of the Common Shares which may be sold by such Selling Stockholder under this Agreement or the consummation by such Selling Stockholder of any of the other transactions contemplated hereby. (h) Disclosure Made by Such Selling Stockholder in the Prospectus. All information furnished by or on behalf of such Selling Stockholder in writing expressly for use in the Registration Statement and Prospectus is, and on the First closing Date and the second Closing Date will be, true, correct, and complete in all material respects, and does not, and on the First Closing Date and the Second Closing Date will not, contain any untrue statement of a material fact or omit to state any material fact necessary to make such information not misleading. Such Selling Stockholder confirms as accurate the number of shares of Common Stock set forth opposite such Selling Stockholder's name in the Prospectus under the caption "Principal and Selling Stockholders" (both prior to and after giving effect to the sale of the Common Shares). (i) No Price Stabilization or Manipulation. Such Selling Stockholder has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. Any certificate signed by or on behalf of any Selling Stockholder and delivered to the Representative or to counsel for the Underwriters shall be deemed to be a representation and warranty by such Selling Stockholder to each Underwriter as to the matters covered thereby. Section 2. Purchase, Sale and Delivery of the Common Shares. (a) The Firm Common Shares. Upon the terms herein set forth, (i) the Company agrees to issue and sell to the several Underwriters an aggregate of 2,000,000 Firm Common Shares and (ii) the Selling Stockholders agree to sell to the several Underwriters an aggregate of 2,000,000 Firm Common Shares, each Selling Stockholder selling the number of Firm Common Shares set forth opposite such Selling Stockholder's name on Schedule B. On the basis of the ---------- representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly to purchase from 11. the Comapny and the Selling Stockholders the respective number of Firm Common Shares set forth opposite their names on Schedue A. The purchase price per Firm --------- Common Share to be paid by the several Underwriters to the Company and the Selling Stockholders shall be $[____] per share. (b) The First Closing Date. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of BAS, 600 Montgomery Street, San Francisco, California (or such other place as may be agreed to by the Company and the Representatives) at 8:00 a.m. San Francisco time, on ___, 2000 or such other time and date not later than 10:30 a.m. San Francisco time, on ____, 2000 as the Representatives shall designate by notice to the Company (the time and date of such closing are called the "First Closing Date"). The Company hereby acknowledges that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 10. (c) The Optional Common Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company and certain of the Selling Stockholders hereby grant an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of 600,000 Optional Common Shares from the Company and certain of the Selling Stockholders at the purchase price per share to be paid by the Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company and certain of the Selling Stockholders, which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be purchased as the number of Firm Common Shares set forth on Schedule A opposite the name of such Underwriter bears to ---------- the total number of Firm Common Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) Public Offering of the Common Shares. The Representatives hereby advise the Company and the Selling Stockholders that the Underwriters intend to offer for sale to the 12. public, as described in the Prospectus, their respective portions of the Common Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in its sole judgment, has determined is advisable and practicable. (e) Payment for the Common Shares. Payment for the Common Shares sold by the Company shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company. Payment for the Common Shares sold by the Selling Stockholders shall be made at the First Closing Date (and, if applicable, at the Second Closing Date ) by wire transfer of immediately available funds to the order of the Custodian. It is understood that the Representatives have been authorized, for their own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriters have agreed to purchase. BAS, individually and not as the Representatives of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Each Selling Stockholder hereby agrees that (i) it will pay all stock transfer taxes, stamp duties and other similar taxes, if any, payable upon the sale or delivery of the Common Shares to be sold by such Selling Stockholder to the several Underwriters, or otherwise in connection with the performance of such Selling Stockholder's obligations hereunder and (ii) the Custodian is authorized to deduct for such payment any such amounts from the proceeds to such Selling Stockholder hereunder and to hold such amounts for the account of such Selling Stockholder with the Custodian under the Custody Agreement. (f) Delivery of the Common Shares. The Company and the Selling Stockholders shall deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters certificates for the Firm Common Shares to be sold by them at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company and certain of the Selling Stockholders shall also deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters, certificates for the Optional Common Shares the Underwriters have agreed to purchase at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Representatives shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. 13. (g) Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on the second business day following the date the Common Shares are first released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered, copies of the Prospectus in such quantities and at such places as the Representatives shall reasonably request. Section 3. Additional Covenants of the Company. A. Covenants of the Company. The Company further covenants and agrees with each Underwriter as follows: (a) Representatives' Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to amending or supplementing the Registration Statement (including any registration statement filed under Rule 462(b) under the Securities Act) or the Prospectus, the Company shall furnish to the Representatives for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably objects. (b) Securities Act Compliance. After the date of this Agreement, the Company shall promptly advise the Representatives in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 434, as applicable, under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission. (c) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if in the reasonable opinion of the Representatives or counsel for the Underwriters it is otherwise necessary to amend or 14. supplement the Prospectus to comply with law, the Company agrees to promptly prepare, file with the Commission and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may reasonably request. (e) Blue Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) the state securities or blue sky laws or Canadian provincial Securities laws of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment. (f) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Common Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (g) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock. (h) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending December 31, 2000 that satisfies the provisions of Section 11(a) of the Securities Act. (i) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall report the use of proceeds from the issuance of the Common Shares as may be required under Rule 463 under the Securities Act. 15. (j) Agreement Not To Offer or Sell Additional Securities. During the period ending on the close of trading December 15, 2000, the Company will not, without the prior written consent of BAS (which consent may be withheld at the sole discretion of BAS), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Common Shares); provided, however, that the Company may issue shares of its Common Stock or options to purchase its Common Stock, or Common Stock upon exercise of options, pursuant to any stock option, stock bonus or other stock plan or arrangement described in the Prospectus, but only if the holders of such shares, options, or shares issued upon exercise of such options, agree in writing not to sell, offer, dispose of or otherwise transfer any such shares or options during such 180 day period without the prior written consent of BAS (which consent may be withheld at the sole discretion of the BAS). (k) Future Reports to the Representatives. During the period of five years hereafter the Company will furnish to the Representatives at 600 Montgomery Street, San Francisco, CA 94111: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. B. Covenants of the Selling Stockholders. Each Selling Stockholder further covenants and agrees, severally and not jointly, with each Underwriter: (a) Agreement Not to Offer or Sell Additional Securities. Such Selling Stockholder will not, without the prior written consent of BAS (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on December 15, 2000. 16. (b) Delivery of Forms W-8 and W-9. To deliver to the Representative prior to the First Closing Date a properly completed and executed United States Treasury Department Form W-8 (if the Selling Stockholder is a non- United States person) or Form W-9 (if the Selling Stockholder is a United States Person). BAS, on behalf of the several Underwriters, may, in its sole discretion, waive in writing the performance by the Company or any Selling Stockholder of any one or more of the foregoing covenants or extend the time for their performance. Section 4. Payment of Expenses. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the NASD's review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with listing the Common Shares on the Nasdaq National Market, (ix) all fees and expenses of the Selling Stockholders' counsel, and (x) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 4, Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. Section 5. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company and the Company Selling Stockholders set forth in Section 1(A) hereof and the Selling Stockholders set forth in Section 1(B) hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company and the Selling Stockholders of their respective covenants and other obligations hereunder, and to each of the following additional conditions: 17. (a) Accountants' Comfort Letter. On the date hereof, the Representatives shall have received from Ernst & Young LLP, independent public or certified public accountants for the Company, a letter dated the date hereof addressed to the Underwriters and the Board of Directors of the Company, in form and substance reasonably satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus (and the Representatives shall have received an additional 2 conformed copies of such accountants' letter). (b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; or, if the Company elected to rely upon Rule 434 under the Securities Act and obtained the Representative's consent thereto, the Company shall have filed a Term Sheet with the Commission in the manner and within the time period required by such Rule 424(b); (ii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or, to the knowledge of the Company and the Representatives, threatened by the Commission; and (iii) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (c) No Material Adverse Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) in the reasonable judgment of the Representatives there shall not have occurred any Material Adverse Change. (d) Opinion of Counsel for the Company. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received an opinion of each of Skadden, Arps, Slate, Meagher & Flom LLP and Bay Venture Counsel, counsel for the Company, dated as of such Closing Date, substantially in the form attached as Exhibit A --------- 18. and Exhibit B, respectively (and the Representatives shall have received --------- an additional 2 conformed copies of such counsel's legal opinion). (e) Opinion of Counsel for the Selling Stockholders. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the favorable opinion of Bay Venture Counsel, counsel for the Selling Stockholders, dated as of such Closing Date, substantially in the form attached as Exhibit C (and the Representatives shall have received an --------- additional 2 conformed copies of such counsel's legal opinion). (f) Opinion of Foreign Counsel for the Company. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the favorable opinion of Fischer, Behar & Co., foreign counsel for the Company, dated as of such Closing Date, to the effect that: (i) Vyyo Limited has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is chartered or organized, with full corporate power and authority to own or lease, as the case may be, and to operate its properties and conduct its business as described in the Prospectus, and has all necessary authorizations in Israel to enable it to do business as a foreign corporation in those jurisdictions in which it conducts business and which are described in the Prospectus; and (ii) All the outstanding shares of capital stock of Vyyo Limited have been duly and validly authorized and issued and are fully paid and nonassessable, and, except as otherwise set forth in the Prospectus, all outstanding shares of capital stock of Vyyo Limited are owned by the Company either directly or through wholly owned subsidiary free and clear of any perfected security interest and, to the knowledge of such counsel, after due inquiry, any other security interest, claim, lien or encumbrance. (g) Opinion of Patent Counsel for the Company. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the favorable opinion of Crosby, Heafy, Roach & May, patent counsel for the Company, dated as of such Closing Date, the form of which is attached as Exhibit D (and the Representatives shall have received an --------- additional 2 conformed copies of such counsel's legal opinion). (h) Opinion of Counsel for the Underwriters. On each of the First Closing Date and the Second Closing Date the Representatives shall have received the favorable opinion of Wilson Sonsini Goodrich & Rosati, counsel for the Underwriters, dated as of such Closing Date, with respect to the matters set forth in paragraphs (i), (vii) (with respect to subparagraph (i) only, (viii), (ix), (x) (xi) and (xiii) (with respect to the captions "Description of Capital Stock" and "Underwriting" under subparagraph (i) only), (xii), and the next-to-last paragraph of Exhibit A (and the --------- Representatives shall have received an additional 2 conformed copies of such counsel's legal opinion). (i) Officers' Certificate. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received a written certificate executed by 19. the Chairman of the Board, Chief Executive Officer or President of the Company and the Chief Financial Officer or Chief Accounting Officer of the Company, dated as of such Closing Date, to the effect set forth in subsections (b)(ii) of this Section 5, and further to the effect that, to their knowledge: (i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change; (ii) the representations, warranties and covenants of the Company set forth in Section 1(A) of this Agreement are true and correct in all material respects with the same force and effect as though expressly made on and as of such Closing Date, and (iii) the Company has complied in all material respects with all the agreements hereunder and satisfied all the conditions on its part to be performed or satisfied hereunder at or prior to such Closing Date. (j) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received from Ernst & Young LLP, independent public or certified public accountants for the Company, a letter dated such date, in form and substance reasonably satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Representatives shall have received an additional 2 conformed copies of such accountants' letter). (k) Selling Stockholder's Certificate. On each of the First Closing Date and the Second Closing Date the Representatives shall receive a written certificate executed by the Attorney-in-Fact of each Selling Stockholder, dated as of such Closing Date, to the effect that: (i) The representations, warranties and covenants of such Selling Stockholder set forth in Section 1(B) of this Agreement are true and correct with the same force and effect as though expressly made by such Selling Stockholder on and as of such Closing Date; and (ii) Such Selling Stockholder has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (l) Selling Stockholders' Documents. On the date hereof, the Company and the Selling Stockholders shall have furnished for review by the Representatives copies of the Powers of Attorney and Custody Agreements executed by each of the Selling Stockholders and such further information, certificates and documents as the Representatives may reasonably request. 20. (m) Lock-Up Agreement. On the date hereof, the Company shall have furnished to the Representatives an agreement in the form of Exhibit E --------- hereto from "each director, officer and each beneficial owner of Common Stock" (as defined and determined according to Rule 13d-3 under the Exchange Act, except that a ninety day period shall be used rather than the sixty day period set forth therein) and such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date. (n) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company and the Selling Stockholders at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 4, Section 6, Section 8 and Section 9 shall at all times be effective and shall survive such termination. Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is terminated by the Representatives pursuant to Section 5, Section 7, Section 10 or Section 11, or if the sale to the Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of- pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Common Shares, including but not limited to the reasonable fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. Section 7. Effectiveness of this Agreement. This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification by the Commission to the Company and the Representatives of the effectiveness of the Registration Statement under the Securities Act. Prior to such effectiveness, this Agreement may be terminated by any party by notice to each of the other parties hereto, and any such termination shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company, or (c) any party hereto to any other party except 21. that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. Section 8. Indemnification. (a) Indemnification of the Underwriters. (1) The Company and the Company Selling Stockholders agree, severally and not jointly, to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company and the Company Selling Stockholders), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; and to reimburse each Underwriter and each such controlling person for any and all expenses reasonably incurred (including the reasonable fees and disbursements of counsel chosen by BAS) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company or the Company Selling Stockholders by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company or the Company Selling Stockholders shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or 22. supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense; and provided, further, the Company and each of the Underwriters agrees with each of the Company Selling Shareholders that any claim of such Underwriter against such Company Selling Shareholder for indemnification, reimbursement or advancement of expenses pursuant to this Section 8(a) or for breach of any representation or warranty in Section 1 hereof shall first be sought by such Underwriter to be satisfied in full by the Company and, subject to the limitation on the aggregate liability of each Company Selling Shareholder set forth below, shall be satisfied by the Company Selling Shareholders only to the extent that such claim has not been satisfied in full by the Company. The liability of each Company Selling Shareholder under this Agreement shall be limited to an amount as set forth in Section 8(e) below. The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Company or the Company Selling Stockholders may otherwise have. (2) Each of the Selling Stockholders (other than the Company Selling Stockholders) agree, severally and not jointly, to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Selling Stockholders (other than the Company Selling Stockholders)), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, to the extent, but only to the extent in the case of (i) and (ii) herein, that such untrue statement or alleged untrue statement or omission or alleged omission was made in any Preliminary Prospectus, the Registration Statement or the Prospectus or any such amendment or supplement in reliance upon and in conformity with written information relating to such Selling Stockholder (other than the Company Selling Stockholders) furnished to the Company by such Selling Stockholder (other than the Company Selling Stockholders) expressly for use therein, and to reimburse each Underwriter and each such controlling person for any and all expenses reasonably incurred (including the reasonable fees and disbursements of counsel chosen by BAS) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; 23. provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Selling Stockholders (other than the Company Selling Stockholders) by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Selling Stockholders (other than the Company Selling Stockholders) shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense; and provided, further, the Company and each of the Underwriters agrees with each of the Selling Shareholders (other than the Company Selling Stockholders) that any claim of such Underwriter against such Selling Shareholder (other than the Company Selling Stockholders) for indemnification, reimbursement or advancement of expenses pursuant to this Section 8(a) or for breach of any representation or warranty in Section 1 hereof shall first be sought by such Underwriter to be satisfied in full by the Company and, subject to the limitation on the aggregate liability of each Selling Shareholder (other than the Company Selling Stockholders) set forth below, shall be satisfied by the Selling Shareholders (other than the Company Selling Stockholders) only to the extent that such claim has not been satisfied in full by the Company. The liability of each Selling Shareholder (other than the Company Selling Stockholders) under this Agreement shall be limited to an amount as set forth in Section 8(e) below. The indemnity agreement set forth in this Section 8(a) shall be in addition to any liabilities that the Selling Stockholders (other than the Company Selling Stockholders) may otherwise have. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, and the Selling Stockholders against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person and the Selling Stockholders may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment 24. or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person or the Selling Stockholders in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company and the Selling Stockholders hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth (A) as the last paragraphs on the inside front cover page of the Prospectus concerning stabilization and passive market making by the Underwriters and (B) in the table in the first paragraph and as the second paragraph second and eleventh paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party 25. under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (BAS in the case of Section 8(b) and Section 9), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) Settlements. The indemnifying party under this Section 8 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 8(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (ii) does not include a statement as to, or an admission of, fault, culpability or a failure to act by or on behalf of an indemnified party. (e) Notwithstanding the foregoing, the liability of each Selling Stockholder under such Selling Stockholder's representations and warranties contained in Section 1 hereof, under the indemnity and contribution agreements contained in this Section 8, and this Agreement shall be limited to an amount equal to the initial public offering price of the Securities sold by each Selling Stockholder to the Underwriters less the discounts and commisions paid for such Securities. The Company and each Selling Stockholder may agree, as among themselves and without limiting the rights of the Underwriters under this Agreement, as to the respective amounts of such liability for which they each shall be responsible. 26. Section 9. Contribution. If the indemnification provided for in Section 8 is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company or the Selling Stockholders, as the case may be, on the one hand, and the Underwriters, on the other hand, from the offering of the Common Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company or the Selling Stockholders, as the case may be, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company or the Selling Stockholders, as the case may be, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Common Shares pursuant to this Agreement (before deducting expenses) received by the Company or the Selling Stockholders, as the case may be, and the total underwriting discount received by the Underwriters, in each case as set forth on the front cover page of the Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding location on the Term Sheet) bear to the aggregate initial public offering price of the Common Shares as set forth on such cover. The relative fault of the Company or the Selling Stockholders, as the case may be, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Stockholders, as the case may be, on the one hand, or the Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 8(c), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 8(c) with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8(c) for purposes of indemnification. The Company, the Selling Stockholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 9. 27. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their names in Schedule A. For purposes of this Section 9, each officer and employee of an - ---------- Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company with the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company. Section 10. Default of One or More of the Several Underwriters. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Common Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Common Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A ---------- bears to the aggregate number of Firm Common Shares set forth opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Common Shares and the aggregate number of Common Shares with respect to which such default occurs exceeds 10% of the aggregate number of Common Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 6, Section 8 and Section 9 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 10. Any action taken under this Section 10 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 28. Section 11. Termination of this Agreement. Prior to the First Closing Date this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq National Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (ii) a general banking moratorium shall have been declared by any of federal, New York, Delaware or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 11 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 shall at all times be effective and shall survive such termination. Section 12. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers, of the Selling Stockholders and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. Section 13. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: Banc of America Securities LLC 600 Montgomery Street San Francisco, California 94111 Facsimile: 415-913-5558 Attention: Richard A. Smith 29. With a copy to: Banc of America Securities LLC 600 Montgomery Street San Francisco, California 94111 Facsimile: (415) 913-5553 Attention: Jeffrey R. Lapic, Esq. If to the Company: Vyyo Inc. 20400 Stevens Creek Blvd., 8th Floor Cupertino, CA 95014 Facsimile: (408) 863-2329 Attention: Eran Pilovsky With a copy to: Skadden, Arps, Slate, Meagher & Flom LLP 525 University Ave., Suite 220 Palo Alto, CA 94301 Facsimile: (650) 470-4570 Attention: Gregory C. Smith, Esq. If to the Selling Stockholders: [ ] With a copy to: Bay Venture Counsel, LLP 1999 Harrison Street, Suite 1300 Oakland, CA 94612 Facsimile: (510) 834-7440 Attention: Bruce D. Whitley, Esq. Any party hereto may change the address for receipt of communications by giving written notice to the others. Section 14. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 10 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9, and in each case their respective successors, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. 30. Section 15. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. Section 16. (a) Governing Law Provisions. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. (c) Waiver of Immunity. With respect to any Related Proceeding, each party irrevocably waives, to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, service of process, attachment (both before and after judgment) and execution to which it might otherwise be entitled in the Specified Courts, and with respect to any Related Judgment, each party waives any such immunity in the Specified Courts or any other court of competent jurisdiction, and will not raise or claim or cause to be pleaded any such immunity at or in respect of any such Related Proceeding or Related Judgment, including, without limitation, any immunity pursuant to the United States Foreign Sovereign Immunities Act of 1976, as amended. Section 17. Failure of One or More of the Selling Stockholders to Sell and Deliver Common Shares. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Stockholders at the First Closing Date pursuant to this Agreement, then the Underwriters may at their option, by written notice from the Representative to the Company and the Selling stockholders, either (i) terminate this Agreement without any liability on the part of any Underwriter or, except as provided in Sections 4, 6, 8 and 9 hereof, the Company or the Selling Stockholders, or (ii) purchase the shares which the Company and other Selling Stockholders have agreed to sell 31. and deliver in accordance with the terms hereof. If one or more of the Selling Stockholders shall fail to sell and deliver to the Underwriters the Common Shares to be sold and delivered by such Selling Stockholders pursuant to this Agreement at the First Closing Date or the Second Closing Date, then the Underwriters shall have the right, by written notice from the Representative to the Company and the Selling Stockholders, to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. Section 18. General Provisions. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 8 and the contribution provisions of Section 9, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 8 and 9 hereto fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act. 32. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, VYYO INC. By: ------------------------------------- [Title] SELLING STOCKHOLDERS By: ------------------------------------- [Title] The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives in San Francisco, California as of the date first above written. BANC OF AMERICA SECURITIES LLC CIBC WORLD MARKETS CORP. DAIN RAUSCHER INCORPORATED NEEDHAM & COMPANY, INC. W.R. HAMBRECHT + CO., INC. Acting as Representatives of the several Underwriters named in the attached Schedule A. BANC OF AMERICA SECURITIES LLC By: ------------------------------- Authorized Signatory 33. SCHEDULE A
Number of Firm Common Shares to Underwriters be Purchased ------------ ---------------- --------------------- Total =====================
Schedule A-1 SCHEDULE B
Number of Firm Number of Optional Name of Common Shares Common Shares Selling Stockholder To Be Sold To Be Sold ------------------- -------------- ------------------
Schedule B-1 EXHIBIT A Opinion of counsel for the Company to be delivered pursuant to Section 5(d) of the Underwriting Agreement. References to the Prospectus in this Exhibit A include any supplements thereto at the Closing Date. (i) The form of certificate used to evidence the Shares is in due and proper form and complies in all material respects with all applicable requirements of the Certificate of Incorporation and the Bylaws of the Company and the General Corporation Law of the State of Delaware; (ii) The issuance of the Shares will not be subject to any preemptive right or similar right arising by operation of the Certificate of Incorporation or the Bylaws of the Company of the General Corporation Law of the State of Delaware, in each case as currently in effect; (iii) The Underwriting Agreement has been duly authorized, executed and delivered by the Company; (iv) The Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to the Underwriting Agreement and, when certificates therefore have been issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will be validly issued, fully paid and nonassessable; (v) The Registration Statement and the Prospectus, as of their respective effective or issue dates appeared o their face to be appropriately responsive in all material respects to the applicable requirements of the Act and the Rules and Regulations, except that, in each case, we express no opinion as to the financial statements, schedules and other financial and statistical data included therein or excluded therefrom or the exhibits thereto, and we do not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus; (vi) The statements (A) in the Prospectus under the captions "Description of Capital Stock" and, to the extent of the description of the Underwriting Agreement, the first, second, third and fourteenth paragraphs under the caption "Underwriting" and (B) in Items 14 and 15 of the Registration Statement, in each case insofar as such statements constitute summaries of the legal matters, the provisions of the Certificate of Incorporation or the Bylaws, documents or proceedings referred to therein fairly summarize the matters referred to therein in all material respects; (vii) Except as described of disclosed in the Prospectus, to our knowledge, there are no legal or governmental actions, suits or proceedings pending or threatened Exhibit A-1 which are required to be described or disclosed in the Prospectus; (viii) No Governmental Approval or consent, or registration or approval of or with the Commission is required to be made or obtained by the Company for the execution and delivery by the Company of the Underwriting Agreement of the issuance and sale of the Shares by the Company pursuant to the Underwriting Agreement, except as have been obtained and made; (ix) The execution and delivery of the Underwriting Agreement by the Company and the issuance and sale of the Shares will not (i) contravene the Certificate of Incorporation of the Bylaws of the Company; (ii) constitute a violation of or default under the terms of any Applicable Contract except to the extent disclosed in the Prospectus; or (iii) to the best of our knowledge, violate any Applicable Law or Applicable Order. As used in such opinion, (i) the term "Applicable Law" means those laws of the State of New York, the State of Delaware, the State of California and the United States of America that, in each case, in such counsel's experience, are normally applicable to transactions of the type contemplated by the Underwriting Agreement (except for United States, state and foreign securities or Blue Sky laws, anti-fraud laws and rules and regulations of the National Association of Securities Dealers, Inc.), but without such counsel having made any special investigation regarding any other laws; (ii) the term "Governmental Authorities" means any federal, New York, California or Delaware executive, legislative, judicial, administrative or regulatory body; (iii) the term "Applicable Order" means those judgements, orders or decrees of any Governmental Authorities specifically identified to such counsel by the Company to be applicable to the Company, as identified on Schedule __ thereto and (iv) the term "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, qualification or registration with, any Governmental Authority required to be made or obtained by the Company pursuant to Applicable Laws, other than any consent, approval, license, authorization, validation, filing, qualification or registration which may have become applicable as a result of the Underwriters' involvement in the transactions contemplated by the Underwriting Agreement or because of the Underwriters' legal or regulatory status or because of any other facts specifically pertaining to the Underwriters; (x) The Company is not, and after receipt of payment for the Offered Shares will not be an "investment company" as defined in the Investment Company Act of 1940; (xi) Except as disclosed in the Registration Statement of the Prospectus, to our knowledge, no persons have registration or other similar rights to have any equity or debt securities of the Company registered for sale under the Registration Statement or included in the offering contemplated by the Underwriting Agreement under any Applicable Contract except for such rights as have been duly waived. Exhibit A-2 EXHIBIT B Opinion of counsel for the Company to be delivered pursuant to Section 5(d) of the Underwriting Agreement. (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware; (ii) The Company has the requisite corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement; (iii) The Company is duly qualified as a foreign corporation and is in good standing in the State of California and in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change; (iv) The authorized capital stock of the Company (including the Common Stock) conforms in all material respects as to legal matters to the description thereof contained in the Prospectus under the caption "Description of Capital Stock"; (v) All of the outstanding shares of Common Stock of the Company as identified in the Prospectus have been duly authorized and validly issued, and are fully paid and nonassessable. (vi) The statements under the Prospectus caption "Shares Eligible for Future Sale", insofar as such statements constitute a summary of matters of law, fairly summarize such matters of law in all material respects; (vii) To our knowledge, other than as described in the Registration Statement of Prospectus, there are no agreements, contracts, indentures, leases or other written instruments that are required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement that are not described or filed as required. (viii) To our knowledge, the Company is not in violation of the Certificate of Incorporation or Bylaws, except in each case for such violations as would not, individually or in the aggregate, result in a Material Adverse Change. Exhibit B-1 EXHIBIT C Opinion of counsel for the Selling Stockholders to be delivered pursuant to Section 5(e) of the Underwriting Agreement. (i) The Shares to be sold by the Selling Stockholders are duly authorized and validly issued and fully paid and nonassessable, and to the best of our knowledge, have not been, and are not being, issued in violation of any preemptive right, registration right, co-sale right, right of first refusal, or other similar right, and the stockholders of the Company have no preemptive or, to the best of our knowledge, other rights to purchase any of these Shares that have not been waived or that have not terminated upon or prior to the date hereof; (ii) Each Selling Stockholder which is not a natural person has full right, power and authority to enter into and to perform its obligations under the Power of Attorney and Custody Agreement to executed and delivered by it in connection with the transactions contemplated therein; the Power of Attorney and Custody Agreement of each Selling Stockholder that is not a natural person has been duly authorized by such Selling Stockholder; the Power of Attorney and the Custody Agreement of each Selling Stockholder has been duly executed and delivered by or on behalf of such Selling Stockholder; and the Power of Attorney and, assuming due authorization, execution and delivery of the Custody Agreement by the Custodian, the Custody Agreement of each Selling Stockholder constitutes the valid and binding agreement of each such Selling Stockholder, enforceable in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws relating to or affecting creditor's rights generally and subject to general equitable principles and to limitations on the availability of equitable relief, including specific performance; (iii) Each of the Selling Stockholders has full right, power, and authority to enter into and to perform its obligations under the Underwriting Agreement and to sell, transfer, assign and deliver the Shares to be sold by such Selling Stockholder under the Underwriting Agreement; (iv) The Underwriting Agreement has been duly authorized by each Selling Stockholder that is not a natural person and has been duly executed and delivered by or on behalf of each Selling Stockholder and, assuming due authorization, execution and delivery by you is valid and binding agreement of such Selling Stockholder, enforceable in accordance with its terms, except insofar as the indemnification and contribution provisions hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, arrangement, moratorium, or other similar laws relating to or affecting creditor's rights generally and subject to general principles and to limitations on the availability of equitable relief, including specific performance; and (v) Upon delivery of and payment for the Shares sold by each Selling Shareholder as contemplated by the Underwriting Agreement; the Underwriters will take Exhibit C-1 such Shares free and clear of any adverse claim. Assuming the Underwriters have purchased such Shares in good faith and without notice of adverse claims. Exhibit C-2 EXHIBIT D Opinion of patent counsel for the Company to be delivered pursuant to Section 5(g) of the Underwriting Agreement. Such counsel are familiar with the technology used by the Company in its business and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents, trade secrets, trademarks, service marks or other proprietary information or materials and: (ix) The Company is listed in the records of the United States Patent and Trademark Office as the holder of record of the patents listed on a schedule to such opinion (the "Patents") and each of the applications listed on a schedule to such opinion (the "Applications"). To the knowledge of such counsel, there are no claims of third parties to any ownership interest or lien with respect to any of the Patents or Applications. Such counsel is not aware of any material defect in form in the preparation or filing of the Applications on behalf of the Company. To the knowledge of such counsel, the Applications are being pursued by the Company. To the knowledge of such counsel, the Company owns as its sole property the Patents and pending Applications; (x) The Company is listed in the records of the appropriate foreign offices as the sole holder of record of the foreign patents listed on a schedule to such opinion (the "Foreign Patents") and each of the applications listed on a schedule to such opinion (the "Foreign Applications"). Such counsel knows of no claims of third parties to any ownership interest or lien with respect to the Foreign Patents or Foreign Applications. Such counsel is not aware of any material defect of form in the preparation or filing of the Foreign Applications on behalf of the Company. To the knowledge of such counsel, the Foreign Applications are being pursued by the Company. To the knowledge of such counsel, the Company owns as its sole property the Foreign Patents and pending Foreign Applications; Such counsel knows of no reason why the Patents or Foreign Patents are not valid as issued. Such counsel has no knowledge of any reason why any patent to be issued as a result of any Application or Foreign Application would not be valid or would not afford the Company useful patent protection with respect thereto; As to the statements under the captions "Risk Factors -- Our Profitability Could Suffer If Third Parties Infringe Upon Our Proprietary Technology" and "Business -- Intellectual Property," nothing has come to the attention of such counsel which caused them to believe that the above-mentioned sections of the Registration Statement and any amendment or supplement thereto made available and reviewed by such counsel, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on any later date on which Option Shares are to be purchased, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and Exhibit D-1 Such counsel knows of no material action, suit, claim or proceeding relating to patents, patent rights or licenses, trademarks or trademark rights, copyrights, collaborative research, licenses or royalty arrangements or agreements or trade secrets, know-how or proprietary techniques, including processes and substances, owned by or affecting the business or operations of the Company which are pending or threatened against the Company or any of its officers or directors. Exhibit D-2 EXHIBIT E [Date] Banc of America Securities LLC [Co-Managers] [As Representatives of the Several Underwriters] [c/o Banc of America Securities LLC] 600 Montgomery Street San Francisco, California 94111 RE: ______________________________(the "Company") Ladies & Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the Representatives[s] of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company [by, among other things, raising additional capital for its operations]. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not, without the prior written consent of BAS (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation any short sale), pledge, transfer, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or otherwise dispose of any shares of Common Stock, options or warrants to acquire shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on December 15, 2000. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions. With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering. Exhibit E-1 This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal Representatives, and assigns of the undersigned. - --------------------------------------- Printed Name of Holder By: ----------------------------------- Signature - --------------------------------------- Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) Exhibit E-2 EX-5.1 3 0003.txt OPINION OF SKADEN ARPS SLATE MEIGHER & FLOM LLP Exhibit 5.1 [LETTERHEAD OF SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP] September 13, 2000 Vyyo Inc. 20400 Stevens Creek Boulevard, 8th Floor Cupertino, CA 95014 Re: Vyyo Inc. Form S-1 Registration Statement ------------------------------- Ladies and Gentlemen: We have acted as special counsel to Vyyo Inc., a Delaware corporation (the "Company"), in connection with the public offering of up to 2,300,000 shares (including 300,000 shares subject to an over-allotment option) to be issued by the Company (the "Primary Shares") of the Company's Common Stock, par value $0.001 per share (the "Common Stock"). This opinion is being furnished in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended (the "Act"). In connection with this opinion, we have examined originals or copies, certified or otherwise identified to our satisfaction, of (i) the Registration Statement on Form S-1 (File No. 33-45132) as filed with the Securities and Exchange Commission (the "Commission") on September 1, 2000 under the Act, Amendment No. 1 to the Registration Statement as filed with the Commission on September 6, 2000 under the Act, and Amendment No. 2 to the Registration Statement, filed with the Commission on the date hereof (such Registration Statement, as so amended, being hereinafter referred to as the "Registration Statement"); (ii) the form of the Underwriting Agreement (the "Underwriting Agreement") proposed to be entered into between the Company, as issuer, and Banc of America Securities LLC, as representatives of the several underwriters named therein (the "Underwriters"), filed as an exhibit to the Registration Statement; (iii) a specimen certificate representing the Common Stock; (iv) the Third Amended and Restated Certificate of Incorporation of the Company, as presently in effect; (v) the Amended and Restated Bylaws of the Company, as presently in effect; and (vi) certain resolutions of the Board of Directors of the Company and drafts of certain resolutions of the Pricing Committee of the Board of Directors of the Company (the "Pricing Committee") in Vyyo Inc. September 13, 2000 Page 2 each case relating to the issuance and sale of the Primary Shares. We have also examined originals or copies, certified or otherwise identified to our satisfaction, of such records of the Company and such agreements, certificates of public officials, certificates of officers or other representatives of the Company and others, and such other documents, certificates and records as we have deemed necessary or appropriate as a basis for the opinions set forth herein. In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies and the authenticity of the originals of such latter documents. In making our examination of documents executed or to be executed by parties other than the Company, we have assumed that such parties had or will have the power, corporate or other, to enter into and perform all obligations thereunder and have also assumed the due authorization by all requisite action, corporate or other, and execution and delivery by such parties of such documents and the validity and binding effect thereof. As to any facts material to the opinions expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. Members of our firm are admitted to the bar in the State of Delaware, and we do not express any opinion as to the laws of any other jurisdiction. Based upon and subject to the foregoing, we are of the opinion that: 1. When (i) the price at which the Primary Shares are to be sold to the Underwriters pursuant to the Underwriting Agreement and other matters relating to the issuance and sale of the Primary Shares have been approved by the Pricing Committee; (ii) the Underwriting Agreement has been duly executed and delivered; and (iii) the Primary Shares have been delivered to and paid for by the Underwriters in accordance with the terms of the Underwriting Agreement, the issuance and sale of the Primary Shares will have been duly authorized, and the Primary Shares will be validly issued, fully paid and nonassessable. Vyyo Inc. September 13, 2000 Page 3 We hereby consent to the filing of this opinion with the Commission as an exhibit to the Registration Statement. We also consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission. Very truly yours, /s/ SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP EX-5.2 4 0004.txt OPINION OF BAY VENTURE COUNSEL, LLP Exhibit 5.2 [LETTERHEAD OF BAY VENTURE COUNSEL, LLP] September 12, 2000 Vyyo Inc. 20400 Stevens Creek Blvd., 8th Fl. Cupertino, CA 95014 Re: Opinion of Counsel Ladies and Gentlemen: This opinion is rendered in connection with the filing by Vyyo Inc., a Delaware corporation (the "Company"), of its Registration Statement on Form S-1 (the "Registration Statement") with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), with respect to the offer and sale by the selling stockholders ("Selling Stockholders") of the Companyidentified in the Registration Statement (the "Offering") of up to 2,300,000 currently issued and outstanding shares (including 300,000 shares subject to an over-allotment option) of the Company's common stock, par value $.0001 per share (the "Shares"). We have acted as counsel to the Selling Stockholders in connection with the preparation of the Registration Statement. In our capacity as such counsel, we have familiarized ourselves with the proceedings taken by the Company in connection with the authorization, issuance and sale of the Shares to the Selling Stockholders. In addition, we have made such legal and factual examinations and inquiries, including an examination of originals (or copies certified or otherwise identified to our satisfaction as being true reproductions of originals) of such documents, corporate records and other instruments, and have obtained from officers of the Company and agents thereof such certificates and other representations and assurances, as we have deemed necessary or appropriate for the purposes of this opinion. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the legal capacity of natural persons executing such documents and the authenticity and conformity to original documents of documents submitted to us as certified or photostatic copies. We are opining herein as to the effect on the subject transaction only of the General Corporation Law of the State of Delaware, including statutory and reported decisional law thereunder, and we express no opinion with respect to the applicability thereto, or the effect thereon, of the laws of any other jurisdiction or, in the case of Delaware, any other laws, or as to any matters of municipal law of the laws of any local agencies within any state. Subject to the foregoing and the other qualifications set forth herein, it is our opinion that, as of the date hereof, based on the foregoing and the proceedings to be taken by the Company as referred to above, the Shares have been duly authorized, validly issued and nonassessable. Vyyo Inc. September 12, 2000 Page 2 of 2 Re: Opinion of Counsel We consent to your filing this opinion as an exhibit to the Registration Statement and to the reference to our firm contained under the heading "Legal Matters" of the prospectus included therein. Very truly yours, /s/ BAY VENTURE COUNSEL, LLP EX-10.31 5 0005.txt AMENDMENT #3 TO REGISTRATION RIGHTS Exhibit 10.31 VYYO INC. AMENDMENT NO. 3 TO REGISTRATION RIGHTS AND LOCK-UP AGREEMENT The undersigned Holders (as that term is defined in the Registration Rights And Lock-Up Agreement, originally executed on April 21, 1996 and amended on August 13, 1999 and February 4, 2000, (the "Rights Agreement") among Vyyo Inc. (the "Company") and such holders of Registrable Securities, (as that term is defined in the Rights Agreement)) which Holders together hold at least 50% of the outstanding Registrable Securities of the Company, hereby amend the registration rights to add Section 2(b)(iii) as follows: "(iii) notwithstanding anything to the contrary in the foregoing, the provision of this Section 2(b) shall not apply to the Company's proposed public offering (the "Offering") pursuant to the Registration Statement filed with the Securities and Exchange Commission on September 1, 2000, as amended." This Amendment will bind all parties to the Rights Agreement, whether parties hereto or not, and without regard to their participation or non-participation in the Offering. This Amendment is not intended to and does not amend or waive any of the indemnification rights of Holders who participate in a registered public offering pursuant to Section 2(f) of the Rights Agreement. This Amendment may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. The undersigned understand that the Company and the underwriters of the Offering will proceed with the Offering in reliance on this Amendment. IN WITNESS WHEREOF, the undersigned has executed this Amendment as of __________ __, 2000. For Corporation/Partnership: For Individual: _______________________ _______________________ (Name of Entity) (Name) By:____________________ ______________________ Title:_________________ (Signature) EX-10.33 6 0006.txt INDEMNIFICATION AGREEMENT Exhibit 10.33 INDEMNIFICATION AGREEMENT This Indemnification Agreement (the "Agreement"), is entered into as of _______________, 2000, by and among Vyyo Inc. (the "Company"), Arnon Kohavi, Michael Corwin and Eran Pilovsky (collectively, referred to herein as the "Company Selling Stockholders"). Capitalized terms used herein but not otherwise defined shall have the meaning set forth in the Underwriting Agreement (as defined below). In consideration of the mutual promises, representations, warranties and conditions set forth in this Agreement and as contemplated to be set forth in that certain Underwriting Agreement (the "Underwriting Agreement"), to be entered into by and among the Company, the Company Selling Stockholders and certain other stockholders of the Company and certain underwriters for the Company, on such date as the Company's Registration Statement on Form S-1 (No. 333-45132) (the "Registration Statement") has been declared effective by the Securities and Exchange Commission, the parties hereto agree as follows: 1. To the extent permitted by law, the Company will indemnify and hold harmless each of the Company Selling Stockholders against any losses, claims, damages, or liabilities (joint or several) to which they may become subject insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based on any inaccuracy in the representations and warranties made on the part of the Company and each Company Selling Stockholder pursuant to Section 1(A) of the Underwriting Agreement; and the Company will reimburse each such person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 1 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability, or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld; provided further, that the Company Selling Stockholder had no actual knowledge of the inaccuracy in the representations or warranties when made by the Company or the Company Selling Stockholder. 2. To the extent permitted by law, the Company will indemnify and hold harmless each of the Company Selling Stockholders against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the Exchange Act or other federal or state law, or pursuant to the terms of the Underwriting Agreement, insofar as such losses, claims, damages or liabilities (or actions in respect thereof), including a request for indemnification by an underwriter, arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation"): (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company or the Registration Statement or any preliminary prospectus of the Securities Act, the Exchange Act, any state securities law, or any rule or regulation promulgated under the Securities Act, the Exchange Act or any state securities law in connection with the public offering to be conducted pursuant to the the Registration Statement; and the Company will reimburse each such person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 2 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld, nor shall the Company be liable in any such case for any such loss, claim, damage, liability, or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with the Registration by such person, or partner, officer, director, or controlling person of such person; and provided further, that the Company Selling Stockholder had no actual knowledge of the (i) untrue statement, (ii) omission, or (iii) violation. 3. Promptly after receipt by an indemnified party under Sections 1 or 2 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under Sections 1 or 2, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the 2 counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under Section 1 or 2, as applicable, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under Sections 1 or 2. 4. If the indemnification provided for in either Sections 1 or 2 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party thereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the violation that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, with respect to Violations under Section 2 whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, that in no event shall any contribution by each of the Company Selling Stockholders hereunder exceed the net proceeds from the offering received by such person. 5. The obligations of the parties to this Agreement shall survive completion of any offering of securities pursuant to the Registration Statement. No indemnifying party, in the defense of any such claim or litigation, shall, except with the consent of each indemnifying party, consent to entry of any judgment or enter into any settlement that does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 3 This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. In witness whereof, the parties hereto have executed this Agreement as of the date set forth in the first paragraph hereof: By:_______________________ Arnon Cohavi By:_______________________ Michael Corwin By:_______________________ Eran Pilovsky Vyyo Inc. By:_______________________ Title:________________________________________ 4 EX-23.1 7 0007.txt CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated January 28, 2000, in Amendment No. 2 to the Registration Statement (Form S-1, No. 333-45132) and related Prospectus of Vyyo Inc. /s/ Ernst & Young LLP San Jose, California September 12, 2000 -----END PRIVACY-ENHANCED MESSAGE-----