0001012870-01-502594.txt : 20011119 0001012870-01-502594.hdr.sgml : 20011119 ACCESSION NUMBER: 0001012870-01-502594 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VYYO INC CENTRAL INDEX KEY: 0001104730 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATIONS EQUIPMENT, NEC [3669] IRS NUMBER: 943241270 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-30189 FILM NUMBER: 1775479 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 10-Q 1 d10q.txt FORM 10-Q FOR PERIOD ENDED 09/30/2001 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 ------------------ or (_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission File Number 0-30189 ------- VYYO INC. --------- (Exact name of registrant as specified in its charter) Delaware 94-3241270 -------- ---------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 20400 Stevens Creek Boulevard, 8/th/ Floor, Cupertino, California 95014 ----------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (408) 863-2300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ --- As of September 30, 2001, there were 36,972,713 shares of Common Stock ($0.0001 par value) outstanding. INDEX VYYO INC.
Page No. ------- PART I. FINANCIAL INFORMATION ----------------------------- Item 1. Condensed Consolidated Financial Statements (Unaudited) Condensed consolidated balance sheets-December 31, 2000 and September 30, 2001........................................................... 3 Condensed consolidated statements of operations-three and nine months ended September 30, 2000 and 2001 ............................................... 4 Condensed consolidated statements of cash flows-nine months ended September 30, 2000 and September 30, 2001 ................................. 5 Notes to condensed consolidated financial statements ............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................ 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................... 22 PART II. OTHER INFORMATION --------------------------- Item 1. Legal Proceedings ................................................................ 23 Item 2. Changes in Securities and Use of Proceeds......................................... 23 Item 3. Defaults upon Senior Securities .................................................. 24 Item 4. Submission of Matters to a Vote of Security Holders .............................. 24 Item 5. Other Information ................................................................ 24 Item 6. Exhibits and Reports on Form 8-K ................................................. 24 SIGNATURE. ............................................................................... 25
2 Part I. Financial Information Item 1. Condensed Consolidated Financial Statements Vyyo Inc. Condensed Consolidated Balance Sheets (In Thousands)
December 31, September 30, ------------ ------------- 2000 2001 ---- ---- (Note 1) (Unaudited) Assets ------ Current Assets -------------- Cash and cash equivalents $ 33,991 $ 17,407 Short-term investments 93,914 70,559 Accounts receivable, net 2,890 1,635 Inventory 6,006 2,056 Other current assets 2,382 1,156 --------- --------- Total current assets 139,183 92,813 Property and equipment, net 3,984 2,078 --------- --------- $ 143,167 $ 94,891 ========= ========= Liabilities and Stockholders' Equity ------------------------------------ Current Liabilities ------------------- Accounts payable $ 6,242 $ 2,972 Accrued liabilities 9,345 7,204 Accrued restructuring charges -- 4,797 --------- --------- Total current liabilities 15,587 14,973 Commitments and Contingencies Stockholders' Equity -------------------- Common stock (37,762 and 36,973 shares issued and 239,613 227,437 outstanding at December 31, 2000 and September 30, 2001, respectively) Notes receivable from stockholders (2,834) (547) Deferred stock compensation (8,100) (900) Other comprehensive income 289 1,155 Accumulated deficit (101,388) (147,227) --------- --------- Total stockholders' equity 127,580 79,918 --------- --------- $ 143,167 $ 94,891 ========= =========
See Notes to Condensed Consolidated Financial Statements Note 1: The condensed consolidated balance sheet at December 31, 2000 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. 3 Vyyo Inc. Condensed Consolidated Statements of Operations (In Thousands Except Per Share Data) (Unaudited)
Three Months Ended Nine Months Ended ----------------- ----------------- September 30, September 30, ------------- ------------- 2000 2001 2000 2001 ---- ---- ---- ---- Net revenues $ 4,465 $ 2,859 $ 9,321 $ 4,889 Cost of revenues [1] 3,086 3,207 6,576 13,264 -------- -------- -------- -------- Gross profit (loss) 1,379 (348) 2,745 (8,375) Operating Expenses ------------------ Research and development 3,957 2,740 8,589 12,670 Sales and marketing 2,350 1,564 5,893 6,145 General and administrative 2,095 895 5,914 5,478 Restructuring charge - 6,161 - 11,562 Charge for stock compensation 2,670 596 12,607 6,034 -------- -------- -------- -------- Total operating expenses 11,072 11,956 33,003 41,889 -------- -------- -------- -------- Operating loss (9,693) (12,304) (30,258) (50,264) Interest and other income (expense), net 1,446 1,236 2,623 4,425 -------- -------- -------- -------- Net loss $ (8,247) $(11,068) $(27,635) $(45,839) ======== ======== ======== ======== Net Loss Per Share: Basic and diluted $ (0.23) $ (0.30) $ (0.89) $ (1.25) ======== ======== ======== ======== Shares used in per share computation - basic and diluted 35,707 36,753 30,949 36,798 ======== ======== ======== ========
[1] Costs of revenues for the nine months ended September 30, 2001, includes $8.67 million of charges for inventory and purchase commitments See Notes to Condensed Consolidated Financial Statements 4 Vyyo Inc. Condensed Consolidated Statements of Cash Flows (In Thousands) (Unaudited)
Nine Months Ended ----------------- September 30, ------------ 2000 2001 ---- ---- Operating Activities: -------------------- Net loss for the period $ (27,635) $ (45,839) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and other 824 4,229 Stock based compensation 12,607 6,034 Changes in operating assets and liabilities: Accounts receivable (1,768) 1,255 Inventory (2,622) 3,950 Other assets (1,451) 1,226 Accounts payable 2,224 (3,270) Accrued liabilities 6,630 2,656 --------- --------- Net cash used in operating activities (11,191) (29,759) --------- --------- Investing Activities: -------------------- Purchases of property and equipment (2,383) (2,359) Purchases of short term investments (61,026) (11,483) Proceeds from sale of short term investments 2,042 35,704 Proceeds from sale of property and equipment 8 36 --------- --------- Net cash provided by (used in) investing activities (61,359) 21,898 --------- --------- Financing Activities: -------------------- Repayment of short-term debt obligations (2,371) - Proceeds from stockholder note 1,170 - Issuance of common stock 147,014 334 Repurchase of stock - (9,057) --------- --------- Net cash provided by (used in) financing activities 145,813 (8,723) --------- --------- Increase (Decrease) in cash and cash equivalents 73,263 (16,584) Cash and cash equivalents at beginning of period 5,036 33,991 --------- --------- Cash and cash equivalents at end of period $ 78,299 $ 17,407 ========= =========
See Notes to Condensed Consolidated Financial Statements 5 Vyyo Inc. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Vyyo Inc. ("Vyyo" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2000, included in the annual report on Form 10-K for the year ended December 31, 2000, filed with the Securities and Exchange Commission. 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. Net Loss Per Share Basic and diluted net losses per share are presented in accordance with SFAS No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. 2. Inventory Inventory is comprised of the following (in thousands): December 31, September 30, 2000 2001 ---- ------ (Unaudited) Raw material $ 2,890 $ - Work in process 809 244 Finished goods 2,307 1,812 ------------ ------------- $ 6,006 $ 2,056 ============ ============= 3. Accrued Liabilities Accrued liabilities consist of the following (in thousands): December 31, September 30, 2000 2001 ---- ---- (Unaudited) Compensation and benefits $ 4,220 $ 2,715 Withholding tax 742 1,099 Warranty 1,103 1,222 Royalties 658 872 Severance pay 644 706 Other 1,978 590 ------------ ------------- $ 9,345 $ 7,204 ============ ============= 6 4. Accrued Restructuring Charges In the third quarter of 2001, the Company continued to implement a restructuring program to reduce operating expenses due to the continuing slowdown in the telecommunication sector and the general economy. The Company recorded charges of $6.2 million in the third quarter, in addition to the $5.4 million recorded in the first two quarters of 2001. Included in these charges are costs related to excess facilities and severance. The restructuring program in the third quarter of 2001 resulted in a reduction in force of approximately 70%. The restructuring charge and its utilization are summarized as follows as of September 30, 2001: Cumulative Restructuring To be charge Utilized Utilized ------------- ------------ --------- Facilities $ 7,451 $ 5,200 $ 2,251 Severance and other 4,111 1,565 2,546 ------------- ------------ --------- $ 11,562 $ 6,765 $ 4,797 ============= ============ ========= 5. Contingencies Patent Matter In early 1999 and in April 2000, the Company received written notices 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 eleven of Hybrid's issued patents. The Company, with the advice of counsel, believes these 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 the Company's operating results, cash flows and financial condition. Common Stock Repurchase Program In December 2000, the Company's board of directors authorized the repurchase of up to 4 million shares of Vyyo's common stock. In March 2001, the Company's board of directors approved an increase in the number of shares it may purchase under its repurchase program by 6 million shares. The Company repurchased and retired 1.3 million shares in open market transactions for a total cost of $9.1 million in the quarter ended March 31, 2001. There was no share repurchase activity in the quarters ended June 30 and September 30, 2001. Shareholder's Note Receivable In the first quarter of 2001, the Company amended a promissory note in the amount of $2,834,163 issued to the Company by an officer to (i) make the note non-recourse to the assets of the issuer of the note other than the underlying collateral, (ii) reduce the interest rate and delay the due date for payment of interest until the maturity date of the note, and (iii) secure the note solely with the underlying shares of common stock purchased with the note proceeds. In the third quarter of 2001, in connection with this amendment, the Company recorded an additional charge for stock compensation of $296,000 related to a decrease in the fair market value of the underlying collateral. The charge for stock compensation was $2.3 million in the first half of 2001. Subsequent to September 30, 2001, the Company agreed to cancel the promissory note in exchange for redelivery to the Company of the shares securing the promissory note. See note 8. 6. Comprehensive Income Total comprehensive income was $222,000 and $866,000 for the first three and nine months of 2001, respectively, compared to a comprehensive loss of $9,000 and a comprehensive income of $8,000 for the first three and nine months of 2000, respectively. 7 7. New Accounting Pronouncements In June 1998, the Financial Accounting Standard Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 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 has adopted the standard effective January 1, 2001. The adoption of SFAS 133 did not affect the Company's financial condition or results of operations. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will no longer be amortized, but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. As the Company has not completed any business combinations through September 30, 2001, the Company believes that these standards will not have a material impact on its financial position or operating results. 8. Subsequent Events In October 2001, in connection with the departure of the Company's Chief Executive Officer, the Company (i) granted options to such officer to purchase 800,000 shares of common stock at an exercise price of $0.01 per share, (ii) canceled all of such officer's currently outstanding options, (iii) agreed to cancel the non-recourse promissory note previously issued by such officer to the Company (see note 5) in exchange for redelivery to the Company of 370,000 shares of common stock securing the note, and (iv) agreed to extend a loan to such officer of up to $1,000,000 upon the request of such officer. If drawn upon, this loan would be due on January 1, 2006, or earlier upon sales of the Company's shares held by such officer or upon certain other circumstances. The loan would be secured solely by the options held by such officer and the shares of the Company's common stock underlying these options. In August 2001, the board approved, subject to stockholder approval, a 1-for-3 reverse stock split of the Company's outstanding common stock. A special meeting of stockholders to vote on the reverse stock split is scheduled for November 13, 2001. 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the condensed consolidated interim financial statements and the notes thereto in Part I, Item 1 of this Quarterly Report and with Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2000, contained in Vyyo's Annual Report (Form 10-K) for the year ended December 31, 2000, filed with the Securities and Exchange Commission. The matters addressed in this Management's Discussion and Analysis of Financial Condition and Results of Operations, with the exception of the historical information presented, contain forward-looking statements involving risks and uncertainties. Vyyo's actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, without limitation, those set forth under the heading "Certain Factors That May Affect Future Results" following this Management's Discussion and Analysis section, and elsewhere in this report. Overview We supply broadband wireless access systems used by telecommunications service providers to deliver wireless, high-speed data connections to business and residential subscribers. We sell our systems directly to service providers, as well as to system integrators that deploy our systems as part of their end-to-end network solutions for service providers. We have incurred significant losses since our inception, and we expect to continue to incur net losses for the foreseeable future. We incurred net losses of approximately $45.8 million for the nine months ended September 30, 2001. As of September 30, 2001, our accumulated deficit was approximately $147.2 million. Results of Operations Net Revenues. Net revenues include product revenues and technology development revenues. Product revenues are derived primarily from sales of hubs and modems to telecommunications service providers and to system integrators. Product revenues are generally recorded when products are shipped, provided there are no customer acceptance requirements and we have no additional performance obligations. We accrue for estimated sales returns or exchanges and product warranty and liability costs upon recognition of product revenues. Our revenue is concentrated among relatively few customers. Though our principal revenue-generating customers are likely to vary on a quarterly basis, we anticipate that our revenues will remain concentrated among a few customers for the foreseeable future. Net revenues decreased by 36% from $4.5 million in the third quarter of 2000 to $2.9 million in the third quarter of 2001 and by 48% from $9.3 million in the first nine months of 2000 to $4.9 million in the first nine months of 2001. Technology development revenues were $480,000 in the first nine months of 2000. There were no technology development revenues in the first nine months of 2001. The decrease in revenues primarily reflects a slowdown in the global economy, reduction of capital spending and further tightening of financial markets in the telecommunication industry, which has reduced our potential customers' ability to secure financing and purchase equipment. Cost of Revenues. Cost of revenues consists of component and material costs, direct labor costs, warranty costs, royalties in connection with Israeli government incentive programs and overhead related to manufacturing our products. Cost of revenues increased from $3.1 million in the third quarter of 2000 to $3.2 million in the third quarter of 2001. Cost of revenues was $6.6 million in the first nine months of 2000 compared with $13.3 million in the first nine 9 months of 2001. Cost of revenues in the three and nine months ended September 30, 2001 included charges of approximately $760,000 and $8.7 million, respectively, for excess inventory and purchase commitments. Research and Development Expenses. Research and development expenses consist primarily of personnel, facilities, equipment, supplies, and funding of external projects for our research and development activities. These expenses are charged to operations as incurred. Our research and development expenses decreased from $4.0 million in the third quarter of 2000 to $2.7 million in the third quarter of 2001. These decreases were due to reductions in the workforce in the second and third quarters of 2001. Research and development expenses increased from $8.6 million in the first nine months of 2000 to $12.7 million in the first nine months of 2001. These increases were due to increases in the number of research and development personnel and related activities in the first two quarters of 2001, a one time charge, and related costs of faci1ities. 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, promotional and marketing activities. Sales and marketing expenses decreased from $2.4 million in the third quarter of 2000 to $1.6 million in the third quarter of 2001. Sales and marketing expenses increased from $5.9 million in the first nine months of 2000 to $6.1 million in the first nine months of 2001. The increase in sales and marketing expenses was primarily due to an increase in the number of sales and marketing personnel and increased sales efforts into emerging markets in the first two quarters of 2001. General and Administrative Expenses. General and administrative expenses consist primarily of personnel and related costs for general corporate functions, including finance, accounting, business development, legal and administration. General and administrative expenses decreased from $2.1 million in the third quarter of 2000 to $895,000 in the third quarter of 2001. General and administrative expenses decreased from $5.9 million in the first nine months of 2000 to $5.5 million in the first nine months of 2001. The quarter over quarter decrease in general and administrative expenses was primarily due to reduction in compensation related expenses. Restructuring Charges. Restructuring charges were $11.6 million for the first nine months of 2001 as result of a company-wide restructuring program. The Company recorded $6.2 million of restructuring charges in the third quarter of 2001 related mainly to workforce reduction and write-off of excess facilities. Charge for Stock Based Compensation. Charge for stock based compensation included amortization of deferred stock compensation as well as stock compensation charges incurred in connection with modifications of stock awards in 2001. Interest and Other Income (Expense), Net. Interest income and other income (expense) includes interest and investment income, foreign currency remeasurement gains and losses offset by interest expense related to bank loans and convertible notes. Net interest income for the third quarter of 2000 was $1.4 million compared to $1.2 million in the third quarter of 2001. Net interest income was $2.6 million in the first nine months of 2000 compared to a net interest income of $4.4 million in the first nine months of 2001. Substantially all of the interest and other income in the first nine months of 2001 are represented by interest income on our cash and short-term investment balances. The Company repaid all of its outstanding loans in the second quarter of 2000. Interest and other income increased due to the higher average balance of invested cash equivalents and short-term investments. Interest income is expected to decline in future quarters due to a decline in cash balances and interest rates. 10 Income Taxes. As of December 31, 2000, the Company had approximately $32 million of Israeli net operating loss carryforwards and $13 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 2020. We have provided a full valuation allowance against our United States deferred tax assets, as the future realization of the tax benefit is not sufficiently assured. Liquidity And Capital Resources As of September 30, 2001, we had $88 million of cash, cash equivalents and short-term investments. In the first nine months of 2000, cash used in operations was $11.2 million, comprised of our net loss of $27.6 million, partially offset by non-cash charges of $13.4 million and an increase in working capital accounts of $3.0 million. In the first nine months of 2001, cash used in operations was $29.8 million, comprised of our net loss of $45.8 million, partially offset by non-cash charges of $10.3 million for stock compensation charges, depreciation and asset write-down and increase in working capital accounts of $5.7 million. Investing activities in the first nine months of 2001, excluding purchases and proceeds from short-term investments, amounted to approximately $2.3 million for investments in property and equipment. Cash used in financing activities in the first nine months of 2001 was $8.7 million, mainly comprised of stock repurchases in the amount of $9.1 million, partially offset by proceeds from stock option exercises. 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 continue to devote substantial capital resources to fund our research and development and our sales and marketing activities as well as general corporate activities. We expect that our cash and investment balances will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months. After that, we may need to raise additional funds for a number of uses. We may not be able to obtain additional funds on acceptable terms, or at all. New Accounting Pronouncements In June 1998, the Financial Accounting Standard Board (FASB) issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 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 has adopted the standard effective January 1, 2001. The adoption of SFAS 133 did not affect the Company's financial condition or results of operations. In July 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. The new rules require business combinations initiated after June 30, 2001 to be accounted for using the purchase method of accounting and goodwill acquired after this date will no longer be amortized, but will be subject to annual impairment tests. All other intangible assets will continue to be amortized over their estimated useful lives. As the Company has not completed any business combinations through September 30, 2001, the Company believes that these standards will not have a material impact on its financial position or operating results. 11 CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTs This Form 10-Q contains forward-looking statements concerning our existing and future products, markets, expenses, revenues, liquidity, performance and cash needs as well as our plans and strategies. These forward-looking statements involve risks and uncertainties and are based on current management expectations. Many factors could cause actual results and events to differ significantly from the results anticipated by us and described in these forward looking statements, including but not limited to the following risk factors. If broadband wireless technology or our implementation of this technology is not broadly accepted, or if the telecommunications equipment market does not improve and grow, 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 and unproven, it is difficult to predict which market segments will develop or expand. We have particularly depended on the timing and extent of rollouts of broadband wireless access systems by the major telecommunications service providers in the United States. The largest MMDS license holder in the US, Sprint, has recently announced that it is suspending any new deployments and acquisition of new customers. The service providers have recently ceased, delayed or reduced these rollouts and may further delay or reduce rollouts in the future. 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 than wireless technologies that we offer or if they delay further 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. Should service providers or systems integrators that we may sell products to in the future 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. In addition, in 2001, the market for telecommunications equipment has significantly declined, which has adversely affected the entire telecommunications industry, including service providers, systems integrators and equipment providers, and has reduced the business outlook and visibility of the industry. In connection with the deterioration of global economic conditions, many of our customers and potential customers are also currently unable to obtain debt or equity financing for deployment of their wireless access networks and therefore do not currently have adequate capital resources to purchase our products. If the telecommunications market, and in particular the market for broadband access equipment, does not improve and grow, our business would be substantially harmed. If the communications and Internet industries do not continue to grow and evolve in a manner favorable to our business strategy or us, 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 growth of the global communications and Internet industries has recently slowed significantly and these industries continue to evolve rapidly. 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, which 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. 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 the third quarter of 2001, one customer accounted for approximately 74% of our revenues, and in the first nine months of 2001, two of our customers accounted for approximately 62% of our revenues, and we expect that we will continue to depend 12 on a limited number of customers for a substantial portion of our revenues in future periods. In addition, most of our customers are not obligated by long-term agreements to purchase our systems, and the agreements we have entered into do not obligate our customers to purchase a minimum number of systems. Our customers can generally cancel or reschedule orders on short notice and discontinue using our systems at any time. 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. In addition, many of our customers are dependent on obtaining funding for their deployments. The continued inability of our customers to obtain such funding will adversely affect their deployments, which would adversely affect our business. The potential effects of regulatory actions could impact spectrum allocation and frequencies worldwide and cause delays or otherwise negatively impact the growth and development of the broadband wireless industry. Countries worldwide are considering or are in the process of allocating frequencies for fixed wireless applications, but not all markets have done so. In addition, in October 2001, the United States Federal Communications Commission indicated that existing MMDS license holders may be able in the future to deploy mobile services using the MMDS frequencies. If service providers in the US will use mobile technology such as 3G cellular technology in the MMDS band, it will harm our business as Vyyo's current technology does not support mobile services. If the United States and/or other countries do not provide sufficient spectrum for fixed wireless applications or reallocate spectrum in the fixed wireless frequency bands for other purposes, our customers may delay or cancel deployments in fixed broadband wireless, which could seriously harm our business. Internationally, there has been delay in the allocation of 3.5Ghz licenses. Any further delays will adversely affect our customers' deployments and could significantly harm our business. 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 $35.2 million in 2000 and $45.8 million in the first nine months of 2001. As of September 30, 2001, our accumulated deficit was approximately $147.2 million. In response to the significant decline in our business and revenues in the first nine months of 2001, we have decreased our operating expenses; however, our expenses will continue to be significantly greater than our gross margin on revenues for the foreseeable future. Our revenues and gross margins may not grow or even continue at their current level. If our revenues do not rapidly increase or if our gross margins do not 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. In the first quarter of 2001, we experienced a particularly significant decline in revenues and increase in negative margin from prior quarters. These variations result from a number of factors, including: . the uncertain timing and level of market acceptance for our systems and the uncertain timing and extent of rollouts of wireless broadband access systems by the major service providers; . reductions in pricing by us or our competitors; . the mix of products sold by us and the mix of sales channels through which they are sold; . the ability of our existing and potential direct customers to obtain financing for the deployment of broadband wireles access systems; global economic conditions; . the effectiveness of our system integrator customers in marketing and selling their network systems equipment; and . changes in the prices or delays in deliveries of the components we purchase or license. 13 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. 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. 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 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. 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 competitors are Hybrid Networks, Inc., Alvarion Inc. (the merged entity of BreezeCOM Ltd and Floware Wireless Systems Ltd.), and Spike, in both the MMDS and 3.5Ghz markets. In addition, well-capitalized companies such as Cisco Systems, 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. 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 or defects in our software or hardware that we have failed to detect. We have in the past experienced, and may experience from time to time in the future, defects in new or enhanced products and systems after commencement of commercial shipments, or defects in deployed systems. 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 have incurred in the past and may again 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 relationship problems and injury to our reputation and may impair the market acceptance of our systems. 14 We depend on contract manufacturers and third party equipment suppliers, and these manufacturers and suppliers 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 two contract manufacturers for the manufacturing of our systems, which are located in Israel. 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. In addition, we currently have no formal agreement or relationship with a manufacturer for our modem products. Although we have sufficient inventory of modems on hand to fulfill anticipated demand for the foreseeable future, should our supply of modems be insufficient to meet future demand, our inability to identify and enter into a relationship with a manufacturer for our modems could harm our business. In the first nine months of 2001, we began to focus our resources on direct sales to service providers. Such direct sales will require us to resell to service providers equipment manufactured by third party suppliers and to integrate this equipment with the equipment we manufacture. We currently have no formal relationship with any third party supplier. If we are unable to establish relationships with suppliers, or if these suppliers are unable to provide equipment that meets the specifications of our customers on the delivery schedules required by our customers, and at acceptable prices, our business would be substantially harmed. 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 15 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. We have a limited operating history in the broadband point-to-multipoint wireless access market, which may limit an investor's ability to evaluate our business. The broadband wireless access market is only beginning to emerge. We began commercial shipments of our first-generation broadband wireless access system in the first quarter of 1999, and we began commercial shipments of our second-generation wireless access system in the fourth quarter of 1999. Our second-generation wireless access system is based on the cable industry's standard set of communications rules, or protocols, that we have adapted for use in wireless applications. Therefore, the success of our business will be entirely dependent upon the success of our wireless products generally, and our new wireless products in particular. We have a very limited operating history in the broadband wireless access market upon which to evaluate our future prospects, and the revenue and income potential of our business and market are unproven. Our limited operating history in this market may limit an investor's ability to evaluate our prospects due to: . our limited historical financial data from our wireless products; . our unproven potential to generate profits; and . our limited experience in addressing emerging trends that may affect our business. As a young company, we face risks and uncertainties relating to our ability to implement our business plan successfully. 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. If we do not effectively manage our costs in response to the decline in the business outlook, our business could be substantially harmed. Although we have recently reduced our operations in response to the decline in our business outlook, we will need to continue to monitor closely our costs and expenses. If the market and our business does not expand, we may need to reduce further our operations. 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 18% of our revenues in 2000 and 12% of our revenues in the first nine months of 2001. We expect that international sales may account for a substantial portion of our revenues in future periods. 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; . our international customers' ability to obtain financing to fund their deployments . changes in regulatory requirements and licensing frequencies to service providers; 16 . 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. We depend on our key personnel, in particular Davidi Gilo, our Chairman of the Board and Chief Executive Officer, Michael Corwin, our President and Chief Operating Officer, and Menashe Shahar, our Chief Technical Officer, the loss of any of whom could seriously harm our business. Our future success depends in large part on the continued services of our senior management and key personnel. In particular, we are highly dependent on the service of Davidi Gilo, our Chairman of the Board and Chief Executive Officer, Michael Corwin, our President and Chief Operating 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, Michael Corwin, Menashe Shahar, other members of senior management or other key personnel could seriously harm our business. If we choose to acquire new 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. We may also acquire companies or technologies that are not complementary or related to our current business. 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. Third parties may bring infringement claims against us that 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. 17 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. Because of our long product development process and sales cycle, we may incur substantial expenses without anticipated revenues that 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 likelihood 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. We may need to raise additional capital in the future, and if we are unable to secure adequate funds on terms acceptable to us, we may not be able to execute our business plan. We expect that the net proceeds from our initial public offering completed in May 2000, and our secondary public offering completed in September 2000, 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. 18 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. Because our management has the ability to control stockholder votes, the premium over market price that an acquirer might otherwise pay may be reduced and any merger or takeover may be delayed. Our management collectively own a substantial percentage of our outstanding common stock. As a result, these stockholders, acting together, will be able to control the outcome of all matters submitted for stockholder action, including: . electing members to our board of directors; . approving significant change-in-control transactions; . determining the amount and timing of dividends paid to themselves and to our public stockholders; and . controlling our management and operations. This concentration of ownership may have the effect of impeding a merger, consolidation, takeover or other business consolidation involving us, or discouraging a potential acquirer from making a tender offer for our shares. This concentration of ownership could also negatively affect our stock's market price or decrease any premium over market price that an acquirer might otherwise pay. Because the Nasdaq National Market is likely to continue to experience extreme price and volume fluctuations, the price of our stock may decline. The market price of our shares has been and likely will continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, including the following: . actual or anticipated variations in our quarterly operating results or those of our competitors; . announcements by us or our competitors of new products or technological innovations; . introduction and adoption of new industry standards; . changes in financial estimates or recommendations by securities analysts; 19 . 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 and telecommunications-related companies in particular, have 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 common stock may be delisted from the Nasdaq National Market. In order for our common stock to continue to be quoted on the Nasdaq National Market, we must satisfy various listing maintenance standards established by Nasdaq, including the requirement that our common stock maintain a minimum bid price of at least $1.00 per share. Under Nasdaq's listing maintenance standards, if the closing bid price of our common stock remains below $1.00 per share for 30 consecutive trading days Nasdaq will issue a deficiency notice to Vyyo. If the closing bid price subsequently does not reach $1.00 per share or higher for a minimum of ten consecutive trading days during the 90 calendar days following the issuance of the deficiency notice from Nasdaq, Nasdaq may de-list our common stock from trading on the Nasdaq National Market. As of the date of this report, our stock price has had a closing bid price below $1.00 for over 30 consecutive trading days. Although Nasdaq recently announced a temporary waiver of the minimum bid price requirement until January 2002, we will need to meet the requirement when it is reinstated. Vyyo has submitted to its stockholders for approval at a special meeting to be held on November 13, 2001, a one-for-three reverse stock split. Vyyo believes the reverse stock split is the most effective means to avoid a delisting of Vyyo's common stock from Nasdaq. If, following the reverse stock split, the per share price of Vyyo's common stock is and remains above $1.00, Vyyo will avoid a delisting action by Nasdaq based on the minimum closing bid price requirement. Vyyo cannot predict whether its stockholders will approve the reverse stock split or, if approved, that the reverse stock split will increase the market price for our common stock. The history of similar stock split combinations for companies in like circumstances is varied. The market price per share of Vyyo common stock following the reverse stock split may not either exceed or remain in excess of the $1.00 minimum bid price as required by Nasdaq. The reverse stock split could negatively impact the value of our common stock by allowing additional downward pressure on the stock price as its relative value becomes greater following the reverse split. Similarly, a delisting may negatively impact the value of the stock, since stocks trading on the over-the-counter market are typically less liquid and trade with larger variations between the bid and ask price. The market price of our common stock will also be based on our performance and other factors, some of which are unrelated to the number of shares outstanding. If the reverse stock split is effected and the market price of our common stock declines, the percentage decline as an absolute number and as a percentage of Vyyo's overall market capitalization may be greater than would occur in the absence of a reverse stock split. Furthermore, liquidity of our common stock could be adversely affected by the reduced number of shares that would be outstanding after the reverse stock split. 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 20 Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Hostilities within Israel have continued to escalate over the past several months, which could disrupt our operations. We could be adversely affected by any major hostilities involving Israel, the interruption or curtailment of trade between Israel and its trading partners, a significant increase in inflation, or a significant downturn in the economic or financial condition of Israel. As a result of the hostilities and unrest presently occurring within Israel, the future of the peace efforts between Israel and its Arab neighbors is uncertain. Moreover, several countries still restrict business with Israel and with Israeli companies. We could be adversely affected by restrictive laws or policies directed towards Israel or Israeli businesses. One of our directors and many of our employees based in Israel 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 certain Israeli 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 enjoyed the tax benefits and would likely be denied these benefits in the future. From time to time, the Government of Israel has considered 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. As of the date hereof, our Israeli subsidiary has accumulated loss carry-forwards for Israeli tax purposes and therefore has not enjoyed any tax benefits under its approved enterprise status. In May 2000, a committee chaired by the Director General of the Israeli Ministry of Finance issued its report recommending a major reform in the Israeli tax system. The proposed tax reform, which could become effective in the near future and may include certain provisions with retroactive effect as of January 1, 2001, provides for material changes to the current Israeli tax system. Some of the committee's proposals may have adverse tax consequences for us and for certain of our stockholders. For example, the committee proposes to eliminate the existing initial tax exemption with respect to income generated by any of our approved enterprise facilities. Because we cannot predict whether, and to what extent, the committee's proposals, or any of them, will eventually be adopted and enacted into law, we and our stockholders face uncertainties as to the potential consequences of these tax reform proposals. 21 In the past, we received grants from the government of Israel through the Office of the Chief Scientist of the Ministry of Industry and Trade ("Chief Scientist"), for financing a portion of our research and development expenditures in Israel. The regulations under which we received these grants restrict our ability to manufacture products funded by the Chief Scientist, or to transfer technology funded by the Chief Scientist, outside Israel. We believe that most of our current products are not based on technology funded by the Chief Scientist and therefore are not subject to this restriction. 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 bylaws; . there are limitations on who can call special meetings of stockholders; . stockholders are not able take action by written consent; and . advance notice is required for nominations of directors and for stockholder proposals. In addition, provisions of Delaware law and our stock option plans may also discourage, delay or prevent a change of control or unsolicited acquisition proposals. Item 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to financial market risks including changes in interest rates and foreign currency exchange rates. Substantially all of our revenue and capital spending is transacted in U.S. dollars, although a substantial portion of the cost of our operations, relating mainly to our personnel and facilities in Israel, is incurred in New Israeli shekels, or NIS. We have not engaged in hedging transactions to reduce our exposure to fluctuations that may arise from changes in foreign exchange rates. In the event of an increase in inflation rates in Israel, or if appreciation of the NIS occurs without a corresponding adjustment in our dollar-denominated revenues, our results of operation and business could be materially harmed. As of December 31, 2000, we had cash, cash equivalents and short-term investments of $127.9 million. As of September 30, 2001, we had cash, cash equivalents and short-term investments of $88.0 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 that 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 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 available-for-sale and considered to be short-term investments. 22 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 may not be able to obtain similar rates after maturity as a result of fluctuating interest rates. We do not hedge any interest rate exposures. Quantitative Interest Rate Disclosure As of December 31, 2000 If market interest rates were to increase on December 31, 2000 immediately and uniformly by 10 percent, the fair value of the portfolio would decline by approximately $600,000 or approximately 0.5% of the total portfolio (approximately 0.4% of total assets). Assuming that the average yield to maturity on our portfolio at December 31, 2000 remains constant throughout 2001 and assuming that our cash, cash equivalents and short-term investments balances at December 31, 2000 remain constant for the duration of 2001, interest income for 2001 would be approximately $7.9 million. Assuming a decline of 10 percent in the market interest rates at December 31, 2000, interest income for 2001 would be approximately $7.7 million in 2001, which represents a decrease in interest income of approximately $200,000. The decrease in interest income will result in a decrease of the same amount to net income and cash flows from operating activities for the year ended December 31, 2001. These amounts are determined by considering the impact of the hypothetical interest rates on the Company's cash equivalents and available-for-sale securities at December 31, 2000, over the remaining contractual lives. Quantitative Interest Rate Disclosure As of September 30, 2001 If market interest rates were to increase on September 30, 2001 immediately and uniformly by 10 percent, the fair value of the portfolio would decline by approximately $230,000 or approximately 0.27% of the total portfolio (approximately 0.24% of total assets). Assuming that the average yield to maturity on our portfolio at September 30, 2001, remains constant for the balance of 2001 and assuming that our cash, cash equivalents and short-term investments balances at September 30, 2001 remain constant for the balance of 2001, interest income for fourth quarter of 2001 would be approximately $1.3 million. Assuming a decline of 10 percent in the market interest rates at September 30, 2001, interest income for the fourth quarter of 2001 would decline by less than $100,000. The decrease in interest income will result in a decrease of the same amount to net income and cash flows from operating activities for each of the remaining quarters in 2001. These amounts are determined by considering the impact of the hypothetical interest rates on the Company's cash equivalents and available-for-sale securities at September 30, 2001, over the remaining contractual lives. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS None. Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS On May 2, 2000, we completed an initial public offering of shares of our common stock, $0.0001 par value. The shares of common stock sold in the offering were registered under the Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-96129). The Registration Statement was declared effective by the Securities and Exchange Commission on April 3, 2000. The initial public offering price was $13.50 per share for an aggregate initial public offering of $104.8 million. After deducting the underwriting discounts and commissions of $7.3 million and the offering expenses of approximately $2.6 million, the net proceeds to us from the offering were approximately $94.9 million. From April 3, 2000, until September 30, 2001, we used approximately $6.0 million of the net offering proceeds for purchases of property, plant and equipment, approximately $2.4 million of the net proceeds for repayment of short term debt obligations, approximately $11.4 million of the net proceeds for repurchase of our common stock, and approximately $44.9 million of the net offering proceeds for working capital. 23 On September 19, 2000, we completed an underwritten public offering of our common stock. The shares of common stock sold in the offering were registered under the Securities Act of 1933 on a Registration Statement on Form S-1 (No. 333-45132). The Registration Statement was declared effective by the Commission on September 13, 2000. The public offering price was $31.5625 per share for an aggregate public offering price of the shares we sold of $55.2 million. After deducting the underwriting discounts and commissions of $2.9 million and the offering expenses of approximately $1.0 million, the net proceeds to us from the offering were approximately $51.3 million. From September 13, 2000, until September 30, 2001, we used none of the net proceeds from this offering. Our temporary investments of the net proceeds from both of the offerings have been in cash, cash equivalents and investment grade, short-term interest bearing securities. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION On October 22, 2001, John O'Connell, Vyyo's Chief Executive Officer, and Eran Pilovsky, Vyyo's Chief Financial Officer, resigned from Vyyo to pursue other career opportunities. Davidi Gilo, Vyyo's Chairman of the Board, was appointed as Chief Executive Officer and as interim Chief Financial Officer. In addition, Michael Corwin was appointed as Vyyo's President and Chief Operating Officer. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.38 First Amendment to Employment Agreement of Davidi Gilo with Vyyo Inc. 10.39 First Amendment to Employment Agreement of Stephen P. Pezzola with Vyyo Inc. (b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended September 30, 2001. 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 2, 2001 VYYO INC. By: /s/ Davidi Gilo --------------------------------------------------------- Davidi Gilo, Acting Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 25 EX-10.38 3 dex1038.txt FIRST AMENDMENT TO EMPLOYMENT AGREEMENT: DAVIDI GILO EXHIBIT 10.38 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT OF DAVIDI GILO WITH VYYO INC. THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment"), is made and entered into effective as of the 1/st/ day of August, 2001, by and between VYYO INC., a Delaware corporation (hereinafter the "Corporation"), and DAVIDI GILO (hereinafter "Gilo") and amends that Employment Agreement (the "Agreement") by and between Gilo and the Corporation entered into as of January 1, 2000. AGREEMENT NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Effect of Amendment. Except as expressly modified herein, the ------------------- Agreement shall remain unchanged and in full force and effect in accordance with its terms. All terms used in this Amendment shall have the meaning given them in the Agreement, unless otherwise provided herein. If any conflict arises between the terms of this Amendment and the Agreement, the terms of this Amendment shall control. 2. Term. Section 2 of the Agreement is hereby amended to read in full ---- as follows: "The initial term of this Agreement shall commence as of the date hereof and terminate on December 31, 2003. Thereafter, this Agreement may be renewed by Gilo and the Corporation on such terms as the parties may agree to in writing. Absent written notice to the contrary, given at least thirty (30) days prior to the end of the initial employment term, this Agreement will be automatically renewed for consecutive one (1) year extensions. Should the term of employment not be renewed after the expiration of the initial term, Gilo shall be entitled to eighteen (18) months salary as severance, in exchange for a release as to any and all claims Gilo may have against the Corporation." 3. Fixed Salary. Section 3.a of the Agreement is hereby amended such ------------ that the first sentence thereof is deleted and replaced in its entirety by the following sentence: "Commencing on September 1, 2001, Gilo's fixed annual salary shall be Two Hundred Thirty Thousand Dollars ($230,000)." 4. Bonus and Severance. For purposes of Sections 2, 3.c., and 6.d. of ------------------- the Agreement, the annual salary or compensation of Gilo on which the calculation of bonus and severance payments contained in such sections is based shall be deemed to be $350,000. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. VYYO INC. DAVIDI GILO a Delaware corporation 20400 Stevens Creek Blvd., Ste. 800 Cupertino, CA 95014 /s/ Davidi Gilo ------------------------------- (Signature) _______________________________ By: /s/ Lewis S. Broad _______________________________ ----------------------------- Lewis S. Broad, (Print Address) Chairman of the Compensation Committee of the Board of Directors 2 EX-10.39 4 dex1039.txt FIRST AMENDMENT TO EMPLOYMENT AGREEMENT: STEPHEN PEZZOLA EXHIBIT 10.39 FIRST AMENDMENT TO EMPLOYMENT AGREEMENT OF STEPHEN P. PEZZOLA WITH VYYO INC. THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (this "Amendment"), is made and entered into effective as of the 1st day of August, 2001, by and between VYYO INC., a Delaware corporation (hereinafter the "Corporation"), and STEPHEN P. PEZZOLA (hereinafter "Pezzola") and amends that Employment Agreement (the "Agreement") by and between Pezzola and the Corporation entered into as of January 1, 2000. AGREEMENT NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Effect of Amendment. Except as expressly modified herein, the ------------------- Agreement shall remain unchanged and in full force and effect in accordance with its terms. All terms used in this Amendment shall have the meaning given them in the Agreement, unless otherwise provided herein. If any conflict arises between the terms of this Amendment and the Agreement, the terms of this Amendment shall control. 2. Term. Section 2 of the Agreement is hereby amended to read in full ---- as follows: "The initial term of this Agreement shall commence as of the date hereof and terminate on December 31, 2003. Thereafter, this Agreement may be renewed by Pezzola and the Corporation on such terms as the parties may agree to in writing. Absent written notice to the contrary, given at least thirty (30) days prior to the end of the initial employment term, this Agreement will be automatically renewed for consecutive one (1) year extensions. Should the term of employment not be renewed after the expiration of the initial term, Pezzola shall be entitled to eighteen (18) months salary as severance, in exchange for a release as to any and all claims Pezzola may have against the Corporation." 3. Fixed Salary. Section 3.a of the Agreement is hereby amended such ------------ that the first sentence thereof is deleted and replaced in its entirety by the following sentence: "Commencing on September 1, 2001, Pezzola's fixed annual salary shall be One Hundred Twenty Thousand Dollars ($120,000)." 4. Bonus and Severance. For purposes of Sections 2, 3.c.B., and 6.d. ------------------- of the Agreement, the annual salary or compensation of Pezzola on which the calculation of bonus and severance payments contained in such sections is based shall be deemed to be $210,000. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. VYYO INC. STEPHEN P. PEZZOLA a Delaware corporation 20400 Stevens Creek Blvd., Ste. 800 Cupertino, CA 95014 /s/ Stephen P. Pezzola ---------------------------- (Signature) ____________________________ By: /s/ Lewis S. Broad ____________________________ ------------------------------------- Lewis S. Broad, (Print Address) Chairman of the Compensation Committee of the Board of Directors 2