-----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, R4+UaW/zmtWpwwgu/8NPH6b+I6CILro1QmOPlSo9Qrgx/evn4Pxn0xgzJNI8qgtT toUVZVdYD1hGhNET+F2YOA== 0001012870-02-002298.txt : 20020515 0001012870-02-002298.hdr.sgml : 20020515 ACCESSION NUMBER: 0001012870-02-002298 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 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: 02648383 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.htm QUARTERLY REPORT FOR THE PERIOD ENDED 03/31/2002 Prepared by R.R. Donnelley Financial -- Quarterly Report for the Period Ended 03/31/2002
 
 
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 March 31, 2002
 
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
(State or other jurisdiction of
incorporation or organization)
  
94-3241270
(I.R.S. Employer
Identification Number)
20400 Stevens Creek Boulevard, 8th 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 March 31, 2002, there were 36,868,478 shares of Common Stock ($0.0001 par value) outstanding.
 

 
 
VYYO INC.
 
        
Page No.
PART I.    FINANCIAL INFORMATION
     
Item 1.
  
Condensed Consolidated Financial Statements (Unaudited)
     
      
3
      
4
      
5
      
6
Item 2.
     
11
Item 3.
     
25
PART II.    OTHER INFORMATION
     
Item 1.
     
26
Item 2.
     
26
Item 3.
     
27
Item 4.
     
27
Item 5.
     
27
Item 6.
     
28
  
29

2

 
Part I.    Financial Information
 
Item 1.    Condensed Consolidated Financial Statements
 
Vyyo Inc.
(In Thousands)
 
    
March 31, 2002
     
December 31, 2001
  
    
(Unaudited)
     
(Note 1)
  
Assets
                  
CURRENT ASSETS:
                  
Cash and cash equivalents
   
$
23,939
 
   
$
17,380
 
Short-term investments
   
 
56,908
 
   
 
66,689
 
Accounts receivable
   
 
1,034
 
   
 
729
 
Inventory
   
 
352
 
   
 
693
 
Other
   
 
644
 
   
 
601
 
    
  
Total current assets
   
 
82,877
 
   
 
86,092
 
PROPERTY AND EQUIPMENT, net
   
 
1,692
 
   
 
1,948
 
    
  
Total assets
   
$
84,569
 
   
$
88,040
 
    
  
Liabilities and stockholders’ equity
                  
CURRENT LIABILITIES:
                  
Accounts payable
   
$
897
 
   
$
827
 
Accrued liabilities
   
 
5,432
 
   
 
6,546
 
Accrued restructuring liability
   
 
2,547
 
   
 
2,815
 
    
  
Total current liabilities
   
 
8,876
 
   
 
10,188
 
    
  
COMMITMENTS AND CONTINGENCIES
                  
STOCKHOLDERS’ EQUITY:
                  
Common stock, $0.0001 par value at amounts paid in and additional paid in capital; 200,000,000 shares authorized; 36,868,478 and 36,792,420 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively
   
 
228,105
 
   
 
228,122
 
Note receivable from stockholder
   
 
(37
)
         
Deferred stock compensation
   
 
(300
)
   
 
(600
)
Accumulated other comprehensive income
   
 
152
 
   
 
721
 
Accumulated deficit
   
 
(152,227
)
   
 
(150,391
)
    
  
Total stockholders’ equity
   
 
75,693
 
   
 
77,852
 
    
  
    
$
84,569
 
   
$
88,040
 
    
  
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements
 
Note 1:
 
The condensed consolidated balance sheet at December 31, 2001 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.
(In Thousands Except Per Share Data)
(Unaudited)
 
    
Three Months Ended March 31,
  
    
2002
     
2001
  
NET REVENUES
   
$
1,815
 
   
$
669
 
COST OF REVENUES (in 2001, includes $7,914 write-offs of excess inventory and purchase commitments)
   
 
904
 
   
 
8,900
 
    
  
GROSS PROFIT (LOSS)
   
 
911
 
   
 
(8,231
)
OPERATING EXPENSES:
                  
Research and development
   
 
1,035
 
   
 
5,534
 
Selling and marketing
   
 
1,082
 
   
 
2,331
 
General and administrative
   
 
1,309
 
   
 
2,822
 
Restructuring charges
            
 
4,573
 
Charge for stock compensation
   
 
222
 
   
 
4,012
 
    
  
Total operating expenses
   
 
3,648
 
   
 
19,272
 
OPERATING LOSS
   
 
(2,737
)
   
 
(27,503
)
INTEREST AND OTHER INCOME, net
   
 
901
 
   
 
1,752
 
    
  
NET LOSS
   
$
(1,836
)
   
$
(25,751
)
    
  
NET LOSS PER SHARE—  
                  
Basic and diluted
   
$
(0.05
)
   
$
(0.70
)
    
  
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING—
                  
Basic and diluted
   
 
36,709
 
   
 
36,983
 
    
  
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements

4

Vyyo Inc.
(In Thousands)
(Unaudited)
 
    
Three Months Ended March 31,
  
    
2002
     
2001
  
CASH FLOWS FROM OPERATING ACTIVITIES:
                  
Net loss
   
$
(1,836
)
   
$
(25,751
)
Adjustments to reconcile net loss to net cash used in operating activities:
                  
Depreciation and other
   
 
264
 
   
 
912
 
Amortization and charge related to stock compensation
   
 
222
 
   
 
4,012
 
Changes in assets and liabilities:
                  
Accounts receivable
   
 
(305
)
   
 
2,244
 
Other current assets
   
 
(43
)
   
 
176
 
Inventories
   
 
341
 
   
 
1,211
 
Accounts payable
   
 
70
 
   
 
(2,945
)
Accrued liabilities
   
 
(1,114
)
   
 
1,924
 
Restructuring liabilities
   
 
(268
)
   
 
4,105
 
    
  
Net cash used in operating activities
   
 
(2,669
)
   
 
(14,112
)
    
  
Investing activities
                  
Purchase of property and equipment
   
 
(10
)
   
 
(1,561
)
Proceeds from sales and maturities of short-term investments
   
 
22,626
 
   
 
17,625
 
Purchase of short-term investments
   
 
(13,414
)
   
 
(11,218
)
Proceeds from sale of property and equipment
   
 
2
 
   
 
24
 
    
  
Net cash provided by investing activities
   
 
9,204
 
   
 
4,870
 
    
  
Financing activities
                  
Repurchase of common stock
            
 
(9,057
)
Issuance of common stock
   
 
24
 
   
 
232
 
    
  
Net cash provided by (used in) financing activities
   
 
24
 
   
 
(8,825
)
    
  
Increase (decrease) in cash and cash equivalents
   
 
6,559
 
   
 
(18,067
)
Cash and cash equivalents at beginning of year
   
 
17,380
 
   
 
33,991
 
    
  
Cash and cash equivalents at end of the period
   
$
23,939
 
   
$
15,924
 
    
  
 
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements

5

 
Vyyo Inc.
(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, 2001, included in the annual report on Form 10-K for the year ended December 31, 2001, filed with the Securities and Exchange Commission.
 
Use of Estimates
 
The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Inventory
 
Inventory is valued at the lower of cost or market. Cost includes the cost of raw materials computed using the moving average basis and, for work in progress and finished goods, direct labor and an appropriate proportion of production overhead. Market is determined by reference to the sales proceeds of items sold in the ordinary course of business or management estimates based on prevailing market conditions.
 
During the year 2001, the Company recognized a write-down of excess inventory of $7.5 million. The write-down was charged to the cost of revenues. In the three months ended March 31, 2002, inventory that was previously written-down to $0 by taking a charge of $197,000 was sold for the amount of $205,000.
 
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.

6

Vyyo Inc.
 
Notes to Condensed Consolidated Financial Statements—(Continued)
 
(Unaudited)

 
2.    Inventory
 
Inventory is comprised of the following:
 
    
March 31,
     
December 31,
    
2002
     
2001
    
In thousands
Raw materials
   
$
25
     
$
25
Work in process
   
 
18
     
 
109
Finished goods
   
 
309
     
 
559
    
    
    
$
352
     
$
693
    
    
 
3.    Accrued Liabilities
 
Accrued liabilities consist of the following:
 
    
March 31,
   
December 31,
    
2002
   
2001
    
In thousands
Compensation and benefits
   
$
1,376
   
$
1,895
Warranty
   
 
1,259
   
 
1,363
Withholding tax
   
 
1,303
   
 
1,268
Other
   
 
1,494
   
 
2,020
    
  
    
$
5,432
   
$
6,546
    
  
 
4.    Accrued Restructuring liability
 
In 2001, the Company implemented a restructuring program to reduce operating expenses due to the continuing slowdown in the telecommunication sector and the economy in general. In 2001, the Company recorded charges of $12.8 million, related to excess facilities, abandoned equipment and employees severance and other, related benefits. The restructuring charge and its utilization are summarized as follows:
 
    
Cumulative restructuring charge in 2001
   
Balance as of December 31, 2001
   
Utilized in 2002
   
To be utilized
    
In thousands
Facilities
   
$
4,913
   
$
2,365
   
$
28
   
$
2,337
Equipment
   
 
2,616
                 
 
—  
Employees severance and other related benefits
   
 
5,298
   
 
450
   
 
240
   
 
210
    
  
  
  
    
$
12,827
   
$
2,815
   
$
268
   
$
2,547
    
  
  
  

7

Vyyo Inc.
 
Notes to Condensed Consolidated Financial Statements—(Continued)
 
(Unaudited)

 
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 twelve of Hybrid’s issued patents. The Company, with the advice of its legal counsel, believes that 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 operating results cash flows and financial condition. No provision has been included in the financial statements.
 
Legal claims regarding breach of leasing agreements
 
A dispute has arisen between the Company and Har Hotzvim Properties Ltd. (“Har Hotzvim”), with respect to the compliance with a leasing agreement and an amendment thereto in which the Company leased office space from Har Hotzvim, at Har Hotzvim industrial zone in Jerusalem, Israel. In August 2001, Har Hotzvim filed a statement of claim against the Company and its subsidiary in Israel, in an aggregate amount of 10 million New Israeli Shekels (NIS), or approximately $2.2 million. However, this amount was claimed for purposes of court fees and the actual amount sought in Har Hotzvim statement of claim is NIS 37 million, or approximately $8.2 million. Har Hotzvim may modify its statement of claim and increase the claim amount subject to court approval. Har Hotzvim alleges that the Company breached its obligations under the lease agreement. The Company claims that Har Hotzvim’s actions constitutes a breach of its obligation under this agreement. In addition to its claim and together therewith, Har Hotzvim has filed a request for provisional attachment on the total amount of approximately $2.2 million. The court has partially approved Har Hotzvim’s request and issued an attachment order in an aggregate amount of NIS 3 million, or approximately $643,000.
 
Both the Company’s and Har Hotzvim’s Claims are in abeyance and at this stage certain intermediate proceeding are being conducted before the court. The Company believes it has included an adequate provision in the financial statements to cover the $2.2 million claim.
 
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. In the quarter ended March 31, 2001, the Company repurchased and retired 1.3 million shares in open market transactions for a total cost of $9.1 million.
 
Former Chief Executive Officer (“former CEO”) separation agreement
 
In April 2002, according to the separation agreement entered into in October 2001, the Company’s former CEO drew down on the $1,000,000 loan provided for in this agreement. This loan is 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 is secured solely by the 800,000 options held by such officer and the shares of the Company’s common stock underlying these options.

8

Vyyo Inc.
 
Notes to Condensed Consolidated Financial Statements—(Continued)
 
(Unaudited)

 
6.    Comprehensive Income (Loss)
 
Total comprehensive loss was $569,000 for the three months ended March 31, 2002, and income of $633,000 for the three months ended March 31, 2001.
 
7.    Recent Accounting Pronouncements
 
In July 2001, the Financial Accounting Standards Board (FASB) 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. All goodwill with adoption of FAS 142 is required to 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 December 31, 2001, the Company believes that these standards will not have a material impact on its financial position or operating results.
 
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”. The statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for all fiscal years beginning after June 15, 2002, with early application permitted. The Company does not expect the adoption of SFAS No. 143 to have a material impact on the Company’s financial position, results of operations, or cash flows.
 
In August 2001, the FASB issued SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, which addresses accounting and financial reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption of SFAS No. 144 to have a material impact on the Company’s financial position, results of operations or cash flows.
 
8.    Subsequent Events
 
On May 14, the Company entered into a Share Exchange Agreement with Shira Computers, Ltd., an Israeli privately held company that provides web-enhanced software and e-commerce products for the prepress and publishing markets (“Shira”), and certain of the shareholders of Shira, providing for the acquisition all of the outstanding ordinary shares of Shira, for an aggregate of 500,000 shares of the Company’s common stock, valued at approximately $560,000, based on the closing price of the Company’s common stock on May 10, 2002 of $1.12 per share. Upon completion of the transaction, Shira will become a wholly-owned subsidiary of the Company. The acquisition will be treated on the basis of the purchase method of accounting.
 
The consideration paid for the acquisition will be attributed to (i) acquired technology which had reached technological feasibility and therefore will be amortize over time, (ii) in-process research and development, that was in various stages of development, which had not reached technological feasibility and has no alternative use, and therefore will expensed in the next quarter, (iii) goodwill, which will be treated according to Statements of Financial Accounting Standards No.142, “Goodwill and Other Intangible Assets”. Accordingly, the purchase price will be allocated to the fair value of the assets acquired and liabilities assumed of Shira and will result in the next quarter.

9

Vyyo Inc.
 
Notes to Condensed Consolidated Financial Statements—(Continued)
 
(Unaudited)

 
Pro-forma information in accordance with APB16 has not been provided, as the net income and the loss per share of Shira for 2000, 2001 and for the three months ended March 31, 2002 were not material in relation to total consolidated net income and for the loss per share.
 
Consummation of the share exchange is subject to certain conditions, including the agreement of all of the Shira shareholders to exchange their shares, the restructuring of certain debt of Shira, and requisite regulatory approvals.

10

 
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, 2001, contained in Vyyo’s Annual Report (Form 10-K) for the year ended December 31, 2001, 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
 
During 2001, the global telecommunications market, and in particular the fixed wireless broadband access market, experienced a significant downturn, and we experienced a dramatic decrease in the sales of our products. In this environment, we determined that significant expenditures in our historical products and technology may not be justified. As a result, we reduced our workforce by approximately 75% during 2001, from 241 employees to 60 employees, and, in doing so, we reduced our research and development expenses to minimum levels. While we expect that the telecommunications market may recover over time, substantial uncertainty exists as to the ability of our existing products and technology to address this market when it returns. Moreover, our ability to develop and market products that effectively address the market as it evolves with new and competitive products and technologies may be limited due to, among other things, our limited research and development budget. While we are continuing to operate and develop our traditional wireless business, we are also exploring a variety of alternatives, including restructuring or the licensing, sale or divestiture of a substantial portion or all of our current technology or assets. In addition to our anticipated acquisition of Shira Computers, Ltd., we also continue to explore alternatives relating to the license, purchase or acquisition of other products, technology, assets or businesses. See Item 5 below. We may not be able to successfully effect any of these alternatives on a timely basis or at all.
 
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 $1.8 million for the three months ended March 31, 2002. As of March 31, 2002, our accumulated deficit was approximately $152.2 million.
 

11

 
Results of Operations
 
Net Revenues.
 
Net revenues include product, technology development and licensing revenues. Product revenues are derived primarily from sales of hubs and modems initially sold as a package to telecommunications service providers and to system integrators. Revenues from products and from system integration products and services are generally recorded when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred and customer acceptance requirements have been met, (iii) the price is fixed or determinable, and (iv) the collection of payments is reasonably assured and we have no additional obligations. We accrue for estimated sales returns and exchanges and product warranty and liability costs upon recognition of product revenues. License revenues are recognized when the license technology is delivered.
 
Our revenue is concentrated among relatively few customers. Though our principal revenue-generating customers are likely to vary on a quarterly basis, we anticipate that our revenues will remain concentrated among a few customers for the fore­seeable future.
 
Net revenues increased by 171% to $1.8 million in the first quarter of 2002 from $669,000 in the first quarter of 2001. The increase in revenues primarily reflects the increase in shipments of our products. Net revenues in the first quarter of 2002, include revenues of approximately $205,000 from sales of inventory that was previously written down to $0, in 2001.
 
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 decreased in the first quarter of 2002 to $904,000 from $8.9 million in the first quarter of 2001. The decrease in cost of revenues and the increase in the gross margin in the first quarter of 2002 was attributable primarily to: (1) charges in the first quarter of 2001 of approximately $7.9 million for excess inventory and purchase commitments, due to the dramatic downturn in the global telecommunications industry and to the decrease in orders for and sales of our products, (2) increased shipments of our products in the first quarter of 2002, and (3) sales in the first quarter of 2002 of inventories that were previously written down to $0 in 2001 by taking a charge of $197,000.
 
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 decreased to $1.0 million in the first quarter of 2002 from $5.5 million in the first quarter of 2001. These decreases were due to significant reductions in our workforce effected in the second and third quarters of 2001. As of March 31, 2002, our research and development staff consisted of 23 employees, compared to 144 employees as of March 31, 2001. We expect that research and development expenses will decrease in future periods due to the significant reductions in our workforce effected in the second and third quarters of 2001. As a result of these decreases in research and development activities, we may be unable to develop next generation products and new products to meet market demand.

12

 
Selling and Marketing Expenses.
 
Selling 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 decreased to $1.1 million in the first quarter of 2002 from $2.3 million in the first quarter of 2001. The decrease in selling and marketing expenses was primarily in response to the significant downturn in the global telecommunications industry and the decrease in orders for and sales of our products. As part of this reduction in expenses, we effected a reduction in our selling and marketing workforce in the second and third quarters of 2001 and in the first quarter of 2002. In connection with this reduction in the first quarter of 2002, we incurred a one-time charge of approximately $300,000.
 
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, legal, human resources and administration. General and administrative expenses decreased to $1.3 million in the first quarter of 2002 from $2.8 million in the first quarter of 2001. The decrease was primarily due to reduction in compensation related expenses resulting from reductions in our workforce in the second and third quarters of 2001.
 
Restructuring Charges
 
In 2002, we utilized $268,00 from the restructuring expenses that were accrued in 2001. In 2001, we implemented a restructuring program to reduce operating expenses due to the dramatic and continuing slowdown in the telecommunications sector and the general economy. In connection with this restructuring, we recorded charges of $12.8 million. These charges are costs related to excess facilities, abandoned equipment and employees’ severance and other, related benefits. The restructuring included a workforce reduction of approximately 180 employees, or approximately 75% of our workforce. The excess facilities costs consist of rental payments for unused premises under current agreements and costs associated with the abandonment of facilities, including lease payments and leasehold improvements invested in these premises and costs associated with the related legal claim against us. Restructuring charges of $4.6 million recorded in the first quarter of 2001 relate mostly to facilities.
 
Charge for Stock Based Compensation.
 
Charge for stock compensation represents the amortization of deferred compensation charges which are based on the aggregate differences between the respective exercise price of stock options and purchase price of stock at their dates of grant or sale and the deemed fair market value of our common stock for accounting purposes, as well as stock compensation charges incurred in connection with modifications of stock awards in 2001. Deferred stock compensation is amortized over the vesting period of the underlying options. Amortization and charge related to stock compensation were $222,000, gross charges of $374,000 and a decrease in compensation of $152,000 related to an accounting variable plan in the first quarter of 2002, and $4.0 million in the first quarter of 2001. As of March 31, 2002, unamortized deferred compensation related to options issued through the completion of the initial public offering amounted to $300,000.
 
Interest and Other Income, Net.
 
Interest and other income, include interest and investment income. Interest income was $901,000 in the first quarter of 2002 and $1.8 million in the first quarter of 2001, mainly from our cash and short-term investment balances from proceeds from our initial and follow-on public offerings effected in 2000. We expect that our interest income will decrease due to decreasing cash balances and reduced interest rates in financial markets.
 
Income Taxes.
 
As of December 31, 2001, we had approximately $60 million of Israeli net operating loss carryforwards, $6 million of United States federal net operating loss carryforwards, and $6 million of state net operating loss carryforwards. The Israeli net operating loss carryforwards have no expiration date and have not been recorded as

13

tax assets because the losses are expected to be utilized during a tax exempt period. The United States federal net operating loss carryforwards expire in various amounts between the years 2011 and 2021. The state net operating loss carryforwards expire in various amounts between the years 2004 and 2006. We have provided a full valuation allowance against our United States federal and state deferred tax assets as the future realization of the tax benefit is not sufficiently assured.
 
Liquidity And Capital Resources
 
As of March 31, 2002, we had $80.8 million of cash, cash equivalents and short-term investments. In the first three months of 2002, cash used in operations was $2.7 million, comprised of our net loss of $1.8 million, partially offset by a non-cash charges of $222,000 for deferred stock compensation charges, $264,000 for depreciation and changes in other working capital accounts of $1.3 million. In the first three months of 2001, cash used in operations was $14.1 million, comprised of our net loss of $25.8 million, partially offset by non-cash charges of $4.9 million for stock compensation charges $912,00 for depreciation and asset write-down and changes in working capital accounts of $6.8 million.
 
Investing activities in the first quarter of 2002, excluding purchases and proceeds from short-term investments, amounted to approximately $8,000 for investments in property and equipment. Investing activities in the first quarter of 2001, excluding purchases and proceeds from short-term investments, amounted to approximately $1.5 million for investments in property and equipment.
 
Financing activities in the first quarter of 2002 amounted to approximately $24,000 of proceeds from stock option exercises. Financing activities in the first three months of 2001 resulted in a net outflow of $8.8 million due to stock repurchases in the amount of $9.1 million, partially offset by proceeds from stock option exercises.
 
As of March 31, 2002, we had approximately $135,000 of inventory purchase obligations. As of March 31, 2001, we had approximately $4.7 million of inventory purchase obligations. In the first quarter of 2001, we recorded a charge of $4.3 million for inventory obligations in excess of estimated inventory requirements.
 
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 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. We expect to devote substantial capital resources to search for, investigate and, potentially, acquire new businesses, companies or technologies. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders.
 
New Accounting Pronouncements
 
In July 2001, the Financial Accounting Standards Board (FASB) 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. Since we did not complete any business combinations through December 31, 2001, we believe that these standards will not have a material impact on our financial position or results of operations.
 
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” The statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement is effective for all fiscal years beginning after June 15, 2002, with early application permitted. We do not expect the adoption of SFAS No. 143 to have a material impact on our financial position, results of operations, or cash flows.

14

 
In August 2001, the FASB issued SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, which addresses accounting and financial reporting for the impairment or disposal of long-lived assets. This statement is effective for fiscal years beginning after December 15, 2001. We do not expect the adoption of SFAS No. 144 to have a material impact on our financial position, results of operations or cash flows.
 
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 continues not to be broadly accepted we will not be able to sustain our business and may need to shut it down.
 
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 if these markets will ever develop or expand. The largest MMDS license holder in the US, Sprint, announced during 2001 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. 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 and may be required to cease operations in this business.
 
If service providers and systems integrators do not promote and purchase our products, or if the telecommunications equipment market continues not to improve and grow, our business will be seriously harmed.
 
Service providers continually evaluate alternative technologies, including digital subscriber line, fiber and cable. Should service providers or systems integrators, to which we may sell products 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 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 slowed significantly over the past two years 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

15

 
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.
 
Since we have significantly reduced our workforce and expenses, we may not be able to address successfully the telecommunications market if and when it recovers.
 
During 2001, the global telecommunications market, and in particular the fixed wireless broadband access market, experienced a significant downturn, and we experienced a dramatic decrease in the sales of our products and the adoption of our technology. In this environment, we determined that significant expenditures in our historical products and technology may not be justified. As a result, we reduced our workforce by approximately 75% during 2001, from 241 employees to 60 employees, and, in doing so, we reduced our research and development expenses to minimum levels. While we expect that the telecommunications market may recover over time, substantial uncertainty exists as to the ability of our existing products and technology to address this market when it returns. Moreover, our ability to develop and market products that effectively address the market as it evolves with new and competitive products and technologies may be limited due to, among other things, our limited research and development budget. While we are continuing to operate and develop our traditional wireless business, we also expect to explore a variety of alternatives, including potential restructuring or the licensing, sale or divestiture of a substantial portion or all of our technology or assets. We also expect to explore alternatives relating to the licensing, purchase or acquisition of other products, technology, assets or businesses. We may not be able to successfully effect any of these alternatives on a timely basis 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 first quarter of 2002, Wuhan Research Institute of Posts and Telecommunication accounted for approximately 45% of our revenues and Dalager Engineering Inc. accounted for approximately 23% of our revenues. In 2001, WorldCom Broadband Solutions, Inc. accounted for approximately 57% of our revenues and Wuhan Research Institute of Posts and Telecommunication accounted for approximately 9% of our revenues. We have not received any new significant orders from WorldCom, nor do we expect them to continue to deploy a large number of cities in the foreseeable future. We expect that we will continue to depend on a limited number of customers for a substantial portion of our revenues in future periods. The loss of a major customer 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.
 
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 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. Further, having a successful field system trial does not necessarily mean that the customer will order large volumes of our systems. The reduction, delay or cancellation of orders from one or more of our customers could seriously harm our operating results.
 
We may not be able to successfully integrate Shira Computers Ltd., or other businesses that we may choose to acquire, in a cost-effective and non-disruptive manner and realize anticipated benefits.
 
In May 2002, we entered into an agreement to purchase Shira Computers, Ltd., a provider of web-enhanced software and e-commerce products for the prepress and publishing markets. We also continue to explore investments in or acquisitions of other companies, products or technologies, including companies or technologies that are not complementary or related to our current wireless broadband access business. We may have difficulty integrating Shira’s or other companies’ personnel, operations, products and technologies into our current business. These difficulties may disrupt our ongoing business, distract our management and employees and increase our expenses. Moreover, the anticipated benefits of our acquisition of Shira or any other acquisition may

16

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. In addition, we expect that we will expend significant resources in searching for and investigating new business opportunities, and may be unsuccessful in acquiring new businesses.
 
The consummation of the purchase of Shira is subject to a number of conditions outside the control of Vyyo, and if some or all of those conditions are not met or waived by us, we may not purchase Shira.
 
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 $1.8 million in the first quarter of 2002 and $49 million in 2001. As of March 31, 2002, our accumulated deficit was approximately $152.2 million. In response to the significant decline in our business and revenues in 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 and may decline even further. 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. 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;
 
 
•
 
the ability of our existing and potential direct customers to obtain financing for the deployment of broadband wireless access systems;
 
 
•
 
the mix of products sold by us and the mix of sales channels through which they are sold;
 
 
•
 
reductions in pricing by us or our competitors;
 
 
•
 
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.
 
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

17

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. Certain 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 Alverion Inc. (the merged entity of BreezeCOM Ltd and Floware Wireless Systems Ltd.), AirSpan and Wi-Lan. In addition, well-capitalized companies such as Alcatel, Marconi and other vendors have in some cases internally developed products. 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.
 
Conditions in Israel affect our operations and may limit our ability to produce and sell our systems.
 
Our research and development, final testing and assembly facilities, and contract manufacturers are located in Israel. Political, economic and military conditions in Israel directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Hostilities within Israel have dramatically escalated over the past several months, which could disrupt our operations. We could be adversely affected by any major hostilities involving Israel, the interruption or

18

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.
 
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 an investment in Vyyo.
 
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 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.
 
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 46% of our revenues in the first quarter of 2002 and approximately 16% of our revenues in 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:

19

 
 
•
 
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;
 
 
•
 
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 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.
 
We depend on our key personnel, in particular Davidi Gilo, our Chairman of the Board, Chief Executive Officer and Interim Chief Financial 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, Chief Executive Officer and Interim Chief Financial 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 or Menashe Shahar, other members of senior management or other key personnel could seriously harm our business.
 
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 addition, during 2001, we began to focus our resources on direct sales to service providers. Such direct sales require us to resell to service providers equipment manufactured by third party suppliers and to integrate this equipment with the equipment we manufacture. We are particularly dependent on third party radio suppliers in selling our 3.5 Ghz and other products. We currently have no formal relationship with any third party supplier. If

20

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 and third party radio vendors 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.            
 
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.

21

 
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 our efforts, 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. 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:
 
 
•
 
acquiring technologies or businesses;
 
 
•
 
hiring additional qualified personnel; and
 
 
•
 
implementing further marketing and sales activities; and
 
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 if necessary, 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.

22

 
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 approximately 47% of our outstanding common stock. As a result, these stockholders, acting together, will be able to control the outcome of all matters submitted for stockholder action, including:
 
 
•
 
electing members to our board of directors;
 
 
•
 
approving significant change-in-control transactions;
 
 
•
 
determining the amount and timing of dividends paid to themselves and to our public stockholders; and
 
 
•
 
controlling our management and operations.
 
This concentration of ownership may have the effect of impeding a merger, consolidation, takeover or other business consolidation involving us, or discouraging a potential acquirer from making a tender offer for our shares. This concentration of ownership could also negatively affect our stock’s market price or decrease any premium over market price that an acquirer might otherwise pay.
 
Because the Nasdaq National Market is likely to continue to experience extreme price and volume fluctuations, the price of our stock may decline.
 
The market price of our shares has been and likely will continue to be highly volatile and could be subject to wide fluctuations in response to numerous factors, including the following:
 
 
•
 
actual or anticipated variations in our quarterly operating results or those of our competitors;
 
 
•
 
announcements by us or our competitors of new products or technological innovations;
 
 
•
 
introduction and adoption of new industry standards;
 
 
•
 
changes in financial estimates or recommendations by securities analysts;
 
 
•
 
changes in the market valuations of our competitors;
 
 
•
 
announcements by us or our competitors of significant acquisitions or partnerships; and
 
 
•
 
sales of our common stock.
 
Many of these factors are beyond our control and may negatively impact the market price of our common stock, regardless of our performance. In addition, the stock market in general, and the market for technology 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.

23

 
If our stock price falls below $1.00 per share, 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. During the fourth quarter of 2001, our stock price had a closing bid price below $1.00 for over 30 consecutive trading days, although the price has since increased to over $1.00. Vyyo cannot predict whether the market price for our common stock will remain above $1.00. 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.
 
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.
 
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. The 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.

24

 
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.
 
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 enforce a U.S. judgment against us and our nonresident director and experts.
 
One of our directors and some of the experts named in this report are nonresidents of the United States, and a substantial portion of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult to enforce a judgment obtained in the United States based upon the civil liabilities provisions of the United States federal securities laws against us or any of those persons or to effect service of process upon these persons in the United States.
 
Item 3.    Quantitative and Qualitative Disclosures about Market Risk
 
We are exposed to financial market risks including changes in interest rates and foreign currency exchange rates. Substantially all of our revenue and capital spending is transacted in U.S. dollars, although a substantial portion of the cost of our operations, relating mainly to our personnel and facilities in Israel, is incurred in New Israeli shekels, or NIS. We have not engaged in hedging transactions to reduce our exposure to fluctuations that may arise from changes in foreign exchange rates. In the event of an increase in inflation rates in Israel, or if appreciation of the NIS occurs without a corresponding adjustment in our dollar-denominated revenues, our results of operation and business could be materially harmed.
 
As of March 31, 2002, we had cash, cash equivalents and short-term investments of $80.8 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.
 
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 March 31, 2002
 
If market interest rates were to increase on March 31, 2002 immediately and uniformly by 10%, the fair value of the portfolio would decline by approximately $157,000 or approximately 0.24% of the total portfolio

25

 
(approximately 0.19% of total assets). Assuming that the average yield to maturity on our portfolio at March 31, 2002 remains constant throughout the second quarter of 2002 and assuming that our cash, cash equivalents and short-term investments balances at March 31, 2002 remain constant for the duration of the second quarter of 2002, interest income for the second quarter of 2002 would be approximately $873,000 million. Assuming a decline of 10% in the market interest rates at March 31, 2002, interest income for the second quarter of 2002 would be approximately $861,000 million, which represents a decrease in interest income of approximately $12,000. 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 three month ended March 31, 2002. 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 March 31, 2002, over the remaining contractual lives.
 
PART II.    OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
As we have previously disclosed, on August 14, 2001, Har Hotzvim Properties Ltd. (“Har Hotzvim”) filed a claim against us and our subsidiary, Vyyo Ltd., in the Jerusalem, Israel, District Court, alleging that we and Vyyo Ltd. breached obligations under a lease agreement and an amendment thereto between Vyyo Ltd. and Har Hotzvim. The lease agreement, as amended, relates to an approximately 93,000 square foot facility in Jerusalem, Israel that Vyyo Ltd. leased from Har Hotzvim. The complaint seeks damages in the amount of NIS 10 million, or approximately $2.2 million; however, this amount was claimed for purposes of court fees, and the actual amount sought in Har Hotzvim’s statement of claim is NIS 37 million, or approximately $8.2 million. The amount claimed may be increased during the proceedings, subject to the court’s approval. Vyyo Inc. and Vyyo Ltd. have filed a statement of defense of Har Hotzvim’s claim. In addition to its claim and together therewith, Har Hotzvim has filed a request for provisional attachment on the total amount of approximately $2.2 million. The court has partially approved Har Hotzvim’s request and issued an attachment order in an aggregate amount of NIS 3 million, or approximately $643,000. Vyyo Ltd. filed a claim in July 2001 against Har Hotzvim, claiming that Har Hotzvim’s actions constitute a breach of its obligations under the lease agreement. The court was requested to order Har Hotzvim to reimburse Vyyo Ltd. for its expenses in complying with the lease agreement in an aggregate amount of approximately NIS 8.7 million. In September 2001, the proceeding was converted from a declarative relief proceeding to a claim for damages.
 
Both Har Hotzvim’s and Vyyo Ltd.’s claims are in abeyance as of the date of this report and certain intermediate proceedings are being conducted before the court.
 
We are also involved in litigation incidental to the ordinary course of our business activities. While the results of such litigation cannot be predicted with certainty, based on our current understanding of the facts, we do not believe that the final resolution of such matters will have a material adverse effect on our consolidated financial position or results of operations.
 
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 March 31, 2002, we used approximately $6.1 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 $50.4 million of the net offering proceeds for working capital.

26

 
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 March 31, 2002, 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 May 14, 2002, Vyyo Inc. entered into a Share Exchange Agreement (the “Exchange Agreement”) with Shira Computers, Ltd., an Israeli privately held company (“Shira”), and certain of the shareholders of Shira, providing for the purchase by Vyyo of all of the outstanding ordinary shares of Shira, for an aggregate of 500,000 shares of Vyyo’s common stock, valued at approximately $560,000, based on the closing price of Vyyo’s common stock on May 10, 2002 of $1.12 per share.
 
Under the terms of the Exchange Agreement, the shareholders of Shira will receive approximately 0.12 shares of Vyyo common stock for each share of Shira common stock held by them, assuming all conditions to the closing are met and subject to certain adjustments in the event of changes in the number of outstanding shares of Shira prior to the closing. Vyyo also has agreed to provide a bridge loan of approximately $600,000 to Shira. The share exchange is intended to qualify as a tax-free reorganization under United States law. Upon completion of the transaction, Shira will become a wholly-owned subsidiary of Vyyo. Consummation of the share exchange will be subject to certain conditions, including the agreement of all of the Shira shareholders to exchange their shares, the restructuring of certain debt of Shira, and requisite regulatory approvals.
 
Shira provides web-enhanced software and e-commerce products for the prepress and publishing markets. Shira develops and provides digital prepress workflow solutions which are web-based and include support for native PDF workflows. Shira’s solution automates the prepress production process and facilitates efficient collaboration between customers and printers/tradeshops. Shira sells its products through a direct sales force, dealers, VARs and reseller/OEM relationships with other vendors. Shira has developed and sold prepress software products for over ten years, and has an established customer base using its products. The prepress software market was estimated by State Street Consultant Inc. to be a $3 billion per year global market, and it is highly fragmented. Over the last 18 months, Shira has developed a new web-based prepress workflow product and is in the initial stages of a marketing launch for this product.
 
For the year ended December 31, 2001, Shira reported revenues of $2,431,000 and a net loss of $881,000, and for the three months ended March 31, 2002, Shira reported revenues of $75,000 and a net loss of $298,000. As of March 31, 2002, Shira had a working capital deficiency of $4,503,000 and an accumulated deficit of $5,898,000.
 
Entities affiliated with Davidi Gilo, the Chairman of the Board and Chief Executive Officer of Vyyo and a significant stockholder of Vyyo, will own an aggregate of approximately 50% of Shira’s ordinary shares at the time of the closing of the transaction, assuming all closing conditions have been met. The entities affiliated with Mr. Gilo will indemnify Vyyo against damages resulting from breaches of certain representations and warranties made by Shira and these entities in the Exchange Agreement, and the Vyyo shares issued to the Gilo entities will be held in escrow for one year to secure the indemnity obligation.

27

 
Item 6.    Exhibits And Reports On Form 8-k
 
(a)    Exhibits
 
10.1
   
Share Exchange Agreement, dated as of May 14, 2002, by and among Vyyo Inc., Shira Computers, Ltd., The Gilo Family Partnership, L.P., Gilo Family Trust dated September 18, 1991, and the Shareholders of Shira Computers, Ltd.
 
(b)    Reports on Form 8-K.
 
No reports on Form 8-K were filed during the quarter ended March 31, 2002.

28

 
 
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: May 14, 2002
 
VYYO INC.
By:
  
/s/    DAVIDI GILO
 
   
Davidi Gilo, Chief Executive Officer and Interim Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)

29
EX-10.1 3 dex101.htm SHARE EXCHANGE AGREEMENT Prepared by R.R. Donnelley Financial -- Share Exchange Agreement
EXHIBIT 10.1
 
SHARE EXCHANGE AGREEMENT
 
By and Among
 
VYYO INC.,
a Delaware corporation
 
and
 
SHIRA COMPUTERS LTD.
an Israeli company 51-118397-2
 
and
 
THE GILO FAMILY PARTNERSHIP, L.P.
a California limited partnership
 
And
 
GILO FAMILY TRUST
Dated January 18, 1991
 
And
 
Shareholders of
SHIRA COMPUTERS LTD.
 
Dated as of May 14, 2002

 
THIS SHARE EXCHANGE AGREEMENT (this “Agreement”) is dated as of May 14, 2002, by and among VYYO INC., a Delaware corporation (the “Company”), SHIRA COMPUTERS LTD., an Israeli company (“Shira”), The Gilo Family Partnership, L.P., a California limited partnership and Gilo Family Trust dated January 18, 1991 (Gilo Family Partnership and Gilo Family Trust shall be hereinafter collectively referred to as “Gilo”, who shall also be deemed to be “Shareholders” as defined below), and the Shareholders (as defined below) of Shira who sign this Agreement.
 
RECITALS
 
A.    Assuming that the conditions to the Closing set forth in Sections 7e, 7f and 7g to this Agreement are met, and that no Option holder or Warrant holder of Shira exercises any of his/its Options or Warrants, Gilo and all the other persons and entities listed in Schedule A attached hereto (each individually a “Shareholder” and collectively, the “Shareholders”) hold or will hold of record 4,187,611 Ordinary Shares of Shira, each bearing a par value of NIS 1.00 (the “Shira Shares”), such Ordinary Shares being all of the issued share capital of Shira.
 
B.    The Company and the Shareholders desire to exchange an aggregate of five hundred thousand (500,000) shares of common stock, $0.0001 par value per share, of the Company (the “Company Shares”) for all of the Shira Shares (the “Share Exchange”).
 
AGREEMENT
 
1.    Exchange.
 
Exchange of Shares.    Subject to the terms and conditions hereof, the Company will issue to each of the Shareholders 0.1193998 (the “Ratio”) Company Shares for each Shira Share owned and held of record by such Shareholder in exchange for such Shira Share, and each Shareholder will sell and transfer to the Company all of the Shira Shares owned and held by such Shareholder for 0.1193998 Company Shares per each such Shira Share, all as set forth on Schedule A attached hereto. Each Shareholder acknowledges and agrees that Schedule A sets forth both the aggregate number of Shira Shares that such Shareholder owns and the aggregate number of Company Shares that such Shareholder is entitled to receive in exchange for such Shareholder’s Shira Shares pursuant to this Agreement.
 
Notwithstanding the foregoing, in the event that any Options or Warrants of Shira are exercised prior to the Closing, then (i) the aggregate number of Ordinary Shares of Shira which shall be issued to the Banks pursuant to the Debt Arrangements (as such terms are defined in Section 7d below) shall be proportionally increased, such that the Banks will hold, in the aggregate, a number of Ordinary Shares of Shira constituting 25% of the issued and outstanding share capital of Shira immediately prior to the Closing; (ii) the additional shares to be issued to the Banks as described in sub-section (i) above and the Ordinary Shares and Class A Non-Voting Shares of Shira underlying such Options or Warrants (collectively, the “Additional Shares”) shall be deemed for all purposes to be “Shira Shares”; (iii) the person or entity to whom such Additional Shares shall be issued shall be deemed for all purposes to be a “Shareholder”; (iv) the Ratio, and the number of Company Shares that shall be issued to each Shareholder upon the consummation of the Share Exchange, shall be adjusted accordingly and the Ratio shall equal to the quotient obtained by dividing (a) 500,000, by (b) the aggregate number of Shira Shares (including the Additional Shares) immediately prior to the Closing; and (v) Schedule A shall be adjusted accordingly, to reflect the changes described in sub-

2

sections (i) through (iv) hereinabove, and any and all references to Schedule A in this Agreement shall include such adjustments, to the extent applicable.
 
2.    Closing Date and Delivery.
 
a.    Closing Date.    Provided that all the Closing conditions set forth herein have been satisfied or waived, the Share Exchange shall take place at a closing (“the Closing”) to be held at the offices of Fischer, Behar, Chen and Co., 3 Daniel Frisch Street, Tel Aviv, Israel, on or before, June 30, 2002, as determined by the Company upon consummation of the Closing conditions set forth herein (the “Closing Date”). If the Closing conditions set forth herein have not been satisfied or waived by the Closing Date, this Agreement shall be automatically terminated, provided however that the Company will be entitled to unilaterally extend the Closing Date by an additional period of up to 90 days (the “Extended Period”), by giving a written notification to Shira and to all Shareholders prior to the said Date. In the event that the Closing conditions have not been satisfied or waived until the end of the Extended Period, this Agreement will expire without any claim or demand from the side of each party to the other. Immediately after the execution of this Agreement, Shira shall approach all other Shareholders and will notify them of the Share Exchange hereunder. If until a date which is 14 days following the date hereof, Shareholders of Shira holding the Minimum Percentage have not executed this Agreement, the Company, at its sole discretion, may terminate this Agreement by giving a written notification to that effect to Shira and to all Shareholders, in which case this Agreement will be terminated upon the giving of such notification without any claim or demand from the side of each party to the other.
 
b.    Transactions at Closing.    At the Closing, the following transactions shall occur, which transactions shall be deemed to take place simultaneously and no transaction shall be deemed to have been completed or any document delivered until all such transactions have been completed and all required documents delivered:
 
(i)  Each Shareholder shall deliver to the Company share certificate(s) accompanied by a duly executed deed of transfer with respect to all of Shira Shares set forth opposite such Shareholder’s name on Schedule A attached hereto, and the Company shall duly execute all such deeds of transfer provided, however, that the share certificate/s need not be delivered if the Shareholder provides the Company with an affidavit, duly executed by such Shareholder and certified by an attorney, according to which the Shareholder has declared that such certificate has never been transferred to him by Shira, has been lost, stolen or destroyed and executes an agreement satisfactory to the Company to indemnify the Company from any loss incurred by it or by Shira in connection with such certificate(s) (and which the Company’s rights for indemnification thereunder shall be assignable), including the posting of a bond as may be reasonably requested by the Company.
 
(ii)  Shira will provide the Company with a copy of a resolution of Shira’s Board of Directors and a copy of a resolution of Shira’s General Meeting of Shareholders approving the transfer of Shira Shares and all other transactions contemplated by this Agreement and by the Debt Arrangements.
 
(iii)  Shira shall register the transfer of the Shira Shares to the Company in the register of shareholders of Shira, and shall provide the Company with a confirmation of such entry.
 
(iv)  The Company shall receive validly executed share certificates covering all the Shira

3

Shares, issued in the name of the Company.
 
(v)  Gilo shall execute and deliver to the Company the Escrow and Pledge Agreement, in the form attached hereto as Schedule 2b(v) (the “Escrow Agreement”) and all other documents necessary to give effect to the transactions contemplated thereby.
 
(vi)  The company will receive a signed opinion of Fischer, Behar, Chen & Co., dated as of the date of the Closing and addressed to the Company.
 
(vii)  The Company shall issue and allot to each Shareholder, and each Shareholder shall purchase from the Company, the number of Company Shares specified opposite the name of such Shareholder on Schedule A hereto, subject to adjustments to the Ratio as provided in Section 1 herein.
 
(viii)  The Company will provide Shira with a copy of a resolution of the Company’s Board of Directors approving the issuance of the Company Shares and all other transactions contemplated by this Agreement.
 
c.    Delivery.    Subject to the terms of this Agreement, as soon as practicable following the Closing, the Company, through its transfer agent, will deliver to each Shareholder the certificates representing the Company Shares to be received by the Shareholder in the Share Exchange, as set forth opposite such Shareholder’s name on Schedule A attached hereto, subject to adjustments as provided in Section 1 herein.
 
3.    Representations and Warranties of the Company.
 
The Company hereby represents and warrants to each of the Shareholders as follows:
 
a.    Organization and Standing.    The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, United States of America.
 
b.    Corporate Power.    The Company has now, or will have at the Closing, all requisite corporate power to enter into this Agreement, to issue the Company Shares hereunder, and to carry out and perform its obligations under the terms of this Agreement, and has or will have taken, prior to the Closing, all actions necessary for the authorization, execution and delivery of this Agreement and the issuance of the Company Shares.
 
This Agreement is a valid and binding obligation of the Company enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, moratorium, and other laws of general application affecting the enforcement of creditors’ rights and by the availability of equitable remedies.
 
c.    No Violation.    The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in the breach of any term of, or constitute a default under, any contract, agreement, commitment, indenture, mortgage, note or other instrument or obligation to which the Company may be bound.
 
d.    Approvals.    To the Company’s knowledge, no consent, approval, order,

4

authorization or registration, qualifications, designation, license, declarations or filings with any Federal or state governmental authority is required on the part of the Company in connection with the execution and delivery of this Agreement by the Company or the consummation of the transactions contemplated herein.
 
e.    Valid Issuance of Shares.    The Company Shares, when issued in compliance with the provisions of this Agreement, will be validly issued, fully paid and nonassessable, and will be free of any liens or encumbrances; provided, however, that the Company shares will be subject to restrictions on transfer under this Agreement and U.S. state and federal securities laws as set forth herein, and as may be required by future changes in such laws.
 
4.    Representations and Warranties of Shareholders.
 
Each Shareholder represents and warrants, severally but not jointly, to the Company as follows:
 
a.    Capacity.    Such Shareholder has full legal capacity, power and authority to execute, deliver, and perform his, her or its obligations under this Agreement, and, if an individual, is at least 18 years of age.
 
b.    Ownership of Shares; Vesting Title.    Such Shareholder owns of record and beneficially only such number of Shira Shares as indicated opposite such Shareholder’s name on Schedule A attached hereto, subject to adjustments as provided in Section 1 herein, with full right and authority to sell and transfer such shares hereunder, and upon sale and transfer of such shares and the delivery of one or more deeds of transfer with respect to such shares hereunder, the Company will receive good, valid and marketable title thereto, free and clear of all liens or encumbrances or any other third parties rights, and not subject to any agreements or understandings among any persons with respect to the voting or transfer of such shares.
 
c.    No Additional Rights.    The Shira Shares listed opposite that Shareholder’s name on Schedule A, subject to adjustments as provided in Section 1 herein, constitute all of the shares, options, warrants and securities in Shira owned by the Shareholder or to which he, she or it has any rights, and he, she, or it has no preemptive rights, convertible securities, outstanding warrants, options or other rights to subscribe for, purchase or acquire from Shira or any third party any shares or securities of Shira or any subsidiary thereof. The Shareholder holds no shares or any other securities of any of Shira’s subsidiaries. Immediately following the consummation of the transactions contemplated in this Agreement, such Shareholder shall own no shares or securities in Shira or in any subsidiary thereof, and he, she or it shall have no rights as a shareholder of Shira or in any subsidiary thereof and no claims of any kind and sort against Shira, any subsidiary thereof and/or the Company.
 
Such Shareholder hereby waives any right, title, interest in and to any additional shares or other securities of Shira or any subsidiary thereof, whether pursuant to an option agreement, warrant agreement, antidilution right, preemptive right or the like, and hereby waives any other right to receive shares or other securities of Shira, any subsidiary thereof or the Company (to the extent such rights exist), and agrees that the Shira Shares listed opposite that Shareholder’s name on Schedule A (subject to adjustments as provided in Section 1 herein) are the sum total of the shares or other securities of Shira to which he/she/it is entitled.

5

 
d.    Ability to Protect Own Interest.    Such Shareholder has a preexisting personal or business relationship with the Company or one or more of its directors or officers or controlling persons, or, by reason of such Shareholder’s business or financial experience, the business or financial experience of such Shareholder’s professional advisors (who are not affiliated with or compensated by the Company or any of its affiliates) or the business or financial experience of such Shareholder’s personal representative, such Shareholder has the capacity to protect its own interest in connection with the Share Exchange.
 
e.    Access to Information.    Such Shareholder (or, if applicable, such Shareholder’s personal representative) understands that the Company files periodic and other reports with the United States Securities and Exchange Commission, which reports are available to the public and to such Shareholder, and has had an opportunity to discuss the Company’s business, management and financial affairs with its management and to ask questions of officers of the Company, which questions were answered to its satisfaction. Such Shareholder understands that such discussions with management, as well as any written information issued by the Company, were intended to describe certain aspects of the Company’s business and prospects but were not a thorough or exhaustive description. Without derogating from the provisions of Section 3(f) below, such Shareholder acknowledges that the foregoing, however, does not limit or modify the representations and warranties of the Company in Section 3 hereof or the right of the Shareholders to rely thereon.
 
f.    Reliance.    In deciding to enter into and consummate the transactions contemplated hereby, such Shareholder has not relied, as to tax, securities and other legal matters, on the advice that such Shareholder has received from the Company, from Shira, or any of their attorneys or representatives, but only on the advice of such Shareholder’s own advisors and experts. Such Shareholder is purchasing the Company Shares without having relied upon any representations and/or warranties by the Company, except those representations and warranties specifically indicated herein.
 
g.    Investment Intent.    The Company Shares to be received by such Shareholder will be acquired for such Shareholder’s own account, for investment and not with a view to, or for resale in connection with, any distribution or public offering thereof within the meaning of the United States Securities Act of 1933, as amended (the “Securities Act”). Such Shareholder furthermore has no current commitment or obligation, contingent or otherwise, to anyone to dispose of the Company Shares and has no current plan or intent to dispose of the Company Shares.
 
h.    Exempt from Registration; Indefinite Holding Period.    Such Shareholder understands and acknowledges that the Company Shares being offered pursuant to this Agreement will not be registered under the Securities Act on the ground that the issuance of the Company Shares in the Share Exchange is exempt from registration pursuant to section 4(2) of the Securities Act and is exempt from qualification pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended (the “Law”), and that the Company’s reliance upon such exemptions is predicated upon the Shareholders’ representations set forth in this Agreement.
 
Such Shareholder acknowledges and understands that the Company Shares must be held indefinitely unless the Company Shares are subsequently registered under the Securities Act and qualified under the Law or an exemption from such registration and such qualification is available. Such Shareholder also understands that any sale of the Company Shares that might be made by such Shareholder in reliance upon Rule 144 under the Securities Act may be made only in limited amounts in accordance with the terms and conditions of that rule.

6

 
i.    Exempt from Registration; Rule 501 of Regulation D; Regulation S.    Such Shareholder is either (i) an “accredited investor”, as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act, or (ii) not a “U.S. Person”, as such term is defined by Rule 902, Section (o) of Regulation S promulgated under the Securities Act (“Regulation S”), was not formed by a “U.S. Person” as defined under Regulation S, was not organized under the laws of any United States jurisdiction, is not holding the Company Shares for the benefit of any “U.S. Person”, was not formed for the purpose of investing in securities not registered under the Securities Act, and is acquiring the Company Shares in an “offshore transaction” as defined under Section (i) of such Rule 902. At the time the signing of this Agreement the Shareholder was outside the United States. The Shareholder, if purchasing the Company Shares pursuant to Regulation S, shall not attempt to have registered any transfer of the Company Shares not made in accordance with the provisions of Regulation S. In addition to any other restrictions on transfer set forth in this Agreement, the Shareholder agrees to transfer the Company Shares only (i) in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration, and (ii) in accordance with any applicable state securities laws. Unless so registered or exempt therefrom, such transfer restrictions shall include but not be limited to and the Shareholder warrants and represents the following:
 
(i)  The Shareholder shall not sell the Company Shares to any U.S. Person, whether directly or indirectly, or for the account or benefit of any such U.S. Person for a period of at least one year after the purchase of the Company Shares unless registered or exempt from registration;
 
(ii)  Any other offer or sale of the Company Shares shall be made only if any subsequent purchaser certifies in writing that it is not a U.S. Person and is not acquiring the Company Shares for the account or benefit of any U.S. Person or is a U.S. Person who purchased the Company Shares in a transaction that did not require registration under the Securities Act; and
 
(iii)  Any transferee of the Company Shares shall agree in writing to resell the Company Shares only in accordance with the provisions of Regulation S, pursuant to registration under the Securities Act, or pursuant to an available exemption from registration.
 
j.    No Violation.    The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in the breach of any term of, or constitute a default under, any contract, agreement, commitment, indenture, mortgage, note or other instrument or obligation to which such Shareholder, or any of such Shareholder’s Shira Shares, may be bound.
 
k.    Binding Obligation.    This Agreement has been duly executed and delivered by such Shareholder and constitutes a legal, valid and binding obligation of such Shareholder, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency and other laws affecting the enforcement of creditors’ rights and by the availability of equitable remedies. If the Shareholder is a corporation, all actions on its part necessary for the authorization, execution, delivery and performance by it of this Agreement have been duly taken. No approval or consent of any person, authority or entity is required in connection with the execution and delivery of this Agreement or the performance of such Shareholder’s obligations contemplated hereby.

7

 
5.    Representations and Warranties of Shira and Gilo.
 
Shira and Gilo each represents and warrants, severally and jointly, to the Company as follows, and acknowledges that the Company is entering into this Agreement in reliance thereon (references in this Section 5 to Shira include Shira and its wholly-owned subsidiaries Shira Inc. and Shira Europe B.V. (the “Subsidiaries”), except where the context requires otherwise). The representations and warranties set forth below in this Section 5 are subject to the Disclosure Schedule delivered by Shira and Gilo to the Company (the “Disclosure Schedule”).
 
a.    Corporate Organization and Standing.    Shira is a private company duly organized and validly existing under the laws of the State of Israel. Shira has the requisite corporate power and authority to carry on its business as presently conducted, and as proposed or contemplated to be conducted in the future, and to enter into and carry out the provisions of this Agreement and the transactions contemplated hereby. Shira is presently qualified to do business as a foreign corporation in all jurisdictions where the failure to be so qualified would materially and adversely affect Shira’s business. A copy of Shira’s Articles of Association, as in effect on the date hereof will be attached to the legal opinion set forth in Section 2b(vi) above.
 
b.    Corporate Capitalization; No Subsidiaries.    As of the date hereof, Shira’s authorized share capital is NIS 4,700,000 (Four Million Seven Hundred Thousand New Israeli Shekels) divided into 4,000,000 (Four Million) Ordinary Shares, each bearing a par value of NIS 1.00 (“Ordinary Shares”), 1,720,072 of which are issued, and 700,000 (Seven Hundred Thousand) Class A Non-Voting Shares, each bearing a par value of NIS 1.00 (the “Non-Voting Shares”), none of which are issued.
 
As of the date hereof, there are issued and outstanding options (“Options”), warrants (collectively with the Mizrachi Warrant, as defined below, the “Warrants”) and convertible notes (“Convertible Notes”) exercisable and convertible into a total of 1,600,055 Ordinary Shares and 284,329 Non-Voting Shares of Shira, all as specified in Schedule 5b delivered to the Company. Except for the shares which will be issued to the Banks pursuant to the Debt Arrangements (as defined in section 7d below) and except for a certain warrant issued to the United Mizrachi Bank Ltd. on February 25, 2001 (the “Mizrachi Warrant”), there are no other preemptive rights, convertible securities, outstanding warrants, options or other rights to subscribe for, purchase or acquire any share capital of Shira and there are not any contracts or binding commitments providing for the issuance of, or the granting of rights to acquire from Shira any share capital or under which Shira is, or may become, obligated to issue any of its securities.
 
Immediately prior to the Closing, Shira’s authorized share capital shall be NIS 7,700,000 (Seven Million Seven Hundred Thousand New Israeli Shekels) divided into 7,000,000 (Seven Million) Ordinary Shares and 700,000 (Seven Hundred Thousand) Non-Voting Shares.
 
Immediately prior to the Closing and assuming that (i) all Convertible Notes are converted into Ordinary Shares, (ii) any and all Ordinary Shares to be issued by Shira to the Banks pursuant to the Debt Arrangements (as set forth in Section 7e herein) were issued to the Banks and (iii) no Option or Warrant has been exercised prior to the Closing, then (A) the issued and paid-up share capital of Shira shall be 4,187,611 Ordinary Shares and no Non-Voting Shares, all as set forth in Schedule A attached hereto, and (B) the persons listed in Schedule A are the lawful owners, beneficially and of record, of all of the issued share capital of Shira and of all rights thereto immediately prior to the Closing. If any Option or Warrant is exercised prior to the Closing, then the aforementioned representation shall remain true and correct subject to the adjustments set forth in Section 1 herein.

8

 
Immediately prior to, or simultaneously with, the Closing, all the issued shares of Shira will be duly authorized, validly issued, fully paid and non-assessable and, to the best of Shira’s and Gilo’s knowledge, free and clear of any liens, claims, charges, attachments, encumbrances, interests or any third party rights or claims of any kind, and shall be duly registered in the name of the respective Shira’s Shareholder in Shira’s register of shareholders.
 
Assuming that the conditions to the Closing set forth in Sections 7e, 7f and 7g of this Agreement are met, immediately prior to, or simultaneously with, the Closing, Shira will have no outstanding options or warrants or rights to subscribe for or purchase any share capital of Shira, no convertible notes convertible into share capital of Shira and no other preemptive rights, convertible securities, outstanding equity or agreements or binding commitments to issue equity (including but not limited to convertible debt) or for the granting of rights to acquire from Shira any share capital or under which Shira is, or may become, obligated to issue any of its securities. Other than the Subsidiaries, Shira has no subsidiaries or ownership of the capital stock of any other entity, and is not a partner or a participant in any partnership or joint venture.
 
c.    Authorization.    All corporate action on the part of Shira, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agree­ment by Shira, has been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by Shira, shall constitute the valid and binding obligation of Shira, enforceable (solely with respect to Shira’s and Gilo’s obligations) in accordance with its terms. Except as set forth in the Disclosure Schedule, the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby will not result in the breach of any term of, or constitute a default under, any contract, agreement, commitment, indenture, mortgage, note or other instrument or obligation to which Shira may be bound. Except as set forth in the Disclosure Schedule, no approval or consent of any person, authority or entity is required in connection with the execution and delivery of this Agreement or the performance of the transactions contemplated hereby. To the best of Shira’s and Gilo’s knowledge, and except for the right of first refusal as provided in a certain agreement among Courses Holdings in Software (1993) Ltd., Steps Holdings (1993) Ltd. and Gilo Family Partnership or its nominee (the “Right of First Refusal” and the “Management Agreement”, respectively), the sale and transfer of Shira Shares are not subject to any right of first refusal or the like, and except as set forth in the Disclosure Schedule, nor is subject to the approval or consent of any third party whose consent has not been, or will not have been, properly obtained prior to the Closing. Such execution, delivery and compliance will not give to others any rights, including rights of termination, cancellation or acceleration, in or with respect to any agreement, contract or commitment, which, if so terminated, cancelled or accelerated, would have a material adverse effect on the business, properties or condition (financial or otherwise), affairs, operation or assets of Shira. There is no restriction, under any agreement or any applicable law, on the transfer or sale of the Shira Shares or any part thereof.
 
d.    Financial Statements.    The audited consolidated US$—denominated annual financial statements of Shira for the year ended December 31, 2001, and the unaudited consolidated quarterly financial statements of Shira for the three months ended March 31, 2002 (collectively, the “Financial Statements”), each of which has been previously delivered to the Company, are true and correct in all material respects, are in accordance with the books and records of Shira and the Subsidiaries, and fairly and accurately present in all material respects the properties, assets, rights, obligations, liabilities and business and financial position of Shira and the Subsidiaries as of such dates and the results of operations for the periods then ended, and have been prepared in accordance with

9

generally accepted accounting principles in the United States (“US GAAP”) consistently applied with Shira’s financial statements for previous years, except that the financial statements for the three months ended March 31, 2002 do not contain all of the notes required under US GAAP. Except as set forth in the Disclosure Schedule, since December 31, 2001, there has been no material adverse change in the assets, liabilities, business or financial position of Shira from that reflected in the Financial Statements. Except as set forth in the Disclosure Schedule, Shira has no material liabilities, debts or obligations, whether accrued, absolute or contingent or otherwise or whether due or to become due, other than liabilities reflected or reserved against in the Financial Statements and liabilities incurred in the ordinary course of business of Shira. Assuming that the condition to the Closing set forth in Section 7d to this Agreement is met, the total sum of Shira’s debts and liabilities, outstanding immediately prior, or simultaneously with, the Closing, shall amount to an aggregate sum not to exceed US$ 2.6 million (including Shira’s debts to the Banks and Shira’s debts to the Company, under a loan which the Company extended to Shira in the sum of US$ 250,000, but excluding a loan which the Company extended to Shira immediately prior to the execution of this Agreement in the sum of US$ 600,000).
 
e.    Litigation.    Except as set forth in the Disclosure Schedule, there are no actions, suits, proceedings or, to Shira’s and Gilo’s best knowledge, investigations pending, or any threat thereof, against or affecting Shira, or, to Shira’s and Gilo’s best knowledge, against any of the officers, directors, or employees of Shira in their capacities as such, which, either individually or in the aggregate, might result in any material adverse change in the business, prospects, condition, affairs or operations of Shira or in any of its proper­ties or assets, or in any material impairment of the right or ability of Shira to carry on its business as presently conducted and as proposed to be conducted, and none which questions the validity of this Agreement or any action taken or to be taken in connection herewith.
 
f.    Governmental Consents.    Except as set forth in the Disclosure Schedule, no consent, approval, order, authorization or registration, qualifications, designation, license, declarations or filings with any governmental authority is required on the part of Shira in connection with the consummation of the transactions contemplated herein, that has not been, or will not have been, obtained by Shira prior to the Closing, except for filings to the Israeli Registrar of Companies.
 
g.    Agreements; Action.
 
(i)  Except as set forth in the Disclosure Schedule, there are no agreements, understandings, obligations, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which Shira is a party or, to its and Gilo’s knowledge, by which it is bound, which have a material adverse effect on its results of operations, financial condition or prospects or which may involve (i) obligations (contingent or otherwise) of, or payments to, Shira in excess of $10,000 (other than obligations of, or payments to, Shira arising from purchase or sale agreements entered into in the ordinary course of business), or (ii) the transfer or license of any patent, copyright, trade secret or other proprietary right to or from Shira (other than licenses arising from the purchase of “off the shelf” or other standard products) (“Material Agreements”).
 
(ii)  Except as set forth in the Disclosure Schedule and except as reflected in the Financial Statements, Shira has not (i) declared or paid any dividends, or authorized or made any distribution (including any repurchases) upon or with respect to any class or series of its share capital, (ii) incurred any indebtedness for money borrowed or any other liabilities (other than with respect to indebtedness and other obligations

10

incurred in the ordinary course of business) individually in excess of $10,000 or, in the case of indebtedness and/or liabilities individually less than $10,000, in excess of $25,000 in the aggregate, (iii) made any loans or advances to any person, other than (a) advances made in the ordinary course of business, including, but not limited to, advance payments pursuant to real estate or car lease agreements, or (b) ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise disposed of any of its assets or rights, other than the sale of its inventory in the ordinary course of business.
 
For the purposes of subsections (i) and (ii) above, all indebtedness, liabilities, agreements, understandings, instruments, contracts and proposed transactions involving the same person or entity (including persons or entities Shira has reason to believe are affiliated therewith) shall be aggregated for the purpose of meeting the individual minimum dollar amounts of such subsections.
 
(iii)  Except as set forth in the Disclosure Schedule, each of the Material Agreements specified in the Disclosure Schedule is in full force and effect.
 
(iv)  Except as set forth in the Disclosure Schedule and except as reflected in the Financial Statements, Shira has not given any guarantee, indemnity or security for or otherwise agreed to become directly or contingently liable for any obligation of any other person, and no person has given any guarantee of or security for any obligation of Shira.
 
h.    Obligations to Related Parties.    Except as set forth in the Disclosure Schedule, except as reflected in the Financial Statements, and except for securities issued to officers directors and Shareholders which are reflected in Schedule A attached hereto and Schedule 5b delivered to the Company, there are no agreements between Shira and any officer, director, shareholder or employee of Shira, or any affiliate of any of the foregoing, other than: (a) an obligation for payment of salary for services rendered by such person; (b) reimbursement for reasonable expenses incurred on behalf of Shira; and (c) for other standard employee benefits made generally available to all employees. Except as set forth in the Disclosure Schedule and except as reflected in the Financial Statements, none of the foregoing has, either directly or indirectly, an interest in any person or entity which (i) furnishes or sells services or products to Shira or (ii) purchases from Shira any goods or services or (iii) has a beneficial interest in any contract or agreement to which Shira is a party or by which it may be bound or affected. No shareholder, officer or director of Shira is indebted to Shira, nor is Shira indebted to any of the foregoing. Shira’s shareholders do not own, hold or possess, in their individual or any other capacities, any property, whether tangible or intangible, which serves Shira, which is material, individually or in the aggregate, to the financial condition, operations, or business of Shira.
 
i.    Patents and Trademarks.    To the best of Shira’s and Gilo’s knowledge and except as set forth in the Disclosure Schedule, Shira owns or possesses sufficient legal rights to all patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes, whether or not registered, and all pending applications for registration thereof, which are necessary for its business as now conducted and as presently proposed to be conducted (the “Intellectual Property”), without any known infringement of the rights of others. Except as set forth in the Disclosure Schedule, there are no outstanding options, licenses or agreements of any kind relating to the foregoing, nor is Shira bound by or a party to any options, licenses or agreements of any kind with respect to the patents, trademarks, service marks, trade names, copyrights, trade secrets, licenses, information and other proprietary rights and processes of any other person or entity other than such licenses or agreements arising from the purchase of “off the shelf” or standard products. Shira has not received any communications alleging that Shira has violated or, by conducting

11

its business as presently proposed, would violate any of the patents, trademarks, service marks, trade names, copyrights or trade secrets or other proprietary rights of any other person or entity. Neither Shira nor Gilo are aware that any of Shira’s employees is obligated under any contract (including licenses, covenants or commitments of any nature) or other agreement, or subject to any judgment, decree or order of any court or administrative agency, that would interfere with their duties to Shira or that would conflict with Shira’s business as conducted and as presently proposed to be conducted. In addition, neither Shira nor Gilo are aware of any facts that would render any of the Intellectual Property invalid or inadequate to protect the interest of Shira therein. Except as set forth in the Disclosure Schedule and except as reflected in the Financial Statements, Shira has not assumed any commitment to make any payments by way of royalties, fees or otherwise to any owner or licensee of, or other claimant to the Intellectual Property. Except as set forth in the Disclosure Schedule, Shira is not under any obligation to obtain any approval for the use of any of the Intellectual Property.
 
j.    Proprietary Information and Inventions Agreements.    Each employee, officer and consultant of Shira has executed Proprietary Information and Inventions Agreement in the form provided to the Company’s counsel. Except as set forth in the Disclosure Schedule, no current employee, officer or consultant of Shira has excluded works or inventions made prior to his or her employment with Shira from his or her assignment of inventions pursuant to such employee, officer or consultant’s Proprietary Information and Inventions Agreement.
 
k.    Taxes.    Except as set forth in the Disclosure Schedule and except as reflected in the Financial Statements, Shira is not currently liable for any tax (whether income tax, capital gains tax, or otherwise), and any taxes which were due in the past (if at all) have been timely paid by Shira. Except as set forth in the Disclosure Schedule and except as reflected in the Financial Statements, Shira has accurately prepared and timely filed all necessary filings and reports (the “Tax Reports”) with the appropriate tax authorities and has paid or made adequate provision for the payment of all amounts due pursuant to the Tax Reports as well as other taxes, assessments and governmental charges which have become due or payable.
 
l.    Employees.    Except as set forth in the Disclosure Schedule and except as reflected in the Financial Statements, Shira has paid in full, or established adequate reserves for all amounts due or payable with respect to its employees, including, but not limited to, wages, severance pay, pension funds, redemption of annual leave or otherwise, social security payments (bituach leumi), income tax withholdings and pension, whether required by law or pursuant to an agreement.
 
m.    Disclosure.    Neither this Agreement (including all Schedules hereto) nor any other documents made or delivered in connection herewith contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements herein or therein not misleading.
 
n.    Interim Period.    Shira hereby undertakes, and Gilo hereby undertakes to make its best efforts, that, during the period commencing on the date hereof and until the Closing Date (the “Interim Period”), Shira and the Subsidiaries shall conduct their business solely in the ordinary course of business, and, without derogating from the generality of the aforementioned obligation, shall not issue any securities, other than as provided for herein, shall not distribute any dividends or other distributions to its shareholders and shall not enter into any related parties transactions, except for additional Factoring agreements between Shira and Sky Farm Management LLC, substantially under the same terms and conditions of the previous Factoring agreements between Shira and Sky Farm Management LLC, copies of which have been provided to the Company. Shira will notify the Company in writing prior to entering into any such additional Factoring agreement with Sky Farm Management LLC.

12

 
6.    Indemnification
 
6.1     Survival of Representations and Covenants.
 
(a)  The representations, warranties, covenants and obligations of Shira and Gilo shall survive (without limitation) the Closing and remain in full force and effect for a period of one (1) year following the Closing.
 
(b)  The representations, warranties, covenants and obligations of Shira and Gilo, and the rights and remedies that may be exercised by the Company, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or knowledge of, the Company or any of its Representatives.
 
(c)  For purposes of this Agreement, each statement or other item of information set forth in the Disclosure Schedule shall be deemed to be a representation and warranty made by Shira and Gilo in this Agreement.
 
6.2    Indemnification by Gilo.
 
Gilo shall hold harmless and indemnify the Indemnitees from and against, and shall compensate and reimburse the Indemnitees for, any Damages which are directly or indirectly suffered or incurred by the Indemnitees or to which the Indemnitees may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) and which arise directly or indirectly from or as a direct or indirect result of, or are directly or indirectly connected with:
 
(i)  any Breach of any representation or warranty made by Shira or Gilo in this Agreement;
 
(ii)  any Breach of any representation, warranty, statement, information or provision contained in the Disclosure Schedule;
 
(iii)  any Breach of any covenant or obligation of Shira or Gilo; or
 
(iv)  any Proceeding relating directly or indirectly to any Breach, alleged Breach, Liability or matter of the type referred to in clause (i), (ii), or (iii) above (including any Proceeding commenced by the Company for the purpose of enforcing any of its rights under this Section 6).
 
6.3    Gilo acknowledge and agree that, if there is any Breach of any representation, warranty or other provision relating to Shira or Shira’s business, condition, assets, liabilities, operations, financial performance, net income or prospects (or any aspect or portion thereof), then the Company itself shall be deemed, by virtue of its ownership of the Ordinary Shares of Shira, to have incurred Damages as a result of such Breach or Liability. Nothing contained in this Section 6.3 shall have the effect of (i) limiting the circumstances under which the Company may otherwise be deemed to have incurred Damages for purposes of this Agreement, or (ii) limiting the other types of Damages that the Company may be deemed to have incurred (whether in connection with any such Breach or Liability or otherwise).

13

 
6.4    Right to Require Cure of Breach.    Without limiting the generality of anything contained in Section 6, if there is any Breach of any representation or warranty made by Shira or Gilo, then Gilo shall be obligated to pay such amounts to the Indemnitees and take such other actions as the Indemnitees may in good faith reasonably request for the purpose of causing such Breach to be corrected, cured and eliminated in all respects (at no cost to Shira or the Indemnitees).
 
6.5    No Contribution.    Gilo waive, and acknowledge and agree that Gilo shall not have and shall not exercise or assert or attempt to exercise or assert, any right of contribution or right of indemnity or any other right or remedy against Shira or the Indemnitees in connection with any indemnification obligation or any other Liability to which Gilo may become subject under this Agreement or the Escrow Agreement or otherwise in connection with any of the transactions contemplated hereby or thereby.
 
6.6    Limitations; Exclusive Remedy.    The Escrow Stock is the sole and exclusive remedy of the Indemnitees against Gilo with respect to any matter arising out of or in connection with this Agreement or the Escrow Agreement; provided, however, that no claim against Gilo for fraud shall be subject to the limitations of this paragraph or this Section 6. Any release of the Escrow Stock shall be in accordance with the terms of the Escrow Agreement. Subject to the rights of the Indemnitees set forth in Section 6.7, Gilo shall not be liable or responsible in any manner whatsoever to the Indemnitees, whether for indemnification or otherwise, except for indemnity as expressly provided in this Section 6. The maximum liability of Gilo under this Agreement and the Escrow Agreement shall be 100% of the Company Shares issued to Gilo in the Share Exchange, including any cash, securities or other property distributable (whether by way of dividend, stock split or otherwise) in respect of or in exchange for such shares (the “Escrow Stock”).
 
6.7    Defense of Third Party Claims.    In the event of the assertion or commencement by any Person of any claim or Proceeding (whether against Shira, against any other Indemnitee or against any other Person) with respect to which Gilo may become obligated to indemnify, hold harmless, compensate or reimburse the Indemnitees pursuant to this Section 6, the Indemnitees shall have the right to assume the defense of such claim or Proceeding. If the Indemnitees so elect to assume the defense of any such claim or Proceeding:
 
(a)  all expenses relating to the defense of such claim or Proceeding (whether or not incurred by the Indemnitees) shall be borne and paid exclusively by Gilo;
 
(b)  the Indemnitees shall proceed to defend such claim or Proceeding in a diligent manner with counsel satisfactory to them;
 
(c)  Gilo shall make available to the Indemnitees any documents and materials in the possession or control of Gilo that may be necessary to the defense of such claim or Proceeding;
 
(d)  The Indemnitees shall keep Gilo informed of all material developments and events relating to such claim or Proceeding; and
 
(e)  The Indemnitees shall not settle, adjust or compromise such claim or Proceeding without the prior written consent of Gilo, not to be unreasonably withheld, unless such settlement includes a general release of the Indemnitees with no payment by the Indemnitees of consideration.

14

 
If the Indemnitees do not elect to assume the defense of any such claim or Proceeding within 7 business days from the date on which they became aware of such claim or Proceeding, Gilo shall assume the defense of such claim or Proceeding with counsel reasonably satisfactory to the Indemnitees, and the following provisions shall apply:
 
(a)  all expenses relating to the defense of such claim or Proceeding shall be borne and paid exclusively by Gilo;
 
(b)  The Indemnitees will cooperate with Gilo in the defense of such claim or Proceeding, provided, however, that if the defendants in such claim or Proceeding include both Gilo and the Indemnitees and there is a conflict of interests which would prevent counsel for Gilo from also representing the Indemnitees, the Indemnitees shall have the right to select one separate counsel to participate in the defense of such claim or Proceeding on behalf of such Indemnitees, and in such event the provisions of Section (e) above shall apply.
 
(c)  Gilo shall not enter into any settlement in any action, suit, or proceeding to which the Indemnitees are a party without the Indemnitees’ prior written consent, unless such settlement includes a general release of the Indemnitees with no payment by the Indemnitees of consideration and without an admission of liability.
 
6.8    Certain Defined Terms.    For purposes of this Section 6, the following capitalized terms shall have the meanings set forth below:
 
“Breach” shall be deemed to be a breach of a representation, warranty, covenant, obligation or other provision if there is or has been (a) any inaccuracy in or breach of, or any failure to comply with or perform, such representation, warranty, covenant, obligation or other provision or (b) any claim (by any Person) or other circumstance that is inconsistent with such representation, warranty, covenant, obligation or other provision; and the term “Breach” shall be deemed to refer to any such inaccuracy, breach, failure, claim or circumstance.
 
“Damages” shall include any loss, damage, injury, decline in value, lost opportunity, Liability, claim, demand, settlement, judgment, award, fine, penalty, tax, fee (including any legal fee, expert fee, accounting fee or advisory fee), charge, cost (including any cost of investigation) or expense of any nature.
 
“Indemnitees” means the following Persons: (a) the Company, (b) the Company’s current and future affiliates (including Shira), (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above, and (d) the respective successors and assigns of the Persons referred to in clauses (a), (b) and (c) above; provided, however, that (i) Shira shall not be entitled to exercise any rights as an Indemnitee prior to the Closing and (ii) neither the Shareholders nor Gilo shall be deemed to be “Indemnitees”.
 
“Liability” means any debt, obligation, duty or liability of any nature (including any unknown, undisclosed, unmatured, unaccrued, unasserted, contingent, indirect, conditional, implied, vicarious, derivative, joint, several or secondary liability), regardless of whether such debt, obligation, duty or liability would be required to be disclosed on a balance sheet prepared in accordance with generally accepted accounting principles and regardless of whether such debt,

15

obligation, duty or liability is immediately due and payable.
 
“Person” means any individual, entity or governmental body.
 
“Proceeding” means any action, suit, litigation, arbitration, proceeding (including any civil, criminal, administrative, investigative or appellate proceeding and any informal proceeding), prosecution, contest, hearing, inquiry, inquest, audit, examination or investigation that is, has been or may in the future be commenced, brought, conducted or heard by or before, or that otherwise has involved or may involve, any court, tribunal or administrative or other governmental body or any arbitrator or arbitration panel.
 
“Representatives” means officers, directors, employees, agents, attorneys, accountants and advisors.            
 
7.    Conditions to the Company’s Obligation to Close.
 
The Company’s obligations under this Agreement, including the Company’s obligation to issue the Company Shares at the Closing, is subject to the fulfillment to the Company’s satisfaction on or prior to the Closing Date of the following conditions, any of which may be waived by the Company in writing in its sole discretion:
 
a.    Representations and Warranties Correct.    The representations and warranties made by the Shareholders in Section 4 hereof, and the representations and warranties of Shira and Gilo in Section 5 hereof, shall be true and correct when made and shall be true and correct on the Closing Date with the same force and effect as if they had been made on and as of said date.
 
b.    Tender.    All of the Shareholders shall have executed this Agreement as parties hereto, or, at the Company’s option, subject to its sole and exclusive discretion, Shareholders holding at least 90% of the issued and outstanding share capital of each class of shares of Shira as of the Closing Date (excluding any Shira Shares which are held by the Controlling Shareholder of the Company or anyone on its behalf or on the Company’s behalf, including any Relatives of the foregoing or corporations Controlled by them. The terms Controlling Shareholder, Relative and Control—as defined in the Israeli Companies Law, 1999) (the “Minimum Percentage”), shall have executed this Agreement as parties hereto. Until such time as the Shareholders (or Gilo and Shareholders holding the Minimum Percentage, as the case may be) sign this Agreement as aforesaid, this Agreement shall be binding upon the parties hereto. In the event that the Company elects, upon its sole discretion, to settle for the signing of Gilo and other Shareholders holding the Minimum Percentage (collectively: the “Consenting Shareholders”), as aforesaid, and notifies all other Shareholders who did not execute this Agreement (the “Non-consenting Shareholders”), that it wishes to purchase the Shira Shares held by them (the “Notification”), then the following provisions will apply: (i) at the Closing, which shall not take place earlier than one month following the date of the Notification, the Company shall purchase the Shira Shares which are held by both the Consenting Shareholders and the Non-consenting Shareholders, on the same terms; (ii) the provisions of Section 2b(i) and 2c hereto shall not apply with respect to the Shira Shares which are held by the Non-consenting Shareholders, and Shira undertakes to register, at the Closing, the Non-consenting Shareholders’ shares in the name of the Company in the register of shareholders of Shira, provided that it has received, prior to or at the Closing (A) a copy of all the Notifications which the Company has sent to the Non-consenting Shareholders and (B) the Company Shares to be transferred to the Non-consenting Shareholders in consideration for their Shira Shares; and (iii) if following the receipt

16

of the Company’s Notification, any one or more of the Non-consenting Shareholders approaches the court in accordance with the provisions of Section 341 to the Israeli Companies Law, 1999 (the “Objection”), then the Company shall be entitled to postpone the Closing Date as it deems fit, and in case the court has not ruled in such Objection until a date which is 60 days following the date hereof, the Company shall be entitled, at its sole discretion, to either (A) terminate this Agreement by giving a written notification to that effect to Shira and to all Shareholders, in which case this Agreement will be terminated upon the giving of such notification without any claim or demand from the side of each party to the other, or (B) postpone the Closing (on one or more occasions) by an additional period of up to 8 (eight) months following the lapse of such 60-day period.
 
c.    Consents and Waivers.    Shira shall have obtained any and all consents, permits and waivers necessary or appropriate for consummation of the transactions contemplated by this Agreement, including, without limitation, the approval of (i) the Chief Scientist of the Ministry of Industry and Trade of the State of Israel, (ii) the Investment Center, (iii) Bank Hapoalim B.M. (iv) United Mizrachi Bank Ltd., (v) Union Bank Ltd.
 
d.    Debts Arrangements.    Bank Hapoalim B.M, United Mizrachi Bank Ltd. and Union Bank Ltd. (collectively, the “Banks”) shall have executed an agreement with Shira (the “Debt Arrangements”), by which the Banks will agree and consent that the total amount of Shira’s outstanding debts to the Banks will not exceed US$ 800,000 (eight hundred thousand United States Dollars), which debts will be guaranteed by the Company. The Company hereby consents to the giving of such guarantee.
 
e.    Issuance of shares to the Banks.    Any and all Ordinary Shares of Shira to be issued by Shira to the Banks pursuant to the Debt Arrangements shall have been issued and registered in the name of the Banks.
 
f.    Conversion of Convertible Notes.    All the Convertible Notes shall be converted into 1,627,927 Ordinary Shares of Shira (to be issued to and registered in the name of the holders of such Convertible Notes immediately prior to the Closing).
 
g.    Release and waiver of Options and Warrants.    All the holders of the Options and Warrants shall have either (i) exercised such Options and Warrants prior to the Closing (in which case, the shares underlying such exercised Options and Warrants will be issued to and registered in the name of the holders of such Options and Warrants prior to the Closing), or (ii) duly executed and delivered to Shira a release letter, conditioned upon the Closing, by which they will agree to the termination and cancellation of such Options and Warrants and waive any right of any kind they posses under such Options and Warrants and any claim of any sort or kind against Shira in respect of said Options and Warrants, provided, however, that in any event the Mizrachi Warrant shall have lapsed and terminated and the rights of the holder thereof to purchase any securities of Shira shall have been waived in writing.
 
h.    Listing of the Company shares.    The Company Shares shall have been approved for listing on the Nasdaq National Market.
 
i.    Termination of Management Agreement.    All parties to the Management Agreement and Gilo Family Trust shall have agreed, in writing, to terminate such agreement, and shall further agree to irrevocably waive the Right of First Refusal with respect to the sale of the Shira Shares hereunder.

17

 
j.    Approval of Proceedings and Documents.    The shareholders of Shira shall have approved this Agreement, all transactions contemplated hereunder and all documents and instruments ancillary hereto (including, without limitation, the increase of Shira’s authorized share capital by the creation of additional 3,000,000 Ordinary Shares), in a General Meeting of the shareholders of Shira duly held or by unanimous written consent, in accordance with the provisions of any applicable law.
 
8.    Conditions to Shira’s Obligation to Close.
 
Shira’s obligations under Sections 7d, 7e, 7f and 7g to this Agreement are subject to the approval by the shareholders of Shira of the transactions contemplated under said sections (including, without limitation, the increase of Shira’s authorized share capital by the creation of additional 3,000,000 Ordinary Shares), in a shareholders meeting duly held or by unanimous written consent.
 
9.    Due Diligence.    
 
This Agreement is further contingent on the Company completing, to its satisfaction and in its sole discretion, a due diligence review of Shira’s corporate authority, financial reporting, material contracts and such other information deemed pertinent to the Company.
 
10.    Restrictive Legends.
 
a.    Each instrument evidencing the Company Shares which the Shareholders receive hereunder and any other securities issued upon any stock split, stock dividend, recapitalization, merger, consolidation or similar event (unless no longer required in the opinion of the counsel for the Company) shall be imprinted with a legend substantially in the following form as well as any additional legend(s) as may be required by the Department of Corporations pursuant to any qualification or “fairness hearing”:
 
THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), AND MAY NOT BE OFFERED OR SOLD WITHOUT REGISTRATION UNDER THE ACT UNLESS THE CORPORATION RECEIVES AN OPINION OF COUNSEL, SATISFACTORY TO THE CORPORATION, THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE OR SUCH REGISTRATION IS NOT REQUIRED PURSUANT TO REGULATION S UNDER THE ACT.
 
b.    In addition, the Company Shares issued to Gilo hereunder shall bear the following legend:
 
THE SECURITIES REPRESENTED BY THIS INSTRUMENT ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN THAT CERTAIN MAY 14, 2002, SHARE EXCHANGE AGREEMENT BETWEEN THE ORIGINAL HOLDER HEREOF AND THE CORPORATION.

18

 
The Company shall be entitled to enter stop transfer notices on its transfer books with respect to the Company Shares during periods when transfers are restricted under the terms of this Agreement.
 
11.    Taxation.
 
Each Shareholder shall bear the payment of any tax or levy, should such payment apply to such Shareholder, pursuant to the provision of any law, in its status of transferor or transferee, depending on the case. Without derogating from the foregoing, each Shareholder alone will be responsible for payment of any income tax and capital gains tax, if any, which may apply as a result of (i) the conversion of any Convertible Notes into shares of Shira, (ii) the conversion of any debt into shares of Shira; (iii) the exercise of any Option or Warrant into shares of Shira; (iv) the transfer and sale of the Shira Shares, and (v) the issuance of the Company Shares by the Company in the Share Exchange, as contemplated herein.
 
12.    Miscellaneous.
 
a.    Governing Law.    The Agreement shall be governed in all respects by the laws of the State of Israel, excluding any corporate or securities aspects relating the Company which will be governed by the applicable state and federal U.S. laws. The parties irrevocably consent to the exclusive jurisdiction of any competent court located within the city of Tel-Aviv-Jaffa, with respect to any and all disputes arising from this Agreement.
 
b.    Successors and Assigns.    Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors and administrators of the parties hereto.
 
c.    Further Acts.    The parties hereto shall perform all further acts and execute and deliver all documents that may be reasonably necessary to carry out their obligations hereunder and the purposes of this Agreement.
 
d.    Changes and Termination.    Except as otherwise expressly provided herein, neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated orally, but only by a statement in writing signed by Shira, Gilo and the Company and the party against whom enforcement of the change, waiver, discharge or termination is sought.
 
e.    Entire Agreement.    This Agreement and the other documents delivered pursuant hereto constitute the full and entire understanding and agreement between the parties with regard to the subjects hereof and thereof.
 
f.    Brokers
 
(i)  Each party represents and warrants to the other that it has dealt with no brokers with respect to the Share Exchange contemplated hereby. No party has done any acts, had any negotiations or conversations, or made any agreements or promises which will in any way create or give rise to any obligation or liability for the payment of any fee, charge, commission or other compensation to any party with respect to the transactions contemplated hereby.
 
(ii)  The Shareholders and the Company agree to forever indemnify, defend and save harmless (on an after-tax basis) each other of, from and against any and all claims or suits

19

for compensation, commission or otherwise which may be asserted or made by any broker, person or entity, as a result of any dealing by the indemnifying party or its representatives with such other broker, person or entity, including, without limitation, all costs, losses, liabilities, damages and expenses (including, without limitation, attorneys’ fees and disbursements) related thereto. This subsection shall survive the Closing or any sooner expiration or termination of this Agreement.
 
g.    Confidentiality.    All information furnished to any Shareholder by the Company or by Shira shall be treated confidentially by the Shareholder. Each Shareholder hereby agrees that, except as required by law, it will not release or cause or permit to be released any press notices, publicity (oral or written) or advertising promotion or otherwise announce or disclose or cause or permit to be announced or disclosed, in any manner whatsoever, the fact that negotiation have taken place, or the terms and conditions or substance of the transactions contemplated herein without first obtaining the express written consent of the Company. The obligation to keep such information confidential shall survive the termination of this Agreement for three years. Notwithstanding anything to the contrary set forth in this subsection, (i) Shareholders shall be permitted to provide confidentially all materials and information furnished by the Company to their attorneys and legal counsel, who shall likewise keep such information confidential and (ii) such confidentiality restrictions hereunder shall not apply to information furnished pursuant to this Agreement which has entered the public domain through no fault of such Shareholder.
 
h.    Notices.    All notices and other communications required or permitted hereunder shall be in writing and shall be delivered personally, mailed by registered or certified mail or airmail, postage prepaid, return receipt requested, or sent via internationally recognized overnight courier, addressed (a) if to a Shareholder, to such Shareholder’s address set forth below, or at such other address as such Shareholder shall have furnished to the Company in writing, or (b) if to the Company, to the address of the Company set forth below, or to such other address as the Company shall have furnished to each Shareholder in writing or (c) if to Shira, to the address of Shira set forth below, or to such other address as Shira shall have furnished to the Company or to each Shareholder in writing. All notices and other communications required or permitted hereunder shall be conclusively deemed to have been duly given: if delivered personally—on the next business day; if mailed by registered or certified mail or airmail, postage prepaid—ten (10) business days after mailing; and if sent via internationally recognized overnight courier, freight pre-paid—three (3) business days after delivery.
 
i.    Severability.    In case any provision of this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby.
 
j.    Expenses.    The Company, Shira and the Shareholders shall each bear their own expenses and legal fees in connection with this Agreement and the transactions contemplated hereby.
 
k.    Titles and Subtitles.    The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement.
 
l.    Counterparts.    This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together constitute one instrument.

20

 
m.    Delays or Omissions.    No delay or omission to exercise any right, power or remedy accruing to the Company shall impair any such right, power or remedy of the Company, nor shall it be construed to be a waiver of any breach or default under this Agreement, or any acquiescence therein, or any waiver of or acquiescence in any similar breach or default thereafter occurring; nor shall any delay or omission to exercise any right, power or remedy accruing to the Company or any waiver by the Company of any single breach or default by any other party be deemed a waiver by the Company of any other right, power or remedy or breach or default theretofore or thereafter occurring. All remedies, either under this Agreement or by law otherwise afforded to the Company shall be cumulative and not alternative.
 
IN WITNESS WHEREOF, the parties have executed this Agreement effective as of May 14, 2002.
 
 
VYYO INC.
Of 20400 Stevens Creek Boulevard, 8th floor, Cupertino, California, 95014, USA
 
By:    /s/    Michael P. Corwin                            
Name:    Michael P. Corwin
Title:    President and Chief Operating Officer
 
 
SHIRA COMPUTERS LTD.
Of 28 Hata’as Street, Kfar Saba 44425, Israel
 
By:    /s/     Robert Graifman                                
Name:    Robert Graifman
Title:    Chairman of the Board
 
 
THE GILO FAMILY PARTNERSHIP, L.P.
Of:                                                                         
 
By:    /s/    Davidi Gilo                                          
Name: Davidi Gilo
Title: General Partner
 
 
GILO FAMILY TRUST DATED JANUARY 18, 1991
 
By:    /s/    Davidi Gilo                                        
Name: Davidi Gilo
Title: Trustee
 
 
AVIV TZIDON
Of:                                                                         
 
By:                                                                         
Name:
Title:

21

 
SHIMON ORIAN
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
LUNA HI-TECH ENTERPRISES LTD.
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
HERBERT DROWER
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
EHUD ZOHAR
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
LIRAZ (INVESTMENTS) SYSTEMS LTD.
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      

22

 
GILAZO ISRAEL LTD.
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
TOM MAINTENANCE AND PROPERTIES (1993) LTD.
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
EICHUT CAPITAL MARKETS AND INVESTMENTS (1993) LTD.
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
SKY FARM MANAGEMENT, LLC
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
LEWIS BROAD
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      

23

 
NEILL & LINDA BROWNSTEIN
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
MAURICE FILLISTER & TRUST I
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
MAURICE FILLISTER & TRUST II
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
ROBERT FITZWILSON TRUSTEE PROFIT SHARING PLAN
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
SUSAN JACKSON
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
KAPLAN & KAPLAN (SAM KAPLAN)
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
KAPLAN & KAPLAN (RALPH STRANGIS)
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      

24

 
BRUCE MANN
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
ROBERT MELAMED
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
KANJI SARASHINA
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
DONALD YOST
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
BANK HAPOALIM B.M.
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
UNITED MIZRACHI BANK LTD.
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 
 
UNION BANK LTD.
 
Of:                                                                         
 
By:                                                                         
 
Name:                                                                    
 
Title:                                                                      
 

25

 
SCHEDULE A
 
SHIRA SHAREHOLDERS
 
Name of Shareholder
   
Number of Ordinary Shares (1), (2), (3)
   
Number of Company Shares Issuable Upon the Consummation of the Share Exchange (1), (2), (3)
Aviv Tzidon
   
10,205
   
1,218
Shimon Orian
   
30,723
   
3,668
Luna Hi-Tech Enterprises Ltd.
   
59,852
   
7,146
Herbert Drower
  
892
   
107
Ehud Zohar
   
4,973
   
594
Liraz (Investments) Systems Ltd.
   
20,574
   
2,457
Gilo Family Partnership
   
430,452
   
51,395
Gilo Family Trust
   
1,667,530
   
199,102
Gilazo Israel Ltd.
   
106,714
   
12,742
Tom Maintenance and Properties (1993) Ltd.
   
106,714
   
12,742
Eichut Capital Markets and Investments (1993) Ltd.
   
71,142
   
8,494
SkyFarm Management, LLC
   
533,324
   
63,678
Lewis Broad
   
17,786
   
2,124
Neill & Linda Brownstein
   
4,460
   
533
Maurice Fillister & Trust I
   
892
   
107
Maurice Fillister & Trust II
   
892
   
107
Robert Fitzwilson Trustee Profit Sharing Plan
   
30,102
   
3,594
Susan Jackson
   
30,102
   
3,594
Kaplan & Kaplan (Sam Kaplan)
   
2,230
   
266
Kaplan & Kaplan (Ralph Strangis)
   
2,230
   
266
Bruce Mann
   
1,784
   
213
Robert Melamed
   
892
   
107
Kanji Sarashina
   
1,784
   
213
Donald Yost
   
4,460
   
533
Bank Hapoalim B.M.; United Mizrachi Bank Ltd.; Union Bank Ltd. (1), (2), (3), (4)
   
1,046,903
   
125,000
    
  
Total
   
4,187,612
   
500,000
    
  
(1)
 
Assuming that all outstanding Options and Warrants shall have been waived and terminated.
 
(2)
 
Assuming that all Convertible Notes shall have been converted into Ordinary Shares.
 
(3)
 
Assuming that Bank Hapoalim B.M, United Mizrachi Bank Ltd. and Union Bank Ltd. shall have entered into and executed the Debt Arrangements, as such term is defined in Section 7d of the Share Exchange Agreement, and that all Ordinary Shares of Shira to be issued to such Banks pursuant thereto have been issued.
 
(4)
 
To be allocated among the Banks pursuant to the provisions of the Debt Arrangements.
 
Ratio
 
(number of Company Shares per 1 Share of Shira): 0.119399791885

26

 
Schedule 2b(v)
 
ESCROW AND PLEDGE AGREEMENT
 
This Escrow and Pledge Agreement is made as of May 14, 2002, by and among Vyyo Inc., a Delaware corporation (“Purchaser”), The Gilo Family Partnership, L.P. and The Gilo Family Trust dated January 18, 1991 (collectively, the “Stockholders”), and Andrew P. Fradkin (the “Escrow Agent”). Certain capitalized terms used in this Agreement and not otherwise defined shall have the meanings given to them in the Share Exchange Agreement dated as of May 14, 2002 (the “Exchange Agreement”), by and among Purchaser, Shira Computers Ltd., an Israeli company (“Shira”), the Stockholders and the other shareholders of Shira.
 
RECITALS
 
A.    Concurrently with the execution of the Exchange Agreement, and as a condition and inducement to Purchaser’s willingness to enter into the Exchange Agreement, the Stockholders shall enter into this Agreement.
 
B.    The Exchange Agreement contemplates the establishment of an escrow arrangement to secure the indemnification obligations of the Stockholders hereunder and under the Exchange Agreement.
 
AGREEMENT
 
Now, Therefore, in consideration of the foregoing and the mutual covenants and agreements set forth herein and intending to be legally bound, the parties agree as follows:
 
1.    Escrow and Indemnification.
 
1.1    Issuance of and Delivery of Purchaser Common Stock; Escrow Stock.    In accordance with the terms of the Exchange Agreement, Purchaser’s transfer agent shall deliver to the Escrow Agent, on behalf and in the name of the Stockholders, one or more certificates representing the shares of the Purchaser’s Common Stock that the Stockholders have the right to receive pursuant to the provisions of Section 1 of the Exchange Agreement (the “Escrow Stock” and the “Certificates”, respectively). For the purpose of this Agreement, the terms Escrow Stock and Certificates shall be deemed, for all purposes, to include any other certificates representing an equal number of shares of the Purchaser’s Common Stock that are held by and registered in the name of the Stockholders or any other person or entity on their behalf (the “Replacement Certificates” and the “Replacement Stock”, respectively), and the Stockholders shall be entitled to replace the Escrow Stock and the Certificates by the Replacement Stock and the Replacement Certificates at any time and from time to time, provided, that (i) such Replacement Stock and Replacement Certificates are free and clear of all liens, encumbrances, restrictions and claims of every kind, and (ii) the legal owner of such Replacement Stock and Replacement Certificates shall execute and deliver to the Escrow Agent forms of assignment separate from certificate and each bearing a “medallion” signature guarantee, stock powers duly endorsed in blank for transfer pursuant to the Replacement Certificates and any other document necessary in order to effectuate a first and paramount pledge thereof for the benefit of the Purchaser under any applicable law, and (iii) the legal owner of such Replacement Stock and Replacement Certificates, if is not the Stockholder, will agree in writing, that such Replacement Stock will be used to secure the indemnification obligations of the Stockholders hereunder and under the Exchange Agreement, and will be held and handled in accordance with the terms of this Agreement. Upon the deposit of the Replacement Stock and Replacement Certificates with the Escrow Agent, and provided that the conditions set forth in sub-sections (i), (ii) and (iii) hereinabove have been met, the Escrow Agent shall immediately release the original Escrow Stock and the original Certificates to the Stockholders.

 
At the Closing, the Stockholders shall deliver to the Escrow Agent forms of assignment separate from certificate fully executed by each Stockholder and each bearing a “medallion” signature guarantee. The Escrow Stock shall constitute an escrow fund (the “Escrow Fund”) with respect to the indemnification obligations of the Stockholders hereunder and under the Exchange Agreement. The Escrow Stock shall be registered in the names of the Stockholders in accordance with their ownership interests set forth in Exhibit A. The Escrow Fund shall be held as a trust fund solely to satisfy each Stockholder’s indemnification obligations hereunder and under the Exchange Agreement, and it is the intention of Purchaser and the Stockholders that the Escrow Fund shall not be subject to any lien, attachment, trustee process or any other judicial process of any creditor of any Stockholder or of any party hereto. The Stockholders hereby pledge the Escrow Stock for the benefit of the Purchaser and hereby assign and set over to Escrow Agent the Certificates together with stock powers duly endorsed in blank for transfer pursuant thereto (“Stock Powers”) and shall execute and deliver to the Escrow Agent, upon the execution of this Agreement, any other document necessary in order to give full force and effect to such pledge under any applicable law. The Escrow Agent agrees to accept delivery of the Escrow Fund and to hold the Escrow Fund in an escrow account (the “Escrow Account”), subject to the terms and conditions of this Agreement and the Exchange Agreement. The Escrow Stock shall be retained in the Escrow Fund until the Escrow Account Release Date.
 
1.2    Voting of the Escrow Stock.    The record owners of the Escrow Stock shall be entitled to exercise all voting rights with respect to such Escrow Stock.
 
1.3    Dividends, Etc.    Purchaser and each of the Stockholders agree, for the benefit of Purchaser and the Escrow Agent, that any cash, securities or other property distributable (whether by way of dividend, stock split or otherwise) in respect of or in exchange for any Escrow Stock shall not be distributed to the record owners of the same, but rather shall be distributed by Purchaser to and held by the Escrow Agent in the Escrow Account. Unless and until the Escrow Agent receives such cash, securities or other property, it may assume without inquiry that the Escrow Stock currently being held by it in the Escrow Account is all that the Escrow Agent is, required to hold. At the time any Escrow Stock is required to be released from the Escrow Account to the Stockholders pursuant to this Agreement or the Exchange Agreement, any cash, securities or other property previously received by the Escrow Agent in respect of or in exchange for such Escrow Stock shall be released from the Escrow Account to such Stockholder in accordance with such Stockholder’s pro-rata interest in the Escrow Stock. At the time any Escrow Stock is required to be released from the Escrow Account to the Indemnitees pursuant to this Agreement or the Exchange Agreement, any cash, securities or other property previously received by the Escrow Agent in respect of or in exchange for such released Escrow Stock shall be released from the Escrow Account to such Indemnitees.
 
1.4    Transferability.    The interests of the Stockholders in the Escrow Account and in the Escrow Stock shall not be sold, assigned, pledged, hypothecated or transferred prior to the Escrow Account Release Date.
 
1.5    Fractional Shares.    No fractional shares of Purchaser Common Stock shall be retained in or released from the Escrow Account pursuant to this Agreement. In connection with any release of Escrow Stock from the Escrow Account, Purchaser and the Escrow Agent shall “round down” in order to avoid retaining any fractional share in the Escrow Account and in order to avoid releasing any fractional share from the Escrow Account.
 
1.6    Representations and Warranties of Stockholders.    Each Stockholder, severally and not jointly, represents, warrants and covenants to Purchaser as follows:
 
(a)    Shira Representations and Warranties; Stockholder’s Indemnity.    Such Stockholder is aware that Shira and such Stockholder have made certain representations and warranties in the Exchange Agreement. Such Stockholder agrees that such Stockholder’s portion of the Escrow Fund may be utilized as provided herein to indemnify and defend the Indemnitees, and hold the Indemnitees harmless, from

- 2 -

any claim for indemnification, whether based upon a representation, warranty or covenant of Shira or the Stockholder set forth in the Exchange Agreement or of the Stockholder set forth herein. The Stockholder agrees that Section 6 of the Exchange Agreement is incorporated herein by reference. Further, each Stockholder shall indemnify, defend and hold harmless the Indemnitees from and against, and shall compensate and reimburse the Indemnitees for, any Damages which are directly or indirectly incurred or suffered by the Indemnitees or to which the Indemnitees may otherwise become subject at any time (regardless of whether or not such Damages relate to any third-party claim) and which arise directly or indirectly from or as a direct or indirect result of or directly or indirectly arising out of or related to: (i) any Breach of any representation or warranty made by Shira or the Stockholder in the Exchange Agreement; (ii) any Breach of any representation, warranty, statement, information or provision contained in the Disclosure Schedule; (iii) any Breach of any covenant or obligation of Shira or the Stockholder; or (iv) any Proceeding relating directly or indirectly to any Breach, alleged Breach, Liability or matter of the type referred to in clause (i), (ii), or (iii) above (including any Proceeding commenced by the Purchaser for the purpose of enforcing any of its rights hereunder), or (iv) fraud committed personally by one or more Stockholder(s) or as to which one or more specified Stockholder(s) participated or aided or abetted. The word “fraud” means fraud as defined in applicable common law provisions.
 
(b)    Power and Capacity; Authorization.    Such Stockholder has all necessary power, authority and legal capacity to execute and deliver this Agreement, to perform such Stockholder’s obligations hereunder and to consummate the transactions contemplated hereby. No corporate, partnership or other acts or proceedings on the part of such Stockholder are necessary to authorize the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. This Agreement has been executed and delivered by such Stockholder and constitutes the legal, valid and binding agreement of such Stockholder, enforceable against such Stockholder in accordance with its terms, subject, as to the enforcement of remedies, to applicable bankruptcy, reorganization, insolvency, moratorium and similar laws affecting creditors’ rights, and, with respect to the remedy of specific performance, equitable doctrines applicable thereto.
 
(c)    No Conflicts.    The execution, delivery and performance of this Agreement by such Stockholder will not: (i) conflict with or result in a breach of or default under any charter or formation documents or trust instruments of such Stockholder; (ii) to the knowledge of Stockholder, result in a violation of any law, rule, ordinance, regulation, order, judgment or decree by which such Stockholder is bound; or (iii) conflict with or result in a material breach of or default under any mortgage, lien, lease, license, permit, agreement, contract or instrument to which such Stockholder is a party or by which such Stockholder is bound, which conflict, breach or default would impair the ability of such Stockholder to perform such Stockholder’s obligations under this Agreement.
 
(d)    Ownership of Stock.    Such Stockholder is immediately prior to the Closing of the Exchange Agreement, the lawful owner, of record and beneficially, of the number of outstanding shares of Shira set forth in Schedule A to the Exchange Agreement, free and clear of all liens, encumbrances, restrictions and claims of every kind.
 
2.    Administration of Escrow Account.    Except as otherwise provided herein, the Escrow Agent shall administer the Escrow Account as follows:
 
2.1    If any Indemnitee has or claims to have incurred or suffered Damages for which it is or may be entitled to indemnification, compensation or reimbursement under the Exchange Agreement or this Agreement, such Indemnitee shall deliver a claim notice (a “Claim Notice”) to the Stockholders and to the Escrow Agent. Each Claim Notice shall state that such Indemnitee believes in good faith and after investigation that there is or has been a breach of a representation, warranty or covenant contained in the Exchange Agreement or this Agreement or that such Indemnitee is entitled to indemnification, compensation or reimbursement under the Exchange Agreement and contain a brief description of the circumstances supporting such Indemnitee’s belief that there is or has been such a breach or that such Indemnitee is so entitled to indemnification, compensation or reimbursement and shall, to the extent

- 3 -

possible, contain a nonbinding, preliminary estimate of the amount of Damages such Indemnitee claims to have so incurred or suffered (the “Claimed Amount”).
 
2.2    Within 30 Business Days (“Business Day” shall mean any day other than a day on which the Nasdaq National Market is closed) after receipt by the Stockholders and the Escrow Agent of a Claim Notice, the Stockholders may deliver to the Indemnitee who delivered the Claim Notice and to the Escrow Agent a written response (the “Response Notice”) in which the Stockholders: (i) agree that a whole number of shares of Escrow Stock having a Stipulated Value (defined below in Section 3) equal to the full Claimed Amount may be released from the Escrow Account to the Indemnitee, (ii) agree that a whole number of shares of Escrow Stock having a Stipulated Value equal to part, but not all, of the Claimed Amount (the “Agreed Amount”) may be released from the Escrow Account to the Indemnitee or (iii) indicate that no Escrow Stock may be released from the Escrow Account to the Indemnitee. Any part of the Claimed Amount that is not to be released to the Indemnitee shall be referred to as the “Contested Amount.” If a Response Notice is not delivered to the Escrow Agent within such 30 Business-Day period, then the Stockholders shall be deemed to have agreed that a whole number of Escrow Stock having a Stipulated Value equal to the full Claimed Amount may be released to the Indemnitee from the Escrow Account.
 
If the Stockholders deliver a Response Notice agreeing that a whole number of shares of Escrow Stock having a Stipulated Value equal to the full Claimed Amount may be released from the Escrow Account to the Indemnitee, or if the Stockholders do not deliver a Response Notice in accordance with Section 2.2 above, the Escrow Agent shall promptly following the receipt of the Response Notice (or, if the Stockholders have not delivered a Response Notice, promptly following the expiration of the 30 Business-Day period referred to in Section 2.2 above), deliver to such Indemnitee such number of shares of Escrow Stock having a Stipulated Value equal to the full Claimed Amount.
 
2.3    If the Stockholders deliver a Response Notice agreeing that a whole number of shares of Escrow Stock having a Stipulated Value equal to part, but not all, of the Claimed Amount may be released from the Escrow Account to the Indemnitee, the Escrow Agent shall promptly following the receipt of the Response Notice deliver to such Indemnitee such number of shares of Escrow Stock having a Stipulated Value equal to the Agreed Amount.
 
2.4    If the Stockholders deliver a Response Notice indicating that there is a Contested Amount or that no Escrow Stock may be released from the Escrow Account to the Indemnitee, the Stockholders and the Indemnitee shall attempt, as soon as practicable, in good faith to resolve the dispute related to the Contested Amount. If the Indemnitee and the Stockholders shall resolve such dispute, a settlement agreement containing the terms and conditions of such resolution shall be signed by the Indemnitee and the Stockholders and delivered to the Escrow Agent (the “Settlement Agreement”). The Escrow Agent shall release from the Escrow Account such number of Escrow Stock as set forth in the Settlement Agreement, within 5 Business Days after the delivery to it of a copy of the Settlement Agreement executed by the Indemnitee and the Stockholders setting forth instructions to the Escrow Agent as to the number of the Escrow Stock, if any, to be released from the Escrow Account, with respect to the Contested Amount. If the Indemnitee and the Stockholders have not resolved such dispute prior to the Escrow Account Release Date, the Escrow Agent shall retain a number of shares of Escrow Stock having a Stipulated Value equal to the Contested Amount (according to written instructions it will receive from the Purchaser) (the “Retained Stock”) in the Escrow Account until the earlier of: (i) such time as the Escrow Agent receives a Settlement Agreement, in which case the Escrow Agent shall use the Retained Stock as provided for in such Settlement Agreement; or (ii) such time as the Escrow Agent receives a judicial order or decree respecting the Retained Stock, in which case the Escrow Agent shall use the Retained Stock as provided for in such order or decree. Following the Escrow Account Release Date, and until the Retained Stock is released in accordance with this Agreement, this Agreement shall continue in full force and effect with respect to the Retained Stock.

- 4 -

 
2.5    Any Escrow Stock released from the Escrow Account to an Indemnitee shall be deemed to reduce the Escrow Stock pro rata with respect to each Stockholder in accordance with each Stockholder’s percentage interest in the Escrow Fund as set forth in Exhibit A.
 
2.6    The timing of the giving of a Claim Notice shall be within the exclusive prerogative of the Indemnitee. No delay on the part of the Indemnitee in giving a Claim Notice Pursuant to Section 2 shall relieve the Stockholders of any liability or obligation under this Agreement or the Exchange Agreement, except to the extent that such delay materially prejudices the Stockholders; provided, however, that to be effective, a Claim Notice must be filed on or prior to the Escrow Account Release Date.
 
3.    Valuation of Escrow Stock; Stock Splits.
 
3.1    For purposes of this Agreement, the “Stipulated Value” per share of Escrow Stock shall be equal to the average of the closing sales prices of a share of Purchaser’s Common Stock, as reported on the Nasdaq National Market or such other securities exchange or quotation system on which Purchaser’s Common Stock may then be quoted (for trading during regular trading hours, not extended trading), for the 30 consecutive trading days ending on the 5th trading day prior to the date any shares of Escrow Stock are to be released from the Escrow Fund by the Escrow Agent pursuant to Sections 2.2, 2.3, 2.4, 2.5 or 5 of this Agreement. Purchaser and the Stockholders shall deliver to the Escrow Agent, prior to any such release, a jointly-signed certificate that shall set forth the Stipulated Value, the number of shares to be released from the Escrow Stock and the allocation of the released Escrow Stock between the Stockholders, on which certificate the Escrow Agent may rely without inquiry.
 
3.2    All numbers contained in, and all calculations required to be made pursuant to, this Agreement shall be adjusted as appropriate to reflect any stock split, reverse stock split, stock dividend or similar transaction effected by Purchaser after the date hereof; provided, however, that the Escrow Agent shall have received notice of such stock split or other action and shall have received the appropriate number of additional shares of Purchaser Common Stock or any cash, securities or other property pursuant to Section 1.3 above, together with an updated version of Exhibit A.
 
4.    Limitation of Escrow Agent’s Liability.
 
4.1    The Escrow Agent undertakes to perform such duties as are specifically set forth in this Agreement only and shall have no duty under any other agreement or document notwithstanding their being referred to herein or attached hereto as an exhibit. The Escrow Agent shall not be liable except for the performance of such duties as are specifically set forth in this Agreement, and no implied covenants or obligations shall be read into this Agreement against the Escrow Agent. The Escrow Agent shall incur no liability with respect to any action taken by it or for any inaction on its part in reliance upon any notice, direction, instruction, consent, statement or other document believed by it to be genuine and duly authorized, nor for any other action or inaction except for its own willful misconduct or gross negligence. The Escrow Agent may rely on and use the Stock Powers and shall not be liable in connection therewith. In all questions arising under this Agreement, the Escrow Agent may rely on the advice of counsel, and for anything done, omitted or suffered in good faith by the Escrow Agent based upon such advice the Escrow Agent shall not be liable to anyone. The Escrow Agent shall not be required to take any action hereunder involving any expense unless the payment of such expense is made or provided for in a manner reasonably satisfactory to it. The Escrow Agent shall not be liable for incidental, consequential or punitive damages.
 
4.2    The parties hereby agree to severally indemnify the Escrow Agent for, and hold it harmless against, any loss, liability or expense incurred without gross negligence or willful misconduct on the part of the Escrow Agent, arising out of or in connection with its carrying out of its duties hereunder. This right of indemnification shall survive the termination of this Agreement, and the resignation of the Escrow Agent. The costs and expenses of enforcing this right of indemnification shall also be paid by the parties hereto (other than the Escrow Agent).

- 5 -

 
5.    Release of Escrow Stock.
 
5.1    The Escrow Agent is not the stock transfer agent for the Purchaser Common Stock. Accordingly, if a release of a number of shares of Purchaser Common Stock less than all of the Escrow Stock is to be made, the Escrow Agent must request the appropriate number of shares from such stock transfer agent, delivering to it the appropriate stock certificates and related Stock Powers. For the purposes of this Agreement, the Escrow Agent shall be deemed to have delivered Purchaser Common Stock to the Person entitled to it when the Escrow Agent has delivered such certificates and Stock Powers to such stock transfer agent with instructions to deliver it to the appropriate Person. Releases of Purchaser Common Stock shall be made to Indemnitees or the Stockholders, as appropriate, at the addresses described in Section 8 below. Whenever a release is to be made to the Stockholders, pro rata release shall be made to each of them based on the percentage interests in the Escrow Fund originally as set forth in Exhibit A, and as adjusted thereafter in accordance with Section 2.5 hereof. Exhibit A may be updated from time to time upon receipt of written notice from Purchaser regarding any adjustment in accordance with Section 2.5.
 
5.2    On the first anniversary of the date on which the Closing of the Exchange Agreement shall take place (the “Escrow Account Release Date”), and provided that the Escrow Agent has received a written notice from the Purchaser and the Stockholders (which Purchaser and the Stockholders agree to deliver to Escrow Agent not later than ten Business Days before the Escrow Account Release Date and setting forth the number of shares of Purchaser Common Stock then held by each Stockholder in the Escrow Fund), the Escrow Agent shall release to each Stockholder such Stockholder’s pro rata portion of the shares of Purchaser Common Stock in the Escrow Account based on the percentage interests in the Escrow Fund as set forth in such notice (“Stockholder’s percentage interest”); provided, however, that the Escrow Agent shall not release any Retained Stock (and the provisions of Section 2.4 hereto shall apply with respect thereto), and provided further that, if, prior to the Escrow Account Release Date, any Indemnitee has given a Claim Notice and the procedures provided for in Section 2 hereto with respect to such Claim Notice have not been completed until the Escrow Account Release Date, the Escrow Agent shall retain a number of shares of Escrow Stock having a Stipulated Value equal to the Claimed Amount of such Claim Notice (according to written instructions it will receive from the Purchaser) and the provisions of Section 2 hereto shall apply to such shares.
 
6.    Cancelled.
 
7.    Resignation; Removal; Successor.
 
7.1    The Escrow Agent may resign as escrow agent under this Agreement and thereby become discharged from the obligations hereby created, by notice in writing given to the Stockholders and the Purchaser not less than 30 days before such resignation is to take effect.
 
7.2    The Escrow Agent may be removed at any time by an instrument or concurrent instruments in writing delivered to the Escrow Agent and signed by Purchaser and the Stockholders.
 
7.3    If at any time hereafter the Escrow Agent shall give notice of its resignation pursuant to Section 7.1 above, shall be removed pursuant to Section 7.2 above, or shall be dissolved or otherwise become incapable of acting, or the position of the Escrow Agent shall become vacant for any other reason, Purchaser and the Stockholders shall promptly appoint a mutually acceptable successor Escrow Agent. Upon such appointment such successor shall execute, acknowledge and deliver to its predecessor, and also to Purchaser and the Stockholders, an instrument in writing accepting such appointment hereunder and agreeing to be bound by the terms and provisions of this Agreement. Thereupon such successor Escrow Agent, without any further act, shall become fully vested with all the rights, immunities, and powers, and shall be subject to all of the duties and obligations of its predecessor and such predecessor Escrow Agent shall promptly deliver the Escrow Fund in the Escrow Account to such successor pursuant to written instructions from Purchaser or the Stockholders. If a successor Escrow

- 6 -

Agent is not appointed within 7 days following the resignation of the Escrow Agent pursuant to Section 7.1 above or its dismissal pursuant to Section 7.2 above, the Escrow Agent may apply to a court of competent jurisdiction to appoint one, provided however that the Escrow Agent shall not be required to take such action unless the payment of the expenses associated with such action is made or provided for in a manner reasonably satisfactory to it.
 
7.4    In the event the Escrow Agent is merged or consolidated with any other entity, and as a result thereof the Escrow Agent ceases to exist as a separate entity, or the Escrow Agent sells substantially all of its corporate trust business (including the escrow contemplated by this Agreement) to another entity, then such surviving entity, without any further act shall become fully vested with all the rights, immunities, and powers, and shall be subject to all of the duties and obligations of the Escrow Agent.
 
7.5    The Escrow Agent bears exclusive risk of loss, theft or damage with respect to the Escrow Stock in its possession.
 
8.    Notices.    All notices, consents, waivers and other communications under this Agreement must be in writing and will be deemed to have been duly given when (i) delivered by hand (with written confirmation of receipt), (ii) sent by facsimile (with written confirmation of receipt), provided that a copy is mailed by registered mail, return receipt requested, or (iii) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and facsimile numbers set forth below (or to such other addresses and facsimile numbers as a party may designate by notice in writing to the other parties); provided, that, in each such instance if such notice or communication is received after 5:00 p.m. local time, it shall constitute delivery the next Business Day:
 
if to Purchaser:
 
Vyyo Inc.
20400 Stevens Creek Boulevard, 8th Floor
Cupertino, CA 95014
Attention: General Counsel
Facsimile: 408-863-2366
 
if to the Stockholders:
 
The Gilo Family Partnership, L.P.
P.O. Box 620925
Woodside, California 94062-0925
Fax: 650-851-2887
 
Gilo Family Trust dated January 18, 1991
P.O. Box 620925
Woodside, California 94062-0925
Fax: 650-851-2887
 
if to the Escrow Agent:
 
Andrew P. Fradkin
C/o Zen Research Inc.
20400 Stevens Creek Blvd., 7th Floor
Cupertino, California 95014
Fax: 408-863-2785
 
Any notice to the Escrow Agent shall be effective only upon receipt. If any notice or document of any kind is required to be delivered to the Escrow Agent and any other person, the Escrow Agent may assume

- 7 -

that such other person received such notice or document on the date on which the Escrow Agent received it, and the Escrow Agent need not require into or confirm such receipt.
 
9.    Counterparts; Facsimile.    This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original and all of which, when taken together, will be deemed to constitute one and the same agreement. This Agreement may be executed by facsimile, with such facsimile copy to serve as conclusive evidence of the consent and ratification of the matters contained herein by the parties hereto.
 
10.    Section Headings; Construction.    The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation. The words “include,” “includes” and “including” when used herein shall be deemed in each case to be followed by the words “without limitation.”
 
11.    Successors and Assigns; Assignment.    This Agreement shall be binding upon the parties and their respective successors and assigns. This Agreement shall inure to the benefit of the parties and the other Indemnitees and their respective successors and assigns. Purchaser may freely assign any or all of its rights under this Agreement, in whole or in part, in connection with an Acquisition without obtaining the consent or approval of any other party hereto or of any other Person. Each of the Stockholders may freely assign or transfer any of the Escrow Stock, in whole or in part, without obtaining the consent or approval of any other party hereto or of any other Person, provided that prior to such transfer and as a condition precedent thereto (i) the transferee of such Escrow Stock shall assume upon itself in writing all of the Stockholder’s respective obligations and rights hereunder, including, without limitation, the obligations set forth in Section 1.1 above, (ii) the transferee of such Escrow Stock will agree in writing, that the Escrow Stock will be used to secure the indemnification obligations of the Stockholders hereunder and under the Exchange Agreement, and will be held and handled in accordance with the terms of this Agreement, (iii) all actions necessary in order to give full force and effect to the effectuation of a first and paramount pledge of the Escrow Stock by the transferee thereof for the benefit of the Purchaser under any applicable law will be taken, (iv) the Stockholder’s indemnification obligations under the Exchange Agreement and this Agreement shall continue to remain at all times the obligations of the Stockholders and shall not be affected by such transfer, and (v) for the purposes of Section 2 herein, The Gilo Family Partnership and The Gilo Family Trust shall continue to be considered the Stockholders.
 
12.    Remedies Cumulative; Specific Performance.    The rights and remedies of the parties hereto shall be cumulative. Each Stockholder agrees that in the event of any Breach or threatened Breach by a party of any covenant, obligation or other provision set forth in this Agreement, Purchaser shall be entitled (in addition to any other remedy that may be available to it) to (i) a decree or order of specific performance or mandamus to enforce the observance and performance of such covenant, obligation or other provision and (ii) an injunction restraining such Breach or threatened Breach.
 
13.    Waiver.    No failure on the part of any Person to exercise any power, right, privilege or remedy under this Agreement; and no delay on the part of any Person in exercising any power, right, privilege or remedy under this Agreement, shall operate as a waiver of such power, right, privilege or remedy; and no single or partial exercise of any such power, right, privilege or remedy shall preclude any other or further exercise thereof or of any other power, right, privilege or remedy. No Person shall be deemed to have waived any claim arising out of this Agreement, or any power, right, privilege or remedy under this Agreement, unless the waiver of such claim, power, right, privilege or remedy is expressly set forth in a written instrument duly executed and delivered on behalf of such Person; and any such waiver shall not be applicable or have any effect except in the specific instance in which it is given.
 
14.    Exclusive Agreement; Modification; Severability.    The Exchange Agreement and this Agreement set forth the entire understanding of the parties relating to the subject matter thereof and hereof and supersede all prior agreements and understandings among or between any of the parties

- 8 -

relating to the subject matter thereof and hereof. This Agreement may not be amended, modified, altered or supplemented other than by means of a written instrument duly executed and delivered on behalf of each of the parties hereto. In the event of a conflict between this Agreement and the Exchange Agreement, the terms of the Exchange Agreement shall govern. In the event that any provision of this Agreement, or the application of any such provision to any Person or set of circumstances, shall be determined to be invalid, unlawful, void or unenforceable to any extent, the remainder of this Agreement, and the application of such provision to Persons or circumstances other than those as to which it is determined to be invalid, unlawful, void or unenforceable, shall not be impaired or otherwise affected and shall continue to be valid and enforceable to the fullest extent permitted by law.
 
15.    Governing Law.    This Agreement shall be governed by the internal laws of the State of California, without regard to conflicts of law principles. Any legal action or other legal proceeding relating to this Agreement or the enforcement of any provision of this Agreement may be brought or otherwise commenced in any state or federal court located in the County of Santa Clara, California. Each Stockholder agrees that, if any Proceeding is commenced against any Indemnitee by any Person in or before any court or other tribunal anywhere in the world, then such Indemnitee may proceed against such Stockholder in such court or other tribunal with respect to any indemnification claim or other claim arising directly or indirectly from or relating directly or indirectly to such Proceeding or any of the matters alleged therein or any of the circumstances giving rise thereto.
 
16.    Further Assurances.    Each party hereto shall execute and/or cause to be delivered to each other party hereto such instruments and other documents, and shall take such other actions, as such other party may reasonably request (prior to, at or after the Closing) for the purpose of carrying out their obligations hereunder and the purposes of this Agreement.
 
17.    Attorneys’ Fees.    If any action or proceeding relating to this Agreement or the enforcement of any provision of this Agreement is brought against any party hereto, the prevailing party shall be entitled to recover reasonable attorneys’ fees, costs and disbursements (in addition to any other relief to which the prevailing party may be entitled).
 
18.    Tax Reporting Information and Certification of Tax Identification Numbers.
 
18.1    The parties hereto agree that, for tax reporting purposes, all interest on or other income, if any, attributable to the Escrow Stock or any other amount held in escrow by the Escrow Agent pursuant to this Agreement shall be allocable to the Stockholders in accordance with their percentage interests in the Escrow Fund set forth in Exhibit A.
 
18.2    Purchaser and each of the Stockholders agree to provide the Escrow Agent with certified tax identification numbers for each of them by furnishing appropriate Forms W-9 (or Forms W-8, in the case of non-U.S. persons) and other forms and documents that the Escrow Agent may reasonably request (collectively, “Tax Reporting Documentation”) to the Escrow Agent within 30 days after the date hereof. The parties hereto understand that, if such Tax Reporting Documentation is not so certified to the Escrow Agent, the Escrow Agent may be required by the Internal Revenue Code, as it may be amended from time to time, to withhold a portion of any interest or other income earned on the investment of monies or other property held by the Escrow Agent pursuant to this Escrow and Pledge Agreement.

- 9 -

 
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed on the date first above written.
 
“PURCHASER”:
   
VYYO INC.
    
By:    /s/     Michael P. Corwin                    
    
Name:        Michael P. Corwin                    
    
Title:        President and COO                        
    
 
By:    /s/     Stephen P. Pezzola                    
    
Name:        Stephen P. Pezzola                                   
    
By:        Secretary                                           
 
 
 
“STOCKHOLDERS”:
 
THE GILO FAMILY PARTNERSHIP, L.P.
/s/    Davidi Gilo                                                 
By:    Davidi Gilo, General Partner
THE GILO FAMILY TRUST DATED JANUARY 18, 1991
/s/    Davidi Gilo                                                 
By:    Davidi Gilo, Trustee
 
 
 
“ESCROW AGENT”:
   
Andrew P. Fradkin
    
 
By:    /s/     Andrew P. Fradkin                    
    
Name:        Andrew P. Fradkin                    
    
By:                                                                    
-----END PRIVACY-ENHANCED MESSAGE-----