<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13A-16 OR 15D-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
BackWeb Technologies Ltd.
-----------------------------------------------
(Translation of Registrant's Name Into English)
3 Abba Hillel Street, Ramat-Gan 52136 Israel
--------------------------------------------
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with to Rule 12g3-2(b): 82-_____
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BACKWEB TECHNOLOGIES LTD.
FORM 6-K
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations for the Three and Six Months ended June 30, 1999 and 1998
Condensed Consolidated Statements of Cash Flows for the Six Months ended June 30, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations
Item 3. Qualitative and Quantitative Disclosure About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
BACKWEB TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $37,047 $ 6,449
Short Term Investments 42,329 -
Trade accounts receivable, net of allowance for doubtful
accounts of $860 and $561 at June 30, 1999 and
December 31, 1998 4,295 2,590
Other current assets 887 712
-------- --------
Total current assets 84,558 9,751
Property and equipment, net 1,188 1,030
Goodwill and other purchased intangibles, net 962 1,824
Other assets 116 96
-------- --------
$ 86,824 $ 12,701
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ - $ 2,000
Accounts payable and accrued liabilities 5,692 3,357
Deferred revenue 3,121 1,666
Payable to related parties 235 304
Current portion of shareholders' loans 822 828
-------- --------
Total current liabilities 9,869 8,155
Accrued severance pay, net 154 93
Long-term portion of shareholders' loans - 327
Shareholders' equity (net capital deficiency):
Preferred Stock 3,454 41,253
Common Stock 124,223 2,002
Notes receivable from shareholders (3,434) -
Deferred stock compensation (2,962) (1,638)
Accumulated deficit (44,480) (37,491)
-------- --------
Total shareholders' equity (net capital deficiency) 76,801 4,126
-------- --------
$ 86,824 $ 12,701
======== ========
</TABLE>
See accompanying notes.
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BACKWEB TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA; UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- --------------------------------
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues:
License $ 4,232 $ 1,727 $ 7,540 $ 3,122
Service 853 307 1,642 491
------- ------- ------- -------
Total revenues 5,085 2,034 9,182 3,613
Cost of revenues:
License 45 74 118 129
Service 705 353 1,297 650
------- ------- ------- -------
Total cost of revenues 750 427 1,415 779
Gross profit 4,335 1,607 7,767 2,834
Operating expenses:
Research and development 1,411 1,201 2,408 2,478
Sales and marketing 4,365 3,267 8,196 6,588
General and administrative 1,077 693 2,008 1,504
Amortization of goodwill, other intangibles, and deferred
stock compensation 872 401 2,074 802
------- ------- ------- -------
Total operating expenses 7,725 5,562 14,686 11,372
Loss from operations (3,390) (3,955) (6,919) (8,538)
Interest and other income (expense) 86 37 (71) 19
Net loss $(3,304) $(3,918) $(6,990) $(8,519)
======= ======= ======= =======
Basic and diluted net loss per share $ (0.12) $ (1.67) $ (0.28) $ (3.68)
======= ======= ======= =======
Shares used in computing basic and diluted net loss per share 27,643 2,349 25,351 2,316
======= ======= ======= =======
Pro forma basic and diluted net loss per share (unaudited) $ (0.20) $ (0.44)
======= =======
Shares used in computing pro forma basic and diluted net loss
per share (unaudited) 20,027 19,550
======= =======
</TABLE>
See accompanying notes.
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BACKWEB TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, 1999 JUNE 30, 1998
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,990) $(8,519)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of intangibles, warrant
and deferred stock compensation 2,145 879
Depreciation 342 251
Remeasurement of stockholders' loans
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (1,705) 706
Other assets (195) (475)
Payable to related parties (68) (540)
Other liabilities and accrued expenses 2,216 738
Accounts payable 29 (885)
Accrued compensation 90 44
Deferred revenue 1,455 55
Severance pay 61 31
-------- -------
Net cash used in operating activities (2,620) (7,715)
-------- -------
INVESTING ACTIVITIES
Purchases of property and equipment (500) (195)
Purchases of investments (42,329) --
-------- -------
Net cash used in investing activities (42,829) (195)
-------- -------
FINANCING ACTIVITIES
Proceeds from/(Repayment of) bank line of credit (2,000) 459
Proceeds from/(Repayment of) stockholders loan (333) (27)
Proceeds from issuance of preferred shares, Net 9,915 11,037
Proceeds from issuance of ordinary shares, Net 68,465 60
-------- -------
Net cash provided by financing activities 76,047 11,529
-------- -------
Net increase (decrease) in
cash and cash equivalents 30,598 3,619
Cash and cash equivalents at
beginning of the period 6,449 6,377
-------- -------
Cash and cash equivalents at
end of the period $ 37,047 $ 9,996
======== =======
NONCASH INVESTING AND FINANCING TRANSACTIONS
Issuance of ordinary shares for notes receivable $ (3,434) --
Conversion of redeemable preferred stock to
Common stock $ 47,331 --
SUPPLEMENTAL DISCLOSURE
Interest paid during the period $ 157 $ 116
</TABLE>
See accompanying notes
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BACKWEB TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been
prepared by BackWeb Technologies Ltd. in connection with the accounts of BackWeb
Technologies Ltd. and its wholly-owned subsidiaries (collectively, "BackWeb" or
the "Company") and reflect all adjustments, consisting only of normal recurring
adjustments, which in the opinion of management are necessary to present fairly
the financial position and the results of operations for the interim periods.
The balance sheet at December 31, 1998 has been derived from audited financial
statements at such date. The financial statements have been prepared in
accordance with the regulations of the Securities and Exchange Commission (the
"Commission"), but limit certain information and footnote disclosure necessary
to present the statements in accordance with generally accepted accounting
principles. These financial statements should be read in conjunction with the
Company's financial statements and notes included in BackWeb's Registration
Statement on Form F-1 filed with the Commission on June 8, 1999 (the
"Registration Statement"). The results of operations for the three and six
months ended June 30, 1999 are not necessarily indicative of the results that
may be expected for future quarters or for the Company's 1999 fiscal year.
REVENUE RECOGNITION
License revenues are comprised of perpetual or multiyear license fees
which are primarily derived from contracts with corporate customers and
resellers. License revenue is recognized when a license agreement has been
executed or a definitive purchase order has been received, the product has been
delivered to end customers, no significant BackWeb obligations with regard to
implementation remain, the fee is fixed and determinable, and collectibility is
probable. For electronic delivery, the software is considered to have been
delivered when BackWeb has provided the customer with the access codes that
allow for immediate possession of the software. If the fee due from the customer
is not fixed and determinable, revenue is recognized as payments become due from
the customer. If collectibility is not considered probable, revenue is
recognized when the fee is collected. Revenue on arrangements with customers who
are not the ultimate users (primary resellers) is not recognized until the
product is delivered to the end user.
Service revenues are comprised of revenue from support arrangements,
consulting fees and training. BackWeb's policy is to recognize license revenue
when these associated services that are not essential to the functionality of
the product. To date, these services have not been essential to the
functionality of the product. Support arrangements provide technical support and
the right to unspecified upgrades on an if-and-when-available basis. Revenue
from support arrangements is deferred and recognized on a straight-line basis as
services revenue over the life of the related agreement, which is typically one
year. Consulting and training revenue is deferred and recognized when provided
to the customer. Customer advances and billed amounts due from customers in
excess of revenue recognized are recorded as deferred revenue.
BackWeb adopted Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), and Statement of Position 98-4, "Deferral of the Effective Date of
Provision of SOP 97-2, Software Revenue Recognition" ("SOP 98-4"), as of January
1, 1998. SOP 97-2 and SOP 98-4 provide guidance for recognizing revenue on
software transactions and supersede Statement of Position 91-1. The adoption of
SOP 97-2 and SOP 98-4 did not have a material impact on BackWeb's financial
results.
In December 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends
SOP 98-4 to extend the deferral of the application of certain passages of SOP
97-2 provided by SOP 98-4 through fiscal years beginning on or before March 15,
1999. All other provisions of SOP 98-9 are effective for transactions entered
into in fiscal years beginning after March 15, 1999. BackWeb has not yet
determined the effect in the final adoption of SOP 98-9 on its financial
condition or results of operations.
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USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
2. NET LOSS PER SHARE
Basic and diluted net loss per share are presented in accordance with SFAS
No. 128, "Earnings per Share" ("SFAS 128"), for all periods presented. Pursuant
to the Securities and Exchange Commission Staff Accounting Bulletin No. 98,
ordinary shares and convertible preferred shares issued or granted for nominal
consideration prior to the anticipated effective date of BackWeb's initial
public offering (the "Offering", see Note 11) must be included in the
calculation of basis and diluted net loss per share as if they had been
outstanding for all periods presented. To date, BackWeb has not had any
issuances or grants for nominal consideration.
Basic and diluted net loss per share have been computed using the
weighted-average number of ordinary shares outstanding during the period. Basic
and diluted pro forma net loss per share, as presented in the statements of
operations, have been computed as described above and also give effect to the
conversion of all preferred shares, excluding the Series E preferred share,
comprised of the redeemable convertible preferred and the convertible preferred
shares that will convert automatically upon completion of the Offering (using
the as-if converted method) from original date of issuance.
The following table presents the calculation of basic and diluted and pro
forma basic and diluted net loss per ordinary share (in thousands, except per
share data):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss $(3,304) $(3,918) $(6,990) $(8,519)
======= ======= ======= =======
Basic and diluted:
Weighted-average shares of common stock outstanding 28,734 2,349 25,935 2,316
Less weighted-average shares subject to repurchase (1,091) -- (584) --
------- ------- ------- -------
Weighted-average shares used in computing basic and
diluted net loss per common share 27,643 2,349 25,351 2,316
======= ======= ======= =======
Basic and diluted net loss per share $ (0.12) $ (1.67) $ (0.28) $ (3.68)
======= ======= ======= =======
Pro forma:
Shares used above 27,643 2,349 25,351 2,316
Proforma adjustment to reflect weighted effect of
assumed conversion of redeemable convertible and
convertible preferred stock (unaudited) -- 17,677 -- 17,234
------- ------- ------- -------
Shares used in computing pro forma basic and diluted
net loss per share (unaudited) 27,643 20,027 25,351 19,550
======= ======= ======= =======
Pro forma basic and diluted net loss per share
(unaudited) $ (0.12) $ (0.20) $ (0.28) $ (0.44)
======= ======= ======= =======
</TABLE>
All preferred stock, outstanding stock options and warrants have been excluded
from the calculation of the diluted loss per ordinary share because all such
securities are antidilutive for all periods presented. The total number of
ordinary shares related to preferred stock, outstanding options and warrants
excluded from the calculations of diluted net loss per share were 6,834,000 for
the three and six months ended June 30, 1999 and 23,170,000 for the three and
six months ended June 30, 1998.
7
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COMPREHENSIVE INCOME (LOSS)
BackWeb adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income", or FAS 130, at January 1, 1998. Under FAS 130,
BackWeb is required to display comprehensive income (loss) and its components as
part of the financial statements. Other comprehensive income includes certain
changes in equity that are excluded from net income/loss. Specifically, FAS 130
requires unrealized holding gains and losses on available-for-sale securities to
be included in accumulated other comprehensive income. BackWeb has no material
components of other comprehensive loss and, accordingly, the comprehensive loss
is the same as net loss for all periods presented.
3. SHAREHOLDER APPROVALS
INCREASE IN AUTHORIZED SHARE CAPITAL, REVERSE STOCK SPLIT, PREFERRED
SHARE CONVERSIONS, AMENDED AND RESTATED ARTICLES OF ASSOCIATION,
INDEMNIFICATION OF OFFICE HOLDERS
On April 26, 1999, the shareholders approved (i) an increase in the
authorized share capital of the Company by New Israeli Shekel ("NIS") 3,500,000,
which amount was divided into 350,000,000 Ordinary Shares, par value NIS 0.01
per share; (ii) an increase in the authorized share capital of the Company by
NIS 150,000,000, which amount was divided into 50,000,000 Preferred Shares of
undesignated series, par value NIS 0.01 per share; (iii) a 3-for-1 reverse
stock split of the Company's shares (other than the Series E Preferred Share)
effective immediately prior to the pricing of the Company's initial public
offering (the "Pricing"); (iv) conversions of any and all Series A, B, C, and D
Preferred Shares outstanding immediately prior to the Pricing into Ordinary
Shares of the Company; (v) the amended and restated Articles of Association,
which amendment became effective immediately prior to the closing of the
Company's initial public offering; and (vi) indemnification of office holders of
the Company to the fullest extent permitted by law.
1998 UNITED STATES STOCK OPTION PLAN
On June 3, 1999, the shareholders approved an amended and restated 1998
United States Stock Option Plan (the "U.S. Plan") that increased the number of
shares reserved for issuance under the U.S. Plan to 30,800,000 plus an annual
increase to be added on July 1st of each year beginning in 2000 equal to the
lesser of (i) 4,200,000 shares, (ii) 3% of the outstanding shares on such date
or (iii) an amount determined by the Company's Board of Directors. The U.S. Plan
provides for the grant of incentive stock options to employees and nonstatutory
stock options and share purchase rights to employees, directors and consultants.
The exercise price of options and share purchase rights granted under the 1998
U.S. Option Plan will be as determined by the relevant administrator, although
the exercise price of incentive stock options must be at least equal to the fair
market value of the Company's ordinary shares on the date of grant. Options
granted under the U.S. Plan generally vest over a four-year period. The U.S.
Plan will terminate in 2008, unless terminated earlier by the Board of
Directors.
1999 EMPLOYEE STOCK PURCHASE PLAN
On June 3, 1999, the shareholders approved a 1999 Employee Stock Purchase
Plan (the "Purchase Plan"). The Purchase Plan, provides the Company's employees
with an opportunity to purchase our ordinary shares through accumulated payroll
deductions. A total of 600,000 ordinary shares have been reserved for issuance
under the Purchase Plan, none of which have been issued. The number of shares
reserved for issuance under the Purchase Plan will be subject to an annual
increase on each anniversary beginning July 1, 2000 equal to the lesser of (a)
833,333 shares, (b) 2% of the outstanding shares on such date or (c) an amount
determined by the Board of Directors. The Purchase Plan permits eligible
employees to purchase ordinary shares through payroll deductions of up to 15% of
an employee's compensation, up to a maximum of $25,000 for all purchases ending
within the same calendar year. The first offering period commenced on the date
of the public offering and will continue until February 29, 2000, and new
offering periods will commence on each March 1 and September 1 thereafter. In
the event of an acquisition of BackWeb, each outstanding option shall be assumed
or an equivalent option substituted by the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the option,
the offering period then in progress will be shortened by setting a new exercise
date. The price at which ordinary shares will be purchased under the Purchase
Plan is equal to 85% of the fair market value of the ordinary shares on the
first or last day of the applicable offering period, whichever is lower.
Employees may end their participation in the offering period at any time, and
participation automatically ends on termination of employment. The Purchase Plan
will terminate in 2009, unless terminated earlier in accordance with its
provisions.
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4. INITIAL PUBLIC OFFERING
On June 8, 1999, BackWeb sold 5,500,000 shares of Ordinary Shares of the
Company in an underwritten public offering and on June 9, 1999 sold an
additional 825,000 shares through the exercise of the underwriters'
over-allotment option for net proceeds of approximately $70,587,000, net of
underwriting discounts and commission and before offering expenses. Immediately
prior to the Pricing of the public offering, all of the outstanding Series A,
Series B, Series C and Series D Preferred Shares were converted into Ordinary
Shares. Also, at such time, all Ordinary Shares and exchangeable shares of
BackWeb Canada, Inc, a wholly owned subsidiary of BackWeb, were subject to a
three-for-one reverse stock split.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
We have made forward looking statements in this Report on Form 6-K that
are subject to risks and uncertainties. Forward looking statements include
information concerning possible or assumed future results of operations of
BackWeb. Also, when we use such words as "believes," expects," anticipates" or
similar expressions, we are making forward looking statements. You should note
that an investment in our securities involves risks and uncertainties that could
affect future financial results. Our actual results could differ materially from
those anticipated in these forward looking statements as a result of a number of
factors, including those set forth in "Risk Factors" and elsewhere in this
Report on Form 6-K, as well as the Risk Factors included BackWeb's periodic
reports and registration statements filed with the U.S. Securities and Exchange
Commission, including, the Registration Statement. BackWeb undertakes no
obligation to publicly update or revise any forward-looking statements.
OVERVIEW
BackWeb is a leading provider of Internet communication infrastructure
software and application-specific software that enables companies to communicate
business-critical, time-sensitive information to their customers, partners and
employees. We were incorporated on August 31, 1995 and commenced our operations
in November 1995. During the period from commencement of operations through
December 31, 1996, we were in a development stage and had insignificant
revenues. Operating activities during this period related primarily to
developing our products, building our corporate infrastructure and raising
capital. In December 1996, we shipped the first commercial version of our
software.
In August 1997, in an effort to expand the features and functionalities of
our product offerings, we acquired all the outstanding shares of Lanacom Inc., a
Canadian corporation. The acquisition has been accounted for using the purchase
method of accounting, and accordingly the purchase price has been allocated to
the tangible and intangible assets acquired and the liabilities assumed on the
basis of their respective fair value on the acquisition date. The purchase price
of $3.9 million was determined based on the value of shares originally issued
and options granted. Of the total purchase price, approximately $3.2 million was
allocated to goodwill, representing the excess of the aggregate purchase price
on the fair value of tangible and intangible assets. The remainder of the
purchase price was allocated to net tangible liabilities assumed
($103,000), developed technology ($400,000) and other identifiable intangible
assets ($383,000). Goodwill, developed technology and other identified
intangibles are amortized on a straight-line basis over the estimated useful
life which range from 24 to 30 months. The first BackWeb product, Version 4.0,
incorporating Lanacom's Headliner product, was released in January 1998.
In early 1998, we engaged in a comprehensive reexamination of our business
strategy and changed our strategic focus from a consumer-oriented to an
enterprise-oriented Internet communication company. In connection with this
change in strategy, we undertook a fundamental repositioning and reorganization
of our work force, particularly in our sales organization. During 1998, we
continued to enhance our infrastructure software, BackWeb Foundation Version
5.0, and in December 1998 released our first packaged application, BackWeb Sales
Accelerator. Since our inception, revenues have been derived primarily from the
licensing of our products and to a lesser extent from maintenance and support,
consulting and training services. The rate of growth of our service revenues is
not commensurate with the costs of service revenues such as salaries and related
expenses of our customer support and
9
<PAGE> 10
consulting organizations and cost of third party contractors to provide
consulting services. Accordingly, our gross margins on service revenues are
significantly lower than our gross margins on license revenues. Our products are
marketed worldwide through a combination of a direct salesforce, resellers and
system integrators.
We recognize software license revenue in accordance with Statement of
Position 97-2, or SOP 97-2, "Software Revenue Recognition," as amended by
Statement of Position 98-4, or SOP 98-4. These statements are effective for our
transactions entered into after January 1, 1998. The application of SOP 97-2 has
not had a material impact on our results of operations. License revenues are
comprised of perpetual or multi-year license fees that are primarily derived
from contracts with corporate customers and resellers. We generally recognize
license revenues when a license agreement has been executed or a definitive
purchase order has been received and the product has been delivered to end-user
customers, no significant obligations with regard to implementation remain, the
fee is fixed and determinable, and collectibility is probable. Revenues on
contracts with resellers are not recognized until software is sold through to
the end-user.
Service revenues are primarily comprised of revenues from standard support
and maintenance agreements, consulting and training fees. Customers licensing
our products generally purchase the standard annual maintenance agreement.
Revenues from maintenance agreements are recognized on a straight-line basis
over the life of the agreement. Consulting services are billed at an agreed upon
rate plus out-of-pocket expenses and training services on a per session basis.
We recognize service revenues from consulting and training upon completion of
the work to be performed. We have expended significant sums since inception on
product development and enhancement of sales and marketing capabilities, and
expect that these expenditures will continue to increase as we pursue the
emerging opportunities in our markets. The functional currency of our operations
is the U.S. dollar, which is the primary currency in the economic environment in
which we conduct our business. A significant portion of our research and
development expenses is incurred in NIS. The results of our operations are
subject to fluctuations in the dollar-NIS exchange rate which is influenced by
various global economic factors including inflation in Israel.
RESULTS OF OPERATIONS
REVENUES
BackWeb incurred a net loss of approximately $3.3 million for the three
months ended June 30, 1999 compared to a net loss of $3.9 million for the three
months ended June 30, 1998. For the six months ended June 30, 1999, BackWeb
incurred a net loss of approximately $ 7.0 million compared to a loss of $ 8.5
million for the six months ended June 30, 1998. Our revenues are derived
primarily from licensing of BackWeb Foundation and BackWeb Sales Accelerator and
to a lesser extent from maintenance and support, consulting and training
services. Total revenues for the three months ended June 30, 1999 was $ 5.1
million, an increase of approximately $3.1 million or 150% from $2.0 million in
the three months ended June 30, 1998. Total revenues for the six months ended
June 30, 1999 was $ 9.2 million, an increase of approximately $ 5.6 million or
154.1% from $ 3.6 million in the six months ended June 30, 1998. The increase
was due both to growth in license and service revenues.
Customers outside of the United States accounted for 18.7% of revenues in
the three months ended June 30, 1999 compared to 13.7% of revenues in the three
months ended June 30, 1998. License revenues were $4.2 million or 83.2% of
revenues in the three months ended June 30, 1999 compared to $1.7 million or
84.9% of revenues in the three months ended June 30, 1998. The decrease in
license revenue as a percentage of total revenue was primarily due to increased
service revenue from support, maintenance and consulting services. Service
revenues were $853,000 or 16.8% of revenues in the three months ended June 30,
1999 compared to $307,000 or 15.1% of revenues in the three months ended June
30, 1998. In 1999, we expect our service revenues to increase on an absolute
basis and as a percentage of net revenues.
COST OF REVENUES
Cost of revenues consists of costs associated with generating license and
service revenues. Cost of revenues was $750,000 or 14.7% of revenues for the
three months ended June 30, 1999 compared to $427,000 or 21.0% of revenues for
the three months ended June 30, 1998. The increase in cost of revenues on an
absolute basis was primarily due to growth of our service organization in 1999.
Cost of revenues was $ 1.4 million or 15.4% of revenues for the six months ended
June 30, 1999 compared to $ 0.8 million or 21.6% of revenues for the six months
ended June 30, 1998.
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<PAGE> 11
Cost of license revenues consists primarily of expenses related to media
duplication, and packaging of our products and amortization of capitalized
developed technology. Cost of license revenues was $45,000 or 0.9% of revenues
for the three months ended June 30, 1999 compared to $74,000 or 3.6% of revenues
for the three months ended June 30, 1998. Cost of service revenues consists
primarily of expenses related to salaries and expenses of our customer support
and professional service organizations, including related expenses of our
consultants and costs of third party consultants. Cost of service revenues was
$705,000, or 13.9% of revenues, in the three months ended June 30, 1999 compared
to $353,000 or 17.4% of revenues, in the three months ended June 30, 1998. The
increase in cost of service revenues was due to growth of the service
organization during 1998 and 1999. We expect cost of service revenues to
increase primarily as a result of the increase in our service revenues in
addition to the continued expansion of our customer support and professional
services organizations.
OPERATING EXPENSES
RESEARCH & DEVELOPMENT
Research and development expenses consist primarily of personnel,
equipment and supply costs for our development efforts. These expenses are
charged to operations as incurred. We have research and development offices in
Israel and Canada. Research and development expenses were $1.4 million in the
three months ended June 30, 1999 compared to $1.2 million in the three months
ended June 30, 1998. Research and development expenses were $ 2.4 million in the
six months ended June 30, 1999 compared to $2.5 million in the six months ended
June 30, 1998.
SALES AND MARKETING
Sales and marketing expenses consist of personnel and related costs for
our direct sales force and marketing staff, and marketing programs, including
trade shows, advertising, collateral, sales materials, seminars and public
relations. We have sales personnel in offices located in the United States,
Canada, Europe and Japan. Sales and marketing expenses were $4.4 million in the
three months ended June 30, 1999 compared to $3.3 million in the three months
ended June 30, 1998. Sales and marketing expenses were $8.2 million for the six
months ended June 30, 1999 compared to $6.6 million in the six months ended
June 30, 1998. We expect that sales and marketing expenses will increase on an
absolute basis over the next year, as we hire additional sales and marketing
personnel, continue to promote our brand and establish sales offices in
additional domestic and international locations, but are expected to decrease as
a percentage of revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
general management, human resources, information services and legal. General and
administrative expenses were $1.1 million in the three months ended June 30,
1999 compared to $0.7 million in the three months ended June 30, 1998. General
and administrative expenses were $2.0 million in the six months ended June 30,
1999 compared to $1.5 million in the six months ended June 30, 1998. We expect
general and administrative expenses to increase on an absolute basis in future
periods but continue to decrease as a percentage of revenues.
AMORTIZATION OF GOODWILL, OTHER INTANGIBLES AND DEFERRED STOCK
COMPENSATION
Amortization of goodwill, other intangibles and deferred stock
compensation consists of amortization of goodwill and other intangibles
associated with our acquisition of Lanacom in August 1997 and deferred stock
compensation for the three months ended June 30, 1999 and amortization of
goodwill and other intangibles only for the three months ended June 30, 1998.
Deferred stock compensation represents the aggregate differences between the
respective exercise price of options at their dates of grant and the deemed fair
market value or our ordinary shares for accounting purposes. Goodwill and other
intangibles are being amortized on a straight line basis over the estimated
useful life, generally two to two and one-half years. Deferred stock
compensation is presented as a reduction of shareholders' equity and is
amortized over the vesting period of the underlying options based on an
accelerated vesting method. Amortization expense was $872,000 in the three
months ended June 30, 1999 compared to $401,000 in the three months ended June
30, 1998. Amortization expense was $2.1 million for the six months ended June
30, 1999 compared to $ 0.8 million in the six months ended June 30, 1998. The
increase in amortization expense was due to deferred stock compensation expense
of $477,000 and $1,284,000 that were recorded in the three and six months
ended June 30, 1999. We currently expect to record amortization of goodwill,
other intangibles and deferred stock compensation of approximately $3.9 million
in 1999, $1.3 million in 2000, $674,000 in 2001 and $317,000 in 2002.
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OTHER INCOME (EXPENSE), NET
Other income (expense), net includes interest income earned on our cash
and cash equivalents, offset by interest expense and fair value of warrants
issued in connection with borrowings from financial institutions and also
includes the effects of foreign currency. Other income was $86,000 in the three
months ended June 30, 1999 compared to $37,000 in the three months ended June
30, 1998. For the six months ended June 30, 1999, Other Income (Expense) was
$(71,000) compared to $19,000 in the six months ended June 30, 1998. The
increase in Other Expense was primarily due to interest paid for bank line of
credit.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception up through the initial public offering, we have funded
operations primarily through the private placement of our equity securities,
equipment lease financings, borrowings and, most recently, through the proceeds
from the public offering of 6.325 million shares. As of June 30, 1999, we had
cash, cash equivalents and short term investments of $79.4 million. Cash used in
operations include expenditures associated with development activities and
marketing efforts related to commercialization of our products. In the six
months ended June 30, 1999, cash used in operations was $2.6 million. We have
made investments in hardware, software, and furniture and fixtures. Expenditures
on property and equipment were approximately $500,000 in the six months ended
June 30, 1999. Pursuant to the public offering, we have repaid loans received
from some of our shareholders and under a secured credit facility, in the sum of
$2.0 million.
On June 8, 1999, BackWeb sold 5,500,000 shares of Ordinary Shares of the
Company in an underwritten public offering and on June 9, 1999 sold an
additional 825,000 shares though the exercise of the underwriters'
over-allotment option for net proceeds of approximately $70,587,000, before
offering expenses.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
additional international operations and other factors. We expect to devote
substantial capital resources to hire and expand our sales, support, marketing
and product development organizations, to expand marketing programs, to
establish additional facilities worldwide and for other general corporate
activities. We believe that our current cash balances along with the proceeds
raised from the public offering will be sufficient to fund our operations for at
least the next 18 months.
EFFECTIVE CORPORATE TAX RATES
Our tax rate will reflect a mix of the U.S. statutory tax rate on our U.S.
income and the Israeli tax rate discussed below. We expect that most of our
taxable income will be generated in Israel. Israeli companies are generally
subject to income tax at the rate of 36% of taxable income. The majority of our
income, however, is derived from our company's capital investment program with
"Approved Enterprise" status under the Law for the Encouragement of Capital
Investments, and is eligible therefore for tax benefits. Pursuant to these
benefits, we will enjoy a tax exemption on income derived during the first two
years in which this investment program produces taxable income, provided that we
do not distribute such income as a dividend, and a reduced tax rate of 15-25%
for the next 5 to 8 years. All of these tax benefits are subject to various
conditions and restrictions. See "Israeli Taxation and Investment Programs-Law
for the Encouragement of Capital Investments, 1959." There can be no assurance
that we will obtain approval for additional Approved Enterprises Programs, or
that the provisions of the law will not change.
Since we have incurred tax losses through December 31, 1998, we have not
yet used the tax benefits for which we are eligible. See "Risk Factors".
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Most of our sales are in U.S. dollars. However, a large portion of our
costs relate to our operations in Israel. A substantial portion of our operating
expenses, primarily our research and development expenses, is denominated in
NIS. Costs not effectively denominated in U.S. dollars are translated to U.S.
dollars, when recorded, at prevailing exchange rates for the purposes of our
financial statements, and will increase if the rate of inflation in Israel
exceeds the devaluation of the Israeli currency as compared to the U.S. dollar
or if the timing of such devaluations were to lag considerably behind inflation.
Consequently, we are and will be affected by changes
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in the prevailing NIS/U.S. dollar exchange rate. We might also be affected by
the U.S. dollar exchange rate to the major European and Asian currencies due to
the fact that we operate offices throughout Europe and Asia.
The annual rate of inflation in Israel was 8.6% in 1998, 7.0% in 1997 and
10.6% in 1996. The NIS was devalued against the U.S. dollar by approximately
17.6% in 1998, 8.8% in 1997 and 3.8% in 1996. The representative dollar exchange
rate for converting the NIS to dollars, as reported by the Bank of Israel, was
NIS 4.1081 for one U.S. dollar on June 30, 1999.
YEAR 2000 COMPLIANCE
RISKS POSED BY YEAR 2000.
We recognize that we must ensure that our products and services will not
be adversely affected by Year 2000 software failures. Although we have taken
actions and created procedures to ensure our own products and services will
properly handle the Year 2000 date change. We have tested all current products
for Year 2000 compliance. We used industry standard testing methods for Year
2000 compliance to ensure our products were compliant. These tests and methods
were run on all current and many previous versions of our products on all
current platforms. Based on results of these tests and methods, we believe our
current products are Year 2000 compliant with respect to date calculations and
internal storage of date information. However, previous versions of our products
may not be Year 2000 compliant. To the extent these products are still being
used by our customers, we are subject to the risk that these products will not
function properly with respect to the Year 2000. Although we do not have a
formal contingency plan to address Year 2000 issues, we are in the preliminary
stages of assessing our internal risks associated with the Year 2000 issue. We
are working internally and with third-party vendors to assure that we are
prepared for the Year 2000. We have inventoried our internal software and
hardware systems, as well as products and services provided by third-party
vendors. These systems include those related to product delivery, customer
service, internal and external communications, accounting and payroll, which we
consider critical areas of our business. We presently will be seeking vendor
certification for all third-party systems and plan to develop a detailed risk
assessment and action plan that will include testing of both critical systems
and systems for which no certification has been obtained. The identification,
certification and risk assessment phases of our Year 2000 project are expected
to be completed by the end of the Company's third quarter of 1999. Subsequent
phases will include our own tests and the development of contingency plans
and/or corrective solutions for systems which have been identified to be
noncompliant. We expect these phases will continue through the first three
quarters of 1999. We believe that our most reasonably likely worst-case
scenarios related to the year 2000 problem are:
- a significant year 2000 problem encountered by us could result in
disruption of our communication links between our development staff in
Israel and Toronto, our staff in San Jose, California and our other
domestic and international locations;
- a significant year 2000 problem encountered by us could result in
disruption of our ability to communicate and receive orders from our
customers and to provide support and consulting services; or
- a failure of or degradation in performance due to year 2000 issues
encountered by a substantial proportion of the systems that carry Internet
traffic, which could negatively affect the performance of our products and
the demand for our products.
COSTS POSED BY YEAR 2000 COMPLIANCE
To date, our costs to address Year 2000 compliance have not been
significant. Based on our preliminary evaluations, we do not believe we will
incur significant operating expenses or be required to invest heavily in
computer system improvements to be Year 2000 compliant. Although we have not yet
developed an exact estimate of these costs, we expect the total costs to be less
than $100,000. However, significant uncertainty exists concerning the potential
costs and effects associated with Year 2000 compliance.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1998, the American Institute of Certified Public Accountants
issued SOP 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires that entities
capitalize certain costs related to internal use software once certain criteria
have been met. We are required to implement SOP 98-1 for the year ending
December 31, 1999. The adoption of SOP 98-1 is expected to have no
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material impact on our financial condition and results of operations. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS 133"). We are required to adopt SFAS 133 for the year
ending December 31, 2000. SFAS 133 establishes methods of accounting for
derivative financial instruments and hedging activities. Since we currently hold
no derivative financial instruments as defined by SFAS 133 and do not currently
engage in hedging activities, adoption of SFAS 133 is expected to have no
material effect on our financial condition or results of operations. In December
1998, the American Institute of Certified Public Accountants issued Statement of
Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions" ("SOP 98-9"). SOP 98-9 amends SOP 98-4 to
extend the deferral of the application of certain passages of SOP 97-2 provided
by SOP 98-4 through fiscal years beginning on or before March 15,1999. All other
provisions of SOP 98-9 are effective for transactions entered into in fiscal
years beginning after March 15, 1999. We have not yet determined the effect of
the final adoption of SOP 98-9 on our financial condition or results of
operations.
RISK FACTORS
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS
LIMITED, WE HAVE A HISTORY OF LOSSES AND WE EXPECT FUTURE LOSSES
We have a limited operating history and an even more limited history
operating the business as currently conducted. We cannot be certain that our
business strategy will be successful. We were incorporated on August 31, 1995
and did not begin generating revenues until December 1996. In early 1998, we
changed our strategic focus from a consumer-oriented to an enterprise-oriented
Internet communication company.
We have not achieved profitability and expect to continue to incur net
losses for at least the foreseeable future. We incurred net losses of
approximately $15.0 million for the year ended December 31, 1997, $14.6 million
for the year ended December 31, 1998 and $7.0 million for the six months ended
June 30, 1999. As of June 30, 1999, we had an accumulated deficit of
approximately $44.5 million. We expect to continue to incur significant sales
and marketing, product development and administrative expenses and expect such
expenses to increase in 1999. As a result, we will need to generate significant
revenues to achieve and maintain profitability.
OUR BUSINESS WILL SUFFER IF OUR TARGET CUSTOMERS DO NOT ACCEPT INTERNET
SOLUTIONS
Our future revenues and profits, if any, depend upon the widespread
acceptance and use of the Internet as an effective medium of business and
communication by our customers. Rapid growth in the use of and interest in the
Internet has occurred only recently. As a result, acceptance and use may not
continue to develop at historical rates, and a sufficiently broad base of
consumers may not adopt, and continue to use, the Internet and other online
services as a medium of commerce and communication. Our success will depend, in
large part, on the acceptance of the Internet in the commercial marketplace and
on the ability of third parties to provide a reliable Internet infrastructure
network with the speed, data capacity, security and hardware necessary for
reliable Internet access and services. To the extent that the Internet continues
to experience increased numbers of users, increased frequency of use or
increased bandwidth requirements of users, the Internet infrastructure may not
be able to support the demands placed on it and the performance or reliability
of the Internet could suffer.
OUR BACKWEB FOUNDATION PLATFORM AND APPLICATIONS ARE NEW AND IT IS UNCLEAR
IF THEY WILL ACHIEVE MARKET ACCEPTANCE
We do not know if our products will be successful. The market for Internet
communications solutions is in its infancy, and we are not certain that our
target customers will widely adopt and deploy our technology throughout their
networks. Even if our products are effective, our target customers may not
choose them for technical, cost, support or other reasons. Our future growth
depends on the commercial success of BackWeb Foundation and applications
developed upon BackWeb Foundation, such as BackWeb Sales Accelerator.
RAPID TECHNOLOGICAL CHANGES COULD CAUSE OUR PRODUCTS TO BECOME OBSOLETE
The Internet communications market is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. If we are unable to develop and
introduce products or enhancements in a timely manner to meet these
technological changes, we may not be able to successfully compete. In addition,
our products may become obsolete in which event we may not be a viable business.
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COMPETITION IN THE INTERNET COMMUNICATIONS MARKET MAY REDUCE THE DEMAND
FOR, OR PRICE OF, OUR PRODUCTS
The Internet communications market is intensely competitive and rapidly
changing. We expect that competition will intensify in the near-term because of
the attention the Internet is currently receiving and because there are very
limited barriers to entry. Our primary long-term competitors may not have
entered the market yet because the Internet communications market is new.
Competition could result in price reductions, fewer customer orders, reduced
gross margin and loss of market share, any of which could cause our business to
suffer. We may not be able to compete successfully, and competitive pressures
may harm our business. Many of our current and potential competitors have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources than we do.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND
SEASONALITY
Our operating results are difficult to predict. Our revenues and operating
results may vary significantly from quarter to quarter due to a number of
factors, including:
- demand for our products and services;
- the timing and mix of sales of our products and services;
- loss of customers;
- changes in the growth rate of Internet usage;
- delays in introducing new products and services;
- new product introductions by competitors;
- changes in our pricing policies or the pricing policies of our
competitors;
- costs related to acquisitions of technology or businesses; and
- economic conditions generally as well as those specific to the
Internet and related industries.
Due to the foregoing factors, we believe that quarter-to-quarter comparisons of
our operating results are not a good indication of our future performance. It is
likely that in some future quarter, our operating results may be below the
expectation of public market analysts and investors.
WE ANTICIPATE INCREASED OPERATING EXPENSES WHICH COULD CAUSE OUR BUSINESS
TO SUFFER IF WE DO NOT CORRESPONDINGLY INCREASE REVENUES
We plan to significantly increase our operating expenses to expand our
sales and marketing operations, broaden our customer support capabilities,
improve operational and financial systems, develop new distribution channels and
fund greater levels of research and development. If we do not significantly
increase our revenues to meet these increased expenses, our business will
suffer.
OUR GROWTH MAY SUFFER BECAUSE OF THE DIFFICULTIES IN IMPLEMENTING OUR
PRODUCTS
The use of our products by our customers requires implementation services.
Although we currently provide implementation services sufficient to meet our
current business level, our growth will be limited in the event we are unable to
expand our implementation services personnel or subcontract these services to
qualified third parties.
IF WE LOSE A MAJOR CUSTOMER, OUR REVENUES COULD SUFFER BECAUSE OF OUR
CUSTOMER CONCENTRATION
We have generated a substantial portion of our annual and quarterly
historical revenues from a limited number of customers. As a result, if we lose
a major customer, or if there is a decline in end-users in any of our customers'
licenses, our revenues would be adversely affected. We expect that a small
number of customers will continue to account for a substantial portion of
revenues for the foreseeable future and revenues from one or more of these
customers may represent more than 10% of our revenues in any quarter or a year.
OUR LONG AND UNPREDICTABLE SALES CYCLE DEPENDS ON FACTORS OUTSIDE OUR
CONTROL AND MAY CAUSE LICENSE REVENUES TO VARY SIGNIFICANTLY
To date, our customers have taken a long time to evaluate our products
before making their purchase decisions. The long, and often unpredictable, sales
and implementation cycles for our products may cause license revenues and
operating results to vary significantly from period to
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period. Along with our distribution partners, we spend a lot of time educating
and providing information to our prospective customers regarding the use and
benefits of our products. In addition, our customers often begin by purchasing
our products on a pilot basis before they decide whether or not to purchase
additional licenses for full deployment. Even after purchase, our customers tend
to deploy BackWeb Foundation slowly, depending upon the skill set of the
customer, the size of the deployment, the complexity of the customer's network
environment; and the quantity of hardware and the degree of hardware
configuration necessary to deploy our products.
FAILURE TO EXPAND OUR SALES AND MARKETING ORGANIZATIONS COULD LIMIT OUR
GROWTH
If we fail to substantially expand our direct and indirect sales and
marketing operations in our existing markets, our growth will be limited. We
have recently expanded our direct sales force in North America and Europe and
plan to hire additional sales personnel to meet market demand. Currently, we
believe we will need to significantly expand our sales and marketing
organization. We might not be able to hire or retain the kind and number of
sales and marketing personnel we are targeting because competition for qualified
sales and marketing personnel in the Internet communications market is intense.
FAILURE TO DEVELOP KEY STRATEGIC RELATIONSHIPS COULD LIMIT OUR GROWTH
We believe that our success in penetrating our target markets depends in
part on our ability to develop and maintain strategic relationships with key
independent software vendors, or ISVs, resellers, systems integrators,
distribution partners and customers. If we fail to develop these strategic
partnerships, our growth could be limited.
WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR EXPECTED GROWTH AND GEOGRAPHIC
DISPERSION
Our ability to successfully offer products and services and to implement
our business plan in the rapidly evolving Internet communications market
requires an effective planning and management process. We continue to increase
the scope of our operations domestically and internationally and expect to grow
our headcount substantially depending on market conditions. These factors have
placed, and our anticipated future operations and geographic dispersion will
continue to place, a significant strain on our management systems and resources.
We expect that we will need to continue to improve our financial and managerial
controls and reporting systems and procedures, and expand, train and manage our
work force worldwide.
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR
CONSENT BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED; OUR
PRODUCTS MAY BE USED IN AN UNINTENDED AND NEGATIVE MANNER
Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
patent, copyright, trade secret and trademark law. However, we may not be able
to adequately protect our proprietary rights which may harm our business.
Unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Policing unauthorized use of our products is difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
In addition, our products are used to transmit information through the
Internet. Our products could be used to transmit harmful applications, negative
messages, unauthorized reproduction of copyrighted material, inaccurate data, or
computer viruses to end-users in the course of delivery. Any such transmission
could damage our reputation or could give rise to legal claims against us. We
could spend a significant amount of time and money defending against these legal
claims.
OUR PROPRIETARY TECHNOLOGY MAY BE SUBJECT TO INFRINGEMENT CLAIMS
Substantial litigation regarding intellectual property rights exists in
the software industry. A successful claim of product infringement against us and
our failure or inability to license the infringed or similar technology could
harm our business. We expect that software products may be increasingly subject
to third-party infringement claims as the number of competitors in our industry
segments grows and the functionality of products in different industry segments
overlaps. Third parties may make a claim of infringement against us with respect
to our products and technology. Any claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays; or require us to enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.
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WE DO NOT HAVE SUFFICIENT INSURANCE TO COVER ALL POTENTIAL PRODUCT
LIABILITY AND WARRANTY CLAIMS
Our products are integrated into our customers' networks. The sale and
support of our products may entail the risk of product liability or warranty
claims based on damage to these networks. In addition, the failure of our
products to perform to customer expectations could give rise to warranty claims.
Although we carry general liability insurance, our insurance would likely not
cover potential claims of this type or may not be adequate to protect us from
all liability that may be imposed.
OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF KEY PERSONNEL
We will need to hire a significant number of additional sales, support,
marketing, and research and development personnel in calendar 1999 and beyond to
increase our revenues. If we fail to attract qualified personnel or retain
current employees, including, our executive officers and other key employees,
our revenues may not increase and could decline. None of our officers or key
employees is bound by an employment agreement for any specific term. Our
relationships with these officers and key employees are at will. Moreover, we do
not have "key person" life insurance policies covering any of our employees.
ANY MAJOR DEVELOPMENTS IN THE POLITICAL OR ECONOMIC CONDITIONS IN ISRAEL
COULD CAUSE OUR BUSINESS TO SUFFER BECAUSE WE ARE INCORPORATED IN ISRAEL
AND HAVE IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL
We are incorporated under the laws of the State of Israel. Our principal
research and development facilities as well as significant executive offices are
located in Israel. Any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could
significantly harm our business. Inflation in Israel and devaluation of the NIS
could have an impact on our financial results. Since a significant portion of
our research and development expenses are incurred in NIS, we may be negatively
affected by fluctuations in the exchange rate between the U.S. dollar and the
NIS. If Israel's economy is hurt by a high inflation rate, our operations and
financial condition could suffer.
ANY FUTURE PROFITABILITY MAY BE DIMINISHED IF TAX BENEFITS FROM THE STATE
OF ISRAEL ARE REDUCED OR WITHHELD
Pursuant to the Law for the Encouragement of Capital Investments, the
Israeli government has granted "Approved Enterprise" status to our existing
capital investment programs. Consequently, we are eligible for tax benefits for
the first several years in which we generate taxable income. Our future
profitability may be diminished if all or a portion of these tax benefits are
reduced. These tax benefits may be cancelled in the event of changes in Israeli
government policies or if we fail to comply with requisite conditions and
criteria. Currently the most significant conditions which we must continue to
meet include making specified investments in fixed assets, maintaining the
development and production nature of our facilities, and financing of at least
30% of these investments through the issuance of capital stock.
THE LOSS OF OUR RIGHT TO USE SOFTWARE LICENSED TO US BY THIRD PARTIES
COULD HARM OUR BUSINESS
We license technology that is incorporated into our products from third
parties, including security and encryption software. Any interruption in the
supply or support of any licensed software could disrupt our operations and
delay our sales, unless and until we can replace the functionality provided by
this licensed software. Because our products incorporate software developed and
maintained by third parties, we depend on these third parties to deliver and
support reliable products, enhance their current products, develop new
production a timely and cost-effective basis and respond to emerging industry
standards and other technological changes.
FAILURE OF OUR PRODUCTS OR COMPUTER SYSTEMS OR THOSE OF OUR CUSTOMERS
TO RECOGNIZE THE YEAR 2000 COULD DISRUPT THE OPERATION OF OUR BUSINESS
AND TECHNICAL SYSTEMS
Many currently installed computer systems and software products are not
capable of distinguishing 21st century dates from 20th century dates. As a
result, beginning on January 1, 2000, computer systems and software used by many
companies and organizations in a wide variety of industries, including
technology, transportation, utilities, finance and telecommunications, will
produce erroneous results or fail unless they have been modified or upgraded to
process date information correctly. In addition, we face the possibility that
our products will fail due to processing errors caused by inaccurate
calculations with respect to the Year 2000. Year 2000 compliance efforts may
involve significant time and expense, and uncorrected problems could harm our
business. Moreover, we may face claims based on Year 2000 issues arising from
the integration of multiple products within an overall system. We may also
experience reduced sales of our products as potential customers reduce their
budgets for our products
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due to increased expenditures on their own Year 2000 compliance efforts. For a
further discussion of Year 2000 issues, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000."
ISRAELI REGULATIONS MAY LIMIT OUR ABILITY TO ENGAGE IN RESEARCH AND
DEVELOPMENT AND EXPORT OUR PRODUCTS
Under Israeli law we are required to obtain an Israeli government license
to engage in research and development of and export of the encryption technology
incorporated in our products. Our current government license to engage in these
activities expires April 4, 2000. Our research and development activities in
Israel and our ability to export our products out of Israel would be limited if
the Israeli government revokes our current license, our current license is not
renewed, our license fails to cover the scope of the technology in our products,
or Israeli law regarding research and development or export of encryption
technologies were to change.
ITEM 3.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We develop products in Israel and sell them in North America, Asia and
Europe. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As most of our sales are currently made in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. We regularly assess these risks and have established
policies and business practices to protect against the adverse effects of these
and other potential exposures. As a result, the Company does not anticipate
material losses in these areas. Due to the nature of our short-term investments,
we have concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
PART II. OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 2.
CHANGES IN SECURITIES AND USE OF PROCEEDS
The effective date of the Registration Statement for the Company's initial
public offering, filed on Form F-1 under the Securities Act of 1933 (File No.
333-10358), was June 7, 1999. The class of securities registered was Ordinary
Shares. The offering commenced on June 8, 1999. The managing underwriters for
the offering were Goldman Sachs & Co., BancBoston Robertson Stephens Inc.,
Lehman Brothers Inc. and Wit Capital Corporation.
Pursuant to the Registration Statement, the Company sold 6,325,000
Ordinary Shares for an aggregate price of $75.9 million. The Company incurred
expenses of approximately $9.4 million, of which $5.3 million represented
underwriting discounts and commissions and approximately $4.1 represented other
expenses related to the offering. The net offering proceeds to the Company after
total expenses was $66.5 million.
We have used approximately $2.0 million of the net proceeds of the
initial public offering to repay indebtedness. The remaining net proceeds have
been invested in interest-bearing, investment-grade securities. The use of the
proceeds from the public offering does not represent a material change in the
use of proceeds described in the prospectus.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.
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ITEM 5.
OTHER INFORMATION
None.
ITEM 5.
EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Articles of Association of Registrant*
3.2 Memorandum of Association of Registrant (English
translation)*
4.1 Specimen of Ordinary Share Certificate*
4.2 Fourth Amended and Restated Rights Agreement *
4.3 Form of Liquidity Proposal between BackWeb Technologies, Ltd.
and the Exchangeable shareholders *
10.1 1996 Israeli Share Option Plan (English translation)*
10.2 1996 U.S. Share Option Plan*
10.3 1998 U.S. Share Option Plan*
10.4 1999 Employee Stock Purchase Plan*
10.5 Lease Agreement for 3 Abba Hillel Street, Ramat Gan, Israel
(English translation)*
10.6 Lease Agreement for 34 Tuval Street, Ramat Gan, Israel
(English translation)*
10.7 Lease Agreement for 2077 Gateway Place, Suite 500, San Jose,
California*
10.8 Form of Agreement by and among Interad (1995) Ltd. and Nir
Barkat Holdings Ltd., Eli Barkat Holdings Ltd., Yuval 63
Holdings (1995) Ltd., and Lior Hass and Iftah Sneh*
10.9 Loan and Security Agreement, and schedule thereto, between
BackWeb Technologies Ltd. and Transamerica Business Credit
Corporation, dated as of December 24, 1998*
10.10 Voting and Exchange Trust Agreement between BackWeb
Technologies Ltd., BackWeb Canada Inc. and the Trust Company
of Bank of Montreal, dated as of August 8, 1997*
10.11 Fourth Amended and Restated Rights Agreement, dated as of
March 24, 1999*
10.12 Agreement and Plan of Acquisition by and among BackWeb
Technologies Ltd., BackWeb Canada Inc., Lanacom Inc. and
Anthony Davis, dated as of July 1, 1997*
10.13+ Software License and Distribution Agreement for Embedded
Products, by and between BackWeb Technologies Ltd. and SAP AG,
dated March 17, 1999*
10.14+ Software Development and OEM License Agreement by and between
BackWeb Technologies Ltd. and Baan Development B.V., dated as
of December 30, 1998*
20.1 July 26, 1999 Press Release: "BackWeb Reports Record Revenues
for Second-Quarter 1999"
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule
</TABLE>
(B) REPORTS ON FORM 8-K
None.
- ------------------
*incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358)
+Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BACKWEB TECHNOLOGIES LTD.
Date: August 19, 1999 By: /s/ HANAN MIRON
--------------------------
Hanan Miron,
Chief Financial Officer
20
<PAGE> 21
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
3.1 Articles of Association of Registrant*
3.2 Memorandum of Association of Registrant (English
translation)*
4.1 Specimen of Ordinary Share Certificate*
4.2 Fourth Amended and Restated Rights Agreement *
4.3 Form of Liquidity Proposal between BackWeb Technologies, Ltd.
and the Exchangeable shareholders*
10.1 1996 Israeli Share Option Plan (English translation)*
10.2 1996 U.S. Share Option Plan*
10.3 1998 U.S. Share Option Plan*
10.4 1999 Employee Stock Purchase Plan*
10.5 Lease Agreement for 3 Abba Hillel Street, Ramat Gan, Israel
(English translation)*
10.6 Lease Agreement for 34 Tuval Street, Ramat Gan, Israel
(English translation)*
10.7 Lease Agreement for 2077 Gateway Place, Suite 500, San Jose,
California*
10.8 Form of Agreement by and among Interad (1995) Ltd. and Nir
Barkat Holdings Ltd., Eli Barkat Holdings Ltd., Yuval 63
Holdings (1995) Ltd., and Lior Hass and Iftah Sneh*
10.9 Loan and Security Agreement, and schedule thereto, between
BackWeb Technologies Ltd. and Transamerica Business Credit
Corporation, dated as of December 24, 1998*
10.10 Voting and Exchange Trust Agreement between BackWeb
Technologies Ltd., BackWeb Canada Inc. and the Trust Company
of Bank of Montreal, dated as of August 8, 1997*
10.11 Fourth Amended and Restated Rights Agreement, dated as of
March 24, 1999*
10.12 Agreement and Plan of Acquisition by and among BackWeb
Technologies Ltd., BackWeb Canada Inc., Lanacom Inc. and
Anthony Davis, dated as of July 1, 1997*
10.13+ Software License and Distribution Agreement for Embedded
Products, by and between BackWeb Technologies Ltd. and SAP AG,
dated March 17, 1999*
10.14+ Software Development and OEM License Agreement by and between
BackWeb Technologies Ltd. and Baan Development B.V., dated as
of December 30, 1998*
20.1 July 26, 1999 Press Release: "BackWeb Reports Record Revenues
for Second-Quarter 1999"
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule
</TABLE>
- ------------------
*incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358)
+Certain portions of this exhibit have been granted confidential treatment
by the Commission. The omitted portions have been separately filed with the
Commission.
<PAGE> 1
EXHIBIT 20.1
For Investor Relations, contact: For Media Relations, contact:
Julie Rowinski Susan Kohl, APR
(408) 933-1724 (408) 933-1769
[email protected] [email protected]
BACKWEB REPORTS RECORD REVENUES FOR SECOND-QUARTER 1999
GROWTH WAS 150% YEAR-OVER-YEAR AND 24% QUARTER-OVER-QUARTER
SAN JOSE, CALIFORNIA -- JULY 26, 1999 -- BackWeb(R) Technologies Ltd. (Nasdaq:
BWEB), a leading provider of Priority Internet communication infrastructure for
the extended enterprise, today announced record results for the second quarter
ended June 30, 1999. Revenues for the period were $5.1 million, a 150% increase
over those of the prior year and a 24% advance over the quarter ended March 31,
1999.
Excluding amortization charges related to previous acquisitions and deferred
stock compensation, BackWeb's operating net loss for second-quarter 1999 was
$2.4 million, or ($0.09) per share, compared to the $3.5 million, or ($0.18) per
share, reported for second-quarter 1998.
Including amortization charges, BackWeb's net loss for the quarter ended June
30, 1999, was $3.3 million, or ($0.12) per share compared to the $3.9 million,
or ($0.20) per share recorded for the second quarter of 1998.
Commenting on these results, BackWeb Chairman and CEO Eli Barkat said, "We are
very pleased with the progress we made on achieving our goals during
second-quarter 1999. Our strong revenue growth, key customer wins, and growing
strategic alliances continue to move us closer toward our objective of being
recognized as the de facto standard in Priority Internet communications."
During the second quarter, BackWeb announced a number of strategic customer wins
including U S WEST which will use BackWeb to expand the portal experience for
ISP and high-capacity broadband network services. In addition, HEWLETT-PACKARD
started shipping BackWeb on all new HP Pavilion home PCs as part of that
company's expansion of its service and support capabilities. These successes in
the business-to-consumer market are expected to add millions of BackWeb seats
over the next 12 months.
BackWeb also announced new distribution and partnership agreements during 1999's
second quarter that will further substantiate the Company's penetration of the
Global 1000 market. These alliances include SAP AG and its use of BackWeb in its
SAP(TM) Customer Relationship Management (CRM) offerings; BAAN COMPANY and its
<PAGE> 2
integration of BackWeb into its customer relationship management product line;
and DELOITTE CONSULTING and its establishment of BackWeb-focused consulting
services as a key component of its e-Business practice.
On the technology front, BackWeb further strengthened barriers to entry with its
receipt of a patent on its Polite Agent(TM) technology from the United States
Patent and Trademark Office. BackWeb's Polite communications software senses
periods of idle bandwidth and uses that time to efficiently transmit data
through networks. This technology enables users to access critical data without
interrupting other applications and activities such as access to e-mail and the
Web.
Finally, during second-quarter 1999 BackWeb Technologies achieved a major
milestone in the Company's four-year history with the initial public offering of
its ordinary shares on the Nasdaq National Market under the trading symbol BWEB.
BackWeb issued 6.325 million shares and raised nearly $68 million.
#####
ABOUT BACKWEB TECHNOLOGIES
BackWeb Technologies is a leading provider of Priority Internet communication
infrastructure and applications software that enables companies to communicate
time-sensitive, business-critical information throughout the extended enterprise
of customers, partners and employees. Corporations such as Cisco, Compaq,
Hewlett-Packard and Schlumberger Dowell have deployed BackWeb's Priority
Internet communication infrastructure for managing critical changes for key
e-business and customer service applications. BackWeb Technologies is
headquartered in San Jose, California, and Ramat Gan, Israel. For more
information, visit its web site at www.backweb.com or call 800-863-0100.
Statements in this news release which are not purely historical are
forward-looking statements within the meaning of the U.S. Federal Securities
laws, including, any statements regarding beliefs, plans, expectations or
intentions regarding the future. Actual results could differ materially from
those in such forward-looking statements. Factors that could cause actual
results to differ materially include changes in the competitive landscape
including new competitors and/or the impact of competitive pricing and products,
dependence upon a limited number of key resellers and customers, timely
availability and customer acceptance of new and existing products, rapid changes
in market conditions due to changing technological standards, fluctuations in
quarterly results, BackWeb's dependence upon and ability to attract and retain
qualified employees, potential Year 2000 problems with BackWeb's products or
internal operating systems, and the risks and uncertainties detailed from time
to time in BackWeb's periodic reports and registration statements filed with the
U.S. Securities and Exchange Commission. BackWeb undertakes no obligation to
publicly update or revise any forward-looking statements.
BACKWEB IS A REGISTERED TRADEMARK OF BACKWEB TECHNOLOGIES. POLITE, POLITE AGENT,
POLITE UPSTREAM AND POLITE NEIGHBORCAST ARE TRADEMARKS OF BACKWEB TECHNOLOGIES.
ALL OTHER TRADEMARKS ARE THE PROPERTY OF THEIR RESPECTIVE OWNERS.
<PAGE> 3
BACKWEB TECHNOLOGIES LTD
Consolidated Statements of Operations
(in thousands, except per share data)
UNAUDITED
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License $ 4,232 $ 1,727 $ 7,540 $ 3,122
Service 853 307 1,642 491
Total revenues 5,085 2,034 9,182 3,613
Cost of revenues:
License 45 74 118 129
Service 705 353 1,297 650
Total cost of revenues 750 427 1,415 779
Gross profit 4,335 1,607 7,767 2,834
Operating expenses:
Research and development 1,411 1,201 2,408 2,478
Sales and marketing 4,365 3,267 8,196 6,588
General and administrative 1,077 693 2,008 1,504
Amortization of goodwill, other intangibles,
and deferred stock compensation 872 401 2,074 802
Total operating expenses 7,725 5,562 4,686 11,372
Loss from operations (3,390) (3,955) (6,919) (8,538)
Other income, net 86 37 (71) 19
Net loss $(3,304) $(3,918) $(6,990) $(8,519)
Net loss per share (including amort.) $ (0.12) $ (0.20) $ (0.28) $ (0.44)
Net loss per share (excluding amort.) $ (0.09) $ (0.18) $ (0.19) $ (0.39)
Shares used in computing net loss per share 27,643 20,027 25,351 19,550
</TABLE>
<PAGE> 4
BACKWEB TECHNOLOGIES LTD
Consolidated Balance Sheets
(in thousands)
UNAUDITED
<TABLE>
<CAPTION>
June 30, 1999 March 31, 1999 Dec. 31, 1998
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $79,376 $11,137 $ 6,449
Accounts receivable 4,295 5,753 2,590
Other current assets 887 1,085 712
Total current assets 84,558 17,975 9,751
Property and equipment, net 1,188 989 1,030
Goodwill and other purchased
intangibles, net 962 1,389 1,824
Other assets 116 96 96
$86,824 $20,449 $12,701
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 2,000 $ 2,000
Accounts payable and
accrued liabilities 5,691 3,689 3,357
Deferred revenue 3,121 2,201 1,666
Payable to related parties 235 140 304
Current portion of
shareholders' loans 822 927 828
Total current liabilities 9,869 8,957 8,155
Accrued severance pay, net 154 108 93
Shareholders' loans -- -- 327
Total Shareholders' equity 76,801 11,384 4,126
$86,824 $20,449 $12,701
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AND THE CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOUND IN THE COMPANY'S 6-K FOR THE QUARTER ENDED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 37,047
<SECURITIES> 42,329
<RECEIVABLES> 5,155
<ALLOWANCES> (860)
<INVENTORY> 0
<CURRENT-ASSETS> 84,558
<PP&E> 2,400
<DEPRECIATION> (1,212)
<TOTAL-ASSETS> 86,824
<CURRENT-LIABILITIES> 9,869
<BONDS> 0
0
3,454
<COMMON> 124,223
<OTHER-SE> (50,876)
<TOTAL-LIABILITY-AND-EQUITY> 86,824
<SALES> 4,232
<TOTAL-REVENUES> 5,085
<CGS> 45
<TOTAL-COSTS> 750
<OTHER-EXPENSES> 7,725
<LOSS-PROVISION> 145
<INTEREST-EXPENSE> 164
<INCOME-PRETAX> (3,304)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,304)
<EPS-BASIC> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
