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Filed pursuant to Rule 424(b)(4)
Registration No. 333-10358
[BACKWEB LOGO] 5,500,000 SHARES
BACKWEB TECHNOLOGIES LTD.
Ordinary Shares
-------------------------
This is an initial public offering of ordinary shares of BackWeb
Technologies Ltd. All of the 5,500,000 ordinary shares are being sold by
BackWeb.
Prior to this offering, there has been no public market for the ordinary
shares. The ordinary shares have been approved for quotation on the Nasdaq
National Market under the symbol "BWEB."
Please see "Risk Factors" beginning on page 4 to read about factors you
should consider before buying the ordinary shares.
-------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
We have received from the Securities Authority of the State of Israel an
exemption from Israel's prospectus publication requirements. Nothing in such
exemption should be construed as authenticating the matters contained in this
prospectus or as an approval of their reliability or adequacy or as an
expression of opinion as to the quality of the securities offered in this
prospectus.
-------------------------
<TABLE>
<CAPTION>
Per Share Total
--------- -----------
<S> <C> <C>
Initial public offering price............................... $12.00 $66,000,000
Underwriting discount....................................... $ 0.84 $ 4,620,000
Proceeds, before expenses, to BackWeb....................... $11.16 $61,380,000
</TABLE>
The underwriters may, subject to the terms of the underwriting agreement,
purchase up to an additional 825,000 shares from BackWeb at the initial public
offering price less the underwriting discount.
-------------------------
The underwriters expect to deliver the shares on June 11, 1999.
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
LEHMAN BROTHERS
WIT CAPITAL CORPORATION
-------------------------
Prospectus dated June 7, 1999.
<PAGE> 2
DESCRIPTION OF GRAPHICS FOR INSIDE
FRONT COVER PAGES OF PROSPECTUS
[BackWeb Logo]
Providing Internet Communication Infrastructure Software and
Application-Specific Software that Enables Companies to Communicate
Business-Critical, Time Sensitive Information throughout the Extended Enterprise
of Customers, Partners and Employees
Below the caption are two concentric circles with the words "BackWeb
Communications Infrastructure" and "Business-Critical Information" in the center
of the inner circle layered on top of representations of different types of
digital data that can be transmitted by our products. Clockwise around the
outside circle are the words "Priority Communications Applications,"
"e-Supplier," "e-Sales," "e-Commerce," "e-Service" and "e-Reseller." Outside the
circles are human shapes representing constituencies within a company's extended
enterprise.
- Priority Communications for e-Business Efficiently gather, target and
deliver business-critical information and applications to PC desktops
throughout the extended enterprise without interfering with normal
network traffic by using idle network connections.
- Improve Customer Satisfaction and Retention Improve the quality of
customer services by proactively providing information and services on an
as-needed basis in a timely manner.
- Strengthen Relationships Increase revenue and improve operational
efficiencies through proactive communications and exchange of data and
information with partners and resellers.
- Gain a Competitive Advantage Accelerate the response time of employees to
changing market conditions for a competitive advantage.
NARRATIVE DESCRIPTION OF INSIDE
COVER GATE FOLD
BackWeb Priority Internet Communications Platform
- Provides an Automated and Reliable Solution to Communicate Large Amounts
of Data Across a Network of Any Speed
- Capture the Immediate Attention of Targeted Recipients
- Monitor the Recipients' Level of Interaction with the Information
Delivered
[GRAPHIC DEPICTING CONNECTIONS BETWEEN BACKWEB SERVER,
BACKWEB POLITE PROXY AND POLITE NEIGHBORCAST]
[BACKWEB LOGO]
<TABLE>
<CAPTION>
CAPACITY URGENCY RELIABILITY
<S> <C> <C>
Polite Communications Attention Management Closed Loop Delivery
Enables the transmission of Capture immediate attention Allows companies to track
significant volumes of to priority information usage, manage effectiveness
digital data through existing utilizing advanced alert and perform surveys
networks without interfering notification displays. throughout the extended
with normal network traffic enterprise.
by using idle network
connections.
</TABLE>
<PAGE> 3
DESCRIPTION OF GRAPHICS FOR INSIDE BACK COVER
<TABLE>
<S> <C>
[Graphics of three computer screens depicting Carlson Wagonlit Travel increased income by
examples of our attention management alerting its agents to distressed inventory
functionality] using BackWeb to send a Flash highlighting
specials on rooms for Radisson Hotels
worldwide.
Compaq cut costs by creating Compaq Service
Connection using BackWeb to enable direct
communication with their customers. This
application proactively sends software
patches and updates to Compaq Presario users.
Schlumberger Dowell uses resources more
effectively by taking advantage of BackWeb to
deliver critical information such as failure
updates and operational alerts to its
employees worldwide.
</TABLE>
BackWeb(R), Polite Agent, Polite Neighborcast,
Polite Proxy and Polite Upstream
are our trademarks.
All other trademarks or trade names used in this prospectus
are the property of their respective owners.
<PAGE> 4
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information and BackWeb's consolidated financial statements and the notes to
those statements appearing elsewhere in this prospectus.
BACKWEB TECHNOLOGIES LTD.
We are a leading provider of Internet communication infrastructure software
and application-specific software that enable companies to communicate
business-critical, time-sensitive information throughout their extended
enterprise of customers, partners and employees. Our products provide a reliable
solution for communicating large amounts of data in any digital format by
enabling our customers to automatically gather and disseminate information. Our
products efficiently disseminate this information across a network of any speed
by automatically adapting the rate of transmission to match the available
network capacity, commonly referred to as bandwidth. Our software enables
companies to adapt quickly to changing market conditions through direct
interaction with their customers, partners and employees, thereby accelerating
the execution of their business processes.
Although we have a limited operating history, industry leaders such as
AT&T, Cisco Systems, Goldman Sachs, Pacific Bell, Rite Aid and Schlumberger have
chosen our products to address a variety of their critical business
communication needs. We intend to pursue additional customers in each of these
industries to expand our customer base.
Our infrastructure software, BackWeb Foundation, is a platform that allows
organizations to efficiently gather, target and deliver sizeable digital data of
any format to users' desktops across their extended enterprise. Our software
enables management to capture the immediate attention of targeted recipients and
monitor the recipients' level of interaction with the information delivered. We
work with our customers, partners and third-party software vendors to develop
applications built on top of BackWeb Foundation.
Our infrastructure software platform is powered by three core technologies
that we have developed:
- Polite Communications, a unique technology that enables the transmission
of significant volumes of digital data through existing networks without
interfering with normal network applications and traffic.
- Attention Management, a technology that uses a variety of display
techniques to alert desktop users to the delivery of business-critical
information.
- Closed Loop Delivery, a technology that allows companies to track, manage
and survey the effectiveness of communications throughout their extended
enterprise.
We have also developed our first packaged application, BackWeb Sales
Accelerator. This application enables organizations to strengthen their customer
relationships by accelerating the response times of the organizations' sales
forces and partners to critical market changes. BackWeb Sales Accelerator
provides a geographically dispersed sales organization with up-to-date
information, such as competitive and customer information from external sources,
internal sales and marketing materials, product pricing information and critical
management announcements.
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OUR STRATEGY
Our objective is to establish ourselves as the leading provider of Internet
communication infrastructure and applications software. The key elements of our
strategy include:
- becoming the de facto standard for Internet communication infrastructure
software;
- leveraging our infrastructure software platform to introduce multiple
communication applications;
- focusing on selected vertical markets;
- extending our technological leadership position; and
- expanding our direct and indirect distribution channels.
OUR OFFICES
Our principal executive offices are located at 3 Abba Hillel Street, Ramat
Gan, Israel and our telephone number is 011-972-3-751-8464.
Our U.S. subsidiary, BackWeb Technologies, Inc. is located at 2077 Gateway
Place, Suite 500, San Jose, California 95110 and its telephone number is (408)
933-1700.
THE OFFERING
<TABLE>
<S> <C>
Ordinary shares offered by BackWeb......... 5,500,000 shares
Ordinary shares to be outstanding after
this offering(1)(2)...................... 35,041,640 shares
Nasdaq National Market symbol.............. BWEB
Use of proceeds............................ - repay indebtedness; and
- general corporate purposes.
</TABLE>
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(1) Based on the number of shares actually outstanding on March 31, 1999.
Includes 2,595,501 ordinary shares issuable upon the exchange of BackWeb
Canada, Inc. exchangeable shares issued to the former shareholders of
Lanacom, Inc. in connection with our acquisition of Lanacom in August 1997.
(2) Excludes:
- 4,946,980 ordinary shares issuable upon exercise of stock options
outstanding as of March 31, 1999 at a weighted average exercise price of
$1.51 per share.
- 145,726 ordinary shares issuable upon exercise of warrants outstanding as
of March 31, 1999 at a weighted average exercise price of $3.45 per
share.
- 3,646,344 ordinary shares available for future grant or issuance under
BackWeb's various benefit plans as of March 31, 1999.
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SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth our consolidated statement of operations
data for the periods presented. The pro forma information in the following table
gives effect to the conversion of all outstanding shares of our preferred stock
into 23,090,238 ordinary shares automatically upon the closing of the offering,
other than the one share of Series E Preferred Stock, which will not be
converted automatically.
<TABLE>
<CAPTION>
TWO MONTHS YEAR ENDED THREE MONTHS
ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ----------------------------- ------------------
1995 1996 1997 1998 1998 1999
------------ ------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues............................................. $ -- $ 71 $ 5,601 $ 9,537 $ 1,579 $ 4,097
Gross profit......................................... -- 71 4,623 7,918 1,227 3,432
Loss from operations................................. (236) (7,641) (15,094) (14,825) (4,583) (3,529)
Net loss............................................. (238) (7,684) (14,962) (14,607) (4,601) (3,686)
Basic and diluted net loss per share................. (6.95) (6.96) (6.07) (2.02) (1.40)
Shares used in computing basic and diluted net loss
per share.......................................... 1,106 2,151 2,408 2,283 2,627
Pro forma basic and diluted net loss per share
(unaudited)........................................ $ (0.69) $ (0.16)
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)..................... 21,208 23,058
</TABLE>
The following table indicates a summary of our balance sheet at March 31,
1999:
- on an actual basis;
- on a pro forma basis giving effect to the conversion of all outstanding
shares of our preferred stock as of March 31, 1999, into 23,090,238
ordinary shares automatically upon the closing of the offering other than
the Series E Preferred Stock, which will not be converted automatically;
and
- on a pro forma as adjusted basis to reflect conversion of the preferred
stock and the sale of 5,500,000 ordinary shares by us and our anticipated
application of the net proceeds of the offering.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 11,137 $11,137 $67,890
Working capital............................................. 9,018 9,018 68,698
Total assets................................................ 20,449 20,449 77,202
Redeemable convertible preferred stock...................... 47,275 -- --
Total shareholders' equity (net capital deficiency)......... (35,891) 11,384 71,064
</TABLE>
- ---------------
Unless otherwise specifically stated, information throughout this
prospectus assumes:
- the effectiveness of a three-for-one reverse share split of ordinary
shares immediately prior to the effective date of this prospectus;
- the underwriters' over-allotment option is not exercised; and
- the conversion of all outstanding shares of preferred stock into
23,090,238 ordinary shares automatically upon the closing of this
offering other than the Series E Preferred Stock, which will not be
converted automatically.
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RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus before
deciding to invest in the ordinary shares.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED
AND WE RECENTLY CHANGED OUR STRATEGIC FOCUS
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. This change required us to adjust our business
processes and make a number of significant personnel changes.
WE HAVE A HISTORY OF LOSSES AND WE EXPECT FUTURE LOSSES
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 $7.7 million for the year ended December 31, 1996, $15.0 million
for the year ended December 31, 1997, and $14.6 million for the year ended
December 31, 1998 and $3.7 million for the three months ended March 31, 1999. As
of March 31, 1999, we had an accumulated deficit of approximately $41.2 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 QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY AND
IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS, OUR
SHARE PRICE MAY DECREASE SIGNIFICANTLY
Our operating results are difficult to predict. Our future quarterly
operating results may fluctuate significantly and may not meet the expectations
of securities analysts or investors. If this occurs, the price of our ordinary
shares would likely decline. The factors that may cause fluctuations of our
operating results include the following:
- the size, timing and contractual terms of sales of our products and
services due to the long and unpredictable sales cycle of our products;
- delays we may encounter in introducing new versions of BackWeb Foundation
and BackWeb Sales Accelerator and new products and services;
- changes in information systems resource allocation by our customers;
- the mix of products and services sold because our profit margins differ
among products and services; and
- the fixed nature of expenses such as base compensation and rent.
Quarterly revenues and operating results generated by our business
generally depend on license fees from our customers within the quarter. Revenues
from license fees depend upon the volume of end-users. A decrease in end-users
or the cancellation or deferral of any customer contract would reduce our
expected revenues, which could negatively affect our quarterly financial
performance.
Moreover, our sales may be subject to seasonality or cyclicality. We expect
that revenues in the first quarter of each year may be lower than revenues in
the fourth quarter of the preceding year. We believe this trend may occur as a
result of our customers annual budgetary, purchasing and sales cycles. For
example, the growth rate of our license revenues decreased in the quarter ending
March 31, 1999 compared to the growth rate of our license revenues for the
quarter ended December 31, 1998. For a more detailed description of our
quarterly results, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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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 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, introduced in December 1998.
OUR SOFTWARE PLATFORM ENABLES THIRD PARTIES TO DEVELOP APPLICATIONS WHICH MAY
COMPETE WITH APPLICATIONS DEVELOPED BY US
Because of BackWeb Foundation's open architecture, third parties have the
ability to develop their own applications on top of our platform. Such third
parties could compete with applications developed by BackWeb. If our target
customers do not widely adopt and purchase our products, or if third parties
were to compete with applications developed by us, our business would 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. In 1997, revenues from
Computer Associates and CompuServe represented 19% and 11%, respectively, of our
revenues. In 1998, no customer accounted for more than 10% of our revenues. 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 future
years.
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 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
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- the quantity of hardware and the degree of hardware configuration
necessary to deploy our products.
COMPETITION IN THE INTERNET COMMUNICATIONS MARKET MAY REDUCE THE DEMAND FOR, OR
PRICES 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. Some of our potential competitors are among the
largest and most well-capitalized software companies in the world. For
additional discussion of our competition, please see "Business -- Competition."
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. As of March 31,
1999, we employed approximately 60 individuals in our sales and marketing
organizations. Currently, we believe we will need to expand our sales and
marketing organization by more than fifty percent of its current size over the
next eighteen months, although this increase is dependent on our ability to
increase sales. 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. Although we do not have any current
exclusive strategic relationships, we have recently entered into nonexclusive
agreements with SAP and Baan relating to the distribution of our products. We
have not derived significant revenues from these agreements and we may not be
able to derive significant revenues in the future from these agreements.
WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR EXPECTED GROWTH
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. In addition, in
connection with the recent change in our strategy from a consumer-oriented to an
enterprise-oriented Internet communications company, we have reorganized our
sales force.
These factors have placed, and our anticipated future operations 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. Furthermore, we expect that we will be required to manage
multiple relationships with various customers and other third parties.
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THE GLOBAL NATURE OF OUR OPERATIONS
STRAINS OUR MANAGEMENT RESOURCES
If we fail to manage our geographically dispersed organization, we may fail
to meet or exceed our business plan and our revenues may decline. Our research
and development facilities are located in Canada and Israel, and our directors,
executive officers and other key employees are similarly dispersed throughout
the world. In addition, we maintain offices in the United States, Canada, Japan
and Europe to market and sell our products in those countries and surrounding
regions. This geographic dispersion requires significant management resources
that our locally-based competitors do not need to devote to their operations. In
addition, the expansion of our existing international operations and entry into
additional international markets will require significant management attention
and financial resources.
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR CONSENT
BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED
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.
For a more detailed description of the protection of our intellectual property,
please see "Business -- Intellectual Property and Proprietary Rights."
OUR PRODUCTS MAY BE USED IN AN
UNINTENDED AND NEGATIVE MANNER
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. For additional information, please see
"Business -- Intellectual Property and Proprietary Rights."
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.
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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.
RAPID TECHNOLOGICAL CHANGES COULD CAUSE OUR PRODUCTS TO BECOME OBSOLETE OR
REQUIRE US TO REDESIGN OUR PRODUCTS
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.
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, our revenues may not increase and could decline.
Competition for these individuals is intense, and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. Our future success also depends upon the continued service of our
executive officers and other key sales, marketing and support personnel. In
addition, our products and technologies are complex and we are substantially
dependent upon the continued service of our existing engineering personnel, and
especially our founders. 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. Since its establishment in 1948, the State of
Israel has been and continues to be in a state of hostility with its neighbors,
varying from time to time in intensity and degree.
Some of our senior officers and key employees are currently obligated to
perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. Fulfillment of these
obligations may deprive us of key employees for extended periods of time.
Inflation in Israel and devaluation of the NIS could have an impact on our
financial results. Although Israel has substantially reduced the rates of
inflation and devaluation in recent years, they are still relatively high
compared to those in the United States and we could be harmed by inflation or
devaluation. If inflation rates in Israel increase again and hurt Israel's
economy as a whole, our operations and financial condition could suffer. For a
more detailed discussion of the political, military and economic environment in
Israel, please see "Conditions in Israel."
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
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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. For a more detailed discussion of Israeli tax laws, please see "Israeli
Taxation and Investment Programs."
OUR GROWTH MAY BE LIMITED IF WE DO NOT DEVELOP LOCALIZED VERSIONS OF OUR
PRODUCTS
Historically, most of our sales have been in the United States. In order to
expand internationally, we need to develop localized versions of our products.
If we fail to develop these localized versions, our growth prospects would be
limited. We currently have limited experience in developing localized versions
of our products and marketing and distributing our products internationally.
EXCHANGE RATE FLUCTUATIONS BETWEEN THE
U.S. DOLLAR AND THE NIS MAY NEGATIVELY AFFECT OUR EARNINGS
Although most of our revenues and a majority of our expenses are
denominated in U.S. dollars, a significant portion of our research and
development expenses are incurred in NIS. In addition, we are engaged in certain
loan transactions with affiliates denominated in and dependent on NIS. As a
result, we may be negatively affected by fluctuations in the exchange rate
between the U.S. dollar and the NIS.
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 products
on a timely and cost-effective basis and respond to emerging industry standards
and other technological changes.
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.
WE MAY OFFER TO REPURCHASE SOME OF OUR PREVIOUSLY GRANTED OPTIONS AND ISSUED
SHARES AND MAY BE SUBJECT TO PENALTIES UNDER CALIFORNIA SECURITIES LAWS
We may commence a rescission offer pursuant to the state securities laws of
the State of California because we failed to qualify or receive an exemption
from qualification under California state securities laws when we granted
options to some of our employees in the State of California. The rescission
offer would cover options to purchase ordinary shares issued pursuant to our
1996 U.S. Stock Option Plan and ordinary
9
<PAGE> 13
shares issued upon exercise of these options which were granted to approximately
42 people in California from 1996 to 1998. The rescission offer would allow
these people to return their equity interests in us in exchange for at least
twenty percent of the exercise price per underlying share for each outstanding
option they hold and the price per share paid by each of these people plus seven
percent interest for each share issued upon exercise of these options. If the
rescission offer is consummated in 1999, BackWeb could be required to make an
aggregate payment in an amount which we believe is not material to us and which
we currently believe will be no more than $400,000. As a legal matter, it
remains uncertain whether we have any liability under California state
securities laws since publicly traded companies are exempt from such filings. In
addition, we are not aware of any claims for rescission against us at the time
of this prospectus. Upon completing a rescission offer approved by the
California Department of Corporations the aforementioned optionees should not
have any rescission rights under California law. We may still be subject to
penalties or fines related to these issuances.
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 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.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR SHARE PRICE WHICH COULD NEGATIVELY
AFFECT YOUR INVESTMENT
You may not be able to resell your shares at or above the initial public
offering price due to a number of factors, including:
- announcements of technological innovations;
- announcements relating to strategic relationships;
- conditions affecting the Internet industry; and
- trends related to the fluctuations of stock prices of Israeli companies.
10
<PAGE> 14
The trading price of our ordinary shares may be volatile. The market for
technology and Internet-related companies, has experienced extreme volatility
that often has been unrelated to the operating performance of particular
companies. These fluctuations may adversely affect the trading price of our
ordinary shares, regardless of our actual operating performance.
ISRAELI COURTS MIGHT NOT ENFORCE JUDGMENTS RENDERED OUTSIDE OF ISRAEL WHICH MAY
MAKE IT DIFFICULT TO COLLECT ON JUDGMENTS RENDERED AGAINST US
We are incorporated in Israel. Some of our directors and executive officers
and the Israeli experts named herein are not residents of the United States and
some of their assets and our assets are located outside the United States.
Service of process upon our non-U.S. resident directors and executive officers
or the Israeli experts named herein and enforcement of judgments obtained in the
United States against us, and our directors and executive officers, or the
Israeli experts named herein, may be difficult to obtain within the United
States. BackWeb Technologies, Inc., our U.S. subsidiary, is the U.S. agent
authorized to receive service of process in any action against us in any federal
or state court arising out of this offering or any related purchase or sale of
securities. We have not given consent for this agent to accept service of
process in connection with any other claim.
We have been informed by our legal counsel in Israel, Naschitz, Brandes &
Co., that there is doubt as to the enforceability of civil liabilities under
U.S. securities laws in original actions instituted in Israel. However, subject
to certain time limitations, an Israeli court may declare a foreign civil
judgment enforceable if it finds that:
- the judgment was rendered by a court which was, according to the laws of
the state of the court, competent to render the judgment;
- the judgment is no longer appealable;
- the obligation imposed by the judgment is enforceable according to the
rules relating to the enforceability of judgments in Israel and the
substance of the judgment is not contrary to public policy; and
- the judgment is executory in the state in which it was given.
Even if the above conditions are satisfied, an Israeli court will not
enforce a foreign judgment if it was given in a state whose laws do not provide
for the enforcement of judgments of Israeli courts (subject to exceptional
cases) or if its enforcement is likely to prejudice the sovereignty or security
of the State of Israel. An Israeli court also will not declare a foreign
judgment enforceable if:
- the judgment was obtained by fraud;
- there was no due process;
- the judgment was rendered by a court not competent to render it according
to the laws of private international law in Israel;
- the judgment is at variance with another judgment that was given in the
same matter between the same parties and which is still valid; or
- at the time the action was brought in the foreign court a suit in the
same matter and between the same parties was pending before a court or
tribunal in Israel.
OUR OFFICERS, DIRECTORS AND AFFILIATED ENTITIES OWN A LARGE PERCENTAGE OF
BACKWEB AND COULD SIGNIFICANTLY INFLUENCE THE OUTCOME OF ACTIONS
We anticipate that our executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
24.9% of our outstanding ordinary shares following the completion of this
offering. These shareholders, if acting together, would be able to significantly
influence all matters requiring approval by our shareholders, including the
election of directors and the approval of mergers or other business combination
transactions.
WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF BACKWEB, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS
Provisions of Israeli corporate and tax law and of our Articles of
Association may
11
<PAGE> 15
have the effect of delaying, preventing or
making more difficult a merger or other acquisition of BackWeb, even if doing so
would be beneficial to our shareholders.
Israeli law regulates mergers, votes required to approve a merger,
acquisition of shares through tender offers and transactions involving
significant shareholders. In addition, our charter documents provide for a
staggered board of directors. For further discussion, please see
"Management -- Election of Directors" and "Description of Share Capital."
VIRTUALLY ALL OF OUR SHARES WILL BE ELIGIBLE FOR SALE SHORTLY AFTER THE OFFERING
AND SUBSTANTIAL SALES OF OUR SHARES COULD CAUSE OUR SHARE PRICE TO FALL
If our shareholders sell substantial amounts of our ordinary shares,
including shares issued upon the exercise of outstanding options and warrants,
in the public market following this offering, the market price of our ordinary
shares could fall dramatically. Such sales also might make it more difficult for
us to sell equity or equity-related securities in the future at a time and price
that we deem appropriate.
Upon completion of this offering, we will have outstanding 32,446,139
ordinary shares, based upon shares outstanding as of March 31, 1999. Of these
shares, the 5,500,000 shares sold in this offering are freely tradable. This
leaves 26,946,139 shares eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- --------------------- ---------------------
<S> <C>
19,300,996........... 180 days from the
date of this
prospectus
7,645,143............ At various times
thereafter through
March 24, 2000
</TABLE>
In addition, upon completion of the offering we will have 2,595,501
ordinary shares that are issuable at any time for no additional consideration
upon exchange of the BackWeb Canada exchangeable shares issued to the former
shareholders of Lanacom, Inc. in connection with our acquisition of Lanacom. We
have agreed to register the resale of these ordinary shares on the 180th day
after the date of this prospectus.
Moreover, on or prior to the 180th day after the date of this prospectus,
we intend to register for resale approximately 10.9 million ordinary shares
reserved for issuance or issued under our employee stock plans. Please see
"Shares Eligible for Future Sale" and "Underwriting."
INVESTORS IN OUR ORDINARY SHARES FACE SUBSTANTIAL IMMEDIATE DILUTION
The initial public offering price is substantially higher than the book
value per share of our outstanding ordinary shares. As a result, investors
purchasing ordinary shares in this offering will incur immediate substantial
dilution of $10.01 per share. In addition, we have issued options and warrants
to acquire ordinary shares at prices significantly below the initial public
offering price. To the extent such outstanding options are ultimately exercised,
there will be further dilution to investors in this offering.
12
<PAGE> 16
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
We have made forward looking statements in this prospectus 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 factors,
including those set forth in "Risk Factors" and elsewhere in this prospectus.
USE OF PROCEEDS
We estimate the net proceeds to us from the sale of the 5,500,000 ordinary
shares being offered to be approximately $59.7 million, after deducting the
underwriting discount and estimated offering expenses payable by us, or $68.9
million if the over-allotment option is exercised in full.
We intend to use approximately $2.9 million of the net proceeds of the
offering to repay indebtedness, of which $2.0 million bears interest at prime
rate plus 4% per annum, and approximately $900,000 bears no interest. The $2.0
million line of credit matures on December 31, 1999 and the $900,000 loan is
repaid at a rate of 2.5% of cumulative consolidated revenues in excess of $5.0
million. We are currently using the proceeds of this indebtedness for working
capital. We expect to use the balance of the net proceeds from this offering for
general corporate purposes. In addition, we may use a portion of the net
proceeds to acquire complementary products, technologies or businesses. However,
we currently have no commitments or agreements and are not involved in any
negotiations with respect to any such transactions. Pending use of the net
proceeds of this offering, we intend to invest the net proceeds in
interest-bearing, investment-grade securities.
We are not limited in our use of the proceeds of this offering. We cannot
predict that the investment of the proceeds in our operations and otherwise will
yield a favorable return.
13
<PAGE> 17
DIVIDEND POLICY
We have never paid cash dividends to our shareholders and we currently do
not intend to pay dividends for the foreseeable future. We intend to reinvest
earnings in the development and expansion of our business. We have decided to
reinvest the amount of tax exempt income derived from our Approved Enterprise
status and not to distribute such income as dividends. See Note 9 of Notes to
the Consolidated Financial Statements included in this prospectus. We may only
pay cash dividends in any fiscal year out of "profits," as determined under
Israeli law. In addition, the terms of financing arrangements restrict us from
paying dividends to our shareholders.
Because of our investment program's Approved Enterprise status, the payment
of dividends by us may be subject to certain Israeli taxes to which we would not
otherwise be subject to. The tax exempt income attributable to the Approved
Enterprise status can be distributed to shareholders without subjecting us to
taxes only upon our complete liquidation. If we decide to distribute cash
dividends out of income that has been exempt from tax, the income out of which
the dividend is distributed will be subject to Israeli corporate tax.
In the event we declare dividends in the future, we will declare those
dividends in NIS but pay those dividends to our non-Israeli shareholders in U.S.
dollars. Under current Israeli regulations, any dividends or other distributions
paid in respect of ordinary shares, may be freely repatriated in non-Israeli
currencies at the rate of exchange prevailing at the time of conversion,
provided that Israeli income tax has been paid on or withheld from such
dividends. Because exchange rates between NIS and the dollar fluctuate
continuously, a U.S. shareholder will be subject to currency fluctuation between
the date when the dividends are declared and the date the dividends are paid.
For additional discussion of Israeli tax issues involved in our payment of cash
dividends, please see "Israeli Taxation and Investment Programs."
14
<PAGE> 18
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis;
- on a pro forma basis giving effect to the conversion of all outstanding
shares of our preferred stock as of March 31, 1999 into 23,090,238
ordinary shares automatically upon the closing of this offering other
than the Series E Preferred Stock, which will not be converted
automatically; and
- on a pro forma as adjusted basis to reflect conversion of the preferred
stock and the sale of 5,500,000 ordinary shares by us and our anticipated
application of the net proceeds of the offering.
You should read this information together with BackWeb's consolidated
financial statements and the notes to those statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Line of credit and current portion of long-term
obligations............................................... $ 2,927 $ 2,927 $ --
======== ======== ========
Series B, C and D redeemable convertible preferred stock:
nominal value approximately $0.003 per share at amount
paid in; 44,737,377 shares authorized and 43,806,603
shares outstanding actual; no shares authorized or
outstanding pro forma and pro forma as adjusted
(liquidation preference of $48,712,000)................... $ 47,275 $ -- $ --
Shareholders' equity (net capital deficiency):
Series A convertible preferred stock: nominal value
approximately $0.003 per share at amount paid in;
25,464,110 shares authorized and outstanding actual; no
shares authorized or outstanding pro forma and pro forma
as adjusted (liquidation preference of $2,024,000)...... 495 -- --
Series E preferred stock: nominal value approximately
$0.003 per share at amount paid in; 1 share authorized
and outstanding actual, pro forma and pro forma as
adjusted(1)............................................. 3,454 3,454 3,454
Preferred stock, nominal value approximately $0.01 per
share; no shares authorized or outstanding actual;
50,000,000 shares authorized and no shares outstanding
pro forma and pro forma as adjusted..................... -- -- --
Ordinary shares: nominal value approximately $0.01 per
share at amount paid in; 10,000,000 shares authorized,
3,855,901 shares outstanding actual; 150,000,000 shares
authorized and 26,946,139 shares outstanding pro forma;
and 150,067,829 shares authorized and 32,446,139 shares
outstanding pro forma as adjusted(2).................... 8,314 56,084 115,764
Notes receivable from shareholders........................ (3,538) (3,538) (3,538)
Deferred stock compensation............................... (3,439) (3,439) (3,439)
Accumulated deficit....................................... (41,177) (41,177) (41,177)
-------- -------- --------
Total shareholders' equity (net capital deficiency)... (35,891) 11,384 71,064
-------- -------- --------
Total capitalization............................... $ 11,384 $ 11,384 $ 71,064
======== ======== ========
</TABLE>
- ---------------
(1) In connection with our acquisition of Lanacom, we issued to the Lanacom
selling shareholders 8,532,909 exchangeable shares of BackWeb Canada, Inc.,
a wholly owned subsidiary of BackWeb, and one share of our Series E
Preferred Stock. The exchangeable shares of BackWeb Canada, Inc. are
exchangeable for an aggregate of 2,595,501 ordinary shares.
(2) Based on the number of shares actually outstanding on March 31, 1999.
Excludes:
- 4,946,980 ordinary shares issuable upon exercise of stock options
outstanding as of March 31, 1999 at a weighted average exercise price of
$1.51 per share.
- 145,726 ordinary shares issuable upon exercise of warrants outstanding as
of March 31, 1999 at a weighted average exercise price of $3.45 per share.
- 3,646,344 ordinary shares available for future grant or issuance under our
various benefit plans as of March 31, 1999.
15
<PAGE> 19
DILUTION
Our net tangible book value as of March 31, 1999 was $10.0 million or
approximately $0.34 per share. Net tangible book value per share represents the
amount of our total tangible assets less total liabilities, divided by the
number of ordinary shares outstanding, assuming the issuance of 2,595,501
ordinary shares issuable for no additional consideration upon exchange of
BackWeb Canada exchangeable shares. Dilution in net tangible book value per
share represents the difference between the amount per share paid by purchasers
of ordinary shares in the offering made hereby and the net tangible book value
per ordinary share immediately after the completion of this offering. After
giving effect to the sale of the 5,500,000 ordinary shares offered by us hereby
and after deducting the underwriting discount and estimated offering expenses
payable by us, our net tangible book value at March 31, 1999 would have been
approximately $69.7 million, or $1.99 per share. This represents an immediate
increase in net tangible book value of $1.65 per share to existing shareholders
and an immediate dilution in net tangible book value of $10.01 per share to new
investors or ordinary shares in this offering. The following table illustrates
this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $12.00
Net tangible book value per share as of March 31, 1999.... $0.34
Increase per share attributable to new investors.......... 1.65
-----
Net tangible book value per share after the offering........ 1.99
------
Dilution in net tangible book value per share to new
investors................................................. $10.01
======
</TABLE>
The following table sets forth, as of March 31, 1999, the differences
between the number of ordinary shares purchased from us, the total consideration
paid and the average price per share paid by existing holders of ordinary shares
and by the new investors, before deducting the underwriting discount and
estimated offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- ------------------------- PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
---------- ---------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders....... 29,541,640 84% $ 56,533,000 46% $ 1.91
New investors............... 5,500,000 16 66,000,000 54 12.00
---------- --- ------------ ----
Total............. 35,041,640 100% $122,533,000 100%
========== === ============ ====
</TABLE>
The foregoing discussion and tables are based upon the number of shares
actually outstanding on March 31, 1999 and assume the issuance of 2,595,501
ordinary shares issuable for no additional consideration upon exchange of
BackWeb Canada exchangeable shares issued in connection with the Lanacom
acquisition and no exercise of options and warrants outstanding as of March 31,
1999. As of March 31, 1999, there were options outstanding to purchase 4,946,980
ordinary shares at a weighted average exercise price of $1.51 per share and
warrants outstanding to purchase 145,726 ordinary shares at a weighted average
exercise price of $3.45 per share. To the extent these options and warrants are
exercised, there will be further dilution to new investors.
16
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated statement of operations data set forth below for
the three years in the period ended December 31, 1998 and the selected
consolidated balance sheet data as of December 31, 1997 and 1998 have been
derived from our audited consolidated financial statements included elsewhere in
this prospectus. The selected consolidated statement of operations data for the
two months ended December 31, 1995 and the selected consolidated balance sheet
data as of December 31, 1995 and 1996 have been derived from our audited
consolidated financial statements not included in this prospectus. The selected
consolidated statement of operations data for the three months ended March 31,
1998 and 1999 and the consolidated balance sheet data at March 31, 1999 have
been derived from unaudited financial statements included elsewhere in this
prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that BackWeb considers
necessary for a fair presentation of its financial position at such dates and
the results of operations for those periods. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999. In addition, our
historical results are not necessarily indicative of results to be expected for
any future period. The data have been derived from financial statements that
have been prepared in accordance with U.S. GAAP and should be read in
conjunction with the Consolidated Financial Statements and the Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
TWO MONTHS ENDED
ENDED YEAR ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, ----------------------------- ----------------------
1995 1996 1997 1998 1998 1999
------------ ------- -------- -------- ------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
License................................... $ -- $ 71 $ 5,311 $ 7,980 $ 1,395 $ 3,308
Service................................... -- -- 290 1,557 184 789
------- ------- -------- -------- ------- --------
Total revenues...................... -- 71 5,601 9,537 1,579 4,097
Cost of revenues:
License................................... -- -- 182 266 55 73
Service................................... -- -- 796 1,353 297 592
------- ------- -------- -------- ------- --------
Total cost of revenues.............. -- -- 978 1,619 352 665
Gross profit................................ -- 71 4,623 7,918 1,227 3,432
Operating expenses:
Research and development.................. 120 1,781 3,955 4,555 1,277 997
Sales and marketing....................... -- 4,535 12,224 13,182 3,321 3,831
General and administrative................ 116 1,396 2,981 3,182 811 931
Amortization of goodwill, other
intangibles, and deferred stock
compensation............................ -- -- 557 1,824 401 1,202
------- ------- -------- -------- ------- --------
Total operating expenses............ 236 7,712 19,717 22,743 5,810 6,961
------- ------- -------- -------- ------- --------
Loss from operations........................ (236) (7,641) (15,094) (14,825) (4,583) (3,529)
Interest income (expense), net.............. (2) (43) 132 218 (18) (157)
------- ------- -------- -------- ------- --------
Net loss.................................... $ (238) $(7,684) $(14,962) $(14,607) $(4,601) $ (3,686)
======= ======= ======== ======== ======= ========
Basic and diluted net loss per share........ $ (6.95) $ (6.96) $ (6.07) $ (2.02) $ (1.40)
======= ======== ======== ======= ========
Shares used in computing basic and diluted
net loss per share(1)..................... 1,106 2,151 2,408 2,283 2,627
======= ======== ======== ======= ========
Pro forma basic and diluted net loss per
share (unaudited)(2)...................... $ (0.69) $ (0.16)
======== ========
Shares used in computing pro forma basic and
diluted net loss per share
(unaudited)(1)(2)......................... 21,208 23,058
======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------- MARCH 31,
1995 1996 1997 1998 1999
----- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ -- $12,068 $ 6,377 $ 6,449 $ 11,137
Working capital (deficit)................................. (36) 9,707 3,024 1,596 9,018
Total assets.............................................. 14 12,784 15,097 12,701 20,449
Long-term obligations, net of current portion............. 211 1,278 1,156 327 --
Redeemable convertible preferred stock.................... -- 16,337 25,532 37,304 47,275
Total shareholders' equity (net capital deficiency)....... (238) (7,407) (18,915) (33,178) (35,891)
</TABLE>
- -------------------------
(1) For an explanation of the number of shares used in per share computation,
see Note 1 of Notes to Consolidated Financial Statements. Loss per share for
1995 is not presented as it is not meaningful.
(2) The pro forma information gives effect to the conversion of all outstanding
shares of our preferred stock into 23,090,238 ordinary shares as of March
31, 1999 automatically upon the closing of the offering, other than the one
share of Series E Preferred Stock which will not be converted automatically.
17
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information, the discussion in this report contains
forward-looking statements that involve risks and uncertainties. These
forward-looking statements include, among others, those statements including the
words, "expects," "anticipates," "intends," "believes" and similar language. Our
actual results could differ materially from those discussed herein. Factors that
could cause or contribute to such differences include, but are not limited to
the risks discussed in the section titled "Risk Factors" in this prospectus.
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 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
18
<PAGE> 22
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.
19
<PAGE> 23
RESULTS OF OPERATIONS
BackWeb's historical operating results for the years ended December 31,
1997 and 1998
and for the three months ended March 31, 1998 and 1999 as a percentage of net
revenues, are as follows:
<TABLE>
<CAPTION>
THREE MONTHS
FISCAL YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
------------------ ---------------
1997 1998 1998 1999
------- ------- ------ -----
<S> <C> <C> <C> <C>
Revenues:
License............................................. 94.8% 83.7% 88.3% 80.7%
Service............................................. 5.2 16.3 11.7 19.3
------ ------ ------ -----
Total revenues................................. 100.0 100.0 100.0 100.0
Cost of revenues:
License............................................. 3.3 2.8 3.5 1.8
Service............................................. 14.2 14.2 18.8 14.4
------ ------ ------ -----
Total cost of revenues......................... 17.5 17.0 22.3 16.2
------ ------ ------ -----
Gross margin.......................................... 82.5 83.0 77.7 83.8
------ ------ ------ -----
Operating expenses:
Research and development............................ 70.6 47.8 80.9 24.4
Sales and marketing................................. 218.3 138.2 210.3 93.5
General and administrative.......................... 53.2 33.4 51.4 22.7
Amortization of goodwill, other intangibles and
deferred stock compensation...................... 9.9 19.1 25.4 29.3
------ ------ ------ -----
Total operating expenses....................... 352.0 238.5 368.0 169.9
------ ------ ------ -----
Loss from operations.................................. (269.5) (155.5) (290.3) (86.1)
Interest income (expense), net........................ 2.4 2.3 (1.1) (3.9)
------ ------ ------ -----
Net loss.............................................. (267.1)% (153.2)% (291.4)% (90.0)%
====== ====== ====== =====
</TABLE>
- ---------------
Because revenues from inception through December 31, 1996 totalled $71,000,
a comparison of our operating results as a percentage of net revenues during
that period or against percentages from later periods is not meaningful.
THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
BackWeb incurred a net loss of approximately $3.7 million for the three
months ended March 31, 1999 compared to a net loss of $4.6 million for the three
months ended March 31, 1998.
REVENUES
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. Net revenues increased approximately $2.5
million or 159% from $1.6 million in the three months ended March 31, 1998 to
$4.1 million in the three months ended March 31, 1999. The increase was due to
growth in license revenues. Customers outside of the United States accounted for
18.0% of revenues in the three months ended March 31, 1999 compared to 16.5% of
revenues in the three months ended March 31, 1998.
License revenues were $3.3 million or 80.7% of revenues in the three months
ended March 31, 1999 compared to $1.4 or 88.3% of revenues in the three months
ended March 31, 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 $789,000 or 19.3% of revenues in
the three months ended
20
<PAGE> 24
March 31, 1999 compared to $184,000 or 11.7% of revenues in the three months
ended March 31, 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 $665,000 or 16.2% of revenues for the
three months ended March 31, 1999 compared to $352,000 or 22.3% of revenues for
the three months ended March 31, 1998. The increase in cost of revenues on an
absolute basis was primarily due to growth of our service organization in 1999.
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 $73,000 or 1.8% of revenues
for the three months ended March 31, 1999 compared to $55,000 or 3.5% of
revenues for the three months ended March 31, 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 $592,000, or 14.4% of revenues, in the
three months ended March 31, 1999 compared to $297,000 or 18.8% of revenues, in
the three months ended March 31, 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 AND 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
$997,000 in the three months ended March 31, 1999 compared to $1.3 million in
the three months ended March 31, 1998. The decrease was due to the consolidation
of our research and development facilities in Jerusalem and Ramat Gan.
We believe significant investment in research and development is essential
to our future success and expect that research and development expenses will
increase on an absolute basis but decrease as a percentage of revenues in future
periods.
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 $3.8
million in the three months ended March 31, 1999 compared to $3.3 million in the
three months ended March 31, 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 $931,000 in the
three months ended March 31, 1999 compared to $811,000 in the three months ended
March 31, 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.
21
<PAGE> 25
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 March 31, 1999 and amortization of
goodwill and other intangibles only for the three months ended March 31, 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 $1.2 million in the three
months ended March 31, 1999 compared to $401,000 in the three months ended March
31, 1998. The increase in amortization expense was due to deferred stock
compensation expense of $807,000 that was recorded in the three months ended
March 31, 1999.
We currently expect to record amortization of goodwill, other intangibles
and deferred stock compensation of approximately $4.1 million in 1999, $1.3
million in 2000, $572,000 in 2001 and $235,000 in 2002.
INTEREST INCOME (EXPENSE), NET
Interest 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. Net interest expense was $157,000 in
the three months ended March 31, 1999 compared to $18,000 in the three months
ended March 31, 1998. The increase in interest expense was due to interest
payments pursuant to loan agreements.
YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996
REVENUES
Net revenues were $9.5 million in 1998, $5.6 million in 1997 and $71,000 in
1996. The increase in revenues from 1997 to 1998 was attributable to an increase
in both license revenues and service revenues. The increase in revenues from
1996 to 1997 was due primarily to an increase in license revenues. During 1996,
we had insignificant revenues as we were in the development stage. Revenues from
customers outside of the United States accounted for 20.6% of revenues in 1998
and 11.1% of revenues in 1997. No customer, domestic or international, accounted
for more than 10% of revenues during 1998. However, in 1997, revenues from two
customers represented 19% and 11% of revenues.
License revenues were $8.0 million, or 83.7% of revenues, in 1998, compared
to $5.3 million, or 94.8% of revenues in 1997. The increase in license revenues
was primarily due to the growth of our customer base, recurring sales to our
installed base and an increase in average transaction size.
Service revenues were $1.6 million, or 16.3% of revenues, in 1998, compared
to $290,000, or 5.2% of revenues in 1997. The increase in service revenues both
on an absolute basis and as a percentage of revenues was primarily due to
increased revenues from customer maintenance and consulting services as a result
of our efforts to build our customer support and professional services
organizations, a greater number of licenses and the complexity of larger
deployments.
COST OF REVENUES
Cost of revenues was $1.6 million, or 17.0% of revenues, for 1998 as
compared to $978,000, or 17.5% of revenues, for 1997. The increase in cost of
revenues was due to our increased revenues in 1998. The decrease in cost of
revenues as a percentage of revenues was due to increased utilization of our
customer support and professional services organization in 1998.
Cost of license revenues was $266,000, or 2.8% of license revenues, in
1998, com-
22
<PAGE> 26
pared to $182,000, or 3.3% of license revenues, in 1997. We expect cost of
license revenues to increase on an absolute basis as a result of increased
license revenues, but remain a small percentage of license revenues.
Cost of service revenues was $1.4 million in 1998, as compared to $796,000
in 1997. The increase was due primarily to the increased headcount in our
professional services organization and to a lesser extent, our technical support
group. Cost of service revenues in 1997 reflects the establishment of the
service organization infrastructure to support future growth.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses were $4.6
million in 1998, $4.0 million in 1997 and $1.8 million in 1996. The increases in
research and development expenses were primarily due to the integration of
former Lanacom employees into our research and development organization in
August 1997.
SALES AND MARKETING. Sales and marketing expenses were $13.2 million in
1998, $12.2 million in 1997 and $4.5 million in 1996. The increases in sales and
marketing expenses were primarily due to our efforts to expand our marketing
programs worldwide, increase brand awareness for our products and adjustments in
our sales force created by our shift from a consumer-oriented to an
enterprise-oriented strategy.
GENERAL AND ADMINISTRATIVE. General and administrative expenses totaled
$3.2 million in 1998, $3.0 million in 1997, and $1.4 million in 1996. The
increases in general and administrative expenses were due primarily to increased
personnel and related overhead to support our growth.
AMORTIZATION OF GOODWILL, OTHER INTANGIBLES AND DEFERRED STOCK
COMPENSATION. Amortization of goodwill, other intangibles and deferred stock
compensation expenses totaled $1.8 million in 1998 and $557,000 in 1997.
INTEREST INCOME (EXPENSE), NET
Net Interest and other income was $218,000 in 1998 and $132,000 in 1997 and
net interest expense was $43,000 in 1996.
INCOME TAXES
As of December 31, 1998, we had approximately $30.0 million of Israeli net
operating loss carryforwards and $1.0 million of U.S. federal net operating loss
carryforwards and of $4.5 million of other foreign net losses carryforwards for
tax reporting purposes available to offset future taxable income. The U.S. net
operating loss carryforwards expire in various amounts between the years 2011
and 2018. The Israeli net operating loss carryforwards have no expiration date.
23
<PAGE> 27
QUARTERLY OPERATING RESULTS
The following table presents our unaudited consolidated quarterly results
of operations for our most recent seven quarters. This data is unaudited. The
financial information has been prepared on the same basis as our annual
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial results set
forth therein. Such statement of operations data should be read in conjunction
with the Consolidated Financial Statements and related Notes thereto in this
prospectus. Our results of operations have fluctuated and are likely to continue
to fluctuate significantly from quarter to quarter. Results of operations for
any previous quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1997 1997 1998 1998 1998 1998 1999
--------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA
Revenues:
License................................... $ 1,606 $ 2,332 $ 1,395 $ 1,727 $ 2,127 $ 2,731 $ 3,308
Service................................... 123 150 184 307 303 763 789
------- ------- ------- ------- ------- ------- -------
Total revenues........................ 1,729 2,482 1,579 2,034 2,430 3,494 4,097
Cost of revenues:
License................................... 70 75 55 74 45 92 73
Service................................... 229 212 297 353 361 342 592
------- ------- ------- ------- ------- ------- -------
Total cost of revenues................ 299 287 352 427 406 434 665
Gross profit................................ 1,430 2,195 1,227 1,607 2,024 3,060 3,432
Operating expenses:
Research and development.................. 1,186 1,407 1,277 1,201 1,105 972 997
Sales and marketing....................... 3,039 3,407 3,321 3,267 3,268 3,326 3,831
General and administrative................ 710 1,160 811 693 756 922 931
Amortization of goodwill, other
intangibles and deferred stock
compensation............................ 186 371 401 401 401 621 1,202
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 5,121 6,345 5,810 5,562 5,530 5,841 6,961
Loss from operations........................ (3,691) (4,150) (4,583) (3,955) (3,506) (2,781) (3,529)
Interest income (expense), net.............. (39) (96) (18) 37 186 13 (157)
------- ------- ------- ------- ------- ------- -------
Net loss.................................... $(3,730) $(4,246) $(4,601) $(3,918) $(3,320) $(2,768) $(3,686)
======= ======= ======= ======= ======= ======= =======
AS A PERCENTAGE OF NET SALES
Revenues:
License................................... 92.9% 94.0% 88.3% 84.9% 87.5% 78.2% 80.7%
Service................................... 7.1 6.0 11.7 15.1 12.5 21.8 19.3
------- ------- ------- ------- ------- ------- -------
Total revenues............................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenues:
License................................... 4.0 3.0 3.5 3.6 1.9 2.6 1.8
Service................................... 13.2 8.5 18.8 17.4 14.9 9.8 14.4
------- ------- ------- ------- ------- ------- -------
Total cost of revenues.................... 17.2 11.5 22.3 21.0 16.8 12.4 16.2
Gross profit................................ 82.8 88.5 77.7 79.0 83.2 87.6 83.8
Operating expenses:
Research and development.................. 68.6 56.7 80.9 59.0 45.5 27.8 24.4
Sales and marketing....................... 175.8 137.3 210.3 160.6 134.5 95.2 93.5
General and administrative................ 41.1 46.7 51.4 34.1 31.1 26.4 22.7
Amortization of goodwill, other
intangibles and deferred stock
compensation............................ 10.8 14.9 25.4 19.7 16.5 17.8 29.3
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 296.3 255.6 368.0 273.4 227.6 167.2 169.9
Loss from operations........................ (213.5) (167.1) (290.3) (194.4) (144.4) (79.6) (86.1)
Interest income (expense), net.............. (2.3) (3.9) (1.1) 1.8 7.7 0.4 (3.9)
------- ------- ------- ------- ------- ------- -------
Net loss.................................... (215.8)% (171.0)% (291.4)% (192.6)% (136.7)% (79.2)% (90.0)%
======= ======= ======= ======= ======= ======= =======
</TABLE>
24
<PAGE> 28
Our quarterly revenues were $1.6 million in the first quarter of 1998 as
compared to $2.5 million in the fourth quarter of 1997, primarily as a result of
our efforts to transition from a consumer-oriented to an enterprise-oriented
strategy. Since the first quarter of 1998 our revenues have grown in each
quarter.
Our operating results may fluctuate significantly in the future as a result
of a variety of factors, many of which are outside of our control. Additionally,
as a strategic response to a changing competitive environment, we may elect from
time to time to make certain pricing, service, marketing or acquisition
decisions that could have a negative effect on our quarterly financial
performance. Our past has shown that a significant percentage of our quarterly
revenues come from orders placed by a small number of customers and are realized
toward the end of a quarter. A delay in the execution of a sale past the end of
a particular quarter could negatively impact results for that particular
quarter. In addition, we expect that revenues in the first quarter of each year
will be lower than the last quarter of the previous year primarily due to the
annual nature of budgetary, procurement and sales cycles.
LIQUIDITY AND CAPITAL RESOURCES
Since our inception, we have funded operations primarily through the
private placement of our equity securities, equipment lease financings and
borrowings. As of March 31, 1999, we had cash and cash equivalents of $11.1
million. Cash used by operations include expenditures associated with
development activities and marketing efforts related to commercialization of our
products. In the three months ended March 31, 1999, cash used in operations was
$5.0 million. In 1998, cash used in operations was $11.9 million, comprised of
the net loss of $14.6 million and partially offset by noncash charges of $2.5
million. In 1997, cash used in operations was $15.5 million comprised of the net
loss of $15.0 million, an increase in accounts receivable of $3.3 million,
partially offset by noncash charges of $917,000 and an increase in deferred
revenues of $1.0 million.
We have made investments in hardware, software, and furniture and fixtures.
Expenditures on property and equipment were approximately $134,000 in the three
months ended March 31, 1999, $390,000 in 1998, $860,000 in 1997 and $498,000 in
1996.
We have raised approximately $48.0 million, net of issuance costs, from
equity sales since our inception through March 31, 1999. In the three months
ended March 31, 1999, we raised $9.9 million through the sale of preferred
shares. In 1998, we raised $11.8 million through the sales of preferred shares.
In 1997, we raised $9.2 million through the sales of preferred shares. In 1996,
we raised $16.8 million through sales of preferred shares. From inception
through March 31, 1999, we raised $309,000 through the issuance of our ordinary
shares pursuant to the exercise of stock options.
Additionally, we have used debt to partially finance our operations and
capital purchases. In December 1998, we entered into a $6.5 million secured
credit facility which is secured by substantially all of our assets. This
facility includes a $1.5 million equipment line, a $3.0 million receivable line
and a $2.0 million non-formula facility. At March 31, 1999, we had borrowed $2.0
million under the non-formula facility which bears interest at the rate of prime
plus 4% per annum. In 1995 and 1996 we obtained loans from some of our
shareholders in the aggregate amount of $1.2 million of which $927,000 remained
outstanding as of March 31, 1999. The loans are linked to the Israeli consumer
price index. The loans do not bear interest and are payable at a rate of 2.5% of
cumulative consolidated revenues in excess of $5.0 million. We intend to repay
these loans with the proceeds from this offering.
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
25
<PAGE> 29
worldwide and for other general corporate activities. We believe that our
current cash balances along with the proceeds raised from this 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" and Note
9 to the Consolidated Financial Statements.
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 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 4.04 for one U.S. dollar on March 31,
1999.
YEAR 2000
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
invento-
26
<PAGE> 30
ried 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 July 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.
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. Backweb regularly assesses these risks and has
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.
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 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
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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.
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BUSINESS
BACKWEB TECHNOLOGIES, LTD.
BackWeb is a leading provider of Internet communication infrastructure
software and application-specific software that enables companies to communicate
business-critical, time-sensitive information throughout their extended
enterprise of customers, partners and employees. Our products provide a reliable
solution for communicating large amounts of data in any digital format by
enabling our customers to automatically gather and disseminate information. Our
products efficiently disseminate this information across a network of any speed
by automatically adapting the rate of transmission to match available bandwidth.
Our infrastructure software, BackWeb Foundation, is a platform that allows
organizations to efficiently gather, target and deliver sizeable digital data of
any format to users' desktops throughout the extended enterprise. We work with
our customers, partners and third-party software vendors to develop applications
built on top of BackWeb Foundation. We have also developed our own application,
BackWeb Sales Accelerator. BackWeb Sales Accelerator enables a geographically
dispersed sales organization to stay instantly updated about competitive and
customer information from external sources, internal sales and marketing
materials, product pricing information, business applications and critical
management announcements.
INDUSTRY BACKGROUND
The Internet has changed the nature of business operations and competition.
Companies, their suppliers, customers and employees now have the means to
conduct business electronically, commonly referred to as e-business. As a
result, it is now possible for new competitors to enter and disrupt established
markets virtually overnight. The spread of electronic commerce has endowed
business customers and consumers with the ability to change vendors at the click
of a button. To compete effectively, companies need to react quickly to changing
market conditions, accelerate critical business processes and stay in closer
contact with sales people, partners and customers. To address these challenges,
companies must be able to effectively communicate the right information to the
right people at the right time. Existing Internet communication methods fall
short of the requirements of this new business environment, as these methods do
not overcome the network congestion, information overload and lack of
reliability characteristic of today's networks.
Companies face the complex challenge of reacting quickly to changes in the
competitive landscape and reliably communicating and tracking time-sensitive,
business-critical information throughout their extended enterprise. The
ineffectiveness of overloaded e-mail systems, passive websites and other
existing means of communication has impeded communication of information between
organizations and their customers, partners and employees. Companies using
existing means of communication are often unable to prioritize and personalize a
communication so that it receives the appropriate level of attention. Once a
communication is sent, companies cannot easily track the communication to ensure
it was received and interacted with, and further, are unable to elicit feedback.
In addition, recipients are inundated with information and lack an effective
means of immediately determining the importance and relevance of information
received, assigning priorities to that information and communicating their
responses. Consequently, recipients often react to this flood of information by
ignoring it or failing to respond in a timely manner. This often results in lost
business opportunities and foregone revenues.
Companies that need to communicate large amounts of digital data are often
limited by the capacity of their network connections and resources.
Bandwidth-intensive data, such as audio, video and multimedia presentations,
software applications and updates, overloads the constrained network resources
of the extended enterprise. Meanwhile, the recipients of large data files are
forced to either disrupt their work in progress or to postpone the download of
the
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file, which may be extremely time-sensitive. These problems are compounded when
users are remote or mobile and become even more complicated when multiple
networks interact.
We believe that in order for the Internet to be used efficiently as an
effective communication medium across the extended enterprise, a complementary,
more sophisticated infrastructure must be introduced. This new communication
infrastructure must:
- permit the prioritization of communications to ensure that users are
presented with relevant information in a manner designed to ensure that
these communications receive the appropriate level of attention;
- communicate large amounts of digital data in any format quickly and
efficiently with a minimal impact on the network of a company and its
extended enterprise;
- permit tracking of the communication by management and the interaction
between management and the user; and
- be an open platform that facilitates the development of applications that
are scalable and easy to deploy.
THE BACKWEB SOLUTION
We develop, market and support Internet communication infrastructure and
applications software that enables companies to communicate business-critical
information to their customers, partners and employees. Our software enables
companies to efficiently target, deliver and track the use of sizeable digital
data in any format throughout their extended enterprise. Using our products and
technology, companies can ensure that the right information reaches the right
people at the right time.
Our products and technology provide the following benefits:
IMPROVE NETWORK EFFICIENCY AND BANDWIDTH UTILIZATION
Our unique technology significantly increases the efficiency and
reliability of communications over the Internet. Our Polite Agent technology
adapts the rate of transmission to match the bandwidth that is available to
ensure that BackWeb-generated traffic does not interfere with other network
traffic on the desktop connection. Our Polite Proxy server technology adapts
BackWeb traffic to utilize available bandwidth on the wide area network, or WAN,
connection. Our Polite Neighborcast technology enables each BackWeb client to
serve as an intelligent cache for other BackWeb clients. As a result, data is
delivered only once to a local area network, or LAN, after which it is
intelligently distributed to neighboring clients, thereby resulting in a fast
and efficient distribution of data. Our network efficiency is further enhanced
by our ability to reduce redundant network traffic by automatically transmitting
only the information that has changed since the user's previous download. In
addition, if a transmission is interrupted, it resumes at the point where it was
cut off, thereby eliminating the need to re-send the entire transmission. As a
result of these capabilities, data transmission across the extended enterprise
is scalable, transparent and efficient.
PRIORITIZE AND CONTROL THE COMMUNICATIONS FLOW
Our software enhances the management of critical information throughout the
extended enterprise. Companies can readily control the destination, access
rights and priority of information being communicated. Business managers can use
our software to determine the effectiveness of their communications through
reports on delivery, usage and interactions. In addition, our products can close
the communication loop by allowing managers to collect feedback from users and
process, review and communicate this feedback throughout the extended
enterprise. Further, business managers can use our tools to automate the
collection and dissemination of information from digital sources such as news
feeds, databases, legacy systems and competitors' websites, resulting in reduced
management time and resources dedicated to data acquisition.
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CAPTURE IMMEDIATE ATTENTION TO CRITICAL INFORMATION
Our unique attention management technology incorporates intelligent
notification techniques to address the challenge of capturing attention in a
world of growing information overload. Our software increases the effectiveness
of communications throughout the extended enterprise by personalizing the
distribution of information. For example, the communication can be customized to
require the user to acknowledge receipt of the information or to automatically
launch a designated application. In addition, not only can business managers
determine the recipients of particular information, but recipients can also
subscribe to various information sources. These capabilities ensure recipients
that the information being received is important to them, and, as a result,
significantly increases the likelihood that it will be reviewed and acted upon.
In addition, the ability to elicit return responses results in greater
effectiveness of the overall communication.
STRATEGY
Our objective is to establish ourselves as the leading provider of Internet
communication infrastructure and applications software. The key elements of this
strategy include:
BECOME THE DE FACTO STANDARD FOR INTERNET COMMUNICATION INFRASTRUCTURE
We intend to establish BackWeb Foundation as the leading infrastructure
software platform for Internet communication. We believe that the recent
adoption of BackWeb Foundation by leading companies across various industries
validate our technology and should facilitate its broad market acceptance. In
addition, we believe that the selection of our products by industry leaders
should promote the adoption of our Internet communication solution by these
companies' partners, suppliers and distributors. We also believe that this
adoption, along with the competitive advantages achieved with our products, will
drive other industry participants to adopt our products as their preferred
solution. We intend to continue to focus our development efforts on increasing
the functionality and flexibility of BackWeb Foundation to facilitate its
continued adoption and to increase the technological barriers to entry.
LEVERAGE INFRASTRUCTURE PLATFORM TO INTRODUCE MULTIPLE INTERNET COMMUNICATION
APPLICATIONS
Our core technology has been designed as an open platform upon which
BackWeb, our customers, our partners and third-party vendors can develop
Internet communication applications that are easy to deploy and to which
additional capabilities can easily be added. We actively market and support our
first application built on top of our infrastructure software, BackWeb Sales
Accelerator, which enables companies to focus the attention of their sales
forces, partners and customers on timely, business-critical information. We
intend to increase our product offerings by introducing new applications,
developed both internally and through third-parties, targeted at various
business functions throughout the extended enterprise.
FOCUS ON SELECTED VERTICAL MARKETS
We target selected vertical markets where we believe our solutions offer
significant value. To date, these markets have included telecommunications, high
technology, financial services, retail and travel services. Within each
industry, we typically target the leader and then leverage our success to
generate additional sales to other companies in that market. We also partner
with large applications vendors and systems integrators that serve these
vertical markets. Through these strategic partnerships, we are able to
significantly expand our installed base as our products are incorporated into
the vendor's products and systems integrator's custom-developed applications. We
and our partners can, in turn, use this installed base to develop and market
BackWeb Foundation and additional BackWeb Foundation-based applications.
EXTEND TECHNOLOGICAL LEADERSHIP POSITION
We intend to continue to devote substantial resources to the development of
new and innovative software products and technologies. We believe that our early
understanding
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and penetration of the market for Internet communication infrastructure software
has allowed us to establish technological leadership and a time-to-market
advantage. We intend to extend our leadership position and build further
technological barriers to entry by enhancing the functionality of our current
BackWeb Foundation infrastructure software platform and developing innovative
applications on top of it.
EXPAND DIRECT AND INDIRECT DISTRIBUTION CHANNELS
We have established a direct sales force in the United States and Canada
and use a combination of direct and indirect channels in Europe and Japan. We
intend to increase the size of our direct sales force and to establish
additional sales offices both domestically and internationally. We intend to
continue to complement our direct sales force by establishing multiple
additional indirect distribution channels worldwide through original equipment
manufacturers, large applications vendors and systems integrators. These
indirect channels are intended to increase geographic sales coverage and address
potential customers that would otherwise be beyond the reach of our direct sales
organization.
TECHNOLOGY AND PRODUCTS
We currently sell BackWeb Foundation and BackWeb Sales Accelerator. We
license BackWeb Foundation to customers, developers and independent software
vendors, thereby enabling them to integrate their own applications or
third-party applications with our infrastructure software platform. BackWeb
Sales Accelerator provides our customers with a packaged application that
incorporates BackWeb Foundation.
TECHNOLOGY
Our infrastructure software platform is powered by three core technologies
that we have developed: Polite Communications, Attention Management and Closed
Loop Delivery.
POLITE COMMUNICATIONS. Polite Communications enables the transmission of
significant volumes of digital data through existing networks without
interfering with normal network applications and traffic. Polite Communications
enables companies to provide any user with rapid communication of
bandwidth-intensive data, regardless of whether they utilize high-speed data
access services. This bandwidth-sensitive delivery is accomplished through the
use of various components including the following:
- POLITE AGENT monitors the network activity of the client workstation and
communicates with BackWeb servers only when the connection is idle.
- POLITE PROXY monitors wide area network, or WAN, connections in the same
manner, using available bandwidth.
- POLITE NEIGHBORCAST enables the automatic transmission of digital data
from one BackWeb Client to others on the same local area network, or LAN,
obviating the need for transmission of the data from the server to each
BackWeb Client. The transmission from BackWeb Client to BackWeb Client on
the same LAN is a fast, efficient and cost-effective means of
disseminating the data.
- POLITE UPSTREAM enables the automatic transmission of digital data from
BackWeb Clients to the BackWeb Server when the network connection is
idle.
Polite Communications further improves the efficiency of transmission by
reducing the amount of data to be transmitted through various techniques,
including:
- compression of data;
- updating only the information which has changed since the user's previous
download; and
- eliminating the need to re-send an interrupted transmission by
progressively resuming the transmission at the point where it was
interrupted.
ATTENTION MANAGEMENT AND FLASH NOTIFICATIONS. Attention Management is an
automatic notification system that alerts users to the delivery of
business-critical information through a variety of display techniques including
tickers and Flash notifications. These
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techniques enable companies to attract immediate attention to time-sensitive
information. Flashes are a particular display technique that can be customized
to notify users and, if desired, can allow management to track the usage of the
information. For example, the recipient can be required to acknowledge their
receipt of the information, or to immediately launch and interact with a
designated application. In addition, Attention Management displays can be
programmed to play automatically according to specific scheduling and expiration
parameters, after which the information and associated data can be automatically
purged.
CLOSED LOOP DELIVERY. Our Closed Loop Delivery capabilities allow companies
to track, manage and survey the effectiveness of communications throughout their
extended enterprise. Companies can track the status and use of any digital data
delivered via BackWeb or generate reports on the overall usage of the system on
a per-user or per-content basis. Using these reports, companies can determine
what types of communication are most effective or most popular and adapt their
communication strategy appropriately.
PRODUCTS
BACKWEB FOUNDATION. Our infrastructure software platform, BackWeb
Foundation, is based on a set of flexible components including BackWeb Server,
BackWeb Client and BackWeb Add-On Components. These components enable an
organization to capture information from virtually any data source, including
websites, file servers, databases, applications and legacy systems, and
efficiently and reliably deliver it throughout its extended enterprise. BackWeb
Server is a software server which runs on standard hardware servers, and
communicates with BackWeb Client, our software program operating on personal
computers or workstations.
BackWeb Server. BackWeb Server communicates with BackWeb Clients and is
capable of receiving digital data from various sources, such as the Internet,
intranet sites, databases, applications and legacy systems and automatically
distributes that data to BackWeb Clients. The BackWeb Server is highly scalable
and optimized to support a large number of clients concurrently. Components of
BackWeb Server include:
- BackWeb Server Console. A console that allows a system administrator to
manage BackWeb Server and control the information flow across the
enterprise through a point-and-click graphical user interface.
- BackWeb Server Extension API. An application programming interface that
allows companies to integrate the BackWeb Server with any digital data
source, enabling automated publishing of content or files from any source
to the BackWeb Server.
- BackWeb Automation SDK and Automation Editor. Includes application
programming interfaces and a library of BackWeb-supplied programs which
perform tasks between the BackWeb Server and external data sources.
- BackWeb BALI Editor. Our BackWeb Authoring Language Interface Editor is
used by companies to create and modify Flashes.
BackWeb Client. BackWeb Client, our software program operating on personal
computer or workstations, operates in the background and communicates with
designated BackWeb Servers during the idle time of a user's network connection,
thereby allowing the user to receive data transparently while using other
applications without disruption. BackWeb Client:
- displays information through Flashes and other displays and user
interfaces, which may be customized;
- provides an application programming interface to enable customer and
third-party applications to integrate with BackWeb Client; and
- can be deployed by a single automatic installation file of less than 100k
in size that can be sent to the user via the Internet, e-mail or floppy
disk.
BackWeb Add-On Components. BackWeb Foundation, our infrastructure software
plat-
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form, also includes the following add-on components:
- BackWeb Enhanced Security Module. Provides encrypted communications
between BackWeb Server and BackWeb Clients and certificate authentication
of data packages. This module incorporates industry standard technologies
from RSA Data Security and Verisign.
- BackWeb AutoFile Update Manager. Enables the automatic replication of
files or file directories from any directory accessible to the BackWeb
Server. Allows the placement of the replicated files in any location on
the user's system. Allows management to have complete flexibility over
the organization of information on the user's desktop.
- StarBurst Connector. In cooperation with StarBurst, we created optional
add-ons to the BackWeb Server and BackWeb Client that allow them to
communicate via StarBurst's multicasting Internet protocol. These add-ons
work in concert with our protocols to provide a deeply integrated
communications solution for customers with multicast Internet protocol
environments.
- NewsEdge and Reuters BackWeb Connectors. In cooperation with the NewsEdge
and Reuters corporations, we created a pre-packaged set of connectors to
their content for the automatic feed of information channels from
NewsEdge and Reuters, respectively, to a customer's BackWeb Server.
- BackWeb Polite Proxy Server. A software server that:
-- caches frequently accessed material for a group of BackWeb clients,
eliminating the need for redundant data transfers from a company's
server;
-- monitors the WAN connection and communicates only when the network
connection is below a certain threshold; and
-- enables a system administrator to manage the BackWeb Proxy Server
Console.
BACKWEB SALES ACCELERATOR. In December 1998, we introduced BackWeb Sales
Accelerator, our first packaged application built on BackWeb Foundation. BackWeb
Sales Accelerator allows companies to keep their extended enterprise equipped
with the most up-to-date documents, market information and management
announcements by automating the collection and dissemination of business
critical information. This application is targeted at companies that need to
communicate to geographically dispersed sales forces and indirect sales channels
to accelerate their business execution and response time to critical changes
affecting their business. Examples of information typically communicated by
BackWeb Sales Accelerator include:
- competitive and industry news and announcements;
- new pricing policies and updated price lists;
- product release announcements and associated fact sheets, white papers,
and training materials;
- new or updated software tools;
- critical executive announcements, in video or other formats, regarding
company acquisitions or strategic priorities; and
- new or modified sales presentations and demonstrations.
BackWeb Sales Accelerator consists of the Market Intelligence Manager,
Strategic Publishing Manager and Automated Marketing Encyclopedia modules:
- Market Intelligence Manager automatically monitors, collects and
organizes information from Internet or intranet sites to keep an
organization's sales force abreast of the latest industry news,
competitive announcements and customer information.
- Strategic Publishing Manager enables managers to publish and direct the
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immediate attention of their constituents to time-sensitive and business
critical information. Editorial, publishing and access rights are
centrally controlled. The published information can be disseminated to
users' desktops using our Flash technology.
- Automated Marketing Encyclopedia enables a company to create a library of
sales information and productivity software to which extended enterprise
users can subscribe. Once subscribed, users automatically receive this
information, software and any subsequent updates.
CUSTOMERS
We sell our products to a broad base of customers from a variety of
industries, including telecommunications, high technology, financial services,
retail and travel services. Our customers include industry leaders such as:
AT&T, barnesandnoble.com, British Telecom, Carlson Travel, Cisco Systems,
Compaq, Computer Associates, Delta Airlines, Electronic Data Systems, Fidelity
Investments, Galileo, Gateway, Goldman Sachs, Hewlett-Packard, AC Nielsen,
Network Associates, o.tel., Pacific Bell, RiteAid, Schlumberger and Siemens.
In 1997, revenues from Computer Associates and CompuServe represented 19%
and 11%, respectively, of our revenues. In 1998, no customer accounted for more
than 10% of our revenues.
SALES AND MARKETING
Our sales strategy is to pursue opportunities with large accounts and
industry leaders through our direct sales force, and to penetrate various
targeted market segments through multiple indirect distribution channels and
strategic partnerships.
We maintain direct sales personnel in the United States, Canada, Japan and
Europe. The direct sales force consists of sales representatives, systems
engineers and telemarketing representatives.
We intend to increase the size of our direct sales force and to establish
additional sales offices domestically and internationally. Competition for sales
personnel is intense, and we may not be able to attract, assimilate or retain
additional qualified personnel in the future.
We also partner with large applications vendors and systems integrators
that serve our target markets. Through these strategic partnerships, we are able
to significantly expand our installed base as our products are incorporated into
the vendor's products and systems integrator's custom-developed applications.
This installed base can, in turn, be leveraged by us and our partners to develop
and market BackWeb Foundation and additional BackWeb Foundation-based
applications. We are in the early stages of building these channels and
currently have entered into written agreements with a limited number of
companies. We may not be able to enter into agreements or establish
relationships with desired distribution partners on a timely basis or ensure
that such distribution partners will devote adequate resources to selling our
products.
We believe it is important to have a strong international presence. We have
established sales offices in the United States, Canada, Japan and a number of
countries in Europe. We intend to hire additional sales and marketing personnel
in these offices and to establish additional offices to support our
international operations.
We market our products using public relations activities, partners
marketing, advertising, trade shows and marketing and sales materials.
CUSTOMER SERVICE AND SUPPORT
We are in the process of developing a comprehensive service and support
organization. Our services are primarily comprised of technical support,
consulting and training.
Our technical support is provided to our customers on an annual basis for
an additional fee. This support includes remote assistance with installation,
configuration and initial set-up of the application, run-time support and
software maintenance releases.
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We also provide consulting, training and on-site installation services. We
expect to expand our variety of services both directly and through third-party
relationships in order to meet the growing needs of our customers.
RESEARCH AND DEVELOPMENT
We believe that strong product development capabilities are essential to
our strategy of enhancing our core technology, developing additional
applications, incorporating that technology and maintaining the competitiveness
of our product and service offerings. We have invested significant time and
resources in creating a structured process for undertaking all product
development projects.
In addition, we have actively recruited key computer scientists, engineers
and software developers and have complemented these individuals by hiring senior
management with backgrounds in the commercial software development industries.
Through our acquisition of Lanacom, we enhanced our research and development
capabilities, particularly with respect to the development of software
applications.
Since our inception, we have focused our research and development efforts
on developing and enhancing BackWeb Foundation and BackWeb Sales Accelerator.
BackWeb is currently working on new applications and adding features and new
functionality to our products. Our research and development expenses totaled
$997,000 for the three months ended March 31, 1999, $4.6 million for the year
ended December 31, 1998, $4.0 million for the year ended December 31, 1997, and
$1.8 million for the year ended December 31, 1996.
COMPETITION
We compete in markets that are new, intensely competitive, highly
fragmented and rapidly changing. We have experienced and expect to continue to
experience increased competition from current and potential competitors. Many of
these companies have greater name recognition, longer operating histories,
larger customer bases and significantly greater financial, technical, marketing,
public relations, sales, distribution and other resources. In addition, some of
our potential competitors are among the largest and most well-capitalized
software companies in the world. We expect to face competition from these and
other competitors, including:
- companies addressing certain segments of our market such as Marimba and
Tibco;
- sales force automation and enterprise resource planning, or ERP, vendors
that may introduce products competitive to BackWeb Sales Accelerator; and
- communications and information management platform companies such as IBM
and its subsidiary Lotus Development Corporation, Microsoft and Sun
Microsystems.
Additional competition could come from operating system vendors, online
service providers, client/server applications and tools vendors, multimedia
companies, document management companies and network management vendors. If any
of our competitors were to become the industry standard or were to enter into or
expand relationships with significantly larger companies through mergers,
acquisitions or otherwise, our business and operating results could be seriously
harmed. In addition, potential competitors may bundle their products or
incorporate functionality into existing products in a manner that discourages
users from purchasing our products.
We expect that competition will increase in the near term and that our
primary long-term competitors may not have entered the market yet. Increased
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.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
Our products and services operate in part by making copies of material
available on the Internet and other networks and making this material available
to end-users from a central location. This creates the potential for claims to
be made against us, either directly or through contractual indemnification
provisions
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with customers, including defamation, negligence, copyright or trademark
infringement, personal injury, invasion of privacy or other legal theories based
on the nature, content or copying of such materials. These claims have been
brought and sometimes successfully pressed against online service providers in
the past. It is also possible that if any such information, or information that
is copied and stored by customers that have deployed our products, contains
errors, third parties could make claims against us for losses incurred in
reliance on such information. Although we carry general liability insurance, our
insurance may not cover potential claims of this type or may not be adequate to
indemnify us for all liability that may be imposed.
Our success and ability to compete are substantially dependent upon our
internally developed technology. While we rely on patent, copyright, trade
secret and trademark law to protect our technology, we believe that factors such
as the technological and creative skills of our personnel, new product
developments, frequent product enhancements and reliable product maintenance are
more essential to establishing and maintaining a technology leadership position.
Others may develop technologies that are similar or superior to our technology.
We generally enter into confidentiality or license agreements with our
employees, consultants and corporate partners, and generally control access to
and distribution of our software, documentation and other proprietary
information. Despite our efforts to protect our proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use our products or
technology. Policing unauthorized use of our products is difficult, and the
steps we have taken might not prevent misappropriation of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as do the laws of the United States.
Substantial litigation regarding intellectual property rights exists in the
software industry. 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. We believe that many of our competitors have filed or intend to file
patent applications covering aspects of their technology that they may claim our
technology infringes. Third parties may claim infringement by us with respect to
our products and technology. Any such 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. A successful claim of product infringement against
us and our failure or inability to license the infringed or similar technology
could harm our business.
EMPLOYEES
As of March 31, 1999, we had a total of 158 employees, 151 of whom were
full-time employees. Of the total number of employees 56 were engaged in
research and development including 7 part-time employees, 64 in sales, marketing
and business development, 16 in professional services and technical support and
22 in finance, administration and operations. Our future performance depends in
significant part upon the continued service of our key technical, sales and
senior management personnel, none of whom is bound by an employment agreement
requiring service for any defined period of time. The loss of the services of
one or more of our key employees could have a material adverse effect on our
business, financial condition and results of operations. Our future success also
depends on our continuing ability to attract, train and retain highly qualified
technical, sales and managerial personnel. Competition for such personnel is
intense, and we may not be able to retain our key personnel in the future. None
of our employees is represented by a labor union. We have not experienced
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any work stoppages and considers our relations with our employees to be good.
In addition, 45 of our employees are located in Israel. Israeli law and
certain provisions of the nationwide collective bargaining agreements between
the Histadrut, which is the General Federation of Labor in Israel, and the
Coordinating Bureau of Economic Organizations which is the Israeli federation of
employers' organizations, apply to our Israeli employees. These provisions
principally concern the maximum length of the work day and the work week,
minimum wages, contributions to a pension fund, insurance for work-related
accidents, procedures for dismissing employees, determination of severance pay
and other conditions of employment. Furthermore, pursuant to such provisions,
the wages of most of our employees are subject to cost of living adjustments,
based on changes in the Israeli Consumer Price Index. The amounts and frequency
of such adjustments are modified from time to time. Israeli law generally
requires the payment of severance pay upon the retirement or death of an
employee or upon termination of employment by the employer or, in certain
circumstances, by the employee. We currently fund our ongoing severance
obligations for our Israeli employees by making monthly payments for insurance
policies to cover these obligations.
FACILITIES
BackWeb leases approximately 5,400 square feet in a single office building
located in Ramat Gan, Israel and approximately 14,365 square feet in a single
office building located in San Jose, California. The office space in Ramat Gan,
Israel is leased pursuant to a lease that terminates in May 1999. We have
entered into a new lease in Ramat Gan for 7,550 square feet in a single office
building that expires in May 2004. The office space in San Jose, California is
leased pursuant to a lease that expires in January 2002. In addition, BackWeb
also maintains a lease for approximately 3,970 square feet of office space in
Toronto, Canada. This lease expires in December 2000. BackWeb also leases space
in Amsterdam, Austin, Boston, Chicago, Hamburg, London, New York City, Paris,
Stockholm and Tokyo. The term of any one of these leases does not extend past
October 2001.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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<PAGE> 42
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND
KEY EMPLOYEES
The following table sets forth information regarding the directors,
executive officers and key employees of BackWeb as of March 31, 1999.
<TABLE>
<CAPTION>
NAME POSITION
---- --------
<S> <C>
Eli Barkat................................... Chairman of the Board and Chief Executive
Officer
Hanan Miron.................................. Chief Financial Officer
Gwen Spertell................................ Senior Vice President, Sales, Marketing and
Business Development
Patricia Wynne............................... Vice President, North American Sales
Carla Stratfold.............................. Vice President, Business Development
Roni Or...................................... Vice President, Product Development
Charles Federman............................. Director
Joseph Gleberman............................. Director
William Larson............................... Director
Gil Shwed.................................... Director
</TABLE>
ELI BARKAT has served as our Chief Executive Officer since 1996. From 1988
to February 1996, Mr. Barkat served as a Managing Director and Vice President of
Business Development of BRM Technologies, Ltd, a technology venture firm. Prior
to 1988, Mr. Barkat held various positions with the Aurec Group, a
communications media and information company, and Daizix Technologies, a
computer assisted design applications company. In addition Mr. Barkat served as
a paratrooper in the Israel Defense Forces where he attained the rank of
lieutenant. Mr. Barkat has a bachelor of science degree in computer science and
mathematics from the Hebrew University of Jerusalem.
HANAN MIRON has served as our Vice President and Chief Financial Officer
since March 1999. From January 1997 to February 1999, Mr. Miron served as
President of North American Operations of Nice Systems Ltd., a computer
telephony integration company. From July 1992 to December 1996, Mr. Miron served
as Vice President and Chief Financial Officer of Nice Systems. Mr. Miron has an
L.L.B. degree from the Law School of the Hebrew University and a M.B.A. degree
from the Amos Tuck School of Business Administration of Dartmouth College.
GWEN SPERTELL has served as our Senior Vice President, Sales, Marketing and
Business Development since December 1997. From September 1989 to December 1997,
Ms. Spertell served in various positions at Oracle Corporation, a software
company, most recently as Vice President, Global ISV Alliances. Ms. Spertell has
a bachelor of arts degree in economics from Rutgers University.
PATRICIA WYNNE has served as our Vice President, North American Sales since
July 1998. From October 1989 to July 1998, Ms. Wynne served in various positions
at Oracle Corporation, most recently serving as Area Vice President of Sales.
Ms. Wynne received a bachelor of arts degree in American Studies from Smith
College and a master of arts degree in American Civilization from the University
of Pennsylvania.
CARLA STRATFOLD has served as our Vice President, Business Development
since December 1998. From November 1988 to November 1998, Ms. Stratfold served
in various positions at Oracle Corporation, most recently serving as its Vice
President of Product Sales and Marketing. Ms. Stratfold received a bachelor of
science degree in political science from Washington State University.
RONI OR has served as our Vice President, Product Development since May
1998. From February 1996 to May 1998, Mr. Or
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<PAGE> 43
served as Director of Online Services at the
Aurec Group. From January 1991 to February 1996, Mr. Or served as Research and
Development Director of Scitex Corporation, a digital printing system company.
Mr. Or has a bachelor of science degree in computer science from the Technion
Haifa Institute of Technology and a M.B.A. from the Hebrew University of
Jerusalem.
CHARLES FEDERMAN has served as a director of BackWeb since November 1996.
Since January 1998, Mr. Federman has served as Managing Director of BRM
Technologies, Ltd. From 1983 to January 1998, Mr. Federman served in various
positions at Broadview Associates LLC, a financial advisory company, most
recently serving as Chairman. Mr. Federman serves on the Board of Directors of
Phoenix Technologies Ltd., a software company, Mathsoft, Inc., a software
company, and International Microcomputer Software, Inc., a software company. Mr.
Federman holds a bachelor of science degree from the Wharton School of the
University of Pennsylvania.
JOSEPH GLEBERMAN has served as a director of BackWeb since November 1998.
Since November 1996, Mr. Gleberman has served as a Managing Director in the
Principal Investment Area of Goldman, Sachs & Co., an investment banking firm.
From November 1990 to November 1996, Mr. Gleberman served as a partner of
Goldman, Sachs & Co., a company he joined in 1982. Mr. Gleberman serves on the
Board of Directors of Applied Analytical Industries, a pharmaceutical service
and development organization and Ticketmaster Online-
CitySearch, Inc., a provider of locally-developed online information and
transaction services. Mr. Gleberman holds a bachelor of arts and a master of
arts degree from Yale University and an M.B.A. from Stanford University Graduate
School of Business.
WILLIAM LARSON has been a director of BackWeb since September 1997. Since
September 1993, Mr. Larson has served as Chief Executive Officer of Networks
Associates, Inc., a software company, where he currently also serves as
President and Chairman of the Board. Mr. Larson has a bachelor of science degree
from the Wharton School of the University of Pennsylvania and a J.D. from
Stanford University.
GIL SHWED has served as a director of BackWeb since March 1999. Since July
1993, Mr. Shwed has served as Chief Executive Officer of Check Point Software
Technologies Ltd., a software company, where he currently also serves as
President and a director. From June 1992 to June 1993, Mr. Shwed served as a
Software Manager of Heliogram, a software development company.
ELECTION OF DIRECTORS
Our Articles of Association provide for a board of directors of not less
than four members nor more than seven. There are currently five directors on our
Board. We currently have a classified Board of Directors consisting of one Class
I director, Joseph Gleberman, two Class II directors, William Larson and Charles
Federman and two Class III directors, Eli Barkat and Gil Schwed. These directors
have been elected to serve until the annual meetings of shareholders to be held
in 2000 for the Class I director, 2001 for the Class II directors and 2002 for
the Class III directors. These provisions, when coupled with the provision of
our Articles of Association authorizing our Board to fill vacant directorships
or increase the size of the Board, may deter a shareholder from removing
incumbent directors and simultaneously gaining control of the Board. Each
director is elected by an ordinary resolution of the annual general meeting of
our shareholders, by a vote of the holders of a majority of the voting power
represented at such meeting. Each director holds office until the annual general
meeting of our shareholders for the year in which his or her term expires and
until his or her successor has been elected. Directors who are up for election
in a given year may be removed at any time during that year by an ordinary
resolution of the general meeting of the shareholders.
ALTERNATE DIRECTORS
Our Articles of Association provide that any director may appoint another
person to serve as an alternate director and may re-
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<PAGE> 44
move such alternate. Any alternate director possesses all the rights and
obligations of the director who appointed him or her, except that the alternate
has no standing at any meeting while the appointing director is present and the
alternate is not entitled to remuneration.
Any individual, whether or not a director, may act as an alternate
director, and the same person may act as the alternate for several directors and
have a corresponding number of votes. Unless the appointing director limits the
time or scope of the appointment, the appointment is effective for all purposes
until the appointing director ceases to be a director or terminates the
appointment. The appointment of an alternate director does not in itself
diminish the responsibility of the appointing director as a director.
INDEPENDENT DIRECTORS
Under Israeli law, "public" Israeli companies are required to appoint at
least two directors who meet stringent standards of independence. BackWeb
believes that this requirement does not currently apply to companies that are
publicly traded only outside of Israel. However, the new Israeli Companies Law,
which will become effective on February 1, 2000, unequivocally extends the
independent director requirement to Israeli companies that are publicly traded
outside of Israel, such as on Nasdaq. Consequently, Backweb expects to appoint
two outside directors in accordance with the new law.
OFFICE HOLDERS
Israeli law codifies the duty of care and fiduciary duties that an office
holder owes to a company. An office holder is generally a director or executive
officer. Under the Companies Ordinance, an office holder's fiduciary duty
includes avoiding any conflict of interest between the office holder's position
in BackWeb and his personal affairs, avoiding any competition with BackWeb,
avoiding exploiting any business opportunity of BackWeb in order to receive
personal advantage for himself or others and revealing to BackWeb any
information or documents relating to BackWeb's affairs which the office holder
has received due to his position as an office holder. Under Israeli law, all
arrangements as to compensation by BackWeb of office holders who are not
directors require approval of the Board of Directors.
AUDIT COMMITTEE
The new Israeli Companies Law, which will become effective on February 1,
2000, provides that public companies, including Israeli companies that are
publicly traded outside of Israel, such as on Nasdaq, must appoint an audit
committee of the board of directors, a certified public accountant to audit the
company's financial statements and to report any improprieties that he or she
may discover to the chairman of the board, and an internal auditor.
APPROVAL OF RELATED PARTY TRANSACTIONS
Israeli law requires that transactions be approved as provided for in a
company's articles of association, and in some circumstances by the audit
committee and by the board of directors. The vote required by the audit
committee and the board of directors for approval of these matters is a majority
of the disinterested directors participating in a duly convened meeting.
Shareholder approval is also required under some circumstances.
Israeli law requires that an office holder of a company promptly disclose
any personal interest that he may have and all related material information
known to him, in connection with any existing or proposed transaction by the
company. Once the office holder complies with these disclosure requirements, the
company may approve the transaction in accordance with the provisions of its
articles of association. If the transaction is with a third party in which the
office holder has a personal interest, the approval must confirm that the
transaction is not adverse to the company's interest. Furthermore, if the
transaction is an extraordinary transaction, in addition to any approval
stipulated by the articles of association, it also must be approved by the
company's audit committee and then by its board of directors. An extraordinary
transaction is a transaction other than in the
41
<PAGE> 45
ordinary course of business, otherwise than
on market terms, or that is likely to have a material impact on the company's
profitability, assets or liabilities. Under certain circumstances, shareholder
approval is required. For example, shareholders must approve all compensation
paid to directors in whatever capacity or any transaction in which a majority of
the board members have a personal interest. An office holder with a personal
interest in any matter may not be present at any audit committee or board of
directors meeting where such matter is being approved, and may not vote.
The new Israeli Companies Law, which will become effective on February 1,
2000, applies the same disclosure requirements to a shareholder that holds 25%
or more of the voting rights in a public company, including an Israeli company
that is publicly traded outside of Israel such as on Nasdaq. Transactions
between a public company and a 25% shareholder, or transactions in which a 25%
shareholder of the company has a personal interest but which are between a
public company and another entity, require the approval of the board of
directors and of the shareholders. Moreover, an extraordinary transaction with a
25% shareholder or the terms of compensation of a 25% shareholder must be
approved by the audit committee, the board of directors and shareholders. The
shareholder approval for an extraordinary transaction must include at least one
third of the shareholders who have no personal interest in the transaction and
are present at the meeting. However, the transaction can be approved by
shareholders without this one third approval, if the total share holdings of
those who vote against the transaction do not represent more than one percent of
the voting rights in the company.
For information concerning the direct and indirect personal interests of
certain office holders and principal shareholders of BackWeb in related party
transactions with BackWeb, see "Related Party Transactions."
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Israeli law permits a company to insure an office holder in respect of
liabilities incurred by him as a result of the breach of his/her duty of care to
the company or to another person, or as a result of the breach of his fiduciary
duty to the company, to the extent that he/she acted in good faith and had
reasonable cause to believe that the act would not prejudice the company. A
company can also insure an office holder for monetary liabilities as a result of
an act or omission that he/she committed in connection with his/her serving as
an office holder. Furthermore, a company can indemnify an office holder for
monetary liability in connection with his/her activities as an office holder.
Our articles of association allow us to insure and indemnify office holders
to the fullest extent permitted by law. We have acquired directors' and
officers' liability insurance covering our officers and directors and our
subsidiaries for certain claims.
COMPENSATION OF OFFICERS AND DIRECTORS
Directors do not receive cash compensation from BackWeb for services they
provide as directors, although they are reimbursed for certain expenses in
connection with attendance at board and committee meetings. From time to time,
certain directors who are not employees of BackWeb may receive grants of options
to purchase BackWeb's ordinary shares.
The aggregate compensation paid to or accrued on behalf of the eight
directors and executive officers of BackWeb as a group during 1998 was
approximately $485,000 in salary and loans and $8,200 in amounts set aside or
accrued to provide pension, retirement or similar benefits, but excluding
amounts expended by BackWeb for automobiles made available to all of its
officers, expenses reimbursed to officers and other fringe benefits commonly
reimbursed or paid by companies in Israel. As of March 31, 1999, the eight
current directors and executive officers of BackWeb held options to purchase an
aggregate of 659,125 ordinary shares and 805,000 ordinary shares subject to a
repurchase option granted in favor of BackWeb.
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<PAGE> 46
OPTION PLANS
We maintain three option plans, a 1996 Israeli Option Plan, a 1996 U.S.
Option Plan and a 1998 U.S. Option Plan.
An aggregate of approximately 10.3 million shares have been reserved under
the 1996 Israeli Option Plan, the 1996 U.S. Option Plan and the 1998 U.S. Option
Plan, including those options already exercised. Under these plans, in 1997 and
1998, options to purchase 1,890,367 and 3,236,500 ordinary shares were granted
at exercise prices ranging from $1.05 to $2.10 per share and 3,385,200 and
5,304,466 were outstanding at each respective year end. In the three months
ended March 31, 1999, options to purchase 1,088,722 ordinary shares were granted
and 4,946,980 options to purchase ordinary shares were outstanding and 3,646,344
options remained available for future grant as of March 31, 1999. The options
granted generally vest over a four-year period from the date of the grant.
1996 ISRAELI OPTION PLAN
Under our Israeli Option Plan, options exercisable for ordinary shares may
be granted to employees, officers, directors and consultants of BackWeb or any
other member of the BRM group. The exercise price of options granted under the
Israeli Option Plan may not be less than the nominal value of the shares into
which such option is exercisable. Each option granted under the Israeli Option
Plan may expire no later than seven years from the date of the grant. Options
granted under the Israeli Option Plan generally vest over a four-year period.
1996 U.S. OPTION PLAN
Under our 1996 U.S. Option Plan incentive stock options exercisable for
ordinary shares have been granted only to employees, and nonstatutory stock
options may be granted to employees, officers, directors and consultants of
BackWeb and any other members of the BRM group. The 1996 U.S. Option Plan may be
administered by the Board or a committee designated by the Board. BackWeb is no
longer granting options under the 1996 U.S. Option Plan.
Options granted under the 1996 U.S. Plan generally vest over a four-year
period. Each option granted under the 1996 U.S. Plan may expire not later than
seven years from the date of the grant. The Board may amend or modify the plan
in all respects, except that no amendment or modification shall adversely affect
the rights of plan participants. In the event of a merger or sale all options
will be assumed by the successor corporation or fully vested for a period of 15
days, after which the options will expire. The 1996 U.S. Option Plan will
terminate on November 1, 2006, unless terminated earlier in accordance with its
provisions.
1998 U.S. OPTION PLAN
Our 1998 U.S. Option 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 number of shares reserved for issuance
under this plan will be subject to an annual increase on each anniversary
beginning July 1, 2000 equal to the lesser of (a) 1,400,000 shares, (b) 3% of
the outstanding shares on such date or (c) an amount determined by the Board.
The 1998 U.S. Option Plan is currently administered by the Board of Directors,
although the Board may designate certain committees to administer the 1998 U.S.
Option Plan with respect to different groups of service providers.
Options and share purchase rights granted under the 1998 U.S. Option Plan
will vest as determined by the relevant administrator, and if not assumed or
substituted by a successor corporation will accelerate and become fully vested
in the event of an acquisition of BackWeb. 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 our
ordinary shares on the date of grant. Options granted under the 1998 U.S. Option
Plan generally vest over a four-year period. The Board of Directors may amend,
modify or terminate the 1998 U.S. Option Plan at any time as long as such
amendment, modification or termination does not impair vesting rights of plan
participants.
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The 1998 U.S. Option Plan will terminate in 2008, unless terminated earlier by
the Board of Directors.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan, or the Purchase Plan, provides our
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. The Purchase Plan will be
administered by the Board of Directors or by a committee appointed by the Board.
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. Employees are
eligible to participate if they are employed by BackWeb for at least 20 hours
per week and more than five months in any calendar year. Unless the Board of
Directors or its committee determines otherwise, each offering period will run
for six months. The first offering period will commence on the date of this
prospectus 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. Generally, the
Board may amend, modify or terminate the Purchase Plan at any time as long as
such amendment, modification or termination does not impair the rights of plan
participants. The Purchase Plan will terminate in 2009, unless terminated
earlier in accordance with its provisions.
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RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH BRM
In 1995, we signed an agreement with EliBarkat Holdings Ltd., a company
controlled by Eli Barkat, BackWeb's Chairman of the Board and Chief Executive
Officer, NirBarkat Holdings Ltd., a company controlled by Nir Barkat, BackWeb's
former Chairman of the Board, and Yuval 63 Holdings (1995) Ltd., a company
controlled by Yuval Rakavy, a former director of BackWeb. In accordance with the
terms of this agreement, these three companies loaned BackWeb an aggregate of
$500,000. The loan is denominated in NIS and is payable at a rate of 2.5% of
cumulative consolidated revenues in excess of $5,000,000.
Eli Barkat, Nir Barkat and Yuval Rakavy historically have provided BackWeb
with management and administrative services, through companies controlled by
them in return for fees and reimbursement of expenses. Aggregate amounts
incurred for these services were approximately $540,000, $516,000, $220,000 and
$24,000 during the years ended December 31, 1996, 1997, 1998 and the three
months ended March 31, 1999. Effective September 30, 1996, $748,000 of accounts
payable to the three companies for their services were converted into a loan
with terms substantially similar to those of the $500,000 loan.
As of September 1998, Eli Barkat became a full-time employee of BackWeb and
began to receive his full compensation as an officer from BackWeb. As of March
1999, BackWeb terminated its service arrangements with the companies controlled
by Nir Barkat and Yuval Rakavy. As of March 31, 1999, $927,000 remained
outstanding under the two loans after reflecting currency conversion adjustments
and repayment.
BackWeb historically has paid to BRM Technologies Ltd., a company
controlled by Eli Barkat, Nir Barkat and Yuval Rakavy through their holding
companies, fees for research and development services on the basis of cost plus
15% and expenses at cost. Amounts incurred for these services were approximately
$1.6 million, $1.2 million and $873,000 during the years ended December 31,
1996, 1997 and 1998 and $67,000 during the three months ended March 31, 1999.
Currently, BackWeb is reducing its use of these services and expects that
amounts payable in connection with these services will be immaterial beginning
in the second quarter of 1999.
BackWeb has exclusive ownership of all technology developed by BRM
Technology Ltd. for BackWeb and by BRM Technology Ltd.'s employees contracted to
BackWeb.
EliBarkat Holdings Ltd., NirBarkat Holdings Ltd. and Yuval 63 Holdings
(1995) Ltd. agreed that in connection with our Series A Preferred Stock
financing they would:
- purchase shares of our Series A Preferred Stock; and
- forego their right to acquire additional shares of our Series A Preferred
Stock in exchange for the right to designate employees and consultants of
BRM Technologies Ltd. as beneficiaries of options to acquire up to
792,167 ordinary shares of BackWeb under our 1996 Israeli Option Plan,
all of which have been granted.
RELATIONSHIP WITH AFFILIATE
We currently are negotiating the terms of a letter of intent with a newly
formed company relating to a nonexclusive license arrangement from us, as
licensor, to this newly formed company, as licensee. This license arrangement
would include a license to our technology enabling the licensee to provide a
directory of community rooms for publishing, sharing and delivery of digital
data among individuals over the Internet in exchange for license fees to be
determined on an arm's length basis. As part of the license arrangement, we
likely would receive approximately 30% of the outstanding capital stock of the
licensee.
Three of our major shareholders, NirBarkat Holdings Ltd., EliBarkat
Holdings Ltd., and Yuval (63) Rakavy Holdings (1995) Ltd. and BARE LLC, a
company controlled by Charles Federman, one of our directors, will hold, in the
aggregate, approximately 70% of the outstanding capital stock of the licensee.
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In addition, the board of directors of the licensee will consist of one director
nominated by us, two directors nominated by the affiliated shareholders referred
to in the preceding sentence, one director who is the Chief Executive Officer of
the licensee, and one director not affiliated with BackWeb or its affiliates.
Execution of a binding letter of intent will be subject to shareholder
approval under Israeli law.
SALE OF SERIES D PREFERRED STOCK
Between December 1997 and March 1999, BackWeb sold its Series D Preferred
Stock in a series of private transactions with a number of investors, including
holding companies controlled by Eli Barkat, Nir Barkat and Yuval Rakavy, and
investment partnerships of which affiliates of The Goldman Sachs Group, L.P., an
affiliate of Goldman Sachs, lead manager of this offering, are general partners,
managing general partner or investment manager. The holding companies controlled
by Eli Barkat, Nir Barkat and Yuval Rakavy each purchased 1,619,073 shares of
Series D Preferred Stock. Upon closing of this offering, each block of 1,619,073
Series D Preferred Stock will convert into 539,691 ordinary shares. Investment
partnerships of which affiliates of The Goldman Sachs Group, L.P., an affiliate
of Goldman Sachs, lead manager of this offering, are general partners, managing
general partner or investment manager purchased 2,818,030 shares of Series D
Preferred Stock, which upon the closing of this offering converts into 939,343
ordinary shares. In January 1998, BancAmerica Robertson Stephens, an affiliate
of BancBoston Robertson Stephens Inc., one of the underwriters in this offering,
participated as the placement agent for the Series D Preferred Stock.
REGISTRATION RIGHTS AGREEMENT
As of March 31, 1999, the holders of 25,685,739 ordinary shares have rights
to register those shares under the Securities Act pursuant to registration
rights agreements. Holders of these registrable shares have unlimited rights to
request that these shares be included in any BackWeb-initiated underwritten
public offering of our securities. The underwriters may reduce the registrable
shares to be included on the registration statement for marketing reasons. In
addition, at any time on or prior to the earlier of December 27, 2002 or six
months after the effective date of this prospectus, holders of a majority of the
registrable shares may demand that we register these shares up to two times.
Also, one year after we become a public reporting company, holders of
registrable shares may request that we effect a registration of these shares on
a shelf registration statement once in any twelve-month period. All expenses
incurred in connection with such registrations, other than underwriters' and
brokers' discounts and commissions, will be borne by BackWeb.
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PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our ordinary shares as of March 31, 1999 and as adjusted to reflect
the sale of ordinary shares offered by us in this offering, for:
-- each person known by us to beneficially own more than 10% of the
outstanding ordinary shares; and
-- all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities.
Except as indicated below, the address for each listed director and officer
is c/o BackWeb Technologies Ltd., 3 Abba Hillel Street, Ramat Gan, Israel.
Except as indicated by footnote, the persons named in the table have sole voting
and investment power with respect to all ordinary shares shown as beneficially
owned by them. The number of ordinary shares outstanding used in calculating the
percentage in the table below includes the ordinary shares underlying options or
warrants held by such person that are exercisable within 60 days of March 31,
1999, but excludes ordinary shares underlying options or warrants held by any
other person. Percentage of beneficial ownership is based on 29,541,640 ordinary
shares outstanding as of March 31, 1999 including 2,595,501 ordinary shares
issuable upon the exchange of BackWeb Canada, Inc. exchangeable shares.
<TABLE>
<CAPTION>
PERCENTAGE OF
ORDINARY SHARES
NUMBER OF BENEFICIALLY OWNED
ORDINARY SHARES -------------------------
BENEFICIALLY PRIOR TO THE AFTER THE
OWNED OFFERING OFFERING
--------------- ------------ ---------
<S> <C> <C> <C>
Nir Barkat(1)(2)(3)................................ 3,352,342 11.3% 9.6%
Eli Barkat(2)(4)................................... 3,702,342 12.5 10.6
Yuval Rakavy(3)(5)................................. 3,352,342 11.3 9.6
Joseph Gleberman
c/o The Goldman Sachs Group, L.P.(6)............. 3,272,676 11.1 9.3
85 Broad Street
New York, New York 10004
All executive officers and directors as a group (8
persons)(7)...................................... 8,799,655 29.5% 24.9%
</TABLE>
- -------------------------
(1) Includes 3,352,342 shares held by Nir Barkat Holdings Ltd. Nir Barkat owns
substantially all of the equity and voting power of NirBarkat Ltd., the
parent company of NirBarkat Holdings Ltd.
(2) Eli Barkat and Nir Barkat are brothers.
(3) Such shareholder's address is: c/o BRM Technologies, Ltd., P.O. Box 45065, 5
Kiryat Madas Har Hotzvim, Jerusalem 91450 Israel.
(4) Includes 3,352,342 shares held by EliBarkat Holdings Ltd. and 350,000 shares
held directly by Eli Barkat subject to the right of repurchase in favor of
BackWeb during a vesting period of four years. Eli Barkat owns substantially
all of the equity and voting power of EliBarkat Holdings Ltd.
(5) Includes 3,352,342 shares held by Yuval 63 Holdings (1995) Ltd. Yuval Rakavy
owns substantially all of the equity and voting power of Yuval Rakavy Ltd.,
the parent company of Yuval 63 Holdings (1995) Ltd.
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(6) Represents 3,272,676 shares owned by investment partnerships, of which
affiliates of The Goldman Sachs Group are the general partner, managing
general partner or investment manager, including:
-- 1,955,591 ordinary shares held by GS Capital Partners II, L.P.;
-- 777,427 ordinary shares held by GS Capital Partners II Offshore, L.P.;
-- 72,132 ordinary shares held by Goldman, Sachs & Co. Verwaltungs GmbH;
-- 278,594 ordinary shares held by Stone Street Fund 1996, L.P.; and
-- 188,932 ordinary shares held by Bridge Street Fund 1996, L.P.
The Goldman Sachs Group disclaims beneficial ownership of the shares owned
by such investment partnerships to the extent attributable to partnership
interests therein held by persons other than The Goldman Sachs Group and
its affiliates. Each of such investment partnerships shares voting and
investment power with certain of its respective affiliates. Mr. Gleberman,
a Managing Director of Goldman, Sachs & Co. and a director of BackWeb,
disclaims beneficial ownership of ordinary shares which may be deemed to be
beneficially owned by The Goldman Sachs Group except to the extent of his
pecuniary interest arising from his interest in The Goldman Sachs Group.
(7) Includes 1,836,900 ordinary shares held by executive officers and directors
subject to the right of repurchase in favor of BackWeb during a vesting
period of four years. Includes 337,737 ordinary shares held by executive
officers and directors subject to options which are exercisable within 60
days of March 31, 1999. Includes 3,352,342 ordinary shares held by EliBarkat
Holdings Ltd. and 3,272,676 ordinary shares beneficially owned by investment
partnerships, of which affiliates of The Goldman Sachs Group are the general
partner, managing general partner or investment manager.
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DESCRIPTION OF SHARE CAPITAL
DESCRIPTION OF SHARES
Set forth below is a summary of the material provisions governing our share
capital. This summary is not complete and should be read together with our
memorandum of association and articles of association, a copy of each of which
has been filed as an exhibit to the registration statement of which this
prospectus forms a part.
Our authorized share capital consists of 200,067,829 shares, NIS 0.03
nominal value per share (except for the Series E Preferred Share, which has a
nominal value of NIS 0.01 per share), including 150,067,829 ordinary shares, 50
million preferred shares and one Series E Preferred Share. As of March 31, 1999,
there were 26,946,139 ordinary shares issued and outstanding.
DESCRIPTION OF ORDINARY SHARES
All issued and outstanding ordinary shares of BackWeb are, and the ordinary
shares offered hereby when issued and paid for will be, duly authorized and
validly issued, fully paid and non-assessable. The ordinary shares do not have
preemptive rights. Neither the memorandum of association or articles of
association of BackWeb nor the laws of the State of Israel restrict in any way
the ownership or voting of ordinary shares by non-residents of Israel, except
with respect to subjects of countries which are in a state of war with Israel.
DIVIDEND AND LIQUIDATION RIGHTS
The ordinary shares offered by this prospectus, when issued, will be
entitled to the full amount of any cash or share dividend declared from the date
of the consummation of this offering. Subject to the rights of the holders of
shares with preferential or other special rights that may be authorized, the
holders of ordinary shares are entitled to receive dividends out of legally
available assets and, in the event of the winding up of BackWeb, to share
ratably in all assets remaining after payment of liabilities, subject to
applicable law. The board of directors may declare interim dividends and
recommend a final annual dividend from retained earnings available for cash
dividends as determined for statutory purposes at such times and in such amounts
as the board of directors may determine. Declaration of the final annual
dividend requires shareholder approval at a general meeting, which may reduce
but not increase such dividend from the amount recommended by the board of
directors. See "Dividend Policy."
In case of a share dividend, holders of shares can receive shares of a
class whether such class existed prior thereto or was created therefor or shares
of the same class that conferred upon the holders the right to receive such
dividend.
VOTING, SHAREHOLDER MEETINGS AND RESOLUTIONS
Holders of ordinary shares have one vote for each ordinary share held on
all matters submitted to a vote of shareholders. Such rights may be affected by
the future grant of any special voting rights to the holders of a class of
shares with preferential rights. As of the closing of this offering, all of the
outstanding Series A, Series B, Series C and Series D Preferred Shares will be
converted into ordinary shares, and there will be no shares outstanding with
preferential rights over the ordinary shares. Any change in the registered
capital of BackWeb, which does not include the issuance of registered but
unissued shares, including the creation of a new class of shares with rights
superior or inferior to existing classes of shares may be adopted by a "special
resolution." A special resolution is the resolution of the holders of 75% or
more of the shares participating in a general meeting.
An annual general meeting shall be held once every calendar year at such
time, but not later than 15 months after the last annual general meeting, and at
such place, either within or outside of the State of Israel, as may be
determined by the board of directors. The quorum required for a general meeting
of shareholders consists of at least two shareholders present in person or by
proxy and
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holding, or representing, more than fifty percent of the voting rights of the
issued share capital. A meeting adjourned for lack of a quorum may be adjourned
to the same day in the next week at the same time and place, or to such time and
place as the chairman of the meeting may determine with the consent of the
holders of a majority of the shares present in person or by proxy and voting on
the question of adjournment. At such adjourned meeting, any two shareholders
present in person or by proxy will constitute a quorum.
Most shareholder resolutions, including resolutions for the election of
directors, the declaration of dividends, the appointment of auditors or the
approval of transactions with office holders as required by the Companies
Ordinance will be deemed adopted if approved by the holders of a majority of the
voting power represented at the meeting, in person or by proxy, and voting
thereon. See "Management -- Approval of Certain Transactions." Certain corporate
actions such as:
- amending the articles of association;
- amending the memorandum of association;
- changing our name;
- making changes in our capital structure such as a reduction of capital,
increase of capital or share split;
- merger or consolidation;
- voluntary winding up; and
- authorizing a new class of shares or changing special rights of a class
of shares
must be approved by a "special resolution" and will be deemed adopted only if
approved by the voting power represented in person or by proxy at the meeting
and voting thereon.
Upon completion of this offering, our executive officers, directors and 10%
or greater shareholders will own beneficially an aggregate of approximately
44.2% of our outstanding ordinary shares, including 2,595,501 ordinary shares
issuable upon exchange of BackWeb Canada, Inc. exchangeable shares, or
approximately 43.2% if the underwriters' over-allotment option is exercised in
full. See "Principal Shareholders."
TRANSFER OF SHARES AND NOTICES
Fully paid ordinary shares are issued in registered form and may be
transferred freely. Each shareholder of record is entitled to receive at least 7
days' prior notice of shareholder meetings. A special resolution can be adopted
only if shareholders are given 21 days' prior notice of the meeting at which
such resolution will be voted on, unless all shareholders entitled to vote agree
that the meeting may be held on a shorter notice period. For purposes of
determining the shareholders entitled to notice and to vote at such meeting, the
board of directors may fix the record date not less than 24 days prior to the
date of a meeting at which a special resolution is to be submitted for vote, and
not less than ten days prior to the date of any other meeting.
MODIFICATION OF CLASS RIGHTS
If at any time the share capital is divided into different classes of
shares, the rights attached to any class, unless otherwise provided by our
articles of association, may be modified or abrogated by BackWeb by a special
resolution subject to the consent in writing of the holders of the issued shares
of the class, or with the adoption of a special resolution passed at a separate
general meeting of the holders of the shares of such class.
DESCRIPTION OF PREFERRED STOCK
BackWeb has one share of Series E Preferred Stock outstanding. In
connection with our acquisition of Lanacom, Inc., a Canadian company, in August
1997, we are obligated to issue to the former Lanacom shareholders an aggregate
of 2,595,501 ordinary shares in exchange for the exchangeable shares in BackWeb
Canada held by the former Lanacom shareholders at any time, at the election of
the holders thereof, into our ordinary shares. The share of Series E Preferred
Stock was issued to a trustee for the former Lanacom shareholders pursuant to a
Voting and Exchange Trust Agreement. Under this agreement, the exchangeable
sharehold-
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ers are entitled to exercise voting rights equivalent to voting rights attaching
to the same number of ordinary shares by and through the trustee of the share of
Series E Preferred Stock. The share of Series E Preferred Stock will be canceled
at such time that no exchangeable shares are held by the former Lanacom
shareholders. The exchangeable share structure is a common tax-advantageous
structure used in acquisitions of Canadian companies.
BackWeb has an additional 50 million preferred shares authorized. The board
of directors has the authority to issue the preferred shares without further
vote or action by the shareholders in one or more series and to fix the rights,
preferences, privileges and restrictions of the preferred shares, including
dividend rights, dividend rates, conversion rights, voting rights, terms of
redemption, redemption prices, liquidation preferences and the number of shares
constituting any series. If the board of directors issues preferred shares, this
may delay, defer or prevent a change in control of BackWeb without further
action by the shareholders. For example, the board of directors could issue
preferred shares that have the power to prevent a change of control transaction.
The issuance of preferred shares with voting and conversion rights may adversely
affect the voting power of the holders of ordinary shares, including the loss of
voting control to others. BackWeb currently has no plans to issue any of the
unissued preferred shares.
OPTIONS AND WARRANTS
As of March 31, 1999, options to purchase 4,946,980 ordinary shares were
outstanding. These outstanding options are subject to the 1996 Israeli Option
Plan, 1996 U.S. Option Plan or 1998 U.S. Option Plan. See "Management -- Option
Plans." BackWeb has also issued warrants to purchase an aggregate of 145,726
ordinary shares at a weighted exercise price of $3.45 per share.
REGISTRATION RIGHTS
As of March 31, 1999, the holders of 25,685,739 ordinary shares have rights
to register those shares under the Securities Act pursuant to registration
rights agreements. Holders of these registrable shares have unlimited rights to
request that these shares be included in any BackWeb-initiated underwritten
public offering of our securities. The underwriters may reduce the registrable
shares to be included on the registration statement for marketing reasons. In
addition, at any time the earlier of December 27, 2002 or six months after the
effective date of this prospectus, holders of a majority of the registrable
shares may demand that we register these shares up to two times. Also, one year
after we become a public reporting company, holders of registrable shares may
request that we effect a registration of these shares on a shelf registration
statement once in any twelve-month period. In addition, we have agreed to
register the resale of the ordinary shares issuable upon the exchange of the
exchangeable shares held by the former shareholders of Lanacom, Inc., on the
180th day after the date of this prospectus and thereafter. All expenses
incurred in connection with such registrations, other than underwriters' and
brokers' discounts and commissions, will be borne by BackWeb.
ANTI-TAKEOVER EFFECTS OF ISRAELI LAWS
The Israeli Companies Ordinance, which governs Israeli corporations, does
not contain provisions that deal specifically with a merger that allows for the
elimination of minority shareholders. Provisions that deal with "arrangements"
between a company and its shareholders have been used, however, to effect
squeeze-out mergers. These provisions generally require that the merger be
approved by at least 75% of the shareholders present and voting on the proposed
merger, at a shareholders meeting that has been called on at least 21 days'
advance notice. In addition to shareholder approval, court approval of the
merger is required, which entails further delay and may entail the imposition of
additional requirements at the court's discretion. Alternatively, the acquiror
can eliminate minority shareholders if it acquires at least 90% of all
outstanding shares, excluding shares held by the acquiror prior to the
acquisition, and none of the minority shareholders seeks to block the
acquisition in court. The new Israeli
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Companies Law that will come into effect on February 1, 2000, does address
squeeze-out mergers but does not significantly modify these requirements.
The new Companies Law also provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company.
Similarly, the new Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 45% shareholder of the company. This
rule does not apply if someone else is already a majority shareholder of the
company. Since regulations implementing these new rules have not yet been
promulgated, we do not know to what extent or how these rules will apply to
Israeli companies that are publicly traded outside of Israel. Finally, Israeli
tax law treats certain acquisitions, particularly stock-for-stock swaps between
an Israeli company and a foreign company, less favorably than United States tax
law. Israeli tax law may, for instance, subject a shareholder who exchanges his
BackWeb shares for shares in a foreign corporation to immediate taxation.
ACCESS TO INFORMATION
We file reports with the Israeli Registrar of Companies regarding our
registered address, our registered capital, our shareholders of record and the
number of shares held by each, the identity of the directors and details
regarding security interests on our assets. In addition, we must file with the
Registrar of Companies our articles of association and a copy of any special
resolution adopted by a general meeting of shareholders. The information filed
with the Registrar of Companies is available to the public. In addition to the
information available to the public, our shareholders are entitled, upon
request, to review and receive copies of all minutes of meetings of our
shareholders.
TRANSFER AGENT AND REGISTRAR
BackWeb has appointed American Stock Transfer and Trust Company as the
transfer agent and registrar for the ordinary shares.
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SHARES ELIGIBLE FOR FUTURE SALE
If our shareholders sell substantial amounts of our ordinary shares,
including shares issued upon the exercise of outstanding options and warrants,
in the public market following this offering, the market price of our ordinary
shares could fall dramatically. These sales also might make it more difficult
for us to sell equity or equity-related securities in the future at a time and
price that we deem appropriate.
The number of ordinary shares available for sale in the public market is
limited by restrictions under federal securities law and by certain "lock-up"
agreements that our shareholders have entered into with the underwriters. The
lock-up agreements restrict our shareholders from selling or otherwise disposing
of any of their shares for a period of 180 days after the date of this
prospectus without the prior written consent of Goldman Sachs. Goldman Sachs
may, however, in its sole discretion and without notice, release all or any
portion of the shares from the restrictions in the lock-up agreements.
Upon completion of this offering, we will have outstanding 32,446,139
ordinary shares, based upon shares outstanding as of March 31, 1999. Of these
shares, the 5,500,000 shares sold in this offering are freely tradable. This
leaves 26,946,139 shares eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
- --------------------- ---------------------
<S> <C>
19,300,996........... 180 days from the
date of this
prospectus
7,645,143............ At various times
thereafter through
March 24, 2000
</TABLE>
Any ordinary shares that may be purchased in this offering by our
"affiliates," as defined in Rule 144 of the Securities Act, will be subject to
the volume and other selling limitations under Rule 144 of the Securities Act.
All but 5,762,820 of the shares eligible for sale at the 180th day after the
date of this prospectus or afterward will be subject initially to certain volume
and other limitations under Rule 144 of the Securities Act.
In addition, upon completion of the offering we will have 2,595,501
ordinary shares that are issuable at any time for no additional consideration
upon exchange of the BackWeb Canada exchangeable shares issued to the former
shareholders of Lanacom in connection with our acquisition of Lanacom.
Moreover, on or prior to the 180th day following the date of this
prospectus, we intend to register for resale approximately 10.9 million ordinary
shares reserved for issuance or issued under our employee stock plans.
The holders of approximately 25,685,739 ordinary shares have the right to
require us to register their shares for sale to the public. In addition, we have
agreed to register the resale of the ordinary shares issuable upon the exchange
of the exchangeable shares held by the former shareholders of Lanacom, Inc., on
the 180th day after the date of this prospectus and thereafter. If these holders
cause a large number of shares to be registered and sold in the public market,
our stock price could fall materially.
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MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences relating to an investment in ordinary shares as of the date
hereof. The summary is based on the Internal Revenue Code of 1986, and existing
final, temporary and proposed Treasury Regulations, Rulings and judicial
decisions, all of which are subject to prospective and retroactive changes. We
will not seek a ruling from the Internal Revenue Service, or the IRS, with
regard to the United States federal income tax treatment relating to investment
in ordinary shares and, therefore, there can be no assurance that the IRS will
agree with the conclusions set forth below. The summary does not purport to
address all federal income tax consequences that may be relevant to a particular
investor and you may want to consult your own tax advisor regarding your
specific tax situation. For example, the summary applies only to holders who
hold ordinary shares as a capital asset within the meaning of Section 1221 of
the Code, and does not address the tax consequences that may be relevant to
investors in special tax situations including, for example:
- insurance companies,
- tax-exempt organizations,
- dealers in securities or currency,
- banks or other financial institutions,
- investors that hold ordinary shares as part of a hedge, straddle or
conversion transaction, or
- holders that own, directly or indirectly, ten percent or more of our
outstanding ordinary shares.
Further, it does not address the alternative minimum tax consequences of an
investment in ordinary shares or the indirect consequences to holders of equity
interests in entities that own ordinary shares. In addition, this summary does
not address the state, local and foreign tax consequences of an investment on
the ordinary shares.
For purposes of this discussion, "U.S. holder" means a holder of ordinary
shares that is:
- a citizen or resident of the United States,
- a partnership or corporation created or organized in or under the laws of
the United States or any State thereof, including the District of
Columbia,
- an estate, the income of which is subject to United States federal income
tax regardless of its source or a trust if (a) a court within the United
States is able to exercise primary supervision over its administration
and (b) one or more United States persons have the authority to control
all substantial decisions of the trusts.
The term "non-U.S. holder" refers to any holder of ordinary shares other
than a U.S. holder.
TAXATION OF U.S. HOLDERS
DISTRIBUTIONS ON ORDINARY SHARES
Distributions made by us with respect to ordinary shares generally will
constitute foreign source dividends for federal income tax purposes. These
distributions will be taxable to a U.S. holder as ordinary income to the extent
of our undistributed current or accumulated earnings and profits (as determined
for United States federal income tax purposes). Distributions in excess of
current or accumulated earnings and profits will be treated first as a
non-taxable return of capital which will reduce the U.S. holder's tax basis in
the ordinary shares. Any such distributions in excess of a U.S. holder's tax
basis in the ordinary shares will be treated as capital gain to the U.S. holder
and will be either long-term or short-term capital gain depending upon the U.S.
holder's federal income tax holding period for the ordinary shares.
Dividends paid by us generally will not be eligible for the dividends
received deduction available to certain United States corporate shareholders
under Code Sections 243 and 245.
The amount of any cash distribution paid in a foreign currency will equal
the U.S. dollar value of the distribution, calculated by refer-
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ence to the exchange rate in effect at the time the dividends are received. A
U.S. holder should not recognize any foreign currency gain or loss if such
foreign currency is converted into U.S. dollars on the day received. If a U.S.
holder does not convert the foreign currency into U.S. dollars on the date of
receipt, however, such holder may recognize gain or loss upon a subsequent sale
or other disposition of the foreign currency (including an exchange of the
foreign currency for U.S. dollars). Such foreign currency gain or loss, if any,
will be U.S. source ordinary income or loss for United States federal income tax
purposes.
Subject to certain conditions and limitations, any Israeli withholding tax
imposed upon distributions under United States income tax law will be eligible
for credit against a U.S. holder's federal income tax liability. Alternatively,
a U.S. holder may claim a deduction for such amount, but only for a year in
which a U.S. holder elects to do so with respect to all foreign income taxes.
The overall limitation on foreign taxes eligible for credit is calculated
separately with respect to specific classes of income. For this purpose,
dividends distributed by us with respect to ordinary shares will generally
constitute foreign source "passive income."
SALE OR EXCHANGE OF ORDINARY SHARES
A U.S. holder of ordinary shares generally will recognize capital gain or
loss upon the sale or exchange of the ordinary shares measured by the difference
between the amount realized and the U.S. holder's tax basis in the ordinary
shares. Gain or loss will be computed separately for each block of shares sold
(shares acquired separately at different times and prices). The gain or loss on
such disposition will be long term-capital gain or loss if the ordinary shares
had been held for more than one year. In general, any capital gain or loss
recognized by a U.S. holder upon the sale or exchange of ordinary shares will be
treated as United States source income or loss, as the case may be, for United
States foreign tax credit purposes. The deductibility of capital losses is
restricted and generally may only be used to reduce capital gains to the extent
thereof. However, individual taxpayers generally may deduct annually $3,000 of
capital losses in excess of their capital gains.
PASSIVE FOREIGN INVESTMENT COMPANY
A foreign corporation generally will be treated as a "passive foreign
investment company," or PFIC, if, after applying certain "look-through" rules,
either
- 75% or more of its gross income for the taxable year is passive income or
- on average for the taxable year (by value or, if BackWeb so elects, by
adjusted basis) 50% or more of its assets produce or are held for the
production of passive income.
Passive income for this purpose generally includes:
- dividends
- interest
- rents
- royalties and the excess of gains over losses from securities and
commodities transactions
The look-through rules provide in part that a foreign corporation that owns
at least 25%, by value, of an operating subsidiary will treat that proportion of
the subsidiaries assets and income as held or received directly by the foreign
parent.
We believe that we were not a PFIC as of December 31, 1998, and do not
anticipate that we will be a PFIC in the future because we expect that less than
75% of our annual gross income will be passive income and less than 50% of our
assets will be passive assets, based on the look-through rules, our current
income and assets and the manner in which we anticipate conducting our
businesses in the future. We do not believe we were a PFIC at the end of our
last fiscal year based upon our determination of our income and assets. However,
there can be no assurance that we are not or will not be treated as a PFIC in
the future.
If we were to be treated as a PFIC, all U.S. holders may be required, in
certain
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circumstances, to pay an interest charge together with tax calculated at maximum
rates on certain "excess distributions," including any gain on the sale of
ordinary shares. In order to avoid this tax consequence, a U.S. holder
- may be permitted to make a "qualified electing fund" election, in which
case, in lieu of the treatment described in the previous sentence, the
U.S. holder would be required to include in its taxable income certain
undistributed amounts of our income or
- may elect to mark-to-market the ordinary shares and recognize ordinary
income (or possible ordinary loss) each year with respect to such
investment and on the sale or other disposition of the ordinary shares.
Neither we nor our advisors has the duty to, or will undertake to inform,
U.S. holders of changes in circumstances that would cause us to become a PFIC.
U.S. holders should consult their own tax advisors concerning our status as a
PFIC at any time after the date of this Prospectus. We do not currently intend
to take the action necessary for a U.S. holder to make a "qualified electing
fund" election in the event we are determined to be a PFIC.
FOREIGN PERSONAL HOLDING COMPANY
A foreign corporation may be classified as a foreign personal holding
company, or FPHC, for federal income tax purposes if both of the following tests
are satisfied:
- at any time during the taxable year five or fewer individuals who are
United States citizens or residents own or are deemed to own, under
certain attribution rules, more than 50% of its stock, by vote or value,
and
- at least 60%, 50% for years subsequent to the year in which it becomes a
FPHC, of its gross income regardless of its source, as specifically
adjusted, "is foreign personal holding company income," which includes
dividends, interest, rents, royalties and gain from the sale of stock or
securities.
We do not believe that we are currently a FPHC nor do we anticipate that we
will be a FPHC in the future. However, no assurance can be given that we are not
or will not become a FPHC as a result of future changes of ownership or changes
in the nature of the income of BackWeb. If we were to be classified as a FPHC,
each U.S. holder would be required to include in income as a taxable
constructive dividend its pro rata share of our undistributed foreign personal
holding company income.
TAXATION OF NON-U.S. HOLDERS
DISTRIBUTIONS ON ORDINARY SHARES
In general, distributions by us to non-U.S. holders who are not engaged in
the conduct of a trade or business within the United States will be subject to
United States federal income tax only if 25% or more of our gross income, from
all sources for the three-year period ending with the close of the taxable year
preceding the declaration of the distribution, was effectively connected with
our conduct of a trade or business in the United States. We do not anticipate
engaging in the conduct of a trade or business within the United States, except
through our subsidiaries. However, if the 25% threshold for such period is
exceeded, a portion of any distribution paid by us to a non-U.S. holder may be
subject to federal income tax withholding at the rate of 30%. The portion of the
distribution that may be subject to withholding will generally correspond to the
portion of our gross income for the period that is effectively connected to the
conduct of a trade or business within the United States.
SALE OR EXCHANGE OF ORDINARY SHARES
Non-U.S. holders will not be subject to United States federal income tax on
any gain realized upon the sale or exchange of ordinary shares, unless
(i) such gain is effectively connected with a United States trade or
business of the non-U.S. holder or,
(ii) in the case of gain recognized by an individual non-U.S. holder, such
individual is present in the United States for 183 days or more during
the taxable year of disposition and certain other conditions are
satisfied.
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UNITED STATES TRADE OR BUSINESS
A non-U.S. holder engaged in a trade or business in the United States whose
income from the ordinary shares (including gain from the sale or exchange
thereof) is effectively connected with the conduct of such trade or business
will generally be subject to regular United States federal income tax on such
income in the same manner as if it were a U.S. Holder. In addition, if such a
holder is a foreign corporation, it may be subject to a branch profits tax equal
to 30% of its effectively connected earnings and profits for the taxable year,
subject to adjustments.
BACKUP WITHHOLDING
Distributions made by us with respect to the ordinary shares and gross
proceeds received from the disposition of the ordinary shares may be subject to
certain information reporting requirements to the IRS and to a 31% backup
withholding tax. However, backup withholding generally will not apply to
payments made to certain exempt recipients such as a corporation or financial
institution or to a holder who furnishes a correct taxpayer identification
number or provides a certificate of foreign status and provides certain other
required information. If backup withholding applies, the amount withheld is not
an additional tax, but is credited against such holder's United States federal
income tax liability.
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ISRAELI TAXATION AND INVESTMENT PROGRAMS
The following is a summary of the current tax laws of the state of Israel
as they relate to BackWeb and our shareholders. This summary does not discuss
all aspects of Israeli tax law that may be relevant to a particular investor in
light of his personal investment circumstances or to certain types of investor
subject to special treatment under Israeli law. The following also includes a
discussion of certain Israeli government programs benefiting various Israeli
businesses such as BackWeb. To the extent that the discussion is based on new
legislation yet to be subject to judicial or administrative interpretation,
there can be no assurance that the views expressed herein will accord with any
such interpretation in the future. This discussion is not intended and should
not be construed as legal or professional tax advice, and does not cover all
possible tax considerations.
GENERAL CORPORATE TAX STRUCTURE
The general corporate tax rate in Israel is 36%. However, the effective tax
rate payable by a Company which derives income from an "Approved Enterprise" may
be considerably lower. See "-- Law for the Encouragement of Capital Investments,
1959."
BackWeb's tax loss carry-forwards were approximately $30.0 million as of
December 31, 1998. The amount of BackWeb's tax loss carry-forwards will be
reduced by any future income of BackWeb that would be fully tax-exempt for a
defined period.
TAXATION UNDER INFLATIONARY CONDITIONS
The income Tax Law (Adjustment for Inflation), 1985 attempts to overcome
some of the problems experienced in a traditional tax system by an economy
experiencing rapid inflation, which was the case in Israel at the time the
Adjustment for Inflation Law was enacted. Generally, the Adjustment for
Inflation Law was designed to neutralize for Israeli tax purposes the erosion of
capital investments in businesses and to prevent unintended tax benefits
resulting from the deduction of inflationary financing expenses. The Adjustment
for Inflation Law applies a supplementary set of inflationary adjustments to a
normal taxable profit computed according to regular historical cost principles.
The Adjustment for Inflation Law introduced a special tax adjustment for
the preservation of equity based on changes in the Israeli consumer price index,
or CPI, whereby certain corporate assets are classified broadly into fixed
(inflation resistant) assets and non-fixed assets. Where shareholders' equity,
as defined in the Adjustment for Inflation Law exceeds the depreciated cost of
fixed assets, a corporate tax deduction which takes into account the effect of
the applicable annual rate of inflation on such excess is allowed, up to a
ceiling of 70% of taxable income for companies in any single tax year, with the
unused portion permitted to be carried forward on a linked basis with no
ceiling. If the depreciated cost of fixed assets exceeds shareholders' equity,
then such excess multiplied by the applicable annual rate of inflation is added
to taxable income.
In addition, subject to certain limitations depreciation deductions on
fixed assets and losses carried forward are adjusted for inflation based on
changes in the Israeli CPI. The net effect of the Adjustment for Inflation Law
on BackWeb might be that our taxable income, as determined for Israeli corporate
tax purposes, will be different than our U.S. dollar income, as reflected in its
financial statements, due to the difference between the annual changes in the
Israeli CPI and in the NIS exchange rate with respect to the U.S. Dollar,
causing changes in the actual tax rate.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
We currently qualify as an "Industrial Company" within the definition of
the Law for the Encouragement of Industry (Taxes), 1969, or the Industry
Encouragement Law. According to the Industry Encouragement Law, an "Industrial
Company" is a company resident in Israel, at least 90% of the income of which in
any tax year determined in Israeli currency exclusive of income from defense
loans, capital gains, interest and dividends, is derived from an "Industrial
Enterprise" owned by it. An "Industrial Enterprise" is defined by
58
<PAGE> 62
that law as an enterprise whose major activity in a given tax year is industrial
production activity.
Tax benefits for an Industrial Company include deductions of 12.5% per
annum of the purchase price of a good faith acquisition of a patent or of
know-how, an election under some conditions to file a consolidated tax return
with additional related Israeli Industrial Companies and accelerated
depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. We cannot
assure you that we will continue to qualify as an "Industrial Company" or that
the benefits described above will be available in the future.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The Law for the Encouragement of Capital Investments, 1959, as amended, or
the Investment Law, provides that a capital investment in eligible facilities
may, upon application to the Israeli Investment Center, be designated as an
Approved Enterprise. Each certificate of approval for an Approved Enterprise
relates to specific program delineated both by its financial scope, including
its capital sources, and by its physical characteristics, i.e., the equipment to
be purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable income attributable to
the specific Approved Enterprise.
BackWeb's investment program has been granted the status of an "Approved
Enterprise" under the Investment Law. As of December 31, 1998, the Investment
Program had not been completed.
In the event a company operates under more than one approval, or only part
of its capital investments are approved, or it generates income from sources
other than its Approved Enterprise Program, its effective corporate tax rate is
the result of a weighted combination of the various applicable rates.
According to the provisions of the Investment Law, we chose the
"Alternative Benefits Program" -- waiver of grants in return for tax exemption.
Accordingly, our income from the Approved Enterprise will be tax-exempt for a
period of two years commencing with the year we first earn taxable income, and
subject to corporate tax at the rate of 10% to 25%, for an additional period of
five to eight years depending on the percentage of the foreign investment in
BackWeb.
This period of tax benefits is subject to a limit of 12 years from the
commencement of production, or 14 years from receiving the approval, whichever
is earlier. Under these conditions, the period of benefits for BackWeb's present
plan will terminate by the year 2009.
If dividends are distributed out of such tax-exempt profits, we will be
liable for corporate tax at the rate which would have been applied if we had not
chosen the alternative tax benefits program (currently 25%).
The dividend recipient is taxed at the reduced rate applicable to dividends
from Approved Enterprises (15%). This tax must be withheld by the company at
source regardless of whether the dividend is converted into foreign currency.
See "-- Capital Gains and Income Taxes Applicable to Non-Israeli Shareholders."
The Investment Law also provides that an Approved Enterprise is entitled to
accelerated depreciation on its property and equipment that are included in an
approved investment program.
Incentives received by a company in accordance with the Investment Law
remain subject to final ratification by the Israeli Investment Center, such
ratification being conditional upon fulfillment of all terms of the approved
program. Failure to comply with all such terms may require the return of such
incentives, inclusive of interest and penalties.
We believe that we have operated and will continue to operate in compliance
with all the "Approved Enterprise" conditions and criteria applicable, although
there can be no assurance of this, and that the likelihood is remote that we
will be required to refund tax benefits under the "Approved Enterprise"
59
<PAGE> 63
status. We cannot assure you that the tax benefits will continue.
Future applications to the Investment Center will be reviewed separately
with approvals based upon several factors, including the prevailing criteria set
forth in the Investment Law, the specific objectives of the applicant company
and the financial criteria of the applicant company.
CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
Israeli law generally imposes a capital gains tax on the sale of securities
and any other capital asset. The basic rate applicable to corporations is
currently 36%. The maximum tax rate for individuals is 50%. These rates are
subject to the provisions of any applicable bilateral double taxation treaty,
including the double taxation treaty between the United States and Israel
discussed below.
Under existing regulations any capital gain realized by an individual
shareholder with respect to the ordinary shares acquired on or after the
registration of such shares will be exempt from Israeli Capital Gains Tax if the
ordinary shares are listed on an approved foreign securities market, (including
the Nasdaq in the United States), and provided that (a) BackWeb continues to
qualify as an Industrial Company under Israeli law and (b) the individual does
not hold such shares for business purposes.
We cannot assure you that we will maintain such qualification or our status
as an Industrial Company. If we do not maintain our status as an Industrial
Company, then subject to any applicable tax treaty, the applicable Israeli
capital gains tax rates would be up to 50% for non-resident individuals and for
any pre-initial public offering gains of resident individuals, 35% for
post-initial public offering gains of resident individuals and 36% for resident
and non-resident companies. Individuals who are non-residents of Israel are
subject to income tax on income derived from sources in Israel, or received in
Israel. Such sources of income include passive income such as dividends,
royalties and interests as well as non-passive income from services rendered in
Israel. Upon a distribution of dividends other than bonus shares (stock
dividends), income tax is generally withheld at source at the rate of 25%, with
a rate of 15% for dividends generated by an Approved Enterprise, unless a double
taxation treaty is in effect between Israel and the shareholders country of
residence that provides for a lower tax rate in Israel on dividends.
A tax treaty between the United States and Israel, or the Treaty, effective
since January 1, 1995, provides for a maximum tax of 25% on dividends paid to a
resident of the United States as defined in the Treaty. Dividends distributed by
an Israeli company and derived from the income of an approved enterprise are
subject to a 15% dividend withholding tax. The Treaty further provides that a
12.5% Israeli dividend withholding tax would apply to dividends paid to a United
States corporation owning 10% or more of an Israeli Company's voting stock
during both the preceding year and the current year through the dividend payment
date. The 12.5% rate applies only on dividends from a company that does not have
an "Approved Enterprise" in the applicable period.
Residents of the United States generally will have withholding tax in
Israel deducted at the source. They may be entitled to a credit or deduction for
U.S. federal income tax purposes in the amount of the taxes withheld, subject to
detailed rules contained in the Treaty and in U.S. tax legislation. See "United
States Federal Income Tax Considerations -- Taxation of U.S. Holders." If for
any reason shareholders do not receive the above exemption for a sale of shares
in an Industrial Company, the Treaty provides U.S. resident investors with an
exemption from Israeli capital gains tax, although there may still be U.S.
taxes, upon a disposition of shares in the Company if they held under 10% of the
Company's voting stock through the 12 months before the share disposition. If
Israeli capital gains tax is payable, it may be credited against U.S. tax in
certain circumstances under special provisions in the Treaty. Special tax rules
apply to businesses in Israel, and regular Israeli taxation will apply to
securities dealers in Israel. A non-resident of Israel who has had dividend
income derived or accrued in Israel from which tax was
60
<PAGE> 64
withheld at source is currently exempt from the duty to file an annual Israeli
tax return with respect to such income, provided such income was not derived
from a business carried on in Israel by such non-resident and that such
non-resident does not derive other non-passive income from sources in Israel.
Proposals are being formulated to expand the requirement to file annual Israeli
tax returns.
TAX BENEFITS FOR RESEARCH AND DEVELOPMENT
Israeli tax law allows under certain conditions a tax deduction in the year
incurred for expenditures (including non-depreciable capital expenditures) in
scientific research and development projects, if the expenditures are approved
by the relevant Israeli Government Ministry (determined by the field of
research) and the research and development is for the promotion of the
enterprise. and is carried out by or on behalf of the company seeking such
deduction. Expenditures not so approved are deductible over a three-year period.
However, according to Israeli Supreme Court decisions, expenditures made out of
the proceeds of government grants are not deductible, i.e., we will be able to
deduct the unfunded portion of the research and development expenditures and not
the gross amount.
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<PAGE> 65
CONDITIONS IN ISRAEL
BackWeb is incorporated under the laws of the State of Israel, and
substantially all of our research and development and significant executive
facilities are located in Israel. Accordingly, BackWeb is directly affected by
political, economic and military conditions in Israel. Our operations would be
materially adversely affected if major hostilities involving Israel should occur
or if trade between Israel and its present trading partners should be curtailed.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and
Palestinian representatives have been signed. In addition, Israel and several
Arab States have announced their intention to establish trade and other
relations and are discussing certain projects. Israel has not entered into any
peace agreement with Syria or Lebanon, and there have been difficulties in the
negotiations with the Palestinians. We cannot be certain as to how the peace
process will develop or what effect it may have upon BackWeb.
Despite the progress towards peace between Israel, its Arab neighbors and
the Palestinians, certain countries, companies and organizations continue to
participate in a boycott of Israeli firms. BackWeb does not believe that the
boycott has had a material adverse effect on BackWeb, but restrictive laws,
policies or practices directed towards Israel or Israeli businesses may have an
adverse impact on the expansion of BackWeb's business.
Generally, all male adult citizens and permanent residents of Israel under
the age of 51 are obligated to perform up to 39 days, or longer under certain
circumstances, of military reserve duty annually. Additionally, all such
residents are subject to being called to active duty at any time under emergency
circumstances. Currently, some of our senior officers and key employees are
obligated to perform annual reserve duty. While we have operated effectively
under these requirements since we began operations, no assessment can be made as
to the full impact of such requirements on our workforce or business if
conditions should change, and no prediction can be made as to the effect on us
of any expansion or reduction of such obligations.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors,
including a period of rampant inflation in the early to mid-1980s, low foreign
exchange reserves, fluctuations in world commodity prices, military conflicts
and civil unrest. The Israeli government has, for these and other reasons,
intervened in various sectors of the economy, employing, among other means,
fiscal and monetary policies, import duties, foreign currency restrictions and
controls of wages, prices and foreign currency exchange rates.
Until May 1998, Israel imposed restrictions on transactions in foreign
currency. These restrictions affected our operations in various ways, and also
affected the right of non-residents of Israel to convert into foreign currency
amounts they received in Israeli currency, such as the proceeds of a judgment
enforced in Israel. Despite these restrictions, foreign investors who purchased
shares with foreign currency were able to repatriate in foreign currency both
dividends, after deduction of withholding tax, and the proceeds from the sale of
the shares. In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents generally may freely deal
in foreign currency and non-residents of Israel generally may freely purchase
and sell Israeli currency and assets. There are currently no Israeli currency
control restrictions on remittances of dividends on the ordinary shares or the
proceeds from the sale of the shares; however, legislation remains in effect
pursuant to
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<PAGE> 66
which currency controls can be imposed by administrative action at any time.
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from Australia, Canada and Japan. These
preferences allow Israel to export the products covered by such programs either
duty-free or at reduced tariffs.
Israel has entered into preferential trade agreements with the European
Union, the United States and the European Free Trade Association. In recent
years, Israel has established commercial and trade relations with a number of
the other nations, including Russia, China and India, with which Israel had not
previously had such relations.
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<PAGE> 67
WHERE YOU CAN FIND MORE INFORMATION
BackWeb has filed with the Securities and Exchange Commission a
registration statement on Form F-1 under the Securities Act with respect to the
ordinary shares offered hereby. This prospectus, which constitutes a part of the
registration statement, does not contain all of the information set forth in the
registration statement and the exhibits filed as a part thereof, certain parts
of which are omitted in accordance with the rules and regulations of the SEC.
For further information with respect to BackWeb and the ordinary shares offered
hereby, reference is made to the registration statement and to the exhibits
filed as a part thereof. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete and are qualified in their entirety by reference to each
such contract, agreement or other document which is filed as an exhibit to the
registration statement. The registration statement, including the exhibits and
schedules thereto, may be inspected without charge at the principal office of
the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at the
Regional Offices of the Commission at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300,
New York, New York 10048. In addition, such material will be available for
inspection at the offices of The Nasdaq Stock Market, Inc., at 1735 K Street,
N.W., Washington D.C. 20006. Copies of such material may be obtained by mail
from the Public Reference Branch of the commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
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<PAGE> 68
REPORTS TO SECURITY HOLDERS
Upon consummation of this offering, BackWeb will be subject to the
information requirements of the Securities Exchange Act of 1934, applicable to
foreign private issuers, and in accordance therewith will file reports,
including annual reports on Form 20-F, reports on Form 6-K and other information
with the Securities and Exchange Commission. Such reports and other information
filed by BackWeb can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following Regional Offices of the Commission:
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and l3th Floor, 7 World Trade Center, New York, New York 10048.
Copies of such materials can be obtained from the Public Reference Section of
the Commission, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed
rates. Although the rules of the Nasdaq National Market will require BackWeb to
solicit proxies from its shareholders, as a foreign private issuer, we are
exempt from the rules under the Exchange Act prescribing the furnishing and the
content of proxy statements.
Additionally, we are subject to disclosure requirements under Israeli laws,
as described in "Description of Share Capital -- Access to Information."
LEGAL MATTERS
Certain legal matters in connection with this offering with respect to
United States law will be passed upon for BackWeb by Wilson Sonsini Goodrich &
Rosati, Professional Corporation, Palo Alto, California. The validity of the
ordinary shares offered hereby and certain other legal matters in connection
with this offering with respect to Israeli law will be passed upon for BackWeb
by Naschitz, Brandes & Co., Tel-Aviv, Israel. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Shearman & Sterling, Menlo Park, California, with respect to United States law
and by Meitar, Liquornik, Geva & Co., Ramat Gan, Israel, with respect to Israeli
law. Naschitz, Brandes & Co. is the owner of 863,997 ordinary shares.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at December 31, 1997 and 1998, and for each of the years in
the three-year period ended December 31, 1998 as set forth in their report. We
have included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given upon the
authority of such firm as experts in accounting and auditing.
ISA EXEMPTION
We have received from the Securities Authority of the State of Israel an
exemption from Israel's prospectus publication requirements. Nothing in such
exemption should be construed as authenticating the matters contained in this
prospectus or as an approval of their reliability or adequacy or as an
expression of opinion as to the quality of the securities offered in this
prospectus.
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<PAGE> 69
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, AND 1998
AND UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Financial Statements
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Redeemable Convertible Preferred
Stock and Changes in Shareholders' Equity (Net Capital
Deficiency)............................................... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 70
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
BackWeb Technologies Ltd.
We have audited the accompanying consolidated balance sheets of BackWeb
Technologies Ltd. as of December 31, 1997 and 1998, and the related consolidated
statements of operations, redeemable convertible preferred stock and changes in
shareholders' equity (net capital deficiency), and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of BackWeb's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
BackWeb Technologies Ltd. at December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles in the United States.
ERNST & YOUNG LLP
Palo Alto, California
March 25, 1999,
Except for Note 11, as to which the date
is May 28, 1999.
F-2
<PAGE> 71
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AT
------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
-------- -------- ----------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 6,377 $ 6,449 $ 11,137
Trade accounts receivable, net of allowance for doubtful
accounts of $475 and $561 at December 31, 1997 and
1998................................................... 3,359 2,590 5,753
Other current assets..................................... 538 712 1,085
-------- -------- --------
Total current assets............................... 10,274 9,751 17,975
Property and equipment, net................................ 1,169 1,030 989
Goodwill and other purchased intangibles, net.............. 3,587 1,824 1,389
Other assets............................................... 67 96 96
-------- -------- --------
$ 15,097 $ 12,701 $ 20,449
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Line of credit........................................... $ 1,030 $ 2,000 $ 2,000
Accounts payable and accrued liabilities................. 3,825 3,357 3,689
Deferred revenue......................................... 1,036 1,666 2,201
Payable to related parties............................... 767 304 140
Current portion of shareholders' loans................... 592 828 927
-------- -------- --------
Total current liabilities.......................... 7,250 8,155 8,957
Accrued severance pay, net................................. 74 93 108
Long-term portion of shareholders' loans................... 665 327 --
Long-term debt............................................. 491 --
Commitments and contingencies
Series B, C and D redeemable convertible preferred stock:
nominal value approximately $0.003 per share at amount
paid in; 36,039,377 shares authorized at December 31,
1997 and 1998 and 44,737,377 at March 31, 1999;
24,906,741, 35,158,788 and 43,806,603 shares issued and
outstanding at December 31, 1997 and 1998 and March 31,
1999; no shares authorized, issued or outstanding pro
forma; aggregate liquidation preference of $38,767 at
December 31, 1998 and $48,712 at March 31, 1999.......... 25,532 37,304 47,275
Shareholders' equity (net capital deficiency):
Series A Convertible preferred stock, nominal value
approximately $0.003 per share at amount paid in;
25,464,110 shares authorized issued and outstanding at
December 31, 1997 and 1998 and March 31, 1999; no
shares authorized, issued or outstanding pro forma;
aggregate liquidation preference of $2,024 at December
31, 1998 and March 31, 1999............................ 495 495 495 $ --
Series E preferred stock, nominal value approximately
$0.003 per share at amount paid in; one share
authorized issued and outstanding at December 31, 1997
and 1998 and March 31, 1999 and pro forma (representing
voting rights with respect to 2,595,501 ordinary shares
at March 31, 1999.).................................... 3,454 3,454 3,454 3,454
Ordinary shares, nominal value approximately $0.01 per
share at amounts paid in; 10,000,000 shares authorized;
2,163,573, 2,518,443 and 3,855,901 shares issued and
outstanding at December 31, 1997 and 1998 and March 31,
1999; 150,067,829 shares authorized and 26,946,139
shares issued and outstanding pro forma................ 20 2,002 8,314 56,084
Notes receivable from shareholders....................... -- -- (3,538) (3,538)
Deferred stock compensation.............................. -- (1,638) (3,439) (3,439)
Accumulated deficit...................................... (22,884) (37,491) (41,177) (41,177)
-------- -------- -------- --------
Total shareholders' equity (net capital
deficiency)...................................... (18,915) (33,178) (35,891) $ 11,384
-------- -------- -------- ========
$ 15,097 $ 12,701 $ 20,449
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 72
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
License................................ $ 71 $ 5,311 $ 7,980 $ 1,395 $ 3,308
Service................................ -- 290 1,557 184 789
------- -------- -------- ------- -------
Total revenues................. 71 5,601 9,537 1,579 4,097
Cost of revenues:
License................................ -- 182 266 55 73
Service................................ -- 796 1,353 297 592
------- -------- -------- ------- -------
Total cost of revenues......... -- 978 1,619 352 665
------- -------- -------- ------- -------
Gross profit............................. 71 4,623 7,918 1,227 3,432
Operating expenses:
Research and development............... 1,781 3,955 4,555 1,277 997
Sales and marketing.................... 4,535 12,224 13,182 3,321 3,831
General and administrative............. 1,396 2,981 3,182 811 931
Amortization of goodwill, other
intangibles, and deferred stock
compensation........................ -- 557 1,824 401 1,202
------- -------- -------- ------- -------
Total operating expenses....... 7,712 19,717 22,743 5,810 6,961
------- -------- -------- ------- -------
Loss from operations..................... (7,641) (15,094) (14,825) (4,583) (3,529)
Interest Income and other................ -- 247 424 48 54
Interest Expense and other............... (43) (115) (206) (66) (211)
------- -------- -------- ------- -------
Net loss................................. $(7,684) $(14,962) $(14,607) $(4,601) $(3,686)
======= ======== ======== ======= =======
Basic and diluted net loss per share..... $ (6.95) $ (6.96) $ (6.07) $ (2.02) $ (1.40)
======= ======== ======== ======= =======
Shares used in computing basic and
diluted net loss per share............. 1,106 2,151 2,408 2,283 2,627
======= ======== ======== ======= =======
Pro forma basic and diluted net loss per
share (unaudited)...................... $ (0.69) $ (0.16)
======== =======
Shares used in computing pro forma basic
and diluted net loss per share
(unaudited)............................ 21,208 23,058
======== =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 73
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
CHANGES IN SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
REDEEMABLE -------------------------------------------------------
CONVERTIBLE NOTES
PREFERRED STOCK PREFERRED SHARES ORDINARY SHARES RECEIVABLE
-------------------- ------------------- ------------------ FROM
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS
---------- ------- ---------- ------ --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995............ -- $ -- -- $ -- 93,333 $ -- $ --
Issuance of ordinary shares............. -- -- -- -- 2,055,240 20 --
Issuance of Series A convertible
preferred shares, net of $5 of issuance
costs.................................. -- -- 25,464,110 495 -- -- --
Issuance of Series B redeemable
convertible preferred shares, net of
$140 of issuance costs................. 4,237,640 3,090 -- -- -- -- --
Issuance of Series C-1 redeemable
convertible preferred shares, net of
$192 of issuance costs................. 9,613,043 10,863 -- -- -- -- --
Issuance of Series C-2 redeemable
convertible preferred shares, net of
$41 of issuance costs.................. 1,586,957 1,784 -- -- -- -- --
Conversion of payable to related parties
into Series C-2 redeemable preferred
shares................................. 521,739 600 -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
---------- ------- ---------- ------ --------- ------ -------
Balance at December 31, 1996............ 15,959,379 16,337 25,464,110 495 2,148,573 20 --
Issuance of Series C-1 redeemable
convertible preferred shares, net of
$28 of issuance costs.................. 869,565 972 -- -- -- -- --
Issuance of one Series E preferred share
representing rights with respect to
2,844,303 ordinary shares, pursuant to
Lanacom, Inc. acquisition.............. -- -- 1 3,454 -- -- --
Issuance of ordinary shares upon
exercise of stock options.............. -- -- -- -- 15,000 -- --
Issuance of Series D redeemable
convertible preferred shares, net of
$640 of issuance costs and net of
shareholders' receivable of $426....... 8,077,797 8,223 -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
---------- ------- ---------- ------ --------- ------ -------
Balance at December 31, 1997............ 24,906,741 25,532 25,464,111 3,949 2,163,573 20 --
Issuance of Series D redeemable
convertible preferred shares including
the collection of shareholders'
receivable of $426, net of $437 of
issuance costs......................... 9,313,511 10,699 -- -- -- -- --
Issuance of ordinary shares pursuant to
options exercised...................... -- -- -- -- 320,885 123 --
Issuance of ordinary shares in
connection with Series D redeemable
preferred shares to placement agent.... -- -- -- -- 33,985 -- --
Issuance of Series C-2 redeemable
convertible preferred shares pursuant
to warrants exercised, net of $6 of
issuance costs......................... 938,536 1,073 -- -- -- -- --
Deferred stock compensation............. -- -- -- -- -- 1,859 --
Amortization of deferred stock
compensation........................... -- -- -- -- -- -- --
Net loss................................ -- -- -- -- -- -- --
---------- ------- ---------- ------ --------- ------ -------
Balance at December 31, 1998............ 35,158,788 $37,304 25,464,111 $3,949 2,518,443 $2,002 --
Issuance of Series D redeemable
convertible preferred shares, net of
$29 of issuance costs (Unaudited)...... 8,647,815 9,915 -- -- -- -- --
Issuance of ordinary shares pursuant to
options exercised (Unaudited).......... -- -- -- -- 1,337,458 3,704 --
Note receivable from shareholders
(Unaudited)............................ -- -- -- -- -- -- (3,538)
Deferred stock compensation
(Unaudited)............................ -- -- -- -- -- 2,608 --
Amortization of deferred stock
compensation and warrant (Unaudited)... -- 56 -- -- -- -- --
Net loss (Unaudited).................... -- -- -- -- -- -- --
---------- ------- ---------- ------ --------- ------ -------
Balance at March 31, 1999 (Unaudited)... 43,806,603 $47,275 25,464,111 $3,949 3,855,901 $8,314 $(3,538)
========== ======= ========== ====== ========= ====== =======
<CAPTION>
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
------------------------------------------------
TOTAL
DEFERRED SHAREHOLDERS'
STOCK ACCUMULATED EQUITY (NET
COMPENSATION DEFICIT CAPITAL DEFICIENCY)
------------ ----------- -------------------
<S> <C> <C> <C>
Balance at December 31, 1995............ $ -- $ (238) $ (238)
Issuance of ordinary shares............. -- -- 20
Issuance of Series A convertible
preferred shares, net of $5 of issuance
costs.................................. -- -- 495
Issuance of Series B redeemable
convertible preferred shares, net of
$140 of issuance costs................. -- -- --
Issuance of Series C-1 redeemable
convertible preferred shares, net of
$192 of issuance costs................. -- -- --
Issuance of Series C-2 redeemable
convertible preferred shares, net of
$41 of issuance costs.................. -- -- --
Conversion of payable to related parties
into Series C-2 redeemable preferred
shares................................. -- -- --
Net loss................................ -- (7,684) (7,684)
------- -------- --------
Balance at December 31, 1996............ -- (7,922) (7,407)
Issuance of Series C-1 redeemable
convertible preferred shares, net of
$28 of issuance costs.................. -- -- --
Issuance of one Series E preferred share
representing rights with respect to
2,844,303 ordinary shares, pursuant to
Lanacom, Inc. acquisition.............. -- -- 3,454
Issuance of ordinary shares upon
exercise of stock options.............. -- -- --
Issuance of Series D redeemable
convertible preferred shares, net of
$640 of issuance costs and net of
shareholders' receivable of $426....... -- -- --
Net loss................................ -- (14,962) (14,962)
------- -------- --------
Balance at December 31, 1997............ -- (22,884) (18,915)
Issuance of Series D redeemable
convertible preferred shares including
the collection of shareholders'
receivable of $426, net of $437 of
issuance costs......................... -- -- --
Issuance of ordinary shares pursuant to
options exercised...................... -- -- 123
Issuance of ordinary shares in
connection with Series D redeemable
preferred shares to placement agent.... -- -- --
Issuance of Series C-2 redeemable
convertible preferred shares pursuant
to warrants exercised, net of $6 of
issuance costs......................... -- -- --
Deferred stock compensation............. (1,859) -- --
Amortization of deferred stock
compensation........................... 221 -- 221
Net loss................................ -- (14,607) (14,607)
------- -------- --------
Balance at December 31, 1998............ $(1,638) $(37,491) $(33,178)
Issuance of Series D redeemable
convertible preferred shares, net of
$29 of issuance costs (Unaudited)...... -- -- --
Issuance of ordinary shares pursuant to
options exercised (Unaudited).......... -- -- 3,704
Note receivable from shareholders
(Unaudited)............................ -- -- (3,538)
Deferred stock compensation
(Unaudited)............................ (2,608) -- --
Amortization of deferred stock
compensation and warrant (Unaudited)... 807 -- 807
Net loss (Unaudited).................... -- (3,686) (3,686)
------- -------- --------
Balance at March 31, 1999 (Unaudited)... $(3,439) $(41,177) $(35,891)
======= ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 74
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss............................................. $(7,684) $(14,962) $(14,607) $(4,601) $(3,686)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of intangibles, warrant and deferred
stock compensation............................... -- 617 1,984 456 1,298
Depreciation....................................... 42 300 529 150 175
Remeasurement of stockholders' loans............... -- (21) (102) (23) 25
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable.............................. (12) (3,324) 769 711 (3,163)
Other assets..................................... (159) (126) (174) (139) (373)
Payable to related parties....................... 413 354 (463) (755) (164)
Other liabilities and accrued expenses........... 781 133 (292) 222 703
Accounts payable................................. 890 123 (621) (336) (237)
Accrued compensation............................. 440 357 445 (95) (134)
Deferred revenue................................. -- 1,036 630 168 535
Severance pay.................................... 39 35 19 9 15
------- -------- -------- ------- -------
Net cash used in operating activities................ (5,250) (15,478) (11,883) (4,233) (5,006)
------- -------- -------- ------- -------
INVESTING ACTIVITIES
Cash received upon acquisition of Lanacom............ -- 120 -- --
Purchase of other assets............................. -- (197) -- --
Purchases of property and equipment.................. (498) (860) (390) (140) (134)
Other assets......................................... (75) 8 (29) (5) --
------- -------- -------- ------- -------
Net cash used in investing activities................ (573) (929) (419) (145) (134)
------- -------- -------- ------- -------
FINANCING ACTIVITIES
Proceeds from bank line of credit.................... -- 2,821 2,500 -- --
Repayment of bank line of credit..................... -- (1,300) (2,021) -- --
Repayment of stockholders loan....................... -- -- -- (253)
Proceeds from issuance of preferred shares........... 16,232 9,195 11,772 426 9,915
Proceeds from issuance of ordinary shares............ 20 -- 123 36 166
Proceeds from shareholders' loans.................... 1,039 -- -- -- --
Advances from related parties........................ 600 -- -- -- --
------- -------- -------- ------- -------
Net cash provided by financing activities............ 17,891 10,716 12,374 462 9,828
------- -------- -------- ------- -------
Net increase (decrease) in cash and cash
equivalents........................................ 12,068 (5,691) 72 (3,916) 4,688
Cash and cash equivalents at beginning of the
period............................................. -- 12,068 6,377 6,377 6,449
------- -------- -------- ------- -------
Cash and cash equivalents at end of the period....... $12,068 $ 6,377 $ 6,449 2,461 $11,137
======= ======== ======== ======= =======
NONCASH INVESTING AND FINANCING TRANSACTIONS
Conversion of payable to related parties into
redeemable convertible preferred stock............. $ 600 $ -- $ -- -- --
======= ======== ======== ======= =======
Issuance of Series E preferred stock upon acquisition
of Lanacom......................................... $ -- $ 3,454 $ -- -- --
======= ======== ======== ======= =======
Issuance of ordinary shares for notes receivable..... -- -- -- (3,538)
======= ======== ======== ======= =======
SUPPLEMENTAL DISCLOSURE
Interest paid during the period...................... $ 3 $ 25 $ 87 $ 64 $ 4
======= ======== ======== ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 75
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
BackWeb Technologies Ltd. was incorporated under the laws of Israel in
August 1995 and commenced operations in November 1995. BackWeb Technologies Ltd.
and its subsidiaries (collectively, "BackWeb" or the "Company") is a provider of
Internet communication infrastructure and applications software that enables
companies to communicate business-critical, time-sensitive information
throughout their enterprise of customers, partners and employees. BackWeb sells
its products primarily to end users from a variety of industries, including the
telecommunications, financial and the computer industries.
Subsidiaries consist of its wholly owned subsidiaries, BackWeb
Technologies, Inc., a U.S. corporation; BackWeb Canada, Inc., a Canadian
corporation; and BackWeb B.V., a Netherlands corporation, and BackWeb K.K. Ltd,
a Japanese corporation.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States. Intercompany
accounts and transactions have been eliminated in consolidation.
A majority of BackWeb's revenues are derived from sales to a limited number
of customers in the United States. U.S. sales represented 100%, 89%, 79% and 82%
of total revenues in 1996, 1997, 1998 and in the three months ended March 31,
1999.
INTERIM FINANCIAL INFORMATION
The financial information at March 31, 1999 and for the three months ended
March 31, 1998 and 1999 is unaudited but, in the opinion of management, has been
prepared on the same basis as the annual financial statements and includes all
adjustments (consisting only of normal recurring adjustments) and that BackWeb
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for those periods. Results for the
interim period are not necessarily indicative of the results to be expected for
the entire year.
REVENUE RECOGNITION
License revenues are comprised of perpetual or multiyear licensee 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 (primarily 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
F-7
<PAGE> 76
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION (CONTINUED)
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
a 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 of the final adoption of SOP 98-9 on its financial
condition or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standard ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," requires capitalization of certain software development costs
subsequent to the establishment of technological feasibility. Based on BackWeb's
product development process, technological feasibility is established upon the
completion of a working model. BackWeb generally does not incur any costs
between the completion of the working model and the point at which the product
is ready for general release. Therefore, through December 31, 1998, BackWeb has
charged all software development costs to research and development expense in
the period incurred.
FOREIGN CURRENCY TRANSACTIONS
BackWeb has elected to prepare its financial statements in U.S. dollars,
which is also BackWeb's functional currency. Most of our sales are in U.S.
dollars. However, a significant substantial portion of BackWeb's research and
development expenses are denominated in New Israeli Shekels ("NIS"). Since the
U.S. dollar is the primary currency in the economic
F-8
<PAGE> 77
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSACTIONS (CONTINUED)
environment in which BackWeb conducts its operations the U.S. dollar is the
functional currency of BackWeb Technologies Ltd. and each of its subsidiaries.
Monetary accounts maintained in currencies other than the dollar
(principally cash and liabilities) are remeasured using the foreign exchange
rate at the balance sheet date in accordance with SFAS No. 52, "Foreign Currency
Translations." Operational accounts and nonmonetary balance sheet accounts are
measured and recorded in current operations at the rate in effect at the date of
the transaction. The foreign currency remeasurement effect for 1998 was a gain
of $163,000. The foreign currency remeasurement effects were insignificant in
1996 and 1997.
ADVERTISING COSTS
BackWeb accounts for advertising costs as expense in the period in which
the costs are incurred. Advertising expense for the years ended December 31,
1996, 1997 and 1998 were $846,000, $756,000 and $42,000.
CASH EQUIVALENTS
Cash equivalents consist of money market accounts and bank time deposits.
BackWeb considers all highly liquid investments with an original maturity from
date of purchase of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation.
Property and equipment are depreciated on a straight-line basis over the
estimated useful lives of the assets, generally three to five years.
INTANGIBLE ASSETS
BackWeb recorded goodwill representing the excess of the aggregate purchase
price over the fair value of the tangible and intangible assets acquired in
connection with the acquisition of Lanacom, Inc., ("Lanacom") (see Note 2).
Goodwill, developed technology and other identified intangibles are amortized on
a straight-line basis over the estimated useful life. The amortization of
developed technology, amounting to $60,000, $160,000 and $40,000 in 1997, 1998
and in the three months ended March 31, 1999 is included in cost of license
revenues. BackWeb regularly performs reviews to determine if the carrying value
of the assets is impaired. The reviews take into consideration the existence of
facts or circumstances, either internal or external, which indicate that the
carrying value of the asset cannot be recovered. No such impairment has been
indicated to date. If such impairment will be indicated, the recoverability
analysis of the long lived assets will consist of calculation of the present
value of the undiscounted expected future cash flows from the respective assets
and comparison of the resulting present value to the carrying
F-9
<PAGE> 78
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS (CONTINUED)
amount. Intangible assets, which include $4,007,000 of intangibles acquired
pursuant to the Lanacom acquisition and $197,000 of other intangibles, consist
of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL ---------------- MARCH 31,
LIFE 1997 1998 1999
---------- ------ ------ -----------
(IN YEARS) (UNAUDITED)
<S> <C> <C> <C> <C>
Goodwill.............................. 2.5 $3,224 $3,224 $3,224
Developed technology.................. 2.5 400 400 400
Other intangibles..................... 2 580 580 580
------ ------ ------
4,204 4,204 4,204
Less: Accumulated amortization........ 617 2,380 2,815
------ ------ ------
Goodwill and other intangibles, net... $3,587 $1,824 $1,389
====== ====== ======
</TABLE>
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject BackWeb to concentrations
of credit risk, consist of cash investments and trade receivables. BackWeb's
cash investments generally consist of money market funds and a certificate of
deposit with qualified financial institutions. The carrying amount of these
financial instruments, as well as debt instruments, are recorded at cost, which
approximates their fair value.
BackWeb sells its products to customers primarily in the United States.
BackWeb performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. BackWeb maintains reserves
to provide for estimated credit losses. Provisions for bad debts in the years
ended December 31, 1997 and 1998 were $485,000 and $677,000. Write-offs of
uncollectible accounts in the years ended December 31, 1997 and 1998 totaled
$10,000 and $591,000. In 1997, revenues from two customers represented 19% and
11% of total revenues. No customer represented more than 10% of total revenues
in 1998.
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 basic 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
F-10
<PAGE> 79
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NET LOSS PER SHARE (CONTINUED)
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>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED MARCH 31,
1998 1999
------------ ---------------
(UNAUDITED)
<S> <C> <C>
Net loss................................................ $(14,607) $ (3,686)
======== ========
Basic and diluted:
Weighted-average shares............................... 2,408 2,703
Less weighted-average shares subject to repurchase.... -- (76)
-------- --------
Shares used in computing basic and diluted net loss per
share................................................. 2,408 2,627
======== ========
Basic and diluted net loss per share.................... $ (6.07) $ (1.40)
======== ========
Pro forma:
Shares used above..................................... 2,408 2,627
Pro forma adjustment to reflect weighted effect of
assumed conversion of redeemable convertible and
convertible preferred stock (unaudited)............ 18,800 20,431
-------- --------
Shares used in computing pro forma basic and diluted
net loss per share (unaudited)..................... 21,208 23,058
======== ========
Pro forma basic and diluted net loss per share
(unaudited)........................................ $ (0.69) $ (0.16)
======== ========
</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 16,069,329,
20,796,354, 25,657,825 and 28,182,944 for the years ended December 31, 1996,
1997, 1998 and the three months ended March 31, 1999. Also excluded from the per
share calculation are the BWC exchangeable shares represented by the one share
of Series E Preferred Stock (see Note 2). Such securities would have been
included in the computation of diluted net income per share using the treasury
stock method.
UNAUDITED PRO FORMA SHAREHOLDERS' EQUITY
If the Offering is consummated, all of the preferred stock, with the
exception of the Series E preferred stock, will be automatically converted into
ordinary shares upon completion of the Offering (see Note 8). Unaudited pro
forma shareholders' equity at March 31, 1999, as adjusted for the assumed
conversion of such shares, is disclosed on the balance sheet.
F-11
<PAGE> 80
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK-BASED COMPENSATION
BackWeb has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. The alternative fair value accounting
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), requires use of option valuation models that were not developed
for use in valuing employee stock options. Under APB 25, when the exercise price
of BackWeb's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized. See the pro
forma disclosures of the application of SFAS 123 in Note 8.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, BackWeb adopted SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS 130"). SFAS 130 establishes standards for reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Adoption of SFAS 130 had no impact on BackWeb's
financial position, results of operations and disclosures, as BackWeb had no
items of other comprehensive income in any period presented.
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
superseded SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in interim financial
reports. SFAS 131 also establishes standards for related disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS 131 did not effect results of operations or financial position, but did
affect the disclosure of geographic information for assets (see Note 10).
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). BackWeb is 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. Because
BackWeb currently holds no derivative financial instruments as defined by SFAS
133 and does not currently engage in hedging activities, adoption of SFAS 133 is
not expected to have a material effect on BackWeb's financial condition or
results of operations.
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. BackWeb is required to implement SOP 98-1 for the year ending
December 31, 1999. Adoption of SOP 98-1 is not expected to have a material
impact on BackWeb's financial condition or results of operations.
2. ACQUISITION OF LANACOM, INC.
In August 1997, BackWeb acquired all of the outstanding shares of Lanacom,
a Canadian corporation, a developer of technology software products in a
stock-for-stock transaction. The transaction was carried out through a wholly
owned subsidiary of BackWeb Technologies Ltd., BackWeb Canada, Inc. ("BWC"), and
was accounted for under the purchase method of accounting.
F-12
<PAGE> 81
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
2. ACQUISITION OF LANACOM, INC. (CONTINUED)
Under the terms of the agreement, BackWeb issued 8,532,909 shares of BWC
and granted options to purchase 341,667 BackWeb ordinary shares, to Lanacom's
stock and option holders at the date of the acquisition. 2,867,373 shares of BWC
exchangeable common shares were placed in escrow. The escrow shares were to be
distributed to the Lanacom shareholders during 1998, and were for the
satisfaction of (i) any shortfall in Lanacom's recorded net liabilities at the
closing or (ii) any losses to BackWeb resulting from any losses incurred by
BackWeb by reason of the breach by Lanacom of any representations, warranties,
covenants or agreements in the acquisition agreement. As of the date of the
acquisition, management believed that all escrow shares were to be distributed
to Lanacom's shareholders. On March 25, 1999, BackWeb entered into a settlement
agreement and mutual release with a former shareholder of Lanacom pursuant to
which 746,404 shares of BWC exchangeable common stock which had been previously
held in escrow and which were further subject to certain employment continuation
conditions, under the former shareholder employment contract, were released to
BackWeb. The release of these shares is reflected in the financial statements at
December 31, 1998.
Each exchangeable BWC share issued in connection with the acquisition is
exchangeable, at any time and at the election of the holder thereof, into 0.33
ordinary shares of BackWeb reflecting the one-for-three reverse ordinary stock
split described in Note 11 (subject to further adjustments for stock splits,
stock dividends, reclassifications, and the like). In connection with the
acquisition, BackWeb issued one share of Series E preferred stock which entitled
each holder of a BWC exchangeable share to voting rights equal to 0.33 ordinary
shares of BackWeb, reflecting the one-for-three reverse ordinary stock split.
The purchase price of $3,904,000 was determined based on the value of the
shares originally issued and options granted. The purchase price was allocated
based upon the estimated fair value of the net assets acquired as follows (in
thousands):
<TABLE>
<S> <C>
Goodwill.................................................... $3,224
Acquired developed technology............................... 400
Acquired other identifiable intangible assets............... 383
Assumed liabilities in excess of assets acquired............ (103)
------
$3,904
======
</TABLE>
The acquired developed technology is comprised of three related software
products which as of the acquisition date, had achieved technological
feasibility. The valuation was based on the stand alone technology of Lanacom,
not considering BackWeb's plans of integration. To determine the value of the
acquired developed technology, the expected future cash flows of the existing
developed technology were based on forecasts of future results that management
believed were likely to occur, at the time of the acquisition. However, no
assurance can be given that deviations from these projections will not occur.
The future cash flows were discounted taking into account the expected income
stream, size of existing markets, growth rates of existing and future markets,
as well as the evaluation of anticipated product life cycles, and associated
risks. Revenues and related expenses for the developed technology were estimated
from the date of the acquisition and extended through the year 2000.
PRO FORMA FINANCIAL INFORMATION
The operations of Lanacom are included in BackWeb's consolidated operating
results from August 1, 1997. The following unaudited pro forma information
presents the results of operations of BackWeb and Lanacom for the year ended
December 31, 1997 as if the acquisition had been
F-13
<PAGE> 82
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
2. ACQUISITION OF LANACOM, INC. (CONTINUED)
PRO FORMA FINANCIAL INFORMATION (CONTINUED)
consummated as of January 1, 1997. This pro forma information does not purport
to be indicative of what would have occurred had the acquisition been made as of
this date or of results which may occur in the future (in thousands, except per
share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
(UNAUDITED)
<S> <C>
Total revenues.............................................. $ 5,625
========
Net loss.................................................... $(17,182)
========
Basic and diluted net loss per share........................ $ (7.99)
========
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment at cost, consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment....................... $1,227 $1,493 $ 1,600
Office equipment, furniture, fixtures,
and other.............................. 284 408 435
------ ------ -------
1,511 1,901 2,035
Less accumulated depreciation............ (342) (871) (1,046)
------ ------ -------
Property and equipment, net.............. $1,169 $1,030 $ 989
====== ====== =======
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- MARCH 31,
1997 1998 1999
------ ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable......................... $1,462 $ 841 $ 604
Accrued compensation..................... 811 1,256 1,122
Other.................................... 1,552 1,260 1,963
------ ------ ------
$3,825 $3,357 $3,689
====== ====== ======
</TABLE>
5. RELATED PARTIES
SHAREHOLDERS' LOAN
In 1995, BackWeb signed an agreement with its early investors (the "Early
Investors"), according to which the Early Investors provided BackWeb with loan
financing in the amount of
F-14
<PAGE> 83
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
5. RELATED PARTIES (CONTINUED)
SHAREHOLDERS' LOAN (CONTINUED)
$500,000. The loan is denominated in NIS and linked to the Israeli consumer
price index. The loan is payable at a rate of 2.5% of cumulative consolidated
revenues in excess of $5,000,000. In addition, effective September 30, 1996,
$748,000 of accounts payable to the Early Investors were converted into a
shareholders' loan on the same terms as the $500,000 loan. As of December 31,
1998, no repayment has been made. As of December 31, 1998, the loan balance,
reflecting currency conversion adjustments, is $1,155,000. As of March 31, 1999,
the loan balance was $927,000 reflecting currency conversion adjustments and
repayment.
SERVICES FROM AFFILIATES
The Early Investors provide BackWeb with professional services relating
primarily to management and administrative services, in return for reimbursement
of specifically identified expenses and salaries. Amounts incurred for these
services were approximately $540,000, $516,000, $220,000 and $24,000 during the
years ended December 31, 1996, 1997, 1998 and the three months ended March 31,
1999.
BackWeb reimburses BRM Technologies Ltd. ("BRM"), a related party, for
technology and administrative services on the basis of specific cost plus markup
and specifically identified expenses at cost. Amounts incurred for these
services were approximately $1.6 million, $1.2 million, $873,000 and $67,000
during the years ended December 31, 1996, 1997, 1998 and the three months ended
March 31, 1999.
BackWeb believes that the amounts charged in connection with the services
from founders approximate the cost that would have been incurred if BackWeb
would have incurred these costs internally.
STOCK OPTIONS
Pursuant to the Founding Agreement, BackWeb granted to its Early Investors
the right to grant stock options for up to 792,167 ordinary shares any person or
entity. Through December 31, 1998, options for 722,084 ordinary shares have been
granted and 70,083 shares remained available and are reflected in the option
activity summary in Note 8. This pool of options has been used by the Early
Investors in granting options to employees and consultants of BRM and related
companies.
Deferred compensation expense related to the Early Investors' options
amounting to $290,000 is included in amortization of goodwill, other intangibles
and deferred stock compensation for the three months ended March 31, 1999. No
compensation expense was recorded in prior periods as amounts ascribed to these
options were immaterial.
F-15
<PAGE> 84
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES
LEASES
BackWeb leases its office facilities under cancelable and noncancelable
operating leases. Future rental payments on a fiscal year basis under
noncancelable operating leases with initial terms in excess of one year are as
follows (in thousands):
<TABLE>
<S> <C>
1999........................................................ $ 830
2000........................................................ 781
2001........................................................ 693
2002........................................................ 153
------
$2,457
======
</TABLE>
Rent expense approximated $165,000, $458,000, and $695,000 for the years
ended December 31, 1996, 1997, and 1998.
BANK LINE OF CREDIT
In December 1998, BackWeb entered into a line of credit agreement with a
bank which provides for formula and nonformula revolving credit loans
aggregating up to $6,500,000. The line of credit is secured by substantially all
of BackWeb's assets. Borrowings under the line of credit bear interest at the
bank's prime rate plus 2%-4%. The borrowing under the line of credit at December
31, 1998 and March 31, 1999 in the amount of $2,000,000 bears interest at prime
plus 4%.
The amount available under the formula loans is limited to the lower of
$3,000,000 or an amount equal to 85% of eligible accounts receivable. The amount
available under the nonformula loans and term loans are $2,000,000 and
$1,500,000, respectively. As of December 31, 1998, BackWeb had $1,220,000 in
unused availability under the formula and nonformula line of credit and utilized
$2,000,000 of the amount available under the line of credit. The loan is due in
December 1999.
In 1997, BackWeb had a credit agreement with a different financial
institution. BackWeb repaid the outstanding balance under this credit agreement
in 1998.
ROYALTY COMMITMENTS
In 1997, BackWeb entered into an in-license agreement which include future
royalty commitments at the rate of generally 1% of product revenues which
incorporate the licensed technology into products sold by BackWeb. As of
December 31, 1998, such royalty commitments have not been met.
7. ACCRUED SEVERANCE PAY, NET
BackWeb's liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment as of the balance sheet date. BackWeb records
as expense the net increase in its funded or unfunded severance liability.
Employees are entitled to one month salary for each year of employment, or a
portion thereof. The Company's liability is fully provided by monthly deposits
with severance pay funds, insurance policies and by an accrual. Deposits with
severance pay funds and insurance policies are not under the control of BackWeb.
F-16
<PAGE> 85
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
7. ACCRUED SEVERANCE PAY, NET (CONTINUED)
The deposited funds include investment income accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the fulfillment of
the obligation pursuant to Israeli severance pay law or labor agreements. The
value of the deposited funds are based on the cash surrendered value of these
policies, and include the accumulated investment income, which has been
immaterial to date.
The net accrual severance pay liability reported in the balance sheets
reflects the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Accrued severance pay....................................... $ 197 $ 279
Less amount funded.......................................... (123) (186)
----- -----
Unfunded portion, net accrued severance pay................. $ 74 $ 93
===== =====
</TABLE>
Severance expense for the years ended December 31, 1996, 1997 and 1998 was
$88,000, $197,000 and $279,000.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
PREFERRED STOCK
Preferred stock consists of the following:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED LIQUIDATION
AUTHORIZED AT AND OUTSTANDING PREFERENCE AT
DECEMBER 31, ------------------------------------- --------------------------
1997 AND DECEMBER 31, MARCH 31, DECEMBER 31, MARCH 31,
1998 1997 1998 1999 1998 1999
------------- ---------- ---------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Redeemable
convertible
preferred stock:
Series B............. 4,237,640 4,237,640 4,237,640 4,237,640 $ 3,207,893 $ 3,207,893
Series C-1........... 10,482,608 10,482,608 10,482,608 10,482,608 12,054,999 12,054,999
Series C-2........... 3,919,129 2,108,696 3,047,232 3,047,232 3,504,317 3,504,317
Series D............. 17,400,000 8,077,797 17,391,308 26,039,123 20,000,004 29,944,991
---------- ---------- ---------- ---------- ----------- -----------
36,039,377 24,906,741 35,158,788 43,806,603 $38,767,213 $48,712,200
========== ========== ========== ========== =========== ===========
Series A convertible
preferred stock.... 25,464,110 25,464,110 25,464,110 25,464,110 $ 2,024,397 $ 2,024,397
========== ========== ========== ========== =========== ===========
Series E preferred
stock.............. 1 1 1 1 -- --
========== ========== ========== ========== =========== ===========
</TABLE>
Each share of Series A convertible preferred stock and each share of Series
B, C, and D redeemable convertible preferred stock is convertible at the option
of the holder, at any time, into 0.33 ordinary shares, subject to certain
antidilution adjustments, including for issuances of additional ordinary shares
for consideration per share less than the conversion price of any series of
redeemable convertible preferred and convertible preferred stock. Outstanding
shares of convertible preferred stock automatically convert into ordinary shares
on the closing of an
F-17
<PAGE> 86
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY) (CONTINUED)
PREFERRED STOCK (CONTINUED)
underwritten public offering of ordinary shares in which BackWeb receives at
least $15,000,000 of net proceeds and the offering price per share is at least
$6.90 (subject to adjustment for share splits, share dividends, and like
events).
Series A convertible preferred shareholders are entitled to receive
dividends as and when declared for holders of ordinary shares calculated on the
basis of the number of ordinary shares into which Series A convertible preferred
stock could then be converted. Series B, C, and D redeemable convertible
preferred shareholders are entitled to dividends in preference to other shares
at an annual rate equal to 7% of the applicable issuance price when declared by
the board of directors out of legally available funds. No dividends have been
declared as of December 31, 1998.
The Series A convertible preferred shareholders and the Series B, C, and D
redeemable convertible preferred shareholders are entitled to receive, upon
liquidation and in certain circumstances as upon a merger, acquisition or
similar event, an amount per share equal to the equivalent in Israeli currency
(subject to stock splits, stock dividends, reclassifications, and the like) at
$0.0795, $0.757, $1.15, and $1.15, plus all declared but unpaid dividends. Any
remaining assets shall be distributed on a pro rata basis among the holders of
all preferred and ordinary shares.
The Series A convertible preferred shareholders and the Series B, C, and D
redeemable convertible preferred shareholders have voting rights based on the
number of ordinary shares into which the preferred stock is convertible into.
With the consent of a majority of the Series B, C-1, and D redeemable
convertible preferred stock, in each case, voting separately as a single class,
BackWeb, at the discretion of the board of directors, may redeem, in whole or in
part, any of the outstanding Series B, C, or D redeemable convertible preferred
stock at the price paid for each share plus all declared but unpaid dividends.
In addition, upon the written request at any time after the 10th anniversary of
the issuance of the Series D redeemable convertible preferred share, of the
holders of a majority of the Series B, C-1, and D redeemable convertible
preferred stock, voting together as a single class, BackWeb shall redeem all the
Series B, C, and D redeemable convertible preferred stock outstanding at the
applicable issuance price, together with all declared but unpaid dividends.
Series E preferred stock was issued to a trustee in connection with the
Lanacom acquisition (see Note 2) and represents the voting and exchange rights
of the BWC exchangeable common shares. The registered holder of the Series E
preferred stock is entitled to have a number of votes equal to the number of
outstanding exchangeable shares of BWC. The holder of the Series E preferred
stock shall not be entitled to receive any dividend declared and paid by
BackWeb. However, if such dividend is declared by BackWeb, an equivalent
dividend will be declared simultaneously by BWC on the exchangeable shares.
Series E preferred stock shall be canceled when there will be no outstanding
exchangeable shares of BWC.
On March 24, 1999, BackWeb issued 8,647,815 shares of Series D redeemable
convertible preferred stock to investors at $1.15 per share, resulting in gross
cash proceeds of approximately $9.9 million.
F-18
<PAGE> 87
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY) (CONTINUED)
ORDINARY SHARES
Ordinary shares subject to future issuance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Conversion of redeemable convertible preferred
and convertible preferred stock (Series A-D)... 20,207,632 23,090,237
Exchange of BWC shares (represented by Series E
preferred stock) into ordinary shares.......... 2,844,303 2,595,501
Exercise of outstanding options.................. 5,304,466 4,946,980
Ordinary shares available for grant under stock
option plans................................... 1,026,316 3,646,344
Exercise of preferred stock warrants outstanding
and conversion to Ordinary shares.............. 145,726 145,726
---------- ----------
29,528,443 34,424,788
========== ==========
</TABLE>
STOCK WARRANTS
In December 1996 and March 1997, in connection with the Series C financing,
BackWeb issued warrants to purchase 1,810,432 Series C-2 redeemable convertible
preferred shares at an exercise price of $1.15 per share. In December 1998,
warrants to purchase 938,536 shares were exercised while the remainder of
871,896 expired.
In August 1997, in connection with a bank line of credit, BackWeb issued a
warrant for the purchase of 52,178 shares of Series D redeemable convertible
preferred shares at $1.15 per share. The warrant is exercisable through the
earlier of August 2002 or an initial public offering of BackWeb's ordinary
stock. The value ascribed to these warrants is immaterial for financial
statement purposes.
In December 1998, in connection with a bank loan, BackWeb issued a warrant
for the purchase of 385,000 shares of Series C-2 redeemable convertible
preferred shares at $1.15 per share. The warrant is exercisable through the
earlier of a merger or consolidation of BackWeb, or December 2003. The warrant
fair value of $224,000 is amortized over the term of the bank line of credit.
STOCK OPTION PLANS
Under the 1996 Israeli Stock Option Plan (the "1996 Israeli Plan"), BackWeb
is authorized to grant options to purchase ordinary shares to its Israeli
employees and other eligible participants. Options granted under the 1996
Israeli Plan expire seven years from the date of grant and terminate upon
termination of the optionee's employment or other relationship with BackWeb. The
options vest ratably over a four-year period.
Under the 1996 U.S. Stock Option Plan (the "1996 U.S. Plan"), BackWeb is
authorized to grant incentive stock options to employees and nonstatutory stock
options to employees, officers, directors and consultants at BackWeb or any
other member of the BRM group. Options granted under the 1996 U.S. Plan expire
no later than seven years from the date of grant and
F-19
<PAGE> 88
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY) (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
generally vest over a four year period. BackWeb is no longer granting options
under the 1996 U.S. Plan. In the event of merger, sale or dissolution of the
Company, all options will terminate immediately, except to the extent options
are assumed by the successor Company.
Under the 1998 U.S. Option Plan (the "1998 U.S. Plan"), BackWeb is
authorized to grant incentive stock options to employees and nonstatutory stock
options and share purchase rights to employees, directors and consultants. The
exercise price of incentive stock options must not be less than the fair market
value of its ordinary share at the date of grant. Options granted under the 1998
U.S. Option Plan generally vest over four years. In the event of an acquisition
of BackWeb, if the options are not assumed by the successor corporation, the
options will accelerate and become fully vested.
As of December 31, 1998, an aggregate of 6,666,667 shares have been
reserved under the 1996 Israeli Plan, the 1996 U.S. Plan and the 1998 U.S. Plan,
including those options already exercised.
BackWeb's 1999 Employee Stock Purchase Plan was adopted by the board of
directors on March 25, 1999 to be effective following the Offering. BackWeb has
reserved a total of 600,000 shares for issuance under the plan. The number of
shares reserved under the plan is subject to an annual increase on each
anniversary beginning July 1, 2000 equal to lesser of 833,333 shares, 2% of the
then outstanding shares or an amount determined by the Board. Eligible employees
may purchase ordinary shares at 85% of the lesser of the fair market value of
BackWeb's ordinary shares on the first day of the applicable offering period or
the last day of the applicable purchase period.
Also on March 25, 1999, the board of directors approved an increase to the
number of shares reserved under the 1998 U.S. Plan by 3,600,000. The number of
shares authorized and reserved under the plan will be subject to an annual
increase on each anniversary beginning July 1, 2000 equal to the lesser of
1,400,000 shares, 3% of the outstanding shares on such date or an amount
determined by the Board.
F-20
<PAGE> 89
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY) (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
A summary of activity under the stock option plans is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
WEIGHTED- AVERAGE
SHARES AVERAGE FAIR VALUE
AVAILABLE OPTIONS PRICE PER EXERCISE OF OPTION
FOR GRANT OUTSTANDING SHARE PRICE GRANTED
---------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C>
Options authorized.............. 5,000,000 -- -- --
Options granted................. (1,751,500) 1,751,500 $0.03-$0.36 $0.21
Options canceled................ 50,000 (50,000) $0.24-$0.36 $0.24
---------- ----------
Balance at December 31, 1996...... 3,298,500 1,701,500 $0.03-$0.36 $0.09 $0.03
Options granted................. (1,890,367) 1,890,367 $1.05-$1.20 $1.17
Options exercised............... -- (15,000) $0.03-$0.24 $0.18
Options canceled................ 191,667 (191,667) $0.03-$1.20 $0.90
---------- ----------
Balance at December 31, 1997...... 1,599,800 3,385,200 $0.03-$1.20 $0.66 $0.21
Options authorized.............. 1,666,667 -- -- --
Options granted................. (3,236,500) 3,236,500 $1.20-$2.10 $1.83
Options exercised............... -- (320,885) $0.03-$1.20 $0.39
Options canceled................ 996,349 (996,349) $0.12-$1.50 $1.05
---------- ----------
Balance at December 31, 1998...... 1,026,316 5,304,466 $0.03-$2.10 $1.32 $0.33
---------- ----------
Options authorized (Unaudited).. 3,600,000 -- -- --
Options granted (Unaudited)..... (1,088,722) 1,088,722 $1.50-$6.30 $4.03
Options exercised (Unaudited)... -- (1,337,458) $0.03-$5.79 $2.77
Options canceled (Unaudited).... 108,750 (108,750) $0.24-$3.00 $1.80
---------- ----------
Balance at March 31, 1999
(Unaudited)..................... 3,646,344 4,946,980 $ 0.03-6.30 $1.51 $0.62
========== ==========
</TABLE>
Exercise prices for options outstanding as of December 31, 1998 and the
weighted-average remaining contractual life are as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- WEIGHTED-
RANGE OF OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 LIFE PRICE 1998 PRICE
-------- -------------- ----------- --------- -------------- ---------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.03 824,667 4.0 $0.03 808,000 $0.03
$0.12 - $1.05 464,833 5.0 $0.34 193,000 $0.29
$1.20 1,023,133 6.2 $1.20 327,811 $1.20
$1.50 1,161,000 7.6 $1.50 -- --
$2.10 1,830,833 9.2 $2.10 11,667 2.10
- --------------------- --------- ---- ----- --------- -----
$0.03 - $2.10........ 5,304,466 7.0 $1.32 1,340,478 $0.37
===================== ========= ==== ===== ========= =====
</TABLE>
F-21
<PAGE> 90
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY) (CONTINUED)
STOCK OPTION PLANS (CONTINUED)
As of March 31, 1999, there were 1,692,954 ordinary shares options
exercisable at a weighted average exercise price of $0.9.
During the year ended December 31, 1998 and the three months ended March
31, 1999, in connection with the grant of certain share options, BackWeb
recorded deferred stock compensation of $1,859,000 and $2,608,000 respectively
representing the difference between the exercise price and the deemed fair value
of BackWeb's ordinary share on the date such stock options were granted. Such
amount is being amortized based on an accelerated method over the vesting period
of the options, generally four years. In 1998 and the three months ended March
31, 1999, BackWeb recorded amortization of deferred stock compensation expense
of approximately $221,000 and $807,000 respectively. At March 31, 1999, BackWeb
had a total of $3,439,000 remaining to be amortized.
RESTRICTED SHARES ISSUED FOR PROMISSORY NOTES
On March 25, 1999, several key employees and one director exercised options
for 1,141,333 ordinary shares for promissory notes in the aggregate amount of
$3,538,000. The notes are full recourse and are secured by the shares, bear
interest at a rate of 6% per annum and are payable over the remaining options
vesting period. The shares are restricted and are subject to a right of
repurchase in favor of BackWeb in accordance with the original options' vesting
schedule which is generally four years.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Pro forma information regarding net loss is required by SFAS 123, which
also requires that the information be determined as if BackWeb has accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these awards was estimated at the date of grant using the minimum
value options pricing model. The minimum value options pricing valuation model
was developed for use in estimating the fair value of options that have no
vesting restrictions and are fully transferable. Option valuation models require
the input of highly subjective assumptions. Because BackWeb's stock-based awards
have characteristics significantly different from those of traded options and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
stock-based awards. The fair value of these options was estimated at the date of
grant using the minimum value method option pricing model with the following
weighted-average assumptions for 1996, 1997, and 1998: risk-free interest rates
of approximately 6%, no dividend yield; and a weighted-average expected life of
the option of approximately 3.46, 3.32, and 3.34 years.
F-22
<PAGE> 91
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY) (CONTINUED)
ACCOUNTING FOR STOCK-BASED COMPENSATION (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. BackWeb's pro
forma information follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997 1998
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss:
As reported............................. $(7,684) $(14,962) $(14,607)
Pro forma............................... $(7,688) $(15,055) $(14,731)
Basic and diluted loss per share:
As reported............................. $ (6.95) $ (6.96) $ (6.07)
Pro forma............................... $ (6.95) $ (7.00) $ (6.12)
</TABLE>
9. INCOME TAXES
Pretax loss from foreign operations (non-Israeli) was $719,000 in 1996,
$2,648,000 in 1997 and $3,621,000 in 1998.
ISRAELI INCOME TAXES
BackWeb's investment program has been granted the status of "Approved
Enterprise" by the Israeli government under the law for the Encouragement of
Capital Investments, 1959 (the "Law"). Israeli income derived from the "Approved
Enterprise" entitles BackWeb to tax exemption for a period of two years
commencing the first year that it will earn taxable income, and to a reduced tax
rate of 10%-25% for an additional 5 to 8 year period (depending on the rate of
foreign investment in BackWeb). The tax benefit period is limited to the
earliest of 12 years from completion of the investment under the plan or
December 31, 2009. Thereafter, BackWeb will be subject to the regular corporate
tax rate of 36% on its Israeli income. Income from sources other than the
"Approved Enterprise" will be subject to tax at the regular rate of 36%.
BackWeb currently has no plans to distribute such tax-exempt income as
dividend and intends to retain future earnings to finance the development of the
business. If the retained tax-exempt income is distributed in a manner other
than in the complete liquidation of BackWeb, it would be taxed at the corporate
tax rate applicable to such profits (currently 25%). As of December 31, 1998,
BackWeb is in the process of completing the investments required under the
program. Should BackWeb fail to meet conditions stipulated by the law and by the
Approval certification, including making specified investments in fixed assets,
maintaining the development and production nature of its facilities, and
financing of at least 30% of the investment program through equity, it could be
subject to corporate tax in Israel at the corporate rate of 36% and could be
required to refund tax benefits already received at that time (inclusive of
interest and penalties).
As of December 31, 1998, BackWeb had approximately $30,000,000 of Israeli
net operating loss carryforwards. The Israeli loss carryforwards have no
expiration date. The Company expects that during the period these tax losses are
utilized, its income would be substantially tax exempt.
F-23
<PAGE> 92
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
9. INCOME TAXES (CONTINUED)
ISRAELI INCOME TAXES (CONTINUED)
Accordingly, there will be no tax benefit available from such losses and no
deferred income taxes have been included in these financial statements.
U.S. INCOME TAXES
At December 31, 1998, BackWeb had a U.S. federal net operating loss
carryforward for income tax purposes of approximately $1,000,000. The net
operating loss expires in various amounts between the years 2011 and 2018.
Utilization of U.S. net operating losses may be subject to substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before utilization.
DEFERRED INCOME TAXES
Deferred tax assets and liabilities reflect the net tax effects of net
operating loss and of temporary differences between the carrying amounts of
assets and liabilities for financial reporting and the amounts used for income
tax purposes. Significant components of BackWeb's deferred tax assets and
liabilities for federal and state income taxes are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforwards................ $ 300 $ 400
Other foreign net operating loss carryforwards....... 400 1,400
Reserve not currently deductible..................... 200 200
Other, net........................................... 100 200
------- -------
Total deferred assets.................................. 1,000 2,200
Valuation allowance.................................... (1,000) (2,200)
------- -------
Net deferred tax assets................................ $ -- $ --
======= =======
</TABLE>
For the year ended December 31, 1997, the valuation allowance increased by
$700,000.
At December 31, 1998, BackWeb had other foreign net operating loss
carryforwards of approximately $4.5 million. The net operating losses expire in
various amounts between 2002 and 2005.
10. SEGMENTS AND GEOGRAPHIC INFORMATION
BackWeb operates in one industry segment, the development and marketing of
network application software. Operations in Israel and Canada include research
and development and local sales. Operations in the U.S. include marketing and
sales. The following is a summary of
F-24
<PAGE> 93
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
10. SEGMENTS AND GEOGRAPHIC INFORMATION (CONTINUED)
operations within geographic areas based on the location of the entity making
that sale (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------- THREE MONTHS ENDED
1996 1997 1998 MARCH 31, 1999
----- ------ ------ ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues from sales to
unaffiliated customers:
Israel....................... $ -- $ 593 $1,623 $ 724
United States................ 71 4,979 7,574 3,360
Canada....................... -- 29 340 13
----- ------ ------ ------
$ 71 $5,601 $9,537 $4,097
===== ====== ====== ======
Long-lived assets:
Israel....................... $ 193 $ 257 $ 257 $ 345
United States................ 272 972 650 574
Canada....................... -- 3,527 1,849 1,436
Other........................ -- -- 98 23
----- ------ ------ ------
$ 465 $4,756 $2,854 $2,378
===== ====== ====== ======
</TABLE>
Revenues generated in the U.S. and Canada (collectively, North America) are
all to customers located in those geographic regions. Revenues generated in
Israel consist of export sales to customers located in Europe and the Far East.
11. PROPOSED PUBLIC OFFERING AND RELATED MATTERS
The board of directors has authorized BackWeb to file a registration
statement with the U.S. Securities and Exchange Commission for an initial public
offering of its ordinary shares.
On March 25, 1999, the board of directors approved an increase in the
authorized share capital of BackWeb to 150,067,829 ordinary shares and
50,000,000 shares of undesignated preferred stock.
On April 26, 1999 the shareholders approved a one-for-three reverse
ordinary stock split which was ratified by the board of directors on May 28,
1999. The reverse stock split will be effected prior to the time of the
Offering. All ordinary share numbers and preferred stock conversion ratios have
been retroactively adjusted to reflect the reverse stock split.
F-25
<PAGE> 94
UNDERWRITING
BackWeb and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., BancBoston
Robertson Stephens Inc., Lehman Brothers Inc. and Wit Capital Corporation are
the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co......................................... 2,157,926
BancBoston Robertson Stephens Inc........................... 1,192,537
Lehman Brothers Inc......................................... 1,192,537
Wit Capital Corporation..................................... 143,000
Hambrecht & Quist LLC....................................... 143,000
Edward D. Jones & Co., L.P.................................. 143,000
Salomon Smith Barney Inc.................................... 143,000
Dain Rauscher Wessels,
a division of Dain Rauscher Incorporated.................. 55,000
Doft & Co., Inc............................................. 55,000
Gruntal & Co., L.L.C........................................ 55,000
Neuberger Berman, LLC....................................... 55,000
SoundView Technology Group, Inc............................. 55,000
Stifel, Nicolaus & Company, Incorporated.................... 55,000
U.S. Bancorp Piper Jaffray Inc.............................. 55,000
---------
Total..................................................... 5,500,000
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 825,000
shares from BackWeb to cover such sales. They may exercise that option for 30
days. If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following tables show the per share and total underwriting discounts
and commissions to be paid to the underwriters by BackWeb. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by the Company
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share............ $ 0.84 $ 0.84
Total.............. $4,620,000 $5,313,000
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $0.50 per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $0.10 per share from the
initial public offering price. If all the shares are not sold at the initial
offering price the representatives may change the offering price and the other
selling terms.
Wit Capital, a member of the National Association of Securities Dealers,
Inc. will participate in the offering as one of the underwriters. The National
Association of
Securities Dealers, Inc. approved the membership of Wit Capital on September 4,
1997. Except for its participation as a manager in this offering, Wit Capital
has no relationship with BackWeb or any of its founders or significant
shareholders.
We have agreed with the underwriters not to dispose of or hedge any of our
ordinary shares or securities convertible into or exchangeable for ordinary
shares during the period from the date of this prospectus continuing through the
date 180 days after the date of this prospectus, except for certain
U-1
<PAGE> 95
gifts to immediate family or with the prior written consent of the
representatives. This agreement does not apply to any existing employee benefit
plans. See "Shares Eligible for Future Sale" for a discussion of certain
transfer restrictions.
In addition, our officers and directors and substantially all holders of
shares of capital stock of BackWeb have agreed that, subject to certain limited
exceptions, they will not offer to sell, sell, contract to sell, pledge, grant
any option to purchase, make any short sale or otherwise dispose of any ordinary
shares owned of record or beneficially prior to the offering or any securities
convertible into or exchangeable for such ordinary shares, for a period of 180
days following the date of the final prospectus for this offering without the
prior written consent of the representatives (other than certain transfers to
immediate family).
At our request, the underwriters have reserved up to 349,000 ordinary
shares for sale, at the initial public offering price, to employees and other
friends of BackWeb through a directed share program. BackWeb has requested that
the underwriters reserve an additional 200,000 ordinary shares at the initial
public offering price to be offered to U S WEST Innovations, Inc., an affiliate
of U S WEST Communications, Inc., one of BackWeb's customers. The number of
ordinary shares available for sale to the general public in the public offering
will be reduced to the extent such persons purchase such reserved shares.
Prior to the offering, there was no public market for the shares. The
initial public offering price was negotiated among BackWeb and the
representatives. Among the factors considered in determining the initial public
offering price of the shares, in addition to prevailing market conditions, were
BackWeb's historical performance, estimates of our business potential and
earnings prospects, an assessment of our management and the consideration of the
above factors in relation to market valuation of companies in related
businesses.
We have been approved for quotation of the ordinary shares on the Nasdaq
National Market under the symbol "BWEB."
In connection with the offering, the underwriters may purchase and sell
ordinary shares in the open market. These transactions may include short sales,
stabilizing transactions and purchases to cover positions created by short
sales. Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the ordinary shares
while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the ordinary shares. As a result, the price of the
ordinary shares may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the number of shares offered.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $1.7 million.
We have agreed to indemnify the several underwriters against liabilities
under the Securities Act of 1933 or contribute to payments which the
underwriters may be required to make in that respect.
Certain investment partnerships of which affiliates of The Goldman Sachs
Group, L.P., an affiliate of Goldman Sachs (lead manager of this offering), are
general partner, managing general partner or investment manager, hold 9,818,029
preferred shares of BackWeb which upon the closing of this offering convert into
3,272,676 ordinary shares. Because of the economic interest based on contributed
U-2
<PAGE> 96
capital of Goldman Sachs and its employees in those investment partnerships, the
aggregate beneficial ownership interest (as determined in accordance with the
Conduct Rules of the National Association of Securities Dealers, Inc.) of
BackWeb attributable to Goldman Sachs is approximately 3.6%. In January 1998,
BancAmerica Robertson Stephens Inc., an affiliate of BancBoston Robertson
Stephens, one of the underwriters in this offering, participated as the
placement agent for the Series D Preferred Shares.
U-3
<PAGE> 97
- ----------------------------------------------------------
- ----------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................... 1
Risk Factors............................. 4
Special Note Regarding Forward Looking
Statements............................. 13
Use of Proceeds.......................... 13
Dividend Policy.......................... 14
Capitalization........................... 15
Dilution................................. 16
Selected Consolidated Financial Data..... 17
Management's Discussion and Analysis of
Financial Condition and Results
Operations............................. 18
Business................................. 29
Management............................... 39
Related Party Transactions............... 45
Principal Shareholders................... 47
Description of Share Capital............. 49
Shares Eligible for Future Sale.......... 53
Material United States Federal Income Tax
Considerations......................... 54
Israeli Taxation and Investment
Programs............................... 58
Conditions in Israel..................... 62
Where You Can Find More Information...... 64
Reports to Security Holders.............. 65
Legal Matters............................ 65
Experts.................................. 65
ISA Exemption............................ 65
Index to Financial Statements............ F-1
Underwriting............................. U-1
</TABLE>
----------------------
Through and including July 2, 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
- ----------------------------------------------------------
5,500,000 Shares
BACKWEB TECHNOLOGIES
LTD.
Ordinary Shares
------------------------------
[BACKWEB LOGO]
------------------------------
GOLDMAN, SACHS & CO.
BANCBOSTON ROBERTSON STEPHENS
LEHMAN BROTHERS
WIT CAPITAL CORPORATION
Representatives of the Underwriters
- ----------------------------------------------------------
- ----------------------------------------------------------
