<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NUMBER 0-26241
BACKWEB TECHNOLOGIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ISRAEL _____________________
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3 ABBA HILLEL STREET, RAMAT-GAN, ISRAEL 52136
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(972) 3-7518464
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Ordinary Shares outstanding as
of April 30, 2000 was 37,151,506 shares.
<PAGE> 2
BACKWEB TECHNOLOGIES LTD.
QUARTERLY REPORT ON FORM 10-Q
QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)....................................................................
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999
Consolidated Statements of Operations for the Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...............
Item 3. Quantitative and Qualitative Disclosure About Market Risk...........................................
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................
Item 2. Changes in Securities and Use of Proceeds...........................................................
Item 3. Defaults Upon Senior Securities.....................................................................
Item 4. Submission of Matters to a Vote of Security Holders.................................................
Item 5. Other Information...................................................................................
Item 6. Exhibits and Report on Form 8-K.....................................................................
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................................. $ 41,522 $ 18,818
Short-term investments ..................................................................... 44,983 56,789
Trade accounts receivable, net of allowance for doubtful accounts of $1074 and $919
At March 31,2000 and December 31, 1999 ...................................................... 8,000 6,142
Other current assets ....................................................................... 2,927 2,344
--------- ---------
Total current assets ............................................................... 97,432 84,093
Property and equipment, net .................................................................. 1,788 1,631
Other assets ................................................................................. 178 325
--------- ---------
Total assets ....................................................................... $ 99,398 $ 86,049
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ................................................... $ 7,569 $ 8,576
Deferred revenue ........................................................................... 3,131 3,321
Payable to related parties ................................................................. -- 50
Current portion of shareholders' loans ..................................................... 368 823
--------- ---------
Total current liabilities .......................................................... 11,068 12,770
Long-term deferred revenue ................................................................... 113 --
Accrued severance pay, net ................................................................... 222 150
Shareholders' equity:
Series E preferred stock, nominal value $0.003 per share; one share authorized
and outstanding at March 31,2000 and December 31, 1999 .................................. 3,454 3,454
Ordinary shares, nominal value $0.01 per share; 150,067,829 shares authorized; 37,123,584
shares outstanding at March 31,2000 and 35,153,402 shares outstanding at December 31, 1999 141,155 124,301
Notes receivable from shareholders ......................................................... (3,316) (3,316)
Deferred stock compensation ................................................................ (1,825) (2,104)
Accumulated other comprehensive loss ....................................................... (341) (226)
Accumulated deficit ........................................................................ (51,132) (48,980)
--------- ---------
Total shareholders' equity ......................................................... 87,995 73,129
--------- ---------
Total liabilities and shareholders' equity ......................................... $ 99,398 $ 86,049
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 4
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Revenues:
License ................................................... $ 6,883 $ 3,308
Service ................................................... 2,020 789
-------- --------
Total revenues .................................... 8,903 4,097
Cost of revenues:
License ................................................... 32 73
Service ................................................... 1,329 592
-------- --------
Total cost of revenues ............................ 1,361 665
-------- --------
Gross profit ................................................ 7,542 3,432
Operating expenses:
Research and development .................................. 1,843 997
Sales and marketing ....................................... 6,936 3,831
General and administrative ................................ 1,596 931
Amortization of goodwill, other intangibles, and deferred
stock compensation ..................................... 447 1,202
-------- --------
Total operating expenses .......................... 10,822 6,961
Loss from operations ........................................ (3,280) (3,529)
Other income (expense), net ................................. 1,128 (157)
-------- --------
Net loss .................................................... $ (2,152) $ (3,686)
======== ========
Basic and diluted net loss per share ........................ $ (0.06) $ (1.40)
======== ========
Shares used in computing basic and diluted net loss per share 35,985 2,627
======== ========
Pro forma basic and diluted net loss per share .............. $ -- $ (0.16)
======== ========
Shares used in computing pro forma basic and diluted net
loss per share ............................................ -- 23,058
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 5
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss .......................................................... $ (2,152) $ (3,686)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of intangibles, warrant and deferred stock
compensation .................................................. 447 1,298
Depreciation .................................................... 204 175
Other ........................................................... -- 25
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable ........................................... (1,858) (3,163)
Other assets .................................................. (604) (373)
Payable to related parties .................................... (50) (164)
Other liabilities and accrued expenses ........................ (902) 703
Accounts payable .............................................. (259) (237)
Accrued compensation .......................................... 154 (134)
Deferred revenue .............................................. (77) 535
Severance pay ................................................. 72 15
-------- --------
Net cash used in operating activities .................... (5,025) (5,006)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment ............................... (361) (134)
Proceeds from short-term investments .............................. 11,691 --
-------- --------
Net cash provided by (used in) investing activities ............... 11,330 (134)
-------- --------
FINANCING ACTIVITIES
Repayment of shareholder loans .................................... (455) (253)
Proceeds from issuance of preferred shares, net ................... -- 9,915
Proceeds from issuance of ordinary shares, net .................... 16,854 166
-------- --------
Net cash provided by financing activities ......................... 16,399 9,828
-------- --------
Net increase (decrease) in cash and cash equivalents .............. 22,704 4,688
Cash and cash equivalents at beginning of the period .............. 18,818 6,449
-------- --------
Cash and cash equivalents at end of the period .................... $ 41,522 $ 11,137
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE> 6
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - 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.
The BackWeb group of companies consist of wholly owned subsidiaries registered
as follows: BackWeb Technologies, Inc., a U.S. corporation; BackWeb Canada,
Inc., a Canadian corporation; BackWeb Technologies B.V., a Netherlands
corporation; BackWeb Technologies U.K. Ltd., a United Kingdom corporation;
BackWeb Technologies GmbH, a German corporation; BackWeb Technologies S.A.R.L.,
a French corporation, BackWeb Technologies A.B., a Swedish corporation and
BackWeb K.K. Ltd., a Japanese corporation.
BASIS OF PRESENTATION - The unaudited consolidated financial statements include
the accounts of BackWeb Technologies Ltd. and its wholly-owned subsidiaries
(collectively, "BackWeb" or the "Company"). They have been prepared in
accordance with established guidelines for interim financial reporting and with
the instructions of form 10Q and Article 10 of Regulation S-X. All significant
intercompany transactions have been eliminated in consolidation. The balance
sheet at December 31, 1999 has been derived from audited financial statements at
such date. In the opinion of management the consolidated financial statements
reflect all adjustments consisting of normal recurring adjustments to fairly
state the company's financial positions results of operations and cash flows for
the period indicated. The financial statements should be read in conjunction
with the notes to the consolidated financial statements included in the
Company's Annual Report on form 10K for the fiscal year ended December 31, 1999.
REVENUE RECOGNITION - License revenues are comprised of perpetual or multi-year
license fees, which are primarily derived from contracts with corporate
customers and resellers, and royalty fees earned upon the shipment of products
which incorporate the Company's software. 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 delivered when BackWeb has provided the customer with the
access codes (the "key") 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. Royalty
revenues are recognized when reported to the Company after shipment of the
related products.
Service revenues are comprised of revenue from support arrangements, consulting
fees and training. BackWeb's policy is to recognize license revenue when these
services are not essential to the functionality of the product. To date, these
services have not been essential to the functionality of the product. Support
arrangements provide technical support and the right to unspecified upgrades on
an if-and-when-available basis. Revenue from support arrangements is deferred
and recognized on a straight-line basis as service revenue over the life of the
related service agreement, 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. In instances where software license agreements include a
combination of consulting services, training and support, these separate
elements are unbundled from the arrangement based on the element's relative fair
value.
BackWeb adopted Statement of Position 97-2, "Software Revenue Recognition" (SOP
97-2), as amended by Statement of Position 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2" and Statement of Position 98-9, "Modification
of SOP 97-2, Software Revenue Recognition, With Respect to Certain
Transactions".
<PAGE> 7
NET LOSS PER SHARE - The basic and diluted net loss per share has been computed
using the weighted-average number of ordinary shares outstanding during the
period.
The basic and diluted "pro forma" net loss per share, as presented in the
statements of operations, has been computed using the weighted-average number of
ordinary shares outstanding during the period and also takes effect of the
conversion of all preferred shares that converted automatically upon completion
of the Company's initial public offering (using the "as-if" converted method)
from original date of issuance.
The following table presents the calculation of the basic, diluted, pro forma
basic and diluted net loss per ordinary share (in thousands, except per share
data):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2000 1999
--------------- ---------------
<S> <C> <C>
Net loss ........................................... $ (2,152) $ (3,686)
======== ========
Basic and diluted:
Weighted-average shares .......................... 36,384 2,703
Less weighted-average shares subject to repurchase (399) (76)
-------- --------
Shares used in computing basic and diluted net loss
per share ........................................ 35,985 2,627
======== ========
Basic and diluted net loss per share ............... $ (0.06) $ (1.40)
======== ========
Pro forma:
Shares used above ................................ 35,985 2,627
Pro forma adjustment to reflect weighted effect
of assumed conversion of redeemable
convertible and convertible preferred stock ... -- 20,431
-------- --------
Shares used in computing pro forma basic and
diluted net loss per share .................... -- 23,058
======== ========
Pro forma basic and diluted net loss per share ... $ -- $ (0.16)
======== ========
</TABLE>
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board 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 December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 summarizes certain of the SEC Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. In March
2000, the SEC issued SAB No. 101A to defer for one quarter the effective date of
implementation of SAB 101 with the earlier application encouraged. The Company
is required to adopt SAB 101 in the second quarter of fiscal 2000. The Company
doesn't expect the adoption of SAB 101 to have a material effect on our
financial position or results of operation.
NOTE 2. SELECTIVE BALANCE SHEET DETAIL
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS - Cash equivalents consist of money
market instruments, bank time deposits and debt-securities with original
maturities of 90 days or less. Short-term investments consist of debt securities
with original maturities between three months and two years.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all debt securities have been classified as
"available-for-sale" and are carried at fair market value, based on quoted
market prices with material unrealized gains and losses, if any, included as a
separate component of
<PAGE> 8
shareholders' equity. Realized gains and losses and declines in value of
securities judged to be other than temporary are included in interest income and
have not been material to date. The cost of securities sold is based on the
specific identification method.
The following is a summary of the company's investment portfolio as of March 31,
2000 (in $ thousands):
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
COST LOSSES FAIR VALUE
------- ---------- ----------
<S> <C> <C> <C>
Money market funds ................ $18,097 $ -- $18,097
Corporate debt securities ......... 27,227 (341) 26,886
------- ------- -------
Totals ............................ $45,324 $ (341) $44,983
======= ======= =======
</TABLE>
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 two
to three years.
Property and equipment at cost, consists of the following (in
thousands):
<TABLE>
<CAPTION>
MAR.31 DEC. 31
2000 1999
------- -------
<S> <C> <C>
Computer equipment ....................................... $ 2,989 $ 2,145
Office equipment, furniture, fixtures, and other ......... 633 1,117
------- -------
3,622 3,262
Less accumulated depreciation ............................ (1,834) (1,631)
------- -------
Property and equipment, net .............................. $ 1,788 $ 1,631
======= =======
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in $
thousands):
<TABLE>
<CAPTION>
MAR. 31, DEC. 31,
2000 1999
------- -------
<S> <C> <C>
Accounts payable ......................................... $ 548 $ 807
Accrued compensation and related expense ................. 2,674 2,519
Sales events ............................................. 950
Other .................................................... 4,347 4,300
------- -------
$ 7,569 $ 8,576
======= =======
</TABLE>
SHAREHOLDERS' LOANS - 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 $500,000. The loan is
denominated in NIS and linked to the Israel 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 March 31, 2000, the loan balance was
$368,000, re-stated for the Israeli consumer price index and reflecting currency
conversion adjustment and repayments.
ACCUMULATED OTHER COMPREHENSIVE LOSS - The accumulated and other
comprehensive loss consists entirely of unrealized losses on short-term
investments. As at March 31,2000 and December 31, 1999, the amount was $341,000
and $226,000 respectively.
NOTE 3. CREDIT FACILITIES
BANK LINE OF CREDIT - In December 1998, BackWeb entered into a line of credit
agreement with TransAmerica Business Credit Corporation, 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 was $2,000,000, with
interest at prime plus 4%. No amounts were outstanding at March 31, 2000.
<PAGE> 9
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 March 31, 2000, BackWeb had $5,000,000 in unused
availability under the formula and nonformula line of credit.
CREDIT RISK - Financial instruments, which potentially subject BackWeb to
concentrations of credit risk, consist of cash equivalents, short-term
investments and trade receivables. BackWeb's cash equivalents and short-term
investments generally consist of money market funds with high credit quality
financial institutions and corporate debt securities. The Company has
established guidelines relative to credit ratings, diversification and maturity
that seek to maintain safety and liquidity.
BackWeb sells its products to customers primarily in the United States. BackWeb
performs ongoing credit reviews of its customers' financial condition and
generally does not require collateral.
In the first quarter of 2000, there was one customer with revenue over 10%.
NOTE 4. COMMITMENTS AND CONTINGENCIES
CONTINGENCIES - From time to time, the Company may have certain contingent
liabilities that arise in the ordinary course of its business activities. The
Company accounts for contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. In
the opinion of management, there are no pending claims of which the outcome is
expected to result in a material adverse effect on the financial position or the
results of operations or cash flows of the Company.
NOTE 5. 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 operations within geographic
areas based on the location of the entity making that sale (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH, 31
-------------------------
2000 1999
------- -------
<S> <C> <C>
Revenues from sales to unaffiliated customers:
Israel ................................................. $ 1,461 $ 724
United States .......................................... 7,429 3,360
Canada ................................................. 13 13
------- -------
$ 8,903 $ 4,097
======= =======
</TABLE>
<TABLE>
<CAPTION>
Long-lived assets: ....................................... MAR.31,2000 DEC.31,1999
----------- -----------
<S> <C> <C>
Israel ................................................. $ 655 $ 517
United States .......................................... 1,045 1,013
Canada ................................................. 85 264
Other .................................................. 16 18
------- -------
$ 1,801 $ 1,812
======= =======
</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.
NOTE 6. SECURITIES PURCHASE AGREEMENT
On January 17, 2000, RealNetworks, Inc. and BackWeb entered into a Securities
Purchase Agreement under which RealNetworks, Inc. acquired 458,000 Ordinary
Shares in exchange for payment of $14,999,500. Further, RealNetworks acquired a
warrant to purchase up to 114,500 Ordinary Shares at an exercise price of $32.75
per share.
NOTE 7. SUBSEQUENT EVENTS
SHELF REGISTRATION
On April 14, 2000, BackWeb's Registration Statement on Form S-1 was
declared effective. Under such Registration Statement, BackWeb registered
1,514,104 ordinary shares held by selling shareholders. The selling shareholders
are composed mainly of former
<PAGE> 10
shareholders of Lanacom Inc., a Canadian company acquired by BackWeb
Technologies Ltd. in August 1997. The offering was not underwritten and BackWeb
did not receive any proceeds from the offering.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We have made forward looking statements in this Report on Form 10-Q that
are subject to risks and uncertainties. Forward looking statements include
information concerning possible or assumed future results of the operations of
BackWeb. Also, when we use such words as "believes," "expects," "anticipates" or
similar expressions, we are making forward looking statements. You should note
that an investment in our securities involves risks and uncertainties that could
affect future financial results. Our actual results could differ materially from
those anticipated in these forward looking statements as a result of a number of
factors, including those set forth in the section title "Risk Factors" and
elsewhere in this quarterly report, as well as the risk factors included in
BackWeb's periodic reports and registration statements filed with the U.S.
Securities and Exchange Commission. BackWeb undertakes no obligation to publicly
update or revise any forward-looking statements.
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 ranges 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 re-examination 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 revenue 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 revenue are significantly lower than our gross margins on license
revenue. Our products are marketed worldwide through a combination of a direct
sales force, resellers and system integrators.
We recognize software license revenue in accordance with Statement of
Position 97-2 (SOP 97-2), "Software Revenue Recognition," as amended by
Statement of Position 98-4 (SOP 98-4). These statements are effective for our
transactions entered into after January 1, 1998. The application of SOP 97-2 has
not had a material impact on the results of our operations. License revenues are
comprised of perpetual or multi-year license fees that are primarily derived
from contracts with corporate customers and resellers, and royalty fees earned
upon shipment of products which incorporate the Company's software. 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, with no significant obligations remaining with regard to
implementation, the fee is fixed and determinable and collectability is
probable. Revenues on contracts with resellers are not recognized until software
is sold through to the end-user. Royalty revenues are recognized when reported
to the Company after shipment of the related products.
<PAGE> 11
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 when provided to the customer.
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.
RESULTS OF OPERATIONS
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. Total revenues for the three-months
ended March 31, 2000 was $8.9 million, an increase of approximately $4.8 million
or 117% from $4.1 million in the three-months ended March 31, 1999. The
increases were due both to growth in license and service revenues. Customers
outside of the United States accounted for 16.6% of revenues in the three-months
ended March 31, 2000 compared to 18.0% of revenues in the three-months ended
March 31, 1999.
License revenues were $6.9 million or 77.3% of revenues in the
three-months ended March 31, 2000 compared to $3.3 million or 80.7% of revenues
in the three-months ended March 31, 1999. The decreases in license revenue as a
percentage of total revenue were primarily due to increased service revenue from
support, maintenance and consulting services. Service revenues were $2.0 million
or 22.7% of revenues in the three-months ended March 31, 2000 compared to $0.8
million or 19.3% of revenues in the three-months ended March 31, 1999. In 2000,
we expect our service revenues to increase on an absolute basis and as a
percentage of net revenues.
COST OF REVENUES
Cost of license revenues consists primarily of expenses related to media
duplication, and packaging of products and amortization of capitalized developed
technology (i.e.; Lanacom related). Cost of license revenues was $32,000 or 0.5%
of license revenues for the three-months ended March 31, 2000 compared to
$73,000 or 2.2% of license revenues for the three-months ended March 31, 1999.
Cost of service revenues consists primarily of expenses related to salaries and
expenses of the customer support and professional service organizations,
including related expenses of BackWeb consultants and third party consultants.
Cost of service revenues was $1.3 million, or 65.8% of service revenues, in the
three-months ended March 31, 2000 compared to $592,000 or 75% of service
revenues, in the three-months ended March 31, 1999. The increase in cost of
service revenues was due to growth of the service organization. We expect the
cost of service revenues to increase primarily as a result of the increase in
service revenues in addition to the continued expansion of the customer support
and professional services organizations.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses consist of personnel and related costs
of our research and development employees, equipment and supply costs for our
development efforts. These expenses are charged to operations as incurred. We
have research and development facilities in Israel and Canada. Research and
development expenses were $1.8 million in the three-months ended March 31, 2000
compared to $1.0 million in the three- months ended March 31, 1999. We expect
our research and development expenses will increase on an absolute basis over
the next year as we continue to invest in developing our technology and
products, but are expected to decrease as a percentage of revenue.
<PAGE> 12
SALES AND MARKETING
Sales and marketing expenses consist of personnel and related costs for
our direct sales force and marketing employees, 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 $6.9 million
for the three-months ended March 31, 2000 compared to $3.8 million in the
three-months ended March 31, 1999. We expect that sales and marketing expenses
will increase on an absolute basis over the next year, as we hire additional
sales and marketing personnel, continue to promote our brand and establish sales
offices in additional domestic and international locations, but are expected to
decrease as a percentage of revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
general management, human resources, information services and legal. General and
administrative expenses were $1.6 million in the three-months ended March 31,
2000 compared to $0.9 million in the three-months ended March 31, 1999. We
expect general and administrative expenses to increase on an absolute basis in
future periods but continue to decrease as a percentage of revenues.
AMORTIZATION OF GOODWILL, OTHER INTANGIBLE ASSETS AND DEFERRED STOCK
COMPENSATION
Amortization of goodwill, other intangible assets 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 1999. 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 of 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 $447,000 for the
three-months ended March 31, 2000 compared to $1.2 million in the three- months
ended March 31, 1999.
OTHER INCOME (EXPENSE), NET
Other income and expenses (net), includes interest income earned on our
cash, cash equivalents and short-term investments offset by interest expense. In
addition, the amortization of the fair value of the warrants issued in
connection with borrowings from financial institutions is also charged to other
income and expense. Other income and expense also includes the effects of
exchange gains and losses arising from the re-measurement of transactions in
foreign currencies. For the three-months ended March 31, 2000, other income was
$1.1 million compared to other expense $157,000 in the three-months ended March
31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000 we had cash, cash equivalents and short-term
investments of $86.5 million. In the three months ended March 31, 1999 cash used
in the operations was $5.0 million primarily associated with development
activities and marketing efforts related to commercialization of our products.
We have made investments in hardware, software, furniture and fixtures. Capital
expenditures on property and equipment were approximately $361,000 in the three-
months ended March 31, 2000.
On January 17, 2000, RealNetworks, Inc. and BackWeb entered into a
Securities Purchase Agreement under which RealNetworks, Inc. acquired 458,000
Ordinary Shares in exchange for payment of $14,999,500. Further, RealNetworks
acquired a warrant to purchase up to 114,500 Ordinary Shares at an exercise
price of $32.75 per share.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
additional international operations and other factors. We expect to devote
substantial capital resources to hire and expand our sales, support, marketing
and product development organizations, to expand marketing programs, to
establish additional facilities worldwide and for other general corporate
activities. We believe that our current cash balances along with the proceeds
raised from the initial public offering will be sufficient to fund our
operations for at least the next 24 months.
<PAGE> 13
As of March 31, 2000, the Company had $5,000,000 in an unused, available
line-of-credit facility.
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. As a result of these
benefits, we will have 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 Act 1959." There can be no
assurance that we will obtain approval for additional Approved Enterprise
Programs, or that the provisions of the law will not change.
Since we have incurred tax losses through December 31, 1999, we have not
yet used the tax benefits for which we are eligible. See "Risk Factors".
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Most of our sales are in U.S. dollars. However a large portion of our
costs are incurred in relation to our operations in Israel. A substantial
portion of our operating expenses, primarily our research and development costs,
are denominated in NIS. Costs not denominated in U.S. dollars are translated to
U.S. dollars, when recorded, at prevailing rates of exchange. This is done for
the purposes of our financial statements and reporting. Costs not denominated in
U.S. dollars 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board 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 December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In March 2000, the SEC issued SAB No. 101A to defer for one quarter the
effective date of implementation of SAB 101 with the earlier application
encouraged. The Company is required to adopt SAB 101 in the second quarter of
fiscal 2000. The Company doesn't expect the adoption of SAB 101 to have a
material effect on our financial position or results of operation.
RISK FACTORS
The Company operates in a rapidly changing environment that involves
numerous risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED
AND WE HAVE 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.
<PAGE> 14
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 fiscal year 2000. We incurred net losses of
approximately $2.2 million for the three months ended March 31, 2000, $11.5
million for the year ended December 31, 1999, $14.6 million for the year ended
December 31, 1998 and $15.0 million for the year ended December 31, 1997. As of
March 31, 2000, we had an accumulated deficit of approximately $51.1 million. We
expect to continue to incur significant sales and marketing, product development
and administrative expenses and expect such expenses to increase in 2000. As a
result, we will need to generate significant revenues to achieve and maintain
profitability.
OUR BUSINESS WILL SUFFER IF OUR TARGET CUSTOMERS DO NOT ACCEPT INTERNET
SOLUTIONS
Our future revenues and profits, if any, depend upon the widespread
acceptance and use of the Internet as an effective medium of business and
communication by our customers. Rapid growth in the use of and interest in the
Internet has occurred only recently. As a result, acceptance and use may not
continue to develop at historical rates, and a sufficiently broad base of
consumers may not adopt, and continue to use, the Internet and other online
services as a medium of commerce and communication. Our success will depend, in
large part, on the acceptance of the Internet in the commercial marketplace and
on the ability of third parties to provide reliable Internet infrastructure
network with the speed, data capacity, security and hardware necessary for
reliable Internet access and services. To the extent that the Internet continues
to experience increased numbers of users, increased frequency of use or
increased bandwidth requirements of users, the Internet infrastructure may not
be able to support the demands placed on it and the performance or reliability
of the Internet could suffer.
OUR BACKWEB FOUNDATION PLATFORM AND APPLICATIONS ARE NEW AND IT IS UNCLEAR IF
THEY WILL ACHIEVE MARKET ACCEPTANCE
We do not know if our products will be successful. The market for
Internet communications solutions is in its infancy, and we are not certain that
our target customers will widely adopt and deploy our technology throughout
their networks. Even if our products are effective, our target customers may not
choose them for technical, cost, support or other reasons. Our future growth
depends on the commercial success of BackWeb Foundation and applications
developed upon BackWeb Foundation, such as BackWeb Sales Accelerator and BackWeb
Service Accelerator.
RAPID TECHNOLOGICAL CHANGES COULD CAUSE OUR PRODUCTS TO BECOME OBSOLETE
The Internet communications market is characterized by rapid
technological change, frequent new product introductions, changes in customer
requirements and evolving industry standards. If we are unable to develop and
introduce products or enhancements in a timely manner to meet these
technological changes, we may not be able to successfully compete. In addition,
our products may become obsolete in which event we may not be a viable business.
COMPETITION IN THE INTERNET COMMUNICATIONS MARKET MAY REDUCE THE DEMAND FOR, OR
PRICE OF, OUR PRODUCTS
The Internet communications market is intensely competitive and rapidly
changing. We expect that competition will intensify in the near-term because of
the attention the Internet is currently receiving and because there are very
limited barriers to entry. Our primary long-term competitors may not have
entered the market yet because the Internet communications market is new.
Competition could result in price reductions, fewer customer orders, reduced
gross margin and loss of market share, any of which could cause our business to
suffer. We may not be able to compete successfully, and competitive pressures
may harm our business. Many of our current and potential competitors have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources than we do. Some of our potential competitors
are among the largest and most well-capitalized software companies in the world.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY
Our operating results are difficult to predict. Our revenues and
operating results may vary significantly from quarter to quarter due to a number
of factors, inter alia:
- demand for our products and services;
- the timing and mix of sales of our products and services;
<PAGE> 15
- loss of customers;
- changes in the growth rate of Internet usage;
- delays in introducing new products and services;
- new product introductions by competitors;
- changes in our pricing policies or the pricing policies of our
competitors;
- costs related to acquisitions of technology or businesses; and,
- economic conditions generally as well as those specific to the
Internet and related industries.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. It is likely that in some future quarter, our operating results may
be below the expectation of public market analysts and investors.
WE ANTICIPATE INCREASED OPERATING EXPENSES, WHICH COULD CAUSE OUR BUSINESS TO
SUFFER IF WE DO NOT CORRESPONDINGLY INCREASE REVENUES
We plan to significantly increase our operating expenses to expand our
sales and marketing operations, broaden our customer support capabilities,
improve operational and financial systems, develop new distribution channels and
fund greater levels of research and development. If we do not significantly
increase our revenues to meet these increased expenses, our business will
suffer.
OUR GROWTH MAY SUFFER BECAUSE OF THE DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS
The use of our products by our customers requires implementation
services. Although we currently provide implementation services sufficient to
meet our current business level, our growth will be limited in the event we are
unable to expand our implementation services personnel or subcontract these
services to qualified third parties.
IF WE LOSE A MAJOR CUSTOMER, OUR REVENUES COULD SUFFER BECAUSE OF OUR CUSTOMER
CONCENTRATION
We have generated a substantial portion of our annual and quarterly
historical revenues from a limited number of customers. As a result, if we lose
a major customer, or if there is a decline in end-users in any of our customers'
licenses, our revenues would be adversely affected. In 1997, revenues from two
customers represented 19% and 11%, respectively. In 1998, no customer accounted
for more than 10% of our revenues. In 1999, revenues from one customer
represented 13% 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 the
quantity of hardware and the degree of hardware configuration necessary to
deploy our products.
FAILURE TO EXPAND OUR SALES AND MARKETING ORGANIZATIONS COULD LIMIT OUR GROWTH
If we fail to substantially expand our direct and indirect sales and
marketing operations in our existing markets, our growth will be limited. We
have recently expanded our direct sales force in North America and Europe and
plan to hire additional sales personnel to meet market demand. Currently, we
believe we will need to significantly expand our sales and marketing
organization. We might not
<PAGE> 16
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 (ISVs), resellers, systems integrators,
distribution partners and customers. If we fail to develop these strategic
partnerships, our growth could be limited.
WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR EXPECTED GROWTH AND GEOGRAPHIC
DISPERSION
Our ability to successfully offer products and services and to implement
our business plan in the rapidly evolving Internet communications market
requires an effective planning and management process. We continue to increase
the scope of our operations domestically and internationally and expect to grow
our headcount substantially depending on market conditions.
These factors together with our anticipated future operations and
geographic dispersion will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures, and expand, train and manage our work force worldwide.
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR CONSENT
BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED
Our 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.
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
segment grows and the functionality of products in different industry segment
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.
WE DO NOT HAVE SUFFICIENT INSURANCE TO COVER ALL POTENTIAL PRODUCT LIABILITY AND
WARRANTY CLAIMS
Our products are integrated into our customers' networks. The sale and
support of our products may entail the risk of product liability or warranty
claims based on damage to these networks. In addition, the failure of our
products to perform to customer expectations could give rise to warranty claims.
Although we carry general liability insurance, our insurance would likely not
cover potential claims of this type or may not be adequate to protect us from
all liability that may be imposed.
<PAGE> 17
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 fiscal 2000 and beyond to
increase our revenues. If we fail to attract qualified personnel or retain
current employees, including, our executive officers and other key employees,
our revenues may not increase and could decline. None of our officers or key
employees is bound by an employment agreement for any specific term. Our
relationships with these officers and key employees are at will. Moreover, we do
not have "key person" life insurance policies covering any of our employees.
ANY MAJOR DEVELOPMENTS IN THE POLITICAL OR ECONOMIC CONDITIONS IN ISRAEL COULD
CAUSE OUR BUSINESS TO SUFFER BECAUSE WE ARE INCORPORATED IN ISRAEL AND HAVE
IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL
We are incorporated under the laws of the State of Israel. Our principal
research and development facilities as well as significant executive offices are
located in Israel. Any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could
significantly harm our business. Inflation in Israel and any devaluation of the
NIS against the U.S. dollar could have an impact on our financial results. Since
a significant portion of our research and development expenses are incurred in
NIS, we may be negatively affected by fluctuations in the exchange rate between
the U.S. dollar and the NIS. If Israel's economy is hurt by a high inflation
rate, our operations and financial condition could suffer.
ANY FUTURE PROFITABILITY MAY BE DIMINISHED IF TAX BENEFITS FROM THE STATE OF
ISRAEL ARE REDUCED OR WITHHELD
Pursuant to the Law for the Encouragement of Capital Investments, the
Israel Government has granted "Approved Enterprise" status to our existing
capital investment programs. Consequently, we are eligible for tax benefits for
the first several years in which we generate taxable income. Our future
profitability may be diminished if all or a portion of these tax benefits are
reduced. These tax benefits may be cancelled in the event of changes in Israeli
government policies or if we fail to comply with requisite conditions and
criteria. Currently the most significant conditions which we must continue to
meet include making specified investments in fixed assets, maintaining the
development and production nature of our facilities, and financing of at least
30% of these investments through the issuance of capital stock.
THE LOSS OF OUR RIGHT TO USE SOFTWARE LICENSED TO US BY THIRD PARTIES COULD HARM
OUR BUSINESS
We license technology that is incorporated into our products from third
parties, including security and encryption software. Any interruption in the
supply or support of any licensed software could disrupt our operations and
delay our sales, unless and until we can replace the functionality provided by
this licensed software. Because our products incorporate software developed and
maintained by third parties, we depend on these third parties to deliver and
support reliable products, enhance their current products, develop new
production on a timely and cost-effective basis and respond to emerging industry
standards and other technological changes.
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 together with 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.
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:
<PAGE> 18
- 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
Our executive officers, directors and entities affiliated with them, in
the aggregate, beneficially own approximately 41.2% of our outstanding ordinary
shares. 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 Israel corporate and tax law and of our articles of
association may have the effect of delaying, preventing or making more difficult
a merger or other acquisition of BackWeb, even if an acquisition would be
beneficial to our shareholders.
Israeli corporate law regulates acquisitions of shares through tender
offers, requires special approvals for transactions involving significant
shareholders and regulates other matters that may be relevant to these types of
transactions. Furthermore, Israel tax considerations may make potential
transactions unappealing to us or to some of our shareholders. In addition, our
charter documents provide for a staggered board of directors. For further
discussion, please see "Description of Share Capital."
THE NEW ISRAEL COMPANIES LAW MAY CAUSE UNCERTAINTIES REGARDING CORPORATE
GOVERNANCE
The new Israel Companies Law, which became effective on February 1,
2000, has brought about significant changes to Israel corporate law. Under this
new law, there may be uncertainties regarding corporate governance in some
areas. These uncertainties will persist until this new law has been adequately
interpreted, and these uncertainties could inhibit takeover attempts or other
transactions and inhibit other corporate decisions.
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in Israel and sell them in North America, Asia and
Europe. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As most of our sales are currently made in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. We regularly assess these risks and have established
policies and business practices to protect against the adverse effects of these
and other potential exposures. As a result, the Company does not anticipate
material losses in these areas. Due to the nature of our short-term investments,
we have concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 17, 2000, RealNetworks, Inc. and BackWeb entered into a
Securities Purchase Agreement under which RealNetworks, Inc. acquired 458,000
Ordinary Shares in exchange for payment of $14,999,500. Further, RealNetworks
acquired a warrant to purchase up to 114,500 Ordinary Shares at an exercise
price of $32.75 per share.
ITEM 3. DEFAULTS UPON CHANGES OF SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith or are incorporated by
reference to exhibits previously filed with the Commission.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
3.1 Articles of Association of Registrant*
3.2 Memorandum of Association of Registrant (English
translation)*
4.1 Specimen of Ordinary Share Certificate*
4.2 Fourth Amended and Restated Rights Agreement*
4.3 Form of Liquidity Proposal between BackWeb
Technologies, Ltd. and the Exchangeable shareholders*
10.1 1996 Israel Share Option Plan (English translation)*
10.2 1996 U.S. Share Option Plan*
10.3 1998 U.S. Share Option Plan*
10.4 1999 Employee Stock Purchase Plan*
10.5 Lease Agreement for 3 Abba Hillel Street, Ramat Gan,
Israel (English translation)*
10.6 Lease Agreement for 34 Tuval Street, Ramat Gan, Israel
(English translation)*
10.7 Lease Agreement for 2077 Gateway Place, Suite 500, San
Jose, California*
10.8 Form of Agreement by and among Interad (1995) Ltd. and
Nir Barkat Holdings Ltd., Eli Barkat Holdings Ltd.,
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<S> <C>
Yuval 63 Holdings (1995) Ltd., and Lior Hass and Iftah
Sneh*
10.9 Loan and Security Agreement, and schedule thereto,
between BackWeb Technologies Ltd. and Transamerica
Business Credit Corporation, dated as of December 24,
1998*
10.10 Voting and Exchange Trust Agreement between BackWeb
Technologies Ltd., BackWeb Canada Inc. and the Trust
Company of Bank of Montreal, dated as of August 8,
1997*
10.11 Fourth Amended and Restated Rights Agreement, dated as
of March 24, 1999*
10.12 Agreement and Plan of Acquisition by and among BackWeb
Technologies Ltd., BackWeb Canada Inc., Lanacom Inc.
and Anthony Davis, dated as of July 1, 1997*
10.13+ Software License and Distribution Agreement for
Embedded Products, by and between BackWeb Technologies
Ltd. and SAP AG, dated March 17, 1999*
10.14+ Software Development and OEM License Agreement by and
between BackWeb Technologies Ltd. and Baan Development
B.V., dated as of December 30, 1998*
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule
</TABLE>
- ----------
* Incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358)
+ Certain portions of this exhibit have been granted confidential
treatment by the Commission. The omitted portions have been separately
filed with the Commission.
(b) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K on February 11, 2000 to report
under Item 5 thereof the sale of 458,000 Ordinary Shares to RealNetworks, Inc.
for payment of $14,999,500, and the issuance of a warrant to RealNetworks, Inc.
to purchase up to 114,500 Ordinary Shares at an exercise price of $32.75.
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BACKWEB TECHNOLOGIES LTD.
Date: May 11, 1999 By: /s/ Hanan Miron
---------------------------------
Hanan Miron,
Chief Financial Officer
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
3.1 Articles of Association of Registrant*
3.2 Memorandum of Association of Registrant (English translation)*
4.1 Specimen of Ordinary Share Certificate*
4.2 Fourth Amended and Restated Rights Agreement*
4.3 Form of Liquidity Proposal between BackWeb Technologies, Ltd. and
the Exchangeable shareholders*
10.1 1996 Israeli Share Option Plan (English translation)*
10.2 1996 U.S. Share Option Plan*
10.3 1998 U.S. Share Option Plan*
10.4 1999 Employee Stock Purchase Plan*
10.5 Lease Agreement for 3 Abba Hillel Street, Ramat-Gan, Israel
(English translation)*
10.6 Lease Agreement for 34 Tuval Street, Ramat-Gan, Israel (English
translation)*
10.7 Lease Agreement for 2077 Gateway Place, Suite 500, San Jose,
California*
10.8 Form of Agreement by and among Interad (1995) Ltd. and Nir Barkat
Holdings Ltd., Eli Barkat Holdings Ltd., Yuval 63 Holdings (1995)
Ltd., and Lior Hass and Iftah Sneh*
10.9 Loan and Security Agreement, and schedule thereto, between BackWeb
Technologies Ltd. and Transamerica Business Credit Corporation,
dated as of December 24, 1998*
10.10 Voting and Exchange Trust Agreement between BackWeb Technologies
Ltd., BackWeb Canada Inc. and the Trust Company of Bank of
Montreal, dated as of August 8, 1997*
10.11 Fourth Amended and Restated Rights Agreement, dated as of March
24, 1999*
10.12 Agreement and Plan of Acquisition by and among BackWeb
Technologies Ltd., BackWeb Canada Inc., Lanacom Inc. and Anthony
Davis, dated as of July 1, 1997*
10.13+ Software License and Distribution Agreement for Embedded Products,
by and between BackWeb Technologies Ltd. and SAP AG, dated March
17, 1999*
10.14+ Software Development and OEM License Agreement by and between
BackWeb Technologies Ltd. and BAAN Development B.V., dated as of
December 30, 1998*
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule
</TABLE>
- ----------
* Incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358)
+ Certain portions of this exhibit have been granted confidential
treatment by the Commission. The omitted portions have been separately
filed with the Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 4-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 41,522
<SECURITIES> 44,983
<RECEIVABLES> 9,074
<ALLOWANCES> 1,074
<INVENTORY> 0
<CURRENT-ASSETS> 97,432
<PP&E> 3,622
<DEPRECIATION> 1,834
<TOTAL-ASSETS> 99,398
<CURRENT-LIABILITIES> 11,068
<BONDS> 0
0
3,454
<COMMON> 141,155
<OTHER-SE> (56,614)
<TOTAL-LIABILITY-AND-EQUITY> 99,398
<SALES> 6,883
<TOTAL-REVENUES> 8,903
<CGS> 32
<TOTAL-COSTS> 1,361
<OTHER-EXPENSES> 10,822
<LOSS-PROVISION> 249
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,152)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,152)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
