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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-
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BACKWEB TECHNOLOGIES LTD.
(Exact name of registrant as specified in its charter)
Israel
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3 Abba Hillel Street, Ramat-Gan, Israel 52136
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(Address of principal executive offices) (Zip Code)
(972) 3-7518464
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(Registrant's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Name of Each Exchange
Title of Each Class On Which Registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Ordinary Shares, NIS 0.03 par value
(Title of Class)
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 [ ]
Indicate by check mark if the disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]
Based on the closing sales price of March 27, 2000 the aggregate
market value of the voting stock held by nonaffiliates of the registrant was
$930,951,450. As of March 27, 2000, registrant had outstanding 37,010,502
shares of Ordinary Shares.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the Proxy Statement for Registrant's 2000 Annual Meeting of
Stockholders to be held May 30, 2000 are incorporated by reference in Part III
of this Form 10-K Report.
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BACKWEB TECHNOLOGIES LTD.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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PART I.
ITEM 1 Business
ITEM 2 Properties
ITEM 3 Legal Proceedings
ITEM 4 Submission of Matter to a Vote of Security Holders
PART II.
ITEM 5 Market for Registrant's Common Equity and Related Stockholder Matters
ITEM 6 Selected Consolidated Financial Data
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations
ITEM 7A Quantitative and Qualitative Disclosures About Market Risk
ITEM 8 Financial Statements and Supplementary Data
ITEM 9 Changes in and Disagreements With Accountants
On Accounting and Financial Disclosure
PART III.
ITEM 10 Directors and Executives Officers of the Registrant
ITEM 11 Executive Compensation
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
ITEM 13 Certain Relationships and Related Transactions
PART IV.
ITEM 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K
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PART I
ITEM 1. BUSINESS
GENERAL
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 the 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 applications,
BackWeb Sales Accelerator and BackWeb Service 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. BackWeb Services
Accelerator enables a product support organization to stay instantly updated
about product information, service requests, product training information and
software diagnostic tools.
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 /or 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 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
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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.
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 applications built on top of our infrastructure software,
BackWeb Sales Accelerator and BackWeb Service Accelerator. Such
application's enables companies to focus the attention of their sales
force or product support organizations, 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.
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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 the 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 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, BackWeb Sales Accelerator and BackWeb
Service 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 and BackWeb Service Accelerator provide our
customers with packaged applications that incorporate 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 techniques enable
companies to attract immediate attention to time-sensitive information.
Flashes are a
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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 Development Tools, 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
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 DEVELOPMENT TOOLS. BackWeb Development Tools are used to
customize the BackWeb Foundation. Components of BackWeb Development
Tools include:
- 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 platform, also includes the following add-on components:
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- 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.
- BackWeb IP Multicasting 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.
- BackWeb Polite Upstream. BackWeb Polite Upstream enables BackWeb
clients to deliver digital data to BackWeb Servers, such as completed
questionnaires or surveys.
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 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.
BACKWEB SERVICE ACCELERATOR. In August 1999, we introduced BackWeb
Service Accelerator, another packaged application built on BackWeb
Foundation. BackWeb Service 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 service organizations and indirect market service providers to
accelerate their business execution and response time to critical
changes affecting their business.
BackWeb Service Accelerator consists of the Automated Encyclopedia,
Priority Publishing Manager and Rapid Survey modules:
- Automated Encyclopedia enables a company to create a library of
service information and software to which extended enterprise users can
subscribe. Once subscribed, users automatically receive this
information, software and any subsequent updates.
- Priority Publishing Manager enables managers to publish and direct the
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.
- Rapid Survey enables companies to acquire feedback from its service
and support personnel through surveys which collect and analyze
information. Companies can publish these surveys through a web-based
interface and create questions that have one response, multiple
responses or text answers. The published information can be disseminated
to users' desktops using our Flash technology.
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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 Corp.,
British Telecommunications plc, Carlson Travel, Cisco Systems, Inc., Compaq
Computer Corporation, Delta Airlines, Electronic Data Systems, Fidelity
Investments Institutional Services Co., Galileo, Goldman Sachs & Co.,
Hewlett-Packard, AC Nielsen, Network Associates, Inc., o.tel.o, Pacific Bell,
RiteAid, Schlumberger, Siemens, US WEST, Nortel Networks and Lucent
Technologies, Inc.
In 1997, revenues from two of our customers represented 19% and 11%,
respectively, of our revenues. In 1998, no customer accounted for more than 10%
of our revenues. In 1999, revenues from one of our customers represented 13% of
our revenues.
ALLIANCES WITH BUSINESS PARTNERS.
In order to accelerate the acceptance of our products, we have developed
cooperative alliances with leading technology vendors, original equipment
manufacturers, applications vendors, web site portals, and Internet-based
solutions providers. We believe that these alliances will provide additional
marketing and sales channels for our products and will facilitate establishing
broad market acceptance for BackWeb's products. The benefits of this approach
include enabling BackWeb to concentrate on its core competencies while allowing
the development of applications by business partners and reducing the
time-to-market for applications based on BackWeb's products. As of December 31,
1999, we have signed agreements for business alliances with Baan Development
B.V., Cable & Wireless USA Inc., RealNetworks, Inc., SAP AG and SAP Labs, Inc.
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, United Kingdom,
The Netherlands, Sweden, Germany and France. 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. 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 as well as our
pre-packaged applications. BackWeb is currently working on new applications and
adding
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features and new functionality to our products. Our research and development
expenses totaled $5.5 million for the year ended December 31, 1999, $4.6 million
for the year ended December 31, 1998 and $4.0 million for the year ended
December 31, 1997.
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 our packaged
applications; 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 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. In June 1999, BackWeb received a U.S. patent
for its "polite" technology. We rely on patent, copyright, trade secret and
trademark law to protect our technology. However, 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 of America.
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
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<PAGE> 10
- 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 December 31, 1999, we had a total of 208 employees, 202 of whom were
full-time employees. Of the total number of employees 68 were engaged in
research and development including 6 part-time employees, 82 in sales, marketing
and business development, 32 in professional services and technical support and
26 in finance, administration and operations. Our future performance depends in
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 any
work stoppages and considers our relations with our employees to be good.
In addition, 58 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.
ITEM 2. PROPERTIES
BackWeb leases approximately 8,500 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 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, which expires in
December 2000. In January 2000, BackWeb also entered into an additional lease
for approximately 8,500 square feet of office space in Toronto which expires in
August 2006. BackWeb also leases space in the following cities:
City Country
- ---- -------
New York City, NY U.S.A.
Chicago, IL U.S.A.
McLean, VA U.S.A.
Atlanta, GA U.S.A.
Carrolton, TX U.S.A.
Framington, MA U.S.A.
Doylestown, PA U.S.A.
Paris France
Bagshot United Kingdom
Amsterdam Netherlands
Uppsala Sweden
Hamburg/Munchen Germany
Tokyo Japan
ITEM 3. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Ordinary Shares are traded on the Nasdaq National Market under the
symbol "BWEB." Public trading of Ordinary Shares commenced on June 8, 1999.
Prior to that, there was no public market for the Ordinary Shares. According to
the records of the Company's transfer agent, the Company had approximately
281 stockholders on record as of March 27, 2000. Because many of such
shares are held by brokers and other institutions on behalf of stockholders, the
Company is unable to estimate the total number of stockholders represented by
these record holders. The following table sets forth the Nasdaq National Market
low and high sales price of the Company's Ordinary Shares for the periods
indicated below:
<TABLE>
<CAPTION>
Low Sale Price High Sale Price
-------------- ---------------
<S> <C> <C>
1999
Fourth Quarter $ 16.750 $ 51.438
Third Quarter $ 15.125 $ 36.500
Second Quarter $ 15.000 $ 28.000
</TABLE>
The Company's policy has been to reinvest earnings to fund future growth.
Accordingly, the Company has not paid dividends and does not anticipate
declaring dividends on its Ordinary Shares in the foreseeable future.
The Company intends to file a Registration Statement on Form S-1 registering up
to 1,514,504 Ordinary Shares for selling shareholders pursuant to an Investor
Rights Agreement immediately after the filing of this Form 10-K.
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 net
cash proceeds of approximately $9.9 million.
ITEM 6 SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Conditions
and Results of Operations", the Consolidated Financial Statements of the Company
and Notes thereto, and other financial information included elsewhere in this
Form 10-K. Historical results are not necessarily indicative of the results to
be expected in the future.
11
<PAGE> 12
BackWeb Technologies Ltd.
Consolidated Statement of Operations
(In thousands, except share and per share data)
<TABLE>
<CAPTION> TWO MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------------------------------------- DECEMBER 31,
1999 1998 1997 1996 1995
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenues:
License $ 18,514 $ 7,980 $ 5,311 $ 71 $ -
Service 4,749 1,557 290 - -
-------- -------- -------- ------- -----
Total revenues 23,263 9,537 5,601 71 -
Cost of revenues:
License 266 266 182 - -
Service 3,911 1,353 796 - -
-------- -------- -------- ------- -----
Total cost of revenues 4,177 1,619 978 71 -
-------- -------- -------- ------- -----
Gross profit 19,086 7,918 4,623 71 -
Operating expenses:
Research and development 5,519 4,555 3,955 1,781 120
Sales and marketing 18,876 13,182 12,224 4,535 -
General and administrative 4,480 3,182 2,981 1,396 116
Amortization of goodwill, other
intangibles, and deferred stock
compensation 3,640 1,824 557 - -
-------- -------- -------- ------- -----
Total operating expenses 32,515 22,743 19,717 7,712 236
-------- -------- -------- ------- -----
Loss from operations (13,429) (14,825) (15,094) $(7,641) (236)
Other income, net 1,940 218 132 (43) (2)
-------- -------- -------- ------- -----
Net loss $(11,489) $(14,607) $(14,962) $(7,684) $(238)
======== ======== ======== ======= =====
Basic and diluted net loss per share $ (0.59) $ (6.07) $ (6.96) $ (6.95)
======== ======== ======== =======
Shares used in computing basic and
diluted net loss per share 19,575 2,408 2,151 1,106
======== ======== ======== =======
Pro forma basic and diluted net loss per share $ (0.39) $ (0.69)
======== ========
Shares used in computing pro forma basic and
diluted net loss per share 29,115 21,208
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ----- ----- ---- -----
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments $75,607 $6,449 $6,377 $12,068 $ -
Working capital (deficit) 71,323 1,596 3,024 9,707 (36)
Total assets 86,049 12,701 15,097 12,784 14
Long-term obligations, net of current portion - 327 1,156 1,278 211
Redeemable convertible preferred stock - 37,304 25,532 16,337 -
Total shareholders' equity (net capital deficiency) 73,129 (33,178) (18,915) (7,407) (238)
</TABLE>
12
<PAGE> 13
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We have made forward looking statements in Form 10-K 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 "Risk Factors" and elsewhere in this Form
10-K, as well as the Risk Factors included in BackWeb's periodic reports and
registration statements filed with the U.S. Securities and Exchange Commission,
including, the Registration Statement. BackWeb undertakes no obligation to
publicly update or revise any forward-looking statements.
OVERVIEW
BackWeb is a leading provider of Internet communication infrastructure software
and application-specific software that enables companies to communicate
business-critical, time-sensitive information to their customers, partners and
employees. We were incorporated on August 31, 1995 and commenced our operations
in November 1995. During the period from commencement of operations through
December 31, 1996, we were in a development stage and had insignificant
revenues. Operating activities during this period related primarily to
developing our products, building our corporate infrastructure and raising
capital. In December 1996, we shipped the first commercial version of our
software.
In August 1997, in an effort to expand the features and functionalities of our
product offerings, we acquired all the outstanding shares of Lanacom Inc., a
Canadian corporation. The acquisition has been accounted for using the purchase
method of accounting, and accordingly the purchase price has been allocated to
the tangible and intangible assets acquired and the liabilities assumed on the
basis of their respective fair value on the acquisition date. The purchase price
of $3.9 million was determined based on the value of shares originally issued
and options granted. Of the total purchase price, approximately $3.2 million was
allocated to goodwill, representing the excess of the aggregate purchase price
on the fair value of tangible and intangible assets. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($103,000),
developed technology ($400,000) and other identifiable intangible assets
($383,000). Goodwill, developed technology and other identified intangibles are
amortized on a straight-line basis over the estimated useful life which 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.
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.
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 New
Israel Shekel (NIS). The
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<PAGE> 14
results of our operations are subject to fluctuations in the dollar-NIS exchange
rate, which is influenced by various global economic factors including inflation
in Israel.
RESULTS OF OPERATIONS
REVENUES
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
twelve months ended December 31, 1999 was $ 23.3 million, an increase of
approximately $ 13.8 million or 144 % from $ 9.5 million in the twelve
months ended December 31, 1998. Total revenues increased approximately $
3.9 million or 70% during 1998 as compared to 1997. The increases were
due both to growth in license and service revenues.
Customers outside of the United States accounted for 29.0% of revenues
in the twelve months ended December 31, 1999 compared to 20.6% and 11.1%
of revenues in the twelve months ended December 31, 1998 and 1997,
respectively. License revenues were $ 18.5 million or 79.6% of revenues
in the twelve months ended December 31, 1999 compared to $ 8.0 million
or 83.7% and $5.3 million or 94.8% of revenues in the twelve months
ended December 31, 1998 and 1997. 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 $ 4.7 million or 20.4% of revenues in the twelve months
ended December 31, 1999 compared to $ 1.6 million or 16.3% and $0.3
million or 5.2% of revenues in the twelve months ended December 31, 1998
and 1997. 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 revenues was $ 4.2 million or 18.0% of revenues for the twelve
months ended December 31, 1999 compared to $ 1.6 million or 17.0% and
$1.0 million or 17.5% of revenues for the twelve months ended December
31, 1998 and 1997. The increases in cost of revenues on an absolute
basis were primarily due to growth of the service organization in 1999
and 1998.
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 $ 266,000 or 1.1% of revenues for the twelve months ended December
31, 1999 compared to $ 266,000 or 2.8% of revenues for the twelve months
ended December 31, 1998. 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 $ 3.9 million, or 16.8% of revenues, in the twelve months
ended December 31, 1999 compared to $ 1.4 million or 14.2% of revenues,
in the twelve months ended December 31, 1998. The increase in cost of
service revenues was due to growth of the service organization during
1998 and 1999. 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 & 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 $ 5.5 million in the
twelve months ended December 31, 1999 compared to $ 4.6 million and $4.0
million in the twelve months ended December 31, 1998 and 1997. 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.
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 $ 18.9 million for the twelve months ended
December 31, 1999 compared to $ 13.2
14
<PAGE> 15
million and $12.2 million in the twelve months ended December 31, 1998
and 1997. 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 $ 4.5 million in the
twelve months ended December 31, 1999 compared to $ 3.2 million and $3.0
million in the twelve months ended December 31, 1998 and 1997. We expect
general and administrative expenses to increase on an absolute basis in
future periods but continue to decrease as a percentage of revenues.
AMORTIZATION OF GOODWILL, OTHER INTANGIBLES AND DEFERRED STOCK
COMPENSATION
Amortization of goodwill, other intangibles and deferred stock
compensation consists of amortization of goodwill and other intangibles
associated with our acquisition of Lanacom in August 1997 and deferred
stock compensation for 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 $ 3.6 million for the twelve
months ended December 31, 1999 compared to $ 1.8 million and $0.6
million in the twelve months ended December 31, 1998 and 1997.
OTHER INCOME AND 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 twelve
months ended December 31, 1999, other income was $1.9 million compared
to $ 218,000 and $132,000 in the twelve months ended December 31, 1998
and 1997. The increase in other income during 1999 was due to interest
income generated from the proceeds of the initial public offering.
INCOME TAXES
As of December 31, 1999, we had approximately $32.3 million of Israeli
net operating loss carryforwards and $1.5 million of U.S. federal net
operating loss carryforwards and of $14.2 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 2019. The Israeli net
operating loss carryforwards have no expiration date.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999 we had cash, cash equivalents and short-term investments
of $75.6 million. In the twelve months ended December 31, 1999 cash used in the
operations was $ 5.3 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 $ 1.4 million in the twelve months
ended December 31, 1999. Following the initial public offering, we have repaid
loans received from shareholders and a secured credit facility, in the sum of $
2.3 million.
On June 8, 1999, BackWeb sold 5,500,000 shares of Ordinary Shares of the Company
in an underwritten public offering and on June 9, 1999 sold an additional
825,000 shares through the exercise of the underwriters' over-allotment option
for net proceeds of approximately $67.9 million.
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.
As of December 31, 1999, 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
15
<PAGE> 16
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.
The annual rate of inflation in Israel was 1.3% in 1999, 8.6% in 1998 and 7.0%
in 1997. The NIS was devalued against the U.S. dollar by approximately 5.9% in
1999, 17.6% in 1998 and 8.8% in 1997. The representative dollar exchange rate
for converting the NIS to U.S. dollars, as reported by the Bank of Israel, was
NIS 4.153 for one U.S. dollar on December 31, 1999.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). We are required to adopt SFAS
133 for the year ending December 31, 2000. SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities. Since we
currently hold no derivative financial instruments as defined by SFAS 133 and do
not currently engage in hedging activities, adoption of SFAS 133 is expected to
have no material effect on our financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" or
SAB 101. SAB 101 summarizes certain of the SEC Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. We are currently evaluating the impact of SAB 101. Should we
determine that a change in our accounting policy is necessary, such a change
will be made effective January 1, 2000 and would result in a charge to results
of operations for the cumulative effect of the change. This amount, if
recognized, would be recorded as deferred revenue and recognized as revenue in
future periods. Financial statements for prior periods would not be restated.
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<PAGE> 17
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. The adoption of this
amendment was expected to have no material impact on our financial condition and
the results of operations.
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.
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 $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 December 31, 1999, we had an
accumulated deficit of approximately $49.0 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:
17
<PAGE> 18
- demand for our products and services;
- the timing and mix of sales of our products and services;
- loss of customers;
- changes in the growth rate of Internet usage;
- delays in introducing new products and services;
- new product introductions by competitors;
- changes in our pricing policies or the pricing policies of our
competitors;
- costs related to acquisitions of technology or businesses; and,
- economic conditions generally as well as those specific to the
Internet and related industries.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our
future performance. It is likely that in some future quarter, our
operating results may be below the expectation of public market analysts
and investors
WE ANTICIPATE INCREASED OPERATING EXPENSES, WHICH COULD CAUSE OUR
BUSINESS TO SUFFER IF WE DO NOT CORRESPONDINGLY INCREASE REVENUES
We plan to significantly increase our operating expenses to expand our
sales and marketing operations, broaden our customer support
capabilities, improve operational and financial systems, develop new
distribution channels and fund greater levels of research and
development. If we do not significantly increase our revenues to meet
these increased expenses, our business will suffer.
OUR GROWTH MAY SUFFER BECAUSE OF THE DIFFICULTIES IN IMPLEMENTING OUR
PRODUCTS
The use of our products by our customers requires implementation
services. Although we currently provide implementation services
sufficient to meet our current business level, our growth will be
limited in the event we are unable to expand our implementation services
personnel or subcontract these services to qualified third parties.
IF WE LOSE A MAJOR CUSTOMER, OUR REVENUES COULD SUFFER BECAUSE OF OUR
CUSTOMER CONCENTRATION
We have generated a substantial portion of our annual and quarterly
historical revenues from a limited number of customers. As a result, if
we lose a major customer, or if there is a decline in end-users in any
of our customers' licenses, our revenues would be adversely affected. 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 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.
18
<PAGE> 19
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.
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
19
<PAGE> 20
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:
- 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.
ITEM 7
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.
20
<PAGE> 21
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To 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, 1999 and 1998, and the related consolidated
statements of operations, shareholders' equity (net capital deficiency), and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
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, 1999 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, 1999, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Palo Alto, California
January 21, 2000
21
<PAGE> 22
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,818 $ 6,449
Short-term investments 56,789 --
Trade accounts receivable, net of allowance for doubtful
accounts of $919 and $561 at December 31, 1999 and 1998 6,142 2,590
Other current assets 2,344 712
--------- ---------
Total current assets 84,093 9,751
Property and equipment, net 1,631 1,030
Goodwill and other purchased intangibles, net 181 1,824
Other assets 144 96
--------- ---------
Total assets $ 86,049 $ 12,701
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (NET CAPITAL
DEFICIENCY)
Current liabilities:
Line of credit $ -- $ 2,000
Accounts payable and accrued liabilities 8,576 3,357
Deferred revenue 3,321 1,666
Payable to related parties 50 304
Current portion of shareholders' loans 823 828
--------- ---------
Total current liabilities 12,770 8,155
Accrued severance pay, net 150 93
Long-term portion of shareholders' loan -- 327
Commitments and contingencies
Series B, C and D redeemable convertible preferred stock, nominal value
$0.003 per share - no shares and 36,039,377 shares authorized at December
31,1999 and 1998; no shares and 35,158,788 shares outstanding at
December 31, 1999 and 1998 -- 37,304
Shareholders' equity (net capital deficiency):
Series A convertible preferred stock, nominal value $0.003 per share no
shares and 25,464,110 shares authorized and outstanding at
December 31, 1999 and 1998 -- 495
Series E preferred stock, nominal value $0.003 per share
1 share authorized and outstanding at December 31, 1999
and 1998 3,454 3,454
Ordinary shares, nominal value $0.01 per share- 150,067,829 shares
authorized; 35,153,402 and 2,518,443 shares outstanding at
December 31, 1999 and 1998 124,301 2,002
Notes receivable from shareholders (3,316) --
Deferred stock compensation (2,104) (1,638)
Accumulated other comprehensive income (loss) (226) --
Accumulated deficit (48,980) (37,491)
--------- ---------
Total shareholders' equity (net capital deficiency) 73,129 (33,178)
--------- ---------
Total liabilities and shareholders' equity $ 86,049 $ 12,701
========= =========
</TABLE>
See accompanying notes.
22
<PAGE> 23
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
License $ 18,514 $ 7,980 $ 5,311
Service 4,749 1,557 290
-------- -------- --------
Total revenues 23,263 9,537 5,601
Cost of revenues:
License 266 266 182
Service 3,911 1,353 796
-------- -------- --------
Total cost of revenues 4,177 1,619 978
-------- -------- --------
Gross profit 19,086 7,918 4,623
Operating expenses:
Research and development 5,519 4,555 3,955
Sales and marketing 18,876 13,182 12,224
General and administrative 4,480 3,182 2,981
Amortization of goodwill, other
intangibles, and deferred stock
compensation 3,640 1,824 557
-------- -------- --------
Total operating expenses 32,515 22,743 19,717
-------- -------- --------
Loss from operations (13,429) (14,825) (15,094)
Interest income and other 2,409 424 247
Interest expense and other (469) (206) (115)
-------- -------- --------
Net loss $(11,489) $(14,607) $(14,962)
======== ======== ========
Basic and diluted net loss per share $ (0.59) $ (6.07) $ (6.96)
======== ======== ========
Shares used in computing basic and
diluted net loss per share 19,575 2,408 2,151
======== ======== ========
Pro forma basic and diluted net loss per share $ (0.39) $ (0.69)
======== ========
Shares used in computing pro forma basic and
diluted net loss per share 29,115 21,208
======== ========
</TABLE>
See accompanying notes.
23
<PAGE> 24
BACKWEB TECHNOLOGIES LTD
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Shareholders' Equity (Net Capital Deficiency)
-----------------------------------------------------------
Notes
Receivable
Preferred shares Ordinary shares from
--------------------- --------------------- Share-
Shares Amount Shares Amount holders
----------- ------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 25,464,110 $ 495 2,148,573 $ 20 $ --
Issuance of one Series E preferred share
representing rights with respect to 1,426,259
ordinary shares, pursuant to Lanacom, Inc.
acquisition 1 3,454 -- -- --
Issuance of ordinary shares pursuant to
options exercised -- -- 15,000 -- --
---------- ------ ---------- -------- -------
Net loss
Balance at December 31, 1997 25,464,111 3,949 2,163,573 20 --
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 -- --
Deferred stock compensation -- -- -- 1,859 --
Amortization of deferred stock compensation -- -- -- -- --
Net loss
---------- ------ ---------- -------- -------
Balance at December 31, 1998 25,464,111 3,949 2,518,443 2,002 --
Conversion of preferred stock to common stock (25,464,110) (495) 23,090,238 47,770 --
Issuance of ordinary shares, net of $8,339
of issuance costs -- -- 6,325,000 67,561 --
Issuance of ordinary shares upon exchange of
Series E preferred shares -- -- 1,169,242 -- --
Issuance of ordinary shares pursuant to options
and warrants exercised -- -- 2,050,479 4,192 --
Note receivable from shareholders -- -- -- -- (3,538)
Repayment of note receivable from shareholders -- -- -- -- 222
Deferred stock compensation -- -- -- 2,608 --
Amortization of deferred stock compensation (net)
and warrant -- -- -- 168 --
Unrealized loss on investments -- -- -- -- --
Net loss
---------- ------ ---------- -------- -------
Balance at December 31, 1999 1 $3,454 35,153,402 $124,301 $(3,316)
========== ====== ========== ======== =======
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
Shareholders' Equity (Net Capital Deficiency)
------------------------------------------------------
Accumu- Total
lated Share-
Other holders'
Deferred Compre- Equity
Stock hensive Accumu- Net
Compen- Income lated Capital
sation (Loss) Deficit Deficiency)
--------- --------- -------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ -- $ -- $ (7,922) $ (7,407)
Issuance of one Series E preferred share
representing rights with respect to 2,844,303
ordinary shares, pursuant to Lanacom, Inc.
acquisition -- -- -- 3,454
Net loss (14,962) (14,962)
--------- ----- -------- -------
Balance at December 31, 1997 -- -- $(22,884) (18,915)
Issuance of ordinary shares pursuant to options
exercised -- -- -- 123
Deferred stock compensation (1,859) -- -- 0
Amortization of deferred stock compensation 221 -- -- 221
Net loss (14,607) (14,607)
-------- ----- --------
Balance at December 31, 1998 (1,638) -- (37,491) (33,178)
Conversion of preferred stock to common stock -- -- -- 47,275
Issuance of ordinary shares, net of $8,339
of issuance -- -- -- 67,561
Issuance of ordinary shares pursuant to options
and warrants exercised -- -- -- 4,192
Note receivable from shareholders -- -- -- (3,538)
Repayment of note receivable from shareholders 222
Deferred stock compensation (2,608) -- -- --
Amortization of deferred stock compensation
and warrant, net of adjustments for terminations 2,142 -- -- 2,310
Unrealized loss on investments -- (226) -- (226)
Net loss -- -- (11,489) (11,489)
------- ----- -------- ---------
Balance at December 31, 1999 $( 2,104) $(226) $(48,980) $ 73,129
======= ===== ======== =========
</TABLE>
<PAGE> 26
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS,)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(11,489) $(14,607) $(14,962)
Adjustments to reconcile net loss to
net cash used in operating activities:
Amortization of intangibles, warrant
and deferred stock compensation 4,009 1,984 617
Depreciation 760 529 300
Other -- (102) (21)
Changes in operating assets and liabilities,
net of effects of acquisition:
Accounts receivable (3,552) 769 (3,324)
Other assets (1,680) (174) (126)
Payable to related parties (254) (463) 354
Other liabilities and accrued expenses 3,990 (292) 133
Accounts payable (34) (621) 123
Accrued compensation 1,263 445 357
Deferred revenue 1,655 630 1,036
Severance pay 57 19 35
-------- -------- --------
Net cash used in operating activities (5,275) (11,883) (15,478)
-------- -------- --------
INVESTING ACTIVITIES
Cash received upon acquisition of Lanacom -- 120
Purchase of other assets -- (29) (189)
Purchases of property and equipment (1,361) (390) (860)
Purchases of short-term investments (64,015) -- --
Maturities of short-term investments 7,000
-------- -------- --------
Net cash used in investing activities (58,376) (419) (929)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from bank line of credit -- 2,500 2,821
Repayment of bank line of credit (2,000) (2,021) (1,300)
Repayment of shareholder loans (332) -- --
Proceeds from shareholders' notes receivable 222 -- --
Proceeds from issuance of preferred shares, net 9,915 11,772 9,195
Proceeds from issuance of ordinary shares, net 68,215 123 --
-------- -------- --------
Net cash provided by financing activities 76,020 12,374 10,716
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 12,369 72 (5,691)
Cash and cash equivalents at beginning of the year 6,449 6,377 12,068
-------- -------- --------
Cash and cash equivalents at end of the year $ 18,818 $ 6,449 $ 6,377
======== ======== ========
NONCASH INVESTING AND
FINANCING TRANSACTIONS
Conversion of redeemable preferred stock to common stock $ 47,275
========
Issuance of Series E preferred stock upon acquisition of Lanacom $ -- $ -- $ 3,454
======== ======== ========
Supplemental Disclosure
Interest paid during the year $ 107 $ 87 $ 25
======== ======== ========
Issuance of ordinary shares for notes receivables $ (3,538) $ -- $ --
======== ======== ========
</TABLE>
25
<PAGE> 27
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States.
Inter-company accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from these
estimates.
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"), 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 and
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
26
<PAGE> 28
March 15, 1999. The Company believes that the adoption of SOP 98-9 will
not have a material effect on the Company's financial results.
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 significant costs
between the completion of the working model and the point at which the
product is ready for general release. Through December 31, 1999 BackWeb
has recognized 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 the revenue
generated is in U.S. dollars. A significant portion of the company's
research and development expenses is generated in New Israel Shekels
("NIS"). Since the U.S. dollar is the primary currency in the economic
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 U.S. dollar
(principally cash and liabilities) are re-measured using the foreign
exchange rate at the balance sheet date in accordance with SFAS No. 52,
"Foreign Currency Translations". Operational accounts and non-monetary
balance sheet accounts are measured and recorded in current operations
at the rate in effect at the date of the transaction. The foreign
currency re-measurement effect for 1999 and 1998 was a loss of $117,000
and gain of $163,000 respectively. The foreign currency re-measurement
effects were immaterial in 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, 1999, 1998 and 1997 were $528,000, $42,000 and $756,000
respectively.
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 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.
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.
GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
BackWeb has recorded goodwill representing the excess of the aggregate
purchase price over the fair market value of the tangible and intangible
assets acquired in connection with the acquisition of Lanacom, Inc.,
("Lanacom"). Goodwill, developed technology and other identified
intangibles are amortized on a straight-line basis over the estimated
useful life. Intangible assets, consist of the following (in thousands):
27
<PAGE> 29
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL -------------------
LIFE 1999 1998
--------- ------ ------
(IN YEARS)
<S> <C> <C> <C>
Goodwill ..................................... 2.5 $3,224 $3,224
Developed technology ......................... 2.5 400 400
Other intangibles ............................ 2 580 580
------ ------
4,204 4,204
Less: Accumulated amortization ............... 4,023 2,380
------ ------
Goodwill and other intangibles, net $ 181 $1,824
====== ======
</TABLE>
CONCENTRATION OF 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. BackWeb maintains
reserves to provide for estimated credit losses. Provision for bad and
doubtful debts in the years ended December 31, 1999, 1998 and 1997 were
$533,000, $677,000 and $485,000 respectively. Bad debt write-off's of
accounts in the years ended December 31, 1999, 1998 and 1997 totaled
$175,000, $591,000 and $10,000, respectively.
In 1999 revenue from one customer which was $3.1 million represented 13%
of total revenue for that year. No customer represented more than 10% of
total revenues in 1998. In 1997, revenues from two customers represented
19% and 11% of total revenues respectively.
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>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
Net loss ........................................... $(11,489) $(14,607)
======== ========
Basic and diluted:
Weighted-average shares .......................... 20,421 2,408
Less weighted-average shares subject to
repurchase .................................... (846) -
-------- --------
Shares used in computing basic and diluted net loss
per share ........................................ 19,575 2,408
======== ========
Basic and diluted net loss per share ............... $ (0.59) $ (6.07)
======== ========
Pro forma:
Shares used above ................................ 19,575 2,408
Pro forma adjustment to reflect weighted effect of
assumed conversion of redeemable convertible
and convertible preferred stock ............... 9,540 18,800
-------- --------
Shares used in computing pro forma basic and
diluted net loss per share .................... 29,115 21,208
======== ========
Pro forma basic and diluted net loss per share ... $ (0.39) $ (0.69)
======== ========
</TABLE>
28
<PAGE> 30
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 considered to be
anti-dilutive for all periods presented in the statement of
operations. 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: 7,672,723
for the year ended December 31, 1999, 25,657,825 for the year
ended December 31, 1998 and 20,796,354, for the year ended
December 31, 1997.
Such securities as noted in the preceding paragraph
would have been included in the computation of the diluted net
income per share using the treasury stock method.
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 the 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.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The accumulated and other comprehensive loss consists entirely of
unrealized losses on short-term investments. As at December 31, 1999 the
amount was $226,000. There was no amount for 1998.
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. The Company is currently evaluating
the impact of SAB 101. Should the Company determine that a change in its
accounting policy is necessary, such a change will be made effective
January 1, 2000 and would result in a charge to results of operations
for the cumulative effect of the change. This amount, if recognized,
would be recorded as deferred revenue and recognized as revenue in
future periods. Prior financial statements would not be restated.
2. SHORT-TERM INVESTMENTS
The following is a summary of the company's investment portfolio as of December
31, 1999 (in $ thousands):
<TABLE>
<CAPTION>
Unrealized Estimated
Cost Losses Fair Value
------- ---------- ---------
<S> <C> <C> <C>
Money market funds $30,000 $ - $30,000
Corporate debt securities 27,015 (226) 26,789
------- ----- -------
Totals $57,015 $ 226 $56,789
======= ===== =======
</TABLE>
All investments mature within two years. At December 31, 1999 the total
amounts of investments due within one year and due after one year
through two years are $43.3 million and $13.5 million respectively.
3. PROPERTY AND EQUIPMENT
Property and equipment at cost, consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------- -------
<S> <C> <C>
Computer equipment ................................. $ 2,145 $ 1,493
Office equipment, furniture, fixtures, and other ... 1,117 408
------- -------
3,262 1,901
Less accumulated depreciation ...................... (1,631) (871)
------- -------
Property and equipment, net ........................ $ 1,631 $ 1,030
======= =======
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in $
thousands):
29
<PAGE> 31
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1999 1998
------ ------
<S> <C> <C>
Accounts payable ............................... $ 807 $ 841
Accrued compensation and related expense........ 2,519 1,256
Sales events ................................... 950 -
Other .......................................... 4,300 1,260
------ ------
$8,576 $3,357
====== ======
</TABLE>
5. RELATED PARTIES
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
December 31, 1999, the loan balance was $823,000, re-stated for the
Israeli consumer price index and reflecting currency conversion
adjustment and repayments.
SERVICES FROM AFFILIATES
The Early Investors provided 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 $7,000, $220,000 and
$516,000, during the years ended December 31, 1999, 1998 and 1997
respectively. BackWeb reimbursed 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 $235,000,
$873,000 and $1.2 million during the years ended December 31, 1999, 1998
and 1997 respectively.
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 have grant of stock options for up to 792,167
ordinary shares of common stock for any person or entity. Through
December 31, 1999, options for 779,107 ordinary shares have been granted
and 13,060 shares remain available. This pool of options has been used
by the Early Investors in granting options to employees and consultants
of BRM and other related companies. .
Some shareholders and officers of BackWeb have a controlling interest in
another company deemed to be a related party.
REVENUE FROM AFFILIATES
During 1999, the company recorded revenues of $1,132,500 related to
products licensed to a related party. As of December 31, 1999 $632,500
is included in account receivable.
6. COMMITMENTS AND CONTINGENCIES
LEASES
BackWeb leases its office facilities under cancelable and non-cancelable
operating leases. Future rental payments on a fiscal year basis under
non-cancelable operating leases with initial terms in excess of one year
are as follows (in thousands):
<TABLE>
<S> <C>
2000 ................................. $1,161
2001 ................................. 808
2002 ................................. 401
2003 ................................. 153
------
$2,523
======
</TABLE>
Rent expense approximated $918,000, $695,000 and $458,000 for the years ended
December 31, 1999, 1998 and 1997 respectively.
30
<PAGE> 32
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 December 31, 1999.
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, 1999,
BackWeb had $5,000,000 in unused availability under the formula and
nonformula line of credit.
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.
7. SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
ORDINARY SHARES
In June 1999, the company completed an initial public offering of
6,325,000 ordinary shares at $12 per share, resulting in net proceeds of
approximately $67.9 million.
The Company's Articles of Association, as amended, authorizes the
Company to issue 150,067,829 Ordinary Shares of common stock at a
nominal value of NIS 0.03 per share.
Ordinary shares subject to future issuance are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1999
------------
<S> <C>
Exchange of BWC shares (represented by Series E preferred stock) into ordinary shares ... 1,426,259
Exercise of outstanding options ......................................................... 5,271,131
Ordinary shares available for grant under stock option plans ............................ 2,624,642
Exercise of preferred stock warrants outstanding and conversion to ordinary shares ...... 128,333
</TABLE>
STOCK SPLIT
In April 1999, the shareholders approved a one-for-three reverse
ordinary stock split. All ordinary share numbers and preferred stock
conversion ratios have been retroactively adjusted to reflect the
reverse stock split.
PREFERRED STOCK
The Company is authorized to provide for the issuance of up to
50,000,000 shares of undesignated preferred stock, none of which has
been issued at December 31,1999.
Immediately prior to the completion of the Company's initial public
offering all outstanding shares of Series A, B, C and D preferred stock
converted into an aggregate of 23,090,238 ordinary shares. At December
31, 1999, one share of Series E preferred stock was outstanding
(representing voting rights with respect to 1,426,259 ordinary shares).
Preferred stock prior to the initial public offering was composed of the
following (in thousands):
31
<PAGE> 33
<TABLE>
<CAPTION>
SHARES SHARES ISSUED LIQUIDATION
AUTHORIZED AND OUTSTANDING PREFERENCE
---------- ---------------- ----------
<S> <C> <C> <C>
Redeemable convertible preferred stock:
Series B .............................. 4,237,640 4,237,640 3,207,893
Series C-1 ............................ 10,482,608 10,482,608 12,054,999
Series C-2 ............................ 3,919,129 3,047,232 3,504,317
Series D .............................. 17,400,000 17,391,308 20,000,004
Series D-1 ............................ 8,647,815 8,647,815 9,944,987
---------- ---------- ----------
44,687,192 43,806,603 8,712,200
========== ========== ==========
Series A convertible preferred stock .. 25,464,110 25,464,110 2,024,397
========== ========== ==========
Series E preferred stock .............. 1 1 -
========== ======= ==========
</TABLE>
The following summarizes the redeemable convertible preferred stock activity (in
thousands):
<TABLE>
<CAPTION>
SERIES B SERIES C SERIES D
----------------- ------------------ ------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 ... 4,237 $ 3,090 11,722 $ 13,247 - $ -
Issuance of Series C ........... - - 870 972 - -
Issuance of Series D ........... - - - - 8,078 8,223
------ ------ ------- -------- ------- --------
Balance at December 31, 1997 ... 4,237 3,090 12,592 14,219 8,078 8,223
Issuance of Series D ........... - - - - 9,313 10,699
Issuance of Series C ........... - - 939 1,073 - -
------ ------ ------- -------- ------- --------
Balance at December 31, 1998 ... 4,237 3,090 13,531 15,292 17,391 18,922
Issuance of Series D ........... - - - - 8,648 9,915
Conversion to ordinary shares .. (4,237) (3,090) (13,531) (15,292) (26,039) (28,837)
------ ------ ------- -------- ------- --------
Balance at December 31, 1999 ... - $ - - $ - - $ -
====== ======= ======= ======== ======= ========
</TABLE>
Series E preferred stock was issued to a trustee in connection with the
Lanacom acquisition and represents the voting and exchange rights of the
BackWeb Canada Inc., (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 Ltd. However, if such a
dividend is declared by BackWeb Ltd, 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.
In March 1999, BackWeb issued 8,647,815 shares of Series D-1 redeemable
convertible preferred stock to investors at $1.15 per share, resulting
in net cash proceeds of approximately $9.9 million.
STOCK WARRANT
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 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 was amortized over
the term of the bank line of credit in 1999.
STOCK OPTION PLANS
Under the 1996 Israel Stock Option Plan (the "1996 Israel 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 the termination of the option holders 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
non-statutory 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 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 the options are assumed by the
Successor Corporation.
Under the 1998 U.S. Option Plan (the "1998 U.S. Plan"), BackWeb is
authorized to grant incentive stock options to employees and
non-statutory stock options and share purchase rights to employees,
directors and consultants. 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
of Directors. The exercise price of incentive stock options must not be
less than the fair market value of its ordinary share at the date of the
grant. Options granted under the 1998 U.S. Option Plan generally vest
over four years. In the event of an acquisition of BackWeb, the options
will accelerate and become fully vested, except to the extent the
options are not assumed by the Successor Corporation.
BackWeb introduced in 1999 an Employee Stock Purchase Plan, which was
adopted by the Board of Directors in March 1999. 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 the lesser of 833,333
shares, 2% of the then
32
<PAGE> 34
outstanding shares or an amount determined by the Board of Directors.
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.
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>
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) 3,236,847 $1.20-$ 2.10 $ 1.83
Options exercised ........ -- (320,885) $0.03-$ 1.20 $ 0.39
Options canceled ......... 997,253 (996,349) $0.12-$ 1.50 $ 1.05
------------ ------------
Balance at December 31, 1998 1,027,220 5,304,813 $0.03-$ 2.10 $ 1.32 $ 0.33
------------ ------------
Options authorized ....... 3,600,000 -- -- --
Options granted .......... (2,688,886) 2,688,886 $1.50-$38.38 $ 10.66
Options exercised ........ -- (2,036,260) $0.03-$ 5.79 $ 2.07
Options canceled ......... 686,308 (686,308) $0.12-$27.19 $ 4.22
------------ ------------
Balance at December 31, 1999 2,624,642 5,271,131 $0.03-$38.38 $ 5.41 $ 10.85
============ ============
</TABLE>
Exercise prices for options outstanding as of December 31, 1999 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 1999 LIFE PRICE 1999 PRICE
-------------- -------------- ----------- -------- -------------- ---------
(IN YEARS)
<S> <C> <C> <C> <C> <C>
$0.03 571,319 2.99 $ 0.03 571,319 $ 0.03
$0.12--$1.05 220,551 4.24 0.47 100,467 0.47
$1.20 423,988 5.47 1.20 235,726 1.20
$1.50 641,688 8.60 1.50 79,959 1.50
$2.10 1,528,697 7.85 2.10 327,464 2.10
$2.70--$8.10 1,198,888 9.22 5.15 15,556 5.15
$16.75-$38.38 686,000 8.80 25.53 -- 25.53
--------- ---------
$0.03--$38.38 5,271,131 7.57 $ 5.41 1,330,491 $ 0.88
========= =========
</TABLE>
During the year ended December 31, 1999 and 1998, in connection with the
grant of certain share options, BackWeb recorded as deferred stock
compensation of $2,608,000 and $1,859,000 respectively. Such amounts
represented the difference between the exercise price and the deemed
fair market 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 1999 and 1998, BackWeb recorded amortization of deferred
stock compensation expense of approximately $2,142,000 and $221,000
respectively. At December 31, 1999, BackWeb had a total of $2,104,000
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 in the range of 5.25% to
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.
33
<PAGE> 35
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies the measurement principles of APB No. 25 in
accounting for its stock option plan. If the compensation expense for
options granted for the years ended December 31, 1999, 1998 and 1997
respectively, had been determined based on the fair market value at the
grant dates as prescribed by SFAS 123, the Company's net loss and net
loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss:
As reported ........................ $ (11,489) $ (14,607) $ (14,962)
Pro forma .......................... $ (15,365) $ (14,731) $ (15,055)
Basic and diluted loss per share:
As reported ........................ $ (0.59) $ (6.07) $ (6.96)
Pro forma .......................... $ (0.78) $ (6.12) $ (7.00)
</TABLE>
Because the determination of fair market value of all options granted
after the time the Company became a public entity include volatility
factors, the above results may not be representative of future periods.
The Company calculated the fair market value of each option grant on the
date of grant using the Black-Scholes option pricing model as prescribed
by SFAS No. 123 and the following assumptions:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rates 6% 6% 6%
Expected lives (in years) 5 5 5
Dividend yield 0% 0% 0%
Expected volatility 100% 0% 0%
</TABLE>
8. INCOME TAXES
Pretax loss from foreign operations (non-Israel) was approximately
$6,487,000 in 1999, $3,621,000 in 1998 and $2,648,000 in 1997.
ISRAELI INCOME TAXES
BackWeb's investment program has been granted the status of "Approved
Enterprise" by the Israel government under the law for the
Encouragement of Capital Investments Act, 1959 (the "Law"). Income
derived in Israel from the "Approved Enterprise" entitles BackWeb to tax
exemption for a period of two years commencing in the first year that it
will earn taxable income. After this BackWeb is entitled 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 Israel 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 was
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, 1999, BackWeb is in the
process of completing the investments required under the program. If
BackWeb fails to meet certain conditions as stipulated by law and the
Approval Certification, 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). The conditions that are specified include inter alia 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.
As of December 31, 1999, BackWeb had approximately $32,300,000 of
Israeli net operating loss carry-forwards. The Israeli loss
carry-forwards have no expiration date. The Company expects that during
the period these losses are utilized, its income would be substantially
tax exempt. Accordingly, there will be no tax benefit available from
such losses and no deferred income taxes have been included in these
financial statements.
34
<PAGE> 36
U.S. INCOME TAXES
At December 31, 1999, the Company has U.S. Federal net operating loss
carry-forwards for income tax purposes of approximately $1,500,000. The
net operating loss expires in various amounts between the years 2011 and
2019.
Utilization of the 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 credit carry-forwards and temporary differences
between the carrying amounts of assets and liabilities for financial
reporting and the amounts used for income tax purposes. Significant
components of the BackWeb's deferred tax assets and liabilities for
federal and state income taxes are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
U.S. Net operating loss carryforwards .................. $ 600 $ 400
Other foreign net operating loss carryforwards ......... 4,300 2,300
Reserves not currently deductible ...................... 300 200
Other, net ............................................. 400 200
------- -------
Total deferred tax assets .............................. 5,600 3,100
Valuation allowance for deferred tax assets ............ (5,600) (3,100)
------- -------
Net deferred tax assets ................................ $ - $ -
======= =======
</TABLE>
For the years ended December 31, 1998 and 1997 the valuation allowance
increased by $2,100,000 and $700,000, respectively.
Approximately $500,000 of the deferred tax asset for U.S. net operating
losses relate to stock option deductions the benefit of which will be
credited to equity upon realization.
At December 31, 1999, BackWeb had other foreign net operating loss
carry-forwards of approximately $14.2 million. The net operating losses
expire in various amounts between 2002 and 2005.
9. 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>
DECEMBER 31 ,
---------------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Revenues from sales to
unaffiliated customers:
Israel .......................... $ 6,401 $ 1,623 $ 593
United States ................... 16,506 7,574 4,979
Canada .......................... 356 340 29
------- ------- -------
$23,263 $ 9,537 $ 5,601
======= ======= =======
Long-lived assets:
Israel .......................... $ 517 $ 257 $ 257
United States ................... 1,013 650 972
Canada .......................... 264 1,849 3,527
Other ........................... 18 98 --
------- ------- -------
$ 1,812 $ 2,854 $ 4,756
======= ======= =======
</TABLE>
35
<PAGE> 37
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.
10. SUBSEQUENT EVENT
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.
36
<PAGE> 38
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Certain information required by Part III is incorporated by reference in this
Form 10-K from the Company's definitive proxy statement for its 2000 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A (the "Proxy
Statement").
ITEM 10 DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT
The information with respect to the Company's directors and executive officers
and compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, required by Item 10 is incorporated by reference from the Proxy
Statement.
ITEM 11 EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by reference from the
Proxy Statement.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 11 is incorporated by reference from the
Proxy Statement.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 11 is incorporated by reference from the
Proxy Statement.
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The following Consolidated Financial Statements are included at Part II, Item 8,
of this Annual Report on Form 10-K:
Page Report of Ernst & Young LLP, Independent Auditors
Consolidated Financial Statements
Balance Sheets as of December 31, 1999 and 1998
Statements of Operations for the three years ended
December 31, 1999.
Statements of Stockholders' Equity for the three years
ended December 31, 1999.
Statements of Cash Flows for the three years ended
December 31, 1999.
Notes to Consolidated Financial Statements
(a) 2. FINANCIAL STATEMENT SCHEDULES
All schedules are omitted because they are not required or the required
information is shown in the financial statements or notes thereto.
(a) 3. 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*
</TABLE>
37
<PAGE> 39
<TABLE>
<S> <C>
10.5 Lease Agreement for 3 Abba Hillel Street, Ramat Gan,
Israel (English translation) *
10.6 Lease Agreement for 34 Tuval Street, Ramat Gan, Israel
(English translation) *
10.7 Lease Agreement for 2077 Gateway Place, Suite 500, San
Jose, California *
10.8 Form of Agreement by and among Interad (1995) Ltd. and Nir
Barkat Holdings Ltd., Eli Barkat Holdings Ltd., Yuval 63
Holdings (1995) Ltd., and Lior Hass and Iftah Sneh *
10.9 Loan and Security Agreement, and schedule thereto, between
BackWeb Technologies Ltd. and Transamerica Business Credit
Corporation, dated as of December 24, 1998 *
10.10 Voting and Exchange Trust Agreement between BackWeb
Technologies Ltd., BackWeb Canada Inc. and the Trust
Company of Bank of Montreal, dated as of August 8, 1997 *
10.11 Fourth Amended and Restated Rights Agreement, dated as of
March 24, 1999 *
10.12 Agreement and Plan of Acquisition by and among BackWeb
Technologies Ltd., BackWeb Canada Inc., Lanacom Inc. and
Anthony Davis, dated as of July 1, 1997 *
10.13+ Software License and Distribution Agreement for Embedded
Products, by and between BackWeb Technologies Ltd. and SAP
AG, dated March 17, 1999 *
10.14+ Software Development and OEM License Agreement by and
between BackWeb Technologies Ltd. and Baan Development
B.V., dated as of December 30, 1998 *
20.1 January 26, 1999 Press Release: "BackWeb Reports Fourth
Quarter and Fiscal Year-End Results"
21.1 Subsidiaries of the Registrant *
27.1 Financial Data Schedule
</TABLE>
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended December 31, 1999.
- ---------------------------
* 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.
38
<PAGE> 40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 27, 2000.
BACKWEB TECHNOLOGIES LTD.
By: /s/ Eli Barkat
-----------------------------
Eli Barkat,
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this report has been
signed by the following persons on behalf of the Registrant in the capacities
and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Eli Barkat Chief Executive Officer and March 27, 2000
- ------------------------------------- Director
Eli Barkat (Principal Executive Officer)
/s/ Hanan Miron Chief Financial Officer March 27, 2000
- ------------------------------------- (Principal Financial and
Hanan Miron Accounting Officer)
/s/ Charles Federman Director March 27, 2000
- -------------------------------------
Charles Federman
/s/ William Larson Director March 27, 2000
- -------------------------------------
William Larson
/s/ Joseph Gleberman Director March 27, 2000
- -------------------------------------
Joseph Gleberman
/s/ Gil Shwed Director March 27, 2000
- -------------------------------------
Gil Shwed
</TABLE>
39
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3.1 Articles of Association of Registrant *
3.2 Memorandum of Association of Registrant (English
translation) *
4.1 Specimen of Ordinary Share Certificate *
4.2 Fourth Amended and Restated Rights Agreement *
4.3 Form of Liquidity Proposal between BackWeb Technologies,
Ltd. and the Exchangeable shareholders *
10.1 1996 Israeli Share Option Plan (English translation) *
10.2 1996 U.S. Share Option Plan *
10.3 1998 U.S. Share Option Plan *
10.4 1999 Employee Stock Purchase Plan *
10.5 Lease Agreement for 3 Abba Hillel Street, Ramat Gan,
Israel (English translation) *
10.6 Lease Agreement for 34 Tuval Street, Ramat Gan, Israel
(English translation) *
10.7 Lease Agreement for 2077 Gateway Place, Suite 500, San
Jose, California *
10.8 Form of Agreement by and among Interad (1995) Ltd. and Nir
Barkat Holdings Ltd., Eli Barkat Holdings Ltd., Yuval 63
Holdings (1995) Ltd., and Lior Hass and Iftah Sneh *
10.9 Loan and Security Agreement, and schedule thereto, between
BackWeb Technologies Ltd. and Transamerica Business Credit
Corporation, dated as of December 24, 1998 *
10.10 Voting and Exchange Trust Agreement between BackWeb
Technologies Ltd., BackWeb Canada Inc. and the Trust
Company of Bank of Montreal, dated as of August 8, 1997 *
10.11 Fourth Amended and Restated Rights Agreement, dated as of
March 24, 1999 *
10.12 Agreement and Plan of Acquisition by and among BackWeb
Technologies Ltd., BackWeb Canada Inc., Lanacom Inc. and
Anthony Davis, dated as of July 1, 1997 *
10.13+ Software License and Distribution Agreement for Embedded
Products, by and between BackWeb Technologies Ltd. and SAP
AG, dated March 17, 1999 *
10.14+ Software Development and OEM License Agreement by and
between BackWeb Technologies Ltd. and Baan Development
B.V., dated as of December 30, 1998 *
20.1 January 26, 1999 Press Release: "BackWeb Reports Fourth
Quarter and Fiscal Year-End Results"
21.1 Subsidiaries of the Registrant *
23.1 Consent of Ernst & Young LLP, Independent Auditors
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.
42
<PAGE> 1
Exhibit 20.1
Media Contact: Investor Relations Contact:
Theresa Campbell Julie Rowinski
Catapult Partners, Inc. BackWeb Technologies
(650) 524-1720 (408) 933-1724
[email protected] [email protected]
BACKWEB REPORTS FOURTH QUARTER AND FISCAL YEAR-END RESULTS
Key Customer Wins and Global Brand Awareness
Drive Annual Revenue Growth of 144 Percent
SAN JOSE, CA -- JANUARY 26, 2000 -- BackWeb(R) Technologies (Nasdaq: BWEB), a
leading provider of push for e-business solutions, today announced fourth
quarter and fiscal year-end results for the period ending December 31, 1999. The
company achieved record revenues driven by escalating demand for its push for
e-business solutions in the business-to-business, business-to-employee, and
e-commerce markets.
Revenues for the fourth quarter increased 125 percent to $7.9 million, from $3.5
million in the same period a year earlier and up 27 percent from $6.2 million
the previous quarter. Excluding amortization charges related to a previous
acquisition and deferred stock compensation, net loss for the fourth quarter was
$1.4 million, or $0.04 per share loss, compared to a net loss of $2.1 million or
$0.10 per share loss for the same period a year earlier, and a net loss of $1.6
million, or $0.05 per share loss for the third quarter of 1999. Including
special charges, net loss for the quarter was $2.1 million, or $0.06 per share
loss compared to a net loss of $2.8 million, or $0.12 per share loss in fourth
quarter of 1998, and a net loss of $2.4 million, or $0.07 per share loss in the
prior quarter.
For the fiscal year ended December 31, 1999, BackWeb reported revenues of $23.3
million, an increase of 144 percent from $9.5 million reported for fiscal 1998.
Excluding amortization charges, net loss for 1999 was $7.8 million, or $0.27 per
share loss,
<PAGE> 2
- more -
2-2-2-2
compared to a net loss of $12.8 million or $0.60 per share loss for 1998.
Including special charges, net loss for 1999 was $11.5 million, or $0.39 per
share loss compared to a net loss of $14.6 million, or $0.69 per share loss in
1998.
"Our fourth quarter was distinguished by strong demand for our push solutions in
the e-business marketplace, particularly as we inked key partnerships and
benefited from the growing worldwide recognition of the BackWeb brand," said Eli
Barkat, chairman and CEO of BackWeb Technologies. "With our Polite(TM) push
technology building towards becoming a de facto Internet standard, we ended our
first fiscal year as a public company with a greatly expanded market opportunity
and are taking advantage of the rapid growth of the e-business market."
FOURTH QUARTER HIGHLIGHTS
- - BackWeb established new and expanding customer relationships with a
growing number of industry-leading companies, including: Charles Schwab
& Co., Inc., Bell Atlantic Mobile; SBC Communications and
Hewlett-Packard Company.
- - BackWeb and RealNetworks, Inc. signed an agreement to integrate
BackWeb's Polite(TM) push technology into RealJukebox(TM) to create a
first of its kind, push-based, Internet music delivery service for
consumers. RealNetworks also announced in January 2000, that it would
make a $15 million minority investment in BackWeb Technologies.
- - In addition, BackWeb realized its first OEM license revenues from SAP
AG's CRM package, which integrates BackWeb into every seat.
<PAGE> 3
- more -
3-3-3-3
HIGH-PROFILE WINS, EXPANDING MARKET POSITION, NEW ALLIANCES AND IPO
MARK FISCAL 1999
BackWeb's push for e-business solutions made significant headway into the Global
2000 by adding over 100 new customers in 1999:
- - Customer wins included BancBoston Robertson Stephens, British
Telecommunications PLC, Compaq Computer Corporation, Tech Data/Computer
2000, Charles Schwab and Co., Ericsson, Goldman Sachs & Co.,
Hewlett-Packard, ICG Communications, Lucent Technologies, Nortel
Networks, Inc., Rogers Cantel, SBC Communications, SAP AG, Telenordia,
Telecom Italia, and US WEST.
BackWeb's push solutions expanded in 1999 from primarily focusing on solutions
for direct sales forces to adding solutions for call centers, e-services and
reseller networks.
- - Call center wins include: Pacific Bell, SBC Communications, Bell
Atlantic Mobile and Charles Schwab and Co.;
- - E-service wins include: Hewlett-Packard, Compaq and First American
Financial Corporation;
- - Reseller network wins include: Tech Data/C2000, Lucent, and Mannesman
o.tel.o GmbH;
A variety of alliances fortified BackWeb's leadership as a key Internet
infrastructure provider. BackWeb announced alliances with:
- - SAP AG, to leverage BackWeb technology as part of its Customer
Relationship Management solution;
- - Hewlett-Packard, to use BackWeb technology to deliver service content to
all HP Pavilion PC users;
- - RealNetworks, to partner with BackWeb to build a push-based digital
music delivery platform;
- - US WEST, to partner with BackWeb to build a proactive portal experience
as a part of their Internet offerings;
<PAGE> 4
- more -
4-4-4-4
BackWeb made a number of significant announcements in 1999 broadening its
product offerings and strengthening the technical barriers of entry into its
market:
- - The company received a U.S. Patent for its Polite push technology;
- - BackWeb unveiled Service Accelerator and the Rapid Survey module as part
of its Accelerator Suite of products; and
- - BackWeb released new versions of its Foundation product which
strengthens its infrastructure offerings
About BackWeb Technologies
BackWeb Technologies is a leading provider of push for e-business solutions that
enable companies to communicate time-sensitive, business-critical information
throughout the extended enterprise of customers, partners and employees. Via
Internet-based applications and proactive portals, corporations such as Cisco,
Compaq, Hewlett-Packard, and British Telecom have deployed BackWeb's Polite push
Internet infrastructure for managing critical changes for key e-business and
customer service applications. BackWeb Technologies is headquartered in San
Jose, California, and Ramat Gan, Israel. For more information, visit its web
site at www.backweb.com or call (800) 863-0100.
Safe Harbor Statement
Statements in this news release which are not purely historical are
forward-looking statements within the meaning of the U.S. Federal Securities
laws, including, any statements regarding beliefs, plans, expectations or
intentions regarding the future. Actual results could differ materially from
those in such forward-looking statements. Factors that could cause actual
results to differ materially include changes in the competitive landscape
including new competitors and/or the impact of competitive pricing and products,
dependence upon a limited number of key resellers and customers, timely
availability and customer acceptance of new and existing products, rapid changes
in market conditions due to changing technological standards, fluctuations in
quarterly results, BackWeb's dependence upon and ability to attract and retain
qualified employees, potential Year 2000 problems with BackWeb's products or
internal operating systems, and the risks and uncertainties detailed from time
to time in BackWeb's periodic reports and registration statements filed with the
U.S. Securities and Exchange Commission. BackWeb undertakes no obligation to
publicly update or revise any forward-looking statements.
# # #
(C) 2000 BackWeb Technologies, Inc. BackWeb is a registered trademark and.
Polite is a trademark of BackWeb Technologies. All other trademarks are the
property of their respective owners.
<PAGE> 5
BACKWEB TECHNOLOGIES LTD.
Consolidated Statements of Operations
(In $ thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
-------------------------- --------------------------
Dec. 31, Dec. 31, Dec. 31, Dec. 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
License $ 6,099 $ 2,731 $ 18,514 $ 7,980
Service 1,767 763 4,749 1,557
-------- -------- -------- --------
Total revenues 7,866 3,494 23,263 9,537
Cost of revenues:
License 89 92 266 266
Service 1,496 342 3,911 1,353
-------- -------- -------- --------
Total cost of revenues 1,585 434 4,177 1,619
-------- -------- -------- --------
Gross profit 6,281 3,060 19,086 7,918
Operating expenses:
Research and development 1,527 972 5,519 4,555
Sales and marketing 5,807 3,326 18,876 13,182
General and administrative 1,249 922 4,480 3,182
Amortization of goodwill,
other intangibles, and
deferred stock compensation 718 621 3,640 1,824
-------- -------- -------- --------
Total operating expenses 9,301 5,841 32,515 22,743
-------- -------- -------- --------
Loss from Operations (3,020) (2,781) (13,429) (14,825)
Other income, net 937 13 1,940 218
-------- -------- -------- --------
Net loss $ (2,083) $ (2,768) $(11,489) $(14,607)
======== ======== ======== ========
Net loss per share
(including amort.) $ (0.06) $ (0.12) $ (0.39) $ (0.69)
======== ======== ======== ========
Net loss per share
(excluding amort.) $ (0.04) $ (0.10) $ (0.27) $ (0.60)
======== ======== ======== ========
Shares used in computing
net loss per share 33,147 22,446 29,115 21,208
======== ======== ======== ========
</TABLE>
<PAGE> 6
BACKWEB TECHNOLOGIES LTD.
Consolidated Balance Sheets
(in $ thousands)
<TABLE>
<CAPTION>
Dec. 31, Dec. 31,
1999 1998
------- -------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $18,818 $ 6,449
Short term investments 56,789 --
Accounts receivable, net 6,142 2,590
Other current assets 2,344 712
------- -------
Total current assets 84,093 9,751
Property and equipment, net 1,631 1,030
Goodwill and other purchased intangibles, net 181 1,824
Other assets 144 96
------- -------
$86,049 $12,701
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit $ -- $ 2,000
Accounts payable and accrued liabilities 8,576 3,357
Deferred revenue 3,321 1,666
Payable of related parties 50 304
Current portion of shareholders' loans 823 828
------- -------
Total current liabilities 12,770 8,155
Accrued severance pay, net 150 93
Shareholders' loans -- 327
Total Shareholders' equity 73,129 4,126
------- -------
$86,049 $12,701
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-84659) pertaining to the BackWeb 1996 Israeli Share Option
Plan, the BackWeb 1996 U.S. Share Option Plan, the BackWeb 1998 U.S. Share
Option Plan and the BackWeb 1999 Employee Stock Purchase Plan of our report
dated January 21, 2000, with respect to the consolidated financial statements of
BackWeb Technologies Ltd. included in this Annual Report (Form 10-K) for the
year ended December 31, 1999.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 28, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 18,818
<SECURITIES> 56,789
<RECEIVABLES> 7,061
<ALLOWANCES> 919
<INVENTORY> 0
<CURRENT-ASSETS> 84,093
<PP&E> 3,262
<DEPRECIATION> 1,631
<TOTAL-ASSETS> 86,049
<CURRENT-LIABILITIES> 12,770
<BONDS> 0
0
3,454
<COMMON> 124,301
<OTHER-SE> (54,626)
<TOTAL-LIABILITY-AND-EQUITY> 86,049
<SALES> 18,514
<TOTAL-REVENUES> 23,263
<CGS> 266
<TOTAL-COSTS> 4,177
<OTHER-EXPENSES> 32,515
<LOSS-PROVISION> 533
<INTEREST-EXPENSE> 469
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,489)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,489)
<EPS-BASIC> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
