<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .
COMMISSION FILE NUMBER 0-26241
BACKWEB TECHNOLOGIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
ISRAEL __________
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3 ABBA HILLEL STREET, RAMAT-GAN, ISRAEL 52136
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
(972) 3-7518464
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Ordinary Shares outstanding as of
July 31, 2000 was 37,551,005 shares.
--------------------------------------------------------------------------------
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<PAGE> 2
BACKWEB TECHNOLOGIES LTD.
QUARTERLY REPORT ON FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)............................ 1
Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999.................................................... 1
Consolidated Statements of Operations for the Three Months
and Six Months Ended June 30, 2000 and 1999................. 2
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2000 and 1999................................ 3
Notes to Consolidated Financial Statements.................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of
Operations.................................................. 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk... 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................... 21
Item 2. Changes in Securities and Use of Proceeds................... 21
Item 3. Defaults Upon Changes of Senior Securities.................. 21
Item 4. Submission of Matters to a Vote of Security Holders......... 21
Item 5. Other Information........................................... 21
Item 6. Exhibits and Report on Form 8-K............................. 21
</TABLE>
i
<PAGE> 3
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 29,706 $ 18,818
Short-term investments.................................... 42,275 56,789
Trade accounts receivable, net of allowance for doubtful
accounts of $1,053 and $919 at June 30, 2000 and
December 31, 1999...................................... 8,785 6,142
Other current assets...................................... 3,799 2,344
-------- --------
Total current assets.............................. 84,565 84,093
Property and equipment, net................................. 2,868 1,631
Goodwill and other purchased intangibles, net............... 8,044 181
Other assets................................................ 263 144
-------- --------
Total assets...................................... $ 95,740 $ 86,049
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 7,406 $ 8,576
Deferred revenue.......................................... 4,522 3,321
Payable to related parties................................ -- 50
Current portion of shareholders' loans.................... 366 823
-------- --------
Total current liabilities......................... 12,294 12,770
Long-term deferred revenue.................................. 113 --
Accrued severance pay, net.................................. 233 150
Shareholders' equity:
Series E preferred stock, nominal value $0.003 per share;
one share authorized and outstanding at June 30, 2000
and December 31, 1999.................................. 3,454 3,454
Ordinary shares, nominal value $0.01 per share;
150,067,829 shares authorized; 37,507,014 shares
outstanding at June 30, 2000 and 35,153,402 shares
outstanding at December 31, 1999....................... 145,407 124,301
Notes receivable from shareholders........................ (2,977) (3,316)
Deferred stock compensation............................... (1,547) (2,104)
Accumulated other comprehensive loss...................... (346) (226)
Accumulated deficit....................................... (60,891) (48,980)
-------- --------
Total shareholders' equity........................ 83,100 73,129
-------- --------
Total liabilities and shareholders' equity........ $ 95,740 $ 86,049
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
License..................................... $ 8,342 $ 4,232 $ 15,225 $ 7,540
Service..................................... 2,290 853 4,310 1,642
-------- ------- -------- -------
Total revenues...................... 10,632 5,085 19,535 9,182
Cost of revenues:
License..................................... 48 45 80 118
Service..................................... 1,590 705 2,919 1,297
-------- ------- -------- -------
Total cost of revenues.............. 1,638 750 2,999 1,415
-------- ------- -------- -------
Gross profit.................................. 8,994 4,335 16,536 7,767
Operating expenses:
Research and development.................... 2,148 1,411 3,991 2,408
Sales and marketing......................... 7,251 4,365 14,187 8,196
General and administrative.................. 1,856 1,077 3,452 2,008
Amortization of intellectual property,
goodwill, other intangibles, and deferred
stock compensation....................... 8,684 872 9,131 2,074
-------- ------- -------- -------
Total operating expenses............ 19,939 7,725 30,761 14,686
-------- ------- -------- -------
Loss from operations.......................... (10,945) (3,390) (14,225) (6,919)
Finance and other income (expense), net....... 1,186 86 2,314 (71)
-------- ------- -------- -------
Net loss...................................... $ (9,759) $(3,304) $(11,911) $(6,990)
======== ======= ======== =======
Basic and diluted net loss per share.......... $ (0.26) $ (0.12) $ (0.33) $ (0.28)
======== ======= ======== =======
Shares used in computing basic and diluted net
loss per share.............................. 37,095 27,643 36,540 25,351
======== ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------------
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(11,911) $ (6,990)
Adjustments to reconcile net loss to net cash used in
operating activities:
Barter transaction........................................ (590) --
Amortization of intangibles, warrant and deferred stock
compensation............................................ 9,131 2,145
Depreciation.............................................. 416 342
Changes in operating assets and liabilities, net of
effects of acquisition:
Accounts receivable..................................... (2,643) (1,705)
Other assets............................................ (1,567) (195)
Payable to related parties.............................. (50) (68)
Other liabilities and accrued expenses.................. (2,000) 2,216
Accounts payable........................................ 129 29
Accrued compensation.................................... 557 60
Deferred revenue........................................ 1,314 1,455
Severance pay, net...................................... 83 61
-------- --------
Net cash used in operating activities.............. (7,131) (2,620)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment......................... (1,063) (500)
Purchases of short-term investments......................... (7,430) --
Maturities of ST investment................................. 21,824 (42,329)
Purchase of Mobix intellectual property..................... (12,300) --
-------- --------
Net cash provided by (used in) investing activities......... 1,031 (42,829)
-------- --------
FINANCING ACTIVITIES
Repayment of bank line of credit............................ -- (2,000)
Proceeds from shareholders' notes receivable................ 339 --
Repayment of shareholder loans.............................. (457) (333)
Proceeds from issuance of preferred shares, net............. -- 9,915
Proceeds from issuance of ordinary shares, net.............. 17,106 68,465
-------- --------
Net cash provided by financing activities................... 16,988 76,047
-------- --------
Net increase (decrease) in cash and cash equivalents........ 10,888 30,598
Cash and cash equivalents at beginning of the period........ 18,818 6,449
-------- --------
Cash and cash equivalents at end of the period.............. $ 29,706 $ 37,047
-------- --------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS
Issuance of ordinary shares for Mobix acquisition........... $ 4,000 --
========
Issuance of ordinary shares for notes receivable............ -- $ 3,434
========
Conversion of redeemable preferred stock to Common stock.... -- $ 47,331
========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- BackWeb Technologies Ltd. was incorporated under the laws
of Israel in August 1995 and commenced operations in November 1995. BackWeb
Technologies Ltd. and its subsidiaries (collectively, "BackWeb" or the
"Company") is a provider of Internet communication infrastructure and
applications software that enables companies to communicate business-critical,
time-sensitive information throughout their enterprise of customers, partners
and employees. BackWeb sells its products primarily to end users from a variety
of industries, including the telecommunications, financial and the computer
industries.
The BackWeb group of companies consist of wholly owned subsidiaries
registered as follows: BackWeb Technologies, Inc., a U.S. corporation; BackWeb
Canada, Inc., a Canadian corporation; BackWeb Technologies B.V., a Netherlands
corporation; BackWeb Technologies U.K. Ltd., a United Kingdom corporation;
BackWeb Technologies GmbH, a German corporation; BackWeb Technologies S.A.R.L.,
a French corporation, BackWeb Technologies A.B., a Swedish corporation and
BackWeb K.K. Ltd., a Japanese corporation.
Basis of Presentation -- The unaudited consolidated financial statements
include the accounts of BackWeb Technologies Ltd. and its wholly-owned
subsidiaries. They have been prepared in accordance with established guidelines
for interim financial reporting and with the instructions of form 10-Q and
Article 10 of Regulation S-X. All significant intercompany transactions have
been eliminated in consolidation. The balance sheet at December 31, 1999 has
been derived from audited financial statements at such date. In the opinion of
management, the consolidated financial statements reflect all adjustments
consisting of normal recurring adjustments to fairly state the company's
financial positions results of operations and cash flows for the period
indicated. The financial statements should be read in conjunction with the notes
to the consolidated financial statements included in the Company's Annual Report
on form 10-K for the fiscal year ended December 31, 1999.
Revenue Recognition -- License revenues are comprised of perpetual or
multi-year license fees, which are primarily derived from contracts with
corporate customers and resellers, and royalty fees earned upon the shipment of
products which incorporate the Company's software. License revenue is recognized
when a license agreement has been executed or a definitive purchase order has
been received, the product has been delivered to end customers, no significant
BackWeb obligations with regard to implementation remain, the fee is fixed and
determinable, and collectibility is probable. For electronic delivery, the
software is considered delivered when BackWeb has provided the customer with the
access codes (the "key") that allow for immediate possession of the software. If
the fee due from the customer is not fixed and determinable, revenue is
recognized as payments become due from the customer. If collectibility is not
considered probable, revenue is recognized when the fee is collected. Revenue on
arrangements with customers who are not the ultimate users (primarily resellers)
is not recognized until the product is delivered to the end user. Royalty
revenues are recognized when reported to the Company after shipment of the
related products.
Service revenues are comprised of revenue from support arrangements,
consulting fees and training. BackWeb's policy is to recognize license revenue
when these services are not essential to the functionality of the product. To
date, these services have not been essential to the functionality of the
product. Support arrangements provide technical support and the right to
unspecified upgrades on an if-and-when-available basis. Revenue from support
arrangements is deferred and recognized on a straight-line basis as service
revenue over the life of the related service agreement, typically one year.
Consulting and training revenue is deferred and recognized when provided to the
customer. Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue. In instances where software
license agreements include a combination of consulting services, training and
support, these separate elements are unbundled from the arrangement based on the
element's relative fair value.
BackWeb adopted Statement of Position 97-2, "Software Revenue Recognition"
(SOP 97-2), as amended by Statement of Position 98-4, "Deferral of the Effective
Date of a Provision of SOP 97-2" and
4
<PAGE> 7
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions".
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 following table presents the calculation of the basic and diluted net
loss per ordinary share (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss................................ $(9,759) $(3,304) $(11,911) $(6,990)
======= ======= ======== =======
Basic and diluted:
Weighted-average shares............... 37,320 28,734 36,937 25,935
Less weighted-average shares subject
to repurchase...................... (225) (1,091) (397) (584)
------- ------- -------- -------
Shares used in computing basic and
diluted net loss per share............ 37,095 27,643 36,540 25,351
======= ======= ======== =======
Basic and diluted net loss per share.... $ (0.26) $ (0.12) $ (0.33) $ (0.28)
======= ======= ======== =======
</TABLE>
Recently Issued Accounting Pronouncements -- In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). BackWeb is required to adopt
SFAS 133 for the year ending December 31, 2000. SFAS 133 establishes methods of
accounting for derivative financial instruments and hedging activities. Because
BackWeb currently holds no derivative financial instruments as defined by SFAS
133 and does not currently engage in hedging activities, adoption of SFAS 133 is
not expected to have a material effect on BackWeb's financial condition or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB 101 until the fourth quarter of fiscal 2000. The Company
doesn't expect the adoption of SAB 101 to have a material effect on our
financial position or results of operation.
5
<PAGE> 8
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. SELECTIVE BALANCE SHEET DETAIL
Cash Equivalents and Short-Term Investments -- Cash equivalents consist of
money market instruments, bank time deposits and debt-securities with original
maturities of 90 days or less. Short-term investments consist of debt securities
with original maturities between three months and two years.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all debt securities have been classified as
"available-for-sale" and are carried at fair market value, based on quoted
market prices with material unrealized gains and losses, if any, included as a
separate component of shareholders' equity. Realized gains and losses and
declines in value of securities judged to be other than temporary are included
in interest income and have not been material to date. The cost of securities
sold is based on the specific identification method.
The following is a summary of the company's investment portfolio as of June
30, 2000 (in $ thousands):
<TABLE>
<CAPTION>
UNREALIZED ESTIMATED
COST LOSSES FAIR VALUE
------- ---------- ----------
<S> <C> <C> <C>
Money market funds.......................... $15,000 $ -- $15,000
Corporate debt securities................... 27,621 (346) 27,275
------- ----- -------
Totals............................ $42,621 $(346) $42,275
======= ===== =======
</TABLE>
Property and Equipment -- Property and equipment are stated at cost, net of
accumulated depreciation. Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets, generally two
to three years.
Property and equipment at cost, consists of the following (in thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ----------
<S> <C> <C>
Computer equipment....................................... $ 2,804 $ 2,145
Office equipment, furniture, fixtures, and other......... 2,111 1,117
------- -------
4,915 3,262
Less accumulated depreciation............................ (2,046) (1,631)
------- -------
Property and equipment, net.............................. $ 2,868 $ 1,631
======= =======
</TABLE>
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in $
thousands):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- -----------
<S> <C> <C>
Accounts payable.......................................... $ 936 $ 807
Accrued compensation and related expense.................. 3,076 2,519
Sales events.............................................. 464 950
Other..................................................... 2,930 4,300
------ ------
$7,406 $8,576
====== ======
</TABLE>
Shareholders' Loans -- In 1995, BackWeb signed an agreement with its early
investors (the "Early Investors"), according to which the Early Investors
provided BackWeb with loan financing in the amount of $500,000. The loan is
denominated in NIS and linked to the Israel consumer price index. The loan is
payable at a rate of 2.5% of cumulative consolidated revenues in excess of
$5,000,000. In addition, effective September 30, 1996, $748,000 of accounts
payable to the Early Investors were converted into a shareholders'
6
<PAGE> 9
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
loan on the same terms as the $500,000 loan. As of June 30, 2000, the loan
balance was $366,000, re-stated for the Israeli consumer price index and
reflecting currency conversion adjustment and repayments.
Accumulated Other Comprehensive Loss -- The accumulated and other
comprehensive loss consists entirely of unrealized losses on short-term
investments. As at June 30, 2000 and December 31, 1999, the amount was $346,000
and $226,000 respectively.
NOTE 3. CREDIT FACILITIES
Bank Line of Credit -- In December 1998, BackWeb entered into a line of
credit agreement with TransAmerica Business Credit Corporation, which provides
for formula and nonformula revolving credit loans aggregating up to $6,500,000.
The line of credit is secured by substantially all of BackWeb's assets.
Borrowings under the line of credit bear interest at the bank's prime rate plus
2% - 4%. The borrowing under the line of credit at December 31, 1998 was
$2,000,000, with interest at prime plus 4%. No amounts were outstanding at June
30, 2000.
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 June 30, 2000, BackWeb had $5,000,000 in unused
availability under the formula and nonformula line of credit.
Credit Risk -- Financial instruments, which potentially subject BackWeb to
concentrations of credit risk, consist of cash equivalents, short-term
investments, trade receivables and accounts payable. 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.
NOTE 4. COMMITMENTS AND CONTINGENCIES
Contingencies -- From time to time, the Company may have certain contingent
liabilities that arise in the ordinary course of its business activities. The
Company accounts for contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. In
the opinion of management, there are no pending claims of which the outcome is
expected to result in a material adverse effect on the financial position or the
results of operations or cash flows of the Company.
NOTE 5. SEGMENTS AND GEOGRAPHIC INFORMATION
BackWeb operates in one industry segment, the development and marketing of
network application software. Operations in Israel and Canada include research
and development and local sales. Operations in the U.S. include marketing and
sales. The following is a summary of operations within geographic areas based on
the location of the entity making that sale (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-----------------
2000 1999
------- ------
<S> <C> <C>
Revenues from sales to unaffiliated customers:
Israel.................................................. $ 3,685 $1,650
United States........................................... 15,229 7,514
Canada.................................................. 621 18
------- ------
$19,535 $9,182
======= ======
</TABLE>
7
<PAGE> 10
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Long-lived assets:
Israel................................................ $ 8,616 $ 388
Europe................................................ 175 129
United States......................................... 1,306 1,013
Canada................................................ 805 264
Other................................................. 16 18
------- ------
$10,918 $1,812
======= ======
</TABLE>
Revenues generated in the U.S. and Canada (collectively, North America) are
all to customers located in those geographic regions. Revenues generated in
Israel consist of export sales to customers located in Europe and the Far East.
NOTE 6. ACQUISITION OF CERTAIN ASSETS
On June 27th, 2000, BackWeb completed its acquisition (the "Acquisition")
of the software and intellectual property owned, licensed or developed by Mobix
Communications Ltd., ("Mobix") for an aggregate amount of $16.4 million,
pursuant to a Software and Asset Purchase Agreement among the Company, Mobix and
the principal shareholder of Mobix, (i) a cash payment of $9.6 million, and (ii)
a number of ordinary shares of BackWeb equal to $2.9 million in value (based on
the average daily closing price of BackWeb ordinary shares for the 15
consecutive trading days immediately preceding the closing of the Acquisition)
or 155,914 ordinary shares. Such shares were deposited in escrow together with
an additional $2.4 million in cash to satisfy Mobix's and the principal
shareholder's indemnification obligations and to secure the retention of certain
key employees of Mobix, (iii) BackWeb granted a number of stock options valued
at $1.1 million to retain two key employees from Mobix, (iv) Acquisition costs
amounted to $444,000.
BackWeb allocated the excess purchase price over the fair value of net
tangible assets acquired to the following identifiable intangible assets: $8.4
million to in-process research and development ("IPR&D"), $5.3 million to
goodwill and $2.7 million to assembled work force and to other intangibles. As
of the acquisition date, technological feasibility of the in-process technology
has not been established and the technology had no alternative future use;
therefore, BackWeb expensed the amount of the purchase price allocated to IPR&D
of approximately $8.4 million as of the date of the Acquisition in accordance
with generally accepted accounting principles. The capitalized intangible assets
are being amortized on a straight-line basis over their estimated useful lives
of two to three years.
8
<PAGE> 11
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. SUBSEQUENT EVENTS
SHELF REGISTRATION
On July 27, 2000, BackWeb's Registration Statement on Form S-3 was filed.
Under such Registration Statement (to the extent it becomes effective), BackWeb
will register 704,408 ordinary shares held by selling shareholders. The selling
shareholders are composed of former shareholders of Lanacom Inc., a Canadian
company acquired by BackWeb in August 1997. The offering is not underwritten and
BackWeb will not receive any proceeds from the offering.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
We have made forward looking statements in this Report on Form 10-Q that
are subject to risks and uncertainties. Forward looking statements include
information concerning possible or assumed future results of the operations of
BackWeb. Also, when we use such words as "believes," "expects," "anticipates" or
similar expressions, we are making forward looking statements. You should note
that an investment in our securities involves risks and uncertainties that could
affect future financial results. Our actual results could differ materially from
those anticipated in these forward looking statements as a result of a number of
factors, including those set forth in the section title "Risk Factors" and
elsewhere in this quarterly report, as well as the risk factors included in
BackWeb's periodic reports and registration statements filed with the U.S.
Securities and Exchange Commission. BackWeb undertakes no obligation to publicly
update or revise any forward-looking statements.
OVERVIEW
BackWeb is a leading provider of Internet communication infrastructure
software and application-specific software that enables companies to communicate
business-critical, time-sensitive information to their customers, partners and
employees. We were incorporated on August 31, 1995 and commenced our operations
in November 1995. During the period from commencement of operations through
December 31, 1996, we were in a development stage and had insignificant
revenues. Operating activities during this period related primarily to
developing our products, building our corporate infrastructure and raising
capital. In December 1996, we shipped the first commercial version of our
software.
In August 1997, in an effort to expand the features and functionalities of
our product offerings, we acquired all the outstanding shares of Lanacom Inc., a
Canadian corporation. The acquisition has been accounted for using the purchase
method of accounting, and accordingly the purchase price has been allocated to
the tangible and intangible assets acquired and the liabilities assumed on the
basis of their respective fair value on the acquisition date. The purchase price
of $3.9 million was determined based on the value of shares originally issued
and options granted. Of the total purchase price, approximately $3.2 million was
allocated to goodwill, representing the excess of the aggregate purchase price
on the fair value of tangible and intangible assets. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($103,000),
developed technology ($400,000) and other identifiable intangible assets
($383,000). Goodwill, developed technology and other identified intangibles are
amortized on a straight-line basis over the estimated useful life which ranges
from 24 to 30 months. The first BackWeb product, Version 4.0, incorporating
Lanacom's Headliner product, was released in January 1998.
On June 27, 2000, BackWeb completed its acquisition of the software and
intellectual property owned, licensed or developed by Mobix Communications Ltd.
(refer to Note 6).
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). "Deferral of the Effective Date of a
Provision of SOP 97-2" and Statement of Position 98-9, "Modification of SOP
97-2, Software Revenue Recognition, With Respect to Certain Transactions." These
statements are effective for our
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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.
RESULTS OF OPERATIONS
REVENUES
Our revenues are derived primarily from licensing of BackWeb Foundation and
BackWeb Sales Accelerator and to a lesser extent from maintenance and support,
consulting and training services. Total revenues for the three-months ended June
30, 2000 were $10.6 million, an increase of approximately $5.5 million or 109%
from $5.1 million in the three-months ended June 30, 1999. Total revenues for
the six-months ended June 30, 2000 were $19.5 million, an increase of
approximately $10.3 million or 113% from $9.2 million in the six-months ended
June 30, 1999. The increases were due both to growth in license and service
revenues. Customers outside of the United States accounted for 26.6% of revenues
in the three-months ended June 30, 2000 compared to 18.3% of revenues in the
three-months ended June 30, 1999. For the six-months ended June 30, 2000,
customers outside of the United States accounted for 22% of revenue compared to
18.2% for the six-months ended June 30, 1999.
License revenues were $8.3 million or 78.5% of revenues for the
three-months ended June 30, 2000 compared to $4.2 million or 83.2% of revenues
for the same period of the prior year. License revenues were $15.2 million or
77.9% of revenues for the six-months ended June 30, 2000 compared to $7.5
million or 82.1% of revenues for the same period of the prior year. The decrease
in license revenue as a percentage of total revenue was primarily due to
increased service revenue from support, maintenance and consulting services.
Service revenues were $2.3 million or 21.5% of revenues for the three-months
ended June 30, 2000 compared to $0.9 million or 16.8% of revenues for the same
period of the prior year. Service revenues were $4.3 million or 22.1% of
revenues for the six-months ended June 30, 2000 compared to $1.6 million or
17.9% of revenues for the same period of the prior year. In 2000, we expect our
service revenues to increase on an absolute basis and as a percentage of net
revenues.
COST OF REVENUES
Cost of license revenues consists primarily of expenses related to media
duplication, packaging of products and amortization of capitalized developed
technology (i.e., Lanacom related). Cost of license revenues were $48,000 or
0.6% of license revenues for the three-months ended June 30, 2000 compared to
$45,000 or 1.1% of license revenues for the same period of the prior year. Cost
of license revenues were $80,000 or 0.5% of license revenues for the six-months
ended June 30, 2000 compared to $118,000 or 1.6% of license revenues for the
same period of the prior year. Cost of service revenues consists primarily of
expenses related to salaries and expenses of the customer support and
professional service organizations, including
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related expenses of BackWeb consultants and third party consultants. Cost of
service revenues was $1.6 million, or 69.4% of service revenues, for the
three-months ended June 30, 2000 compared to $705,000 or 82.6% of service
revenues, for the same period of the prior year. Cost of service revenues was
$2.9 million, or 67.7% of service revenues, for the six-months ended June 30,
2000 compared to $1.3 million or 79.0% of service revenues, for the same period
of the prior year. The increase in cost of service revenues was due to growth of
the service organization. We expect the cost of service revenues to increase
primarily as a result of the increase in service revenues in addition to the
continued expansion of the customer support and professional service
organizations.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT
Research and development expenses consist of personnel and related costs of
our research and development employees, equipment and supply costs for our
development efforts. These expenses are charged to operations as incurred. We
have research and development facilities in Israel and Canada. Research and
development expenses were $2.1 million for the three-months ended June 30, 2000
compared to $1.4 million for the same period of the prior year. Research and
development expenses were $4.0 million for the six-months ended June 30, 2000
compared to $2.4 million for the same period of the prior year. Research and
development expenses were 20.2% and 27.7% of total revenue in the second quarter
of fiscal 2000 and 1999, respectively and were 20.4% and 26.2% for the six-month
periods ended June 30, 2000 and 1999, respectively. 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 $7.3 million for the
three-months ended June 30, 2000 compared to $4.4 million for the same period of
the prior year. Sales and marketing expenses were $14.2 million for the
six-months ended June 30, 2000 compared to $8.2 million for the same period of
the prior year. Sales and marketing expenses were 68.2% and 85.8% of total
revenue in the second quarter of fiscal 2000 and 1999, respectively and were
72.6% and 89.3% for the six-month periods ended June 30, 2000 and 1999,
respectively. We expect that sales and marketing expenses will increase on an
absolute basis over the next year, as we hire additional sales and marketing
personnel, continue to promote our brand and establish sales offices in
additional domestic and international locations, but are expected to decrease as
a percentage of revenues.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel and
related costs for general corporate functions, including finance, accounting,
general management, human resources, information services and legal. General and
administrative expenses were $1.9 million for the three-months ended June 30,
2000 compared to $1.1 million for the same period of the prior year. General and
administrative expenses were $3.5 million for the six-months ended June 30, 2000
compared to $2.0 million for the same period of the prior year. General and
administrative expenses were 17.5% and 21.2% of total revenue in the second
quarter of fiscal 2000 and 1999, respectively and were 17.7% and 21.9% for the
six-month periods ended June 30, 2000 and 1999, respectively. We expect general
and administrative expenses to increase on an absolute basis in future periods
but continue to decrease as a percentage of revenues.
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AMORTIZATION OF GOODWILL, OTHER INTANGIBLE ASSETS AND DEFERRED STOCK
COMPENSATION
Amortization of goodwill, intellectual property, other intangible assets
and deferred stock compensation consists of amortization of goodwill and other
intangibles associated with our acquisition of Lanacom in August 1997, deferred
stock compensation for 1999 and initial write-off of the acquisition of
intellectual property from Mobix Communications Ltd. in June, 2000. 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, intellectual
property and other intangibles are being amortized on a straight-line basis over
the estimated useful life, generally two to three 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 $8.7 million for the
three-months ended June 30, 2000 compared to $872,000 for the same period of the
prior year. Amortization expense was $9.1 million for the six-months ended June
30, 2000 compared to $2.1 million for the same period of the prior year. The
total amortization expense related to one-time write-off of in-process research
and development was $8.4 million in June, 2000.
FINANCE AND OTHER INCOME (EXPENSE), (NET)
Finance and 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 finance and other income and expense. Finance and other income
and expense also includes the effects of exchange gains and losses arising from
the re-measurement of transactions in foreign currencies. For the three-months
ended June 30, 2000, finance and other income was $1.2 million compared to
$86,000 for the same period of the prior year. For the six-months ended June 30,
2000, finance and other income was $2.3 million compared to other expense
$71,000 for the same period of the prior year. The increase was primarily due to
increased interest income earned from cash equivalents and short-term
investments.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2000, the Company had $72.0 million of cash, cash
equivalents and short-term investments, which represents a decrease of $3.6
million as compared to December 31, 1999.
Net cash used in operating activities was $7.1 million and $2.6 million for
the six-months ended June 30, 2000 and 1999, respectively. Cash provided by
investing activities was $1.0 million for the six-months ended June 30, 2000 and
cash used for investing activities was $42.8 million for the same period of the
prior year and was primarily for capital expenditures, purchase of intellectual
property and short-term investments. Cash provided by financing activities was
$17.0 million and $76.0 million for the six-months ended June 30, 2000 and 1999,
respectively, and consists primarily of proceeds from the issuance of common
stock.
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.
EFFECTIVE CORPORATE TAX RATES
Our tax rate will reflect a mix of the U.S. statutory tax rate on our U.S.
income and the Israeli tax rate discussed below. We expect that most of our
taxable income will be generated in Israel. Israeli companies are generally
subject to income tax at the rate of 36% of taxable income. The majority of our
income, however, is derived from our company's capital investment program with
"Approved Enterprise" status under the Law for the Encouragement of Capital
Investments, and is eligible therefore for tax benefits. As a result of these
benefits, we will have a tax exemption on income derived during the first two
years in which this investment
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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
(depending on the rate of foreign investment in BackWeb). All of these tax
benefits are subject to various conditions and restrictions. See "Israeli
Taxation and Investment Programs -- Law for the Encouragement of Capital
Investments Act 1959." There can be no assurance that we will obtain approval
for additional Approved Enterprise Programs, or that the provisions of the law
will not change.
Since we have incurred tax losses through December 31, 1999, we have not
yet used the tax benefits for which we are eligible. See "Risk Factors".
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Most of our sales are in U.S. dollars. However a large portion of our costs
are incurred in relation to our operations in Israel. A substantial portion of
our operating expenses, primarily our research and development costs, are
denominated in NIS. Costs not denominated in U.S. dollars are translated to U.S.
dollars, when recorded, at prevailing rates of exchange. This is done for the
purposes of our financial statements and reporting. Costs not denominated in
U.S. dollars will increase if the rate of inflation in Israel exceeds the
devaluation of the Israeli currency as compared to the U.S. dollar or if the
timing of such devaluations were to lag considerably behind inflation.
Consequently, we are and will be affected by changes in the prevailing NIS/ U.S.
dollar exchange rate. We might also be affected by the U.S. dollar exchange rate
to the major European and Asian currencies due to the fact that we operate
offices throughout Europe and Asia.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
BackWeb is required to adopt SFAS 133 for the year ending December 31, 2000.
SFAS 133 establishes methods of accounting for derivative financial instruments
and hedging activities. Because BackWeb currently holds no derivative financial
instruments as defined by SFAS 133 and does not currently engage in hedging
activities, adoption of SFAS 133 is not expected to have a material effect on
BackWeb's financial condition or results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). SAB 101 summarizes certain of the SEC Staff's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
In June 2000, the SEC issued SAB No. 101B to defer the effective date of
implementation of SAB 101 until the fourth quarter of fiscal 2000. The Company
doesn't expect the adoption of SAB 101 to have a material effect on our
financial position or results of operation.
RISK FACTORS
The Company operates in a rapidly changing environment that involves
numerous risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
OUR BUSINESS IS DIFFICULT TO EVALUATE BECAUSE OUR OPERATING HISTORY IS LIMITED
AND WE HAVE RECENTLY CHANGED OUR STRATEGIC FOCUS
We have a limited operating history and an even more limited history
operating the business as currently conducted. We cannot be certain that our
business strategy will be successful. We were incorporated on August 31, 1995
and did not begin generating revenues until December 1996. In early 1998, we
changed our strategic focus from a consumer-oriented to an enterprise-oriented
Internet communication company. This change required us to adjust our business
processes and make a number of significant personnel changes.
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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 $11.9 million for the six months ended June 30, 2000, $11.5
million for the year ended December 31, 1999, $14.6 million for the year ended
December 31, 1998 and $15.0 million for the year ended December 31, 1997. As of
June 30, 2000, we had an accumulated deficit of approximately $60.9 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 QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY
Our operating results are difficult to predict. Our revenues and operating
results may vary significantly from quarter to quarter due to a number of
factors, inter alia:
- demand for our products and services;
- the timing and mix of sales of our products and services;
- 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 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.
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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 the BackWeb e-Accelerator products.
OUR SOFTWARE PLATFORM ENABLES THIRD PARTIES TO DEVELOP APPLICATIONS WHICH MAY
COMPETE WITH APPLICATIONS DEVELOPED BY US
Because of BackWeb Foundation's open architecture, third parties have the
ability to develop their own applications on top of our platform. Such third
parties could compete with applications developed by BackWeb. If our target
customers do not widely adopt and purchase our products, or if third parties
were to compete with applications developed by us, our business would suffer.
OUR GROWTH MAY SUFFER BECAUSE OF THE DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS
The use of our products by our customers requires implementation services.
Although we currently provide implementation services sufficient to meet our
current business level, our growth will be limited in the event we are unable to
expand our implementation services personnel or subcontract these services to
qualified third parties.
IF WE LOSE A MAJOR CUSTOMER, OUR REVENUES COULD SUFFER BECAUSE OF OUR CUSTOMER
CONCENTRATION
We have generated a substantial portion of our annual and quarterly
historical revenues from a limited number of customers. As a result, if we lose
a major customer, or if there is a decline in end-users in any of our customers'
licenses, our revenues would be adversely affected. In 1997, revenues from 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.
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.
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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.
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.
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
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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.
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.
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.
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THE LOSS OF OUR RIGHT TO USE SOFTWARE LICENSED TO US BY THIRD PARTIES COULD HARM
OUR BUSINESS
We license technology that is incorporated into our products from third
parties, including security and encryption software. Any interruption in the
supply or support of any licensed software could disrupt our operations and
delay our sales, unless and until we can replace the functionality provided by
this licensed software. Because our products incorporate software developed and
maintained by third parties, we depend on these third parties to deliver and
support reliable products, enhance their current products, develop new
production on a timely and cost-effective basis and respond to emerging industry
standards and other technological changes.
ISRAELI REGULATIONS MAY LIMIT OUR ABILITY TO ENGAGE IN RESEARCH AND DEVELOPMENT
AND EXPORT OUR PRODUCTS
Under Israeli law we are required to obtain an Israeli government license
to engage in research and development of and export of the encryption technology
incorporated in our products. Our current government license to engage in these
activities expires May 31, 2001. 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;
19
<PAGE> 22
- 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 22% of our outstanding ordinary shares
as of July 31, 2000. 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.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in Israel and sell them in North America, Asia and
Europe. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As most of our sales are currently made in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. We regularly assess these risks and have established
policies and business practices to protect against the adverse effects of these
and other potential exposures. As a result, the Company does not anticipate
material losses in these areas. Due to the nature of our short-term investments,
we have concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.
20
<PAGE> 23
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 27, 2000, BackWeb completed its acquisition (the "Acquisition") of
the software and intellectual property owned, licensed or developed by Mobix
Communications Ltd., a company incorporated under the laws of the State of
Israel ("Mobix") pursuant to a Software and Asset Purchase Agreement among the
Company, Mobix and Ester Hemli, the principal shareholder of Mobix. As
consideration in the Acquisition, Mobix received (i) a cash payment of $9.6
million, and (ii) a number of ordinary shares of BackWeb equal to $2.9 million
in value (based on the average daily closing price of BackWeb ordinary shares
for the 15 consecutive trading days immediately preceding the closing of the
Acquisition) or 155,914 ordinary shares, such shares to be deposited in escrow
together with an additional $2.4 million in cash to satisfy Mobix's and the
principal shareholder's indemnification obligations and to secure the retention
of certain key employees of Mobix.
Purchased assets include all registered patents, designs, copyrights and
trademarks, all applications for registration thereof, all computer programs,
algorithms, utilities, flowcharts, processes, experimental methods,
specifications, engineering drawings, test protocols, and all other works of
authorship, inventions, concepts, ideas, and discoveries developed or used by
Mobix and all intellectual property rights therein.
The ordinary shares of BackWeb issued in the Acquisition have not been
registered under the Securities Act of 1933, as amended, and are therefore
subject to certain restrictions on resale.
ITEM 3. DEFAULTS UPON CHANGES OF SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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>
21
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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*
10.15 Amendment One dated June 9, 2000 to Software License and
Distribution Agreement for Embedded Products, by and between
BackWeb Technologies Ltd. and SAP AG dated March 17, 1999
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule
</TABLE>
---------------
* Incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358)
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
(b) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K on July 10, 2000 to report under
Item 2 thereof the acquisition of certain assets from Mobix Communications Ltd.
for (i) a cash payment of $9.6 million, and (ii) a number of ordinary shares of
BackWeb equal to $2.9 million in value (based on the average daily closing price
of BackWeb ordinary shares for the 15 consecutive trading days immediately
preceding the closing of the Acquisition) or 155,914 ordinary shares, such
shares to be deposited in escrow together with an additional $2.4 million in
cash to satisfy Mobix's and the principal shareholder's indemnification
obligations and to secure the retention of certain key employees of Mobix.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BACKWEB TECHNOLOGIES LTD.
Date: August 14, 2000 By: /s/ HANAN MIRON
------------------------------------
Hanan Miron,
Chief Financial Officer
23
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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*
10.15 Amendment One dated June 9, 2000 to Software License and
Distribution Agreement for Embedded Products, by and between
BackWeb Technologies Ltd. and SAP AG dated March 17, 1999
21.1 Subsidiaries of the Registrant*
27.1 Financial Data Schedule
</TABLE>
---------------
* Incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358)
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
24
