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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-26241
BACKWEB TECHNOLOGIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ISRAEL
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
3 ABBA HILLEL STREET, RAMAT-GAN, ISRAEL 52136
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(972) 3-6118800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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NONE NONE
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 20, 2001 the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$48,390,566. As of March 20, 2001, registrant had outstanding 38,343,639 shares
of Ordinary Shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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BACKWEB TECHNOLOGIES LTD.
ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matter to a Vote of Security Holders.......... 18
PART II
Item 5. Market for Registrant's Common Equity and Related 19
Stockholder Matters.........................................
Item 6. Selected Consolidated Financial Data........................ 21
Item 7. Management's Discussion and Analysis of Financial Condition 23
and Results of
Operations..................................................
Item 7A. Quantitative and Qualitative Disclosures About Market 28
Risk........................................................
Item 8. Financial Statements and Supplementary Data................. 29
Item 9. Changes in and Disagreements With Accountants On Accounting 50
and Financial Disclosure....................................
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 50
Item 11. Executive Compensation...................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and 55
Management..................................................
Item 13. Certain Relationships and Related Transactions.............. 57
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 58
8-K.........................................................
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This Annual Report on Form 10-K contains express or implied forward-looking
statements. The words "believes," "expects," "anticipates," "intends,"
"forecasts," "projects," "plans," "estimates" and similar expressions identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and financial performance or operations and speak
only as of the date the statements are made. Such forward-looking statements
involve risks and uncertainties and readers are cautioned not to place undue
reliance on forward-looking statements. The Company's actual results may differ
materially from such statements. Factors that cause or contribute to such
differences include those discussed elsewhere in this Form 10-K in the Section
entitled "Risk Factors." Although the Company believes that the assumptions
underlying its forward-looking statements are reasonable, any of the assumptions
could prove inaccurate and, therefore, there can be no assurance that the
results contemplated in such forward-looking statements will be realized. The
inclusion of such forward-looking information should not be regarded as a
representation by the Company or any other person that the future events, plans
or expectations contemplated by the Company will be achieved. The Company
undertakes no obligation to publicly update, review or revise any
forward-looking statements to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statements is based.
PART I
ITEM 1. BUSINESS
GENERAL
BackWeb Technologies Ltd. ("BackWeb" or the "Company") is a leading
provider of Internet communication infrastructure software and
application-specific software that enable companies to communicate
business-critical, time-sensitive information throughout their extended
enterprise of customers, partners and employees. Our products provide a reliable
solution for communicating large amounts of data in any digital format by
enabling our customers to automatically gather and disseminate information. Our
products efficiently disseminate this information across a network of any speed
by automatically adapting the rate of transmission to match the available
bandwidth. The Company sells its products primarily through its direct sales
force, resellers and OEMs.
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 an application,
BackWeb e-Accelerator, for sales and service organizations. BackWeb
e-Accelerator for direct sales force 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 e-Accelerator for field service enables a product support
organization to stay instantly updated about product information, service
requests, product training information and software diagnostic tools.
The Company was incorporated in the State of Israel in 1995. The principal
executive offices of the Company are located at 3 Abba Hillel Street, Ramat Gan,
Israel, 52136. In the United States, the Company's principal offices are located
at 2077 Gateway Place Suite 500, San Jose, California, 95110.
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
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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 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
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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.
Escalate Messages to Track Down Appropriate Recipients
Our Push Application Server's multi-channel communications and escalation
technology combine to ensure the highest possible success rate for contacting
users with the right information. This capability makes BackWeb's Push
Application Server a reliable way to deliver critical messages to an audience.
Multi-channel communication enables message delivery to users with personal
computers, PDAs, mobile phones and other devices. Escalation makes it possible
to re-route messages from one user device to another until the user confirms
delivery, or to reroute messages from one person to another until an intended
recipient confirms delivery. Our customers are able to have more success
contacting appropriate users with less effort, and all through a single system
with a single application programming interface. This obviates the need for our
customers to integrate different products offering a single communication
method.
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
validates 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
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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 applications enable 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.
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 Push Application Server, and
the BackWeb e-Accelerator. We license BackWeb Foundation and Push Application
Server 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 e-Accelerator provides our
customers with packaged applications that incorporate BackWeb Foundation and
Push Application Server.
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Technology:
Our infrastructure software platform is powered by three core technologies
that we have developed: Polite Communications, Multi-channel delivery and
Escalation/Attention Management.
Polite Communications. Polite Communications enables the transmission of
significant volumes of digital data from BackWeb servers to BackWeb clients on
personal computers 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 or low-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. It is
able to interrupt BackWeb communications when other applications request
use of the user's network connection.
- Polite Proxy allows communication between the BackWeb proxy server and
BackWeb servers only when WAN bandwidth utilization is below a specified
threshold. It achieves this by monitoring the wide area network, or WAN.
- 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.
Multi-channel Delivery. The BackWeb Push Application Server provides push
communications-related business logic which can be applied to different kinds of
communication or delivery methods. Examples of the delivery methods supported by
the Push Application Server include BackWeb Polite Communication to personal
computers, email, and wireless SMS messaging. Additional delivery methods can be
added in the future as the Push Application Server has an application
programming interface that provides the facilities for BackWeb or third parties
to add delivery methods to the system. The push communications-business logic
provides the kind of software services needed to support proactive
communications, such as targeting, subscriptions, reporting, management of users
and groups, and application programming interfaces. Multi-channel delivery makes
it possible for BackWeb's proactive communications expertise to be extended to
users with different kinds of devices on different kinds of networks.
Escalation/Attention Management and Flash Notifications. The BackWeb
products are often used by customers for notification applications, where people
need to be notified of time-sensitive or otherwise critical information. When
combined with BackWeb's multi-channel delivery capability, BackWeb's Escalation
and Attention Management capabilities provide the means to get important
notifications to the right people at the right time with a high rate of success.
Escalation refers to the capability to reroute messages from one device to
another device if the intended recipient did not receive the message or confirm
receipt of the message on the first device. Furthermore, messages can also be
rerouted or escalated to another person if the originally targeted recipient was
not reached. This escalation intelligence allows the multi-channel delivery
technology to coordinate all delivery methods with a focus on achieving the
desired user notification. Attention Management is an automatic notification
system supported by the BackWeb client software on personal
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computers. When content items are pushed to the personal computer, the BackWeb
attention management capability is able to alert users with the information if
appropriate for that user and content item. It alerts users to the delivery of
business-critical information through a variety of display techniques including
Flash notifications and ticker displays. These techniques enable companies to
attract immediate attention to time-sensitive information. Flashes are a
particular display technique that can be customized to notify users and, if
desired, can allow management to track the usage of the information. For
example, the recipient can be required to acknowledge their receipt of the
information, or to immediately launch and interact with a designated
application. In addition, Attention Management displays can be programmed to
play automatically according to specific scheduling and expiration parameters,
after which the information and associated data can be automatically purged.
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 web sites, 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.
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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:
- 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 Polite Upstream. BackWeb Polite Upstream enables BackWeb clients
to deliver digital data to BackWeb Servers, such as completed
questionnaires or surveys.
BackWeb Push Application Server. In August 2000, we introduced BackWeb Push
Application Server. The Push Application Server provides two levels of
functionality -- proactive communications or push business logic and
multi-channel communications capability. Push business logic refers to the
business logic required to proactively delivery information to users. It
provides basic capabilities such as:
- targeting techniques so information can be directed to the right people
- subscription management for determining who should receive which
information automatically
- user/group management
- application programming interfaces for content publishing and system
operation
- reporting on system and user events
- message escalation
Multi-channel delivery refers to the ability of the system to communicate
with users via different communication or delivery methods. Examples of the
delivery methods supported by the Push Application Server include BackWeb Polite
Communication to personal computers, email, and wireless SMS messaging.
Additional delivery methods can be added in the future as the Push Application
Server has an application programming interface that provides the facilities for
BackWeb or third parties to add delivery methods to the system. Multi-channel
delivery makes it possible for BackWeb's proactive communications expertise to
be extended to users with different kinds of devices on different kinds of
networks.
BackWeb e-Accelerator. In December 1998, we introduced BackWeb Sales
Accelerator (now e-Accelerator), our first packaged application built on BackWeb
Foundation. BackWeb e-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 employees, resellers, partners
and customers to accelerate their business execution and response
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time to critical changes affecting their business. Examples of information
typically communicated by BackWeb e-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 e-Accelerator consists of the Market Intelligence Manager,
Strategic Publishing Manager, Rapid Survey and Automated Marketing Encyclopedia
modules:
- Market Intelligence Manager automatically monitors, collects and
organizes information from Internet or intranet sites to keep users
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 rights, 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
documents or files to which extended enterprise users can subscribe. Once
subscribed, these files are automatically pushed to users and subsequent
updates are also pushed and applied automatically.
- Rapid Survey enables companies to acquire feedback from its users through
interactive 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. Users can respond to these surveys quickly and even when they
are offline, increasing the response rate and decreasing the response
time as compared to other survey techniques.
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, Ericcsson,
Fidelity Investments Institutional Services Co., Goldman Sachs & Co.,
Hewlett-Packard, IBM, AC Nielsen, NBC, Nestle, Network Associates, Inc.,
o.tel.o, Pacific Bell, Schlumberger, Siemens, Nortel Networks and Lucent
Technologies, Inc.
In 2000, one OEM accounted for more than 27% of our revenues. In 1999,
revenues from one End-user represented 13% of our revenues. In 1998 no customer
accounted for more than 10% of our revenues.
For a more complete discussion of related party transactions and their
affect on the Company please refer to Note 8 of the "Notes to Consolidated
Financial Statements." For a more complete discussion of external customers
transaction by geography please refer to Note 12 of the "Notes to Consolidated
Financial Statements."
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
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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, 2000, we have
signed agreements for business alliances with Baan Development B.V., Cable &
Wireless USA Inc., IBM CRM, KPMG, 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 have a comprehensive service and support organization which we intend to
expand. Our services are primarily comprised of maintenance, consulting and
training. Maintenance is provided to our customers on an annual basis for an
additional fee. This maintenance 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
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adding features and new functionality to our products. Our research and
development expenses, net totaled $8.8 million for the year ended December 31,
2000, $5.5 million for the year ended December 31, 1999, and $4.6 million for
the year ended December 31, 1998.
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.
While relying largely on internally developed technology, on June 27, 2000,
BackWeb completed its 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"). Purchased assets
include
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all registered patents, designs, copyrights and trademarks, all applications for
registration thereof, all computer programs, all hardware, 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 Company believes the Mobix acquisition
will enable it to extend its technology edge.
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
- 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, 2000, we had a total of 290 employees, 282 of whom were
full-time employees. Of the total number of employees 101 were engaged in
research and development, including 1 temporary employee, 106 in sales,
marketing and business development, including 4 temporary employees, 36 in
professional services and technical support and 47 in finance, administration
and operations, including 3 temporary employees. 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 consider our relations with our employees to be good.
In addition, 87 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 Organization, 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
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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.
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 2001. We incurred net losses of
approximately $19.2 million for the year ended December 31, 2000, $11.5 million
for the year ended December 31, 1999, and $14.6 million for the year ended
December 31, 1998. As of December 31, 2000, we had an accumulated deficit of
approximately $68.2 million. We expect to continue to incur significant sales
and marketing, product development and administrative expenses and expect such
expenses to increase in 2001. As a result, we will need to generate significant
revenues to achieve and maintain profitability. In addition, some of our
customers continue to operate in the dot-com market based on internet-centric
business models and are experiencing a significant economic slowdown and an
inability to raise additional capital, which could have a material adverse
effect on our revenue and earnings.
INTERNET-RELATED STOCK PRICES ARE ESPECIALLY VOLATILE AND THIS VOLATILITY
MAY DEPRESS OUR STOCK PRICE
The stock market from time to time has experienced significant price and
volume fluctuations. Recently, the stock market and specifically the stock
prices of internet-related companies have been very volatile. This volatility is
not necessarily related to the operating performance of companies. Because we
are an internet-related company, our stock price may be similarly volatile. This
volatility may reduce the price of our common stock without regard to our
operating performance and investors could lose all or part of their investments.
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 BackWeb e-Accelerator and PAS.
RAPID TECHNOLOGICAL CHANGES COULD CAUSE OUR PRODUCTS TO BECOME OBSOLETE
The Internet communications market is characterized by rapid technological
change, frequent new product introductions, changes in customer requirements and
evolving industry standards. If we are unable to develop and introduce products
or enhancements in a timely manner to meet these technological changes, we may
not be able to successfully compete. In addition, our products may become
obsolete in which event we may not be a viable business.
COMPETITION IN THE INTERNET COMMUNICATIONS MARKET MAY REDUCE THE DEMAND
FOR, OR PRICE OF, OUR PRODUCTS
The Internet communications market is intensely competitive and rapidly
changing. We expect that competition will intensify in the near-term because of
the attention the Internet is currently receiving and because there are very
limited barriers to entry. Our primary long-term competitors may not have
entered the market yet because the Internet communications market is new.
Competition could result in price reductions, fewer customer orders, reduced
gross margin and loss of market share, any of which could cause our business to
suffer. We may not be able to compete successfully, and competitive pressures
may harm our business. Many of our current and potential competitors have
greater name recognition, longer operating histories, larger customer bases and
significantly greater financial, technical, marketing, public relations, sales,
distribution and other resources than we do. Some of our potential competitors
are among the largest and most well-capitalized software companies in the world.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND SEASONALITY
Our operating results are difficult to predict. Our revenues and operating
results may vary significantly from quarter to quarter due to a number of
factors, inter alia:
- demand for our products and services;
- the timing and mix of sales of our products and services;
- 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.
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WE ANTICIPATE INCREASED OPERATING EXPENSES, WHICH COULD CAUSE OUR BUSINESS
TO SUFFER IF WE DO NOT CORRESPONDINGLY INCREASE REVENUES
We plan to significantly increase our operating expenses to expand our
sales and marketing operations, broaden our customer support capabilities,
improve operational and financial systems, develop new distribution channels and
fund greater levels of research and development. If we do not significantly
increase our revenues to meet these increased expenses, our business will
suffer.
OUR GROWTH MAY SUFFER BECAUSE OF THE DIFFICULTIES IN IMPLEMENTING OUR
PRODUCTS
The use of our products by our customers often 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 2000, one OEM customer
accounted for more than 27% of our revenues. In 1999, revenues from one End-user
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.
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WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR EXPECTED GROWTH AND GEOGRAPHIC
DISPERSION
Our ability to successfully offer products and services and to implement
our business plan in the rapidly evolving Internet communications market
requires an effective planning and management process. We continue to increase
the scope of our operations domestically and internationally and expect to grow
our headcount substantially depending on market conditions.
These factors together with our anticipated future operations and
geographic dispersion will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures, and expand, train and manage our work force worldwide.
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR
CONSENT BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED
Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
patent, copyright, trade secret and trademark law. However, we may not be able
to adequately protect our proprietary rights, which may harm our business.
Unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Policing unauthorized use of our products is difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
OUR PRODUCTS MAY BE USED IN AN UNINTENDED AND NEGATIVE MANNER
Our products are used to transmit information through the Internet. Our
products could be used to transmit harmful applications, negative messages,
unauthorized reproduction of copyrighted material, inaccurate data, or computer
viruses to end-users in the course of delivery. Any such transmission could
damage our reputation or could give rise to legal claims against us. We could
spend a significant amount of time and money defending against these legal
claims.
OUR PROPRIETARY TECHNOLOGY MAY BE SUBJECT TO INFRINGEMENT CLAIMS
Substantial litigation regarding intellectual property rights exists in the
software industry. A successful claim of product infringement against us and our
failure or inability to license the infringed or similar technology could harm
our business. We expect that software products may be increasingly subject to
third-party infringement claims as the number of competitors in our industry
segment grows and the functionality of products in different industry segment
overlaps. Third parties may make a claim of infringement against us with respect
to our products and technology. Any claims, with or without merit, could be
time-consuming to defend, result in costly litigation, divert management's
attention and resources, cause product shipment delays; or require us to enter
into royalty or licensing agreements. Royalty or licensing agreements, if
required, may not be available on acceptable terms, if at all.
WE DO NOT HAVE SUFFICIENT INSURANCE TO COVER ALL POTENTIAL PRODUCT
LIABILITY AND WARRANTY CLAIMS
Our products are integrated into our customers' networks. The sale and
support of our products may entail the risk of product liability or warranty
claims based on damage to these networks. In addition, the failure of our
products to perform to customer expectations could give rise to warranty claims.
Although we carry general liability and E&O insurance, our insurance may 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 2001 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
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may not increase and could decline. None of our officers or key employees is
bound by an employment agreement for any specific term. Our relationships with
these officers and key employees are at will. Moreover, we do not have "key
person" life insurance policies covering any of our employees.
ANY MAJOR DEVELOPMENTS IN THE POLITICAL OR ECONOMIC CONDITIONS IN ISRAEL
COULD CAUSE OUR BUSINESS TO SUFFER BECAUSE WE ARE INCORPORATED IN ISRAEL AND
HAVE IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL
We are incorporated under the laws of the State of Israel. Our principal
research and development facilities as well as significant executive offices are
located in Israel. Any major hostilities involving Israel or the interruption or
curtailment of trade between Israel and its present trading partners could
significantly harm our business. Inflation in Israel and any devaluation of the
NIS against the U.S. dollar could have an impact on our financial results. Since
a significant portion of our research and development expenses are incurred in
NIS, we may be negatively affected by fluctuations in the exchange rate between
the U.S. dollar and the NIS. If Israel's economy is hurt by a high inflation
rate, our operations and financial condition could suffer.
ANY FUTURE PROFITABILITY MAY BE DIMINISHED IF TAX BENEFITS FROM THE STATE
OF ISRAEL ARE REDUCED OR WITHHELD
Pursuant to the Law for the Encouragement of Capital Investments, the
Israel Government has granted "Approved Enterprise" status to our existing
capital investment programs. Consequently, we are eligible for tax benefits for
the first several years in which we generate taxable income. Our future
profitability may be diminished if all or a portion of these tax benefits are
reduced. These tax benefits may be cancelled in the event of changes in Israeli
government policies or if we fail to comply with requisite conditions and
criteria. Currently the most significant conditions which we must continue to
meet include making specified investments in fixed assets, maintaining the
development and production nature of our facilities, and financing of at least
30% of these investments through the issuance of capital stock.
THE LOSS OF OUR RIGHT TO USE SOFTWARE LICENSED TO US BY THIRD PARTIES COULD
HARM OUR BUSINESS
We license technology that is incorporated into our products from third
parties, including security and encryption software. Any interruption in the
supply or support of any licensed software could disrupt our operations and
delay our sales, unless and until we can replace the functionality provided by
this licensed software. Because our products incorporate software developed and
maintained by third parties, we depend on these third parties to deliver and
support reliable products, enhance their current products, develop new
production on a timely and cost-effective basis and respond to emerging industry
standards and other technological changes.
ISRAELI REGULATIONS MAY LIMIT OUR ABILITY TO ENGAGE IN RESEARCH AND
DEVELOPMENT AND EXPORT OUR PRODUCTS
Under Israeli law we are required to obtain an Israeli government license
to engage in research and development of and export of the encryption technology
incorporated in our products. Our current government license to engage in these
activities expires May 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
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, and enforcement of judgments obtained
in the United States against us, and our directors and executive officers, 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 our initial
public offering or any related
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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 40.1% 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.
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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 2. PROPERTIES
As of December 31, 2000, BackWeb leased approximately 8,500 square feet in
a single office building located in Ramat-Gan, Israel and approximately 20,500
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 March 2007. 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 sales and office space in the
following cities:
CITY COUNTRY
---- --------------
New York City, NY.......................................... U.S.A.
Chicago, IL................................................ U.S.A.
Warrenville, IL............................................ U.S.A.
McLean, VA................................................. U.S.A.
Atlanta, GA................................................ U.S.A.
Carrollton, TX............................................. U.S.A.
Austin, TX................................................. U.S.A.
Framingham, MA............................................. U.S.A.
Warminster, PA............................................. U.S.A.
Richmond, VA............................................... U.S.A.
Denver, CO................................................. U.S.A.
Bellevue, WA............................................... 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 173 stockholders on record as of March 20, 2001. 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:
LOW HIGH
SALE PRICE SALE PRICE
---------- ----------
2000
Fourth Quarter.......................................... $ 5.75 $11.38
Third Quarter........................................... $10.14 $25.00
Second Quarter.......................................... $12.56 $29.94
First Quarter........................................... $31.56 $58.00
1999
Fourth Quarter.......................................... $16.75 $51.44
Third Quarter........................................... $15.13 $36.50
Second Quarter.......................................... $15.00 $28.00
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.
In addition, the terms of financing arrangements restrict us from paying
dividends to our shareholders.
If we were to distribute cash dividends out of income that had been exempt
from tax because of our investment program's Approved Enterprise status (for
description of such status please refer to the section entitled "Effective
Corporate Tax Rate" in the Company's MD&A) such income would become subject to
Israeli corporate tax.
If we were to declare dividends in the future, we would declare those
dividends in NIS but pay those dividends to our non-Israeli shareholders in U.S.
dollars. Because exchange rates between NIS and the dollar fluctuate
continuously, a U.S. shareholder would be subject to currency fluctuation
between the date when the dividends were declared and the date the dividends
were paid.
Until May 1998, Israel imposed restrictions on transactions in non-Israeli
currency. Those restrictions affected our operations in various ways, and also
affected the right of non-residents of Israel to convert into non-Israeli
currency amounts they received in Israeli currency. Currently, there are no
longer Israeli currency control restrictions on remittances of dividends on the
ordinary shares (after deduction of withholding tax) or the proceeds from the
sale of the shares, and shareholders may freely convert these amounts into
non-Israeli currencies and remit these amounts abroad. However, legislation
remains in effect pursuant to which currency controls can be imposed by
administrative action at any time.
On September 20, 2000, BackWeb's Registration Statement on Form S-3 was
declared effective by the Securities and Exchange Commission. Under such
Registration Statement, BackWeb registered 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 was not underwritten and BackWeb did not receive any proceeds
from the offering.
In November 2000, BackWeb filed a Registration Statement on Form S-8,
pursuant to which BackWeb registered an additional 4,522,084 ordinary shares for
issuance under the Company's 1996 Israeli Employee
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Stock Option Plan, 1998 U.S. Stock Option Plan, and 1999 Employee Stock Purchase
Plan. For each named Plan, the additional shares registered were 1,131,415,
2,639,966 and 750,703 respectively.
On January 28, 2000, the Company issued and sold 458,000 ordinary shares
for an aggregate purchase price of $14,999,500 to RealNetworks, Inc., a
Washington corporation ("RealNetworks"), pursuant to a Securities Purchase
Agreement, dated January 17, 2000 (the "Agreement"), between the Company and
RealNetworks, and issued a warrant (the "Warrant") to purchase 114,500 ordinary
shares with an exercise price of $32.75 per share to RealNetworks. The per share
price for the ordinary shares acquired pursuant to the Agreement and for the
ordinary shares that may be acquired pursuant to the Warrant ($32.75 per share),
is equal to the average Nasdaq National Market closing price of the Company's
ordinary shares for the 60 trading days before January 14, 2000. The ordinary
shares of the Company were sold in reliance upon the exemption from registration
under the Securities Act of 1933, as amended (the "Securities Act"), provided by
Section 4(2) thereof and Rule 506 thereunder.
On June 27, 2000, the Company 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, dated
June 4, 2000, among the Company, Mobix and 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, and 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. BackWeb also granted stock options valued at $1.1
million to retain two key employees from Mobix. The ordinary shares of the
Company issued in the Acquisition were sold in reliance upon the exemption from
registration under the Securities Act, provided by Section 4(2) thereof and Rule
506 thereunder.
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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.
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31,
-------------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- -------
Revenues:
License............................ $ 29,294 $ 18,514 $ 7,980 $ 5,311 $ 71
Service............................ 9,052 4,749 1,557 290 --
-------- -------- -------- -------- -------
Total revenues............. 38,346 23,263 9,537 5,601 71
Cost of revenues:
License............................ 249 266 266 182 --
Service............................ 6,051 3,911 1,353 796 --
-------- -------- -------- -------- -------
Total cost of revenues..... 6,300 4,177 1,619 978 71
-------- -------- -------- -------- -------
Gross profit......................... 32,046 19,086 7,918 4,623 71
-------- -------- -------- -------- -------
Operating expenses:
Research and development, net...... 8,790 5,519 4,555 3,955 1,781
Sales and marketing................ 28,479 18,876 13,182 12,224 4,535
General and administrative......... 7,480 4,480 3,182 2,981 1,396
Amortization of goodwill, other
intangibles and deferred stock
compensation.................... 11,259 3,640 1,824 557 --
-------- -------- -------- -------- -------
Total operating expenses... 56,008 32,515 22,743 19,717 7,712
-------- -------- -------- -------- -------
Loss from operations................. (23,962) (13,429) (14,825) (15,094) (7,641)
Finance and other income (expense),
net................................ 4,749 1,940 218 132 (43)
-------- -------- -------- -------- -------
Net loss............................. $(19,213) $(11,489) $(14,607) $(14,962) $(7,684)
======== ======== ======== ======== =======
Basic and diluted net loss per
share.............................. $ (0.52) $ (0.59) $ (6.07) $ (6.96) $ (6.95)
======== ======== ======== ======== =======
Weighted average number of shares
used in computing basic and diluted
net loss per share(1).............. 37,205 19,575 2,408 2,151 1,106
======== ======== ======== ======== =======
DECEMBER 31,
------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------- ------- ------
(U.S. DOLLARS IN THOUSANDS)
CONDENSED CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments............................... 64,734 75,607 6,449 6,377 12,068
Working capital............................. 63,916 71,323 1,596 3,024 9,707
Total assets................................ 90,374 86,049 12,701 15,097 12,784
Long-term obligations, net of current....... -- -- 327 1,156 1,278
Redeemable convertible preferred stock...... -- -- 37,304 25,532 16,337
Total shareholders' equity (net capital
deficiency)............................... 78,430 73,129 (33,178) (18,915) (7,407)
- ---------------
(1) For the calculation of the number of shares, please see Note 2 of the Notes
to Consolidated Financial Statements, "Net Loss Per Share."
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UNAUDITED QUARTERLY FINANCIAL DATA FOR 2000 AND 1999
The following are summaries of quarterly financial data for the years ended
December 31, 2000 and 1999 as reported by the Company:
FIRST SECOND THIRD FOURTH
QTR QTR QTR QTR
--------- --------- --------- ---------
UNAUDITED
(US DOLLAR IN THOUSANDS, EXCEPT PER SHARE DATA)
2000
Revenues........................................ 8,903 20,632 11,738 7,073
Gross profit.................................... 7,542 8,994 10,007 5,503
Net loss........................................ (2,152) (9,759) (1,531) (5,771)
Basic and diluted net loss per share (after
amortisation)................................ (0.06) (0.26) (0.04) (0.15)
1999
Revenues........................................ 4,097 5,085 6,215 7,866
Gross profit.................................... 3,432 4,335 5,038 6,281
Net loss........................................ (3,686) (3,304) (2,416) (2,083)
Basic and diluted net loss per share (after
amortisation)................................ (1.40) (0.12) (0.07) (0.06)
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with,
and is qualified by, the "Selected Consolidated Financial Data" and our
Consolidated Financial Statements and Notes thereto included elsewhere herein,
as well as the section on "Risk Factors" that is set forth in Item 1 of Part I
of this Form 10-K. In addition, this discussion contains forward-looking
statements and is, therefore, subject to the overall qualification on
forward-looking statements that appears at the beginning of this Form 10-K.
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, 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 the direct
sales force, reseller channel, system integrators and OEM's.
On June 27, 2000, BackWeb completed its acquisition of the software and
intellectual property owned, licensed or developed by Mobix Communications Ltd.
for an aggregate amount of $16.44 million pursuant to a Software and Asset
Purchase Agreement among the Company, Mobix and the principal shareholder of
Mobix. 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
had 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 extended useful lives of
two to three years.
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We recognize software license revenue in accordance with Statement of
Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as amended. SOP 97-2
generally requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair value of the
elements. We have also adopted SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition with Respect to Certain Transactions" ("SOP 98-9"), for all
transactions entered into after January 1, 2000. SOP 98-9 requires that revenue
be recognized under the "Residual Method" when vendor specific objective
evidence (VSOE) of fair value exists for all undelivered elements and no VSOE
exists for the delivered elements.
The Company adopted Staff Accounting Bulletin 101 ("SAB 101") issued by the
Securities and Exchange Commission with effect from the fourth quarter of the
year ending December 31, 2000. The adoption of SAB 101 did not have and is not
expected to have a material effect of the Company's consolidated balance sheets
or results of operations.
To date, the Company has derived its revenue from license fees of its
products, maintenance, training and rendering of consulting services. The
Company sells its products primarily through its direct sales force, resellers
and OEMs.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectibility is probable. We generally do not grant a right
of return to our customers. When a right of return exists, we defer revenue
until the right of return expires, at which time revenue is recognized provided
that all other revenue recognition criteria have been met. If the fee is not
fixed or determinable, revenue is recognized as payments become due from the
customer provided that all other revenue recognition criteria have been met.
When contracts contain multiple elements wherein VSOE of fair value exists
for all undelivered elements, we account for the delivered elements in
accordance with the "Residual Method" prescribed by SOP 98-9. Maintenance
revenue included in these arrangements is deferred and recognized on a
straight-line basis over the term of the maintenance agreement. The VSOE of fair
value of the undelivered elements (maintenance, training and consulting
services) is determined based on the price charged for the undelivered element
when sold separately.
License revenues are comprised of perpetual or time-based 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. 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
maintenance agreements, consulting and training fees. Customers licensing our
products generally purchase the standard annual maintenance agreement for the
products. Revenues from maintenance agreements are recognized on a straight-line
basis over the life of the maintenance period. 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 in Israel is
incurred in New Israeli Shekel (NIS). The results of our operations are subject
to fluctuations in the U.S. dollar-NIS exchange rate, which is influenced by
various global economic factors including inflation in Israel.
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RESULTS OF OPERATIONS
Revenues
Our revenues are derived primarily from licensing of BackWeb Foundation,
BackWeb e-accelerator suite and the push application server and to a lesser
extent from maintenance, consulting and training services. Total revenues for
the twelve months ended December 31, 2000 was $38.3 million, an increase of
approximately $15.0 million or 64% from $23.3 million in the twelve months ended
December 31, 1999. Total revenues increased approximately $13.8 million or 144%
during 1999 as compared to 1998. The increases in each year described were a
function of increased volume in the amount of license and service revenues.
Customers outside of the United States accounted for 27.6% of revenues in the
twelve months ended December 31, 2000 compared to 29.0% and 20.6% of revenues in
the twelve months ended December 31, 1999 and 1998, respectively.
License revenues were $29.3 million or 76.4% of revenues in the twelve
months ended December 31, 2000 compared to $18.5 million or 79.6% and $8.0
million or 83.7% of revenues in the twelve months ended December 31, 1999 and
1998, respectively. The decreases in license revenue as a percentage of total
revenue were primarily due to increased service revenue from maintenance and
consulting services. Service revenues were $9.1 million or 23.6% of revenues in
the twelve months ended December 31, 2000 compared to $4.7 million or 20.4% and
$1.6 million or 16.3% of revenues in the twelve months ended December 31, 1999
and 1998, respectively.
In 2000, one OEM customer accounted for more than 27% of our revenues. In
1999, revenues from one End-user 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. In 1998 no one customer accounted for more than 10% of our revenues.
COST OF REVENUES
Cost of revenues was $6.3 million or 16.4% of revenues for the twelve
months ended December 31, 2000 compared to $4.2 million or 18.0% and $1.6
million or 17.0% of revenues for the twelve months ended December 31, 1999 and
1998, respectively. The increases in cost of revenues on an absolute basis were
primarily due to growth of the service organization in 2000 and 1999.
Cost of license revenues consists primarily of expenses related to media
duplication, packaging of products and in 1998 and 1999 only, amortization of
capitalized developed technology (i.e., Lanacom related). Cost of license
revenues was $249,000 or 0.65% of revenues for the twelve months ended December
31, 2000 compared to $266,000 or 1.1% of revenues for the twelve months ended
December 31, 1999 and $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 $6.1 million, or 15.8% of
revenues, in the twelve months ended December 31, 2000 compared to $3.9 million
or 16.8% of revenues, in the twelve months ended December 31, 1999 and $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 2000 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 and Development, net
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 $8.8 million in the twelve months ended December 31,
2000 compared to
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$5.5 million and $4.6 million in the twelve months ended December 31, 1999 and
1998, 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.
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 $28.5 million for
the twelve months ended December 31, 2000 compared to $18.9 million and $13.2
million in the twelve months ended December 31, 1999 and 1998, 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.
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, legal and provision
for bad and doubtful debt. The bad and doubtful debt for the years ended
December 31, 2000, 1999 and 1998 was $732,000, $396,000 and $535,000,
respectively. General and administrative expenses were $7.5 million in the
twelve months ended December 31, 2000 compared to $4.5 million and $3.2 million
in the twelve months ended December 31, 1999 and 1998, respectively. We expect
general and administrative expenses to increase on an absolute basis.
Amortization of Goodwill, Other Intangibles 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, initial write-off of the acquisition of
intellectual property from Mobix Communications Ltd. in June 2000 and
amortization of goodwill, intellectual property and other intangibles associated
with 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. The total amortization expense related to
one-time write-off of in-process research and development was $8.4 million in
June 2000. Amortization expense was $11.3 million for the twelve months ended
December 31, 2000 compared to $3.6 million and $1.8 million in the twelve months
ended December 31, 1999 and 1998, respectively.
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 (net)
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, 2000, other income was $4.7 million compared to $1.9 million
and $218,000 in the twelve months ended December 31, 1999 and 1998,
respectively. The increase in finance and other income during 2000 and 1999 was
due to interest income generated from the proceeds of the initial public
offering.
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Income Taxes
As of December 31, 2000, we had approximately $31.0 million of Israeli net
operating loss carryforwards and $7.4 million of U.S. federal net operating loss
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 2020. The Israeli net operating loss carryforwards
have no expiration date.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2000, the Company had $64.7 million of cash, cash
equivalents and short-term investments, which represents a decrease of $10.9
million as compared to December 31, 1999.
Net cash used in operating activities was $11.0 million and $5.3 million
for the twelve-months ended December 31, 2000 and 1999, respectively. Cash used
in investing activities was $5.6 million and $58.4 million for the twelve months
ended December 31, 2000 and 1999, respectively, and was primarily for capital
expenditures, purchase of intellectual property and short-term investments. Cash
provided by financing activities was $18.8 million and $76.0 million for the
twelve months ended December 31, 2000 and 1999, respectively, and consists
primarily of proceeds from the issuance of ordinary shares.
As of December 31, 2000, the Company had no material commitments for
capital expenditures. 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,
maintenance, 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 will be
sufficient to fund our operations for at least the next 24 months.
As of December 31, 2000, the Company had $5,000,000 in an unused, available
line-of-credit facility.
EFFECTIVE CORPORATE TAX RATES
Our tax rate will reflect a mix of the U.S. statutory tax rate on our U.S.
income, versus European country tax rates on our individual European country
income and the Israeli tax rate discussed below. We expect that most of our
taxable income will be generated in Israel. Israeli companies are generally
subject to income tax at the rate of 36% of taxable income. The majority of our
income, however, is derived from our Company's capital investment program with
"Approved Enterprise" status under the Law for the Encouragement of Capital
Investments, and is eligible therefore for tax benefits. As a result of these
benefits, we will have a tax exemption on income derived during the first two
years in which this investment program produces taxable income, provided that we
do not distribute such income as a dividend, and a reduced tax rate of 15% - 25%
for the next 5 to 8 years, depending upon the proportion of foreign ownership of
the Company.
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, 2000, we have not
yet used the tax benefits for which we are eligible. See Item 1,
"Business -- 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 lags
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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 0% in 2000, 1.3% in 1999 and
8.6% in 1998. The NIS was devalued against the U.S. dollar by approximately
- -2.7% in 2000, -17% in 1999 and 17.6% in 1998. The representative dollar
exchange rate for converting the NIS to U.S. dollars, as reported by the Bank of
Israel, was NIS 4.041 for one U.S. dollar on December 31, 2000.
RECENT ACCOUNTING PRONOUNCEMENTS
As of July 1, 2000, the Company adopted the Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No.
138, which requires companies to recognize all derivatives as either assets or
liabilities in the balance sheet and measure such instruments at fair value.
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 September 2000, the SFAS issued FAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125," FAS 140 revises the standards of
accounting for securitizations and other transfers of financial assets and
collateral and requires certain additional disclosures, although it continues
most of the provisions of FAS 125 without consideration. The provisions of FAS
140 are effective for periods beginning after December 15, 2000. The Company
does not expect the adoption of the provisions of FAS 140 to have a material
impact on the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in Israel and Canada 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.
28
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Shareholders'
BackWeb Technologies Ltd.
We have audited the accompanying consolidated balance sheets of BackWeb
Technologies Ltd. (the "Company") and its subsidiaries as of December 31, 2000
and 1999, and the related consolidated statements of operations, changes in
shareholders' equity (net capital deficiency) and cash flows for each of the
three years in the period ended December 31, 2000. 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. and its subsidiaries as of December 31, 2000 and 1999
and the consolidated results of their operations and cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
January 25, 2001 A Member of Ernst & Young International
29
32
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
--------------------
2000 1999
-------- --------
Current assets:
Cash and cash equivalents................................. $ 21,076 $ 18,818
Short-term investments.................................... 43,658 56,789
Trade accounts receivable, net of allowance for doubtful
accounts of $1,038 and $919 at December 31, 2000 and
1999................................................... 8,400 6,142
Other accounts receivables and prepaid expenses........... 2,370 2,344
-------- --------
Total current assets.............................. 75,504 84,093
Long-term investments....................................... 3,000 --
Property and equipment, net................................. 4,025 1,631
Goodwill and other purchased intangibles, net............... 6,462 181
Other long-term assets...................................... 1,383 144
-------- --------
Total assets...................................... $ 90,374 $ 86,049
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 7,260 $ 8,576
Deferred revenue.......................................... 3,957 3,321
Payable to related parties................................ -- 50
Current portion of shareholders' loans.................... 371 823
-------- --------
Total current liabilities......................... 11,588 12,770
Accrued severance pay, net.................................. 243 150
Long-term deferred revenue.................................. 113 --
Commitments and contingencies
Shareholders' equity:
Series E preferred stock, nominal value NIS 0.03 per
share; one share authorized and issued and outstanding
at December 31, 2000 and 1999.......................... 3,454 3,454
Ordinary shares, nominal value NIS 0.03 per share;
150,067,829 shares authorized at December 31, 2000 and
1999; 38,047,738 and 35,153,402 shares issued and
outstanding at December 31, 2000 and 1999,
respectively........................................... 146,751 124,301
Notes receivable from shareholders........................ (2,486) (3,316)
Deferred stock compensation............................... (890) (2,104)
Accumulated other comprehensive loss...................... (206) (226)
Accumulated deficit....................................... (68,193) (48,980)
-------- --------
Total shareholders' equity........................ 78,430 73,129
-------- --------
Total liabilities and shareholders' equity........ $ 90,374 $ 86,049
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
30
33
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Revenues:
License.................................................. $ 29,294 $ 18,514 $ 7,980
Service.................................................. 9,052 4,749 1,557
-------- -------- --------
Total revenues................................... 38,346 23,263 9,537
-------- -------- --------
Cost of revenues:
License.................................................. 249 266 266
Service.................................................. 6,051 3,911 1,353
-------- -------- --------
Total cost of revenues........................... 6,300 4,177 1,619
-------- -------- --------
Gross profit............................................... 32,046 19,086 7,918
-------- -------- --------
Operating expenses:
Research and development, net............................ 8,672 5,519 4,555
Sales and marketing...................................... 28,479 18,876 13,182
General and administrative............................... 7,480 4,480 3,182
In-process research and development write-off and
amortization of goodwill and other intangible
assets................................................ 10,163 1,498 1,824
Amortization of deferred stock compensation.............. 1,214 2,142 --
-------- -------- --------
Total operating expenses......................... 56,008 32,515 22,743
-------- -------- --------
Loss from operations....................................... (23,962) (13,429) (14,825)
Interest income and other.................................. 4,952 2,409 424
Interest expense and other................................. (203) (469) (206)
-------- -------- --------
Net loss................................................... $(19,213) $(11,489) $(14,607)
======== ======== ========
Basic and diluted net loss per share....................... $ (0.52) $ (0.59) $ (6.07)
======== ======== ========
Weighted average number of shares used in computing basic
and diluted net loss per share........................... 37,205 19,575 2,408
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
31
34
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
---------------------------------------------------------
NOTES
RECEIVABLE
PREFERRED SHARES ORDINARY SHARES FROM
-------------------- --------------------- SHARE-
SHARES AMOUNT SHARES AMOUNT HOLDERS
----------- ------ ---------- -------- ----------
BALANCE AT JANUARY 1, 1998..... 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 ordinary shares......... (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 --
Notes receivable from
shareholders............... -- -- -- -- (3,538)
Repayment of notes receivable
from shareholders.......... -- -- -- -- 222
Deferred stock
compensation............... -- -- -- 2,608 --
Amortization of deferred
stock compensation (net)
and warrant................ -- -- -- 168 --
Unrealized loss on available
for sale marketable
securities................. -- -- -- -- --
Net loss..................... -- -- -- --
----------- ------ ---------- -------- -------
BALANCE AT DECEMBER 31, 1999... 1 3,454 35,153,402 124,301 (3,316)
Issuance of ordinary shares,
net of $4,688 of issuance
costs...................... -- -- 458,000 14,779 --
Issuance of ordinary shares
upon exchange of Series E
preferred shares........... -- -- 932,770 -- --
Issuance of ordinary shares
pursuant to options and
warrants exercised......... -- -- 1,468,153 4,130 --
Issuance of shares and stock
options in respect of
Intellectual Property
acquisition................ -- -- 155,914 4,000 --
Forfeiture of restricted
shares..................... -- -- (120,501) (459) 459
Repayment of notes receivable
from shareholders.......... -- -- -- -- 371
Amortization of deferred
stock compensation......... -- -- -- -- --
Unrealized gain on available
for sale marketable
securities................. -- -- -- -- --
Net loss..................... -- -- -- -- --
----------- ------ ---------- -------- -------
BALANCE AT DECEMBER 31, 2000... 1 $3,454 38,047,738 $146,751 $(2,486)
=========== ====== ========== ======== =======
SHAREHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
----------------------------------------------------------
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFERRED OTHER EQUITY
STOCK COMPREHENSIVE ACCUMULATED (NET CAPITAL
COMPENSATION LOSS DEFICIT DEFICIENCY)
------------ ------------- ----------- -------------
BALANCE AT JANUARY 1, 1998..... $ -- $ -- $(22,884) $(18,915)
Issuance of ordinary shares
pursuant to options
exercised.................. -- -- -- 123
Issuance of ordinary shares
in connection with Series D
redeemable preferred shares
to placement agent......... -- -- -- --
Deferred stock
compensation............... (1,859) -- -- --
Amortization of deferred
stock compensation......... 221 -- -- 221
Net loss..................... -- -- (14,607) (14,607)
------- ----- -------- --------
BALANCE AT DECEMBER 31, 1998... (1,638) -- (37,491) (33,178)
Conversion of preferred stock
to ordinary shares......... -- -- -- 47,275
Issuance of ordinary shares,
net of $8,339 of issuance
costs...................... -- -- -- 67,561
Issuance of ordinary shares
upon exchange of Series E
preferred shares........... -- -- -- --
Issuance of ordinary shares
pursuant to options and
warrants exercised......... -- -- -- 4,192
Notes receivable from
shareholders............... -- -- -- (3,538)
Repayment of notes receivable
from shareholders.......... -- -- -- 222
Deferred stock
compensation............... (2,608) -- -- --
Amortization of deferred
stock compensation (net)
and warrant................ 2,142 -- -- 2,310
Unrealized loss on available
for sale marketable
securities................. -- (226) -- (226)
Net loss..................... -- (11,489) (11,489)
------- ----- -------- --------
BALANCE AT DECEMBER 31, 1999... (2,104) (226) (48,980) 73,129
Issuance of ordinary shares,
net of $4,688 of issuance
costs...................... -- -- -- 14,779
Issuance of ordinary shares
upon exchange of Series E
preferred shares........... -- -- -- --
Issuance of ordinary shares
pursuant to options and
warrants exercised......... -- -- -- 4,130
Issuance of shares and stock
options in respect of
Intellectual Property
acquisition................ -- -- -- 4,000
Forfeiture of restricted
shares..................... -- -- -- --
Repayment of notes receivable
from shareholders.......... -- -- -- 371
Amortization of deferred
stock compensation......... 1,214 -- -- 1,214
Unrealized gain on available
for sale marketable
securities................. -- 20 -- 20
Net loss..................... -- -- (19,213) (19,213)
------- ----- -------- --------
BALANCE AT DECEMBER 31, 2000... $ (890) $(206) $(68,193) $ 78,430
======= ===== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
32
35
BACKWEB TECHNOLOGIES LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
OPERATING ACTIVITIES
Net loss................................................... $(19,213) $(11,489) $(14,607)
Adjustments to reconcile net loss to net cash used in
operating activities:
In-process research and development write-off and
amortization of goodwill and other intangible
assets................................................ 10,163 369 1,984
Amortization of deferred stock compensation.............. 1,214 3,640 --
Depreciation............................................. 906 760 529
Other.................................................... -- -- (102)
Changes in operating assets and liabilities:
Trade accounts receivable............................. (2,258) (3,552) 769
Other accounts receivables, prepaid expenses and other
long-term assets.................................... (1,265) (1,680) (174)
Payable to related parties............................ (50) (254) (463)
Accounts payable and accrued liabilities.............. (1,316) 5,219 (468)
Deferred revenue...................................... 749 1,655 630
Accrued severance pay, net............................ 93 57 19
-------- -------- --------
Net cash used in operating activities............... (10,977) (5,275) (11,883)
-------- -------- --------
INVESTING ACTIVITIES
Purchase of other assets................................... -- -- (29)
Purchases of property and equipment........................ (3,300) (1,361) (390)
Purchases of short-term investments........................ (21,725) (64,015) --
Proceeds from sales of short-term investments.............. 34,876 7,000 --
Purchase of Mobix intellectual property.................... (12,444) -- --
Long term investments...................................... (3,000) -- --
-------- -------- --------
Net cash used in investing activities...................... (5,593) (58,376) (419)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from bank line of credit.......................... -- -- 2,500
Repayment of bank line of credit........................... -- (2,000) (2,021)
Repayment of shareholders' loans........................... (452) (332) --
Proceeds from shareholders' notes receivable............... 371 222 --
Proceeds from issuance of preferred shares, net............ -- 9,915 11,772
Proceeds from issuance of ordinary shares, net............. 18,909 68,215 123
-------- -------- --------
Net cash provided by financing activities.................. 18,828 76,020 12,374
-------- -------- --------
Net increase in cash and cash equivalents.................. 2,258 12,369 72
Cash and cash equivalents at beginning of the year......... 18,818 6,449 6,377
-------- -------- --------
Cash and cash equivalents at end of the year............... $ 21,076 $ 18,818 $ 6,449
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
TRANSACTIONS
Conversion of redeemable preferred stock to ordinary
shares................................................... $ -- $ 47,275 $ --
======== ======== ========
Issuance of ordinary shares for notes receivables.......... $ -- $ 3,538 $ --
======== ======== ========
Issuance of ordinary shares in respect of the purchase of
Mobix intellectual property.............................. $ 4,000 $ -- $ --
======== ======== ========
Forfeiture of restricted shares............................ $ 459 $ -- $ --
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
33
36
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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, computer industries; and through OEM
arrangements.
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
FINANCIAL STATEMENTS IN U.S. DOLLARS
BackWeb prepares 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 Israeli 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 and reporting 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 the years ended
December 31, 2000, 1999 and 1998 was a gain of $305,000, a loss of $117,000 and
a gain of $163,000, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of BackWeb
Technologies Ltd. and its wholly owned subsidiaries. Significant intercompany
balances and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents are short-term highly liquid investments that are readily
convertible to cash with original maturities of three months or less.
34
37
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SHORT-TERM INVESTMENTS
The Company accounts for investments in debt and equity securities in
accordance with FASB Statement No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
Management determines the appropriate classification of marketable 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.
LONG-TERM INVESTMENTS
Investments in non-marketable and other long-term investments are recorded
at the lower of cost or estimated fair value, since the Company does not have
the ability to exercise significant influence over operating and financial
policies of the investee.
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, as follows:
YEARS
-----
Computer and peripheral equipment.......................... 2-3
Office furniture and equipment............................. 3
Leasehold improvements..................................... Over the term of the lease
The Company periodically assesses the recoverability of the carrying amount
of property and equipment and provides for any possible impairment loss based
upon the difference between the carrying amount and fair value of such assets,
in accordance SFAS No. 121 "Accounting for the Impairment of Long Lived Assets
and Long Lived Assets to be Disposed of." As of December 31, 2000, no impairment
losses had been identified.
GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
Goodwill and other intangible assets acquired in purchase transactions are
amortized on a straight-line method over the estimated useful lives of the
assets between two to three years.
REVENUE RECOGNITION
The Company adopted Staff Accounting Bulletin 101 ("SAB 101") issued by the
Securities and Exchange Commission with effect from the fourth quarter of the
year ending December 31, 2000. The adoption of SAB 101 did not and is not
expected to have a material effect of the Company's consolidated balance sheets
or results of operations.
The Company recognizes software license revenue in accordance with
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as
amended. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of the elements. The Company has also adopted SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions" ("SOP 98-9"), for all transactions entered into after January 1,
2000. SOP 98-9 requires that revenue be recognized under the "Residual Method"
when
35
38
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
vendor specific objective evidence (VSOE) of fair value exists for all
undelivered elements and no VSOE exists for the delivered elements.
To date, the Company has derived its revenue from license fees of its
products, maintenance, training and rendering of consulting services. The
Company sells its products primarily through its direct sales force, resellers
and OEMs.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectibility is probable. The Company does not grant a right
of return to our customers. When a right of return exists, the Company defers
revenue until the right of return expires, at which time revenue is recognized
provided that all other revenue recognition criteria have been met. If the fee
is not fixed or determinable, revenue is recognized as payments become due from
the customer provided that all other revenue recognition criteria have been met.
When contracts contain multiple elements wherein VSOE of fair value exists
for all undelivered elements, the Company accounts for the delivered elements in
accordance with the "Residual Method" prescribed by SOP 98-9. Maintenance
revenue included in these arrangements is deferred and recognized on a
straight-line basis over the term of the maintenance agreement. The VSOE of fair
value of the undelivered elements (maintenance, training and consulting
services) is determined based on the price charged for the undelivered element
when sold separately.
License revenues are comprised of perpetual or time-based license fees that
are primarily derived from contracts with corporate customers and resellers, and
royalty fees earned upon delivery of products which incorporate the Company's
software. 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 delivery of the related products.
Service revenues are primarily comprised of revenues from standard
maintenance agreements, consulting and training fees. Customers licensing our
products generally purchase the standard annual maintenance agreement for the
products. Revenues from maintenance agreements are recognized on a straight-line
basis over the life of the maintenance period. Consulting services are billed at
an agreed upon rate plus out-of-pocket expenses and training services on a per
session basis. The Company recognizes service revenues from consulting and
training when provided to the customer.
Deferred revenue includes amounts received from customers for which revenue
has not been recognized.
RESEARCH AND DEVELOPMENT EXPENSES
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, 2000 BackWeb had
recognized all software development costs to research and development expense in
the period incurred.
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,
2000, 1999 and 1998 were $1,849,000, $528,000 and $42,000, respectively.
36
39
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INCOME TAXES
BackWeb accounts for income taxes in accordance with SFAS 109, "Accounting
for Income Taxes." This Statement prescribes the use of the liability method
whereby deferred tax assets and liability account balances are determined based
on differences between financial reporting and tax based on assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse. BackWeb provides a
valuation allowance, if necessary, to reduce deferred tax assets to their
estimated realizable value.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject BackWeb to concentrations
of credit risk, consist of cash, cash equivalents, short-term investments and
trade accounts receivable. BackWeb's cash and cash equivalents and short-term
investments generally consist of money market funds with high credit quality
financial institutions and corporate debt securities, which are invested in
major banks in the United States. Such investments in the United States may be
in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Company's
investments are financially sound and, accordingly, minimal credit risk exists
with respect to these investments. The Company has established guidelines
relative to credit ratings, diversification and maturity that seek to maintain
safety and liquidity. The company from time to time engages in selling of
receivables on a non-recourse basis with established commercial banking
institutions.
BackWeb sells its products to customers primarily in North America. 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. An allowance for doubtful accounts is determined with
respect to those amounts that the Company has determined to be doubtful of
collection. Provision for bad and doubtful debts in the years ended December 31,
2000, 1999 and 1998 were $732,000, $533,000 and $677,000, respectively. Bad debt
write-offs of accounts in the years ended December 31, 2000, 1999 and 1998
totaled $612,000, $175,000 and $591,000, respectively.
NET LOSS PER SHARE
Basic net loss per share is comprised of the weighted average number of
ordinary shares outstanding each year. Diluted net loss per share is computed
based on the weighted average number of ordinary shares outstanding during the
year plus dilutive potential ordinary shares considered outstanding during the
year in accordance with FASB Statement No. 128, "Earning per Share".
The following table presents the calculation of the basic and diluted net
loss per ordinary share (in thousands, except per share data):
YEAR ENDED DECEMBER 31,
--------------------------------
2000 1999 1998
-------- -------- --------
Net loss........................................... $(19,213) $(11,489) $(14,607)
======== ======== ========
Basic and diluted:
Weighted-average shares.......................... 37,307 20,421 2,408
Less weighted-average shares subject to
repurchase.................................... (102) (846) --
-------- -------- --------
Shares used in computing basic and diluted net loss
per share........................................ 37,205 19,575 2,408
======== ======== ========
Basic and diluted net loss per share............... $ (0.52) $ (0.59) $ (6.07)
======== ======== ========
37
40
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
All preferred stock, outstanding stock options and warrants have been
excluded from the calculation of the diluted net loss per ordinary share because
all such securities are considered to be anti-dilutive for all periods presented
in the statements 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 9,822,359, 7,672,723 and 25,657,825 for the
years ended December 31, 2000, 1999 and 1998, respectively.
ACCOUNTING FOR STOCK-BASED COMPENSATION
BackWeb has elected to follow Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and Interpretation No. 44
"Accounting for Certain Transactions Involving Stock Compensation" ("FIN 44") in
accounting for its employee stock options. Under APB 25, when the exercise price
of the Company's share options is less than the market price of the underlined
shares on the date of grant, compensation expense is recognized. The pro forma
disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") are provided in Note 10.
The Company applies SFAS 123 and EITF 96-18, "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services" with respect to warrants issued to
non-employees. SFAS 123 requires use of an option valuation model to measure the
fair value of the options at the grant date.
GOVERNMENT GRANTS
The Company received non-royalty bearing rants from the Government of
Israel for funding approved research and development projects. The grants are
recognized at the time the Company is entitled to such grants, on the basis of
the costs incurred and included as a deduction of research and development
costs, Research and development grants amount to $150,000, $397,000 and $415,000
in the years ending December 31, 2000, 1999 and 1998, respectively.
SEVERANCE PAY
BackWeb Technologies Ltd. liability for severance pay is calculated
pursuant to Israeli severance pay law based on the most recent salary of the
employees multiplied by the number of years of employment, as of the balance
sheet date. Employees are entitled to one month's salary for each year of
employment or a portion thereof. BackWeb Technologies Ltd. liability for all of
its employees is fully provided by monthly deposits with insurance policies and
by an accrual.
The funds deposited include profits accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon fulfillment of the
obligation pursuant to Israeli severance pay law or labor agreements. The value
of the deposited funds are based on the cash surrendered value of these policies
and include immaterial profits.
Severance expenses for the years ended December 31, 2000, 1999 and 1998
amounted to approximately $93,000, $57,000 and $19,000, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company and its
subsidiaries in estimating their fair value disclosures for financial
instruments.
The carrying amounts of cash and cash equivalents, short-term investments,
trade accounts receivable and accounts payable approximate their fair value due
to the short-term maturity of such instruments.
The fair value for marketable securities are based on quoted market prices.
38
41
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
As of July 1, 2000, the Company adopted SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and
SFAS No. 138, which requires companies to recognize all derivatives as either
assets or liabilities in the balance sheet and measure such instruments at fair
value. 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 position or results of operations.
In September 2000, the SFAS issued FAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of FASB Statement No. 125." FAS 140 revises the standards for
accounting for securitizations and other transfers of financial assets and
collateral and requires certain additional disclosures, although it continues
most of the provisions of FAS 125 without consideration. The provisions of FAS
140 are effective for periods beginning after December 15, 2000. The Company
does not expect the adoption of the provisions of FAS 140 to have a material
impact on the Company's financial position or results of operations.
3. SHORT-TERM INVESTMENTS
The following is a summary of the Company's available-for-sale marketable
securities (in thousands):
DECEMBER 31,
---------------------------------------------------------------------
2000 1999
--------------------------------- ---------------------------------
UNREALIZED ESTIMATED UNREALIZED ESTIMATED
COST LOSSES FAIR VALUE COST LOSSES FAIR VALUE
------- ---------- ---------- ------- ---------- ----------
Money market funds................... $15,166 $ -- $15,166 $30,000 $ -- $30,000
Corporate debt securities............ 28,698 (206) 28,492 27,015 (226) 26,789
------- ----- ------- ------- ----- -------
Totals..................... $43,864 $(206) $43,658 $57,015 $(226) $56,789
======= ===== ======= ======= ===== =======
The net adjustment to unrealized holding gains (losses) on
available-for-sale securities included as a separate component of shareholders'
equity totaled $206,000 and $226,000 in 2000 and 1999, respectively. At December
31, 2000, the total amounts of investments due within one year and due after one
year through three years were $30.7 million and $13.0 million, respectively.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment at cost consists of the following (in thousands):
DECEMBER 31,
------------------
2000 1999
------- -------
Computer and peripheral equipment........................... $ 3,392 $ 2,145
Office, furniture and equipment............................. 2,251 1,075
Leasehold improvement....................................... 919 42
------- -------
6,562 3,262
Less: accumulated depreciation.............................. (2,537) (1,631)
------- -------
Property and equipment, net................................. $ 4,025 $ 1,631
======= =======
Depreciation expenses for the years ended December 31, 2000, 1999 and 1998
were $906,000, $760,000 and $529,000, respectively.
39
42
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. GOODWILL AND OTHER PURCHASED INTANGIBLE ASSETS
On June 27, 2000, the Company 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, dated
June 4, 2000, among the Company, Mobix and the principal shareholder of Mobix.
The Company used the purchase method of accounting for this acquisition. 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 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, BackWeb also granted a number of stock
options valued at $1.1 million to retain two key employees from Mobix.
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
had 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 Acquisition in accordance with generally
accepted accounting principles. The capitalized intangible assets are being
amortized on a straight-line basis over their expected useful lives of two to
three years.
No pro forma results of operations is provided, as the business
acquired -- the software, intellectual property and assembled workforce -- is
not a continuation of Mobix' prior operations including the nature of the
revenue-producing activity which has not remained the same as before the
Acquisition.
Goodwill and other purchased intangible assets are composed as follows:
ESTIMATED
USEFUL DECEMBER 31,
LIFE ----------------
(IN YEARS) 2000 1999
---------- ------ ------
Goodwill................................................ 3 $5,525 $3,224
Other intangibles....................................... 2 2,700 980
------ ------
8,225 4,204
Less: Accumulated amortization.......................... 1,763 4,023
------ ------
Goodwill and other intangibles, net..................... $6,462 $ 181
====== ======
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following (in $
thousands):
DECEMBER 31,
----------------
2000 1999
------ ------
Accounts payable............................................ $ 770 $ 807
Accrued employees compensation and related expense.......... 1,921 2,519
Sales events................................................ 377 950
Other....................................................... 4,192 4,300
------ ------
$7,260 $8,576
====== ======
40
43
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. LONG-TERM INVESTMENTS
On October 3, 2000, BackWeb acquired 1,197,679 shares of Series B Preferred
Stock of 3Path, Inc. (formerly DeliverEx, Inc.) representing approximately 12%
of its share capital, in exchange for payment of $2,500,000 under the Stock
Purchase Agreement for Series B Convertible Preferred Stock dated February 2,
2000 between 3Path, Inc., BackWeb and various other investors.
On November 1, 2000, BackWeb acquired 483,600 shares of Series B Preferred
Shares of Emony Ltd. representing approximately 7% of its share capital in
exchange for payment of $500,000 under the Share Purchase and Shareholders
Agreement dated October 10, 2000 between Emony Ltd., BackWeb and various other
investors. Further, under such Share Purchase and Shareholders Agreement,
BackWeb was granted (a) a warrant to purchase Series B Preferred Shares of Emony
Ltd. in an amount as may be purchased in exchanged for $500,000, based on a
pre-exercise valuation of Emony Ltd. of $10,000,000 on a fully diluted and
as-converted basis; and (b) a warrant to purchase Series B Preferred Shares of
Emony Ltd. in an amount as may be purchased in exchanged for $930,233, based on
a pre-exercise valuation of Emony Ltd. of $15,000,000 on a fully diluted and
as-converted basis.
8. RELATED PARTIES
SHAREHOLDERS' LOANS
In 1995, BackWeb signed an agreement ("Founding Agreement") with its early
investors (the "Early Investors"), according to which the Early Investors
provided BackWeb with loan (the "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 loan. As of December 31, 2000, the loan balance was $371,000,
re-stated for the Israeli consumer price index and reflecting currency
conversion adjustment and repayments. The loan was fully repaid subsequent to
the balance sheet date.
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 $0, $7,000 and $220,000 during the years ended
December 31, 2000, 1999 and 1998, respectively. In addition, 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 $3,000, $235,000 and $873,000 during the years ended December
31, 2000, 1999 and 1998, respectively.
BackWeb believes that the amounts charged in connection with the services
from the Early Investors and BRM approximate the cost that would have been
incurred if BackWeb would have incurred these costs internally.
STOCK OPTIONS
Pursuant to the Founding Agreement, BackWeb granted to its Early Investors
the right to grant stock options for up to 792,167 ordinary shares for any
person or entity. Through December 31, 2000 options for 762,672 ordinary shares
have been granted and 29,495 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.
41
44
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Some shareholders and officers of BackWeb have a controlling interest in
another company deemed to be a related party.
REVENUE FROM AFFILIATES
During 2000, the Company recorded revenue of $571,000 related to products
licensed to a related party. As of December 31, 2000, an amount of $27,900 is
included in trade accounts receivable. During 1999, the Company recorded revenue
of $1,132,500 related to products licensed to a related party. As of December
31, 1999, $0 is included in trade accounts receivable.
9. 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):
2001................................................ $1,749
2002................................................ 663
2003................................................ 411
2004................................................ 261
2005 and after...................................... 484
------
$3,568
======
Rent expense approximated $1,628,000, $918,000 and $695,000 for the years
ended December 31, 2000, 1999 and 1998, respectively.
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 and
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 formula and nonformula loans are $1,500,000 and $2,000,000,
respectively. As of December 31, 2000, 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.
42
45
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CHARGES AND GUARANTIES
Motor vehicles of the Company are pledged at a fixed charge in favor of a
bank. The Company also has a floating charge on all of its intellectual
property, investments and various property and equipment in favor of a financing
institution.
The Company obtained bank guaranties in the amount of $174,000 in favor of
its lessor in Israel.
10. SHAREHOLDERS' EQUITY
ORDINARY SHARES
Ordinary shares subject to future issuance are as follows:
DECEMBER 31,
----------------------
2000 1999
---------- ---------
Exchange of BWC (as defined below) shares (represented by
Series E preferred stock) into ordinary shares............ 493,488 1,426,259
Exercise of outstanding options............................. 9,214,371 5,271,131
Ordinary shares available for grant under stock option
plans..................................................... 1,371,038 2,624,642
Exercise of warrants outstanding to ordinary shares......... 114,500 128,333
---------- ---------
11,193,397 9,450,365
========== =========
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 had been issued at
December 31, 2000.
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, 2000,
one share of Series E preferred stock was outstanding (representing voting
rights with respect to 493,488 ordinary shares).
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 Technologies Ltd. However, if such a dividend is declared by BackWeb
Technologies 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. The total number of
exchangeable common shares as of December 31, 2000 is 493,488.
STOCK WARRANTS
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 was 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. The bank exercised the warrant over the first quarter of 2000, for
ordinary shares of BackWeb.
On January 17, 2000, RealNetworks Inc. and BackWeb entered into a
Securities Purchase Agreement under which RealNetworks Inc. was granted a
warrant to purchase up to 114,500 ordinary shares of BackWeb
43
46
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
at an exercise price of $32.75 per share. The warrant is exercisable until June
2001. The fair value ascribed to the warrant is immaterial.
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 under the 1996 Israel Plan will vest as determined by the Plan
Administrator and generally vest over a four-year period. The 1996 Israel Plan
does not have a termination date. Stock options cancelled or forfeited are
credited back to the stock option pool.
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.
Options and Share Purchase Rights under the 1998 U.S. Plan will vest as
determined by the Plan Administrator and, if not assumed or substituted by a
successor corporation will accelerate and become fully vested in the event of an
acquisition of the Company. The exercise price of options and Share Purchase
Rights granted under the 1998 U.S. Plan will be as determined by the Plan
Administrator, although 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. Plan generally vest over four years.
Stock options cancelled or forfeited are credited back to the stock option pool.
The Plan Administrator may amend, modify or terminate the 1998 U.S. Plan at any
time as long as such amendment, modification or termination does not impair
vesting rights of 1998 U.S. Plan participants. The 1998 U.S. Plan will terminate
in 2008, unless terminated earlier by the administrator.
Effective of July 1, 2000, the Company has amended the 1998 U.S. Plan and
the 1996 Israel Plan (the "Plans") to adopt an annual increase provision,
commonly referred to as an "evergreen" provision, to each of the Plans. These
amendments provide for an automatic increase on each anniversary beginning July
1, 2000 in the number of shares authorized for issuance under the Plans equal to
the lesser of (a) an aggregate amount equal to 1,960,000, (b) 5% of the
outstanding shares on such date, or (c) an amount to be determined by the Board
of Directors. The total annual increase will be allocated 70% to the 1998 U.S.
Plan and 30% to the 1996 Israel Plan, unless the Board of Directors determines a
different allocation. Therefore, for the 1996 Israel Plan, the amount of
increase would be equal to the lesser of 588,000 or 1.5% of the outstanding
shares of such date, unless the Board of Directors determines a different
allocation between the Plans or decides on a lesser amount. Also, for the 1998
U.S. Plan the amount of increase would be equal to the lesser of 1,372,000 or
3.5% of the outstanding shares on such date, unless the Board of Directors
determines a different allocation between the Plans or decides on a lesser
amount.
In addition to the automatic annual increase on July 1, 2000, the Company
approved an additional increase in the shares available under the 1998 U.S. Plan
and the 1996 Israel Plan to increase the shares available under the Plans by
1,894,622 shares as of June 30, 2000. The total amount of the increase was
allocated 70% to the 1998 U.S. Plan and 30% to the 1996 Israel Plan, which is
1,326,235 shares for the 1998 U.S. Plan and 568,387 shares for the 1996 Israel
Plan.
44
47
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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:
WEIGHTED-
SHARES WEIGHTED- AVERAGE
AVAILABLE FOR OPTIONS EXERCISE PRICE AVERAGE FAIR VALUE OF
GRANT OUTSTANDING PER SHARE EXERCISE PRICE OPTION GRANTED
------------- ----------- -------------- -------------- --------------
Balance at January 1, 1998... 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
Options authorized......... 3,771,381 -- -- --
Options granted............ (6,962,292) 6,962,292 $0.01 - $49.25 $18.00
Options exercised.......... -- (1,202,246) $0.03 - $ 8.10 $ 1.90
Options canceled........... 1,816,806 (1,816,806) $0.24 - $42.13 $12.01
Forfeited shares........... 120,501 -- $1.50 - $ 2.10 1.56
---------- ----------
Balance at December 31,
2000....................... 1,371,038 9,214,371 $0.01 - $49.25 $14.11 $19.63
========== ==========
Exercise prices for options outstanding and exercisable as of December 31,
2000 and the weighted-average remaining contractual life are as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AS OF 12/31/00 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/00 EXERCISE PRICE
- --------------- -------------- ---------------- -------------- -------------- --------------
$ 0.01 - $ 0.01 59,141 6.58 $ 0.01 0 $ 0.00
$ 0.03 - $ 0.03 230,553 1.99 $ 0.03 230,553 $ 0.03
$ 0.12 - $ 2.10 1,475,502 6.11 $ 1.70 791,640 $ 1.56
$ 2.70 - $ 3.00 231,224 7.45 $ 2.99 164,472 $ 2.99
$ 4.50 - $ 7.32 2,334,676 6.73 $ 7.12 67,221 $ 6.15
$ 8.10 - $17.25 1,699,874 6.66 $14.79 77,047 $11.36
$17.35 - $19.00 1,393,926 6.81 $18.93 69,666 $18.98
$19.07 - $34.69 832,125 6.62 $28.61 51,258 $28.58
$35.00 - $35.00 701,100 6.41 $35.00 250 $35.00
$36.69 - $49.25 256,250 6.12 $40.04 15,875 $38.23
--------- ---------
$ 0.01 - $49.25 9,214,371 6.48 $14.10 1,467,982 $ 4.38
========= =========
45
48
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the year ended December 31, 1999 and 1998, in connection with the
grant of certain share options, BackWeb recorded 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.
During 2000, 6,903,151 options were granted at an exercise price equal to
fair value and 59,141 options were granted at an exercise price below fair
value.
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 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. In the year 2000, the Company
has repurchased 120,501 unvested restricted ordinary shares from two employees
who left the Company.
ACCOUNTING FOR STOCK-BASED COMPENSATION
The Company applies the measurement principles of APB 25 and FIN 44 in
accounting for its stock option plans. If the compensation expense for options
granted for the years ended December 31, 2000, 1999 and 1998 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:
DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net loss:
As reported...................................... $(19,213) $(11,489) $(14,607)
Pro forma........................................ $(51,940) $(15,365) $(14,731)
Proforma basic and diluted net loss per share...... $ (1.40) $ (0.78) $ (6.12)
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:
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
---- ---- ----
Risk-free interest rates.................................... 6% 6% 6%
Expected lives (in years)................................... 5 5 5
Dividend yield.............................................. 0% 0% 0%
Expected volatility......................................... 116% 100% 0%
46
49
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES
ISRAELI INCOME TAXES
Measurement of taxable income under the Income Tax (Inflationary Adjustments)
Law, 1985:
Results for tax purposes are measured in terms of earnings in NIS after
certain adjustments for increases in the Israeli CPI. As explained in Note 2,
the financial statements are measured in U.S. dollars. The difference between
the annual change in the Israeli CPI and in the NIS/dollar exchange rate causes
a further difference between taxable income and the income before taxes shown in
the financial statements. In accordance with paragraph 9(f) of SFAS No. 109, the
Company has not provided deferred income taxes on the difference between the
functional currency and the tax bases of assets and liabilities.
Tax benefits under the Israeli Law for the Encouragement of Industry
(Taxation), 1969:
BackWeb Technologies Ltd. is an "industrial company" under the above law
and as such is entitled to certain tax benefits, including accelerated rates of
depreciation, deduction of public offering expenses in three equal annual
installments and deduction of 12.5% per annum on the purchase of certain
intangible property rights.
Tax benefits under the Law for the Encouragement of Capital Investments, 1959:
BackWeb Technologies Ltd. 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 Technologies Ltd. to tax
exemption for a period of two years commencing in the first year that it will
earn taxable income. After this BackWeb Technologies Ltd. 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, 2000,
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.
Income not eligible for "Approved Enterprise" benefits mentioned above is
subject to taxation at the rate of 36%.
As of December 31, 2000, BackWeb had approximately $31 million of Israeli
net operating loss carry-forwards. The Israeli loss carryforwards 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.
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BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DIVIDENDS
In the event that cash dividends are declared in the future, such dividends
will be paid in NIS. The Company does not intend to pay cash dividends in the
foreseeable future.
U.S. INCOME TAXES
At December 31, 2000, BackWeb Technologies Inc. had U.S. federal net
operating loss carryforward of approximately $7.4 million. The net operating
loss carryforward expires in various amounts between the years 2011 and 2020.
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.
Loss before income taxes consisted of the following (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
------- ------- -------
Domestic (Israel)..................................... $ 1,366 $ 5,002 $10,986
Foreign............................................... 17,847 6,487 3,621
------- ------- -------
$19,213 $11,489 $14,607
======= ======= =======
Due to operating losses and the inability to recognize the benefits
therefrom, there is no provision for income taxes for the years ended December
31, 2000, 1999 or 1998.
Deferred taxes
Deferred tax assets reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the company's deferred tax assets are as follows (in thousands):
DECEMBER 31,
-------------------
2000 1999
-------- -------
Net operating loss carryforwards............................ $ 14,096 $ 4,900
Reserves not currently deductible........................... 3,120 300
Other, net.................................................. 364 400
-------- -------
Net deferred assets before valuation allowance.............. 17,580 5,600
Valuation allowance......................................... (17,580) (5,600)
-------- -------
Net deferred tax assets..................................... $ -- $ --
======== =======
As of December 31, 2000 the Company and its subsidiaries have provided
valuation allowances of approximately $17.58 million in respect of deferred tax
assets resulting from tax loss carryforwards, tax benefits related to employee
stock option exercises, which will be credited to additional paid-in capital
when realized, and other temporary differences. For the years ended December 31,
2000, 1999 and 1998, the valuation allowance increased by $11.98 million, $2.5
million and $2.1 million respectively. Management currently believes that since
the Company and its subsidiaries have a history of losses, it is more likely
than not that those deferred tax deductions will not be realized in the
foreseeable future.
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51
BACKWEB TECHNOLOGIES LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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., Europe and Japan
include marketing and sales. The following is a summary of operations within
geographic areas based on the location of the Legal Entity making that sale (in
thousands):
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
Revenues from sales to unaffiliated customers:
North America........................................ $20,926 $16,862 $7,914
Israel............................................... 13,020 6,401 1,623
Europe............................................... 4,400 -- --
------- ------- ------
$38,346 $23,263 $9,537
======= ======= ======
DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- ------
Long-lived assets:
Israel............................................... $10,254 $ 517 $ 257
North America........................................ 3,034 1,277 2,499
Other................................................ 199 18 98
------- ------- ------
$13,487 $ 1,812 $2,854
======= ======= ======
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 End-customers located in Europe and the Far
East; and OEM sales to all geographic regions.
Revenue from one customer accounted for 27.3% of total revenue in the year
ended December 31, 2000. Revenue from one customer accounted for 13.3% of total
revenue in the year ended December 31, 1999. No one customer accounted for more
than 10% of total revenue in the year ended December 31, 1998.
13. SUBSEQUENT EVENTS (UNAUDITED)
In February 2001, the Company implemented a voluntary stock option exchange
program for its employees. The program was implemented to ameliorate in part the
impact of current financial market conditions on our employees who are critical
to the Company's continued success and creating long-term value for all
shareholders. Under the program, each employee was offered the opportunity to
cancel all, or part of, outstanding stock options previously granted to them
from June 8, 1999 through and including January 15, 2001 (but excluding those
options granted on November 1, 2000, with a set vesting schedule) in exchange
for an equal number of new options. The new options will be granted after at
least six months and one day from cancellation. The exercise price of the new
options will be the fair market value as of the new date of grant. The new
options would be granted to the employee only if the employee was continually
employed by the Company through the date the new options were granted. Members
of the Company's Board of Directors and its CEO, did not participate in this
program. The vesting schedule of the new options will be unchanged from that of
the cancelled options. An aggregate of 194 employees elected to cancel their
options, resulting in the cancellation of options to acquire 3,022,149 ordinary
shares of the Company. The stock option exchange program will not have an affect
on the Company's results of operations.
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52
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in and no disagreements with our accountants.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. DIRECTORS AND EXECUTIVE OFFICERS
Our current directors and designated executive officers are:
NAME AGE POSITION
---- --- --------
Eli Barkat................................ 37 Chairman of the Board and Chief Executive
Officer
Charles Federman.......................... 44 Director
Joseph Gleberman.......................... 43 Director
William L. Larson......................... 44 Director
Leora Rubin Meridor....................... 53 Director
Gil Shwed................................. 32 Director
Hanan Miron............................... 49 Chief Financial Officer
Gwen B. Spertell.......................... 47 Chief Operating Officer
Eli Barkat has served as our Chairman of the Board and Chief Executive
Officer since 1996. From 1988 to February 1996, Mr. Barkat served as a Managing
Director and Vice President of Business Development of BRM Technologies, Ltd., a
technology venture firm. Prior to 1988, Mr. Barkat held various positions with
the Aurec Group, a communications media and information company, and Daizix
Technologies, a computer assisted design applications company. In addition Mr.
Barkat served as a paratrooper in the Israel Defense Forces where he attained
the rank of lieutenant. Mr. Barkat has a bachelor of science degree in computer
science and mathematics from the Hebrew University of Jerusalem. Mr. Barkat's
term as a director of the Company expires at the Annual Meeting of Shareholders
to be held in 2003.
Charles Federman has served as a director of BackWeb since November 1996.
Since January 1998, Mr. Federman has served as Managing Director of BRM
Technologies, Ltd. From 1983 to January 1998, Mr. Federman served in various
positions at Broadview Associates LLC, a financial advisory company, most
recently serving as Chairman. Mr. Federman serves on the Board of Directors of
Phoenix Technologies Ltd. Mathsoft, Inc., and International Microcomputer
Software, Inc., each of which is a software company. Mr. Federman holds a
bachelor of science degree from the Wharton School of the University of
Pennsylvania. Mr. Federman's term as a director of the Company expires at the
Annual Meeting of Shareholders to be held in 2001.
Joseph Gleberman has served as a director of BackWeb since November 1998.
Since November 1996, Mr. Gleberman has served as a Managing Director in the
Principal Investment Area of Goldman, Sachs & Co., an investment banking firm.
From November 1990 to November 1996, Mr. Gleberman served as a partner of
Goldman, Sachs & Co., a company he joined in 1982. Mr. Gleberman serves on the
Board of Directors of Applied Analytical Industries, a pharmaceutical service
and development organization, and Ticketmaster Online-CitySearch, Inc., a
provider of locally developed online information and transaction services. Mr.
Gleberman holds a bachelor of arts and a master of arts degree from Yale
University and an MBA from Stanford University Graduate School of Business. Mr.
Gleberman's term as a director of the Company expires at the Annual Meeting of
Shareholders to be held in 2003.
William L. Larson has been a director of BackWeb since September 1997. From
September 1993, to January, 2001 Mr. Larson served as the Chief Executive
Officer of Network Associates, Inc., a software company, where he has also
served as President and a director since October 1993 and as Chairman of the
Board since April 1995. Mr. Larson also served as Chairman of the Board of
McAfee.com from October 1998 to January 2001. From August 1988 to September
1993, Mr. Larson served as a Vice President of SunSoft,
50
53
Inc., a systems software subsidiary of Sun Microsystems, where he was
responsible for worldwide sales and marketing. Prior to SunSoft, Mr. Larson held
various executive positions at Apple Computer and Spinnaker Software and was a
consultant with Bain & Company. Mr. Larson holds degrees from the Stanford Law
School and the Wharton School of the University of Pennsylvania. Mr. Larson is a
member of the California Bar Association and serves on the boards of several
high technology companies. Mr. Larson's term as a director of the Company
expires at the Annual Meeting of Shareholders to be held in 2001.
Leora Rubin Meridor has served as a director of BackWeb since August 2000.
From February 2001 to the present, Ms. Meridor has served as Chair of the Board
of Poakim Capital Markets and Investments, an investment bank. From December
2000 to date, Ms. Meridor has served as Chairman of the Board of Bezeq
International, a telecommercial company. From 1996 through September 2000, Ms.
Meridor has served as Head of Credit of First International Bank. From 1992 to
1996, Ms. Meridor served as Head of Research of the Bank of Israel. Ms. Meridor
holds a bachelor of science degree, master of science degree, and a doctorate
degree from the Hebrew University of Jerusalem. Ms. Meridor's term as a director
of the Company expires at the Annual Meeting of Shareholders to be held in 2003.
Gil Shwed has served as a director of BackWeb since March 1999. Since July
1993, Mr. Shwed has served as Chief Executive Officer of Check Point Software
Technologies Ltd., a software company, where he currently also serves as
Chairman of the Board and President. From June 1992 to June 1993, Mr. Shwed
served as a Software Manager of Heliogram, a software development company. Mr.
Gleberman's term as a director of the Company expires at the Annual Meeting of
Shareholders to be held in 2003.
Hanan Miron has served as our Chief Financial Officer since 1999. From 1997
to March 1999, Mr. Miron served as President of Nice Systems, Inc., a leading
global provider of computer telephony integrated (CTI) logging, quality
measurement and workflow solutions for voice, fax and data. From July 1992 to
January 1997, Mr. Miron was Vice President and Chief Financial Officer of Nice
Systems, Ltd. Mr. Miron holds a LLB degree from the Law School of the Hebrew
University and an MBA from the Amos Tuck School of Business Administration of
Dartmouth College.
Gwen Spertell has served as our Chief Operating Officer since August 2000.
From December 1997 to August 2000, Ms. Spertell held the position of Senior Vice
President responsible for sales, marketing and business development. Prior to
joining BackWeb, from 1989 through 1997, Ms. Spertell spent eight years at
Oracle Corporation where she served in various management positions responsible
for sales, consulting and alliance development, with her last position at Oracle
being Vice President of Global ISV Alliances. Ms. Spertell holds a Bachelor of
Arts in Economics from Rutgers University.
B. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's executive officers and directors and
persons who own more than 10 percent of a registered class of the Company's
equity securities to file an initial report of ownership on Form 3 and changes
in ownership on Form 4 or 5 with the SEC and the National Association of
Securities Dealers, Inc. Executive officers, directors and greater than 10
percent shareholders are also required by SEC rules to furnish the Company with
copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that, with respect to fiscal year 2000, all filing requirements applicable to
its officers, directors and 10 percent shareholders were met with the exception
of a late filing on behalf of Mr. Larson of a Form 4, a late filing on behalf of
Mr. Gleberman of a Form 5 with respect to the fiscal year ended December 31,
2000, and amendments filed and to be filed to correct inadvertent errors in the
original Form 3 filings by Mr. Larson, Mr. Shwed and Mr. Spertell, a subsequent
Form 4 filing by Ms. Spertell and this year's Form 5 filing by Mr. Gilmore. In
addition, after he left the Company employ, Roni Or did not file a Form 4 for
December 2000 or a Form 5 for the year 2000.
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54
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation earned for services
rendered to us in all capacities for the fiscal year ended December 31, 2000 and
the fiscal year ended December 31, 1999, the year that we became a public
company, by our Chief Executive Officer; the only other two executive officers
who earned more than aggregate cash compensation of $100,000 during the fiscal
year ended December 31, 2000; two additional persons who have not been appointed
as executive officers but who make Section 16(a) filings; and an additional
person who would have been considered as an executive officer but for the fact
that he left the Company prior to December 31, 2000 (collectively, our "Named
Executive Officers"):
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS COMPENSATION($)
--------------------------- --------- -------- ------------ ---------------
Eli Barkat................................. 2000 $261,251 -0- 750,000 -0-
Chief Executive Officer.................. 1999 $220,008 $130,000 350,000 -0-
Hanan Miron(1)............................. 2000 $213,125 $ 45,000 148,200 -0-
Chief Financial Officer.................. 1999 $166,667 $ 39,500 316,666 -0-
Gwen Spertell.............................. 2000 $225,000 $ 87,000 166,000 -0-
Chief Operating Officer.................. 1999 $197,917 $ 78,750 -0-
Christopher Marshall(2).................... 2000 $143,750 $ 13,594 211,800 -0-
Vice President, Finance.................. 1999 -0- -0- -0- -0-
David Gilmore(3)........................... 2000 $182,917 $ 70,000 60,000 -0-
Vice President, Int'l Business........... 1999 $ 37,500 $ 7,500 150,000 -0-
Roni Or(4)................................. 2000 $123,937 $ 15,803 50,000 -0-
Vice President, Product Dev. ............ 1999 $115,355 $ 18,500 -0- $22,378
- ---------------
(1) Mr. Miron joined BackWeb in March 1999.
(2) Mr. Marshall joined BackWeb in January 2000 and was not paid any
compensation by the Company for the fiscal year ended December 31, 1999.
(3) Mr. Gilmore joined BackWeb in October 1999.
(4) Mr. Or left BackWeb in November 2000. Mr. Or's other compensation
aggregating $22,378 in 1999, consisted of $15,333 paid into a pension
benefit fund, plus $7,245 paid into an education fund for job-related
training.
STOCK OPTION GRANTS IN FISCAL 2000
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 2000, to each of the Named Executive Officers in
the Summary Compensation Table set forth above. No stock appreciation rights
were granted during this period.
The exercise price of each option was equal to the fair market value of our
Ordinary Shares as valued by the Board of Directors on the date of grant. The
fair market value of our Ordinary Shares is the closing sales price as quoted on
the Nasdaq National Market. In the case of initial grants to new employees, the
exercise price is equal to the average closing price of our Ordinary Shares
during the thirty days preceding the first of the month, if the employee
commences employment between the first and fifteenth of the month. In the event
the employee commences employment between the sixteenth and the end of a month,
the exercise price is equal to the average closing price of our Ordinary Shares
during the thirty days preceding the sixteenth. As a result, there are
circumstances in which an employee may receive an option grant with an exercise
price below fair market value on the date of grant. The exercise price may be
paid in cash, in shares of our Ordinary Shares valued at fair market value on
the exercise date or through a cashless exercise procedure involving a same-day
sale of the purchased shares. We may also finance the option exercise by lending
the optionee sufficient funds
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55
to pay the exercise price for the purchased shares, together with any federal
and state income tax liability incurred by the optionee in connection with such
exercise.
The following table presents the grants of stock options to each of the
Named Executive Officers under our 1996 Israeli and 1998 U.S. Stock Option Plans
(the "Option Plans") during the fiscal year ended December 31, 2000, including
the potential realizable value of the options at assumed 5% and 10% annual rates
over the term of the option, compounded annually. If the exercise price of an
option was below the market price of the Company's Ordinary Shares at the date
of grant, a 0% rate is shown. These rates of returns are mandated by the rules
of the Securities and Exchange Commission and do not represent our estimate or
projections of our future stock prices. Actual gains, if any, on stock option
exercises will be dependent on the future performance of our Ordinary Shares.
The potential realizable value of the options in the following table were
calculated based on a seven-year option term, except in one instance for Ms.
Spertell whose 75,000 share grant had a ten-year term, and Mr. Or whose 50,000
share grant had a six and one-half year term.
Percentages shown under "Percent of Total Options Granted to Employees in
the Fiscal Year" are based on an aggregate of 6,843,092 options granted to
employees of BackWeb under its 1996 Israeli and 1998 U.S. Stock Option Plans
during the fiscal year ended December 31, 2000.
OPTION GRANTS IN FISCAL 2000
INDIVIDUAL OPTIONS
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATE
NUMBER OF PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
SECURITIES OPTIONS GRANTED TO FOR OPTION TERM
UNDERLYING EMPLOYEES IN EXERCISE OR BASE EXPIRATION -----------------------------------
NAME OPTIONS GRANTED FISCAL YEAR PRICE ($/SHARE) DATE 0% 5% 10%
---- --------------- ------------------ ---------------- ---------- -------- ---------- -----------
Eli Barkat 750,000 10.96% $17.25 8/24/07 $ -0- $5,266,861 $12,274,027
Hanan Miron 50,000 0.73% $35.00 2/1/07 $ -0- $ 712,755 $ 1,661,145
33,200 0.49% $19.00 7/1/07 $128,816 $ 438,056 $ 849,477
65,000 0.95% $ 7.32 11/1/07 $170,300 $ 433,328 $ 783,266
Gwen Spertell 75,000 1.10% $35.00 2/1/10 $ -0- $1,651,420 $ 4,185,352
50,000 0.73% $19.00 7/1/07 $194,000 $ 659,723 $ 1,279,332
41,000 0.60% $ 7.32 11/1/07 $107,420 $ 273,330 $ 494,060
Christopher Marshall 80,000 1.17% $32.75 1/10/07 $ -0- $1,068,082 $ 2,489,640
61,800 0.90% $19.00 7/1/07 $239,784 $ 815,417 $ 1,581,255
70,000 1.02% $ 7.32 11/1/07 $183,400 $ 466,660 $ 843,517
David Gilmore 10,000 0.15% $19.00 7/1/07 $ 38,800 $ 131,945 $ 2,555,866
50,000 0.73% $ 7.32 11/1/07 $131,000 $ 333,329 $ 602,512
Roni Or 50,000 0.73% $19.00 2/1/07 $194,000 $ 627,768 $ 1,193,701
In February 2001, the Company implemented a voluntary stock option exchange
program for its employees. The program was implemented to ameliorate, in part,
the impact of current financial market conditions on our employees who are
critical to the Company's continued success and creating long-term value for all
shareholders. Under the program, each employee was offered the opportunity to
cancel all, or part of, outstanding stock options previously granted from June
8, 1999 through and including January 15, 2001 (but excluding those options
granted on November 1, 2000, with a set vesting schedule) in exchange for an
equal number of new options to be granted at least six months and one day in the
future. The exercise price of these new options will be equal to the fair market
value of the Company's common stock as at the date of the grant. The vesting
schedule of the new options will be unchanged from that of the cancelled
options. Members of the Company's Board of Directors and Eli Barkat, its CEO,
did not participate in this program. Messrs. Miron and Marshall did, as well as
Ms. Spertell. Each of them cancelled all options granted to him or her in fiscal
2000,
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and set forth in the table above, except for those having an exercise price of
$7.32. For a further discussion of this program, please see Note 13 to
Consolidated Financial Statements contained in this report.
The vesting schedule for the options retained by Messrs. Miron and Marshall
and Ms. Spertell, and for Mr. Gilmore's options with an exercise price of $7.32
is: 25% of the options vesting six months from the date of the grant; 25% six
months thereafter; and the remainder of the option vesting on a pro rata monthly
basis for twenty-four months thereafter. The other options held by Messrs.
Barkat, Gilmore and Or each vest 25% on the one-year anniversary of the date of
the grant and then pro rata on a monthly basis thereafter for thirty-six months.
The options granted under our Option Plans generally have a term of seven
years from the date of grant. As set forth on the table above, Mr. Spertell
received one grant of options with a ten-year term which was one of the grants
cancelled in connection with the program described above. In addition, Mr. Or
received a grant of options with a six and one-half years term.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES
The following table sets forth options exercised by each of the Named
Executive Officers in the Summary Compensation Table during the fiscal year
ended December 31, 2000, and the number and value of securities underlying
unexercised options that are held by these executive officers as of December 31,
2000.
Amounts shown under the column "Value Realized" are equal to the fair
market value of the purchased shares on the option exercise date, less the
exercise price paid for such shares.
Amounts shown under the column "Value of Unexercised In-the-Money Options
at Fiscal Year End" are based on the fair market value of our Ordinary Shares at
December 29, 2000, the last trading day of fiscal 2000, which was equal to $6.75
per share, less the exercise price payable for such shares.
AGGREGATE OPTION EXERCISES IN FISCAL 2000
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END AT FISCAL YEAR END
SHARES ACQUIRED --------------------------- ---------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
Eli Barkat............. -0- -0- -0- 750,000 -0- -0-
Hanan Miron............ 20,000 $ 815,000 138,333 148,200 $518,749 -0-
Gwen Spertell.......... -0- -0- 25,783 262,675 $119,891 $449,539
Chris Marshall......... -0- -0- -0- 211,800 -0- -0-
David Gilmore.......... -0- -0- 43,750 166,250 -0- -0-
Roni Or................ 75,208 $1,276,273 45,486 -0- $233,802 -0-
EMPLOYMENT AGREEMENTS
None of the Named Executive Officers has an employment agreement with the
Company.
In the event of a change-in-control of the Company or a change in
responsibilities following a change-in-control, the vesting schedule for options
granted to the Named Executive Officers would be accelerated and the options
would be vested in full at the time of the closing of any such transaction.
COMPENSATION OF DIRECTORS
Directors do not receive cash compensation from BackWeb for services they
provide as directors, although they are reimbursed for certain expenses in
connection with attendance at board and committee meetings. From time to time,
subject to the approval of shareholders, certain directors who are not employees
of BackWeb may receive grants of options to purchase BackWeb's Ordinary Shares.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This table shows the number of the Company's Ordinary Shares beneficially
owned, as of March 20, 2001, by (i) each beneficial owner of more than 5% of the
Company's Ordinary Shares, (ii) each director, (iii) each Named Executive
Officer and (iv) all directors and executive officers as a group. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and includes voting or investment power with respect to the
securities.
Except as indicated below, the address for each listed director and officer
is c/o BackWeb Technologies Ltd., 3 Abba Hillel Street, Ramat Gan, Israel.
Except as indicated by footnote, the persons named in the table have sole voting
and investment power with respect to all ordinary shares shown as beneficially
owned by them. The number of Ordinary Shares outstanding used in calculating the
percentage in the table below includes the ordinary shares underlying options or
warrants held by such person that are exercisable within 60 days of March 20,
2001, but excludes ordinary shares underlying options or warrants held by any
other person. Percentage of beneficial ownership is based on 38,343,639 ordinary
shares outstanding as of March 20, 2001.
NUMBER OF PERCENTAGE OF
ORDINARY SHARES ORDINARY SHARES
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
---------------- ------------------ ------------------
5% SHAREHOLDERS
Eli Barkat Holdings Ltd.(1)................................. 3,352,342 8.7%
8 Hamarpe Street
Har Hotzvim
Jerusalem 91450 Israel
Yuval 63 Holdings (1995) Ltd.(2)............................ 3,352,342 8.7%
8 Hamarpe Street
Har Hotzvim
Jerusalem 91450 Israel
Nir Barkat Holdings Ltd.(3)................................. 3,352,342 8.7%
8 Hamarpe Street
Har Hotzvim
Jerusalem 91450 Israel
The Goldman Sachs Group(4).................................. 3,272,676 8.5%
85 Broad Street
New York, New York 10004
United States Trust Company of New York(5).................. 3,272,677 8.5%
West 47th Street, 25th Floor
New York, New York 10036
EXECUTIVE OFFICERS AND DIRECTORS
Eli Barkat(6)............................................... 3,900,473 10.2%
Hanan Miron(7).............................................. 312,916 *
Gwen Spertell(8)............................................ 462,531 1.2%
Christopher Marshall(9)..................................... 17,500 *
David Gilmore(10)........................................... 72,175 *
Roni Or..................................................... -0- -0-
Charles Federman(11)........................................ 768,264 2.0%
Joseph Gleberman(12)........................................ 3,272,676 8.5%
William Larson(13).......................................... 11,111 *
Gil Shwed(14)............................................... 25,000 *
Leora Rubin Meridor......................................... -0- -0-
All executive officers and directors as a group (10 8,842,646 23.1%
persons)(15)..............................................
- ---------------
(1) Eli Barkat, the Company's Chairman and Chief Executive Officer,
substantially controls the voting power of Eli Barkat Holdings Ltd. The
shares listed in the table above for Eli Barkat Holdings Ltd. do not
include 548,131 Ordinary Shares owned directly by Eli Barkat.
55
58
(2) Yuval Rakavy, a former BackWeb director, owns substantially all of the
equity and voting power of Yuval Rakavy Ltd., the parent company of Yuval
63 Holdings (1995) Ltd. The shares listed in the table above for Yuval 63
Holdings (1995) Ltd. do not include 198,136 Ordinary Shares owned directly
by Mr. Rakavy.
(3) Nir Barkat, a former BackWeb director, owns substantially all of the equity
and voting power of Nir Barkat Ltd., the parent company of Nir Barkat
Holdings Ltd. Nir Barkat is the brother of Eli Barkat, our Chief Executive
Officer. The shares listed in the table above for Mr. Barkat Holdings Ltd.
do not include 198,133 Ordinary Shares owned directly by Nir Barkat.
(4) The shares listed in the table above represent 3,272,676 Ordinary Shares
owned by investment partnerships, of which affiliates of The Goldman Sachs
Group are the general partner, managing general partner or investment
manager, including:
- 1,955,591 Ordinary Shares held by GS Capital Partners II, L.P.;
- 777,427 ordinary Shares held by GS Capital Partners II Offshore, L.P.;
- 72,132 Ordinary Shares held by Goldman, Sachs & Co. Verwaltungs GmbH;
- 278,594 Ordinary Shares held by Stone Street Fund 1996, L.P.; and
- 188,932 Ordinary Shares held by Bridge Street Fund 1996, L.P.
The Goldman Sachs Group disclaims beneficial ownership of the Ordinary
Shares owned by such investment partnerships to the extent attributable to
partnership interests therein held by persons other than The Goldman Sachs
Group and its affiliates. Each of such investment partnerships shares
voting and investment power with certain of its respective affiliates. Mr.
Gleberman, a Managing Director of Goldman, Sachs & Co. and a director of
BackWeb, disclaims beneficial ownership of Ordinary Shares which may be
deemed to be beneficially owned by The Goldman Sachs Group except to the
extent of his pecuniary interest arising from his interest in The Goldman
Sachs Group.
(5) The shares listed in the table above for United States Trust Company of New
York represent the Ordinary Shares owned by the investment partnerships of
The Goldman Sachs Group, referenced in footnote (4) above, which entered
into a Voting Trust Agreement, dated as of July 1, 1999, with United States
Trust Company of New York as voting trustee (the "Voting Trustee").
Pursuant to the Voting Trust Agreement, the investment partnerships agreed
to deposit into the voting trust created under such agreement (the "Voting
Trust") and transfer to the Voting Trustee all Ordinary Shares of BackWeb
beneficially owned by the investment partnerships. Under the Voting Trust
Agreement, the Voting Trustee, among other things, will vote such Ordinary
Shares with the majority of votes cast or, in certain circumstances, in
proportion to the votes cast for all other Ordinary Shares outstanding or
abstain from voting. Under the Voting Trust Agreement, (i) each investment
partnership has the power to dispose or to direct the disposition of the
Ordinary Shares deposited by such investment partnership into the Voting
Trust and (ii) each investment partnerships has the right to receive all
dividends paid on the Ordinary Shares deposited by such investment
partnership into the Voting Trust, including distribution of securities not
entitled to vote on the Ordinary Shares.
(6) The shares listed in the table above for Eli Barkat include 3,352,342
Ordinary Shares held by Eli Barkat Holdings Ltd., an entity substantially
controlled by Eli Barkat.
(7) The shares listed in the table above for Hanan Miron include options to
purchase 154,583 Ordinary Shares that are exercisable within sixty days of
March 20, 2001.
(8) The shares listed in the table above for Gwen Spertell include options to
purchase 147,458 Ordinary Shares that are exercisable within sixty days of
March 20, 2001.
(9) The shares listed in the table above for Christopher Marshall include
options to purchase 17,500 Ordinary Shares that are exercisable within
sixty days of March 20, 2001.
(10) The shares listed in the table above for David Gilmore include options to
purchase 71,874 Ordinary Shares that are exercisable within sixty days of
March 20, 2001.
56
59
(11) The shares listed in the table above for Charles Federman include 539,691
shares held by Bare LLC, an entity substantially controlled by Charles
Federman.
(12) The shares listed in the table above for Joseph Gleberman include 3,272,676
shares held by entities affiliated with the Goldman Sachs Group. Mr.
Gleberman is a Managing Partner of Goldman Sachs & Co.
(13) The shares listed in the table above for William Larson include options to
purchase 11,111 Ordinary Shares that are exercisable within sixty days of
March 20, 2001.
(14) The shares listed in the table above for Gil Shwed include options to
purchase 25,000 Ordinary Shares that are exercisable within sixty days of
March 20, 2001.
(15) The shares listed in the table above for all executive officers and
directors as a group include 808,333 ordinary shares held by executive
officers and directors subject to the right of repurchase in favor of
BackWeb during a vesting period of four years and 427,526 ordinary shares
deemed held by executive officers and directors subject to options which
are exercisable within 60 days of March 20, 2001.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK OPTION LOANS
In March 1999, prior to its initial public offering, the Company made loans
to certain executive officers to allow such executive officers to exercise
options to purchase ordinary shares of the Company. Each loan is evidenced by a
full recourse promissory note with an interest rate of 5.25% compounded
annually. Each note is secured by the shares. Each note is to be repaid in equal
installments over a four year period which coincides with the vesting schedule
for the underlying options. Each payment is to consist of one-quarter of the
outstanding principal, plus all accrued unpaid interest as at the date of
payment. Payments are due on each anniversary date of vesting schedule of the
underlying options. The executive officers to whom the loans were made are Eli
Barkat, the Chairman of the Board and CEO; Hanan Miron, the Company's CFO; and
Gwen Spertell, the Company's COO. During the year ended December 31, 2000 the
largest aggregate amount of each person's indebtedness was $2,174,321, $248,378
and $221,569 respectively. As of March 27, 2001, the amounts outstanding on each
loan is $1,519,875, $254,499 and $225,393, respectively.
TRANSACTIONS WITH 3PATH INC.
On October 3, 2000 the Company acquired 1,197,679 shares of Series B
Preferred Stock of 3Path Inc. (formerly Deliverex Inc.) in exchange for payment
of $2,500,000 under a Stock Purchase Agreement for Series B Convertible
Preferred Stock dated February 2, 2000, between 3Path Inc., the Company and
other various investors.
Among such other investors are some of our major shareholders including Eli
Barkat Holdings Ltd., NirBarkat Holdings Ltd., Yuval 63 Holdings (1995) Ltd.,
BARE, L.L.C., a company controlled by Charles Federman (who is a BackWeb
director), affiliates of the Goldman Sachs Group, L.P. (which is a principal
shareholder of BackWeb), and Intel Corporation (which is also a shareholder of
BackWeb). As a group, such shareholders have a controlling interest in 3Path. In
addition, Charles Federman currently serves as chairmen of the Board of
Directors and Joseph Gleberman and Gwen Spertell serve as members of the Board.
In the ordinary course of business, the Company has granted 3Path various
non-exclusive licenses to use the Company's programs for 3Path's business. These
transactions were granted on customary commercial terms.
BackWeb's Audit Committee, Board of Directors and Shareholders approved the
Company's investment in 3Path.
OTHER
Please refer to Note 8 to Consolidated Financial Statements elsewhere in
this report.
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60
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 a member of Ernst and Young International, Kost, Forer &
Gabbay, Independent Auditors
Consolidated Financial Statements:
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the three years ended December 31, 2000, 1999
and 1998
Statements of Shareholders Equity (net capital deficiency) for the three
years ended December 31, 2000, 1999 and 1998
Statements of Cash Flows for the three years ended December 31, 2000, 1999
and 1998
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 Securities and Exchange Commission.
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Software and Asset Purchase Agreement Among the Registrant,
Mobix Communications Ltd and Esther Hemli, dated as of June
4, 2000(1)
3.1 Articles of Association of Registrant(2)
3.2 Memorandum of Association of Registrant (English
translation)(2)
4.1 Specimen of Ordinary Share Certificate(2)
4.2 Fourth Amended and Restated Rights Agreement(2)
4.3 Form of Liquidity Proposal between BackWeb Technologies,
Ltd. and the Exchangeable Shareholders(2)
10.1* 1996 Israel Share Option Plan (English translation)(2)
10.2* 1996 U.S. Share Option Plan(2)
10.3* 1998 U.S. Share Option Plan (Amended and Restated as of July
1, 2000)(3)
10.4* 1999 Employee Stock Purchase Plan(2)
10.5 Lease Agreement for 3 Abba Hillel Street, Ramat Gan, Israel
(English translation)(2)
10.6 Lease Agreement for 34 Tuval Street, Ramat Gan, Israel
(English translation)(2)
10.7 Master Lease Agreement for 2077 Gateway Place, Suite 500,
San Jose, California(2)
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(2)
10.9 Loan and Security Agreement, and schedule thereto, between
BackWeb Technologies Ltd. and Transamerica Business Credit
Corporation, dated as of December 24, 1998(2)
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(2)
58
61
EXHIBIT NO. DESCRIPTION
----------- -----------
10.11 Fourth Amended and Restated Rights Agreement, dated as of
March 24, 1999(2)
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(2)
10.13+ Software License and Distribution Agreement for Embedded
Products, by and between BackWeb Technologies Ltd. and SAP
AG, dated March 17, 1999(2)
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(2)
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(4)
10.16 Securities Purchase Agreement, dated as of January 17, 2000
by and between BackWeb Technologies Ltd. and RealNetworks,
Inc.(5)
10.17 BackWeb Technologies Ltd. warrant issued January 26, 2000 to
RealNetworks, Inc.(6)
10.18 1(ST) Amendment to Lease -- Expansion, made May 12, 2000,
between Speiker Properties, L.P. and BackWeb Technologies,
Inc.
10.19 2(ND) Amendment to Lease -- Expansion, made November 7,
2000, between Speiker Properties, L.P. and BackWeb
Technologies, Inc.
10.20 Form of Promissory Note and Security Agreement for executive
officer loans for early exercise of options granted prior to
initial public offering.
10.21 Sublease Agreement, as of September 27, 1996, between SSA
Canada Corporation, Lanacom Inc. and Confederation Life
Insurance Company.
10.22 Amendment to Sublease Agreement, as of June 1, 2000, between
Zurich Canadian Holdings Limited, Backweb Canada, Inc., and
Backweb Technologies Ltd.
21.1 Subsidiaries of the Registrant(2)
23.1 Consent of Independent Auditors
- ---------------
(1) Incorporated herein by reference to the corresponding Exhibit from the
Company's Current Report on Form 8-K, filed July 10, 2000.
(2) Incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358).
(3) Incorporated herein by reference to Exhibit 10.16 from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2000, filed November 14, 2000.
(4) Incorporated herein by reference to Exhibit 10.15 from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000,
filed August 14, 2000.
(5) Incorporated herein by reference to Exhibit 10.1 from the Company's Current
Report on Form 8-K, filed February 11, 2000.
(6) Incorporated herein by reference to Exhibit 10. 2 from the Company's Current
Report on Form 8-K, filed February 11, 2000.
* Indicates management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Annual Report on Form 10-K.
+ 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
No reports on Form 8-K were filed by the Company during the quarter ended
December 31, 2000.
59
62
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
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 30, 2001.
BACKWEB TECHNOLOGIES LTD.
By: /s/ ELI BARKAT
------------------------------------
Eli Barkat,
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ ELI BARKAT Chief Executive Officer March 30, 2001
- ----------------------------------------------------- and Director
Eli Barkat (Principal Executive Officer)
/s/ HANAN MIRON Chief Financial Officer March 30, 2001
- ----------------------------------------------------- (Principal Financial and
Hanan Miron Accounting Officer)
/s/ CHARLES FEDERMAN Director March 30, 2001
- -----------------------------------------------------
Charles Federman
/s/ WILLIAM LARSON Director March 30, 2001
- -----------------------------------------------------
William Larson
/s/ JOSEPH GLEBERMAN Director March 30, 2001
- -----------------------------------------------------
Joseph Gleberman
/s/ GIL SHWED Director March 30, 2001
- -----------------------------------------------------
Gil Shwed
/s/ LEORA RUBIN MERIDOR Director March 30, 2001
- -----------------------------------------------------
Leora Rubin Meridor
60
63
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 Software and Asset Purchase Agreement Among the Registrant,
Mobix Communications Ltd and Esther Hemli, dated as of June
4, 2000(1)
3.1 Articles of Association of Registrant(2)
3.2 Memorandum of Association of Registrant (English
translation)(2)
4.1 Specimen of Ordinary Share Certificate(2)
4.2 Fourth Amended and Restated Rights Agreement(2)
4.3 Form of Liquidity Proposal between BackWeb Technologies,
Ltd. and the Exchangeable Shareholders(2)
10.1* 1996 Israel Share Option Plan (English translation)(2)
10.2* 1996 U.S. Share Option Plan(2)
10.3* 1998 U.S. Share Option Plan (Amended and Restated as of July
1, 2000)(3)
10.4* 1999 Employee Stock Purchase Plan(2)
10.5 Lease Agreement for 3 Abba Hillel Street, Ramat Gan, Israel
(English translation)(2)
10.6 Lease Agreement for 34 Tuval Street, Ramat Gan, Israel
(English translation)(2)
10.7 Master Lease Agreement for 2077 Gateway Place, Suite 500,
San Jose, California(2)
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(2)
10.9 Loan and Security Agreement, and schedule thereto, between
BackWeb Technologies Ltd. and Transamerica Business Credit
Corporation, dated as of December 24, 1998(2)
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(2)
10.11 Fourth Amended and Restated Rights Agreement, dated as of
March 24, 1999(2)
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(2)
10.13+ Software License and Distribution Agreement for Embedded
Products, by and between BackWeb Technologies Ltd. and SAP
AG, dated March 17, 1999(2)
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(2)
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(4)
10.16 Securities Purchase Agreement, dated as of January 17, 2000
by and between BackWeb Technologies Ltd. and RealNetworks,
Inc.(5)
10.17 BackWeb Technologies Ltd. warrant issued January 26, 2000 to
RealNetworks, Inc.(6)
10.18 1(ST) Amendment to Lease -- Expansion, made May 12, 2000,
between Speiker Properties, L.P. and BackWeb Technologies,
Inc.
10.19 2(ND) Amendment to Lease -- Expansion, made November 7,
2000, between Speiker Properties, L.P. and BackWeb
Technologies, Inc.
10.20 Form of Promissory Note and Security Agreement for executive
officer loans for early exercise of options granted prior to
initial public offering.
61
64
EXHIBIT NO. DESCRIPTION
----------- -----------
10.21 Sublease Agreement, as of September 27, 1996, between SSA
Canada Corporation, Lanacom Inc. and Confederation Life
Insurance Company.
10.22 Amendment to Sublease Agreement, as of June 1, 2000, between
Zurich Canadian Holdings Limited, Backweb Canada, Inc., and
Backweb Technologies Ltd.
21.1 Subsidiaries of the Registrant(2)
23.1 Consent of Independent Auditors
- ---------------
(1) Incorporated herein by reference to the corresponding Exhibit from the
Company's Current Report on Form 8-K, filed July 10, 2000.
(2) Incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358).
(3) Incorporated herein by reference to Exhibit 10.16 from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended September 30,
2000, filed November 14, 2000.
(4) Incorporated herein by reference to Exhibit 10.15 from the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2000,
filed August 14, 2000.
(5) Incorporated herein by reference to Exhibit 10.1 from the Company's Current
Report on Form 8-K, filed February 11, 2000.
(6) Incorporated herein by reference to Exhibit 10. 2 from the Company's Current
Report on Form 8-K, filed February 11, 2000.
* Indicates management contract or compensatory plan or arrangement required
to be filed as an exhibit to this Annual Report on Form 10-K.
+ Certain portions of this exhibit have been granted confidential treatment by
the Commission. The omitted portions have been separately filed with the
Commission.
62