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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.
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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,