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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________ .
COMMISSION FILE NUMBER 0-26241
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BACKWEB TECHNOLOGIES LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------------
ISRAEL 77-0436149
(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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Ordinary Shares outstanding as of
August 7, 2001 was 38,404,707 shares.
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BACKWEB TECHNOLOGIES LTD.
QUARTERLY REPORT ON FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2001
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)..... 4
Condensed Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000....................................... 4
Condensed Consolidated Statements of Operations for the
Three Months and Six Months Ended June 30, 2001 and 2000.... 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2001 and 2000......................... 6
Notes to Condensed Consolidated Financial Statements........ 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 13
Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 25
Item 2. Changes in Securities and Use of Proceeds................... 25
Item 3. Defaults Upon Changes of Senior Securities.................. 25
Item 4. Submission of Matters to a Vote of Security Holders......... 25
Item 5. Other Information........................................... 25
Item 6. Exhibits and Report on Form 8-K............................. 25
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THIS REPORT ON FORM 10-Q 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, BUT ARE NOT LIMITED TO, THOSE DISCUSSED ELSEWHERE IN THIS
FORM 10-Q IN, FOR EXAMPLE, ITEM 2, 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 STATEMENT IS
BASED.
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4
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BACKWEB TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
UNAUDITED AUDITED
Current assets:
Cash and cash equivalents................................. $ 30,893 $ 21,076
Short-term investments.................................... 22,916 43,658
Trade accounts receivable, net of allowance for doubtful
accounts of $3,087 and $1,038 at June 30, 2001 and
December 31, 2000, respectively........................ 2,975 8,400
Other accounts receivable and prepaid expenses............ 1,178 2,370
-------- --------
Total current assets.............................. 57,962 75,504
Long-term investments....................................... 500 3,000
Property and equipment, net................................. 3,906 4,025
Goodwill and other purchased intangibles, net............... 4,896 6,462
Other long-term assets...................................... 1,496 1,383
-------- --------
Total assets...................................... $ 68,760 $ 90,374
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 5,257 $ 7,260
Deferred revenue.......................................... 2,762 3,957
Current portion of shareholders' loans.................... -- 371
-------- --------
Total current liabilities......................... 8,019 11,588
Long-term deferred revenue.................................. 85 113
Accrued severance pay, net.................................. 254 243
Shareholders' equity:
Series E preferred stock, nominal value NIS 0.03 per
share; one share authorized and outstanding at June 30,
2001 and December 31, 2000............................. 3,454 3,454
Ordinary shares, nominal value NIS 0.03 per share;
150,067,829 shares authorized; 38,397,297 and
38,047,738 shares issued and outstanding at June 30,
2001 and December 31, 2000, respectively............... 147,278 146,751
Notes receivable from shareholders........................ (1,980) (2,486)
Deferred stock compensation............................... (553) (890)
Accumulated other comprehensive loss...................... (61) (206)
Accumulated deficit....................................... (87,736) (68,193)
-------- --------
Total shareholders' equity........................ 60,402 78,430
-------- --------
Total liabilities and shareholders' equity........ $ 68,760 $ 90,374
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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5
BACKWEB TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
Revenues:
License............................... $ 2,820 $ 8,342 $ 8,007 $ 15,225
Service............................... 1,755 2,290 3,789 4,310
-------- -------- -------- --------
Total revenues................ 4,575 10,632 11,796 19,535
Cost of revenues:
License............................... 174 48 272 80
Service............................... 1,336 1,590 3,086 2,919
-------- -------- -------- --------
Total cost of revenues........ 1,510 1,638 3,358 2,999
-------- -------- -------- --------
Gross profit............................ 3,065 8,994 8,438 16,536
Operating expenses:
Research and development, net......... 2,588 2,148 5,148 3,991
Sales and marketing................... 5,974 7,251 13,300 14,187
General and administrative............ 3,192 1,856 6,377 3,452
In-process research and development
write-off and amortization of
goodwill and other intangible
assets............................. 783 8,406 1,566 8,574
Amortization of deferred stock
compensation....................... 168 278 337 557
-------- -------- -------- --------
Total operating expenses...... 12,705 19,939 26,728 30,761
-------- -------- -------- --------
Loss from operations.................... (9,640) (10,945) (18,290) (14,225)
-------- -------- -------- --------
Finance and other income, net........... 533 1,186 1,247 2,314
Write-down of equity investments........ (2,500) -- (2,500) --
-------- -------- -------- --------
Net loss................................ $(11,607) $ (9,759) $(19,543) $(11,911)
======== ======== ======== ========
Basic and diluted net loss per share.... $ (0.30) $ (0.26) $ (0.51) $ (0.33)
======== ======== ======== ========
Weighted average number of shares used
in computing basic and diluted net
loss per share........................ 38,161 37,095 38,064 36,540
======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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BACKWEB TECHNOLOGIES LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
--------------------
JUNE 30, JUNE 30,
2001 2000
-------- --------
OPERATING ACTIVITIES
Net loss.................................................... $(19,543) $(11,911)
Adjustments to reconcile net loss to net cash used in
operating activities:
Bad debt.................................................. 2,193 --
In-process research and development write-off and
amortization of goodwill and other intangible assets... 1,566 8,574
Amortization of deferred stock compensation............... 337 557
Depreciation.............................................. 853 416
Write-down of equity investments.......................... 2,500 --
Barter transaction........................................ -- (590)
Changes in operating assets and liabilities:
Trade accounts receivable................................. 3,232 (2,643)
Other accounts receivable, prepaid expenses, and other
long-term assets....................................... 1,079 (1,567)
Accounts payable and accrued liabilities.................. (2,003) (1,364)
Deferred revenue.......................................... (1,223) 1,314
Accrued severance pay, net................................ 11 83
-------- --------
Net cash used in operating activities............. (10,998) (7,131)
-------- --------
INVESTING ACTIVITIES
Purchases of property and equipment......................... (734) (1,063)
Purchase of short-term investments.......................... (5,319) (7,430)
Proceeds from short-term investments........................ 26,206 21,824
Purchase of Mobix intellectual property..................... -- (12,300)
-------- --------
Net cash provided by investing activities......... 20,153 1,031
-------- --------
FINANCING ACTIVITIES
Repayment of shareholder loans.............................. (371) (457)
Proceeds from shareholders' notes receivable................ 506 339
Proceeds from issuance of ordinary shares, net.............. 527 17,106
-------- --------
Net cash provided by financing activities......... 662 16,988
-------- --------
Net increase in cash and cash equivalents................... 9,817 10,888
Cash and cash equivalents at beginning of the period........ 21,076 18,818
-------- --------
Cash and cash equivalents at end of the period.............. $ 30,893 $ 29,706
======== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
TRANSACTIONS
Issuance of ordinary shares for Mobix acquisition........... $ -- $ 4,000
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
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BACKWEB TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -- BackWeb Technologies Ltd. was incorporated under the laws
of Israel in August 1995 and commenced operations in November 1995. BackWeb
Technologies Ltd. and its subsidiaries (collectively, "BackWeb" or the
"Company") is a provider of Internet communication infrastructure and
applications software that enables companies to communicate business-critical,
time-sensitive information throughout their enterprise of customers, partners
and employees. BackWeb sells its products primarily to end users from a variety
of industries, including the telecommunications, financial and computer
industries; and through OEM arrangements.
The BackWeb group of companies consist of wholly owned subsidiaries
registered as follows: BackWeb Technologies, Inc., a U.S. corporation; BackWeb
Canada, Inc., a Canadian corporation; BackWeb Technologies B.V., a Netherlands
corporation; BackWeb Technologies (U.K.) Ltd., a United Kingdom corporation;
BackWeb Technologies GmbH, a German corporation; BackWeb Technologies S.a.r.l.,
a French corporation; BackWeb Technologies A.B., a Swedish corporation and
BackWeb K.K. Ltd., a Japanese corporation.
Basis of Presentation -- The unaudited interim condensed consolidated
financial statements include the accounts of BackWeb Technologies Ltd. and its
wholly owned subsidiaries. They have been prepared in accordance with
established guidelines for interim financial reporting and with the instructions
of Form 10-Q and Article 10 of regulation S-X. All significant intercompany
balances and transactions have been eliminated in consolidation. The balance
sheet at December 31, 2000 has been derived from audited financial statements at
such date. In the opinion of management, the consolidated financial statements
reflect all adjustments (consisting only of normal recurring adjustments to
fairly state the Company's financial position), results of operations and cash
flows for the period indicated. The interim consolidated financial statements
should be read in conjunction with the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
Revenue recognition -- The Company adopted Staff Accounting Bulletin 101
("SAB 101") issued by the Securities and Exchange Commission with effect from
the fourth quarter of the year ending December 31, 2000. The adoption of SAB 101
did not and is not expected to have a material effect on the Company's
consolidated balance sheets or results of operations.
The Company recognizes software license revenue in accordance with
Statement of Position 97-2, "Software Revenue Recognition" ("SOP 97-2"), as
amended. SOP 97-2 generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair value of the elements. The Company has also adopted SOP 98-9,
"Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain
Transactions" ("SOP 98-9"), for all transactions entered into after January 1,
2000. SOP 98-9 requires that revenue be recognized under the "Residual Method"
when vendor specific objective evidence (VSOE) of fair value exists for all
undelivered elements and no VSOE exists for the delivered elements.
To date, the Company has derived its revenue from license fees of its
products, maintenance, training and rendering of consulting services. The
Company sells its products primarily through its direct sales force, resellers
and OEMs.
Revenue from license fees is recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, no significant
obligations with regard to implementation remain, the fee is fixed or
determinable, and collectibility is probable. The Company does not grant a right
of return to its customers. When a right of return exists, the Company defers
revenue until the right of return expires, at which time revenue is recognized
provided that all other revenue recognition criteria have been met. If the fee
is not fixed or determinable, revenue is recognized as payments become due from
the customer provided that all other revenue recognition criteria have been met.
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BACKWEB TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
When contracts contain multiple elements wherein VSOE of fair value exists
for all undelivered elements, the Company accounts for the delivered elements in
accordance with the "Residual Method" prescribed by SOP 98-9. Maintenance
revenue included in these arrangements is deferred and recognized on a
straight-line basis over the term of the maintenance agreement. The VSOE of fair
value of the undelivered elements (maintenance, training and consulting
services) is determined based on the price charged for the undelivered element
when sold separately.
License revenues are comprised of perpetual or time-based license fees that
are primarily derived from contracts with corporate customers and resellers.
Royalty fees are earned upon delivery of products which incorporate the
Company's software and are recognized when reported to the Company after
delivery of the related products or in the case of extended payment terms being
granted they are recognized on an installment basis. Revenues on contracts with
resellers are not recognized until software is sold through to the end-user.
Service revenues are primarily comprised of revenues from standard
maintenance agreements, consulting and training fees. Customers licensing our
products generally purchase the standard annual maintenance agreement for the
products. Revenues from maintenance agreements are recognized on a straight-line
basis over the life of the maintenance period. Consulting services are billed at
an agreed upon rate plus out-of-pocket expenses and training services on a per
session basis. The Company recognizes service revenues from consulting and
training when provided to the customer.
Deferred revenue includes amounts received from customers for which revenue
has not been recognized.
Net Loss Per Share -- The basic and diluted net loss per share has been
computed using the weighted-average number of Ordinary shares outstanding during
the period.
The following table presents the calculation of the basic and diluted net
loss per ordinary share (in thousands, except share and per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------ ------------------------------
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- ------------- ------------- -------------
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
Net loss................................ $(11,607) $(9,759) $(19,543) $(11,911)
======== ======= ======== ========
Basic and diluted:
Weighted-average shares............... 38,349 37,320 38,271 36,937
Less weighted-average shares subject
to repurchase...................... (188) (225) (207) (397)
-------- ------- -------- --------
Weighted average number of shares used
in computing basic and diluted net
loss per share........................ 38,161 37,095 38,064 36,540
======== ======= ======== ========
Basic and diluted net loss per share.... $ (0.30) $ (0.26) $ (0.51) $ (0.33)
======== ======= ======== ========
Recently Issued Accounting Pronouncements -- In June 2001, the Financial
Accounting Standards Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations; and No. 142, Goodwill and Other Intangible
Assets (the "new rules"), effective for the fiscal years beginning after
December 15, 2001. Under the new rules, goodwill (and intangible assets deemed
to have indefinite lives) will no longer be amortized but will be subject to
impairment tests in accordance with the new rules. Other intangible assets will
continue to be amortized over their estimated useful lives. The Company will
apply the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of fiscal year 2002. Application of the
non-amortization provisions of the new rules is expected to result in an
increase in net income of approximately $1.6 million for fiscal 2002
(approximately $0.04 per share based on the shares outstanding as of June 30,
2001). During the fiscal year 2002, the Company will perform the first of the
required impairment tests of goodwill and intangible assets recorded as of
January 1, 2002. The Company has
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BACKWEB TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
not yet determined what the effect of these tests will be on the earnings and
the financial position of the Company.
NOTE 2. SELECTIVE BALANCE SHEET DETAIL
Cash Equivalents and Short-Term Investments -- Cash equivalents consist of
money market instruments, bank time deposits and debt-securities with original
maturities of 90 days or less. Short-term investments consist of debt securities
with original maturities between three months and two years.
Management determines the appropriate classification of debt and equity
securities at the time of purchase and evaluates such designation as of each
balance sheet date. To date, all debt securities have been classified as
"available-for-sale" and are carried at fair market value, based on quoted
market prices with material unrealized gains and losses, if any, included as a
separate component of shareholders' equity. Realized gains and losses and
declines in value of securities judged to be other than temporary are included
in interest income and have not been material to date. The cost of securities
sold is based on the specific identification method.
The following is a summary of the Company's investment portfolio as of June
30, 2001 (in $ thousands):
UNREALIZED ESTIMATED
COST LOSS FAIR VALUE
--------- ---------- ----------
UNAUDITED UNAUDITED UNAUDITED
Corporate debt securities........................... $22,977 $(61) $22,916
======= ==== =======
The accumulated and other comprehensive loss consists entirely of
unrealized losses on short-term investments. As of June 30, 2001 and December
31, 2000, the amount was $61,000 and $206,000, respectively.
Property and Equipment -- Property and equipment are stated at cost, net of
accumulated depreciation. Property and equipment are depreciated on a
straight-line basis over the estimated useful lives of the assets, generally two
to three years.
Property and equipment, at cost, consists of the following (in $
thousands):
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
UNAUDITED AUDITED
Computer and peripheral equipment........................... $ 3,742 $ 3,392
Office equipment, furniture, fixtures and other............. 2,479 2,251
Leasehold improvements...................................... 1,071 919
------- -------
7,292 6,562
Less accumulated depreciation............................... (3,386) (2,537)
------- -------
Property and equipment, net................................. $ 3,906 $ 4,025
======= =======
Write-Down of Equity Investments -- The Company invested during fiscal year
2000, $3.0 million in certain development companies in Internet centric
businesses in which the company believed it had a significant strategic
interest. However, due to the economic slowdown and the significant decline in
capital available to and in the valuations of the privately funded Internet
centric businesses, the Company believes that a portion of these investments has
become impaired. Accordingly, in the three-months ended June 30, 2001 the
Company has recorded a charge of $2.5 million to reflect impairment of these
assets below their recorded cost to represent what the Company's management
considers to be fair value.
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BACKWEB TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following (in $
thousands):
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
UNAUDITED AUDITED
Accounts payable............................................ $ 390 $ 770
Accrued compensation and related expense.................... 2,543 1,921
Sales events................................................ 423 377
Other....................................................... 1,901 4,192
------ ------
$5,257 $7,260
====== ======
NOTE 3. CREDIT FACILITIES
Bank Line of Credit -- In December 1998, BackWeb entered into a line of
credit agreement with TransAmerica Business Credit Corporation, which provides
for formula and nonformula revolving credit loans aggregating up to $6,500,000.
The line of credit is secured by substantially all of BackWeb's assets.
Borrowings under the line of credit bear interest at the bank's prime rate plus
2% - 4%. No amounts were outstanding at June 30, 2001 and December 31, 2000.
The amount available under the formula loans is limited to the lower of
$3,000,000 or an amount equal to 85% of eligible accounts receivable. The amount
available under the nonformula loans and term loans are $2,000,000 and
$1,500,000, respectively. As of June 30, 2001, BackWeb had $5,000,000 in unused
availability under the formula and nonformula line of credit.
Credit Risk -- Financial instruments, which potentially subject BackWeb to
concentrations of credit risk, consist of cash, cash equivalents, short-term
investments and trade receivables. BackWeb's cash and cash equivalents and
short-term investments generally consist of money market funds with high credit
quality financial institutions and corporate debt securities, which are invested
in major banks in the United States. Such investments in the United States may
be in excess of insured limits and are not insured in other jurisdictions.
Management believes that the financial institutions that hold the Company's
investments are financially sound and, accordingly, minimal credit risk exists
with respect to these investments. The Company has established guidelines
relative to credit ratings, diversification and maturity that seek to maintain
safety and liquidity. The Company from time to time engages in selling
receivables on a non-recourse basis with established commercial banking
institutions.
BackWeb sells its products to customers primarily in the United States.
BackWeb performs ongoing credit reviews of its customers' financial condition
and generally does not require collateral.
NOTE 4. COMMITMENTS AND CONTINGENCIES
Contingencies -- From time to time, the Company may have certain contingent
liabilities that arise in the ordinary course of its business activities. The
Company accounts for contingent liabilities when it is probable that future
expenditures will be made and such expenditures can be reasonably estimated. In
the opinion of management, there are no pending claims of which the outcome is
expected to result in a material adverse effect on the financial position or the
results of operations or cash flows of the Company.
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BACKWEB TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. SEGMENTS AND GEOGRAPHIC INFORMATION
BackWeb operates in one industry segment, the development and marketing of
network application software. Operations in Israel and Canada include research
and development and local sales. Operations in the U.S. and Europe include
marketing and sales. The following is a summary of operations within geographic
areas based on the location of the legal entity making that sale (in $
thousands):
JUNE 30, JUNE 30,
2001 2000
--------- ---------
UNAUDITED UNAUDITED
Revenues from sales to unaffiliated customers:
North America............................................. $ 3,674 $12,962
Israel.................................................... 6,781 4,764
Europe.................................................... 1,341 1,809
------- -------
$11,796 $19,535
======= =======
JUNE 30, DECEMBER 31,
2001 2000
--------- ------------
UNAUDITED AUDITED
Long-lived assets:
Israel.................................................... $1,363 $3,792
North America............................................. 2,862 3,034
Other..................................................... 181 199
------ ------
$4,406 $7,025
====== ======
Revenues generated in the U.S. and Canada (collectively, North America) and
Europe are all to customers located in those geographic regions. Revenues
generated in Israel consist of export sales to customers located in the Far East
and sales within Israel. One OEM accounted 47.0% and 14.0% of our revenues in
the six-months ended June 30, 2001 and June 30, 2000, respectively.
NOTE 6. ACQUISITION OF CERTAIN ASSETS
On June 27, 2000, BackWeb completed its acquisition (the "Acquisition") of
the software and intellectual property owned, licensed or developed by Mobix
Communications Ltd., ("Mobix") for an aggregate amount of $16.4 million,
pursuant to a Software and Asset Purchase Agreement among the Company, Mobix and
the principal shareholder of Mobix, (i) a cash payment of $9.6 million, and (ii)
a number of ordinary shares of BackWeb equal to $2.9 million in value (based on
the average daily closing price of BackWeb ordinary shares for the 15
consecutive trading days immediately preceding the closing of the Acquisition)
or 155,914 ordinary shares. Such shares were deposited in escrow together with
an additional $2.4 million in cash to satisfy Mobix's and the principal
shareholder's indemnification obligations and to secure the retention of certain
key employees of Mobix, (iii) BackWeb granted a number of stock options valued
at $1.1 million to retain two key employees from Mobix, (iv) Acquisition costs
amounted to $444,000.
BackWeb allocated the excess purchase price over the fair value of net
tangible assets acquired to the following indentifiable intangible assets: $8.4
million to in-process research and development ("IPR&D"). $5.3 million to
goodwill and $2.7 million to assembled work force and to other intangibles. As
of the acquisition date, technological feasibility of the in-process technology
has not been established and the technology had no alternative future use;
therefore, BackWeb expensed the amount of the purchase price allocated to IPR&D
of approximately $8.4 million as of the date of the Acquisition in accordance
with generally accepted accounting principles. The capitalized intangible assets
are being amortized on a straight-line basis over their estimated useful lives
of two to three years.
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BACKWEB TECHNOLOGIES LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7. SUBSEQUENT EVENTS
On July 2, 2001 the Company announced a restructuring plan. The
restructuring plan intended to reduce the Company's cost structure beginning in
the three-months ending September 30, 2001.
The restructuring plan includes the reduction in workforce, vacating
certain facilities, and canceling of office service leases as a result of
employee terminations and office consolidation. On July 9, 2001 the Company
terminated approximately 60 employees representing approximately 25% of the
Company's global workforce employed as of June 30, 2001. The restructuring
charges to be incurred during the three months ending September 30, 2001 are
estimated to be in the range of $1.5 to $1.9 million.
12
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ITEM 2. 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, our Consolidated Financial Statements and Notes thereto
included elsewhere herein, as well as the section on "Risk Factors" that is set
forth below. 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-Q.
OVERVIEW
BackWeb is a leading provider of Internet communication infrastructure
software and application-specific software that enables companies to communicate
business-critical, time-sensitive information to their customers, partners and
employees. We were incorporated on August 31, 1995 and commenced our operations
in November 1995. During the period from commencement of operations through
December 31, 1996, we were in a development stage and had insignificant
revenues. Operating activities during this period related primarily to
developing our products, building our corporate infrastructure and raising
capital. In December 1996, we shipped the first commercial version of our
software.
In August 1997, in an effort to expand the features and functionalities of
our product offerings, we acquired all the outstanding shares of Lanacom Inc., a
Canadian corporation. The acquisition has been accounted for using the purchase
method of accounting, and accordingly the purchase price has been allocated to
the tangible and intangible assets acquired and the liabilities assumed on the
basis of their respective fair value on the acquisition date. The purchase price
of $3.9 million was determined based on the value of shares originally issued
and options granted. Of the total purchase price, approximately $3.2 million was
allocated to goodwill, representing the excess of the aggregate purchase price
on the fair value of tangible and intangible assets. The remainder of the
purchase price was allocated to net tangible liabilities assumed ($103,000),
developed technology ($400,000) and other identifiable intangible assets
($383,000). Goodwill, developed technology and other identified intangibles are
amortized on a straight-line basis over the estimated useful life which ranges
from 24 to 30 months. The first BackWeb product, Version 4.0, incorporating
Lanacom's Headliner product, was released in January 1998.
In early 1998, we engaged in a comprehensive re-examination of our business
strategy and changed our strategic focus from a consumer-oriented to an
enterprise-oriented Internet communication company. In connection with this
change in strategy, we undertook a fundamental repositioning and reorganization
of our work force, particularly in our sales organization. During 1998, we
continued to enhance our infrastructure software, BackWeb Foundation Version
5.0, and in December 1998 released our first packaged application, BackWeb Sales
Accelerator. Since our inception, revenues have been derived primarily from the
licensing of our products and to a lesser extent from maintenance and support,
consulting and training services. The rate of growth of our service revenue is
not commensurate with the costs of service revenues such as salaries and related
expenses of our customer support and consulting organizations and cost of third
party contractors to provide consulting services. Accordingly, our gross margins
on service revenue are significantly lower than our gross margins on license
revenue. Our products are marketed worldwide through a combination of a direct
sales force, resellers, 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 Communication Ltd.,
for an aggregate amount of $16.4 million pursuant to a Software and Asset
Purchase Agreement among the Company, Mobix and the principal shareholder of
Mobix. 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 the expected 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 required 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.
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, reseller's
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, 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, or in the case of fixed
price arrangements over the course of the agreement.
Service revenues are primarily comprised of revenues from standard
maintenance agreements, consulting and training fees. Customers licensing our
products generally purchase these 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.
The functional currency of our operations is in 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 Shekels (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.
RESULTS OF OPERATIONS
Revenues
Our revenues are derived primarily from licensing of BackWeb Foundation and
BackWeb e-Accelerator and to a lesser extent from maintenance and support,
consulting and training services. Total revenues for the three-months ended June
30, 2001 was $4.6 million a decrease of approximately $6.0 million or 57.0% from
$10.6 million in the three-months ended June 30, 2000. Total revenues for the
six-months ended June 30, 2001 was $11.8 million a decrease of approximately
$7.7 million or 39.6% from $19.5 million in the six-months ended June 30, 2000.
The decreases were due to a decrease in license sales.
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Customers outside of the United States accounted for 68.2% of revenues in
the three-months ended June 30, 2001 compared to 44.9% of revenues in the
three-months ended June 30, 2000. Customers outside of the United States
accounted for 71.5% of revenues in the six-months ended June 30, 2001 compared
to 36.8% of revenues in the six-months ended June 30, 2000. Excluding indirect
revenues from our OEM Customers, revenues arising outside of the United States
accounted for 16.6% in the three-months ended June 30, 2001 compared to 19.0% of
revenues in the three-months ended June 30, 2000. Excluding indirect revenues
from our OEM Customers, revenues arising outside of the United States accounted
for 14.4% in the six-months ended June 30, 2001 compared to 14.7% of revenues in
the six-months ended June 30, 2000. One OEM accounted for 47.0% and 14.0% of our
revenues in the six-months ended June 30, 2001 and 2000, respectively.
License revenues were $2.8 million or 61.6% of revenues in the three-months
ended June 30, 2001 compared to $8.3 million or 78.5% of revenues in the
three-months ended June 30, 2000. License revenues were $8.0 million or 67.9% of
revenues in the six-months ended June 30, 2001 compared to $15.2 million or
77.9% of revenues in the six-months ended June 30, 2000 The decreases in license
revenues as a percentage of total revenues were primarily due to the decrease in
license revenues versus previous fiscal quarters. Service revenues were $1.8
million or 38.4% of revenues in the three-months ended June 30, 2001 compared to
$2.3 million or 21.5% of revenues in the three-months ended June 30, 2000.
Service revenues were $3.8 million or 32.1% of revenues in the six-months ended
June 30, 2001 compared to $4.3 million or 22.1% of revenues in the six-months
ended June 30, 2000. The decreases in service revenues as a percentage of total
revenues were primarily due to the decrease in service revenues versus previous
fiscal quarters.
Cost of Revenues
Cost of license revenues consists primarily of expenses related to media
duplication and packaging of products. Cost of license revenues was $174,000 or
6.2% of license revenues for the three-months ended June 30, 2001 compared to
$48,000 or 0.6% of license revenues for the three-months ended June 30, 2000.
Cost of license revenues was $272,000 or 3.4% of license revenues for the
six-months ended June 30, 2001 compared to $80,000 or 0.5% of license revenues
for the six-months ended June 30, 2000. Cost of service revenues consists
primarily of expenses related to salaries and expenses of the customer support
and professional service organizations, including related expenses of BackWeb
consultants and third party consultants. Cost of service revenues was $1.3
million, or 76.1% of service revenues, in the three-months ended June 30, 2001
compared to $1.6 million or 69.4% of service revenues, in the three-months ended
June 30, 2000. Cost of service revenues was $3.1 million, or 81.4% of service
revenues, in the six-months ended June 30, 2001 compared to $2.9 million or
67.7% of service revenues, in the six-months ended June 30, 2000. The increase
in cost of service as a percentage of revenues was due to reduced levels of
consulting revenue.
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 primarily based in Israel. Research and
development expenses were $2.6 million in the three-months ended June 30, 2001
compared to $2.1 million in the three-months ended June 30, 2000. Research and
development expenses were $5.1 million in the six-months ended June 30, 2001
compared to $4.0 million in the six-months ended June 30, 2000. Research and
development expenses were 56.6% and 20.2% of total revenue in the three-month
periods ended June 30, 2001 and 2000, respectively and were 43.6% and 20.4% for
the six-month periods ended June 30, 2001 and 2000, respectively. Research and
development expenses increased as a percentage of revenue principally due to
reduced levels of license and service revenue.
Sales and Marketing
Sales and marketing expenses consist of personnel and related costs for our
direct sales force and marketing employees, and marketing programs, including
trade shows, advertising, collateral, sales materials, seminars and public
relations. We have sales personnel in offices located in the United States,
Canada, Europe
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and Japan. Sales and marketing expenses were $6.0 million in the three-months
ended June 30, 2001 compared to $7.3 million in the three-months ended June 30,
2000. Sales and marketing expenses were $13.3 million in the six-months ended
June 30, 2001 compared to $14.2 million in the six-months ended June 30, 2000.
Sales and marketing expenses were 130.6% and 68.2% of total revenue in the
three-month periods ended June 30, 2001 and 2000, respectively and were 112.8%
and 72.6% for the six-month periods ended June 30, 2001 and 2000, respectively.
Sales and marketing expenses decreased due to reduced expenses but increased as
percentage of revenue due to reduced levels of license and service revenue.
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 debts. General and administrative expenses were $3.2
million in the three-months ended June 30, 2001 compared to $1.9 million in the
three-months ended June 30, 2000. General and administrative expenses were $6.4
million in the six-months ended June 30, 2001 compared to $3.5 million in the
six-months ended June 30, 2000. General and administrative expenses were 69.8%
and 17.5% of total revenue in the three-month periods ended June 30, 2001 and
2000, respectively and were 54.1% and 17.7% for the six-month periods ended June
30, 2001 and 2000, respectively. Excluding the provision for bad and doubtful
debts of $1.1 million and $0 for the three-months ended June 30, 2001 and June
30, 2000, respectively, the general and administrative expenses were $2.2
million and $1.9 million, respectively. Excluding the provision for bad and
doubtful debts of $2.2 million and $0 for the six-months ended June 30, 2001 and
June 30, 2000, respectively, the general and administrative expenses were $4.2
million and $3.5 million, respectively.
Amortization of Goodwill, Other Intangible Assets and Deferred Stock
Compensation
Amortization of goodwill, intellectual property, other intangible assets
and deferred stock compensation consists of amortization of goodwill and other
intangibles associated with our acquisition of Lanacom in August 1997, deferred
stock compensation for 1999, the 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 and other intangibles are being amortized on a straight-line basis over
the estimated useful life, generally two to two and one-half years. Deferred
stock compensation is presented as a reduction of shareholders' equity and is
amortized over the vesting period of the underlying options based on an
accelerated vesting method. Amortization expense was $168,000 for the
three-months ended June 30, 2001 compared to $278,000 in the three-months ended
June 30, 2000. Amortization expense was $337,000 for the six-months ended June
30, 2001 compared to $557,000 in the six-months ended June 30, 2000.
Finance and Other Income, Net
Finance and other income, (net) includes interest income earned on our
cash, cash equivalents and short-term investments offset by interest expense.
Other income and expense also includes the effects of exchange gains and losses
arising from the re-measurement of transactions in foreign currencies. For the
three-months ended June 30, 2001, finance and other income was $533,000 compared
to $1.2 million in the three-months ended June 30, 2000. For the six-months
ended June 30, 2001, finance and other income was $1.2 million compared to $2.3
million in the six-months ended June 30, 2000.
Write-Down of Equity Investments
The Company invested during fiscal year 2000, $3.0 million in certain
development companies in Internet centric businesses in which the company
believed it had a significant strategic interest. However, due to the economic
slowdown and the significant decline in capital available to and in the
valuations of the privately funded Internet centric businesses, the Company
believes that a portion of these investments has become
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impaired. Accordingly, in the three-months ended June 30, 2001 the Company has
recorded a charge of $2.5 million to reflect impairment of these assets below
their recorded cost to represent what the Company's management considers to be
fair value.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001 the Company had cash, cash equivalents and short-term
investments of $53.8 million, which represents a decrease of $10.9 million as
compared to December 31, 2000.
Net cash used in operating activities was $11.0 million and $7.1 million
for the six-months ended June 30, 2001 and 2000, respectively and was primarily
used in funding the operations of the ongoing business needs. Cash provided by
investing activities was $20.2 million and $1.0 million for the six-months ended
June 30, 2001 and 2000, respectively. Cash provided by financing activities was
$662,000 and $17.0 million for the six-months ended June 30, 2001 and 2000,
respectively, and consists primarily of proceeds from the issuance of ordinary
shares.
Our capital requirements depend on numerous factors, including market
acceptance of our products, the resources we devote to developing, marketing,
selling and supporting our products, the timing and extent of establishing
additional international operations and other factors. We expect to devote
substantial capital resources to hire and expand our sales, support, marketing
and product development organizations, to expand marketing programs 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 June 30, 2001, the Company had $5,000,000 in an unused, available
line-of-credit facility. See Note 3. "Credit Facilities" to the Condensed
Consolidated Financial Statements.
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 June 30, 2001, we have not yet
used the tax benefits for which we are eligible. See "Risk Factors".
IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Most of our sales are in U.S. dollars. However a large portion of our costs
are incurred in relation to our operations in Israel. A substantial portion of
our operating expenses, primarily our research and development costs, are
denominated in NIS. Costs not denominated in U.S. dollars are translated to U.S.
dollars, when recorded, at prevailing rates of exchange. This is done for the
purposes of our financial statements and reporting. Costs not denominated in
U.S. dollars will increase if the rate of inflation in Israel exceeds the
devaluation of the Israeli currency as compared to the U.S. dollar or if the
timing of such devaluations were to lag considerably behind inflation.
Consequently, we are and will be affected by changes in the prevailing NIS/ U.S.
dollar exchange rate. We might also be affected by the U.S. dollar exchange rate
to the major European and Asian currencies due to the fact that we operate
offices throughout Europe and Asia.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, Business Combinations; and No. 142,
Goodwill and Other Intangible Assets (the "new rules"), effective for the fiscal
years beginning after December 15, 2001. Under the new rules, goodwill (and
intangible assets deemed to have indefinite lives) will no longer be amortized
but will be subject to impairment tests in accordance with the new rules. Other
intangible assets will continue to be amortized over their estimated useful
lives. The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of fiscal year 2002.
Application of the non-amortization provisions of the new rules is expected to
result in an increase in net income of approximately $1.6 million for fiscal
2002 (approximately $0.04 per share based on the shares outstanding as of June
30, 2001). During the fiscal year 2002, the Company will perform the first of
the required impairment tests of goodwill and intangible assets recorded as of
January 1, 2002. The Company has not yet determined what the effect of these
tests will be on the earnings and the financial position of the Company.
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.
WE RECENTLY INSTITUTED A COST RESTRUCTURING PLAN AND CANNOT GUARANTEE ITS
SUCCESS
On July 2, 2001, we announced a restructuring plan that was intended to
reduce the Company's cost structure. The restructuring plan includes the
reduction of workforce, vacating certain facilities, and canceling of office
service leases as a result of employee terminations and office consolidation. We
cannot guarantee that the restructuring plan will have the intended result of
decreasing our cost structure to anticipated levels. Further, the loss of
personnel could result in our inability to provide satisfactory service to our
existing customers, to compete for and take advantage of new business
opportunities, or to maintain or increase our market share. Any of the these
results would have a material adverse effect on our business and our operating
results.
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 $19.5
million for the six-months ended June 30, 2001, $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 June 30, 2001, we had an
accumulated deficit of approximately $87.7 million. 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-
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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.
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, PAS and
Shadow.
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;
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- loss of customers;
- changes in the growth rate of Internet usage;
- delays in introducing new products and services;
- new product introductions by competitors;
- changes in our pricing policies or the pricing policies of our
competitors;
- costs related to acquisitions of technology or businesses; and,
- economic conditions generally as well as those specific to the Internet
and related industries.
Due to the foregoing factors, we believe that quarter-to-quarter
comparisons of our operating results are not a good indication of our future
performance. It is likely that in some future quarter, our operating results may
be below the expectation of public market analysts and investors.
WE ANTICIPATE INCREASED OPERATING EXPENSES, WHICH COULD CAUSE OUR BUSINESS TO
SUFFER IF WE DO NOT CORRESPONDINGLY INCREASE REVENUES
We plan to significantly increase our operating expenses to expand our
sales and marketing operations, broaden our customer support capabilities,
improve operational and financial systems, develop new distribution channels and
fund greater levels of research and development. If we do not significantly
increase our revenues to meet these increased expenses, our business will
suffer.
OUR GROWTH MAY SUFFER BECAUSE OF THE DIFFICULTIES IN IMPLEMENTING OUR PRODUCTS
The use of our products by our customers 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 the six-months ending
June 30, 2001 one OEM customer accounted for approximately 47% of our total
revenues. 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.
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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 as needed to meet market demand.
Currently, we believe we will need to significantly expand our sales and
marketing organization. We might not be able to hire or retain the kind and
number of sales and marketing personnel we are targeting because competition for
qualified sales and marketing personnel in the Internet communications market is
intense.
FAILURE TO DEVELOP KEY STRATEGIC RELATIONSHIPS COULD LIMIT OUR GROWTH
We believe that our success in penetrating our target markets depends in
part on our ability to develop and maintain strategic relationships with key
independent software vendors (ISVs), resellers, systems integrators,
distribution partners and customers. If we fail to develop these strategic
partnerships, our growth could be limited.
WE MAY EXPERIENCE DIFFICULTIES MANAGING OUR EXPECTED GROWTH AND GEOGRAPHIC
DISPERSION
Our ability to successfully offer products and services and to implement
our business plan in the rapidly evolving Internet communications market
requires an effective planning and management process. We continue to increase
the scope of our operations domestically and internationally and expect to grow
our headcount substantially depending on market conditions.
These factors together with our anticipated future operations and
geographic dispersion will continue to place, a significant strain on our
management systems and resources. We expect that we will need to continue to
improve our financial and managerial controls and reporting systems and
procedures, and expand, train and manage our work force worldwide.
OUR INTELLECTUAL PROPERTY COULD BE USED BY THIRD PARTIES WITHOUT OUR CONSENT
BECAUSE PROTECTION OF OUR INTELLECTUAL PROPERTY IS LIMITED
Our success and ability to compete are substantially dependent upon our
internally developed technology, which we protect through a combination of
patent, copyright, trade secret and trademark law. However, we may not be able
to adequately protect our proprietary rights, which may harm our business.
Unauthorized parties may attempt to copy or otherwise obtain and use our
products or technology. Policing unauthorized use of our products is difficult,
and we cannot be certain that the steps we have taken will prevent
misappropriation of our technology, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the United States.
OUR PRODUCTS MAY BE USED IN AN UNINTENDED AND NEGATIVE MANNER
Our products are used to transmit information through the Internet. Our
products could be used to transmit harmful applications, negative messages,
unauthorized reproduction of copyrighted material, inaccurate data, or computer
viruses to end-users in the course of delivery. Any such transmission could
damage our reputation or could give rise to legal claims against us. We could
spend a significant amount of time and money defending against these legal
claims.
OUR PROPRIETARY TECHNOLOGY MAY BE SUBJECT TO INFRINGEMENT CLAIMS
Substantial litigation regarding intellectual property rights exists in the
software industry. A successful claim of product infringement against us and our
failure or inability to license the infringed or similar 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;
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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 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 certain 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
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license to engage in these activities expires May 2002. 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 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 40.4% 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.
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WE HAVE ADOPTED ANTI-TAKEOVER PROVISIONS THAT COULD DELAY OR PREVENT AN
ACQUISITION OF BACKWEB, EVEN IF AN ACQUISITION WOULD BE BENEFICIAL TO OUR
SHAREHOLDERS
Provisions of Israel corporate and tax law and of our articles of
association may have the effect of delaying, preventing or making more difficult
a merger or other acquisition of BackWeb, even if an acquisition would be
beneficial to our shareholders.
Israeli corporate law regulates acquisitions of shares through tender
offers, requires special approvals for transactions involving significant
shareholders and regulates other matters that may be relevant to these types of
transactions. Furthermore, Israel tax considerations may make potential
transactions unappealing to us or to some of our shareholders. In addition, our
charter documents provide for a staggered board of directors.
THE NEW ISRAEL COMPANIES LAW MAY CAUSE UNCERTAINTIES REGARDING CORPORATE
GOVERNANCE
The new Israel Companies Law, which became effective on February 1, 2000,
has brought about significant changes to Israel corporate law. Under this new
law, there may be uncertainties regarding corporate governance in some areas.
These uncertainties will persist until this new law has been adequately
interpreted, and these uncertainties could inhibit takeover attempts or other
transactions and inhibit other corporate decisions.
OUR BOARD OF DIRECTORS CAN AUTHORIZE AND EXPAND THE NUMBER GRANTED UNDER OUR
1996 ISRAELI EMPLOYEE STOCK OPTION PLAN
Under Israeli law, our Board of Directors may authorize additional shares
to be issued under our 1996 Israeli Employee Stock Option Plan. Such action does
not require an amendment to such plan or shareholder approval under Israeli law
(but may in certain cases, require approval under the rules applicable to
companies listed on the NASDAQ Stock Market). The Board's ability to expand the
number of shares to be granted under such plan is governed by and limited by the
fiduciary duties of each Board member under Israeli corporate law and the
remaining number of our authorized shares which are not outstanding. Any such
Board actions may result in dilution to the ownership interest of existing
shareholders.
OUR BOARD OF DIRECTORS HAS LIMITED THE NUMBER OF OPTIONS THAT IT MAY GRANT UNDER
OUR AMENDED AND RESTATED 1998 U.S. STOCK OPTION PLAN, BUT IT CAN REMOVE THE
LIMITATION WITHOUT OBTAINING SHAREHOLDER APPROVAL
Our shareholders have approved the issuance, under our Amended and Restated
1998 U.S. Stock Option Plan, of options to purchase up to 12.9 million shares as
of June 30, 2001. Our Board of Directors has adopted a resolution to limit the
issuance under that plan to approximately 10.6 million shares. Our Board of
Directors has the authority, without obtaining shareholder approval, to remove
or reduce the limitation, which could cause dilution to our existing
shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop products in Israel and sell them in North America, Asia and
Europe. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As most of our sales are currently made in U.S. dollars, a
strengthening of the dollar could make our products less competitive in foreign
markets. Our interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of our investments are in
short-term instruments. We regularly assess these risks and have established
policies and business practices to protect 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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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON CHANGES OF SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 Articles of Association of Registrant*
3.2 Memorandum of Association of Registrant (English
translation)*
4.1 Specimen of Ordinary Share Certificate*
4.2 Fourth Amended and Restated Rights Agreement*
4.3 Form of Liquidity Proposal between BackWeb Technologies,
Ltd. and the Exchangeable Shareholders*
---------------
(*) Incorporated herein by reference to the corresponding Exhibit from the
Company's Registration Statement on Form F-1 (File No. 333-10358).
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the six-months
ended June 30, 2001
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BACKWEB TECHNOLOGIES LTD.
Date: August 10, 2001 By: /s/ CHRISTOPHER C. MARHSALL
----------------------------------------------------
Christopher C. Marshall
Vice President of Finance and
Chief Accounting Officer
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