Filed Pursuant to Rule 424(b)(5)
File No. 333-46192
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED June 1, 2001)
Commtouch Software Ltd.
315,789 Ordinary Shares
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Commtouch Software Ltd. is offering 315,789 of its ordinary shares to
Rideau Ltd. pursuant to a purchase agreement with Rideau.
The shares are being sold at an average price of $1.056 per share
($333,000 in aggregate gross proceeds) based on recent trading prices of our
shares on the Nasdaq National Market, less a discount of 10% (aggregate discount
of $33,000) or $0.106 per share. We will receive aggregate net proceeds of
$300,000. See "Offer Statistics and Expected Timetable" beginning on page S-3 of
this prospectus supplement.
The shares are quoted on the Nasdaq National Market under the symbol
"CTCH." On May 31, 2001, the closing sale price of the shares was $1.04 per
share.
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This investment involves a high degree of risk. See Risk Factors
beginning on page 7 of the prospectus attached to this prospectus supplement.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus supplement is June 1, 2001.
TABLE OF CONTENTS
About this Prospectus Supplement.............................................S-2
Special Note Regarding Forward-Looking Information...........................S-2
The Offering.................................................................S-3
Offer Statistics and Expected Timetable......................................S-3
Dilution.....................................................................S-5
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ABOUT THIS PROSPECTUS SUPPLEMENT
Unless otherwise indicated, all references in this document to
"Commtouch," "the Company," "we," "us" or "our" are to Commtouch Software Ltd.
or its wholly-owned and majority-owned subsidiaries, Commtouch Inc., Commtouch
(UK) Ltd, Commtouch Latin America Inc., Wingra Technologies Inc. and Commtouch
K.K. (Japan).
This prospectus supplement and the attached prospectus are parts of a
registration statement that we filed with the Securities and Exchange Commission
under which we may sell up to 4,000,000 of our ordinary shares in one or more
offerings. The prospectus provides general information about us and our proposed
ongoing offering of the 4,000,000 shares. This prospectus supplement provides
specific information about the offering of 117,180 shares to Rideau. You should
read both this prospectus supplement and the prospectus carefully.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This document contains forward-looking statements that involve risks
and uncertainties. These statements relate to our future plans, objectives,
beliefs, expectations and intentions. In some cases, you can identify
forward-looking statements by our use of words such as "expects," "anticipates,"
"believes," "intends," "plans," "seeks" and "estimates" and similar expressions.
Our actual results, levels of activity, performance or achievements may differ
materially from those expressed or implied by these forward-looking statements.
Factors that could cause or contribute to these differences include those
discussed in our Annual Report on Form 20-F, as amended, which is on file with
the Securities and Exchange Commission.
S-2
THE OFFERING
Ordinary shares offered ..................................... 315,789 shares
Ordinary shares outstanding after the offering .............. 17,563,117 shares
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Except as stated in the Consolidated Financial Statements and related
Notes incorporated by reference into the prospectus and except as otherwise
specified in this prospectus supplement and the prospectus, all information in
this prospectus supplement and the prospectus is based on the number of shares
outstanding as of March 31, 2001, and:
o assumes the issuance of 276,744 ordinary shares issuable upon
exercise of options granted to executive officers and
directors within 60 days of March 31, 2001 at a weighted
average exercise price of $19.21 per share.
o with respect to financial information, is reported in U.S.
dollars;
and does not include:
o 1,598,239 ordinary shares issuable to employees and
consultants upon exercise of outstanding options under our
stock option plans and stock option agreements as of March 31,
2001 at a weighted average exercise price of $19.36 per share;
and
o 1,878,067 ordinary shares available for future grant or
issuance under our stock option and stock purchase plans as of
March 31, 2001.
OFFER STATISTICS AND EXPECTED TIMETABLE
Commtouch has entered into an agreement under which it will sell up to
$300,000 in market value of it ordinary shares at a discount to Rideau Ltd., a
Bahamian corporation.
The price Rideau will pay for these shares is $0.95. Settlement will
occur within two business days.
S-3
Rideau's obligation to purchase shares is subject to the following
conditions, among others:
o Our ordinary shares continue to be traded on the Nasdaq
National Market.
o Trading in securities generally as reported by the Nasdaq
National Market has not been suspended or limited, and no
minimum prices have been established on securities traded on
the American Stock Exchange or the New York Stock Exchange.
o The registration statement under which the shares are to be
sold must remain effective and we must have enough unsold
registered shares to deliver to Rideau.
o There has not been a material adverse effect on our business,
operations, properties, or financial condition.
At any given time, we might not be able to satisfy all of these conditions. If
not, we would likely need to raise money from other sources in order to continue
to fund our operations. Such alternative funding might not be available. Also,
we cannot put shares to Rideau at a time when we have not publicly disclosed
material information about us.
We also agreed to indemnify Rideau, and it agreed to indemnify us, in
the event either of us suffers specified losses or liabilities in connection
with actions of the other related to sales under the purchase agreement and the
registration statement.
The shares issuable to Rideau are freely tradable and will come from
the 4,000,000 shares we previously registered under a registration statement
declared effective by the Securities and Exchange Commission in December 2000.
Our arrangements with Rideau do not affect our equity line purchase
agreement with Torneaux, which remains in full force and effect. Under that
agreement Torneaux agreed to invest in our ordinary shares provided the share
price is above $2 or a lower amount if mutually agreed. Recently, our ordinary
shares have been trading at below that price.
S-4
The settlement and issuance of shares to Rideau will occur on June 4,
2001. At that time, we will issue 315,789 shares to Rideau. The shares are being
sold at an average price of $1.056 per share ($333,000 in aggregate gross
proceeds) based on recent trading prices of our shares on the Nasdaq National
Market, less a discount of 10% (aggregate discount of $33,000) or $0.106 per
share. We will receive net proceeds of $300,000.
Status as Underwriter. Rideau is an "underwriter" within the meaning of
the Securities Act in connection with the share purchase described above.
Broker-dealers or other persons acting on behalf of Rideau or on behalf of each
other that participate in the distribution of the shares may also be deemed
underwriters. Any commissions or profits they receive on the resale of the
shares may be deemed to be underwriting discounts and commissions under the
Securities Act. Rideau's address is Rideau Ltd., c/o Eurodutch Company,
Charlotte House, Charlotte Street, Nassau, Bahamas Attn: Dierdre McCoy.
DILUTION
Our net tangible book value as of March 31, 2000 was $30.1 million or
$1.74 per ordinary share. Net tangible book value per share is determined by
dividing the amount of our total tangible assets less total liabilities by the
number of ordinary shares outstanding at that date. Dilution/accretion in net
tangible book value per share represents the difference between the amount per
share paid by purchasers of ordinary shares in this offering and the net
tangible book value per ordinary share immediately after the completion of this
offering.
After giving effect to our sale to Rideau of 315,789 ordinary shares at
a price of $0.95 per share and after deducting our estimated offering expenses,
the pro forma net tangible book value of Commtouch at March 31, 2001 would have
been $30.4 million, or $1.73 per share. This represents an immediate decrease in
pro forma as adjusted net tangible book value of $0.01 per share to the existing
shareholders and an immediate accretion of $0.78 per share to new investors
purchasing ordinary shares in this offering. The following table illustrates
this per-share dilution:
Offering price per share..................................... $ 0.95
Net tangible book value per share as of March 31, 2001....... $ 1.74
Decrease in pro forma as adjusted net tangible book
value per share attributable to this offering....... $ 0.01
Pro forma as adjusted net tangible book value per
share after the offering............................ $ 1.73
Accretion per share to new investors......................... $ 0.78
S-5
The above table assumes no exercise of options after March 31, 2001. As of March
31, 2001, there were outstanding options to purchase a total 2,476,919 ordinary
shares under our stock option plans and option agreements with our employees and
consultants, and executive officers and directors, at a weighted average
exercise price of $19.10 per share, and 1,878,067 ordinary shares available for
future grant under our stock option grants. If all of these outstanding options
had been exercised on March 31, 2001, our pro forma net tangible book value on
that date would have been $77.7 million, or $3.93 per share, the increase in net
tangible book value per share attributable to the existing investors would have
been $2.20 per share and the accretion in net tangible book value to new
investors would have been $2.98 per share.
S-6
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Commtouch Software Ltd.
4,000,000 Ordinary Shares
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With this prospectus, we may offer up to 4,000,000 of our ordinary shares. We
will provide specific terms for each offer and sale of the ordinary shares in
supplements to this prospectus. You should read this prospectus and the relevant
prospectus supplement carefully before investing in our ordinary shares. The
ordinary shares are quoted on the Nasdaq National Market under the symbol
"CTCH." On May 30, 2001, the closing sale price of the ordinary shares was $1.02
per share.
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This investment involves risk. See "Risk Factors" beginning on page 7.
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Neither the Securities and Exchange Commission nor any state securities
Commission has approved of anyone's investment in these securities or determined
if this prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
The date of this Prospectus is May 31, 2001
TABLE OF CONTENTS
Page
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Summary .................................................................... 1
Risk Factors ............................................................... 4
The Offer and Listing....................................................... 17
Reasons for Offer Use of Proceeds .......................................... 18
Description of Share Capital ............................................... 19
Shares Eligible for Future Sale ............................................ 23
Plan of Distribution ....................................................... 24
Legal Matters .............................................................. 27
Experts .................................................................... 27
Where You Can Find More Information ........................................ 27
Information Incorporated by Reference ...................................... 28
Enforceability of Civil Liabilities ........................................ 28
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SUMMARY
Unless otherwise indicated, all references in this prospectus to "Commtouch,"
"the Company," "we," "us" or "our" are to Commtouch Software Ltd. or its
wholly-owned and majority-owned subsidiaries, Commtouch Inc., Commtouch (UK)
Ltd, Commtouch Latin America Inc., Wingra Technologies Inc. and Commtouch K.K.
(Japan).
Commtouch
We are a leading global provider of outsourced email and messaging solutions to
small, medium and large enterprises and their service providers, as well as
internet-centric organizations including web portals and web sites.
Our main target customers include companies that specialize in providing
communications applications to enterprises: ASPs, ISPs, telecoms, CLECs,
wireless carriers, data centers, systems integrators, and IT consultants.
Email and messaging is complex and requires focus to implement, deliver and
maintain. Today's robust solutions include: the ability to address both
front-end and back-end requirements, anytime-anywhere access, and features such
as anti-virus protection, unified messaging, calendaring, group scheduling, file
sharing, and collaboration. Technologies for the future are necessitating that
email and messaging adapt and change with the new innovations. With outsourced
email and messaging being less expensive to construct and maintain than in-house
"build" solutions, and with IT developers and administrators in short supply,
and companies needing to focus resources on their area of core expertise, the
demand for outsourced email and messaging has proliferated in the last several
years. Our flexible technology and economies of scale enable us to provide email
solutions in a cost-effective manner, allowing businesses to achieve significant
economic advantages. As rapid time to market is often critical to our customers,
our reputation for quick deployment is a significant advantage in the outsourced
email and marketing industry. Additionally, we provide comprehensive maintenance
and administration of our email services, which eliminates the need for our
customers to undertake the significant burden of developing and maintaining an
in-house email system.
With 10 years of experience in email and messaging and providing services in 26
languages in 180 countries, we have proven that our solutions, which utilize the
cost-efficient Microsoft NT(R) platform, are quickly deliverable, scalable,
reliable, and integrate well with a variety of communications applications that
enterprises view as critical to providing them with a mission critical service
and competitive advantage in the marketplace.
In addition to providing the infrastructure and software for enterprise-grade
email and messaging solutions, we are also a service-driven company, providing
24/7 management for the customer, either remotely or onsite. We offer a variety
of professional services to enterprises: facilitating the transition from legacy
email and messaging systems to new, advanced systems (via our subsidiary Wingra
Technologies); integrating email and messaging with such applications as
wireless communications, video and audio communications, and customer relations
management; and allowing for unified communications in which email, instant
messaging, voice, and other data communications are accessible anytime,
anywhere.
We are recognized as one of the few companies with the depth and breadth of
expertise in email and messaging. We currently partner with a variety of
organizations. We provide service level agreements (SLAs) for our customers that
use our enterprise-grade email and messaging solutions.
We offer outsourced anytime-anywhere email and messaging solutions to three
segments of the market:
Large enterprises and their service providers
o Hosted Exchange
o Our carrier-grade messaging and collaboration hosting
service enables small and medium enterprises and their service
providers to create, store and share information, as well as
act on that information with speed and intelligence.
o Our service is built on top-quality-hardware. The
Microsoft(R) Exchange Hosting service includes the complete
management and monitoring of systems, technical support and
comes with a 99.5% availability guarantee.
o Our users benefit from McAfee(TM) virus protection and spam
blocking, full Outlook functionality, and enhanced Outlook Web
Access as well as public folders. Another feature,
xManage(TM), a Commtouch developed, secure web-based
administration tool, is brandable for resellers.
o xManage is a web-based service management tool that provides
enterprises and resellers the ability to enable end-customers
and users to self-administer their otherwise complex hosted
Exchange environments without training, support or technical
knowledge. xManage is the industry's leading tool for
delivering Total Cost of Ownership (TCO) savings to
corporations, as well as speed to market and customer value
for new Exchange 2000 hosting resellers.
o Our optional services include VPN (virtual private network)
support, a 99.9% high-availability Service Level Agreement
(SLA) and automated mail migration via Exchange Migrator(TM),
built by our subsidiary Wingra.
o Our growing list of advanced features that are scheduled to
be rolled out during 2001 include wireless access, content
filtering and policy management, as well as unified messaging
features.
Service Providers Targeted at Small and Medium Size Enterprises
o Our Service Provider Solution enables service providers to
easily manage the email and messaging features/services that
they in turn provide to their end users, mainly small and
medium size enterprises. Our solution provides:
o Anytime, anywhere access to accounts from standard
desktop email clients (e.g. Microsoft Outlook,
Qualcomm Eudora, or Netscape Messenger), Web browsers
and wireless devices, such as WAP-enabled mobile
phones.
o Message notification on an advanced platform, to
pagers, mobile phones, instant messengers and other
email addresses.
o Integrated, Web-based applications, including
calendar, task manager, contact center, notes, short
message service (SMS), and more.
o Customization of the Web email client interface to
extend an organization's brand.
o Multiple language support for a multilingual user
base.
o We also offer Service Providers the option to license and
install our software and technology, where circumstances
allow. In this offering, the customer licenses the Service
Provider Solution, installs it in-house, and offers messaging
and email from its own data center facility. Advantages and
features include:
2
o A complete software version of the Service Provider
Solution, including all advanced features mentioned
above.
o Complete design of the required architecture for
running the Software.
o A dedicated installation team to install the system
and software in a timely and cost effective fashion.
o A pricing model based on an upfront license fee,
and an annual 20% support contract.
o An optional 24/7 remote monitoring and system
administration function for customers that require
on-going management.
o Our Service Provider Solution provides comprehensive
administrative capabilities
o Our well-documented XML APIs (application
programming interface) allow a service provider to
integrate email administrative activities and
customer data into its current applications and
systems.
o Our domain-level management gives the service
provider the option of delegating administration to
its customer to lower the service provider's support
costs.
o Our detailed reports provide essential information
for billing and usage statistics.
o Our ability to fully secure SSL management
transactions ensure that service provider's data is
safe.
o Our Online Management Center (OMC) provides the
service provider with a user-friendly administration
interface equipped with a broad-range of account
provisioning functionality, as an alternative to
using APIs.
Internet-centric organizations (web portals and web sites that provide
free email and messaging to their customers and site visitors)
o Our solution is easy to use and provides a broad range of
functionality. This includes the ability for end users to
collect email from other email accounts, create folders,
attach electronic documents, store messages, maintain a
contact center, maintain an integrated calendar, create
distribution lists and establish user profiles and signatures.
Our service uses IMAP4, an advanced email protocol, which
allows email folders to be accessed from multiple email
environments.
o The value of our solution is increased by our provision of
additional services, such as those which allow end users to
send and receive voicemail and pages from the emailbox; access
the Web-based emailbox from an off-line client (such as
Microsoft Outlook); and have email forwarded to other
addresses.
o Our solutions are aimed at increasing the potential for our
customers to generate revenue by increasing the "stickiness"
of their websites. We believe that traffic to our customers'
websites should increase as end users frequently visit the
website to check their email. The benefits of increased
website stickiness include more frequent communication with
end users, enhanced customer loyalty and the potential
opportunity to generate revenues from advertising, direct
marketing and e-commerce transactions.
3
Because we have a limited operating history providing outsourced email services
to the service provider, telecommunications and enterprise markets, it is
difficult to evaluate our business and prospects. We commenced operations in
1991, but we began commercially selling Web-based email services only in 1998
after changing our strategic focus from the sale, maintenance and service of
stand-alone email client software products for mainframe and personal computers.
During the third quarter of 2000, we began the process of repositioning the
company to provide outsourced email and messaging services to the service
provider, telecommunications and enterprise markets primarily through channel
partners. This change required us to adjust our business processes and to
restructure Commtouch to become an outsourced email service provider. Therefore,
we have only a limited operating history as a provider of email services upon
which you can evaluate our business and prospects. It is too early to judge the
success of this service offering, the enterprise focus and distribution through
channel partners. We incurred net losses of approximately $4.4 million in 1998,
$19.9 million in 1999, $54.2 million in 2000 and $17.1 million in the first
quarter of 2001. As of March 31, 2001, we had an accumulated deficit of
approximately $102.9 million. We have not achieved profitability in any period,
and we expect to continue to incur net losses for the foreseeable future. If we
do achieve profitability, we may not sustain or increase profitability in the
future. This may, in turn, cause our share price to decline.
Office Location
Our principal executive offices are located at 6 Hazoran Street, Poleg
Industrial Park, Netanya 42504, Israel, where our telephone number is
011-972-9-863-6888, and 2029 Stierlin Court, Mountain View, California
94043-4655, where our telephone number is (650) 864-2000. Our website addresses
are www.commtouch.com and www.zzn.com. The information contained on our websites
is not a part of this prospectus.
RISK FACTORS
You should carefully consider the following risk factors before you decide to
buy our ordinary shares. You should also consider the other information in this
prospectus. If any of the following risks actually occur, our business,
financial condition, operating results or cash flows could be materially
adversely affected. This could cause the trading price of our ordinary shares to
decline, and you could lose part or all of your investment. The risks described
below are not the only ones facing us. Additional risks not presently known to
us, or that we currently deem immaterial, may also impair our business
operations. This prospectus contains forward-looking statements that involve
risks and uncertainties. These statements relate to our future plans,
objectives, beliefs, expectations and intentions. In some cases, you can
identify forward-looking statements by our use of words such as "expects,"
"anticipates," "believes," "intends," "plans," "seeks" and "estimates" and
similar expressions. You will find forward-looking statements under the captions
"Summary," "Risk Factors," "Reasons for Offer and Use of Proceeds," and
elsewhere in this prospectus and the information incorporated by reference into
this prospectus. Our actual results, levels of activity, performance or
achievements may differ materially from those expressed or implied by these
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this prospectus and
the information incorporated by reference into this prospectus.
RECENT DEVELOPMENTS
On January 2, 2001, we announced that, in the wake of the economic downturn and
changes in market demand, we had initiated several internal changes to better
serve the enterprise messaging market. These internal changes include reducing
our operating expenses associated with supporting the dot-com and destination
site markets, closing our e-commerce division and email services for small
community sites, and promoting greater efficiencies in channel sales and
marketing to the enterprise market. Those changes were designed to reduce our
4
worldwide headcount by approximately 20% and, combined with other cost savings,
reduce overall operating expenses by $16 million from the operating plan for
2001.
On February 14, 2001, we reported a net loss for the fourth quarter of 2000 of
$24.1 million, or a loss of $1.51 a share, compared with a net loss of $7.4
million, or a loss of $0.51 a share for the fourth quarter of 1999. Total
revenues rose to $5.3 million for the quarter from $2.2 million in the fourth
quarter of 1999. We also said we expected to restate our revenue and net loss
for the first three quarters of 2000. We stated that first-quarter revenue would
be restated downwards to $3.6 million from $4.3 million, second-quarter revenue
would be restated downwards to $5.0 million from $5.9 million and third-quarter
revenue would be restated downwards to $5.2 million from $8.1 million. We said
our net loss for the first quarter would be restated to $9.1 million from a net
loss of $8.5 million, our second-quarter net loss would be restated to $10.8
million from $9.9 million and our third-quarter net loss would be restated to
$10.2 million from $7.6 million. On March 22, 2001, we filed amendments to Forms
6-K which included restated financial statements for the first, second and third
quarters of 2000.
On March 1, 2001, we announced that we are reorganizing our business to enhance
our focus on enterprise messaging solutions. Accordingly, we expect to focus our
operations on three enterprise messaging businesses: Commtouch core email and
messaging service for the enterprise market which include the recently launched
Microsoft Hosted Exchange service offering; the enterprise messaging migration
and integration technologies business through our wholly-owned subsidiary Wingra
Technologies; and our technology development of next-generation messaging
applications for marketing to worldwide telecommunication companies, Internet
Data Centers and service providers. We said that as part of this reorganization,
we would be streamlining our global operations and reducing our workforce by
approximately 50%, to about 210 people. We noted that the current global
economic environment required that we incur a significant reduction in expenses
in order to enhance our financial strength and maintain a sharp focus on the
most promising market opportunities. While this reorganization is expected to
increase service and licensing revenues, we are unable to predict if this
strategy will be successful in enhancing returns to shareholders.
Following our restatement of revenues for the first three quarters of 2000,
several class action lawsuits were filed in the United States District Court for
the Northern District of California, against the Company and certain of our
officers and directors, alleging violations of the antifraud provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
While we are unable to predict the ultimate outcome of these claims, we believe
they are without merit and intend to vigorously defend ourselves.
As of December 31, 2000, we had approximately $29.4 million of cash to fund
operations in 2001. In 2000 we utilized $31.2 million of cash to fund operating
losses, $19.1 million for purchasing property, plant and equipment and $7.0
million in strategic long term investments. To limit our cash expenses in 2001,
we have significantly reduced staff, curtailed discretionary expenses, made
available for sublease excess facilities and limited capital expenditures. These
actions were made due to a decline in our revenue growth resulting from
competitive factors and a slowing economic environment. To enhance our overall
financial position, we have entered into an equity line purchase agreement under
which Torneaux Fund, Ltd., an institutional investor, has agreed to invest in
the Company's ordinary shares provided the share price is above $2 or a lower
amount if mutually agreed. Recently, our ordinary shares have been trading at
below that price. The cash realized for the shares sold will be determined based
on the weighted average price of the shares in the month of placement.
Based on the cash balance at March 31, 2001 of $13.3 million, current
projections of revenues, related expenses, the ability to further curtail
certain discretionary expenses, in accordance with a board approved contingency
plan, and a potential funding capability under the current equity line
arrangement or other equity arrangement, the Company believes it has sufficient
cash to continue operations for at least the next twelve months. However, to
continue funding developments of its software products, the company needs to
5
raise at least $5 million of additional cash by issuing equity under its
existing equity line arrangement, and/or the Company needs to seek alternative
sources of capital. Accordingly, the Board of Directors has retained William
Blair & Company to render investment banking services in connection with a
possible private placement of the Company's equity securities.
Business Risks
If the market for our outsourced email services does not grow significantly, we
would fail to generate revenues.
Our success will depend on the acceptance and use of email that is outsourced by
enterprises as a means of communication (as opposed to in-house deployment). The
market for outsourced email services is new and rapidly evolving. We cannot
estimate the size or growth rate of the potential market for our service
offerings. If the market for outsourced email fails to grow or grows more slowly
than we currently anticipate, our business will suffer dramatically. Even if
that market grows, our service may not achieve broad market acceptance. Since we
have only recently introduced our services, we do not have sufficient experience
to evaluate whether they will achieve broad market acceptance. Also, because a
preponderance of our revenue is derived directly or indirectly from our
outsourced email solutions, if that market does not grow, our business will
likely fail.
Our future email services revenues are unpredictable and our quarterly operating
results may fluctuate which could adversely affect the value of your investment.
Because we have a limited operating history in the provision of outsourced email
services and because of the emerging nature of the markets in which we compete,
our revenue is unpredictable. Our current and future expense levels are to a
large extent fixed. We may be unable to adjust spending quickly to compensate
for any revenue shortfall, and any significant revenue shortfall would have an
immediate negative effect on our results of operations and share price.
A number of factors, many of which are enumerated in this "Risk Factors"
section, are likely to cause fluctuations in our operating results and/or cause
our share price to decline. Other factors which may cause such fluctuations
include:
o The size, timing and fulfillment of orders for our email services;
o The success of our channel and direct selling efforts to enterprise
customers;
o The rate of adoption of out-sourced e-mail solutions by enterprise
customers in the current economic environment;
o The threat of de-listing by the NASDAQ if our shares fall below $1
for an extended period of time;
o The receipt or payment of irregular or nonrecurring revenues or
expenses;
o Our mix of service offerings, including our ability to successfully
implement new services;
o Pricing of our services; and
o Effectiveness of our customer support.
Because of differing operating factors, period-to-period comparisons of our
operating results are not a good indication of our future performance. It is
likely that our operating results in some quarters will be below market
expectations. Because we have a limited operating history providing outsourced
6
email services to the service provider, telecommunications and enterprise
markets, it is difficult to evaluate our business and prospects.
We commenced operations in 1991, but we began commercially selling Web-based
email services only in 1998 after changing our strategic focus from the sale,
maintenance and service of stand-alone email client software products for
mainframe and personal computers. During the third quarter of 2000, we began the
process of repositioning the company to provide outsourced email and messaging
services to the service provider, telecommunications and enterprise markets
primarily through channel partners. This change required us to adjust our
business processes and to restructure Commtouch to become an outsourced email
service provider. Therefore, we have only a limited operating history as a
provider of email services upon which you can evaluate our business and
prospects. It is too early to judge the success of this service offering, the
enterprise focus and distribution through channel partners.
We have many established competitors who are offering the same or similar
services
The market for outsourced email services is intensely competitive and we expect
it to be increasingly competitive. Increased competition could result in pricing
pressures, reduced operating margins and loss of market share, any of which
could cause our business to suffer.
In the market for email and messaging services, we compete directly with
outsourced email service providers, including Critical Path, Easylink
Corporation (formerly Mail.com), USA.NET, United Messaging and USinteractive as
well as with companies that develop and maintain in-house email solutions such
as Microsoft and IBM. In addition, companies such as Openwave, (formerly
Software.com) and iPlanet currently offer email software products to ISPs, web
hosting companies, web portals and corporations. Furthermore, numerous
small-scale email providers offer low-cost basic services, but without scalable
systems or value-added functionality. These and other companies could
potentially leverage their existing capabilities and relationships to enter the
email service industry by redesigning their system architecture, pricing and
marketing strategies to sell through to the entire market. The ability of these
competitors to offer a broader suite of complementary services may give them a
considerable advantage over us. In the future, ISPs, web hosting companies and
outsourced application companies may broaden their service offerings to include
outsourced email.
Our market's level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter the
market. In the future, as we expand our service offerings, we may encounter
increased competition in the development and delivery of these services. Many of
our current and potential competitors have longer operating histories, larger
customer bases, greater brand recognition and greater financial, marketing and
other resources than we do and may enter into strategic or commercial
relationships on more favorable terms. Further, certain of our competitors may
offer services at or below cost. In addition, new technologies and the expansion
of existing technologies may increase competitive pressures on us. We may not be
able to compete successfully against current and future competitors and
increased competition may result in reduced operating margins and loss of market
share.
Our ability to increase our revenues will depend on our ability to successfully
execute our sales and marketing plan.
The complexity of our Internet messaging services and the emerging nature of the
outsourced email market require highly trained sales and marketing personnel to
educate prospective customers regarding the use and benefits of our services.
The majority of our sales and marketing personnel have only recently joined
Commtouch and have limited experience working together. In addition we have
limited experience in selling to enterprise customers and in successful channel
selling. It will take time for these employees to learn how to market our
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enterprise solutions and to be integrated into our sales and marketing
organization. Some of them may not succeed in making this transition.
Additionally, we are unable to predict the success in selling newly introduced
additional services that we have no experience marketing and are relying on
these services to produce a substantial portion of our revenues in the future.
As a result of these factors, our sales and marketing organization may not be
able to compete successfully against the bigger and more experienced sales and
marketing organizations of our competitors.
We have a history of losses and may never achieve profitability.
We incurred net losses of approximately $4.4 million in 1998, $19.9 million in
1999, $54.2 million in 2000 and $17.1 million for the first quarter of 2001. As
of March 31, 2001, we had an accumulated deficit of approximately $102.9
million. We have not achieved profitability in any period, and we expect to
continue to incur net losses for the foreseeable future. If we do achieve
profitability, we may not sustain or increase profitability in the future. This
may, in turn, cause our share price to decline.
Need For Additional Funds
We are dependent upon raising additional funds to finance our business. Our cash
balance at March 31, 2001 was $13.3 million. We will need at least $5 million in
additional funding in the near term in order to continue our business at the
current level of operations for the next twelve months. If we fail to raise
sufficient near term funding, we have developed a contingency plan which will be
put into effect. The plan will require us to effect cost reductions by
curtailing research and development operations, human resources expenses and
other costs so as to allow us to continue a reduced level of operations for the
next twelve months.
Assuming we either raise at least $5 million in additional funding in the near
term or implement the contingency plan, we may nonetheless continue to be thinly
capitalized, which may adversely affect our ability to expand our operations, to
recruit and retain employees, to enter into agreements with vendors and
customers, and to withstand changes in business conditions. We may, therefore,
need to raise additional funds, through additional equity or debt financing,
collaborative relationships, strategic alliances with commercial partners, or
otherwise. There can be no assurance that we will be able to raise the necessary
funds or that we will be able to do so on terms acceptable to us. Our inability
to obtain adequate capital would limit our ability to continue our operations.
Any such additional funding may result in significant dilution to existing
stockholders.
Risk of Recession
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.
Our ability to collect outstanding receivables is significantly impacted by the
liquidity issues of these customers and this may also impact our ability to sell
future services and recognize future revenue despite committed contracts from
them. This has had, and may continue to have, a negative impact on our ability
to recognize future revenues and as a result, we may experience unexpected
shortfalls in our future revenues.
The loss of our key employees would adversely affect our ability to manage our
business, therefore causing our operating results to suffer and the value of
your investment to decline.
Our success depends on the skills, experience and performance of our senior
management and other key personnel, many of whom have worked together for only a
short period of time. The loss of the services of any of our senior management
8
or other key personnel, including Gideon Mantel, our Chief Executive Officer,
Amir Lev, our President and Chief Technical Officer, and Sunil Bhardwaj, our
Chief Financial Officer who recently joined us, could materially and adversely
affect our business. We do not have employment agreements with any of our senior
management or other key personnel. We cannot prevent them from leaving at any
time. We do not maintain key-person life insurance policies on any of our
employees.
Our recent head-count reduction from 486 employees to approximately 210 is
significantly straining our managerial, operational and financial resources. We
have significantly curtailed sales and marketing resources and this may
compromise our ability to enhance revenues. We also will incur significant
expenditures for wage continuance payments in connection with this personnel
restructuring in order to comply with the WARN ACT 60 day notice requirements.
Our business and operating results could suffer if we do not successfully
address the risks inherent in the expansion of our international operations.
At December 31, 2000 we had sales offices in the Israel, United States, England,
Latin America and Japan. During the first quarter of 2001, we closed sales
offices in New York, Miami and England. We intend to continue to seek ways to
market our services in international markets by utilizing significant financial
and managerial resources. We have limited experience in international operations
and may not be able to compete effectively in international markets. The Company
will face risks inherent in conducting business internationally, such as:
o difficulties and costs of staffing and managing international
operations;
o fluctuations in currency exchange rates;
o imposition of currency exchange controls;
o differing technology standards;
o export restrictions, including export controls relating to
encryption technologies;
o difficulties in collecting accounts receivable and longer collection
periods;
o unexpected changes in regulatory requirements;
o political and economic instability;
o potentially adverse tax consequences; and
o potentially reduced protection for intellectual property rights.
Any of these factors could adversely affect the Company's international
operations and, consequently, business and operating results. Specifically,
failure to successfully manage international growth could result in higher
operating costs than anticipated or could delay or preclude altogether the
Company's ability to generate revenues in key international markets.
Technology Risks
Because our business is based on communications and messaging services, we are
susceptible to system interruptions and capacity constraints, which could harm
our business and reputation.
Our ability to successfully receive and send our end users' email messages and
provide acceptable levels of service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and network
9
systems and those of our outsourced hosting service. In addition, the growth in
the use of the Internet has caused frequent interruptions and delays in
accessing the Internet and transmitting data over the Internet. We do not
possess insurance to cover losses caused by unplanned system interruptions and
software defects. In the past, we have experienced some interruptions in our
email service. We believe that these interruptions will continue to occur from
time to time. These interruptions may be due to hardware failures, unsolicited
bulk email (also known as "spam"), operating system failures, inadequate
Internet infrastructure capacity, and other mechanical and human causes. We
expect to experience occasional, temporary capacity constraints due to sharply
increased traffic, which may cause unanticipated system disruptions, slower
response times, impaired quality and degradation in levels of customer service.
If we experience frequent or long system interruptions that reduce our ability
to provide email services, we may have fewer users of our email services. In
addition, we have entered into service agreements with some of our customers
that require minimum performance standards. If we fail to meet these standards,
our customers could terminate their relationships with us.
We must continue to expand and adapt our network infrastructure to changing
requirements and increasing numbers of end users. The expansion and adaptation
of our network infrastructure will require substantial financial, operational
and managerial resources. In addition, we depend on improvements being made to
the entire Internet infrastructure to alleviate overloading and congestion of
the Internet. The ability of our network to continue to connect and manage an
expanding number of customers, end users and messages at high transmission
speeds is unproven and uncertain. We face risks related to our network's and the
Internet's ability to operate with higher use levels while maintaining expected
performance levels. To manage any further growth, we will need to improve or
replace our existing operational, customer service and financial systems as well
as our procedures and controls.
Although we are a leading global provider in our particular field of outsourced,
email, we are a relatively small competitor in the electronic messaging industry
as a whole. As a result, we may not have the resources to adapt to the changing
technological requirements and the shifting consumer preferences of our
industry.
The Internet messaging industry is characterized by rapid technological change,
changes in end user requirements and preferences, and the emergence of new
industry standards and practices that could render our existing services and
proprietary technology obsolete. Our success depends, in part, on our ability to
continually enhance our existing email and messaging services and to develop new
services, functions and technology that address the increasingly sophisticated
and varied needs of our prospective customers. The development of proprietary
technology and necessary service enhancements entails significant technical and
business risks and requires substantial expenditures and lead-time. We may not
be able to keep pace with the latest technological developments. We may not be
able to use new technologies effectively or adapt our services to customer or
end user requirements or emerging industry standards. Also, we must be able to
act more quickly than our competition.
Our services may be adversely affected by software defects, which could cause
our customers or end users to stop using our services.
Our service offerings depend on complex software. Complex software often
contains defects, particularly when first introduced or when new versions are
released. Although we conduct extensive testing, we may not discover software
defects that affect our new or current services or enhancements until after they
are deployed. Although we have not experienced any material software defects to
date, it is possible that, despite testing by us, defects may exist in the
software we use. These defects could cause service interruptions that could
damage our reputation or increase our service costs, cause us to lose revenue,
delay market acceptance or divert our development resources, any of which could
cause our business to suffer. Some of our services are based on software
provided by third parties. We have no control over the quality of such software.
10
We rely on the integrity of our network security, which may be susceptible to
breaches that could harm our reputation and business.
A fundamental requirement for online communications is the secure transmission
of confidential information over public networks. Third parties may attempt to
breach our security or that of our customers. Despite our implementation of
third party encryption technology and network security measures, our servers are
vulnerable to computer viruses, physical or electronic break-ins and similar
disruptions, which could lead to interruptions, delays or loss of data. We may
be liable to our customers and their end users for any breach in our security,
including claims for impersonation or other similar fraud claims, as well as
claims for other misuses of personal information, for example for unauthorized
marketing purposes. Also, such a breach could harm our reputation and
consequently our business. We may also be required to expend significant capital
and other resources to license encryption technology and additional technologies
to protect against security breaches or to alleviate problems caused by any
breach. Our failure to prevent security breaches could have a material adverse
effect on our business and operating results.
In addition, the Federal Trade Commission and several states have been
investigating some Internet companies regarding their use of personal
information. We could incur additional expenses if new regulations regarding the
use of personal information are introduced, if our privacy practices are
investigated or if our privacy policies are viewed unfavorably by users or
potential users.
Investment Risks
We may need additional capital.
We have invested heavily in technology and infrastructure development. We expect
to continue to spend substantial financial and other resources on developing and
introducing new service offerings and maintaining our sales and marketing and
corporate management organizations, strategic relationships and operating
infrastructure. We also expect to invest substantial resources in research and
development projects to develop enhanced service provider messaging solutions.
Based on the cash balance at March 31, 2001 of $13.3 million, current
projections of revenues, related expenses, the ability to further curtail
certain discretionary expenses, in accordance with a board approved contingency
plan, and a potential funding capability under the current equity line
arrangement or other equity arrangement, the Company believes it has sufficient
cash to continue operations for at least the next twelve months. However, to
continue funding developments of its software products, the company needs to
raise at least $5 million of additional cash by issuing equity under its
existing equity line arrangement, and/or the Company needs to seek alternative
sources of capital. Accordingly, the Board of Directors has retained William
Blair & Company to render investment banking services in connection with a
possible private placement of the Company's equity securities.
We are subject to several pending lawsuits the outcome of which may have a
material adverse effect on us.
Following our restatement of revenues for the first three quarters of 2000,
several class action lawsuits were filed in the United States District Court for
the Northern District of California, against the Company and certain of our
officers and directors, alleging violations of the antifraud provisions of the
Securities Exchange Act of 1934 arising from the Company's financial statements.
While we are unable to predict the ultimate outcome of these claims we believe
they are without merit and intend to vigorously defend ourselves.
If we cannot satisfy Nasdaq's maintenance requirements, it may delist our
11
ordinary shares and we may not have an active public market for our ordinary
shares, which would likely make our shares an illiquid investment.
Our ordinary shares are quoted on the Nasdaq National Market Market. To continue
to be listed, our shares must have a minimum bid price of $1.00 per share, among
other requirements. Recently, from time to time, our shares have had a minimum
bid price of less than $1.00 per share. Consequently, we may not be able to
satisfy the Nasdaq listing requirement in the future. If this occurs, trading in
the shares may be conducted in the over-the-counter market in the so-called
"pink sheets" or, if available, the "OTC Bulletin Board Service." As a result,
an investor would likely find it significantly more difficult to dispose of, or
to obtain accurate quotations as to the value of, our shares.
Nasdaq also may delist our shares if it deems it necessary to protect investors
and the public interest.
If our shares are delisted, they may become subject to the SEC's "penny stock"
rules and more difficult to sell.
SEC rules require brokers to provide information to purchasers of securities
traded at less than $5.00 and not traded on a national securities exchange or
quoted on the Nasdaq Stock Market. If our shares become "penny stock" that is
not exempt from these SEC rules, these disclosure requirements may have the
effect of reducing trading activity in our shares and making it more difficult
for investors to sell. The rules require a broker-dealer to deliver a
standardized risk disclosure document prepared by the SEC that provides
information about penny stocks and the nature and level of risks in the penny
market. The broker must also give bid and offer quotations and broker and
salesperson compensation information to the customer orally or in writing before
or with the confirmation. The SEC rules also require a broker to make a special
written determination that the penny stock is a suitable investment for the
purchaser and receive the purchaser's written agreement to the transaction
before a transaction in a penny stock.
Our directors, executive officers and principal shareholders will be able to
exert significant influence over matters requiring shareholder approval and
could delay or prevent a change of control.
Our directors and affiliates of our directors, our executive officers and our
shareholders who currently individually own over five percent of our ordinary
shares, beneficially own, in the aggregate, approximately 25% of our outstanding
ordinary shares. If they vote together, these shareholders will be able to
exercise significant influence over all matters requiring shareholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership could also delay or prevent a
change in control of Commtouch.
Jan Eddy, the President and Chief Executive Officer of Wingra Technologies,
beneficially owns approximately 5% of our outstanding ordinary shares issued to
her in connection with our acquisition of Wingra Technologies on November 24,
2000.
InfoSpace beneficially owns approximately 5% of our outstanding ordinary shares.
InfoSpace merged with Go2Net in October 2000. In connection with this merger
InfoSpace assumed Go2Net shares, warrants and rights. In 1999, in connection
with entering into an email services agreement, we issued to InfoSpace a warrant
to purchase 1,136,000 ordinary shares at an exercise price of $12.80 per share.
The warrant is non-forfeitable, fully vested and immediately exercisable, and
will expire in July 2004. Assuming exercise of the InfoSpace warrant on a net
issuance basis, the warrant currently has no impact on beneficial ownership, as
the warrant is currently underwater.
These significant shareholders will be able to significantly influence and
possibly exercise control over most matters requiring approval by our
shareholders, including the election of directors and approval of significant
12
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in control. InfoSpace will also have the
right to name one director to our Board as long as it continues to hold at least
620,022 shares, including the shares issuable upon exercise of the InfoSpace
warrant. They have named Thomas Camp to the Board under this provision. In
addition, conflicts of interest may arise as a consequence of these significant
shareholders control relationship with us, including:
o conflicts between significant shareholders, and our other
shareholders whose interests may differ with respect to, among other
things our strategic direction or significant corporate
transactions;
o conflicts related to corporate opportunities that could be pursued
by us, on the one hand, or by these shareholders, on the other hand;
or
o conflicts related to existing or new contractual relationships
between us, on the one hand, and these shareholders, on the other
hand.
Substantial sales of our ordinary shares could adversely affect our share price.
The sale, or availability for sale, of substantial quantities of our ordinary
shares may have the effect of depressing its market price. A large number of our
ordinary shares which were previously subject to resale restrictions, are
currently eligible for resale. In addition a significant number of shares will
be eligible for resale at various dates in the future.
As previously mentioned, we have an agreement to issue equity under an equity
line agreement with Torneaux, an institutional investor. The shares we issue
under this agreement will dilute existing shareholders.
On November 24, 2000 the company announced its acquisition of Wingra
Technologies for a purchase price of 1.29 million Commtouch ordinary shares and
0.3 million fully vested Commtouch options and warrants. The Company is required
to register these shares and intends to file a registration statement shortly.
Upon effectiveness of the registration, the shares can be freely traded which
could adversely impact our share price.
Governmental Risks
If we fail to adequately protect our intellectual property rights or face a
claim of intellectual property infringement by a third party, we could lose our
intellectual property rights or be liable for significant damages.
We regard our copyrights, service marks, trademarks, trade secrets and similar
intellectual property as critical to our success, and rely on trademark and
copyright law, trade secret protection and confidentiality or license agreements
with our employees and customers to protect our proprietary rights. Third
parties may infringe or misappropriate our copyrights, trademarks and similar
proprietary rights. Although we have not filed any patent applications, we may
seek to patent certain software or other technology in the future. Any such
future patent applications may not be issued within the scope of the claims we
seek, or at all. We cannot be certain that our software does not infringe issued
patents that may relate to our software products. In addition, because patent
applications in the United States are not publicly disclosed until the patent is
issued, applications may have been filed which relate to our software products.
Despite our precautions, unauthorized third parties may copy certain portions of
our technology or reverse engineer or obtain and use information that we regard
as proprietary. End user license provisions protecting against unauthorized use,
copying, transfer and disclosure of the licensed program may be unenforceable
under the laws of some jurisdictions and foreign countries. In addition, the
laws of some foreign countries do not protect proprietary rights to the same
extent as do the laws of the United States. Our means of protecting our
proprietary rights in the United States or abroad may not be adequate and
13
competitors may independently develop similar technology.
We may have liability for email content.
As a provider of email services, we face potential liability for defamation,
negligence, copyright, patent or trademark infringement and other claims based
on the nature and content of the materials transmitted via email. We do not and
cannot screen all of the content generated by end users. Some foreign
governments, such as the government of Germany, have enforced laws and
regulations related to content distributed over the Internet that are more
strict than those currently in place in the United States. Any imposition of
liability could damage our reputation and hurt our business and operating
results, or could result in criminal penalties.
Governmental regulation and legal uncertainties could impair the growth of the
Internet and decrease demand for our services or increase our cost of doing
business.
There are currently few laws and regulations directly applicable to the Internet
and commercial email services. However, a number of laws have been proposed
involving the Internet, including laws addressing user privacy, pricing,
content, copyright, antitrust, distribution and characteristics and quality of
products and services. Further, the growth and development of the market for
email may prompt calls for more stringent consumer protection laws that may
impose additional burdens on companies conducting business online. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. The adoption of
additional laws or regulations, or the application of existing laws or
regulations to the Internet, may impair the growth of the Internet or commercial
online services. This could decrease the demand for our services and increase
our cost of doing business, or otherwise harm our business and operating
results.
Due to the global nature of the Web, it is possible that, although our
transmissions currently originate in California, the governments of other states
or foreign countries might attempt to regulate our transmissions or levy sales
or other taxes relating to our activities. The European Union previously adopted
a directive addressing data privacy that may result in limits on the collection
and use of user information.
On October 20, 1999, The Federal Trade Commission issued the final rule to
implement the Children's Online Privacy Protection Act of 1998 ("COPPA"). The
main goal of the COPPA and the rule is to protect the privacy of children using
the Internet. As of May 21, 2000, certain commercial websites and online
services directed to, or that knowingly collect information from, children must
obtain parental consent before collecting, using, or disclosing personal
information from children under 13. The COPPA regulations could reduce our
ability to engage in direct marketing. The cost to the Company of complying with
the new requirements is not known and such cost may have a material effect upon
operating results or financial condition.
Risks Relating to Operations in Israel
We have important facilities and resources located in Israel, which has
historically experienced severe economic instability and military and political
unrest.
We are incorporated under the laws of the State of Israel. Our principal
research and development facilities are located in Israel. Although
substantially all of our sales currently are being made to customers outside
Israel, we are nonetheless directly influenced by the political, economic and
military conditions affecting Israel. Any major hostilities involving Israel, or
the interruption or curtailment of trade between Israel and its present trading
14
partners, could significantly harm our business, operating results and financial
condition.
Israel's economy has been subject to numerous destabilizing factors, including a
period of rampant inflation in the early to mid-1980's, low foreign exchange
reserves, fluctuations in world commodity prices, military conflicts and civil
unrest. In addition, Israel and companies doing business with Israel have been
the subject of an economic boycott by the Arab countries since Israel's
establishment. These restrictive laws and policies may have an adverse impact on
our operating results, financial condition or expansion of our business.
Since the establishment of the State of Israel in 1948, a state of hostility has
existed, varying in degree and intensity, between Israel and the Arab countries.
Although Israel has entered into various agreements with certain Arab countries
and the Palestinian Authority, and various declarations have been signed in
connection with efforts to resolve some of the economic and political problems
in the Middle East, we cannot predict whether or in what manner these problems
will be resolved.
Our results of operations may be negatively affected by the obligation of key
personnel to perform military service.
In addition, certain of our officers and employees are currently obligated to
perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. Although Commtouch has
operated effectively under these requirements since its inception, we cannot
predict the effect of these obligations on Commtouch in the future. Our
operations could be disrupted by the absence, for a significant period, of one
or more of our officers or key employees due to military service.
Because a substantial portion of our revenues are generated in U.S. dollars,
while a significant portion of our expenses are incurred in New Israeli Shekels,
our results of operations may be adversely affected by inflation and currency
fluctuations.
We generate a substantial portion of our revenues in U.S. dollars but incur a
significant portion of our expenses, principally salaries and related personnel
expenses, in New Israeli Shekels, commonly referred to as NIS. As a result, we
are exposed to the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the dollar or that the timing of
any devaluation may lag behind inflation in Israel. While in recent years the
rate of devaluation of the NIS against the dollar has generally exceeded the
rate of inflation, which is a reversal from prior years, we cannot be sure that
this reversal will continue. If the dollar cost of our operations in Israel
increases, our dollar-measured results of operations will be adversely affected.
Our operations also could be adversely affected if we are unable to guard
against currency fluctuations in the future. Accordingly, we may enter into
currency hedging transactions to decrease the risk of financial exposure from
fluctuations in the exchange rate of the dollar against the NIS. These measures,
however, may not adequately protect us from material adverse effects due to the
impact of inflation in Israel.
The government programs and benefits which we currently receive require us to
meet several conditions and may be terminated or reduced in the future.
Prior to 1998, we received grants from the Government of Israel, through the
OCS, for the financing of a significant portion of our research and development
expenditures in Israel. In 2000 we applied for additional grants and we may
apply for additional grants in the future. In 1998, 1999 and 2000 we did not
receive any grants from the OCS and we expect the percentage of our research and
development expenditures financed from OCS grants will continue to remain quite
low. The OCS budget has been subject to reductions which may affect the
availability of funds for these grants in the future. Therefore, we cannot be
certain that we will continue to receive grants at the same rate, or at all. In
15
addition, the terms of any future OCS grants may be less favorable than our past
grants. In connection with research and development grants received from the
OCS, we must make royalty payments to the OCS on the revenue derived from the
sale of products, technologies and services developed with grants from the OCS
unless such research and development projects are unsuccessful.
The terms of the OCS grants and the law pursuant to which the grants are made
restrict our ability to manufacture products or transfer technologies developed
using OCS grants outside of Israel. This restriction may limit our ability to
enter into agreements or similar arrangements for those products or
technologies, without OCS approval. We cannot be certain that the approvals of
the OCS will be obtained on terms that are acceptable to us. In connection with
our grant applications, we have made representations and covenants with the OCS.
The funding from the OCS is subject to the accuracy of these representations and
covenants and to our compliance with the conditions and restrictions imposed by
the OCS. If we fail to comply with any of these conditions or restrictions, we
could be required to repay any grants previously received, together with
interest and penalties, and would likely be ineligible to receive OCS grants
thereafter.
The tax benefits we are currently entitled to from the Government of Israel may
be reduced or terminated in the future.
Pursuant to the Law for the Encouragement of Capital Investments, the Government
of Israel through the Investment Center has granted "approved enterprise" status
to a significant portion of our research and development efforts. The portion of
our income derived from our approved enterprise program will be exempt from tax
for a limited period commencing in the first year in which have taxable income,
and will be subject to a reduced tax for an additional period. The benefits
available to an approved enterprise are conditioned upon the fulfillment of
conditions regarding a required amount of investments in fixed assets and a
portion of these investments being made with net proceeds of equity capital
raised by us as stipulated in applicable law and in the specific certificates of
approval. If we fail to comply with these conditions, in whole or in part, we
may be required to pay additional taxes for the period in which we benefited
from the tax exemption or reduced tax rates and would likely be denied these
benefits in the future. From time to time, the Government of Israel has
discussed reducing or eliminating the benefits available under the approved
enterprise program. It is possible that these tax benefits may not be continued
in the future at their current levels or at all.
Israeli courts might not enforce judgments rendered outside of Israel and it
might therefore be difficult for an investor to recover any judgment against any
of our officers or directors resident in Israel.
We are organized under the laws of Israel, and we maintain significant
operations in Israel. Certain of our officers and directors reside outside of
the United States. Therefore, you might not be able to enforce any judgment
obtained in the U.S. against us or any of such persons. You might not be able to
bring civil actions under U.S. securities laws if you file a lawsuit in Israel.
However, we have been advised by our Israeli counsel that, subject to certain
limitations, Israeli courts may enforce a final judgment of a U.S. court for
liquidated amounts in civil matters after a hearing in Israel. We have appointed
Commtouch Software Inc., our U.S. subsidiary, as our agent to receive service of
process in any action against us arising from this report. We have not given our
consent for our agent to accept service of process in connection with any other
claim and it may therefore be difficult for an investor to effect service of
process against us or any of our non-U.S. officers, directors and experts
relating to any other claims. If a foreign judgment is enforced by an Israeli
court, it may be payable in Israeli currency.
Provisions of Israeli law may delay, prevent or make difficult an acquisition of
Commtouch, which could prevent a change of control and therefore depress the
price of our shares.
16
Israeli corporate law regulates mergers, votes required to approve mergers and
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.
Proposed tax reform in Israel may reduce our tax benefits, which might adversely
affect our profitability.
On May 4, 2000 a committee chaired by the Director General of the Israeli
Ministry of Finance, Avi Ben-Bassat, issued a report recommending a sweeping
reform in the Israeli system of taxation. The proposed reform would
significantly alter the taxation of individuals, and would also affect corporate
taxation. In particular, the proposed reform would reduce, but not eliminate,
the tax benefits available to approved enterprises such as ours. The Israeli
cabinet approved the recommendations in principle, but implementation of the
reform requires legislation by Israel's Knesset. In the interim, a new Israeli
government has been formed, and there are indications that the new government
may eliminate significant aspects of the proposed reform. We cannot be certain
whether the proposed reform will be adopted, when it will be adopted or what
form any reform will ultimately take.
The new Israeli Companies Law, to which we are subject, has not yet been
interpreted by the courts.
The new Israeli Companies Law became effective as of February 1, 2000,
instituting major and comprehensive changes to Israeli corporate law. To date,
Israeli courts have not fully reviewed or interpreted certain important aspects
of the new Israeli Companies Law. Furthermore, to date the Israeli Minister of
Justice has promulgated only a portion of the regulations required to implement
the new Israeli Companies Law. As a result, there remain many questions
concerning the application of the law, and shareholders instituting actions
against Israeli companies, or against their directors, officers or controlling
shareholders, may experience difficulties, as well as uncertainties in
protecting their interests.
-----------------
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, ordinary shares only in jurisdictions where offers and sales are permitted.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of any
sale of our ordinary shares.
THE OFFER AND LISTING
Ordinary shares offered ............................ 4,000,000 shares
Use of proceeds .................................... Expansion of sales and
marketing activities;
capital expenditures;
expansion of research and
development activities;
expansion of international
operations; working
capital and other general
corporate purposes. See
"Reasons for Offer and Use
of Proceeds."
NASDAQ National Market Symbol ...................... CTCH
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- --------------
Shares will be offered on a registered basis and not as bearer shares.
Except as otherwise specified, all information in this prospectus is based on
the number of shares outstanding as of March 31, 2001, and:
o assumes the issuance of 276,744 ordinary shares issuable upon
exercise of options granted to executive officers and directors
within 60 days of March 31, 2001 at a weighted average exercise
price of $19.21 per share.
o with respect to financial information, is reported in U.S.
dollars;
and does not include:
o 1,598,239 ordinary shares issuable to employees and consultants
upon exercise of outstanding options under our stock option plans
and stock option agreements as of March 31, 2001 at a weighted
average exercise price of $19.36 per share; and
o 1,878,067 ordinary shares available for future grant or issuance
under our stock option and stock purchase plans as of March 31,
2001.
Market Information
Our ordinary shares are listed on the Nasdaq National Market under the
symbol "CTCH". The annual high and low reported sale prices for the ordinary
shares were $66.50 and $3.8125, respectively, for fiscal 2000 and were $49.125
and $11.0625, respectively, for fiscal 1999 (beginning July 13, 1999, the date
of our initial public offering). The high and low reported sale prices for the
ordinary shares on a quarterly basis for 1999 and 2000 and for the six months
preceding the date of this prospectus were as follows:
1999:
Third Quarter (beginning July 13, 1999) $ 22.625 $ 11.0625
Fourth Quarter 49.125 14.3125
2000:
First Quarter $ 66.50 $ 35.5625
Second Quarter 38.5625 14.625
Third Quarter 33.9375 16.50
Fourth Quarter 18.9375 3.8125
Most Recent Six Months:
December 2000 7.25 3.8125
January 2001 $ 4.6875 $ 2.00
February 2001 3.625 1.25
March 2001 1.0625 0.75
April 2001 0.74 0.49
May 2001 1.69 0.73
REASONS FOR OFFER AND USE OF PROCEEDS
We intend to use the proceeds of this offering for the following:
o expansion of our sales and marketing activities;
o capital expenditures, including purchase of equipment, primarily
for our hosting facilities;
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o expansion of research and development activities;
o expansion of our international operations; and
o working capital and other general corporate purposes.
The amounts and timing of these expenditures will vary significantly depending
on a number of factors, including, but not limited to, the amount of cash
generated by our operations and the market response to the introduction of any
new service offerings. In addition, we may use a portion of the net proceeds of
this offering from time to time to acquire or invest in businesses, products,
services or technologies complementary to our current business, through mergers,
acquisitions, joint ventures or otherwise. Accordingly, our management will
retain broad discretion as to the use and allocation of the net proceeds of this
offering. Pending the above uses, we intend to invest the net proceeds of this
offering in short-term, interest-bearing investment grade securities.
DESCRIPTION OF SHARE CAPITAL
Description of Shares
Set forth below is a summary of the material provisions governing our share
capital. This summary is not complete and should be read together with our
Memorandum of Association and Articles of Association, copies of which have been
filed as exhibits to our Annual Report on Form 20-F, as amended, subject to
amendment of our Articles of Association from time to time.
As of March 31, 2001, our authorized share capital consisted of 40,000,000
ordinary shares, NIS 0.05 par value. As of March 31, 2001, there were 16,970,584
ordinary shares and no preferred shares issued and outstanding.
Description of Ordinary Shares
All issued and outstanding ordinary shares of Commtouch are duly authorized and
validly issued, fully paid and nonassessable. The ordinary shares do not have
preemptive rights. Neither our Memorandum of Association, Articles of
Association nor the laws of the State of Israel restrict in any way the
ownership or voting of ordinary shares by non-residents of Israel, except with
respect to subjects of countries which are in a state of war with Israel.
Dividend and Liquidation Rights
The ordinary shares offered by this prospectus are entitled to their full
proportion of any cash or share dividend declared from the date of this
prospectus.
Subject to the rights of the holders of shares with preferential or other
special rights that may be authorized, the holders of ordinary shares are
entitled to receive dividends in proportion to the sums paid up or credited as
paid up on account of the nominal value of their respective holdings of the
shares in respect of which the dividend is being paid (without taking into
account the premium paid up on the shares) out of assets legally available
therefor and, in the event of our winding up, to share ratably in all assets
remaining after payment of liabilities in proportion to the nominal value of
their respective holdings of the shares in respect of which such distribution is
being made, subject to applicable law. Our Board of Directors may declare
interim dividends and recommend a final annual dividend only out of profits and
in such amounts as the Board of Directors may determine. Declaration of the
final annual dividend requires shareholder approval at a general meeting, which
may reduce but not increase such dividend from the amount recommended by the
Board of Directors.
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In case of a share dividend, holders of shares can receive shares of a class
whether such class existed prior thereto or was created therefor or shares of
the same class that conferred upon the holders the right to receive such
dividend.
Voting, Shareholder Meetings and Resolutions
Holders of ordinary shares have one vote for each ordinary share held on all
matters submitted to a vote of shareholders. Such rights may be affected by the
future grant of any special voting rights to the holders of a class of shares
with preferential rights. Once the creation of a class of shares with preference
rights has been approved, the Board of Directors may issue preferred shares,
unless the Board is limited from doing so by the Articles of Association or a
contractual provision.
An annual general meeting must be held once every calendar year at such time
(not more than 15 months after the last preceding annual general meeting) and at
such place, either within or outside the State of Israel, as may be determined
by the Board of Directors. The quorum required for a general meeting of
shareholders consists of at least two shareholders present in person or by proxy
and holding, or representing, more than one-quarter of the voting rights of the
issued share capital. A meeting adjourned for lack of a quorum may be adjourned
to the same day in the next week at the same time and place, or to such time and
place as the Board of Directors may determine. At such reconvened meeting any
two shareholders present in person or by proxy (and not in default under the
articles) will constitute a quorum. Shareholder resolutions will be deemed
adopted if approved by the holders of a majority of the voting power represented
at the meeting, in person or by proxy, and voting thereon.
Anti-Takeover Provisions Under Israeli Law
Under the Companies Law, a merger is generally required to be approved by the
shareholders and board of directors of each of the merging companies. If the
share capital of the company that will not be the surviving company is divided
into different classes of shares, the approval of each class is also required.
The Companies Law provides that the articles of association of companies, such
as ours, that were incorporated prior to February 1, 2000 are deemed to include
a provision whereby the approval of a merger requires a majority of three
quarters of those present and voting at a general meeting of shareholders. In
addition, a merger can be completed only after all approvals have been submitted
to the Israeli Registrar of Companies and at least seventy days have passed from
the time that a proposal for approval of the merger was filed with the
Registrar.
The Companies Law provides that an acquisition of shares in a public company
must be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 25% shareholder of the company. This rule does not
apply if there is already another 25% shareholder of the company. Similarly, the
Companies Law provides that an acquisition of shares in a public company must be
made by means of tender offer if as a result of the acquisition the purchaser
would become a 45% shareholder of the company, unless someone else already holds
a majority of the voting power of the company. These rules do not apply if the
acquisition is made by way of a merger. Regulations promulgated under the
Companies Law provide that these tender offer requirements do not apply to
companies whose shares are listed for trading outside of Israel if, according to
the law in the country in which the shares are traded, including the rules and
regulations of the stock exchange on which the shares are traded, either:
o there is a limitation on acquisition of any level of control of
the company; or
o the acquisition of any level of control requires the purchaser to
do so by means of a tender offer to the public.
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Finally, Israeli tax law treats specified acquisitions, including a
stock-for-stock swap between an Israeli company and a foreign company, less
favorably than does U.S. tax law. For example, Israeli tax law may subject a
shareholder who exchanges his ordinary shares for shares in a foreign
corporation to immediate taxation.
Transfer of Shares and Notices
Fully paid ordinary shares are issued in registered form and may be transferred
freely. Each shareholder of record is entitled to receive at least seven days'
prior notice of shareholder meetings. A special resolution can be adopted only
if shareholders are given 21 days' prior notice of the meeting at which such
resolution will be voted on (unless all shareholders entitled to vote agree that
the meeting may be held on a shorter notice period). For purposes of determining
the shareholders entitled to notice and to vote at such meeting, the Board of
Directors may fix the record date not exceeding 90 days prior to the date of any
general meeting.
Modification of Class Rights
If at any time the share capital is divided into different classes of shares,
the rights attached to any class (unless otherwise provided by our Articles of
Association) may be modified or abrogated by Commtouch by a special resolution
subject to the consent in writing of the holders of the issued shares of the
class, or by the adoption of a special resolution passed at a separate general
meeting of the holders of the shares of such class.
Description of Investor Options and Warrants
InfoSpace/Go2Net Warrant
In connection with the Customized Web-based Email Service Agreement entered into
between Commtouch and Go2Net (subsequently acquired by InfoSpace), Commtouch
issued to InfoSpace a fully vested, non-forfeitable, warrant to purchase
1,136,000 ordinary shares at a per-share exercise price of $12.80, subject to
adjustment as provided in the warrant. The warrant is exercisable at any time
until it expires on July 16, 2004. At InfoSpace's option, the warrant is
exercisable pursuant to a cashless exercise based on the average closing price
of the ordinary shares for the five days preceding the exercise. The Company
extended registration rights to InfoSpace covering the warrant and the shares
issuable upon exercise of the warrant and a registration statement relating to
the resale of the shares and the warrant became effective on January 7, 2000.
The holder of the warrant is required to avoid becoming a 10% or greater
shareholder of the Company as a result of any exercise of the warrant.
The holder of the warrant is given the opportunity to profit from a rise in the
market price of the ordinary shares and the warrant. The warrant includes
provisions which adjust the exercise and price upon the occurrence of certain
events which might otherwise dilute the value of the warrant.
Wingra Warrants and Options
In connection with our acquisition of Wingra, we assumed warrants and options to
issue 137,232 shares to the Wingra investors and options to issue 168,383
ordinary shares to Wingra employees. Upon effectiveness of the merger, these
warrants and options became immediately exercisable. The 137,232 assumed
warrants were originally granted by Wingra in connection with loans granted to
Wingra by banks and shareholders. The exercise price of those warrants range
from $6.29 to $9.35 and the expiration dates range from March 2001 through
August 2002. The 168,383 shares were originally granted to Wingra employees
under the Wingra Technologies, LLC 1998 Unit Option Plan. The exercise price of
those options range from $0.2010 to $3.5010 and the expiration dates range from
March 2001 through August 2002. At the time of the merger, we assumed the rights
and obligations under that Option Plan.
Registration Rights
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The holders of convertible preferred shares which were converted into 7,109,800
ordinary shares (the "Registrable Securities") upon effectiveness of the initial
public offering, have certain rights to register those shares under the
Securities Act. If requested by holders of a majority of the Registrable
Securities after the second anniversary of the date of the initial public
offering, Commtouch must file a registration statement under the Securities Act
covering all Registrable Securities requested to be included by all holders of
such Registrable Securities. Commtouch may be required to effect up to two such
registrations. Commtouch has the right to delay any such registration for up to
120 days under certain circumstances, but not more than once during any 12-month
period.
In addition, if Commtouch proposes to register any of its ordinary shares under
the Securities Act other than in connection with a company employee benefit plan
or a corporate reorganization pursuant to Rule 145 under the Securities Act, or
a registration on any registration form that does not permit secondary sales or
does not include substantially the same information as would be required to be
included in a registration statement covering the sale of Registrable
Securities, the holders of Registrable Securities may require Commtouch to
include all or a portion of their shares in such registration, although the
managing underwriter of any such offering has certain rights to limit the number
of shares in such registration.
Further, a majority of the holders of Registrable Securities may require
Commtouch to register all or any portion of their Registrable Securities on Form
F-3, subject to certain conditions and limitations. All expenses incurred in
connection with all registrations (other than fees, expenses and disbursements
of counsel retained by the holders of the Registrable Shares, and underwriters'
and brokers' discounts and commissions) will be borne by Commtouch.
The registration rights described in the preceding three paragraphs expire five
years after the closing date of our initial public offering, which will occur on
July 16, 2004.
In addition, the Company granted registration rights to InfoSpace, Vulcan
Ventures and Microsoft pursuant to which their holdings in the Company
(including the warrant issued to Go2Net) were registered on January 7, 2000.
Also, under the terms of the Wingra acquisition agreement, we are required to
register the 1,590,909 shares issuable to the Wingra investors and employees
(which includes the shares underlying options and warrants described above).
Access to Information
We file reports with the Israeli Registrar of Companies regarding our registered
address, our registered capital, our shareholders of record and the number of
shares held by each, the identity of the directors and details regarding
security interests on our assets. In addition, Commtouch must file with the
Israeli Registrar of Companies its Articles of Association and a copy of any
special resolution adopted by a general meeting of shareholders. The information
filed with the Registrar of Companies is available to the public. In addition to
the information available to the public, our shareholders are entitled, upon
request, to review and receive copies of all minutes of meetings of our
shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is Wells Fargo
Minnesota N.A.
SHARES ELIGIBLE FOR FUTURE SALE
22
Future sales of substantial amounts of our ordinary shares in the public market,
or the possibility of these sales occurring, could adversely affect prevailing
market prices for our ordinary shares or our future ability to raise capital
through an offering of equity securities.
As of March 31, 2001 we had 16,970,584 ordinary shares outstanding. The
3,450,000 ordinary shares sold in our initial public offering and the 1,344,086
ordinary shares and the warrant exercisable for 1,136,000 ordinary shares of
InfoSpace and Vulcan Ventures, as well as 707,965 ordinary shares held by
Microsoft Corporation, are freely tradable in the public market without
restriction under the Securities Act, unless the shares are held by "affiliates"
of the Company, as that term is defined in Rule 144 under the Securities Act. In
addition, the 4,000,000 shares to which this prospectus relates will also be
freely tradeable without restriction, unless otherwise indicated in the related
prospectus supplement.
In connection with our acquisition of Wingra, we issued 1,285,294 of our
ordinary shares to the Wingra investors, and as noted above we assumed warrants
to issue an additional 137,232 shares to those investors and options to issue
168,383 ordinary shares to Wingra employees. Further, 20% of the 1,590,909
shares issued or issuable in connection with our acquisition of Wingra are
subject to an agreement between us and the Wingra investors which prohibits each
of them from transferring, selling or otherwise disposing of these shares until
December 20, 2001. I addition, 5% of these 1,590,909 shares are held in escrow
until December 5, 2001 in connection with payment of possible future claims by
us arising out of the acquisition. We are required to register these shares and
intend to file a registration statement shortly. Upon effectiveness of the
registration, the shares can be freely traded (subject to the restrictions
noted) which could adversely impact our share price.
The remaining ordinary shares outstanding upon completion of this offering will
be "restricted securities" as that term is defined under Rule 144. We issued and
sold these restricted securities in private transactions in reliance on
exemptions from registration under the Securities Act. Restricted securities may
be sold in the public market only if they are registered or if they qualify for
an exemption from registration under Rule 144 or Rule 701 under the Securities
Act, as summarized below.
Shares Subject to Restriction under Rule 144
Most of the restricted shares are subject to certain volume and other resale
restrictions pursuant to Rule 144 because the holders are affiliates of
Commtouch. In general, under Rule 144, an affiliate of Commtouch, or a person
(including a group of related persons whose shares must be aggregated under the
Rule) who has beneficially owned restricted shares for at least one year, will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of
o 1% of the then outstanding ordinary shares (approximately 170,877
shares immediately following completion of the offering), or
o the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the
Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about
Commtouch. A person who was not an affiliate of Commtouch for 90 days before the
sale and who has beneficially owned the shares for at least two years may sell
under Rule 144(k) without regard to the above limitations.
Shares Under Employee Benefit Plans
23
On January 20, 2000, we filed a Form S-8 registration statement under the
Securities Act to register 5,400,000 ordinary shares issuable in connection with
option exercises and shares reserved for issuance under all stock plans and
agreements as well as 150,000 ordinary shares under the Company's Employee Stock
Purchase Plan which the Company may issue to employees from time to time. The
Company also issues employee and director stock options from time to time. Such
options are subject to vesting periods after which the shares may be resold by
the holders, subject to Rule 144 limitations if the holder is an affiliate. Of
2,476,919 options issued, 778,442 option shares were vested and unexercised as
of March 31, 2001 and 1,145,014 options had been exercised. The Company will
file another Form S-8 registration statement to register an additional 250,000
of our ordinary shares, reserved for issuance under the Company's director stock
option plan, as approved by our shareholders on August 10, 2000 as well as
additional shares issuable under our Employee Stock Purchase Plan. In addition,
the Company will file a Form S-8 registration statement to register 168,383 of
its shares underlying options issuable to employees of Wingra pursuant to the
terms of the Wingra merger agreement.
On April 30, 2001 our Board of Directors approved the "repricing" of outstanding
stock options previously granted to employees, contingent upon the completion of
certain regulatory filings. Previously granted options will be cancelled and new
options will be issued with an exercise price equal to the par value of the
shares. Options subject to the repricing must have an original exercise price of
more than $10 per share and must be currently unexercised. The options will vest
over three years with 1/3 vesting on February 15, 2002 and the remaining 2/3
vesting every six months for the next two years. After regulatory filings are
completed, if these repriced options are issued the decreased option exercise
price may cause optionees to exercise options immediately and resell the shares
received in the exercise on the open market, which may cause downward pressure
on the price of the shares.
Additional Restrictions
In addition to the restrictions imposed by the securities laws, 662,680
restricted shares were issued to certain Commtouch employees under agreements
which give Commtouch Inc. a repurchase option on any unvested shares. The
repurchase option lapses ratably over time. As of March 31, 2001, approximately
101,907 ordinary shares are subject to repurchase.
PLAN OF DISTRIBUTION
We may sell ordinary shares through underwriters, dealers or agents, directly to
one or more purchasers, or by means of both of these methods. We may distribute
ordinary shares from time to time in one or more transactions at a fixed price
or prices (which may be changed from time to time), at market prices prevailing
at the time of sale, at prices related to these prevailing market prices, or at
negotiated prices.
Regardless of the method we use to sell our ordinary shares, we will provide a
prospectus or prospectus supplement pursuant to Rule 424(b) under the Securities
Act of 1933 (the "Securities Act") that will disclose:
o the identity of any underwriters, dealers, agents or investors
who purchase ordinary shares, as required;
o the number of shares sold, the public offering price and
consideration paid, and the proceeds we will receive from the
sale;
o the amount of any compensation, discounts or commissions to be
received by underwriters, dealers or agents;
o the terms of any idemnification provisions, including
indemnification from liabilities under the federal securities
laws; and
24
o any other material terms of the distribution of the ordinary
shares.
Use of Underwriters and Agents
Only underwriters named in a prospectus or prospectus supplement, if any, are
underwriters of the ordinary shares offered with that prospectus or prospectus
supplement. If underwriters are used in the sale, they will acquire the ordinary
shares for their own account and may resell the ordinary shares from time to
time in one or more transactions at a fixed public offering price or at varying
prices determined at the time of sale. We may offer the ordinary shares to the
public through underwriting syndicates represented by managing underwriters or
by underwriters without a syndicate. Subject to certain conditions, the
underwriters will be obligated to purchase all the ordinary shares offered by
the prospectus supplement in which they are named, if any. Any public offering
price and any discounts or concessions allowed or reallowed or paid to dealers
may change from time to time.
We may sell the ordinary shares through agents we designate from time to time.
We will name any agent involved in the offering and sale of ordinary shares and
in the prospectus supplement we will describe any commissions we will pay the
agent. Unless the prospectus supplement states otherwise, our agent will act on
a best-efforts basis for the period of appointment.
We may authorize agents or underwriters to solicit offers by certain types of
institutional investors to purchase the ordinary shares from us pursuant to
delayed delivery contracts providing for payment and delivery on a specified
date in the future. We will list the public offering price for any such shares
and describe the conditions to these contracts and the commissions we must pay
for solicitation of these contracts in a prospectus supplement.
In connection with the sale of the ordinary shares offered by this prospectus,
underwriters, dealers or agents may receive compensation from us or from
purchasers of the ordinary shares for whom they may act as agents, in the form
of discounts, concessions or commissions. Agents and underwriters may engage in
transactions with us, or perform services for us, in the ordinary course of
business.
Sales Directly to Purchasers
We may enter into agreement directly with one or more purchasers. Such
agreements may provide for the sale of our ordinary shares at a fixed price,
based on the market price of the ordinary shares or otherwise. Alternatively,
such agreement may provide for the sale of ordinary shares over a period of time
by means of draw downs at our election which the purchaser would be obligated to
accept under specified conditions. Under this form of agreement, we may sell
ordinary shares at a per share purchase price which is discounted from the
market price. Such agreement may also provide for sales of ordinary shares based
on combinations of or variations from these methods.
Deemed Underwriters
The underwriters, dealers, agents or purchasers that participate in the
distribution of the ordinary shares may be deemed to be underwriters under the
Securities Act. Broker-dealers or other persons acting on behalf of parties that
participate in the distribution of the ordinary shares may also be deemed to be
underwriters. Any discounts or commissions received by them and any profit on
the resale of the ordinary shares received by them may be deemed to be
underwriting discounts and commissions under the Securities Act. Anyone deemed
to be an underwriter under the Securities Act may be subject to statutory
liabilities, including Sections 11, 12 and 17 of the Securities Act and Section
10(b) and Rule 10b-5 under the Securities Exchange Act of 1934 (the "Exchange
Act").
Underwriters or purchasers that would be deemed underwriters under the
Securities Act, and their pledgees, donees, transferees and other subsequent
owners, may offer the ordinary shares at various times in the over-the-counter
market or in privately negotiated transactions, at a fixed price or prices
25
(which may be changed from time to time), prevailing market prices at the time
of sale, at prices related to those prevailing market prices, or at negotiated
prices. These sales may be made according to one or more of the following
methods:
o ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
o block trades in which the broker or dealer so engaged will
attempt to sell the ordinary shares as agent but may position and
resell a portion of the block as principal in order to facilitate
the transaction;
o purchases by a broker or dealer as principal and resale by the
broker or dealer for its account as allowed under this
prospectus, including resale to another broker or dealer;
o exchange distributions under the rules of the exchange;
o negotiated transactions between sellers and purchasers without a
broker-dealer; and
o by writing options.
These underwriters or purchasers may also sell the ordinary shares under Rule
144, instead of under this prospectus, if Rule 144 is available for those sales.
Underwriters and purchasers that are deemed underwriters under the Securities
Act may engage in transactions that stabilize, maintain or otherwise affect the
price of the ordinary shares, including the entry of stabilizing bids or
syndicate covering transactions or the imposition of penalty bids. Such
purchasers will be subject to the applicable provisions of the Securities Act
and Exchange Act and the rules and regulations thereunder, including Rule 10b-5
and Regulation M. Regulation M may restrict the ability of any person engaged in
the distribution of the ordinary shares to engage in market-making activities
with respect to the ordinary shares. In addition, the anti-manipulation rules
under the Exchange Act may apply to sales of the ordinary shares in the market.
All of the foregoing may affect the marketability of the ordinary shares and the
ability of any person to engage in market-making activities with respect to the
ordinary shares.
Expenses Associated with Registration
We are paying substantially all of the expenses of registering the ordinary
shares under the Securities Act and of compliance with blue sky laws, including
registration and filing fees, printing and duplication expenses, administrative
expenses, Israeli Stamp duty and our legal and accounting fees. We estimate
these expenses to be approximately $1,034,507, which include the following
categories of expenses:
SEC registration fee.............................. $ 20,757
Nasdaq National Market filing fee................. 17,500
Blue Sky fees and expenses........................ 10,000
Printing and engraving expenses................... 50,000
Israeli Stamp Duty................................ 786,250
Legal fees and expenses........................... 50,000
Accounting fees and expenses...................... 50,000
Transfer agent and registrar fees and expenses.... 10,000
Miscellaneous expenses............................ 40,000
Indemnification and Contribution
We may provide agents, underwriters or purchasers with indemnification against
civil liabilities, including liabilities under the Securities Act, or
contribution with respect to payments that the agents, underwriters or
purchasers may make with respect to such liabilities.
26
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, we have been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
LEGAL MATTERS
Certain legal matters with respect to United States law are being passed upon
for Commtouch by McCutchen, Doyle, Brown & Enersen, LLP, San Francisco,
California. The validity of the ordinary shares offered hereby is being passed
upon for Commtouch by Naschitz, Brandes & Co., Tel-Aviv, Israel. The partners of
Naschitz, Brandes & Co. and McCutchen, Doyle, Brown & Enersen, LLP beneficially
own, in the aggregate, less than 1% of the outstanding shares of the Company.
EXPERTS
Kost, Forer & Gabbay, a member of Ernst & Young International, independent
auditors, have audited our consolidated financial statements included in our
Annual report on Form 20-F for the year ended December 31, 2000, as amended, as
set forth in their report, which is incorporated by reference in this prospectus
and elsewhere in the registration statement. Our financial statements are
incorporated by reference in reliance on Kost, Forer and Gabbay's report, given
on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form F-3 with the SEC for the shares
and warrant we are offering by this prospectus. This prospectus does not include
all of the information contained in the registration statement. You should refer
to the registration statement and its exhibits for additional information.
Whenever we make reference in this prospectus to any of our contracts,
agreements or other documents, the references are not necessarily complete and
you should refer to the exhibits attached to the registration statement for
copies of the actual contract, agreement or other document.
We are required to file annual and special reports and other information with
the SEC. You can read our SEC filings, including the registration statement,
over the Internet at the SEC's web site at http://www.sec.gov. You may also read
and copy any document we file with the SEC at its public reference facilities at
450 Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may also obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the SEC at 450
Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330
for further information on the operation of the public reference facilities. Our
SEC filings are also available at the office of the Nasdaq National Market. For
further information on obtaining copies of our public filings at the Nasdaq
National Market, you should call (212) 656-5060.
We are subject to certain of the informational requirements of the Exchange Act.
As a "foreign private issuer," we are exempt from the rules under the Exchange
Act prescribing certain disclosure and procedural requirements for proxy
solicitations and our officers, directors and principal shareholders are exempt
from the reporting and "short-swing" profit recovery provisions contained in
Section 16 of the Exchange Act, with respect to their purchases and sales of
ordinary shares. In addition, we are not required to file quarterly reports, or
to file annual and current reports and financial statements with the Securities
and Exchange Commission as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act. However, we intend to file
with the Securities and Exchange Commission, within 180 days after the end of
each fiscal year, an annual report on Form 20-F containing financial statements
that will be examined and reported on, with an opinion expressed by an
27
independent accounting firm, as well as quarterly reports on Form 6-K containing
unaudited financial information for the first three quarters of each fiscal
year, within 60 days after the end of each such quarter.
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" information into this
prospectus. This means that we can disclose important information to you by
referring you to another document filed by us with the Commission. Information
incorporated by reference is deemed to be part of this prospectus, except for
any information superseded by this prospectus or by information we file with the
Commission in the future.
The following documents are incorporated by reference:
(a) Our Annual Report on Form 20-F for the fiscal year ended December 31, 2000,
as amended;
(b) Our two reports on Form 6-K for the month of May 2001 filed May 29, 2001
(containing quarterly information for the quarter ended March 31, 2001) and May
31, 2001 (reporting our transaction with Rideau Ltd. and other matters); and
(c) The description of our ordinary shares contained in the registration
statement under the Exchange Act on Form 8-A as filed with the Commission on
June 25, 1999, and any subsequent amendment or report filed for the purpose of
updating this description.
In addition, all subsequent annual reports filed on Form 20-F prior to the
termination of this offering are incorporated by reference into this prospectus.
Also, we may incorporate by reference our future reports on Form 6-K by stating
in those Forms that they are being incorporated by reference into this
prospectus.
We will provide without charge to any person (including any beneficial owner) to
whom this prospectus has been delivered, upon oral or written request, a copy of
any document incorporated by reference in this prospectus but not delivered with
the prospectus (except for exhibits to those documents unless a document states
that one of its exhibits is incorporated into the document itself). Such
requests should be directed to Sunil Bhardwaj, Chief Financial Officer, c/o
Commtouch Inc., 2029 Stierlin Court, Mountain View, California 94043-4655. Our
corporate website address is http://www.commtouch.com. The information on our
website is not intended to be a part of this prospectus.
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated in Israel, and most of our directors and many of the
executive officers and the Israeli experts named herein are not residents of the
United States and substantially all of their assets and our assets are located
outside the United States. Service of process upon our non-U.S. resident
directors and executive officers or the Israeli experts named herein and
enforcement of judgments obtained in the United States against us, and our
directors and executive officers, or the Israeli experts named herein, may be
difficult to obtain within the United States. Commtouch Inc. is the U.S. agent
authorized to receive service of process in any action against us arising out of
this offering or any related purchase or sale of securities. We have not given
consent for this agent to accept service of process in connection with any other
claim.
We have been informed by our legal counsel in Israel, Naschitz, Brandes & Co.,
that there is doubt as to the enforceability of civil liabilities under the
Securities Act or the Exchange Act 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
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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 (i) the judgment was obtained by fraud, (ii) there was no due process, (iii)
the judgment was rendered by a court not competent to render it according to the
laws of private international law in Israel, (iv) 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 (v) 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. Judgments rendered or enforced by Israeli
courts will generally be payable in Israeli currency. Judgment debtors bear the
risk associated with converting their awards into foreign currency, including
the risk of unfavorable exchange rates.
29
4,000,000 Ordinary Shares
COMMTOUCH SOFTWARE LTD.
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PROSPECTUS
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May 31, 2001