Filed Pursuant to Rule 424(b)(3)
File No. 333-68248
PROSPECTUS
COMMTOUCH SOFTWARE LTD.
1,406,612 ORDINARY SHARES
As we describe further below under "Offer Statistics and Expected
Timetable and Plan of Distribution," the Selling Securityholders identified in
this prospectus are selling up to 1,406,612 of our ordinary shares, some of
which underlie warrants and options held by some of the Selling Securityholders.
The warrants and options themselves are not being offered by this prospectus.
The Selling Securityholders acquired the ordinary shares as a result of our
acquisition of Wingra Incorporated in December 2000. The ordinary shares offered
hereby have been registered pursuant to registration rights granted to the
Selling Securityholders by the Company in connection with the Wingra
acquisition. These securities may be offered from time to time by the Selling
Securityholders through public or private transactions, on or off the Nasdaq
National Market, at prevailing market prices or at privately negotiated prices.
The Selling Securityholders will receive all of the proceeds from this offering
and will pay all underwriting discounts and selling commissions, if any,
applicable to the sale of the securities. We will pay the expenses of
registration of this offering.
The Company has agreed to indemnify the Selling Securityholders against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act").
In addition, approximately 5% of the shares being offered are being
held in escrow until December 5, 2001 in connection with payment of possible
future claims by us arising out of the Wingra acquisition. Because of this
restriction, the Selling Securityholders have no present intention to sell
approximately 5% of the shares being offered by this prospectus until on or
after December 5, 2001. Also, approximately 20% of the shares to which this
prospectus relates are subject to an agreement between us and the Selling
Securityholders which prohibits each of them from transferring, selling or
otherwise disposing of his or her shares until December 20, 2001. Because of
this restriction, the Selling Securityholders have no present intention to sell
approximately 20% of their respective ordinary shares being offered by this
prospectus until on or after December 20, 2001.
The ordinary shares are being offered by the Selling Securityholders
subject to prior sale, subject to their right to reject offers in whole or in
part and subject to certain other conditions.
The Selling Securityholders may be deemed to be "underwriters" within
the meaning of the Securities Act and any profits realized by them may be deemed
to be underwriting commissions. Any broker-dealers that participate in the
distribution of ordinary shares also may be deemed to be "underwriters," as
defined in the Securities Act, and any commissions or discounts paid to them, or
any profits realized by them upon the resale of any securities purchased by them
as principals, may be deemed to be underwriting commissions or discounts under
the Securities Act. The sale of the ordinary shares is subject to the prospectus
delivery requirements of the Securities Act.
Our ordinary shares are currently traded on the Nasdaq National Market
under the symbol "CTCH." On September 24, 2001 the last reported sales price of
an ordinary share on the Nasdaq National Market was $0.22 per share.
This investment involves risk. See "Risk Factors" beginning on page 5.
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 is September 26, 2001
TABLE OF CONTENTS
PAGE
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Special Note Regarding Forward-Looking Information.............................i
Summary .......................................................................1
Risk Factors ..................................................................5
The Offer and Listing.........................................................18
Reasons for the Offer and Use of Proceeds ....................................19
Selling Securityholders ......................................................19
Description of Share Capital .................................................21
Shares Eligible for Future Sale ..............................................24
Offer Statistics and Expected Timetable and Plan of Distribution .............26
Legal Matters ................................................................27
Experts ......................................................................27
Where You Can Find More Information ..........................................27
Information Incorporated by Reference ........................................28
Enforceability of Civil Liabilities ..........................................29
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.
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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.
and its wholly-owned subsidiaries, Commtouch Inc., Commtouch (UK) Ltd, Commtouch
Latin America Inc. and Wingra Technologies Inc., and its majority-owned
subsidiary 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 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.
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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:
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.
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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.
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 $25.7 million for the first six
months of 2001. As of June 30, 2001, we had an accumulated deficit of
approximately $111.4 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.
CAPITALIZATION AND INDEBTEDNESS
The following table sets forth the capitalization and indebtedness of
Commtouch as of June 30, 2001:
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JUNE 30, 2001
-------------
(UNAUDITED)
(IN THOUSANDS)
-------------
Long-term liabilities .......................................... $ 1,899
Shareholders' equity:
Ordinary shares, NIS 0.05 par value; 40,000,000 shares
Authorized, 17,286,373 actual shares issued and outstanding .. 238
Additional paid-in capital ..................................... 151,768
Deferred compensation .......................................... (1,767)
Notes receivable from shareholders ............................. (754)
Accumulated other comprehensive income ......................... --
Accumulated deficit ............................................ (111,410)
Total shareholders' equity ..................................... 38,075
Total capitalization ........................................... 39,974
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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.
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
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.
On June 5, 2001 we entered into a Stock Purchase Agreement (the "Stock
Purchase Agreement") with Hughes Holdings LLC ("Hughes"). The following
discussion is qualified in its entirety by reference to the text of the purchase
agreement, which has been filed with the Commission as an exhibit to a report on
Form 6-K filed on June 12, 2001.
Pursuant to the Stock Purchase Agreement, (i) commencing on June 6,
2001, and after all of the necessary approvals have been obtained, we shall sell
and Hughes shall purchase 850,000 ordinary shares, par value NIS .05 per share,
of our capital stock (the "Initial Shares"), at a minimum amount of $250,000
weekly, and (ii) for a period of four (4) months commencing on June 6, 2001 and
ending on October 6, 2001, Hughes shall have the option to purchase up to an
additional 1,400,000 ordinary shares, par value NIS .05 per share, of our
capital stock (the "Option Shares"). In the event Hughes does not perform its
obligations to purchase the minimum amount of $250,000 weekly, during any
continuous two-week period during the term of the Stock Purchase Agreement, any
and all of Commtouch's future obligations thereunder as to the Option
5
Shares shall terminate with the exception of delivery of shares purchased and
warrants owed under the terms of the Stock Purchase Agreement.
In addition, at the time of each sale, we shall issue to Hughes
warrants in a proportion of ten percent (10%) of the Initial Shares and the
Options Shares, as the case may be, purchased by Hughes to purchase up to an
additional 85,000 shares of our capital stock at an exercise price of $1.20 per
share in the event Hughes purchases all of the Initial Shares, and an additional
option to purchase up to 140,000 shares of our capital stock may be issued (the
"Option Warrant") in the event Hughes elects to purchase all of the Option
Shares. The Option Warrant shall be exercisable for shares of our common stock
at one hundred twenty percent (120%) of the applicable purchase price (as set
forth below).
Hughes' purchase price, and consequently the number of shares
purchased, will fluctuate based upon the daily volume weighted average price
over a 5-day trading period. However, if the pricing period is less than $0.75
cents Hughes can purchase $250,000 worth of stock at the $0.75 less the allowed
10% discount or choose not to fund. We will not be obligated to sell any Shares
pursuant to this Stock Purchase Agreement below the $0.75 less the 10% discount,
unless otherwise agreed by Hughes and us. Hughes shall have no obligation to us
if the purchase price falls below $0.75. Since our stock price has been below
$0.75 per share, this funding has never been concluded.
The shares issuable to Hughes will originate from the 4,000,000 shares
previously registered under a registration statement declared effective by the
Securities and Exchange Commission in December 2000, of which 3,684,211 shares
remain after our recent sale of 315,789 shares to Rideau Ltd., a private
investor.
The parties' obligations under the Stock Purchase Agreement are subject
to the fulfillment of certain conditions stated in the document, which we may or
may not be able to satisfy. The closing or closings of the Initial Shares and
the Option Shares, as the case may be, will take place as soon as practicable
after the closing conditions set forth in the Stock Purchase Agreement have been
met by the parties and in amounts of no less than $250,000 and no greater than
$2,000,000 (per closing) worth of the Initial Shares or the Option Shares, which
shall be purchased weekly.
In connection with our entering into the Stock Purchase Agreement, the
Ordinary Share Purchase Agreement between Torneaux Fund Ltd., a Bahamian limited
liability company ("Torneaux"), and the Company, dated as of January 23, 2001,
in which we had an option for a twenty-four (24) month period to sell our
ordinary shares to Torneaux for a maximum amount of $40,000,000, was terminated
by Torneaux.
During the second quarter of 2001, the Company implemented a Board
approved restructuring plan. The restructuring reduced operating expense
associated with serving unprofitable and non-paying dot-com, destination site
and small community site customers. In addition, the Company closed the
e-commerce division and further reduced its workforce to about 160 people. The
restructuring plan focused on increased efficiencies through channel sales and
marketing to the enterprise market.
Also during the second quarter of 2001, we raised additional equity of
$0.8 million to fund the expansion of our majority owned subsidiary Commtouch
K.K. Japan.
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 Hughes Holdings LLC, an
institutional investor, has agreed to invest in the Company's ordinary shares
provided the share price is above $.75 or a lower amount if mutually agreed. The
cash realized for the shares sold will be determined based on the weighted
average price of the shares in the month of placement. Since our stock price has
been below $0.75 per share, this funding has never been concluded.
On July 24, 2001, we reported a loss of $8.5 million and $25.7 million
for the quarter and the six months ended June 30, 2001, compared to a loss of
$10.8 million and $19.9 million for the comparable quarter and six months
periods of 2000.
Based on the cash balance at June 30, 2001 of $9.1 million, the
expected receipt of $1 million from a grant approved by the Israeli Office of
Chief Scientist ("OCS"), current projections of revenues, related expenses, the
ability to further curtail certain discretionary expenses, in accordance with
our ongoing board approved contingency plan, and a potential funding capability
under the current Hughes equity line arrangement or other equity arrangement,
the Company believes it has
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sufficient cash to continue operations through at least June of 2002. The grant
from OCS to cover research and development expenses is dependent upon the
Company's fulfillment of its commitments under the OCS approval and the OCS's
satisfaction with the Company's R&D progress, its ability to raise funds in the
capital markets and the status of the shareholders legal actions. The Company is
attempting to raise at least $5 million in additional funding in the near term
by issuing equity under our existing equity line arrangement with Hughes, and/or
seeking 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.
Since we have so far failed to secure that amount of funding, we have started to
implement our contingency plan which requires 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 through
at least June 30, 2002. We began making these reductions in the second quarter
of 2001.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, Business Combinations, and
No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the nonamortization provisions of the Statement is expected to result in a
decrease in net loss of $2.5 million ($0.15 per share) per year. During 2002,
the Company will perform the first of the required impairment tests of goodwill
and indefinite lived intangible assets as of January 1, 2002 and has not yet
determined what the effect of these tests will be on the earnings and financial
position of the Company. Until December 31, 2001, the Company will continue to
perform the impairment testing according to Statement of Financial Accounting
Standards No. 121.
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 remain
below $1 for an extended period of time;
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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
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 us 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
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
8
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 $25.7 million for the first six
months of 2001. As of June 30, 2001, we had an accumulated deficit of
approximately $111.4 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 June 30, 2001 was $9.1 million. We are attempting to raise
at least $5 million in additional funding in the near term. Since we have so far
failed to secure that amount of funding, we have started to implement our
contingency plan which requires 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 through at least June
30, 2002. We began making these reductions in the second quarter of 2001.
Notwithstanding initiation of 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 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 160
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 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
9
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 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.
10
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.
The loss of our right to use software licensed to us by third parties
could harm our business.
We license technology that is incorporated into our products from third
parties, including security and encryption software. Any interruption in the
supply or support of any licensed software could disrupt our operations and
delay our sales, unless and until we can replace the functionality provided by
this licensed software. Because our products incorporate software developed and
maintained by third parties, we depend on these third parties to deliver and
support reliable products, enhance their current products, develop new
production on a timely and cost-effective basis and respond to emerging industry
standards and other technological changes.
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.
11
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 June 30, 2001 of $9.1 million, current
projections of revenues, related expenses, the ability to further curtail
certain discretionary expenses in accordance with a board approved contingency
plan, the expected receipt of $1 million from the OCS as noted above under
"Recent Developments," and a potential funding capability under the current
equity line arrangement with Hughes or other equity arrangement, the Company
believes it has sufficient cash to continue operations through at least June 30,
2002. 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. Since we have
so far failed to secure that amount of funding, we have started to implement our
contingency plan which requires 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 through at least June
30, 2002. We began making these reductions in the second quarter of 2001.
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 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. To
continue to be listed, our shares must have a minimum bid price of $1.00 per
share, among other requirements. Recently, our shares have had a minimum bid
price of substantially 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.
12
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
Incorporated and Wingra Technologies, LLC, beneficially owns approximately 5% of
our outstanding ordinary shares issued to her in connection with our acquisition
of Wingra on December 5, 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 higher than the market
value of our shares.
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
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. 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 Hughes Holdings Ltd., an institutional investor. The
shares we issue under this agreement will dilute existing shareholders. Since
our stock price has been below $0.75 per share, this funding has never been
concluded.
On November 2, 2000 the company announced its acquisition of Wingra
Technologies for a purchase price of approximately 1.29 million Commtouch
ordinary shares and approximately 0.3 million fully vested Commtouch options and
warrants. The Company is required to register these shares. This prospectus is a
part of the registration statement which we have filed to register those shares
(other than the shares underlying options granted to employees pursuant to the
Wingra Technologies, LLC 1998 Unit Option Plan, which were covered by a
Registration Statement on Form S-8 which was filed and became effective on July
20, 2001). Upon effectiveness of the registration statement, the shares
registered pursuant to the registration statement can be freely traded which
could adversely impact our share price. This registration statement was declared
effective on September 6, 2001.
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.
13
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
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. Recently, the military unrest has increased, resulting in a higher
number of hostile actions.
On September 11, 2001 terrorists attacked the World Trade Center in New
York City and the Pentagon in Washington DC. At this time, the United States
government suspects that these terrorists are from the Middle East. Any
14
United States government action in the Middle East in response to these
terrorist attacks could further increase economic instability and military and
political unrest in Israel and could significantly harm our business, operating
results and financial condition.
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
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 and 2001 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. In May 2001 we received approval for a grant of $1 million
from the OCS. The grant is conditioned upon the Company incurring research and
development expenses of at least $2 million during 2001. The grant from OCS to
cover research and development expenses is dependent upon the Company's
fulfilment of its commitments under the OCS approval and the OCS's satisfaction
with the Compnay's R&D progress, its ability to raise funds in the capital
markets and the status of the shareholders legal actions. 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 addition, the terms of any future
OCS grants may be less favorable than our past grants. In connection with
research and
15
development grants received from the OCS, we must make royalty payments to the
OCS of 3% - 5% of 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 Inc., our U.S. subsidiary, as our agent to receive service of process
in any action against us arising from this offering. 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.
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 former 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
16
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 any other person to provide you with different
information. This prospectus is not an offer to sell, nor is it seeking an offer
to buy, these securities in any state where the offer or sale is not permitted.
The information in this prospectus is complete and accurate as of the date on
the front cover, but the information may have changed since that date.
17
THE OFFER AND LISTING
THE OFFERING
Ordinary shares offered............................. 1,406,612 shares
Ordinary shares outstanding after the offering...... 17,407,708 shares
Use of proceeds..................................... We will not receive any of
the proceeds from the sale
of the shares by the
Selling Securityholders in
this offering.
NASDAQ National Market Symbol....................... CTCH
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 June 30, 2001, and:
o assumes the issuance of 478,762 ordinary shares issuable upon
exercise of options granted to executive officers and
directors within 60 days of June 30, 2001 at an exercise price
of $0.0125 per share, which is the price offered in our option
repricing; and
o with respect to financial information, is reported in U.S.
dollars;
and does not include:
o 1,480,085 ordinary shares issuable to employees and
consultants upon exercise of outstanding options under our
stock option plans and stock option agreements as of June 30,
2001 at an exercise price of $0.0125; and
o 1,958,596 ordinary shares available for future grant or
issuance under our stock option and stock purchase plans as of
June 30, 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:
HIGH LOW
--------- ---------
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
2001:
First Quarter..................................................... $ 4.6875 $ 0.75
Second Quarter.................................................... 1.69 0.60
Most Recent Six Months:
March 2001........................................................ 1.0625 0.75
April 2001........................................................ 0.74 0.49
May 2001.......................................................... 1.69 0.73
18
June 2001......................................................... 1.050 0.60
July 2001......................................................... 0.640 0.46
August 2001....................................................... 0.54 0.43
REASONS FOR THE OFFER AND USE OF PROCEEDS
We will not receive any proceeds from the sale of the shares by the
Selling Securityholders in this offering.
SELLING SECURITYHOLDERS
The following table presents information provided by the Selling
Securityholders with respect to beneficial ownership of our ordinary shares as
of June 30, 2001, and as adjusted to reflect the sale of the shares offered by
this prospectus, by the Selling Securityholders and assumes that all shares
being offered by this prospectus are ultimately sold in the offering by the
Selling Securityholders.
The table includes all shares issuable within 60 days of June 30, 2001
upon the exercise of options, warrants and other rights beneficially owned by
the indicated shareholders on that date. Beneficial ownership as set forth below
includes the power to direct the voting or the disposition of the securities or
to receive the economic benefit of ownership of the securities. To our
knowledge, except under applicable community property laws or as otherwise
indicated, the persons named in the table have sole voting and sole investment
control with respect to all shares beneficially owned. The applicable percentage
of ownership for each shareholder is based on 17,286,373 ordinary shares
outstanding as of June 30, 2001 and 17,407,702 ordinary shares outstanding
immediately following the completion of this offering, together with applicable
options and/or warrants for that shareholder that are exercisable within 60 days
of June 30, 2001.
SHARES BENEFICIALLY OWNED SHARES TO BE SHARES BENEFICIALLY OWNED
PRIOR TO OFFERING OFFERED AFTER OFFERING
---------------------- ------ ----------------------
PERCENT OF PERCENT OF
OUTSTANDING OUTSTANDING
NAME OF BENEFICIAL OWNER NUMBER SHARES NUMBER NUMBER SHARES
------ ------ ------ ------ ------
Anchor Bancorp 124,833 * 124,833 0 0
Wisconsin, Inc. (1)
25 West Main St.
Madison, WI 53703
David and Carol Anderson 7,159 * 7,159 0 0
6193 Washington Cir.
Wauwatosa, WI 53213
Marta and Stephen Ballering 7,810 * 7,810 0 0
3837 Cora Ln.
Richfield, WI 53076
R. Michael Campbell (1) 18,396 * 18,396 0 0
417 S. Hilusi
Mt. Prospect, IL 60056
Jan Eddy (1)(2) 881,947 5.0 881,947 0 0
c/o Wingra Technologies, Incorporated
450 Science Dr.
Ste. One West
Madison, WI 53711
William and Jeanette Erickson 7,810 * 7,810 0 0
5506 Sunset Tr.
Waunakee, WI 53597
Foley & Lardner 6,089 * 6,089 0 0
150 East Gilman St.
Madison, WI 53701
John Fox (1) 26,572 * 26,572 0 0
75 Golf Pkwy.
Madison, WI 53704
Deidre Garton 12,047 * 12,047 0 0
4101 Monona Dr.
19
Madison, WI 53716
Joseph Garton 16,866 * 16,866 0 0
4101 Monona Dr.
Madison, WI 53716
David Hackworthy 7,846 * 7,846 0 0
2136 Van Hise Ave.
Madison, WI 53705
R. Stephen Holdeman 7,810 * 7,810 0 0
1809 Stratford Ln.
Rockford, IL 61107
David Jackson (1) 8,909 * 8,909 0 0
514 Crecent Ln.
Thiensville, WI 53092
Douglas C. Johnson (3) 13,030 * 13,030 0 0
2219 Hamilton Ln.
Darien, IL 60561
Todd Johnson 7,810 * 7,810 0 0
6833 Cedar Creek Rd.
Cedarburg, WI 53012
Richard and Marcia Klipsch 24,095 * 24,095 0 0
5530 North Via Elena
Tucson, AZ 85718
W. Robert Koch (1) 68,300 * 68,300 0 0
5609 Trempealeau Tr.
Madison, WI 53705
Leif Larson (1) 18,379 * 18,379 0 0
W52 N629 Highland Dr.
Cedarburg, WI 53012
Gregory and Margaret Larson 62,492 * 62,492 0 0
509 8th St.
Waunakee, WI 53597
Roland Pampel 12,047 * 12,047 0 0
17 North Main St.
P.O. Box 879
Essex, CT 06426
D. Scott Paul 11,716 * 11,716 0 0
3939 Monona Dr. #402
Monona, WI 53716
John and Josephine Pollock (1) 18,378 * 18,378 0 0
1155 Farwell Dr.
Madison, WI 53704
John Shaefer 13,048 * 13,048 0 0
708 Timber Ridge
Sun Prairie, WI 53590
Lawrence and Lois Sobyak 7,810 * 7,810 0 0
4529 Meadow Wood Cir.
De Forest, WI 53532
Ken Urso (1) 5,348 * 5,348 0 0
3330 University Ave., Ste. 320
Madison, WI 53705
John C. Zimdars, Jr.(4) 10,065 * 10,065 0 0
440 Science Dr., Ste. 403
Madison, WI 53711
1,406,612 8.0% 1,406,612 0 0
========= ==== ========= = =
<FN>
------------
* Less than 1%.
(1) All of these Selling Securityholders hold promissory notes issued by Wingra
Technologies, Inc. in an aggregate principal amount for all such notes of
approximately $650,000 plus interest thereon. As of June 30, 2001, the maturity
dates of the notes range from December 2001 to March 2004.
20
(2) Jan Eddy serves as President of Wingra Incorporated and Wingra Technologies
LLC, subsidiaries of the Company.
(3) Held by the Douglas C. Johnson Revocable Trust dated 5/9/97, of which Mr.
Johnson is the sole trustee.
(4) All of such shares are held by the Zimdars Company 401(k) Plan Trust, of
which Mr. Zimdars is the sole trustee.
</FN>
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 June 30, 2001, our authorized share capital consisted of
40,000,000 ordinary shares, NIS 0.05 par value. As of June 30, 2001, there were
17,286,373 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.
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
21
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.
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 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
22
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 purchase 137,233 shares issued to the Wingra investors (subsequently
reduced to 121,329 due to expiration of certain options), and options to
purchase 168,382 ordinary shares to Wingra employees (subsequently reduced to
162,257 due to expiration of options of terminating employees). Upon
effectiveness of the merger, these warrants and options became immediately
exercisable.
The assumed investor warrants and options were originally issued by
Wingra in connection with loans to Wingra by banks and shareholders. The
exercise prices of those warrants and options range from $6.29 to $9.35 and the
expiration dates range from July 2002 through March 2004.
The employee stock options were originally granted to Wingra employees
under the Wingra Technologies, LLC 1998 Unit Option Plan. The exercise prices of
those options range from $0.2010 to $3.5010 and the expiration dates range from
August 2008 through July 2010. At the time of the merger, we assumed the rights
and obligations under that Option Plan.
REGISTRATION RIGHTS
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 (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 InfoSpace) were registered on January 7, 2000.
Also, under the terms of the Wingra acquisition agreement, we are
required to register the 1,568,869 shares issuable to the Wingra investors and
employees, including shares currently issuable under options and warrants
described above. The registration statement of which this prospectus is a part
and a Form S-8 registration statement were filed to fulfill this requirement and
became effective, respectively, on September 6, 2001 and July 20, 2001.
23
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
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 June 30, 2001 we had 17,286,373 ordinary shares outstanding. The
3,450,000 ordinary shares sold in our initial public offering in July 1999; the
1,344,086 ordinary shares and the warrant exercisable for 1,136,000 ordinary
shares of InfoSpace and Vulcan Ventures registered in 2000 in a secondary
offering along with the 707,965 ordinary shares held by Microsoft Corporation;
and the 315,789 shares we issued to Rideau Ltd., a private investor, on June 30,
2001, are (or, in the case of the InfoSpace warrant, will be upon exercise of
the warrant) 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
1,406,612 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 (including fractional shares payable
in cash), and as noted above we assumed warrants and options to issue an
additional 137,233 shares to those investors (subsequently reduced to 121,329
due to expiration of certain options), and options to issue 168,382 ordinary
shares to Wingra employees (subsequently reduced to 162,257 due to expiration of
options of terminating employees). Further, 20% of the 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. Five
percent of these 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 all of these shares. The registration statement of
which this prospectus is a part was filed to fulfill this requirement as to
1,406,612 shares and became effective on September 6, 2001. On July 20, 2001, we
filed an additional registration statement on Form S-8 to cover the employee
stock options which became exercisable for our shares upon consummation of the
acquisition, which became effective on that date. Upon effectiveness of these
registrations, the shares can be freely traded (subject to the restrictions
noted), which could adversely impact our share price.
Also, the 850,000 shares to be issued to Hughes Holdings LLC and the up
to 1,400,000 additional shares which Hughes will have an option to purchase,
noted above under "Risk Factors--Recent Developments," will be freely tradeable,
as will the warrants which we may issue to Hughes for 85,000 shares and 140,000
shares, respectively, in connection with these two purchases. Since our stock
price has been below $0.75 per share, this funding has never been concluded.
The 3,684,211 shares remaining under our shelf registration statement
after the recent issuance of 315,789 shares to Rideau Ltd. will be freely
tradeable once issued. The shares to be issued to Hughes will originate from
this registration statement.
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.
24
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
174,077 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
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
2,404,390 options issued, 989,387 option shares were vested and unexercised as
of June 30, 2001 and 1,145,014 options had been exercised. On July 20, 2001, the
Company filed another Form S-8 registration statement to register: an additional
250,000 of our ordinary shares approved by our shareholders on August 10, 2000
for issuance under the Company's director stock option plan; an additional
79,156 shares issuable under our Employee Stock Purchase Plan; and 162,257
shares underlying options issuable to employees of Wingra pursuant to the terms
of the Wingra merger agreement and the Wingra Technologies, LLC 1998 Unit Option
Plan.
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. Options to purchase 1,521,988 shares are
covered by this repricing.
ADDITIONAL RESTRICTIONS
In addition to the restrictions imposed by the securities laws, 493,660
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 June 30, 2001, approximately
13,733 ordinary shares are subject to repurchase.
In addition, approximately 5% of the shares being offered are being
held in escrow until December 5, 2001 in connection with payment of possible
future claims by us arising out of the Wingra acquisition. Because of this
restriction, the Selling Securityholders have no present intention to sell
approximately 5% of the shares being offered by this prospectus until on or
after December 5, 2001. Also, approximately 20% of the shares to which this
prospectus relates are subject to an agreement between us and the Selling
Securityholders which prohibits each of them from transferring, selling or
otherwise disposing of his or her shares until December 20, 2001. Because of
this restriction, the Selling Securityholders have no present intention to sell
approximately 20% of their respective ordinary shares being offered by this
prospectus until on or after December 20, 2001.
25
OFFER STATISTICS AND EXPECTED TIMETABLE AND PLAN OF DISTRIBUTION
The Selling Securityholders may sell, directly or through brokers, the
ordinary shares in one or more long or short transactions at fixed prices, at
market prices at the time of sale, at varying prices determined at the time of
sale or at negotiated prices. As noted above under "Shares Eligible for Future
Sale--Additional Restrictions," certain of the shares covered by this prospectus
are subject to contractual agreements entered into by the Selling Shareholders
by which such shares may not be resold until certain time periods have elapsed.
Although none of the Selling Securityholders has advised us of the manner in
which such Securityholder currently intends to sell its ordinary shares, the
Selling Securityholders may choose to sell all or a portion (or none) of such
shares from time to time in one or more of the following transactions:
o On any national securities exchange or quotation service on
which the ordinary shares may be listed or quoted at the time
of sale, including the Nasdaq National Market;
o In the over-the-counter market;
o In private transactions;
o Through options or other derivative instruments;
o By pledge to secure debts or other obligations;
o Through block transactions;
o Any other legally available means; or
o A combination of any of the above transactions.
In connection with such sales, the Selling Securityholders and any
participating broker may be deemed to be "underwriters" of the shares within the
meaning of the Securities Act, although the offering of these securities may not
be underwritten by a broker-dealer firm. If a Selling Securityholder qualifies
as an "underwriter" under the Securities Act and the rules and regulations and
interpretations thereunder, such person will be subject to the prospectus
delivery requirements of the Act. Such broker-dealers may receive compensation
in the form of underwriting discounts, concessions or commissions from the
Selling Securityholders. Any such commissions and profits realized on any resale
of the shares might be deemed to be underwriting discounts and commissions under
the Securities Act. Sales in the market may be made to broker-dealers making a
market in the ordinary shares or other broker-dealers, and such broker-dealers,
upon their resale of such securities, may be deemed to be underwriters in this
offering.
In addition, any ordinary shares offered by this prospectus that
qualify for sale pursuant to Rule 144 under the Securities Act may be sold under
Rule 144 rather than pursuant to this prospectus.
The Company will bear all costs and expenses of the registration under
the Securities Act and certain state securities laws of the ordinary shares,
other than any discounts or commissions payable with respect to sales of such
securities. From time to time this prospectus may be supplemented or amended as
required by the Securities Act. During any time when a supplement or amendment
is required, the Selling Securityholders are required to stop making sales until
the prospectus has been supplemented or amended. Further, the Company is
required to maintain the effectiveness of the Registration Statement until the
earlier of (a) May 6, 2003 or (b) such time as all securities offered hereby
have been sold. We will make copies of this prospectus available to the Selling
Securityholders and have informed the Selling Securityholders of the need for
delivery of a copy of this prospectus to each purchaser of the ordinary shares
prior to or at the time of such sale.
Pursuant to the terms under which the ordinary shares were issued to
the Selling Securityholders, the Company has agreed to indemnify the Selling
Securityholders against such liabilities as they may incur as a result of any
untrue statement of a material fact in the Registration Statement, or any
omission therein to state a material fact required to be stated therein or
necessary in order to make the statements made not misleading. Such
indemnification includes liabilities under the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), state securities laws and
the rules thereunder, but excludes liabilities for statements or omissions that
were based on written information provided by the Selling Securityholders
expressly for use in the Registration Statement, as to which the Selling
Securityholders have agreed to indemnify the Company. The Company has also
agreed to indemnify the Selling Securityholders against liabilities they may
26
incur arising from any violation or alleged violation by the Company of the Act,
the Exchange Act, any state securities law or any rule or regulation promulgated
under the Securities Act, or the Exchange Act or any state securities law.
Each Selling Securityholder and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Securityholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distribution, subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
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, our legal and accounting fees and the legal fees of
counsel on behalf of the Selling Securityholders. We estimate these expenses to
be approximately $ 230,158, which include the following categories of expenses:
SEC registration fee.................................. $ 158*
Printing and engraving expenses....................... 10,000
Legal fees and expenses............................... 100,000
Accounting fees and expenses.......................... 100,000
Transfer agent and registrar fees and expenses........ 10,000
Miscellaneous Expenses................................ 10,000
Total................................................. $ 230,158
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*This fee is being offset against the filing fee of $49,468.00 previously paid
for Registration No. 333-31836, which was withdrawn prior to effectiveness.
------------------
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 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 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
27
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 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 SEC. 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
SEC 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
June 1, 2001 (reporting our transaction with Rideau Ltd. and other matters); our
report on Form 6-K for the month of June 2001 filed June 12, 2001 (reporting our
transaction with Hughes Holdings LLC and the termination of our equity line
agreement with Torneaux Fund Ltd.); and our report on Form 6-K for the month of
August filed August 10, 2001 (containing information for the quarter and six
months ended June 30, 2001); 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.
28
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated in Israel, and many 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 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
1,406,612 Ordinary Shares
COMMTOUCH SOFTWARE LTD.
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PROSPECTUS
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September 26, 2001