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FORM 6-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OF 15d-16 OF
THE SECURITES EXCHANGE ACT OF 1934
FOR THE MONTH OF AUGUST 1999
(CONTAINING QUARTERLY INFORMATION FOR THE QUARTER ENDED JUNE 30, 1999)
COMMTOUCH SOFTWARE LTD.
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
10 TECHNOLOGY AVENUE EIN VERED 40696, ISRAEL
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F
----- -----
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes No X
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COMMTOUCH SOFTWARE LTD.
FORM 6-K
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets December 31, 1998
(Audited) and June 30, 1999 (Unaudited)
Condensed Consolidated Statements of Operations Three and Six
months ended June 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows Six months
ended June 30, 1999 and 1998 (Unaudited)
Note to Condensed Consolidated Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibit
Exhibit Description of Document
1 August 10, 1999 Press Release: "Commtouch
Revenues increase 837 percent"
Signatures
1
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(UNAUDITED) (1)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,663 $ 834
Trade receivables 465 133
Prepaid expenses 1,263 96
Government authorities 31 45
Other accounts receivable 244 103
-------- --------
Total current assets 13,666 1,211
Severance Pay Fund 273 223
Property and Equipment, net 2,155 932
-------- --------
$ 16,094 $ 2,366
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term bank line of credit $ -- $ 1,328
Current portion of bank loans and capital leases 124 112
Trade payables 797 446
Employees and payroll accruals 476 313
Government authorities 275 246
Deferred revenue 84 74
Other liabilities 308 132
-------- --------
Total current liabilities 2,064 2,651
-------- --------
Long-term Portion of Bank Loans and Capital Leases 99 164
Accrued Severance Pay 465 366
-------- --------
564 530
-------- --------
Commitments and Contingent Liabilities -- --
Shareholder's Equity (Deficit):
Convertible Preferred Shares
107 74
Ordinary Shares
36 27
Additional Paid-in Capital 39,421 11,256
Stock-Based Employee Deferred Compensation (7,528) (418)
Notes Receivable from Shareholders (964) (77)
Accumulated Deficit (17,606) (11,677)
-------- --------
Total Shareholders' Equity (Deficit) 13,466 (815)
-------- --------
$ 16,094 $ 2,366
======== ========
</TABLE>
The accompanying note is an integral part of these condensed consolidated
financial statements.
(1) The balance sheet at December 31, 1998 has been derived from audited
financial statements at that date, but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
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COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Email Services - revenue ................. $ 553 $ 59 $ 899 $ 91
Cost of Email services - revenue ........ 747 85 1,202 144
------- ------- ------- -------
Gross loss ............................... (194) (26) (303) (53)
------- ------- ------- -------
Operating expenses:
Research and development, net .......... 407 305 714 571
Sales and marketing .................... 1,180 506 1,661 965
General and administrative ............. 828 137 1,587 275
Amortization of stock-based employee
deferred compensation ............... 1,013 8 1,399 10
------- ------- ------- -------
Total operating expenses ....... 3,428 956 5,361 1,821
------- ------- ------- -------
Operating loss ........................... (3,622) (982) (5,664) (1,874)
Interest income (expense) and other, net . 6 (59) (265) (86)
------- ------- ------- -------
Net loss ................................. $(3,616) $(1,041) $(5,929) $(1,960)
======= ======= ======= =======
Basic and diluted net loss per share ..... $ (1.66) $ (0.72) $ (3.17) $ (1.35)
======= ======= ======= =======
Weighted average number of shares used in
computing basic and diluted net loss per
share .................................. 2,178 1,450 1,869 1,450
======= ======= ======= =======
</TABLE>
The accompanying note is an integral part of these condensed consolidated
financial statements.
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COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 1998
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................... $ (5,929) $ (1,960)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization ....................... 498 87
Amortization of stock-based employee deferred
compensation and warrants issued for service
received and bank line of credit .................. 1,752 10
Decrease (increase) in trade receivables ............ (332) 32
Increase in other accounts receivable and
prepaid expenses .................................. (1,294) (200)
Increase (decrease) in trade payables ............... 351 (35)
Increase (decrease) in other liabilities ............ 303 (75)
Increase in deferred revenue ........................ 10 --
Increase in accrued severance pay, net .............. 49 19
-------- --------
Net cash used in operating activities ............. (4,592) (2,122)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ..................... (1,659) (248)
-------- --------
Net cash used in investing activities ............. (1,659) (248)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank line of credit, net .................... (1,328) 496
Payment of capital lease ............................... (50) --
Proceeds from issuance of shares ....................... 18,458 1,890
-------- --------
Net cash provided by financing activities ......... 17,080 2,386
-------- --------
Increase in cash and cash equivalents .................... 10,829 16
Cash and cash equivalents at the beginning of the period 834 324
-------- --------
Cash and cash equivalents at the end of the period ....... $ 11,663 $ 340
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITY:
Cash paid during the year:
Interest ................................................. $ 42 $ 25
======== ========
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Ordinary shares issued for notes receivable from
shareholders ......................................... $ 887 $ --
======== ========
</TABLE>
The accompanying note is an integral part of these condensed consolidated
financial statements.
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COMMTOUCH SOFTWARE LTD.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The condensed consolidated financial statements have been prepared by
Commtouch Software Ltd., without audit, and include the accounts of
Commtouch Software Ltd. and its wholly-owned subsidiary (collectively
the "Company"). Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant
to such rules and regulations. In the opinion of the Company, the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
financial position at June 30, 1999 and the operating results and cash
flows for the reported periods. These financial statements and notes
should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended December 31, 1998,
which were filed with the Securities and Exchange Commission on Form
F-1.
The results of operations for the three and six months ended
June 30, 1999 are not necessarily indicative of the results that may be
expected for the future quarters or the year ending December 31, 1999.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based upon current
expectations that involve risks and uncertainties. Any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects," "intends" and similar expressions are intended to identify
forward-looking statements. CommTouch's actual results and the timing of certain
events may differ significantly from those projected in the forward-looking
statements. Factors that might cause future results to differ materially from
those projected in the forward-looking statements include, but are not limited
to, those discussed in "Risk Factors" in the Company's prospectus dated July 13,
1999.
OVERVIEW
We are a leading global provider of outsourced email and other messaging
services. Our flexible and highly customizable solutions enable us to satisfy
the different email and messaging needs of a wide range of business partners,
including websites of all sizes and businesses worldwide. As of June 30, 1999,
we had approximately 109 business partners offering our Web-based email from
their sites. Our business partners include Excite, LookSmart, FortuneCity, Talk
City and Nippon Telephone and Telegraph. Through our business partners' sites we
serve approximately 4.9 million emailboxes. In November 1998, we launched our
ZapZone Network service, which enables sites to provide email to their end users
at no cost. As of June 30, 1999, we had registered approximately 103,000 sites
through the ZapZone Network service, and were serving over 658,000 ZapZone
Network emailboxes. Business partners may provide us with a large number of
users but pay a relatively small minimum annual service fee. Consumers have
historically been reluctant to pay for services on the Internet, and therefore
end users may not be willing to pay for premium services. Since untargeted
advertising on the Internet has not shown a significant success rate,
advertisers may not be willing to pay us to provide banner advertising or direct
e-marketing.
STRATEGIC TRANSACTION
Concurrently with our initial public offering, we entered into an agreement with
Go2Net, a network of branded, technology- and community-driven websites focused
on personal finance, commerce, and games. Go2Net also develops Web-related
software. Pursuant to the agreement we will offer Go2Net's end users with a
private label email service, including our email, calendaring and other
services. The services will be customized to the look and feel of Go2Net's
websites. The terms of this agreement are substantially the same as our
commercial agreements with other business partners except that we have agreed to
share a materially greater portion of our advertising revenues with Go2Net than
we are sharing under other similar agreements. In addition, in connection with
the agreement, we will issue to Go2Net a warrant to purchase 1,136,000 ordinary
shares at a per share exercise price of $12.80, subject to adjustment as set
forth in the warrant. The warrant is fully vested and non-forfeitable. The
warrant will expire on the fifth anniversary of the public offering. The fair
value of the warrant, estimated at $5.8 million, will be amortized to operating
expenses ratably over the minimum term of the agreement, or one-year.
Simultaneously with the sale of the shares in the public offering, we sold
1,344,086 ordinary shares to Go2Net and Vulcan Ventures Incorporated at $14.88
per share in a private placement which was not registered with the Securities
and Exchange Commission at the time of the public offering, but will be
registered within the six months following the offering. In the future, we may
have to issue in-the-money warrants to acquire our ordinary shares to business
partners who provide us with a large base of potential end users. We may also
have to provide these business partners with more favorable commercial terms
than we have previously provided to our business partners. The issuance of
in-the-money warrants and the grant of more favorable terms to business partners
may further dilute our shareholders, increase our operating loss in the future
and cause our stock price to fall.
RESULTS OF OPERATIONS
The following table sets forth financial data for the three month and six month
periods ended June 30, 1999 and 1998 (in thousands):
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Email service - revenue .................. $ 553 $ 59 $ 899 $ 91
Cost of Email service - revenue .......... 747 85 1,202 144
------- ------- ------- -------
Gross loss ............................... (194) (26) (303) (53)
------- ------- ------- -------
Operating expenses:
Research and development, net .......... 407 305 714 571
Sales and marketing .................... 1,180 506 1,661 965
General and administrative ............. 828 137 1,587 275
Amortization of stock-based employee
deferred compensation ................ 1,013 8 1,399 10
------- ------- ------- -------
Total operating expenses .......... 3,428 956 5,361 1,821
------- ------- ------- -------
Operating loss ........................... (3,622) (982) (5,664) (1,874)
Interest income/(expense) and other, net . 6 (59) (265) (86)
------- ------- ------- -------
Net loss ................................. $(3,616) $(1,041) $(5,929) $(1,960)
======= ======= ======= =======
</TABLE>
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
Revenues. Email service revenues increased from $59,000 for the three months
ended June 30, 1998 to $553,000 for the three months ended June 30, 1999. Email
service revenue increased from $91,000 for the six months ended June 30, 1998 to
$899,000 for the six months ended June 30, 1999. The key factor contributing to
the growth of our revenues for the three and six month periods ended June 30,
1999 is the increase in the number of Business partners that have contracts that
are generating revenue for the Company. As of June 30, 1999, the Company had
backlog from minimum service fee contracts amounting to approximately
$4,000,000, which will be recognized as revenue on a ratable basis through the
second quarter of 2001. Revenues from one customer, Excite, amounted to $55,000
and $110,000, or 9.9% and 12.2% of total revenues for the three and six months
ended June 30, 1999, respectively. In the future, we expect revenues from Excite
to decrease substantially as a percentage of email services revenue.
Cost of Revenues. Our cost of revenues increased from $85,000 for the three
months ended June 30, 1998 to $747,000 for the three months ended June 30, 1999
and increased from $144,000 for the six months ended June 30, 1998 to $1,202,000
for the six months ended June 30, 1999 because of the increase in the number of
business partners. Costs of revenues consisted primarily of costs related to
Internet data center services from a third-party provider, depreciation of
equipment, Internet access, personnel and related costs. We expect cost of
revenues to increase on an absolute basis, primarily as a result of an increase
in our email service revenues, but to decrease as a percentage of email service
revenues due to economies of scale.
Research and Development Costs, Net. Research and development costs consist
primarily of personnel and related costs, depreciation of equipment, supply
costs and royalties paid to the Israeli Government for grants received in prior
years for research and development activities. These royalties are paid at rates
ranging from 3% to 5% of total revenues. We do not expect to receive further
grants from the Israeli Government. Our research and development costs increased
from $305,000 for the three months ended June 30, 1998 to $407,000 for the three
months ended June 30, 1999 and from $571,000 from the six months ended June 30,
1998 to $714,000 for the six months ended June 30, 1999, due primarily to higher
personnel and related costs. We expect that research and development costs, net,
will increase in absolute dollar amounts due to increases in personnel costs
related directly to new employees being hired to develop new service offerings,
however such costs will decrease as a percentage of revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of personnel
and related costs, public relations, direct sales efforts, including travel
expenses and royalties paid to the Israeli Government for grants received in
prior years for marketing activities. Our sales and marketing expenses increased
from $506,000 for the three months ended June 30, 1998 to $1,180,000 for the
three months ended June 30, 1999 and increased from $965,000 for the six months
ended June 30, 1998 to $1,661,000 for the six months ended June 30, 1999 due
primarily to marketing and other costs to support the growth of our email
service revenues. We expect sales and marketing expenses to significantly
increase in the future in absolute dollar amounts due to increases in personnel
costs related directly to new employees being hired to conduct sales to business
partners and the related market support to further develop our brand. We expect
that for the next several quarters, the increase in sales and marketing will be
somewhat proportionate to the increase in revenues. Once we achieve significant
revenue growth, we expect that sales and marketing expenses will start to
decline as a percentage of total revenues as we hire additional personnel and
continue to support and develop the email service business.
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General and Administrative. General and administrative costs consist primarily
of personnel and related costs, professional services and facility costs. Our
general and administrative expenses increased from $137,000 for the three months
ended June 30, 1998 to $828,000 for the three months ended June 30, 1999, and
increased from $275,000 for the six months ended June 30, 1998 to $1,587,000 for
the six months ended June 30, 1999, due primarily to substantially higher
personnel and related costs, facility costs, higher fees for outside
professional services and other costs to support the growth of our email service
revenues. We expect general and administrative costs to increase on an absolute
basis due to increased personnel and related costs, higher facility costs
associated with additional personnel and other costs necessary to support and
develop the email service business. We expect that general and administrative
expenses as a percentage of total revenues will start to decline in the next
several quarters.
Amortization of Stock-based Employee Deferred Compensation. Our stock-based
employee compensation expenses increased from $8,000 for the three months ended
June 30, 1998 to $1,013,000 for the three months ended June 30, 1999 and from
$10,000 for the six months ended June 30, 1998 to $1,399,000 for the six months
ended June 30, 1999. The deferred compensation is being amortized using the
sum-of-digits method over the vesting schedule, generally four years and will be
slightly higher in the third quarter of 1999 then decreasing in each successive
quarter.
Interest Income/(Expense) and Other Expense, Net. Our interest income/(expense)
and other expense, net, decreased from a net expense of $59,000 for the three
months ended June 30, 1998 to a net income of $6,000 for the three months ended
June 30, 1999, due primarily to increased recognized costs of warrants granted
to the Bank Lepituach Ha Taasia B'Israel Ltd. (Bank Lepituach Ha Taasia) net of
interest income earned from cash and cash equivalents. In April 1999, we fully
repaid the short-term bank line of credit to Bank Lepituach Ha Taasia.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations principally from the sale of equity securities
and to a lesser extent from bank loans and research and development and
royalty-bearing marketing grants from the Israeli government. As of June 30,
1999, we had $11,663,000 in cash and cash equivalents.
Net cash provided by financing activities was $17,080,000 for the six months
ended June 30, 1999. Net cash used in operating activities was $4,592,000 for
the six months ended June 30, 1999. Net cash used for operating activities is
comprised of net loss for the six months, partially offset by depreciation,
amortization expenses, increases in other accounts receivable and prepaid
expenses, which primarily relate to costs incurred in connection with Company's
initial public offering, which was closed in July 1999. Net cash used in
investing activities was $1,659,000 for the six months ended June 30, 1999.
These investing activities consisted of purchases of property and equipment.
As of June 30, 1999, we had net working capital of $11,602,000. The short-term
bank line of credit was repaid in April 1999. Through March 31, 1999, we issued
to Bank Lepituach Ha Taasia warrants to purchase 96,340 ordinary shares. The
bank exercised the warrant in the second quarter of 1999.
In the first quarter of 1999, we issued Series C Convertible Preferred Shares to
investors resulting in net proceeds of $5.3 million. In the second quarter of
1999, we issued to investors Convertible Promissory Notes which have since
converted into 42,081 Series D Convertible Preferred Shares, resulting in net
proceeds of approximately $13.2 million. All of our convertible preferred shares
automatically converted into ordinary shares upon the closing of our initial
public offering.
On July 13, 1999, the Company raised $67,500,000, net of underwriters
commission, from the public offering and the private placement from the
Strategic partnership with Go2Net and Vulcan Ventures.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations, causing disruptions of operations for any
company using such computer programs or hardware, including, among other things,
a temporary inability to process transactions, send invoices or engage in normal
business activities. As a result, many companies' computer systems may need to
be upgraded or replaced in order to avoid Year 2000 issues.
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We are a comparatively new enterprise, and, accordingly, the majority of the
software and hardware we use to manage our business has been purchased or
developed by us within the last 24 months. While this fact does not uniformly
protect us against Year 2000 exposure, we believe we gain some mitigation from
the fact that the information technology (IT) we use to manage our business is
not based upon "legacy system" hardware and software. "Legacy system" is a term
often used to describe hardware and software systems which were developed in
previous decades when there was less awareness of Year 2000 issues. Generally,
hardware and software design in this decade and the past several years in
particular has given greater consideration to Year 2000 issues. All of the
software code we have internally developed to manage our network traffic, for
example, uses four digits to define the applicable year.
We are in the process of testing our internal IT and non-IT systems. To date, we
have only completed preliminary testing of our internally developed IT and
non-IT systems. All of the testing we have completed has been performed by our
own personnel; to date, we have not retained any outside service or consultants
to test or review our systems for Year 2000 compliance. Based on the testing we
have performed, we believe that such software is Year 2000 compliant; however,
we intend to complete more extensive testing in the third quarter of 1999.
In addition to our internally developed software, we utilize software and
hardware developed by third parties for both our network and internal
information systems. To date, we have not done any testing of such third-party
software or hardware to determine Year 2000 compliance. We have, however,
obtained certifications from our key suppliers of hardware and networking
equipment for our data centers that such hardware and networking equipment is
Year 2000 compliant. Additionally, we have received assurances from the
providers of key software applications for our internal operations that their
software is Year 2000 compliant. Based upon an initial evaluation of our broader
list of software and hardware providers, we believe that all of these providers
are reviewing and implementing their own Year 2000 compliance programs, and we
will work with these providers to address the Year 2000 issue and continue to
seek assurances from them that their products are Year 2000 compliant.
In addition, we rely on third party network infrastructure providers to gain
access to the Internet. If such providers experience business interruptions as a
result of their failure to achieve Year 2000 compliance, our ability to provide
Internet connectivity could be impaired, which could have a material adverse
effect on our business, results of operations and financial condition.
Our customers' success in maintaining Year 2000 compliance is also significant
to our ability to generate revenues and execute our business plan. We currently
derive revenue by charging a fixed fee per month for each mailbox we host, by
charging a service fee plus advertising sharing or by sharing advertising
revenues with our customers. In either case, interruptions in our customers'
services and online activities caused by Year 2000 problems could have a
material, adverse effect on our revenues to the extent that such interruptions
limit or delay our customers' ability to expand their base of email users.
We have not incurred any significant expenses to date, and we do not anticipate
that the total costs associated with our Year 2000 remediation efforts,
including both expenses already incurred and any to be incurred in the future,
will exceed $100,000. However, if we, our customers, our providers of hardware
and software, or our third party network providers fail to remedy any Year 2000
issues, our service could be interrupted and we could experience a material loss
of revenues that could have a material adverse effect on our business, results
of operations, and financial condition. We would consider such an interruption
to be the most reasonably likely unfavorable result of any failure by us, or the
third parties upon whom we rely, to achieve Year 2000 compliance. Presently, we
believe we are unable to reasonably estimate the duration and extent of any such
interruption, or quantify the effect it may have on our future revenues. We have
yet to develop a comprehensive contingency plan to address the issues which
could result from such an event. We are prepared to develop such a plan if our
ongoing assessment leads us to conclude we have significant exposure based upon
the likelihood of such an event.
EFFECTIVE CORPORATE TAX RATES
Our tax rate will reflect a mix of the U.S. statutory tax rate on our U.S.
income and the Israeli tax rate discussed below. We expect that most of our
taxable income will be generated in Israel. Israeli companies are generally
subject to corporate tax at the rate of 36% of taxable income. The majority of
our income, however, is derived from our company's capital investment program
with Approved Enterprise status under the Law for the Encouragement of Capital
Investments in two separate plans, and is therefore eligible for certain tax
benefits. Pursuant to these benefits, we will enjoy a tax exemption on income
derived during the first two years in which such investment plans produce
taxable income (provided that we do not distribute such income as a dividend)
and a reduced tax rate of 10% to 25% for an additional period of eight years
depending on the level of foreign investment in CommTouch. All of these tax
benefits are subject to various conditions and restrictions. There can be no
assurance that we will obtain approval for additional Approved Enterprise
programs, or that the provisions of the law will not change. Moreover,
notwithstanding these tax benefits, to the extent we receive income from
countries other than Israel, such income may be subject to withholding tax.
Since we have incurred tax losses through December 31, 1998, we have not yet
used the tax benefits for which we are eligible.
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IMPACT OF INFLATION AND CURRENCY FLUCTUATIONS
Most of our sales are in dollars. However, a large portion of our costs relates
to our operations in Israel. A substantial portion of our operating expenses,
primarily our research and development expenses, is denominated in NIS. For the
purposes of our financial statements, costs not effectively denominated in
dollars are translated to dollars when recorded, at prevailing exchange rates
and will increase if the rate of inflation in Israel exceeds the devaluation of
the NIS as compared to the dollar or if the timing of such devaluations lags
considerably behind inflation. Consequently, we are and will be affected by
changes in the prevailing NIS/dollar exchange rate. We might also be affected by
the dollar exchange rate to the major European and Asian currencies, due to the
fact that we derive revenues from business partners in Europe and Asia.
In recent years (until 1997), inflation in Israel exceeded the devaluation of
the NIS against the dollar and the Company experienced increases in the dollar
cost of its operations in Israel. Because exchange rates between the NIS and the
dollar fluctuate continuously (albeit with a historically declining trend in the
value of the NIS), exchange rate fluctuations and especially larger periodic
devaluations will have an impact on our profitability and period-to-period
comparisons of our results. The effects of foreign currency remeasurements are
reported in the Consolidated Financial Statements in current operations. In the
fourth quarter of 1998 the rate of exchange between the NIS and the dollar
fluctuated more significantly than in prior periods.
The representative exchange rate, as reported by the Bank of Israel, was NIS
4.076 for one dollar on June 30, 1999.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We develop our technology in Israel and provide our services in North America,
India, Europe and the Far East. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. As most of our sales are currently made
in U.S. dollars, a strengthening of the dollar could make our services less
competitive in foreign markets. Our interest expense on our capital lease
obligations with a U.S. leasing company is sensitive to changes in the general
level of U.S. interest rates. Due to the nature and level of our debts, we have
concluded that there is currently no material market risk exposure. Therefore,
no quantitative tabular disclosures are required.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMTOUCH SOFTWARE, LTD.
----------------------------------------
(Registrant)
Date August 27, 1999 By /s/ JAMES E. COLLINS
--------------------- --------------------------------------
James E. Collins
Chief Financial Officer
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<PAGE> 1
EXHIBIT 1
FOR IMMEDIATE RELEASE
COMMTOUCH REVENUES INCREASE 837 PERCENT
Santa Clara, CA (August 10, 1999)--CommTouch Software Ltd. (Nasdaq: CTCH), a
leading provider of web-based email, today reported results for the second
quarter and six months ended June 30, 1999. Revenues for the quarter ended June
30, 1999 increased 837% to $553,000 from $59,000 in the comparable quarter a
year ago. Revenues for the six months ended June 30, 1999 increased 887% to
$899,000 from $91,000 for the six months ended June 30, 1998. Revenues for the
1999 second quarter rose 59% over first quarter revenues of $346,000. As of June
30, 1999, the Company had a backlog from email service fee contracts amounting
to approximately $4,000,000 which will be recognized as revenue on a ratable
basis through the second quarter of 2001.
"The increase in our revenues are a testament to the rapidly growing number of
business partners who recognize CommTouch's unique ability to provide them with
state of the art email services," explained Gideon Mantel, CEO of CommTouch.
"During the past quarter, CommTouch has attracted nearly two million new
subscribers to its services, and we see this trend continuing as we provide more
email solutions," Mantel added.
Net loss for the quarter ended June 30, 1999 was $3.60 million compared to $1.04
million for the second quarter of 1998. Net loss for the six month period ended
June 30, 1999 were $5.93 million compared to $1.96 million for the six months
ended June 30, 1998. Net loss per share for the quarter ended June 30, 1999 was
$1.66 compared to net loss per share of $0.72 in the comparable quarter a year
ago.
ABOUT COMMTOUCH
Serving now 6.4 million active mailboxes around the world, CommTouch is a
leading provider of private-label email services, offered exclusively through
the web sites of major Internet portals, community sites and web based
businesses. CommTouch email is designed for superior performance and rapid
scalability, offering end user interfaces in fifteen of the world's major
languages.
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<PAGE> 2
With more than eight years of delivering intuitive, award-winning email
software, CommTouch provides its partners a truly comprehensive turn-key email
service, together with options for premium communications services and direct
marketing opportunities.
The Company partners with internationally recognized consumer-driven
organizations, including Excite (NASDAQ: ATHM), Go2Net (Nasdaq: GNET),
McGraw Hill's BusinessWeek Magazine (NYSE: MHP), Discovery Channel Online,
Nippon Telephone & Telegraph (NYSE: NTT), ZDNet (NYSE: ZDZ), Talk City,
LookSmart, Netopia (NASDAQ: NTPA), Hachette Multimedia, the McClatchy
Group's Nando.net (NYSE: MNI), The Headbone Zone, News Corp's (NYSE:NWS)
People's Daily joint venture ChinaByte and the Hollinger Group's Jerusalem
Post.
Founded in 1991, CommTouch has offices in Silicon Valley, California, New
York City and Ein Vered, Israel. Additional information may be obtained by
visiting: www.commtouch.com.
-More-
(C) 1999 CommTouch Software, Ltd. All rights reserved.
CommTouch is a registered trademark of CommTouch Software Ltd.
Terms and product names in this document may be trademarks of others.
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<PAGE> 3
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 11,663 $ 834
Trade receivables 465 133
Prepaid expenses 1,263 96
Government authorities 31 45
Other accounts receivable 244 103
-------- --------
Total current assets 13,666 1,211
Severance Pay Fund 273 223
Property and Equipment, net 2,155 932
-------- --------
$ 16,094 $ 2,366
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term bank line of credit $ -- $ 1,328
Current portion of bank loans and capital leases 124 112
Trade payables 797 446
Employees and payroll accruals 476 313
Government authorities 275 246
Deferred revenue 84 74
Other liabilities 308 132
-------- --------
Total current liabilities 2,064 2,651
-------- --------
Long-term Portion of Bank Loans and Capital Leases 99 164
Accrued Severance Pay 465 366
-------- --------
564 530
-------- --------
Commitments and Contingent Liabilities: -- --
Shareholder's Equity (Deficit)
Convertible Preferred Shares 107 74
Ordinary Shares 36 27
Additional Paid-in Capital 39,421 11,256
Stock-Based Employee Deferred Compensation (7,528) (418)
Notes Receivable from Shareholders (964) (77)
Accumulated Deficit (17,606) (11,677)
-------- --------
Total Shareholders' Equity (Deficit) 13,466 (815)
-------- --------
$ 16,094 $ 2,366
======== ========
</TABLE>
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<PAGE> 4
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Email Services - revenue ................. $ 553 $ 59 $ 899 $ 91
Cost of Email services - revenue ........ 747 85 1,202 144
------- ------- ------- -------
Gross loss ............................... (194) (26) (303) (53)
------- ------- ------- -------
Operating expenses:
Research and development, net .......... 407 305 714 571
Sales and marketing .................... 1,180 506 1,661 965
General and administrative ............. 828 137 1,587 275
Amortization of stock-based employee
deferred compensation ............... 1,013 8 1,399 10
------- ------- ------- -------
Total operating expenses ....... 3,428 956 5,361 1,821
------- ------- ------- -------
Operating loss ........................... (3,622) (982) (5,664) (1,874)
Interest income (expense) and other, net . 6 (59) (265) (86)
------- ------- ------- -------
Net loss ................................. $(3,616) $(1,041) $(5,929) $(1,960)
======= ======= ======= =======
Basic and diluted net loss per share ..... $ (1.66) $ (0.72) $ (3.17) $ (1.35)
======= ======= ======= =======
Weighted average number of shares used in
computing basic and diluted net loss per
share .................................. 2,178 1,450 1,869 1,450
======= ======= ======= =======
</TABLE>
14
