<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1999
REGISTRATION NO. 333-78531
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COMMTOUCH SOFTWARE LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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ISRAEL 7389 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
10 TECHNOLOGY AVENUE
EIN VERED 40696, ISRAEL
011-972-9-796-1053
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
C/O COMMTOUCH SOFTWARE INC.
JAMES E. COLLINS, CHIEF FINANCIAL OFFICER
3945 FREEDOM CIRCLE, SUITE 730
SANTA CLARA, CALIFORNIA 95054
(408) 653-4358
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
------------------------
COPIES TO:
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<S> <C> <C> <C>
LIOR O. NUCHI AARON M. LAMPERT ROBERT P. LATTA BARRY P. LEVENFELD
DAWN L. JUDD AMIR ENGLER CHRIS F. FENNELL SHERYL SILVER OCHAYON
IRENE SONG SHARKANSKY NASCHITZ, CHRISTIAN E. MONTEGUT YIGAL ARNON & CO.
JASON J. TAYLOR BRANDES & CO. PRIYA CHERIAN HUSKINS 3 DANIEL FRISCH STREET
ORIT H. REGWAN 5 TUVAL STREET WILSON SONSINI TEL AVIV 64731, ISRAEL
MCCUTCHEN, DOYLE, TEL AVIV 67897 ISRAEL GOODRICH & ROSATI
BROWN & ENERSEN, LLP 650 PAGE MILL ROAD
3150 PORTER DRIVE PALO ALTO, CA 94304
PALO ALTO, CA 94304
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AGGREGATE AMOUNT OF
BEING REGISTERED OFFERING PRICE REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------
ordinary shares, NIS 0.05 nominal value per share....... $58,650,000 $16,305.00(1)(2)
- --------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Calculated pursuant to Rule 457(a).
(2) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE SECURITIES AND EXCHANGE COMMISSION DECLARES
OUR REGISTRATION STATEMENT EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY
STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 3, 1999
COMMTOUCH SOFTWARE LTD.
3,000,000 ORDINARY SHARES LOGO
$ PER SHARE
- --------------------------------------------------------------------------------
- - CommTouch Software Ltd. is offering 3,000,000 of its ordinary shares.
- - We anticipate that the initial public offering price will be between $15.00
and $17.00 per share.
- - This is our initial public offering and no public market currently exists for
our shares.
- - Proposed trading symbol: Nasdaq National Market -- CTCH.
---------------------------------------------
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
- --------------------------------------------------------------------------------
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<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price....................................... $ $
Underwriting Discounts and Commissions...................... $ $
Proceeds to CommTouch....................................... $ $
</TABLE>
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The underwriters have a 30 day option to purchase up to 450,000 additional
ordinary shares from us to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The Israel Securities Authority has granted CommTouch an exemption from the
obligation to publish an Israeli prospectus relating to this offering. This
exemption shall not be construed as a determination that this prospectus is
truthful or complete or as an expression of opinion as to the securities
offered.
U.S. Bancorp Piper Jaffray
Prudential Securities
Warburg Dillon Read LLC
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 3
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL, AND SEEKING OFFERS TO
BUY, ORDINARY SHARES ONLY IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF
THIS PROSPECTUS, REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY
SALE OF OUR ORDINARY SHARES.
IN THIS PROSPECTUS, THE "COMPANY," "COMMTOUCH," "WE," "US," AND "OUR" REFER
COLLECTIVELY TO COMMTOUCH SOFTWARE LTD., AN ISRAELI COMPANY, AND ITS UNITED
STATES SUBSIDIARY, COMMTOUCH SOFTWARE INC. (UNLESS THE CONTEXT OTHERWISE
REQUIRES). ALL REFERENCES TO "DOLLARS" OR "$" IN THIS PROSPECTUS ARE TO UNITED
STATES DOLLARS AND ALL REFERENCES TO "NIS" ARE TO NEW ISRAELI SHEKELS.
-------------------------
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
Summary..................................................... 1
Risk Factors................................................ 4
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Capitalization.............................................. 17
Dilution.................................................... 18
Selected Consolidated Financial Information................. 19
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 21
Business.................................................... 31
Management.................................................. 48
Certain Transactions........................................ 56
Principal Shareholders...................................... 59
Description of Share Capital................................ 61
Shares Eligible for Future Sale............................. 65
U.S. Tax Considerations Regarding Ordinary Shares Acquired
by U.S. Taxpayers......................................... 67
Israeli Taxation and Investment Programs.................... 71
Conditions In Israel........................................ 76
Underwriting................................................ 78
Legal Matters............................................... 79
Experts..................................................... 79
ISA Exemption............................................... 80
Where You Can Find More Information......................... 80
Enforceability of Civil Liabilities......................... 80
Index to Consolidated Financial Statements.................. F-1
</TABLE>
We have the following registered trademarks: COMMTOUCH (registered in the U.S.);
PRONTO (U.S. and other countries); COMMTOUCH SOFTWARE (Australia and New
Zealand); PRONTO FAMILY, PRONTO SECURE (Japan); and PRONTO MAIL (Japan and New
Zealand). We also have the following pending trademark applications: ZAPZONE
NETWORK, ZZN (U.S., Israel and other countries); and PRONTO (Canada, Mexico,
European Community and India). This prospectus also includes trademarks, trade
names and service marks of other companies, each of which belongs to its holder.
i
<PAGE> 4
SUMMARY
The items in the following summary are described in more detail later in this
prospectus. This summary provides an overview of selected information and does
not contain all the information you should consider in making an investment.
Therefore, you should also read the more detailed information set out in this
prospectus, including the Consolidated Financial Statements and the Notes
thereto.
COMMTOUCH
We are a leading global provider of 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. We provide a full-featured,
branded Web-based email service that enhances online brand image, promotes
website usage and creates the opportunity to generate additional revenues from
advertising and direct marketing online. For businesses, we provide email and
communication services to employees and online customers, thereby increasing
communication, brand awareness and revenue opportunities.
Email is one of the most widely used applications on the Internet and has become
a significant communications medium. International Data Corporation, or IDC,
projects that email traffic in the United States will increase from 1.2 billion
messages per day in 1997 to 8.0 billion messages per day in 2002. Further,
Web-based email, which is email accessed over the Internet using a browser
program, is one of the fastest growing categories of email. With the dramatic
growth of international Internet usage, websites and businesses worldwide are
seeking to differentiate themselves online.
We have been providing our Web-based email and other messaging services since
January 1998. As of May 16, 1999, we had over 100 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 4.5 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 May 16, 1999, we had
registered approximately 75,000 sites through the ZapZone Network service, and
were serving approximately 480,000 ZapZone Network emailboxes. Our comprehensive
email and messaging services offer the following benefits:
- - Extensive email features. Our services are easy to use, and include a broad
set of email capabilities.
- - Ability to support hundreds of millions of emailboxes. We can support hundreds
of millions of emailboxes across millions of domains while maintaining a
highly reliable service.
- - Customization. Our business partners use our proprietary customization tool to
make the look and feel of their Web-based email interface consistent with
their own brand image.
- - Increased website usage. Our services increase the frequency and duration of
users' visits to our partners' websites.
- - Online marketing capabilities. Our business partners and third parties selling
goods and services online can leverage our services and the demographic
information of our end users to conduct one-to-one direct marketing and
targeted advertising campaigns.
- - Rapidly deployable and cost-effective solutions. Our solutions can be quickly
implemented and can save our partners the significant costs of developing and
maintaining an email service in-house.
- - Extensive Language Capabilities. Our email services are available in 14
languages. Additionally, we can support more than one language on any of our
business partners' websites.
OFFICE LOCATION
Our principal executive offices are located at 10 Technology Avenue, Ein Vered
40696, Israel, where our telephone number is 011-972-9-796-3445, and 3945
Freedom Circle, Santa Clara, California 95054, where our telephone number is
(408) 653-4330. Our website addresses are www.commtouch.com, www.zzn.com and
www.prontomail.com. The information contained on our websites is not a part of
this prospectus.
1
<PAGE> 5
THE OFFERING
Ordinary shares offered by CommTouch...... 3,000,000 shares
Ordinary shares to be outstanding after
the offering.............................. 12,258,120 shares
Use of Proceeds........................... Expansion of sales and marketing
activities; capital expenditures;
expansion of research and
development activities; expansion
of international operations;
working capital and other general
corporate purposes. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol.... CTCH
Except as set forth in the Consolidated Financial Statements included as part of
this prospectus and as otherwise specified, all information in this prospectus
(including the information set forth above regarding the ordinary shares offered
and the ordinary shares to be outstanding after the offering) is based on the
number of shares outstanding as of March 31, 1999 and:
- assumes no exercise of the underwriters' over-allotment option,
- gives effect to the April 1999 issuance of Convertible Promissory Notes
that will convert into 42,081 Series D Convertible Preferred Shares upon
the obtaining of certain Israeli governmental approvals and the
conversion of those notes,
- gives effect to a 20-for-one split of the ordinary shares to be effected
prior to the offering,
- gives effect to the conversion of each of CommTouch's convertible
preferred shares into 20 ordinary shares upon the closing of the
offering,
- with respect to financial information, is reported in U.S. dollars,
and does not include:
- 694,860 ordinary shares issuable upon exercise of outstanding options
under our stock option plans and stock option agreements as of March 31,
1999 at a weighted average exercise price of $1.25 per share,
- 3,642,460 ordinary shares available for future grant or issuance under
our stock option plans as of March 31, 1999,
- 409,940 shares issuable upon exercise of outstanding warrants as of March
31, 1999 at a weighted average exercise price of $1.70 per share, of
which warrants to purchase 277,460 shares expire upon the closing of this
offering if not exercised and
- 205,000 ordinary shares issuable upon exercise of options granted to
officers and directors after March 31, 1999 at a weighted average
exercise price of $15.75 per share.
2
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following tables set forth our summary consolidated financial data. The
information set forth for the three months ended March 31, 1999 is unaudited.
You should read the following information together with our Consolidated
Financial Statements and the Notes thereto beginning on page F-1 of this
prospectus, the information under "Selected Consolidated Financial Information"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations." See Note 1 of the Notes to our Consolidated Financial Statements
for an explanation of the weighted average number of shares used in computing
per-share data.
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<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------ ----------------
1996 1997 1998 1998 1999
---------- ---------- ---------- ------ -------
(UNAUDITED)
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Email services..................................... $ -- $ -- $ 389 $ 32 $ 346
Software licenses, maintenance and services........ 3,134 899 -- -- --
---------- ---------- ---------- ------ -------
Total revenues.............................. 3,134 899 389 32 346
Operating loss..................................... (1,237) (3,405) (4,025) (892) (2,040)
Net loss........................................... (1,282) (3,473) (4,351) (919) (2,311)
Net loss per share -- basic and diluted............ (0.66) (2.40) (3.00) (0.63) (1.50)
Weighted average number of shares -- basic and
diluted.......................................... 1,934 1,450 1,450 1,450 1,546
Pro forma net loss per share -- basic and diluted
(unaudited)...................................... $ (0.78) $ (0.32)
Pro forma weighted average number of
shares -- basic and diluted (unaudited).......... 5,594 7,313
</TABLE>
The following data is presented:
- On an actual basis.
- On a pro forma basis to give effect to (1) the April 1999 issuance of
Convertible Promissory Notes that will convert into 42,081 Series D
Convertible Preferred Shares upon the obtaining of certain Israeli
governmental approvals and (2) the automatic conversion of all
CommTouch's convertible preferred shares, including those issuable under
the Convertible Promissory Notes, into 7,109,800 ordinary shares upon the
closing of this offering.
- On a pro forma as adjusted basis to give effect to the sale of 3,000,000
ordinary shares in this offering, assuming an initial public offering
price of $16.00 per share resulting in net cash proceeds of approximately
$42.5 million.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(UNAUDITED)
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CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 3,226 $ 16,331 $58,871
Working capital........................................... 1,418 14,523 57,063
Total assets....................................... 6,025 19,130 61,670
Long-term liabilities..................................... 560 560 560
Shareholders' equity...................................... 2,807 15,912 58,452
</TABLE>
3
<PAGE> 7
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.
RISKS RELATING TO THE COMPANY
BECAUSE WE HAVE A LIMITED OPERATING HISTORY AS A WEB-BASED EMAIL SERVICE
PROVIDER, IT IS DIFFICULT TO EVALUATE OUR 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 and
service of stand-alone email client software products for mainframe and personal
computers. This change required us to adjust our business processes and to
restructure CommTouch to become a Web-based email service provider. Therefore,
we have only a limited operating history as a provider of Web-based email
services upon which you can evaluate our business and prospects.
WE HAVE A HISTORY OF LOSSES AND MAY NEVER ACHIEVE PROFITABILITY
We incurred net losses of approximately $1.3 million in 1996, $3.5 million in
1997 and $4.4 million in 1998 and $2.3 million in the three months ended March
31, 1999 . As of March 31, 1999, we had an accumulated deficit of approximately
$14.0 million. We have not achieved profitability in any period, and we expect
to continue to incur net losses for the foreseeable future.
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 expanding our sales and marketing
organizations, strategic relationships and operating infrastructure. We expect
that our expenses will continue to increase in absolute dollars. If our revenues
do not correspondingly increase, our operating results and financial condition
will be negatively affected. We may never attain sufficient revenues to achieve
profitability. If we do achieve profitability, we may not sustain or increase
profitability in the future. This may, in turn, cause our stock price to
decline.
OUR FUTURE EMAIL SERVICES REVENUES ARE UNPREDICTABLE AND OUR QUARTERLY OPERATING
RESULTS MAY FLUCTUATE DUE TO THE EMERGING MARKET FOR INTERNET-BASED BUSINESSES
AND SERVICES
As a result of the recent introduction of our email services, our limited
operating history, and the emerging nature of the Web-based email market, we
cannot accurately forecast our future revenues. Our revenues and operating
results have varied widely in the past and we expect them to fluctuate in the
future. In addition, our operating results may not follow any past trends. A
number of factors, many of which are enumerated in this "Risk Factors" section,
are likely to cause fluctuations in our operating results. Other factors which
may cause such fluctuations include:
- - the size, timing and fulfillment of orders for our email services;
- - our mix of service offerings, including our ability to successfully implement
new services;
- - pricing of our services; and
- - effectiveness of our customer support.
Because of these 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. In this
event, the price of our ordinary shares is likely to decline. Despite this
uncertainty regarding our future revenues and operating results, we typically
make decisions regarding operating expenses based on anticipated revenue trends.
Significant portions of these expenses are fixed in the short term. Thus, if our
revenue expectations are wrong, our operating results may suffer.
4
<PAGE> 8
WE DEPEND ON RAPID GROWTH IN THE DEMAND FOR WEB-BASED EMAIL SERVICES
Our success will depend on the widespread acceptance and use of Web-based email
by our customers as a means to increase the value of their services or as a
means of communication. The market for Web-based 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 Web-based email fails to
grow or grows more slowly than we currently anticipate, our business will suffer
dramatically. Even if that market grows, we do not know whether our service will
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 all of our revenue is derived
directly or indirectly from our Web-based email solutions, we are far more
vulnerable to factors that affect that market than we would be if we had more
diversified product and service offerings.
WE DEPEND ON OUR BUSINESS PARTNER RELATIONSHIPS, WHICH ARE BASED ON RELATIVELY
SHORT TERM, NONEXCLUSIVE AGREEMENTS
Our ability to increase revenues depends upon successful marketing of our
services through new and existing business partners. Our agreements with our
business partners generally can be terminated for any or for no reason after the
first year. The agreements with our business partners are non-exclusive and do
not restrict them from introducing competing services. Also, some of our
relationships allow termination earlier than one year if we do not provide a
specified level of service. Loss of one or a few key business partners to a
competitive solution could damage our reputation and hurt our ability to develop
new relationships. This could prevent new relationships with business partners
as well as with marketing partners. If we fail to develop new relationships or
if our business partners terminate or do not renew their contracts with us, our
business will suffer, as we will lose potential revenue from the lost business
partners and from their underlying base of email users. One of our business
partners, Talk City, accounts for 20 percent of the emailboxes we currently
host. Another business partner, Excite, accounted for 54 percent of our revenues
in 1998.
IF WE DO NOT COMPETE SUCCESSFULLY WITH LARGER AND MORE ESTABLISHED EMAIL SERVICE
AND SOFTWARE COMPANIES, OUR OPERATING RESULTS AND BUSINESS WILL SUFFER
The market for Web-based 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. Many of our current and potential
competitors have longer operating histories, larger end user bases, greater
brand recognition and significantly greater financial, marketing and other
resources than we do. These competitors may enter into strategic or commercial
relationships with larger, more established and better-financed companies. In
addition to competing with companies that develop and maintain in-house
services, we compete with email service providers, such as USA.NET, Mail.com and
Critical Path, and email software companies, such as Microsoft, Software.com,
Inc. and Lotus Development Corporation. Microsoft currently offers free Web-
based email through its Hotmail website and has a dominant market share. In
addition, Internet service providers, such as AOL (and its subsidiary,
Netscape), provide Web-based email services to a large number of end users.
Some of our competitors provide a variety of Web-oriented services, such as
Internet access, browser software, homepage design and hosting, in addition to
email. The ability of these competitors to offer a broader suite of
complementary services may give them a considerable advantage over us in
accessing customers, meeting customer needs and minimizing the effect that
performance of a single product will have on their business. Some of our
competitors may offer services at or below cost. In the future, as we expand our
service offerings, we expect to encounter increased competition in the
development and delivery of these services.
5
<PAGE> 9
OUR SUCCESS DEPENDS ON OUR SUCCESSFUL INTEGRATION OF OUR SALES AND MARKETING
PERSONNEL, MANY OF WHOM WERE RECENTLY HIRED
Our ability to increase our revenues will depend on our ability to successfully
expand our sales and marketing organization. The complexity of our Internet
messaging services and the emerging nature of the Web-based email market require
highly trained sales and marketing personnel to educate prospective business
partners regarding the use and benefits of our services. The majority of our
sales and marketing personnel have only recently joined CommTouch and have
limited experience working together. Our Vice President, Marketing has only
worked with us since March 1999. It will take time for these employees to learn
how to market our solutions and to be integrated into our sales organization.
Some of them may not succeed in making this transition. Additionally, we are
beginning to roll out a significant number of services that we have no
experience marketing and will rely on these services to produce a substantial
portion of our revenues in the future. As a result of these factors, our sales
and marketing organization may not be able to compete successfully against the
bigger and more experienced sales and marketing organizations of our
competitors.
WE MARKET OUR EMAIL AND MESSAGING SERVICES IN PART THROUGH BUSINESS PARTNERS,
MANY OF WHOM HAVE NO EXPERIENCE IN MARKETING SUCH SERVICES
We rely to some extent on our business partners to market our email and
messaging services to their end users. These business partners often have no
experience marketing these types of services. In addition, even though our
business partners can earn revenues from successfully helping us market our
services, and are contractually obligated to provide some marketing effort, it
will be difficult for us to control that effort.
WE ARE EXPERIENCING RAPID INTERNAL GROWTH WHICH HAS AND LIKELY WILL STRAIN OUR
MANAGEMENT RESOURCES
We recently began to expand our operations rapidly and intend to continue this
expansion. The number of our employees increased from 36 on June 30, 1998 to 45
on December 31, 1998 and to 62 on March 31, 1999. This expansion has placed, and
is expected to continue to place, a significant strain on our managerial,
operational and financial resources. To manage any further growth, we will need
to improve or replace our existing operational, customer service and financial
systems, procedures and controls.
OUR CURRENT AND INCREASING RELIANCE ON INTERNATIONAL OPERATIONS MAKES US
PARTICULARLY VULNERABLE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES
We provide our email services in the United States and internationally. We
received approximately 40% of our total revenues in 1997 and approximately 72%
of our total revenues in 1998 from customers or business partners located
outside of North America. We maintain offices in the U.S. and Israel to market
and sell our products in those countries and surrounding regions. We plan to
establish additional facilities in other parts of the world. The expansion of
our existing international operations and entry into additional international
markets will require significant management attention and financial resources.
We cannot be certain that our investment in establishing facilities in other
countries will produce desired levels of revenue. We currently have limited
experience in developing localized versions of our products, and in marketing
and distributing our products internationally. In addition, our international
operations are subject to other inherent risks, including, but not limited to:
- slower adoption of the Internet;
- uncertain demand in foreign markets for Web-based email advertising,
direct marketing and online commerce applications;
- greater difficulty in accounts receivable collection, and longer
collection periods;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- potentially adverse tax consequences; and
- political and economic instability.
6
<PAGE> 10
Some of our international revenues are denominated in local currencies. We do
not currently engage in currency hedging activities. Although to date exposure
to currency fluctuations has been insignificant, future fluctuations in currency
exchange rates may negatively affect revenues from international sales. While
most of our revenues and a majority of our expenses are denominated in dollars,
a significant portion of our research and development expenses are incurred in
NIS. As a result, we may be negatively affected by fluctuations in the exchange
rate between the U.S. dollar and the NIS.
WE DEPEND ON A FEW KEY SENIOR MANAGEMENT PERSONNEL, SOME OF WHOM HAVE LIMITED
EXPERIENCE WORKING TOGETHER
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,
Isabel Maxwell, the President of our subsidiary, and Amir Lev, our Chief
Technical Officer, could materially and adversely affect our business. We do not
have long-term 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.
WE MUST RECRUIT AND RETAIN QUALIFIED EMPLOYEES IN THE HIGHLY COMPETITIVE
TECHNOLOGY LABOR MARKETS OF SILICON VALLEY AND ISRAEL
Our success depends on our ability to recruit, retain and motivate highly
skilled sales and marketing, technical and managerial personnel. Competition for
these people is intense, particularly in Silicon Valley and Israel, and we may
not be able to successfully recruit, train or retain qualified personnel.
WE MAY FAIL TO EXPLOIT OUR POTENTIAL REVENUE STREAMS, WHICH ARE UNPROVEN AND
INVOLVE EMERGING PRODUCTS AND SERVICES
Our business plan calls for us to increase our business partner and end user
base, to successfully exploit existing sources of revenue and to create new
sources of revenue. We have generated our revenues mainly from service fees,
advertising sharing with our business partners and set-up and installation fees.
We are subject to several constraints which may limit our ability to generate
revenues from our business partners and our end user base, such as:
- - Infrequency of emailbox usage. On an ongoing basis, many of our end users will
not regularly use their emailboxes, and a significant number will cease using
our service each month. For example, approximately 1.1 million of the
emailboxes we host were established under a program in which one of our
business partners issued emailboxes to all of its users on an unsolicited
basis, rather than having the end users register for emailboxes. Accordingly,
the figure 4.5 million emailboxes, indicated throughout this prospectus, does
not necessarily reflect the number of emailboxes from which we will be able to
generate revenues.
- - Inability to market premium services. Our end users may be reluctant to pay
for services provided over the Internet, especially when similar or competing
services are offered at no cost.
- - Failure of online advertising market to develop. Because we, and our business
partners, have only recently begun to offer online advertising, our potential
advertisers have little or no experience with this medium. We do not yet have
enough experience to demonstrate the effectiveness of this form of
advertising. As a result, those advertisers willing to try online advertising
are likely to allocate only a limited portion of their advertising budgets to
online advertising.
- - Potential inaccuracy of demographic data. We may only be able to provide
limited information about our end users to advertisers, marketing firms and
other third parties concerning the end users of the emailboxes we host.
Additionally, we are unable to confirm the accuracy of this data. We rely on
our end users to provide limited demographic information about themselves, but
we have not made any attempt to verify this user data and have no current
plans to do so. As a result, our databases may
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contain inaccurate user information. This could limit the ability of our
business partners to successfully target end users for direct marketing and
advertising, and could have a material adverse effect on our business and
operating results.
- - Lack of acceptance of direct online marketing. Our current and potential
business partners may not readily adopt online applications of direct
marketing. Enterprises that have already invested substantial resources in
other methods of conducting business may be reluctant or slow to adopt a new
approach that may replace, limit or compete with their existing systems.
Furthermore, if a significant number of our end users do not elect to receive
direct marketing messages, we will fail to derive meaningful revenues from
this potential revenue stream.
BECAUSE OUR BUSINESS IS BASED ON COMMUNICATIONS AND MESSAGING SERVICES, WE ARE
SUSCEPTIBLE TO SYSTEM INTERRUPTIONS AND CAPACITY CONSTRAINTS, WHICH COULD HARM
OUR BUSINESS
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. 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 business partners that require
minimum performance standards. If we fail to meet these standards, our business
partners 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. The ability of our network to continue to connect and
manage an expanding number of partners, end users and messages at high
transmission speeds is unproven and uncertain. We face risks related to our
network's ability to operate with higher use levels while maintaining expected
performance levels.
WE ARE A RELATIVELY SMALL COMPETITOR IN THE ELECTRONIC MESSAGING INDUSTRY, AND
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 business partners. 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 business partner or end user requirements or emerging industry
standards. Also, in addition to addressing changing technologies and end user
needs, we must also do so more quickly than our competition.
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OUR SERVICES MAY BE ADVERSELY AFFECTED BY SOFTWARE DEFECTS
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.
WE MAY NOT BE SUCCESSFUL IN BUILDING OUR BRAND AND ATTEMPTING TO DO SO WILL BE
VERY COSTLY
We believe that a strong brand identity will be important if we are to increase
both revenue and end user traffic on our sites. We intend to use a portion of
the proceeds of the offering to substantially increase our marketing efforts to
build the CommTouch brand. We do not have experience with some of the types of
marketing that we are contemplating. Failure to build our brand could have an
adverse effect on our business and operating results.
MANY OF OUR BUSINESS PARTNERS ARE EMERGING INTERNET COMPANIES WITH UNPROVEN
BUSINESS MODELS AND MAY BE INSUFFICIENTLY CAPITALIZED
Many of our business partners have limited operating histories, are operating at
a loss, and have limited access to capital. Many of these businesses could fail,
and as a result we may lose market opportunities with respect to their end
users, or those businesses could represent credit risks.
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 business partners. 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 business partners and their end users for any breach in our
security. 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. To our knowledge, we have not experienced a
security breach of our system.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
OR TO AVOID OTHERS SUCCESSFULLY CLAIMING THAT WE INFRINGE THEIRS
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 business partners 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 with 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.
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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 be subject to legal proceedings and claims regarding intellectual
property rights from time to time in the ordinary course of our business. Such
proceedings may involve claims of alleged infringement of the trademarks and
other intellectual property rights of third parties by us or claims by us to
protect our proprietary rights. Any intellectual property litigation, regardless
of whether we ultimately prevail, would likely be expensive and time-consuming
and could divert management's attention away from running our business. If we
were to lose any such dispute, we could be subject to substantial liabilities.
We could also be prevented from using technology that we rely upon or be forced
to license such technology. Such licenses may not be available on acceptable
terms or at all. Even if available, such licenses could result in significant
expenses that could harm our operating results. If such licenses are not
available, we would have to develop the technology ourselves, which could be
expensive and cause interruption in the provision of our services.
THIRD PARTIES MAY ALLEGE THAT USERS OF OUR ZAPZONE NETWORK SERVICE INFRINGE UPON
THEIR INTELLECTUAL PROPERTY RIGHTS AND MAY BRING LEGAL CLAIMS AGAINST US
Our ZapZone Network service allows webmasters to select the email service name
of their choice (although we reserve the right to eliminate their account or to
change their email service name). There is, therefore, the possibility that they
will select email service names that may infringe the rights of others. We have
received several complaints about ZapZone Network service webmasters' registered
email service names, as described below, and we have referred these complainants
directly to the ZapZone Network service subscribers who are allegedly engaging
in the infringing activities.
ZapZone Network service's placement of ZapZone Network service icons and
advertisements on ZapZone Network service webmasters' web pages may contribute
to our perceived liability for any allegedly infringing acts. We do not audit
webmasters' email service name choices for compliance with any intellectual
property rights of others. We have received complaints from several parties
complaining that email service names chosen and registered by ZapZone Network
service users are similar or identical to domain names and/or trademarks in
which the complainants claim an interest. We responded by referring the
complainants to the webmasters who registered those email service names, as it
is our policy to do.
WE RELY ON THIRD PARTIES TO PROVIDE TECHNOLOGIES AND COMMUNICATION
INFRASTRUCTURE USED IN OUR SOLUTION
We intend to continue to license certain technology from third parties,
including our Web server, mail server, database server and encryption
technology. We also license technology that enables us to provide some features
of our communications functionality. The market is evolving and we may need to
license additional technology to remain competitive. We may not be able to
license this technology on commercially reasonable terms, or at all. An
inability to obtain any of these licenses could delay product and service
development until equivalent technology can be identified, licensed or developed
internally and integrated. In addition, we may fail to successfully integrate
any licensed technology into our services. These third-party licenses may expose
us to increased risks of diversion of resources from the development of our own
proprietary technology. We also may not be able to generate revenues from new
technology sufficient to offset the costs of acquiring these third party
technology licenses.
We are also dependent on other companies to supply certain key components of our
telecommunications infrastructure and system and network management solutions.
This includes telecommunications services and networking equipment that, in the
quantities and quality demanded by us, are available only from sole or limited
sources. In particular, we currently have almost all of our website and
Internet-based mail
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servers, which are critical components of our solutions, hosted by a single
company. That hosting is pursuant to an agreement which may be terminated by
either party upon 90 days' written notice. If any of these providers were to
discontinue these arrangements, and alternative providers did not quickly emerge
or were to increase the cost of providing access, our ability to transmit email
or provide any of our services could be reduced.
WE MAY HAVE LIABILITY FOR EMAIL CONTENT AND WE MAY NOT HAVE ADEQUATE LIABILITY
INSURANCE
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, and we could be exposed
to liability with respect to this content. 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. Although we carry general liability insurance, our
insurance may not adequately protect us from such claims. Any imposition of
liability, particularly liability that is not covered by insurance, or is in
excess of insurance coverage, could damage our reputation and hurt our business
and operating results, or could result in criminal penalties.
GOVERNMENTAL REGULATION AND LEGAL UNCERTAINTIES COULD HARM OUR 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.
The Federal Trade Commission is considering regulation regarding the collection
and use of personal identifying information obtained from individuals, including
children, when accessing websites. Such regulation may include disclosure and
privacy provisions, and could reduce our ability to engage in direct marketing.
UNSUCCESSFUL ACQUISITIONS COULD HARM OUR OPERATING RESULTS AND OUR BUSINESS
We may acquire businesses, products and technologies that complement or augment
our existing businesses, services and technologies. Integrating any newly
acquired businesses or technologies may be expensive and time-consuming, and we
may not be able to successfully integrate any acquired business. Such
acquisitions, if they involve our issuance of equity, would result in dilution
of our existing shareholders' interests in CommTouch.
WE MAY NEED ADDITIONAL CAPITAL AND RAISING ADDITIONAL CAPITAL MAY DILUTE
EXISTING SHAREHOLDERS
We believe that our existing capital resources, including the anticipated
proceeds of this offering, will enable us to maintain our current and planned
operations for at least the next 12 months. However, we may be required to raise
additional funds due to unforeseen circumstances. If our capital requirements
vary materially from those currently planned, we may require additional
financing sooner than anticipated. Such financing may not be available in
sufficient amounts or on terms acceptable to us and may cause dilution to
existing shareholders. Also, we may raise such additional capital by issuing
securities that have superior rights and preferences to our ordinary shares.
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WE HAVE NO INTENTION OF PAYING DIVIDENDS
We have never declared or paid any cash dividends on our share capital. We
currently intend to retain any future earnings for funding growth and,
therefore, do not expect to pay any dividends in the foreseeable future.
IF WE DO NOT ADEQUATELY ADDRESS "YEAR 2000" ISSUES, WE MAY INCUR SIGNIFICANT
COSTS AND OUR BUSINESS COULD SUFFER
The "Year 2000" issue is the result of computer programs and embedded hardware
systems having been developed using two digits rather than four to define the
applicable year. These 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 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 comply with the Year 2000
requirements. We have preliminarily tested our internally developed software and
are in the process of revising it to make it Year 2000 compliant. Many of our
business partners maintain their Internet operations on commercially available
operating systems that may be impacted by Year 2000 complications. In addition,
we rely on third-party vendors for certain software and hardware included within
our services, which may not be Year 2000 compliant. Where we are aware that such
software or hardware is not Year 2000 compliant, we are working with those
vendors to address these issues and to ensure that those systems will be Year
2000 compliant. Failure of our internal computer systems or third-party
equipment or software, or of systems maintained by our suppliers, to operate
properly with regard to the year 2000 and thereafter, could require us to incur
significant unanticipated expenses to remedy any problems and could cause system
interruptions and loss of data. Any of these events could harm our reputation,
business and operating results. We have not yet developed a comprehensive
contingency plan to address the issues that could result from Year 2000
complications.
AFTER THE LOCK-UP AGREEMENTS EXPIRE, A SIGNIFICANT NUMBER OF ADDITIONAL SHARES
WILL BECOME FREELY TRADABLE, WHICH MAY REDUCE THE PER SHARE TRADING PRICE OF OUR
STOCK
After this offering, we will have 12,258,120 ordinary shares outstanding. All
the shares sold in this offering will be freely tradable. The remaining
9,258,120 ordinary shares outstanding after this offering are subject to lockup
agreements that prohibit the sale of the shares for 180 days after the date of
this prospectus. Immediately after the 180-day lockup period, 7,825,360 of the
ordinary shares which will be outstanding after the offering will become
available for sale. The remaining ordinary shares will become available at
various times thereafter upon the expiration of one-year holding periods. Sales
of a substantial number of ordinary shares in the public market after this
offering or after the expiration of the lockup and holding periods could cause
the market price of our ordinary shares to decline.
PURCHASERS OF OUR ORDINARY SHARES WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is expected to be substantially higher than
the book value per share of our ordinary shares. Some elements of our market
value do not originate from measurable transactions. Therefore, there is not a
corresponding rise in "book," or historical cost accounting, value for our rise
in market value, if any. Examples of these elements include the perceived growth
prospects of our core commercial market, perceived growth prospects of our
Web-based email services and our perceived competitive position within the
market for Web-based email services. Purchasers of our ordinary shares in this
offering will experience immediate dilution of $11.23 in the pro forma net
tangible book value per share of ordinary shares, assuming a public offering
price of $16.00 per share. Purchasers will also experience additional dilution
upon the exercise of outstanding stock options.
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OUR DIRECTORS, EXECUTIVE OFFICERS AND PRINCIPAL SHAREHOLDERS WILL BE ABLE TO
EXERT SIGNIFICANT INFLUENCE OVER US
After this offering, our directors, executive officers and our shareholders who
currently own over five percent of our ordinary shares will beneficially own
approximately 44.5 percent 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.
OUR INDUSTRY IS EXPERIENCING CONSOLIDATION AND THESE MERGERS MAY STRENGTHEN SOME
OF OUR COMPETITORS OR ELIMINATE SOME OF OUR CUSTOMERS
The Internet industry has recently experienced substantial consolidation. For
example, AOL has acquired Netscape, Yahoo has agreed to acquire Broadcast.com,
At Home has agreed to acquire Excite, and Compaq has agreed to acquire ZIP2. We
expect this consolidation to continue. These acquisitions could affect us in a
number of ways, including if companies from whom we acquire services are
acquired by one of our competitors and stop providing their services to us and
if our business partners are acquired by one of our competitors and stop
purchasing our services.
Furthermore, our business partners can choose not to renew their agreements with
us because they have entered into a merger or other strategic relationship with
another company that can provide email service. This may become increasingly
common in light of the consolidation taking place among websites, ISPs and other
Internet-related businesses.
RISKS RELATING TO OPERATIONS IN ISRAEL
WE HAVE IMPORTANT FACILITIES AND RESOURCES LOCATED IN ISRAEL WHICH HAS
HISTORICALLY EXPERIENCED SEVERE ECONOMIC INSTABILITY AND MILITARY AND POLITICAL
UNREST
We are incorporated under the laws of the State of Israel. Our principal
research and development facilities are located in Israel. Although
substantially all of our sales currently are being made to customers outside
Israel, we are nonetheless directly influenced by the political, economic and
military conditions affecting Israel. Any major hostilities involving Israel, or
the interruption or curtailment of trade between Israel and its present trading
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. 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. 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. 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.
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. CommTouch has operated
effectively under these requirements since its inception. We cannot predict the
effect of these obligations on CommTouch in the future.
Inflation in Israel and devaluation of the NIS could impact our financial
results. Although Israel has substantially reduced the rates of inflation and
devaluation in recent years, they are still relatively high and we could be
harmed by inflation or devaluation. If inflation rates in Israel increase again
and hurt Israel's economy as a whole, our operations and financial condition
could suffer. Moreover, non-residents of Israel are subject to income tax on
certain income (including cash dividends) derived from sources in Israel. The
tax treaty between Israel and the United States provides for a maximum tax of 25
percent on dividends
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paid to residents of the United States and for withholding at a rate of 15
percent with respect to dividends paid by an Approved Enterprise, as discussed
below.
WE RELY ON TAX BENEFITS AND OTHER FUNDING FROM THE STATE OF ISRAEL
Pursuant to the Law for the Encouragement of Capital Investments, the Israeli
government has granted "Approved Enterprise" status to our existing capital
investment programs. Consequently, we are eligible for certain tax benefits for
the first several years in which we generate taxable income. CommTouch, however,
has not yet begun to generate taxable income for purposes of this law and it
does not expect to utilize these tax benefits for the foreseeable future. Once
we begin to generate taxable income, our financial condition could suffer if our
tax benefits were reduced.
In order to receive tax benefits, we must comply with a number of conditions. If
we fail to comply with these conditions and criteria, the tax benefits that we
receive could be partially or fully canceled, and we could be forced to refund
the amount of the benefits we received, adjusted for inflation and interest. We
believe that we have operated and will continue to operate in compliance with
the required conditions, although we cannot be sure. We further believe that the
likelihood is remote that we will be required to refund tax benefits that we
receive under our Approved Enterprise status.
ISRAELI COURTS MIGHT NOT ENFORCE JUDGMENTS RENDERED OUTSIDE OF ISRAEL
We are organized under the laws of Israel, and we maintain significant
operations in Israel. Certain of our officers and directors named in this
prospectus reside outside of the United States. Therefore, you might not be able
to enforce any judgment obtained in the U.S. against us or any of such persons.
You might not be able to bring civil actions under U.S. securities laws if you
file a lawsuit in Israel. However, we have been advised by our Israeli counsel
that, subject to certain limitations, Israeli courts may enforce a final
judgment of a U.S. court for liquidated amounts in civil matters after a hearing
in Israel. We have appointed CommTouch Software Inc., our U.S. subsidiary, as
our agent to receive service of process in any action against us arising out of
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 will be payable in Israeli
currency.
PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE DIFFICULT AN ACQUISITION OF
COMMTOUCH
Certain provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger or other acquisition of
CommTouch. The Israeli Companies Ordinance, which governs Israeli corporations,
does not contain provisions that deal specifically with a merger that allows for
the elimination of minority shareholders. Various provisions that deal with
"arrangements" between a company and its shareholders have been used, however,
to effect squeeze-out mergers. These generally require that the merger be
approved by at least 75 percent of the shareholders present and voting on the
proposed merger, at a shareholders meeting that has been called on at least 21
days' advance notice. In addition to shareholder approval, court approval of the
merger is required, which entails further delay and the need to obtain a
discretionary approval. Alternatively, the acquiror can cause minority
shareholders to sell their shares if it acquires at least 90 percent of all
outstanding shares (excluding shares held by the acquiror prior to the
acquisition) and none of the minority shareholders successfully seeks to block
the acquisition in court. The new Israeli Companies Law, which will come into
effect on February 1, 2000, does address squeeze-out mergers but does not
significantly modify these requirements.
The new Israeli Companies Law also 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 new Israeli 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 45% shareholder of the company.
Here too there is an exception, if someone else is already a
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majority shareholder of the company. Since regulations implementing these new
rules have not yet been promulgated, we do not know to what extent or how these
rules will apply to Israeli companies that are publicly traded outside of
Israel.
Finally, Israeli tax law treats certain acquisitions, particularly
stock-for-stock swaps between an Israeli company and a foreign company, less
favorably than United States tax law. Israeli tax law may, for instance, subject
a shareholder who exchanges his CommTouch shares for shares in a foreign
corporation to immediate taxation.
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USE OF PROCEEDS
The net proceeds we will receive from the sale of the 3,000,000 ordinary shares
offered by us, assuming an initial public offering price of $16.00 per share,
after deducting the underwriting discounts and commissions and the estimated
offering expenses payable by us, (which are estimated to be $5.5 million, or
$6.0 million if the underwriters' over-allotment option is exercised in full)
are estimated to be $42.5 million ($49.2 million if the underwriters'
over-allotment option is exercised in full).
We intend to use the proceeds of this offering for the following:
- expansion of our sales and marketing activities;
- capital expenditures, including purchase of equipment, primarily for our
hosting facilities;
- expansion of research and development activities;
- expansion of our international operations; and
- working capital and other general corporate purposes.
The amounts and timing of these expenditures will vary significantly depending
on a number of factors, including, but not limited to, the amount of cash
generated by our operations and the market response to the introduction of any
new service offerings.
In addition, we may use a portion of the net proceeds of this offering to
acquire or invest in businesses, products, services or technologies
complementary to our current business, through mergers, acquisitions, joint
ventures or otherwise. However, we have no specific agreements or commitments
and are not currently engaged in any negotiations with respect to such
transactions. Accordingly, our management will retain broad discretion as to the
use and allocation of the net proceeds of this offering. Pending the above uses,
we intend to invest the net proceeds of this offering in short-term,
interest-bearing investment grade securities.
DIVIDEND POLICY
We have never paid cash dividends to our shareholders and we currently do not
intend to pay dividends for the foreseeable future. We intend to reinvest
earnings in the development and expansion of our business. We may only pay cash
dividends in any fiscal year out of profits, as determined under Israeli law.
The declaration of any final cash dividend requires shareholder approval.
Shareholders may reduce, but not increase, the amount of dividends from the
amount proposed by the Board of Directors.
Because of CommTouch's investment programs' Approved Enterprise status, the
payment of dividends by CommTouch may subject CommTouch to certain Israeli taxes
to which it would not otherwise be subject. The tax exempt income attributable
to the Approved Enterprise can be distributed to shareholders without subjecting
CommTouch to taxes only upon the complete liquidation of CommTouch. If CommTouch
decides to distribute cash dividends out of income that has been exempt from
tax, the income out of which the dividend is distributed will be subject to
Israeli corporate tax (currently 25%). We have decided to reinvest the amount of
tax exempt income derived from our Approved Enterprise and not to distribute
such income as dividends. (For a description of our Approved Enterprise status,
please see "Israeli Taxation and Investment Programs.")
16
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of CommTouch as of March 31,
1999:
The following data is presented:
- On an actual basis.
- On a pro forma basis to give effect to (1) the April 1999 issuance of
Convertible Promissory Notes that will convert into 42,081 Series D
Convertible Preferred Shares upon the obtaining of certain Israeli
governmental approvals, and the conversion of those notes and (2) the
automatic conversion of all CommTouch's convertible preferred shares,
including those issuable under the Convertible Promissory Notes, into
7,109,800 ordinary shares upon the closing of this offering.
- On a pro forma as adjusted basis to give effect to the sale of 3,000,000
ordinary shares in this offering, assuming an initial public offering
price of $16.00 per share, resulting in net cash proceeds of
approximately $42.5 million.
<TABLE>
<CAPTION>
MARCH 31, 1999
------------------------------------
(UNAUDITED)
(IN THOUSANDS)
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
<S> <C> <C> <C>
Long-term liabilities less current portion................ $ 560 $ 560 $ 560
-------- -------- --------
Shareholders' equity:
Convertible Preferred Shares, NIS 1 nominal value;
565,820 shares authorized; 313,409 shares issued and
outstanding actual; no shares issued and outstanding
pro forma and pro forma as adjusted.................. 96 -- --
Ordinary shares, NIS 0.05 par value; 10,683,600 shares
authorized, 2,148,320 shares issued and outstanding
actual, 9,258,120 shares issued and outstanding pro
forma; 12,258,120 shares issued and outstanding, pro
forma as adjusted.................................... 35 142 179
Additional paid-in capital.............................. 24,910 38,004 80,507
Deferred compensation................................... (7,282) (7,282) (7,282)
Notes receivable from shareholders...................... (964) (964) (964)
Accumulated deficit..................................... (13,988) (13,988) (13,988)
-------- -------- --------
Total shareholders' equity...................... 2,807 15,912 58,452
-------- -------- --------
Total capitalization............................ $ 3,367 $ 16,472 $ 59,012
======== ======== ========
</TABLE>
The number of ordinary shares to be outstanding after this offering does not
include the following:
- 694,860 ordinary shares issuable upon exercise of stock options
outstanding under our stock option plans and stock option agreements as
of March 31, 1999 at a weighted average exercise price of $1.25 per
share;
- 409,940 ordinary shares issuable upon exercise of warrants outstanding as
of March 31, 1999 at a weighted average exercise price of $1.70 per
share, of which warrants to purchase 277,460 shares expire upon the
closing of this offering if not exercised;
- 3,642,460 ordinary shares available for future grant or issuance under
our stock option plans as of March 31, 1999; and
- 205,000 ordinary shares issuable upon exercise of options granted to
officers and directors after March 31, 1999 at a weighted average price
of $15.75 per share.
17
<PAGE> 21
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was $15,912,000 or
$1.72 per ordinary share, after giving effect to the April 1999 issuance of
Convertible Promissory Notes that will convert into 42,081 Series D Convertible
Preferred Shares upon the obtaining of certain Israeli governmental approvals
and the receipt of the net proceeds therefrom. Pro forma net tangible book value
per share is determined by dividing the amount of our total tangible assets less
total liabilities by the number of ordinary shares outstanding at that date,
assuming conversion of all outstanding convertible preferred shares into
ordinary shares. Dilution in net tangible book value per share represents the
difference between the amount per share paid by purchasers of ordinary shares in
the offering made hereby and the net tangible book value per ordinary share
immediately after the completion of this offering. After giving effect to the
sale of 3,000,000 ordinary shares by CommTouch in this offering (at an assumed
public offering price of $16.00 per share and after deducting the underwriting
discounts and commissions and our estimated offering expenses), the pro forma
net tangible book value of CommTouch at March 31, 1999 would have been $58.5
million, or $4.77 per share. This represents an immediate increase in pro forma
net tangible book value of $3.05 per share to the existing shareholder and an
immediate dilution of $11.23 per share to new investors purchasing ordinary
shares in this offering. The following table illustrates this per-share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 16.00
-------
Pro forma net tangible book value per share as of March 31,
1999...................................................... $ 1.72
------
Increase in pro forma net tangible book value per share
attributable to this offering............................. $ 3.05
------
Pro forma net tangible book value per share after the
offering.................................................. $ 4.77
-------
Dilution per share to new investors......................... $ 11.23
=======
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1999 after
giving effect to (1) the April 1999 issuance of Convertible Promissory Notes
that will convert into 42,081 Series D Convertible Preferred Shares upon the
obtaining of certain Israeli governmental approvals and the conversion of those
notes, and the receipt of the net proceeds therefrom and (2) the automatic
conversion of all CommTouch's convertible preferred shares, including those
issuable under the Convertible Promissory Notes, into 7,109,800 ordinary shares
upon the closing of this offering, the total number of ordinary shares purchased
from CommTouch, the total consideration paid to CommTouch and the average price
per share paid by existing shareholders and by new investors purchasing shares
in this offering (based upon an assumed initial public offering price of $16.00
per share and before deducting the underwriting discounts and commissions and
our estimated offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders.............. 9,258,120 75.5% $29,825,000 38.3% $ 3.22
New investors...................... 3,000,000 24.5% $48,000,000 61.7% $16.00
---------- ---- ----------- ----
Total.................... 12,258,120 100% $77,825,000 100%
========== ==== =========== ====
</TABLE>
The foregoing table assumes no exercise of the underwriters' over-allotment
option or of any outstanding stock options or warrants after March 31, 1999. As
of March 31, 1999, there were outstanding options to purchase an aggregate of
694,860 ordinary shares at a weighted average exercise price of $1.25 per share
and 409,940 shares issuable upon exercise of outstanding warrants at a weighted
average exercise price of $1.70 per share. To the extent any of these options or
warrants are exercised, there will be further dilution to new investors. See
Note 9 of the Notes to Consolidated Financial Statements.
18
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated statement of operations data for the years ended
December 31, 1996, 1997 and 1998 and the selected consolidated balance sheet
data as of December 31, 1997 and 1998 have been derived from the Consolidated
Financial Statements of CommTouch included elsewhere in this prospectus. The
selected consolidated statement of operation data for the years ended December
31, 1994 and 1995 and the selected consolidated balance sheet data as of
December 31, 1994, 1995 and 1996 have been derived from the Consolidated
Financial Statements of CommTouch not included elsewhere in this prospectus. The
selected consolidated statement of operations data for the three months ended
March 31, 1998 and 1999 and the consolidated balance sheet data at March 31,
1999 have been derived from unaudited financial statements included elsewhere in
this prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, that CommTouch considers
necessary for a fair presentation of its financial position at such dates and
the results of operations for those periods. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999. In addition, our
historical results are not necessarily indicative of results to be expected for
any future period. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and the Notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------------- ----------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- ----------- ------ -------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues
Email services............................. $ -- $ -- $ -- $ -- $ 389 $ 32 $ 346
Software licenses, maintenance and
services................................. 699 1,733 3,134 899 -- -- --
--------- --------- --------- --------- --------- ------ -------
Total revenues........................... 699 1,733 3,134 899 389 32 346
Cost of revenues
Email services............................. -- -- -- -- 569 59 405
Software licenses, maintenance and
services................................. 109 327 463 165 -- -- --
--------- --------- --------- --------- --------- ------ -------
Total cost of revenues................... 109 327 463 165 569 59 405
--------- --------- --------- --------- --------- ------ -------
Gross profit(loss)........................... 590 1,406 2,671 734 (180) (27) (59)
--------- --------- --------- --------- --------- ------ -------
Operating expenses
Research and development, net............ 197 463 1,479 1,108 1,149 266 307
Sales and marketing, net................. 956 832 1,965 2,202 2,001 459 481
General and administrative............... 287 369 465 829 604 138 807
Amortization of stock-based employee
deferred compensation.................. -- -- -- -- 91 2 386
--------- --------- --------- --------- --------- ------ -------
Total operating expenses................. 1,440 1,664 3,908 4,139 3,845 865 1,981
--------- --------- --------- --------- --------- ------ -------
Operating loss............................... (850) (258) (1,237) (3,405) (4,025) (892) (2,040)
Interest and other expense, net.............. (65) (62) (45) (68) (326) (27) (271)
--------- --------- --------- --------- --------- ------ -------
Net loss..................................... $ (915) $ (320) $ (1,282) $ (3,473) $ (4,351) $ (919) $(2,311)
========= ========= ========= ========= ========= ====== =======
Net loss per share -- basic and diluted...... $ (0.43) $ (0.11) $ (0.66) $ (2.40) $ (3.00) $(0.63) $ (1.50)
========= ========= ========= ========= ========= ====== =======
Weighted average shares -- basic and
diluted.................................... 2,113 2,885 1,934 1,450 1,450 1,450 1,546
========= ========= ========= ========= ========= ====== =======
Pro forma net loss per share (unaudited)
Net loss per share-basic and diluted....... $ (0.78) $ (0.32)
========= =======
Weighted average shares-basic and
diluted.................................. 5,594 7,313
========= =======
</TABLE>
19
<PAGE> 23
The following data is presented:
- on an actual basis;
- on a pro forma basis to give effect to (1) the April 1999 issuance of
Convertible Promissory Notes that will convert into 42,081 Series D
Convertible Preferred Shares upon the obtaining of certain Israeli
governmental approvals and (2) the automatic conversion of all of
CommTouch's convertible preferred shares, including those issuable under
the Convertible Promissory Notes, into 7,109,800 ordinary shares upon the
closing of this offering; and
- on a pro forma as adjusted basis to give effect to the sale of 3,000,000
ordinary shares in this offering, assuming an initial public offering
price of $16.00 per share, resulting in net cash proceeds of
approximately $42.5 million.
<TABLE>
<CAPTION>
MARCH 31, 1999
(UNAUDITED)
DECEMBER 31, --------------------------------
------------------------------------------ PRO FORMA
1994 1995 1996 1997 1998 ACTUAL PRO FORMA AS ADJUSTED
----- ----- ------ ------- ------- ------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................. $ 4 $ 54 $ 690 $ 324 $ 834 $3,226 $ 16,331 $58,871
Working capital (deficit).................. (555) (734) 539 (1,264) (1,440) 1,418 44,523 57,063
Total assets............................... 497 773 2,180 1,065 2,366 6,025 19,130 61,670
Long-term liabilities...................... 352 324 371 366 530 560 560 560
Shareholders' equity (deficit)............. (554) (650) 777 (1,018) (815) 2,807 15,912 58,452
</TABLE>
20
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this
prospectus. This discussion 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" and elsewhere in this prospectus.
OVERVIEW
We are a leading global provider of outsourced email and messaging solutions.
Our flexible and highly customizable solutions enable us to satisfy the unique
email and messaging needs of a wide range of customers, including Web-based
companies, small websites and businesses worldwide. As of May 16, 1999, we had
over 100 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 host
approximately 4.5 million emailboxes. In November 1998, we launched our ZapZone
Network service, which enables small sites to provide email to their end users.
As of May 16, 1999, we had registered approximately 75,000 sites through the
ZapZone Network service, and were hosting approximately 480,000 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.
Business History and Transition
Email Client Software Business (1991-1997). From 1991 to 1997, we generated all
of our revenue from sales of software licenses, maintenance and service for
stand-alone email client software for both mainframes and personal computers. In
1996, we generated approximately $3.1 million in revenues from such software
licenses.
Transition to Web-Based Email Services (1997). During 1996, the popularity of
email at home and at work began to increase rapidly. Microsoft began bundling
Outlook, its email client software, in "office suite" packages. At the same
time, Netscape began to provide its email client software bundled in its
Internet browser software. The entrance into the email client software market by
both Microsoft and Netscape resulted in the rapid adoption of email as a
mass-market communications channel. At the same time, use of the World Wide Web
(Web) began to expand rapidly, and the market for stand-alone email client
software began to be dominated by companies which bundled such software with
operating systems and/or browsers. We recognized an opportunity to leverage our
technology and experience in developing email software to pursue the market
created by these two rapidly growing phenomena: email and the Web. As a result,
we redeployed the efforts of our existing research and development personnel and
independent contractors to adapt the technology embedded in Pronto 96 for use as
a Web-based email service. We ceased all stand-alone email software license
sales during 1997, and as a result, revenues in 1997 decreased to $899,000. To
further support our transition to providing Web-based email services, in 1997 we
opened a marketing, sales and support office in Silicon Valley in order to have
better access to Web-based business partners.
Web-Based Email Service Business (January 1998-Present). In January 1998, we
began to offer email services to business partners. Our services allow our
business partners to provide free Web-based email to their end users, thus
enhancing the business partner's online presence, increasing the frequency and
21
<PAGE> 25
duration of visits to the partner's website and creating an opportunity for the
business partner and us to generate advertising and direct e-marketing revenue
through email. Meanwhile, we recognized that webmasters on small sites were
seeking a method to promote their sites and offer email to their users. In
November 1998, we launched our ZapZone Network service which enables small sites
to provide email to their end users at no cost in a matter of minutes.
Revenue Sources
Email Service Revenues. In 1998, our email service revenue was derived from
service fees and set up and installation fees. Approximately 60.5% of our email
service revenue resulted from contracts that provide for business partners to
pay us minimum annual service fees. These agreements also typically provide for
the business partner to pay us a share of revenues generated from the sale of
banner advertisements on their email site. The minimum annual service fee is
credited against the shared portion of the advertising revenue. Revenue from
minimum annual service fees is recognized ratably over the contract term from
the launch of the email site.
Some of our contracts with business partners provide for email service fees
based solely on a share of banner advertising revenue, with no minimum annual
commitment. In 1998, revenues from these contracts represented approximately
21.0% of our email service revenue. Revenues from sharing advertising are
recognized when such revenues are earned by our business partner.
We anticipate that revenues from advertising will increase both in absolute
dollars and as a percentage of total revenues. This is because we have recently
attained a platform of approximately 4.5 million emailboxes through our business
partners and we believe that we now have a large enough user base to be
attractive to advertisers and to generate additional advertising revenues by
targeting the user demographic objectives of the advertiser. In addition, by
aggregating demographic information garnered from small websites, the ZapZone
Network service is providing us with an additional opportunity to focus
advertising efforts in a targeted manner. We anticipate that combined service
fees and advertising revenues shared by business partners will continue to be
our major source of revenue in the future.
The remaining 18.5% of email service revenues in 1998 consisted of setup and
installation fees. We charge these fees in instances where the scope and
complexity of the solution warrant such a fee. These revenues are recognized
upon installation of the email site to which they relate. We expect that these
revenues will increase in absolute dollars as such installations increase in
number, but will decrease as a percentage of email service revenue in the
future, because service fees and advertising revenues are expected to increase
at a proportionally greater rate.
Premium Services. In March 1999, we launched our premium service offerings.
These services enhance our core service and include features such as:
- Off-line email client access;
- Unified messaging;
- Additional disk storage space;
- Automated, user-defined email forwarding;
- Automated, rules-based pager notification; and
- Email-by-phone.
These services will be paid for by emailbox users. To date we have not generated
any revenues from premium services but we anticipate that these revenues will be
a meaningful component of our revenues in the future.
22
<PAGE> 26
Direct E-Marketing. In December 1998, we began to offer direct e-marketing
opportunities to ecommerce vendors. Ecommerce vendors seek channels through
which they can market goods and services. Because of our installed user base and
our agreements with our business partners, we can assist ecommerce companies in
marketing their products to end users who have opted to receive offers by email.
We share with our business partners the revenues from this direct e-marketing,
which are earned either on a per-message basis or as a commission on products
sold. To date we have made these offerings available to only a limited number of
users. However, we anticipate that direct e-marketing revenues will be a
meaningful component of our revenues in the future.
RESULTS OF OPERATIONS
The following table sets forth financial data for the years ended December 31,
1996, 1997 and 1998 and for the three months ended March 31, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31 ENDED MARCH 31
--------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Email services............................................ $ -- $ -- $ 389 $ 32 $ 346
Software licenses, maintenance and services............... 3,134 899 -- -- --
------- ------- ------- ----- -------
Total revenues.......................................... 3,134 899 389 32 346
------- ------- ------- ----- -------
Cost of revenues:
Email services............................................ -- -- 569 59 405
Software licenses, maintenance and services............... 463 165 -- -- --
------- ------- ------- ----- -------
Total cost of revenues.................................. 463 165 569 59 405
------- ------- ------- ----- -------
Gross profit (loss)....................................... 2,671 734 (180) (27) (59)
------- ------- ------- ----- -------
Operating expenses:
Research and development, net........................... 1,479 1,108 1,149 266 307
Sales and marketing..................................... 1,965 2,202 2,001 459 481
General and administrative.............................. 465 829 604 138 807
Amortization of stock-based employee deferred
compensation.......................................... -- -- 91 2 386
------- ------- ------- ----- -------
Total operating expenses........................... 3,908 4,139 3,845 865 1,981
------- ------- ------- ----- -------
Operating loss............................................ (1,237) (3,405) (4,025) (892) (2,040)
Interest expense and other, net........................... (45) (68) (326) (27) (271)
------- ------- ------- ----- -------
Net loss.................................................. $(1,282) $(3,473) $(4,351) $(919) $(2,311)
======= ======= ======= ===== =======
</TABLE>
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999
Revenues. Email service revenues increased from $32,000 for the three months
ended March 31, 1998 to $346,000 for the three months ended March 31, 1999. We
began providing email services during the three months ended March 31, 1998. Our
business partners have grown from six for the three months ended March 31, 1998
to over 90 business partners for the three months ended March 31, 1999. Revenues
from one customer, Excite, amounted to $55,000, or 15.9% of total revenues for
the three months ended March 31, 1999. 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 $59,000 for the three
months ended March 31, 1998 to $405,000 for the three months ended March 31,
1999 because of the growth of 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
23
<PAGE> 27
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. At March 31, 1999, our outstanding
contingent obligation was approximately $400,000. Research and development
expense are charged to operations as incurred. Our research and development
costs increased from $266,000 for the three months ended March 31, 1998 to
$307,000 for the three months ended March 31, 1999, due primarily to higher
personnel and related costs. We expect that research and development costs, net,
will increase due to increased personnel and related costs associated with the
accelerated development of new email service offerings.
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. We have a contingent obligation to pay
royalties to the Israeli Government for grants received in prior years for
marketing activities at a rate of 3% of total revenues. At March 31, 1999, our
outstanding contingent obligation was approximately $110,000. Our sales and
marketing expenses increased from $459,000 for the three months ended March 31,
1998 to $481,000 for the three months ended March 31, 1999, due primarily to
marketing and other costs to support the growth of our email service revenues.
We expect sales and marketing expenses to increase in the future as we hire
additional personnel and continue to support and develop the email service
business.
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 $138,000 for the three months
ended March 31, 1998 to $807,000 for the three months ended March 31, 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.
Amortization of Stock-based Employee Deferred Compensation. Our stock-based
employee compensation expenses increased from $2,000 for the three months ended
March 31, 1998 to $386,000 for the three months ended March 31, 1999, due the
amortization of the aggregate of $7.2 million in deferred compensation recorded
during the three months ended March 31, 1999. The deferred compensation is being
amortized over the vesting schedule, generally four years.
Interest Expense and Other Expense, Net. Our interest expense and other expense,
net, increased from $26,000 for the three months ended March 31, 1998 to
$271,000 for the three months ended March 31, 1999, due primarily to increased
recognized costs of warrants granted to the Bank Lepituach Ha Taasia B'Israel
Ltd. (Bank Lepituach Ha Taasia). In April 1999, we fully repaid the short-term
bank line of credit.
Income Taxes. As of December 31, 1998, we had approximately $5.7 million of
Israeli net operating loss carryforwards and $4.7 million of U.S. federal net
operating loss carryforwards available to offset future taxable income. The U.S.
net operating loss carryforwards will expire in various amounts in the years
2010 to 2016. The Israeli net operating loss carryforwards have no expiration
date.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
Revenues. In 1997, we ceased all sales of stand-alone email client software
licenses, maintenance and services. Accordingly, revenue comparisons between
1996, 1997 and 1998 are not meaningful. In 1998, our email service revenues were
$389,000, of which one customer, Excite, represented 54%. In the future, we
24
<PAGE> 28
expect revenues from Excite to decrease substantially as a percentage of email
service revenue because the 1998 revenues from Excite included one-time payments
for setup and installation. We had no email service revenue in 1997. Our
revenues from software licenses and maintenance fees decreased from $3.1 million
in 1996 to $899,000 in 1997 due to the change in our business model and the
phasing out of our stand-alone email client software business.
Cost of Revenues. In 1998, our cost of revenues was $569,000 and 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. We had no email
service costs in 1996 and 1997. In 1996 and 1997, our costs of revenues were
$463,000 and $165,000. These costs consisted of expenses related to the stand-
alone email software business, including personnel and related costs, media
duplication and product packaging. The decrease in cost of revenues in 1997 from
1996 was due to the change in our business model as we phased out our
stand-alone email client software business.
Research and Development Costs, Net. Research and development costs decreased
from $1.5 million in 1996 to $1.1 million in 1997 because of $288,000 in
off-setting royalty-bearing grants from the Israeli Government, recorded as a
reduction of research and development costs. We have a contingent obligation to
pay royalties at the rate of 3%-5% of total revenues. Our outstanding contingent
obligation was approximately $481,000 as of December 31, 1998. Research and
development costs in 1998 remained relatively unchanged from 1997. However, in
1998 we transferred several key research and development personnel into our
operations group to support and maintain our newly developed Web-based email
services infrastructure. Costs relating to these personnel were included in cost
of revenues in 1998. We expect that research and development costs, net, will
increase due to increased personnel and related costs associated with the
accelerated development of new email service offerings.
Sales and Marketing. Sales and marketing expenses were $2.0 million in 1996,
$2.2 million in 1997 and $2.0 million in 1998. We have a contingent obligation
to pay royalties to the Israeli Government for grants received in prior years
for marketing activities at a rate of 3% of total revenue. This contingent
obligation was approximately $121,000 at December 31, 1998.
General and Administrative. General and administrative costs were $465,000 in
1996, $829,000 in 1997 and $604,000 in 1998. The increase in 1997 was primarily
due to the write-off of $171,000 for receivables related to the phasing out of
our stand-alone email client software license sales.
Interest Expense and Other, Net. Interest expense and other, net, consists of
interest payments and fair value of warrants granted in 1997 and 1998 in
connection with a short-term bank line of credit. Interest expense and other
expense, net, increased from $45,000 in 1996 to $68,000 in 1997 and to $326,000
in 1998. This increase in 1998 was due to a higher level of borrowing and change
in the terms of the agreement with Bank Lepituach Ha Taasia to include the grant
of warrants in addition to customary interest payments. In April 1999, we fully
repaid that short-term bank line of credit.
Income Taxes. As of December 31, 1998, we had approximately $5.7 million of
Israeli net operating loss carryforwards and $4.7 million of U.S. federal net
operating loss carryforwards available to offset future taxable income. The U.S.
net operating loss carryforwards will expire in various amounts in the years
2010 to 2016. The Israeli net operating loss carryforwards have no expiration
date.
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<PAGE> 29
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly statements of
operations data for the five quarters ended March 31, 1999. This information has
been derived from CommTouch's consolidated unaudited financial statements,
which, in management's opinion, have been prepared on the same basis as the
audited Consolidated Financial Statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the information for the quarters presented. This information
should be read in conjunction with our audited Consolidated Financial Statements
and the Notes thereto included elsewhere in this prospectus. The operating
results for any quarter are not necessarily indicative of the operating results
for any future period. Given the relatively small absolute dollar amounts in the
operating results for each quarter presented below, non-periodic amounts accrued
in one quarter cause significant fluctuations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
MARCH 31, 1998 JUNE 30, 1998 SEPTEMBER 30, 1998 DECEMBER 31, 1998 MARCH 31, 1999
-------------- ------------- ------------------ ----------------- --------------
(IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Total email service
revenues.............. $ 32 $ 59 $ 130 $ 168 $ 346
Cost of email service
revenues.............. 59 85 166 259 405
----- ------- ------- ------- -------
Gross profit (loss)..... (27) (26) (36) (91) (59)
----- ------- ------- ------- -------
Operating expenses:
Research and
development........ 266 305 308 270 307
Sales and marketing... 459 506 509 527 481
General and
administrative..... 138 137 151 178 807
----- ------- ------- ------- -------
Amortization of stock-
based employee
deferred
compensation.......... 2 8 18 63 386
Total operating
expenses.............. 865 956 986 1,038 1,981
----- ------- ------- ------- -------
Operating loss.......... (892) (982) (1,022) (1,129) (2,040)
Interest expense and
other, net............ (27) (59) (28) (212) (271)
----- ------- ------- ------- -------
Net loss................ $(919) $(1,041) $(1,050) $(1,341) $(2,311)
===== ======= ======= ======= =======
</TABLE>
FLUCTUATIONS IN QUARTERLY RESULTS
We have incurred operating losses since inception, and we cannot be certain that
we will achieve profitability on a quarterly or annual basis in the future. Our
results of operations have fluctuated and are likely to continue to fluctuate
significantly from quarter to quarter as a result of a variety of factors, many
of which are outside of our control. A relatively large expense in a quarter
could have a negative effect on our financial performance in that quarter.
Additionally, as a strategic response to a changing competitive environment, we
may elect from time to time to make certain pricing, service, marketing or
acquisition decisions that could have a negative effect on our quarterly
financial performance. Other factors that may cause our future operating results
to fluctuate include, but are not limited to:
- continued growth of the Internet and of email usage;
- demand for Web-based email services;
- our ability to attract and retain customers and maintain customer
satisfaction;
- our ability to upgrade, develop and maintain our systems and
infrastructure;
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<PAGE> 30
- the amount and timing of operating costs and capital expenditures
relating to expansion of our business and infrastructure;
- technical difficulties or system outages;
- dollar/NIS exchange rate fluctuations;
- the announcement or introduction of new or enhanced services by our
competitors;
- our ability to attract and retain qualified personnel with Internet
industry expertise, particularly sales and marketing personnel;
- the pricing policies of our competitors;
- failure to increase our sales; and
- governmental regulation relating to the Internet, and email in
particular.
In addition to the factors set forth above, our operating results will be
impacted by the extent to which we incur non-cash charges associated with
stock-based arrangements with employees and non-employees.
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 March 31,
1999, we had $3,226,000 in cash and cash equivalents.
Net cash provided by financing activities was $2.4 million in 1996, $2.3 million
in 1997, $4.5 million in 1998 and $5.0 million in the three months ended March
31, 1999. Net cash used in operating activities was $1.3 million in 1996, $2.6
million in 1997, $3.6 million in 1998 and $1.7 million for the three months
ended March 31, 1999. Net cash used in operating activities in 1996, 1997, and
1998 and the three months ended March 31, 1999 is comprised of net loss for each
of the years partially offset by depreciation and amortization expenses and in
1996, 1997 and the three months ended March 31, 1999 also impacted by changes in
trade receivables in addition to an increase in prepaid expenses during the
three months ended March 31, 1999. Net cash used in investing activities was
$427,000 in 1996, $93,000 in 1997, $442,000 in 1998 and $950,000 for the three
months ended March 31, 1999. These investing activities consisted of purchases
of property and equipment. During 1998, we entered into capital leases of
$328,000.
As of March 31, 1999, we had a net working capital deficit of $1.4 million. We
have a short-term bank line of credit agreement with a bank, collateralized by
all our assets and share capital, allowing us to borrow up to $1.3 million. The
short-term bank line of credit was repaid in April 1999. Interest under the
terms of the short-term bank line of credit agreement was a combination of
warrants for ordinary shares at an exercise price equal to the par value,
calculated based on the outstanding utilized line of credit, and an additional
annual interest payment at a rate of LIBOR plus 3% (LIBOR plus 8% for overdrawn
amounts). Through March 31, 1999, we issued to the bank warrants to purchase
96,340 ordinary shares.
In the first quarter of 1999, we issued Series C Convertible Preferred Shares to
investors resulting in net proceeds of $5.3 million. In April 1999, we issued to
investors Convertible Promissory Notes convertible into Series D Convertible
Preferred Shares upon the obtaining of Israeli governmental approvals, resulting
in net proceeds of approximately $13.2 million. All of our convertible preferred
shares will automatically convert into ordinary shares upon the closing of an
initial public offering.
We believe that the net proceeds from this offering, together with existing cash
balances and financing arrangements, will provide us with sufficient funds to
finance operations and make the necessary capital expenditures to support growth
through the next 12 months.
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
27
<PAGE> 31
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.
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 by mid-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, 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
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<PAGE> 32
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.
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. For example, in 1995 and 1996, the rate of
inflation in Israel was 8.1% and 10.6%, and the devaluation of the NIS against
the dollar was 3.9% and 3.7%. This trend was reversed during 1997 and 1998 (when
the rate of inflation was 7.0% and 8.6%, and the rate of devaluation was 8.8%
and 17.6%). The reversal experienced in 1997 and 1998 may not continue and we
may be materially adversely affected in the future if inflation in Israel
exceeds the devaluation of the NIS against the dollar or if the timing of such
devaluation lags behind increases in inflation 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
4.034 for one dollar on March 31, 1999 (NIS 4.160 on December 31, 1998, NIS
3.536 on December 31, 1997 and NIS 3.251 on December 31, 1996).
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<PAGE> 33
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.
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<PAGE> 34
BUSINESS
COMPANY OVERVIEW
We are a leading global provider of email and other messaging solutions. Our
flexible and highly customizable solutions enable us to satisfy the unique email
and messaging needs of a wide range of business partners, including websites of
all sizes and businesses worldwide. As of May 16, 1999, we had over 100 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 4.5
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 May
16, 1999, we had registered approximately 75,000 sites through the ZapZone
Network service, and were serving approximately 480,000 ZapZone Network
emailboxes.
INDUSTRY BACKGROUND
GROWTH OF THE INTERNET WORLDWIDE AND PROLIFERATION OF EMAIL
The Internet has become a vitally important global medium for communication,
commerce, content distribution and advertising. International Data Corporation,
or IDC, estimates that as of December 1998, there were over 28 million Web users
in the United States and over 83 million users worldwide. IDC projects that, by
the end of 2002, these numbers will increase to over 90 million Web users in the
United States and over 282 million users worldwide. This growth in the global
usage of the Web provides significant opportunities for emerging Web-based
businesses and other companies developing an online presence.
Email is one of the most widely used applications on the Internet and has become
a primary platform for business and personal communication. According to
Forrester Research, over 80 percent of Internet users access their email while
online, making this activity the most popular use of the Internet. IDC projects
that email traffic in the United States will increase from 1.2 billion messages
per day in 1997 to 8.0 billion messages per day in 2002.
EMERGENCE OF WEB-BASED EMAIL
Until recently, most email systems were provided by employers, Internet service
providers (ISPs) or universities to individuals or closed groups of end users
through software applications located on the users' desktops or local area
networks. Such email systems, however, only permit access through the computer
or network on which the email software resides or through cumbersome remote
access systems. The recent emergence of email systems that use Internet browsers
as the application for sending and receiving email has resulted in tremendous
advances in email access, functionality and ease of use. This new email standard
is commonly referred to as "Web-based email."
Web-based email offers the following benefits over traditional closed systems:
- anytime, anywhere (universal) access to both business and personal email
accounts;
- advanced integrated communication services over the Web, such as unified
messaging (receiving faxes and voicemail via email) and integrated
calendars and directories; and
- easy to use registration, set-up and administration.
With the dramatic growth of international Internet usage, businesses worldwide
are seeking to differentiate themselves online. Email is an optimal solution to
address this business need because it increases brand
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<PAGE> 35
awareness, builds and reinforces a loyal, connected member base and facilitates
commerce in the following ways:
- Companies embracing Web-based email can enhance their brand identity by
controlling the look and feel of their Web-based email interface and also
by providing end users with distinctive branded email addresses such as
[email protected].
- Web-based email significantly enhances the frequency and duration of
website visits, commonly referred to as the website's "stickiness". The
personalized nature of email and the ability to bundle it with additional
services, such as calendaring, scheduling and unified messaging,
establishes an important one-to-one relationship with email users.
- Email is emerging as an effective application for direct marketing
online, as email users provide important demographic data when they
register for and use email services. This information can be used to
create highly targeted marketing campaigns with minimal distribution
costs.
THE OPPORTUNITY TO PROVIDE OUTSOURCED WEB-BASED EMAIL SERVICES
While many organizations worldwide recognize the advantages of Web-based email
services, they often lack the infrastructure, expertise and resources to fully
realize these benefits through internal development. Due to the growing
complexity of in-house email systems and the increasing levels of infrastructure
investment and management resources needed to provide comprehensive email
services, organizations around the world are seeking to outsource email
services. Businesses worldwide seek to partner with a dedicated provider of
Web-based email to provide high quality, feature-rich email services without
having to invest internally in email management and systems. Small websites,
such as affinity sites and personal homepages, seek free, easy to implement
email services for their end users.
THE COMMTOUCH SOLUTION
We are a leading global provider of 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 customers worldwide, including
websites of all sizes and businesses of all types.
BENEFITS OF THE COMMTOUCH SOLUTION
Extensive Email Features. Our core solution is easy to use and provides a broad
range of industry-standard functionality. This includes the ability for end
users to collect email from other email accounts, to create folders, to attach
electronic documents, to store messages, to maintain a contact center, to create
distribution lists and to establish user profiles and signatures. Our core
service uses IMAP4, an advanced email protocol, which allows email folders to be
accessed from multiple email environments.
The value of our solution is increased by our provision of premium services,
which allow end users to send and receive faxes, 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. We believe
that, by providing a single platform which integrates multiple communication
services and devices, the Web-based emailbox we provide has the potential to
become our end users' primary online communications center.
Ability to Support Hundreds of Millions of Emailboxes. Our modular technology
architecture enables the rapid set up of full-service hosting facilities and
enables us to rapidly and easily expand our system as our user base grows. In
addition, we utilize redundant servers and server load balancing to re-direct
traffic to prevent service interruptions. Our system architecture and software
platform have been designed to provide high quality service to hundreds of
millions of emailboxes across millions of domains. We believe that our robust
and flexible technology platform enables us to maintain one of the highest
service performance levels in the industry.
Customization. Our solutions enable our business partners to leverage their
email as a brand building tool. Business partners offer our email and messaging
services to their end users with the partner's domain
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<PAGE> 36
name. For example, a business partner can provide email at its website with an
address such as: [email protected]. This repeated visibility of the partner's
name on every email message promotes brand awareness and customer loyalty. In
addition, our business partners can use our proprietary customization tool to
design the look and feel of their Web-based email interface so that it reflects
their own brand image.
Increased Website Usage. Our solutions increase the potential for our partners
to generate revenue by increasing the stickiness of their websites. We believe
that traffic to our partners' websites increases as end users frequently visit
the website to check their email. Thus, business partners may have many
opportunities to expose their end users to repeated and/or fresh content every
time they send or receive email. The benefits of increased website stickiness
include more frequent communication with end users, enhanced customer loyalty
and the opportunity to generate revenues from advertising, direct marketing and
ecommerce transactions.
Online Marketing Capabilities. Our business partners can leverage our email
solutions along with the demographic information of their end users to conduct
one-to-one marketing and targeted advertising campaigns. We collect demographic
information from end users when they register for their emailbox. We believe
this information provides a powerful platform on which to design targeted
marketing campaigns. To enhance our business partners' marketing capabilities,
we provide our MailTarget tool which enables them to select and deliver tailored
messages to targeted segments of their user population.
Rapidly Deployable and Cost-Effective Solutions. Our solutions for business
partners can be implemented in as little as several days, while solutions for
small websites can be implemented in a matter of minutes. We believe that this
rapid time to market is critical to our business partners, who desire to realize
the benefits of Web-based email as quickly as possible. 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. We also
provide comprehensive maintenance and administration of our email service, which
eliminates the need for our business partners to undertake the significant
burden of developing and maintaining an in-house email system.
Extensive Language Capabilities. We provide email services in the following 14
languages: English, Chinese, Japanese, Spanish, French, German, Portuguese,
Dutch, Finnish, Danish, Norwegian, Swedish, Russian and Italian. Additionally,
we can support multiple languages on the same site for any of our business
partners and offer spell-checking in many of these languages. Our multi-lingual
capabilities enable us to serve the needs of businesses worldwide as well as
multinational organizations.
COMMTOUCH STRATEGY
Our objective is to be the leading global provider of integrated email and other
messaging services. We plan to achieve this goal by pursuing the following key
strategies:
EXPAND USER BASE BY ADDING BUSINESS PARTNERS
We are building our base of email users by partnering with companies worldwide
that want to offer their online customers a branded email service. As of May 16,
1999, we had over 100 business partners offering our Web-based email from their
sites. Through these business partners, we host approximately 4.5 million
emailboxes worldwide. These partners include Web-based companies, such as
Excite, Talk City, LookSmart, FortuneCity and Nippon Telephone and Telegraph. We
plan to continue to recruit top-tier partners and to position ourselves as a
leading provider of state-of-the-art email services that are critical to our
partners' online business strategy. We believe recruiting more business partners
and end users will provide us with greater revenue opportunities from service
fees, advertising, premium services and direct e-marketing possibilities as well
as greater brand recognition.
EXTEND INTERNATIONAL LEADERSHIP
We plan to continue to aggressively market our solutions to business partners
worldwide. We have focused on marketing our international email services in
countries which we believe will experience the largest
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growth in Web users. We have developed multiple language interfaces for our
email services to be used in the world's most widely used non-English languages,
such as Chinese, Japanese, Russian, French, Spanish and German. We have also
established a marketing group in Israel, because of its proximity to both Europe
and Asia, and a marketing group in the United States to market to North America,
Canada and Latin America. We believe that we have a strong advantage in
providing Web-based email services in many major foreign markets.
EXPAND OUR EMAIL SERVICE FOR SMALL WEBSITES THROUGH THE ZAPZONE NETWORK SERVICE
Small websites, online affinity groups and personal homepages represent a
significant and growing segment of the market for Web-based email
communications. We recognized that this market was under-served, and as a result
we developed our ZapZone Network service solution, which we launched in November
1998. By May 16, 1999, we had registered approximately 75,000 sites through this
service, and are currently hosting approximately 480,000 ZapZone Network service
emailboxes. Our objective is to make the ZapZone Network service the premier
brand of choice for small sites. Every email sent and received contains the
ZapZone Network domain name, and the "powered by CommTouch" logo. We believe
that this produces a powerful viral marketing effect and promotes the ZapZone
Network brand quickly, efficiently and at a low cost. We plan to generate
revenues from our ZapZone Network service by selling premium and direct
marketing services to end users and also by selling advertising and sponsorship
packages to third parties.
EXPLOIT PRICE-PER-EMAILBOX OFFERING TO BUSINESSES
We believe that as more businesses seek to outsource their email services and
develop a need for creative messaging solutions, there is an opportunity for us
to provide our price-per-emailbox outsourcing solutions. We intend to
aggressively market our outsourcing solution by increasing our direct sales and
marketing personnel and resources in this market segment. Additionally, we
intend to partner with businesses that have traditionally offered goods and
services to the small office/home office (SOHO) market to offer the
price-per-emailbox option to that market.
DRIVE MULTIPLE REVENUE STREAMS
We plan to continue to generate multiple revenue streams from our email and
messaging services. We are currently focused on the following revenue sources:
- - Service fees. We plan to continue to charge service fees for delivering
outsourced email solutions to business partners.
- - Advertising. We plan to continue to sell advertising and sponsorships on our
global email network to both business partners and third party vendors.
- - Premium services. We plan to continue to market and upsell premium services to
end users.
- - Direct online marketing. We plan to continue to offer business partners and
other third parties the opportunity to send targeted messages to select
segments of our business partners' user base and our ZapZone Network user
base, and share in the revenue that these parties generate from online
selling.
EXTEND TECHNOLOGY LEADERSHIP IN EMAIL SERVICES
We intend to leverage our core technology, software platform and expertise in
developing and managing a comprehensive Web-based email service to deliver
industry-leading functionality and advanced messaging services. We are currently
planning to add new services that we believe end users and webmasters desire,
including calendar integration, webmaster administration tools, message boards
and list server features, HTML editing and email message language translation.
We intend to continue to work closely with our business partners to identify new
trends and functionality that will be popular with end users.
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LEVERAGE OUR COST-EFFECTIVE TECHNOLOGY PLATFORM
Our open, scalable architecture gives us the flexibility to use servers that
provide us with the best cost-quality combination and to leverage third-party
hosting providers. This enables us to achieve a low service cost-per-emailbox
while maintaining a high level of service quality. This combination of economic
advantage and service quality enables us to price our services attractively to
our business partners and end users. We believe that the price performance of
our solution enables us to compete aggressively, expand market share and build
our brand name.
SERVICES
We provide outsourced email and messaging services to customers of all sizes.
Our solutions enable these organizations to attract, retain, communicate and
conduct ecommerce with their end users.
We provide our email and messaging solutions through a variety of licensing
arrangements. These arrangements typically consist of one of the following:
- a minimum annual service fee plus advertising revenue sharing;
- advertising revenue sharing only; or
- price-per-emailbox.
For our ZapZone Network service members, we provide our core email and messaging
services free of charge. We currently derive revenue from this network through
advertising and we plan to upsell our premium services to users in the ZapZone
Network.
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CORE SERVICE
Our core service provides the following features:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION
- -----------------------------------------------------------------------------------------------------
ELECTRONIC MAILBOX Includes a full range of industry-standard
functionality, such as the ability for end users to
create folders, attach electronic documents, store
messages, maintain a contact center, distribute
lists, establish user profiles and signatures.
- -----------------------------------------------------------------------------------------------------
PARTNER-BRANDED ELECTRONIC MAIL INTERFACE Business partners offer our email services to their
end users with the business partner's name included
in the domain address. This repeated visibility of
the business partner's name promotes brand awareness
and customer loyalty. Additionally, our business
partners can design the look and feel of their
Web-based email interface with our proprietary
customization wizard tool.
- -----------------------------------------------------------------------------------------------------
ENHANCED MANAGEMENT FEATURES Includes advanced email functionality such as the
ability to collect email from other email accounts,
sort email and access a sent messages folder. Also
includes a draft folder option, message notification
upon login and IMAP4 support, which allows email
folders to be accessed from multiple email
environments.
- -----------------------------------------------------------------------------------------------------
CONTACT CENTER Enhanced address book functionality that includes
integrated third-party instant messaging and chat.
- -----------------------------------------------------------------------------------------------------
SPAM PROTECTION Advanced anti-spamming controls and email filtering.
- -----------------------------------------------------------------------------------------------------
MULTIPLE LANGUAGE CAPABILITY Our email services are provided in 14 languages:
English, Chinese, Japanese, Spanish, French, German,
Portuguese, Dutch, Finnish, Danish, Norwegian,
Swedish, Russian and Italian. Additionally, we
provide spell-checking in many of these languages
and can support more than one language on any of our
customer websites.
- -----------------------------------------------------------------------------------------------------
KIDS' EMAIL An email option that enables parents to control who
may correspond electronically with their children.
- -----------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 40
PREMIUM SERVICES
We introduced our premium services in March 1999. These services are designed to
transform the end user's emailbox into an integrated primary communications
center. We currently offer the following premium services to end users for a
fee:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION
- -----------------------------------------------------------------------------------------------------
OFF-LINE EMAIL CLIENT ACCESS End users can access their emailbox using either a
Web browser or their off-line client software, such
as Microsoft Outlook.
- -----------------------------------------------------------------------------------------------------
UNIFIED MESSAGING This service enables the emailbox to become an
integrated communications platform through which the
user can access email and send and receive voicemail
messages, faxes, and pages.
- -----------------------------------------------------------------------------------------------------
ADDITIONAL DISK SPACE STORAGE End users can increase their storage capacity up to
an additional ten megabytes of disk space to
maintain more folders and messages in their
emailbox.
- -----------------------------------------------------------------------------------------------------
AUTOMATED, USER-DEFINED EMAIL FORWARDING Incoming emails can be automatically forwarded to an
alternate emailbox based on the end user's pre-set
criteria.
- -----------------------------------------------------------------------------------------------------
AUTOMATED, RULES-BASED PAGER NOTIFICATION Incoming emails can be automatically forwarded to
the end user's pager based on the end user's pre-set
criteria.
- -----------------------------------------------------------------------------------------------------
EMAIL-BY-PHONE End users can call to have their email messages read
to them using text-to-speech technology. End users
have the option to reply with a voicemail message
that is sent as a voice attachment, fax the email or
can delete the message.
- -----------------------------------------------------------------------------------------------------
INTERNET PROTOCOL (IP) TELEPHONY ACCESS Enables voice communication over the Internet that
is integrated with the end user's emailbox.
- -----------------------------------------------------------------------------------------------------
</TABLE>
The unified messaging, email-by-phone and IP telephony premium services
integrate third party technology.
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<PAGE> 41
PLANNED SERVICES
We are developing new messaging services to complement our existing services. We
actively monitor the email and communication needs of our business partners and
end users and work to develop new features and enhancements to meet their
evolving requirements. The following services are currently in, or planned for,
development:
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------------
FEATURE DESCRIPTION
- -----------------------------------------------------------------------------------------------------
CALENDAR INTEGRATION Online calendars and group scheduling will be
integrated with the end user's email interface and
contact center, as well as to applications such as
Microsoft Outlook and Palm Pilot software.
(Anticipated in the third quarter of 1999).
- -----------------------------------------------------------------------------------------------------
ENHANCED EMAIL SECURITY Support for SSL encryption and technologies with
enhanced anti-virus and anti-vandal security
measures. (Anticipated in the third quarter of
1999).
- -----------------------------------------------------------------------------------------------------
WEBMASTER ADMINISTRATION TOOLS Provides webmasters with enhanced website
administration functionality, including opening and
deleting accounts online, enhanced tracking and
reporting features, and Lightweight Directory
Application Protocol (LDAP) support, which provides
remote enhanced administrative and control
capabilities. (Anticipated in the third quarter of
1999).
- -----------------------------------------------------------------------------------------------------
COMMUNITY-BUILDING APPLICATIONS Additional functionality such as message boards and
list servers, which enable frequent communication
among end users. (Anticipated in the third quarter
of 1999).
- -----------------------------------------------------------------------------------------------------
EMAILBOX ENHANCEMENT Enhancements such as message search features, HTML
editing and enhanced secure login interface.
(Anticipated in the third quarter of 1999).
- -----------------------------------------------------------------------------------------------------
EMAIL MESSAGE LANGUAGE TRANSLATION Email messages will be automatically translated
between languages according to pre-defined user
preferences. (Anticipated in the fourth quarter of
1999).
- -----------------------------------------------------------------------------------------------------
</TABLE>
Direct online marketing services. We have a large and growing network of end
users. As of May 16, 1999, through our business partners we host approximately
4.5 million emailboxes and through our ZapZone Network service, which has over
75,000 sites registered, we host approximately 480,000 emailboxes. This
extensive user network, along with our advanced technologies and strategic
relationships, will allow us to offer value-added direct marketing services to
our business partners and third parties. We are currently planning the following
services:
Deal Me In (also known as Opt-in). Users can elect to receive promotions
from third-party vendors for pre-selected product categories such as books,
music, toys, computers and gifts. Whenever end users choose to purchase one
of these items, we would earn a percentage of the revenue generated from
the transaction.
MailTarget. We provide our business partners with a Web-based tool which
enables webmasters to select and send tailored messages to targeted
segments of their end user base. We would earn revenues by charging
business partners a fee for each message sent with this tool.
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<PAGE> 42
Third-party marketing programs. In addition to our own internal opt-in
program, we also provide other third-party direct marketing companies with
the opportunity to leverage our extensive user base to market their
products. We would earn revenues by charging third-party direct marketing
companies a fee for each message sent.
The statements in this prospectus regarding planned service offerings and
anticipated features of such offerings are forward-looking statements. Actual
service offerings and benefits could differ materially from those projected. We
provide some of our features and services by integrating our technology with
what we believe to be best of breed, third-party providers.
THE ZAPZONE NETWORK EMAIL SERVICE
Our ZapZone Network service delivers email messaging solutions to small websites
and homepages, which we believe represent a large and growing market of end
users. Our ZapZone Network service enables individuals and website
administrators to set up Web-based email online, often in under ten minutes.
ZapZone Network-enabled sites are able to provide our core Web-based email
services to their end users in multiple languages. Our ZapZone Network service
enables websites to collect valuable user demographic information, which
facilitates their ability to conduct targeted marketing campaigns with their
members. Webmasters can then communicate with and market to those users. In
addition, we plan to sell premium services to these end users in the near
future.
PRONTOMAIL
We provide a Web-based email service directly to end users under the name
ProntoMail. Individuals can register for this service through our corporate
website. We use ProntoMail for beta testing of new service offerings and have no
plans to actively market this service.
CUSTOMERS
BUSINESS PARTNERS
We offer email and messaging communications services to over 100 global business
partners. The following is a list of companies with which we have email service
agreements and which have the greatest number of mailboxes within their
respective categories:
COMMUNITY SITE:
TALK CITY (CHAT ROOMS)
FORTUNECITY (GENERAL)
LOOKSMART (PORTAL)
COLLEGES.COM (STUDENT INFORMATION)
DESERET (MORMON COMMUNITY SITE)
INTERNATIONAL SITE:
EXCITE (PORTAL)
GOO (NIPPON TELEPHONE AND TELEGRAPH)
YUPI (SPANISH PORTAL)
SOHU (CHINESE PORTAL)
MONCOURRIER (FRENCH CANADIAN PORTAL)
DIGITAL MEDIA COMPANY:
PRIMEDIA (SEVENTEEN.COM)
DISCOVERY CHANNEL ONLINE
PROLAUNCH (PERSONAL MEDIA)
MEDSCAPE (MEDICAL)
ZD NET (ONLINE MEDIA)
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<PAGE> 43
ENTERTAINMENT SITE:
WARNER BROS. (ACMECITY.COM)
JOKES.COM
GARFIELD.COM (CARTOON SITE)
MUSIC.COM
HEADBONE.COM (KIDS SITE)
NEWSPAPERS/PUBLISHING:
CANOE (CANADIAN NEWS)
THE IRISH TIMES
HOLLINGER GROUP (JERUSALEM POST)
THE TIMES OF INDIA
NEWS CORP. (CHINABYTE)
ZAPZONE NETWORK MEMBERS
We meet the email and messaging needs of small websites and home pages through
our ZapZone Network (ZZN). This service enables our members to offer Web-based
email and messaging to their end users and allows us to increase our membership
base. The following is a sampling of ZapZone Network member sites:
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------
ZZN MEMBER SITE DESCRIPTION
- ---------------------------------------------------------------------------------------------------
Baby.com (baby.zzn.com) Community site that aggregates parenting information and
sells baby-related products.
- ---------------------------------------------------------------------------------------------------
Bboy.com (bboy.zzn.com) Music-oriented website that aggregates "hip hop"
information.
- ---------------------------------------------------------------------------------------------------
Citrus Cool Kids Children's portal that offers book reviews, a newsletter,
(citruscoolkids.zzn.com) and information about games and the Internet.
- ---------------------------------------------------------------------------------------------------
Diabetes.com (diabetes.zzn.com) Health-oriented site for diabetes information.
- ---------------------------------------------------------------------------------------------------
OilLink (oillink.zzn.com) Oil industry news site.
- ---------------------------------------------------------------------------------------------------
Oxford Online Community site for people who live in Oxford, England.
(oxfordonline.zzn.com)
- ---------------------------------------------------------------------------------------------------
Soccer Club (soccerclub.zzn.com) Website for soccer fans around the world.
- ---------------------------------------------------------------------------------------------------
The Tom Green Show Fan club for the MTV talk show host Tom Green.
(tomgreenshow.zzn.com)
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
</TABLE>
SALES AND MARKETING
SALES STRATEGY
Our flexible and highly customizable solutions enable us to satisfy the email
and messaging needs of a wide range of customers worldwide, from Web-based
companies to small websites and businesses. Our sales strategy is to target
these market segments through a combination of direct, indirect and online
selling initiatives. Our direct sales force is responsible for targeting large
companies, online businesses and hosting sites throughout the world. While our
salespeople are responsible for selling our solutions in a geographic area, they
often collaborate to recruit new business partners, particularly when dealing
with
40
<PAGE> 44
multinational organizations. Our sales offices are located in Santa Clara,
California, and Ein Vered, Israel. We plan to extend our sales force into Europe
and Asia within the next 12 months. As our sales force grows, it will focus not
only on acquiring new partners worldwide, but also on continuing to sell premium
and direct e-marketing services to existing clients.
We also plan to enter into agreements with select third parties, who will
package our messaging solution as part of a comprehensive service offering that
they will sell to their business customers. We expect to share revenues and/or
receive fees from these third parties.
We will continue to actively promote our ZapZone Network service to small
websites and businesses. A key part of our ZapZone Network strategy will be for
us to mobilize our direct and indirect sales forces to sell premium and direct
online marketing services to ZapZone Network members.
MARKETING STRATEGY
Our marketing strategy is focused on increasing global awareness of our solution
and building our brand as a leading international provider of email and
messaging services. We plan to market our solution primarily through a mix of
print advertising, direct marketing, public relations and online initiatives. We
plan to aggressively promote our premium services to our business partners and
their end users and our direct e-marketing services to our business partners and
third parties. We intend to leverage our direct sales force and develop
co-branding and marketing opportunities with other online organizations to
augment our marketing efforts. Our ZapZone Network service logo is featured on
every ZapZone Network service member homepage and we believe that as more
members join the ZapZone Network service and use zzn.com as their email suffix,
its brand will be strengthened.
BUSINESS PARTNER SUPPORT
CommTouch provides its business partners rapid callback technical support 24
hours a day, seven days a week. We have also developed a proprietary software
tool that provides end users with immediate online support without intervention
from customer service representatives or technical staff. We believe that this
technical support model enables us to provide high quality and cost effective
support service to our business partners and end users.
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<PAGE> 45
TECHNOLOGY
We leverage our eight years of email and technology experience to create
world-class, robust, full-featured, reliable email solutions. We believe we
possess three major advantages over other Web-based email solutions:
SCALABLE AND MODULAR SYSTEM ARCHITECTURE
Our Web-based email system is designed to provide maximum flexibility. We have
developed a system architecture consisting of three main components: Web
servers, mail servers and database servers. Web servers are responsible for the
front-end email application, mail servers are responsible for the storage and
transmittal of email messages and database servers are responsible for storing
all other important end user and partner information. These servers interact
through standard communications protocols such as HTTP, IMAP4, POP3 and SMTP and
ODBC.
LOGO
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<PAGE> 46
The modularity of our network architecture provides several key technological
advantages:
- - Rapidly deployable and cost-effective. The design of our system enables us to
significantly reduce our deployment time as well as costs to support each
mailbox.
- We outsource server hosting and Internet backbone access to third party
providers because they are able to offer such services at bulk rates. In
addition, there are numerous third-party providers from whom we can
obtain these services, so our capacity is not limited and we are able to
obtain favorable rates. This significantly reduces our Internet
connectivity and server maintenance costs.
- The modularity of our system architecture allows us to choose from among
a broad range of industry-standard mail servers, and select the servers
with optimal price/performance characteristics. Again, we are able to
obtain these servers from a number of vendors, so our capacity is not
limited.
- The outsourcing of our server needs enables us to focus on the rapid
deployment of applications for our clients rather than on the costly and
time-consuming maintenance and development of an internal hardware
infrastructure.
- Because third-party mail servers are constantly upgraded with the most
advanced features (LDAP support, HTML messaging, etc.), we are able to
reduce our development time by leveraging existing off-the-shelf
technology and immediately integrating these features into our service
offerings.
- - Scalable and reliable. Our modular technology architecture enables the rapid
setup of full-service email hosting facilities and enables us to quickly and
seamlessly expand our system as our user base grows. In addition, we utilize
redundant servers and server load balancing capabilities to re-direct traffic
if a server malfunctions. Our system architecture and software platform have
been designed to provide excellent service to hundreds of millions of
emailboxes across millions of domains. We believe that our robust and flexible
technology platform enables us to maintain one of the highest service
performance levels in the industry.
- - Portable. As the market for outsourced email systems evolves, some
organizations may demand their own in-house hosting facility. The highly
modular nature of our system architecture provides us with the ability to
duplicate a system in another location within a period of several days. As a
result, we are well-equipped to rapidly deploy email services to this growing
subset of the outsourced email systems market.
PROPRIETARY DEVELOPMENT LANGUAGE
We have custom-built a proprietary software development language called
Application Dynamic Markup Language (ADML) in order to maximize the flexibility
and minimize the development time of our email solutions.
The ADML environment encapsulates the functionality and layout of a generic
Web-based email interface, while allowing our developers to rapidly customize a
business partner's email system with specific features. All external resources,
such as text strings, images and site-dependent parameters are stored in various
databases. When a new site is built, the ADML code is compiled into ASP
(Microsoft's Active Server Pages technology) code which runs on the web servers
and translates the ADML code into HTML. This enables the developer to build an
email interface for a business partner without having to write a single line of
HTML code. This provides us with a competitive advantage for several reasons:
- we can add new functionality and features (languages, premium and direct
marketing services, etc.) to any business partner's existing email system
in as little as a few hours;
- we can simultaneously upgrade more than one email system (for example,
immediately making additional languages available to any end user of a
ZapZone Network service email site); and
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<PAGE> 47
- we can offer automated email customization tools to our end users. For
example, the ZapZone Network service takes advantage of the flexibility
provided by ADML to allow webmasters to build, customize and deploy
ready-to-use email sites in very little time.
ADML FLOW CHART
[ADML FLOW CHART]
ADVANCED PROPRIETARY TECHNOLOGIES
We have developed the following proprietary technologies:
- Complex Foreign Language Support. Currently, our system is fully
double-byte-enabled to handle intricate character languages such as
Chinese and Japanese. We are currently in the final stages of developing
the technology to enable right-to-left reading/writing capabilities to
support languages like Hebrew, Arabic and Urdu.
- Integrated Open Platform Interface. We have developed an integrated
platform and series of application programming interfaces that enable us
to rapidly and fully integrate additional communications features and
functionality into our service offering.
- Automated Customer Service. We have developed a proprietary software
tool that allows us to field most end users' technical questions with an
automated email feedback system.
- Advanced Direct Marketing Technology. Our MailTarget service is a
Web-based tool which provides business partners with a user-friendly
method of selecting and delivering tailored messages to a targeted
segment of their user population.
- Customization Wizard Tool. We have developed a proprietary technology
tool which enables customers to design the look and feel of their
Web-based email interface so that it is consistent with their own brand
images.
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<PAGE> 48
COMPETITION
The market for email and messaging services is intensely competitive and we
expect it to be increasingly competitive. In addition to competing with
companies that develop and maintain in-house email solutions, we directly
compete with Web-based email service providers, including USA.NET, Mail.com and
Critical Path. We also compete with software companies that provide email,
including Microsoft, Software.com and Lotus Development Corporation. Microsoft
currently offers free Web-based email through its Hotmail website. We face
further competition from websites that offer email services, ISPs, including
America Online (and its subsidiary, Netscape), Yahoo and Lycos, and other
service providers, such as telecommunications companies.
Some of our competitors provide a variety of Web-based services in addition to
email, such as Internet access, browser software, homepage design and hosting.
The ability of these competitors to offer a broader suite of complementary
services may give them a considerable advantage over us. Some of our competitors
may offer services at or below cost. Many of our current and potential
competitors have longer Web-based email operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we do and may enter into strategic or commercial
relationships with larger, more established and better-financed companies.
We believe that our solution has the following competitive advantages:
- highly customizable and flexible;
- rapidly deployable;
- available in 14 languages;
- designed to integrate numerous messaging applications; and
- has the ability to effectively address multiple market needs.
However, despite our competitive positioning, we may not be able to compete
successfully against current and future competitors.
INTELLECTUAL PROPERTY
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 and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We have the following registered trademarks: COMMTOUCH
(registered in the U.S.); PRONTO (U.S. and South Korea); COMMTOUCH SOFTWARE
(Australia and New Zealand); PRONTO FAMILY, PRONTO SECURE (Japan); PRONTO MAIL
(Japan and New Zealand). We also have the following pending trademark
applications: ZAPZONE NETWORK, ZZN (U.S., Israel and other countries) and PRONTO
(Canada, Mexico, European Community and India). It may be possible for
unauthorized third parties to copy or reverse engineer certain portions of our
products or obtain and use information that we regard as proprietary. Certain
end user license provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program may be unenforceable under the
laws of certain 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. There can be no assurance that our means of
protecting our proprietary rights in the United States or abroad will be
adequate or that competing companies will not independently develop similar
technology.
Other parties may assert infringement claims against us. We may also be subject
to legal proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of the trademarks and other
intellectual property rights of third parties by us and our licensees. Such
45
<PAGE> 49
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
Our ZapZone Network service allows webmasters to select the email service name
of their choice. There is, therefore, the possibility that they will select
email service names that may infringe the rights of others under U.S. state
and/or federal or foreign trademark and/or anti-dilution or similar laws.
ZapZone Network service's placement of ZapZone Network service icons and
advertisements on ZapZone Network service webmasters' web pages may contribute
to our perceived liability for any allegedly infringing acts. We do not audit
webmasters' email service name choices for compliance with any intellectual
property rights of others. However, in our current webmaster license agreements,
we require webmasters to indemnify us for claims resulting from their chosen
email service names; we also require users to indemnify us in their license
agreements. Furthermore, in our license agreements with webmasters and users, we
expressly reserve the right to eliminate their account or to change their email
service names, in our sole discretion. We have received complaints from several
parties that email service names chosen and registered by ZapZone Network
service users are similar or identical to domain names and/or trademarks in
which the complainants claim an interest. We responded by referring the
complainants to the webmasters who registered those email service names, as it
is our policy to do.
We also intend to continue to strategically license certain technology from
third parties, including our mail server and SSL encryption technology. In the
future, if we add certificate technology to our systems, we may license
additional technology from third-party vendors. We cannot be certain that these
third-party content licenses will be available to us on commercially reasonable
terms or that we will be able to successfully integrate the technology into our
products and services. These third-party in-licenses may expose us to increased
risks, including risks associated with the assimilation of new technology, the
diversion of resources from the development of our own proprietary technology
and our inability to generate revenues from new technology sufficient to offset
associated acquisition and maintenance costs. The inability to obtain any of
these licenses could result in delays in product and service development until
equivalent technology can be identified, licensed and integrated. Any such
delays in services could cause our business, financial condition and operating
results to suffer.
GOVERNMENT REGULATION
Although there are currently few laws and regulations directly applicable to the
Internet and commercial email services, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or commercial email
services covering issues such as user privacy, pricing, content, copyright,
distribution, antitrust and characteristics and quality of products and
services. Further, the growth and development of the market for online email may
prompt calls for more stringent consumer protection laws that may impose
additional burdens on companies conducting business online. The adoption of
additional laws or regulations may impair the growth of the Internet or
commercial online services, which could, in turn, decrease the demand for our
products and services and increase our cost of doing business, or otherwise have
a material adverse effect on our business, operating results and financial
condition. 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. Any such new legislation or regulation, the application of laws and
regulations from jurisdictions whose laws do not currently apply to our business
or the application of existing laws and regulations to the Internet could have a
material adverse effect on our business, operating results and financial
condition.
EMPLOYEES
As of March 31, 1999, we had 62 full-time employees. None of our U.S. employees
is covered by a collective bargaining agreement. We believe that our relations
with our employees are good.
Israeli law and certain provisions of the nationwide collective bargaining
agreements between the Histadrut (General Federation of Labor in Israel) and the
Coordinating Bureau of Economic Organizations (the
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<PAGE> 50
Israeli federation of employers' organizations) apply to CommTouch's Israeli
employees. These provisions principally concern the maximum length of the work
day and the work week, minimum wages, contributions to a pension fund, insurance
for work-related accidents, procedures for dismissing employees, determination
of severance pay and other conditions of employment. Furthermore, pursuant to
such provisions, the wages of most of CommTouch's employees are subject to cost
of living adjustments, based on changes in the Israeli Consumer Price Index
(CPI). The amounts and frequency of such adjustments are modified from time to
time. Israeli law generally requires the payment of severance pay upon the
retirement or death of an employee or upon termination of employment by the
employer or, in certain circumstances, by the employee. CommTouch currently
funds its ongoing severance obligations by making monthly payments for insurance
policies.
A general practice in Israel followed by CommTouch, although not legally
required, is the contribution of funds on behalf of certain employees to an
individual insurance policy known as "Managers' Insurance." This policy provides
a combination of savings plan, insurance and severance pay benefits to the
insured employee. It provides for payments to the employee upon retirement or
death and secures a substantial portion of the severance pay, if any, to which
the employee is legally entitled upon termination of employment. Each
participating employee contributes an amount equal to 5% of such employee's base
salary, and the employer contributes between 13.3% and 15.8% of the employee's
base salary. Full-time employees who are not insured in this way are entitled to
a savings account, to which each of the employee and the employer makes a
monthly contribution of 5% of the employee's base salary. CommTouch also
provides certain employees with an Education Fund, to which each participating
employee contributes an amount equal to 2.5% of such employee's base salary, and
the employer contributes 7.5% of the employee's base salary.
OFFICE LOCATION
Our principal executive offices are located at 10 Technology Avenue, Ein Vered
40696, Israel, where our telephone number is 011-972-9-796-3445, and 3945
Freedom Circle, Santa Clara, California 95054, where our telephone number is
(408) 653-4330.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of CommTouch and their ages, as of March
31, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Gideon Mantel(1)..................... 39 Chief Executive Officer and Director
Isabel Maxwell....................... 48 President, CommTouch Software, Inc.
Amir Lev............................. 39 Chief Technology Officer, General Manager and Director
James Collins........................ 40 Chief Financial Officer and Secretary
Eran Schindler....................... 33 Vice President, Finance
Robert "Rip" Gerber.................. 36 Vice President, Marketing, CommTouch Software, Inc.
Avner Amram.......................... 37 Vice President, Operations, CommTouch Software, Inc.
Yael Elish........................... 30 Vice President, Strategic Development, CommTouch
Software, Inc.
Igor Gusak........................... 44 Vice President, Sales, CommTouch Software, Inc.
Yuval Neria.......................... 39 Vice President, International Sales
Ronen Rosenblatt..................... 35 Vice President, Research and Development
Allan Barkat(1)(2)................... 39 Chairman of the Board of Directors
Yiftah Atir.......................... 49 Director
Yair Safrai.......................... 40 Director
Yoseph Sela(1)(2).................... 46 Director
Richard Sorkin(3).................... 37 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
(3) Mr. Sorkin will join the Board of Directors following the closing of the
offering.
Gideon Mantel is a co-founder of CommTouch and served as its Chief Financial
Officer from its inception in February 1991 until October 1995, when he became
CommTouch's Chief Operating Officer. In November 1997, he became CommTouch's
Chief Executive Officer. He has also served as a director of CommTouch since
inception. Mr. Mantel received a B.A. in Political Science and an M.B.A from Tel
Aviv University.
Isabel Maxwell has served as the President of CommTouch Software, Inc. since
February 1997. Ms. Maxwell was a co-founder, and from March 1993 to August 1996
served as the Senior Vice President of International Business Development,
Corporate Affairs and Investor Relations, of The McKinley Group Inc., an
Internet search engine company. From August 1996 to October 1996, Ms. Maxwell
was an Executive Vice President of Excite, Inc. Ms. Maxwell received a B.A. and
M.A. in History and Modern Languages from Oxford University.
Amir Lev is a co-founder of CommTouch and has served as its Chief Technology
Officer and as a director since its inception in 1991. Mr. Lev has also been the
General Manager of CommTouch since January 1997. Mr. Lev received a B.A. in
Computer Science and Economics from Hebrew University, Jerusalem.
James Collins has served as the Chief Financial Officer of CommTouch since March
1999 and as the Secretary of CommTouch since April 1999. From October 1997 to
February 1999, Mr. Collins was a private investor. From March 1992 to December
1996, Mr. Collins served as the Chief Financial Officer and Secretary, and from
January 1997 to September 1997 as the Vice President of Operations of Pete's
Brewing Company, a specialty brewer. Mr. Collins received a B.S. in Business
Administration from the University of the Pacific and is a Certified Public
Accountant in the State of California.
Eran Schindler has served as Vice President, Finance of CommTouch since November
1998. From December 1997 to November 1998, Mr. Schindler served as Chief
Financial Officer of AutoMedia Ltd., a
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<PAGE> 52
video and postproduction software company. From December 1996 to October 1997,
Mr. Schindler served as Chief Executive Officer and from July 1994 to December
1996 as Chief Financial Officer of Hosen Electrical Appliances Ltd., an importer
and marketer of electrical appliances. Mr. Schindler received a B.A. from Haifa
University.
Robert "Rip" Gerber has served as Vice President, Marketing of CommTouch
Software, Inc. since March 1999. Mr. Gerber was the founder of @once, an email
direct marketing company, and from February 1998 to February 1999 served as its
president. From September 1995 to January 1998, Mr. Gerber served as Managing
Director of Pantheon Consulting Group LLC, a marketing and planning services
company. From August 1992 to August 1995, Mr. Gerber was a consultant for
Deloitte & Touche LLP, a public accounting firm. Mr. Gerber received a B.S. in
Chemical Engineering from the University of Virginia and an M.B.A. from Harvard
Business School.
Avner Amram has served as Vice President, Operations of CommTouch Software, Inc.
since April 1999. Mr. Amram was Director of Operations of CommTouch Software,
Inc. from March 1998 to April 1999 and a Software Team Leader from March 1996 to
March 1998. Mr. Amram received a B.Sc. in Computer Science from the Technion,
Haifa.
Yael Elish has served as the Vice President, Strategic Development of CommTouch
Software, Inc. since April 1999. Ms. Elish was CommTouch's Director of Business
Development from August 1998 to March 1999 and was CommTouch's Director of Sales
from December 1996 to August 1998. From August 1993 to August 1996, Ms. Elish
was a Marketing Manager of Widecom Ltd., a provider of Internet integration
services and software development. Ms. Elish received a B.A. in International
Relations from Hebrew University in Jerusalem.
Igor Gusak has served as the Vice President, Sales of CommTouch Software, Inc.
since April 1999. Dr. Gusak was the Director of Sales and Marketing of CommTouch
from February 1997 to March 1999 and the Director of Original Equipment
Manufacturer Sales for CommTouch from January 1995 to January 1997. Dr. Gusak
received a Ph.D. in Mathematics from Urals University, Ekaterinburg, Russia.
Yuval Neria has served as the Vice President, International Sales of CommTouch
since April 1999. Mr. Neria was the Director of International Marketing and
Sales for CommTouch from March 1997 to April 1999, the Director of Pacific Rim
Operations for CommTouch from March 1996 to April 1997, a Product Manager for
CommTouch from March 1995 to April 1996, and a Quality Assurance Manager for
CommTouch from March 1993 to April 1995. Mr. Neria received a B.A. in Computer
Science from the City University of New York.
Ronen Rosenblatt has served as the Vice President, Research and Development of
CommTouch since April 1999. Mr. Rosenblatt served as the Director of Research
and Development for CommTouch from November 1994 to March 1999. Mr. Rosenblatt
received a B.Sc. in Electronics and Computer Engineering from Tel Aviv
University.
Yiftah Atir has served as a Director of CommTouch since January 1996. From
November 1994 to the present, Mr. Atir has served as Managing Director of
Evergreen Venture Capital, a technology focused venture capital fund. Mr. Atir
received a B.A. from Haifa University and an M.B.A. from Tel Aviv University.
Allan Barkat has served as a Director of CommTouch since February 1996 and
Chairman of the Board of Directors since April 1999. From March 1997 to the
present, Mr. Barkat has been a Managing Director of Apax-Leumi Partners, Ltd.
the investment advisor to Israel Growth Fund, LP, a technology focused venture
capital fund. From January 1995 to March 1997, Mr. Barkat served as an Assistant
Director of Apax-Leumi Partners Ltd. From 1992 to 1994, Mr. Barkat served as
Vice President of Marketing & Sales of DSP Communications Group, Inc., a
wireless semiconductor company. Mr. Barkat has also served as a director of
Fundtech Ltd. Mr. Barkat received a B.Sc. from the Technion, Haifa.
Yair Safrai has served as a Director of CommTouch since January 1999. From
September 1996 to the present, Mr. Safrai has been the Managing Partner of
Concord Ventures, a technology focused venture capital
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fund. From July 1994 to September 1996, Mr. Safrai served as Vice President of
Nitzanim, a venture capital fund. Mr. Safrai received a B.A. in Management and
Economics from Tel Aviv University, an M.A. from the University of Pennsylvania,
and an M.B.A. from the Wharton Business School, University of Pennsylvania.
Yoseph Sela has served as a Director of CommTouch since February 1996. From
January 1993 to the present, Mr. Sela has served as Executive Vice President of
Gemini Capital Fund Management, a technology focused venture capital fund. Mr.
Sela received a B.Sc. from the Technion, Haifa and an M.B.A. from Tel Aviv
University.
Richard Sorkin will join the Board immediately following the closing of the
offering. Since June 1998 Mr. Sorkin has served as an advisor to several
early-stage Internet companies and is a director of several private companies.
From June 1998 to April 1999 he was the Chairman of the Board of Directors of
ZIP2, an Internet media company which was sold to Compaq. From May 1996 to June
1998, he was Chief Executive Officer of ZIP2 and from May 1993 to May 1996 he
held various executive positions with Creative Technology, a leading provider of
multi-media hardware. Mr. Sorkin received a B.A. with honors in Economics from
Yale University and an MBA from Stanford University.
ELECTION OF DIRECTORS
Directors are elected by shareholders at the annual shareholders meeting and
hold office until the next Ordinary General Meeting, which is held at least once
in every calendar year, but not more than fifteen months after the last
preceding Ordinary General meeting. Directors may be removed and other directors
may be elected in their place or to fill vacancies in the Board of Directors at
any time by the holders of a majority of the voting power at a general meeting
of the shareholders. In the intervals between Ordinary General Meetings, the
Board of Directors may appoint new directors temporarily to fill vacancies on
the Board of Directors. The Articles of Association of CommTouch authorize nine
directors. There are no family relationships among any of the directors,
officers or key employees of CommTouch.
ALTERNATE DIRECTORS
The Articles of Association of CommTouch provide that any director may appoint
another person to serve as an alternate director and may remove such alternate.
Any alternate director possesses all the rights and obligations of the director
who appointed him, except that the alternate has no standing at any meeting
while the appointing director is present, and the alternate is not entitled to
remuneration. Any individual, whether or not a director, may act as an alternate
director, and the same person may act as the alternate for several directors and
have a corresponding number of votes. Unless the appointing director limits the
time or scope of the appointment, the appointment is effective for all purposes
until the appointing director ceases to be a director or terminates the
appointment. The appointment of an alternate director does not in itself
diminish the responsibility of the appointing director as a director.
INDEPENDENT DIRECTORS; AUDIT FUNCTION
Under the requirements for quotation on Nasdaq, CommTouch is required to have at
least two independent directors on its Board and to establish an audit
committee, at least a majority of whose members are independent of management.
Messrs. Barkat and Sela, as independent directors, serve as the members of
CommTouch's Audit Committee.
Under Israeli law, "public" Israeli companies are required to appoint at least
two directors resident in Israel who meet stringent standards of independence.
CommTouch believes that this requirement does not currently apply to companies
that are publicly traded only outside of Israel. Nevertheless, CommTouch may be
required to appoint such independent directors. Moreover, the new Israeli
Companies Law, which will become effective on February 1, 2000, unequivocally
extends the independent director requirement to Israeli companies that are
publicly traded outside of Israel, such as on Nasdaq.
The new Israeli Companies Law also provides that public companies must appoint
an audit committee of the Board of Directors, a certified public accountant to
audit the company's financial statements and to
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report any improprieties that the accountant may discover to the Chairman of the
Board, and an internal auditor.
OFFICE HOLDERS
Israeli law codifies the duty of care and fiduciary duties that an Office Holder
(generally, a director or executive officer) owes to a company. An Office
Holder's fiduciary duty includes avoiding any conflict of interest between the
Office Holder's position in CommTouch and his personal affairs, avoiding any
competition with CommTouch, avoiding exploiting any business opportunity of
CommTouch in order to receive personal advantage for himself or others and
revealing to CommTouch any information or documents relating to CommTouch's
affairs which the Office Holder has received due to his position as an Office
Holder.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee, which was established by the Board in January 1996,
is responsible for determining salaries, incentives and other forms of
compensation for our directors, officers and other employees and for
administering various incentive compensation and benefit plans. The Compensation
Committee consists of the Chief Executive Officer and two outside directors.
Allan Barkat and Yoseph Sela are currently the two outside directors on our
Compensation Committee.
COMPENSATION OF OFFICERS AND DIRECTORS
The directors of CommTouch can be remunerated by CommTouch for their services as
directors to the extent such remuneration is approved by the CommTouch's
shareholders at an annual general meeting. Directors currently do not receive
compensation for their services as directors but are reimbursed for their
expenses for each Board of Directors meeting attended.
The aggregate direct remuneration paid by CommTouch to all directors and
executive officers (11 persons) in 1998 was approximately $500,000. During the
same period CommTouch accrued or set aside approximately $66,000 for the same
group to provide pension, retirement or similar benefits. As of March 31, 1999,
directors and executive officers of CommTouch (15 persons) held stock options to
purchase an aggregate of 469,520 ordinary shares.
U.S. STOCK OPTION PLAN
Our 1996 CSI Stock Option Plan, which is the plan for U.S. employees and
consultants, is administered by our Compensation Committee. Our Compensation
Committee consists of at least two directors who are non-employee directors, as
that term is defined in Rule 16b-3. The Board of Directors may amend the option
plan as desired without further action by CommTouch's shareholders, except as
required by applicable law. The plan will continue in effect until terminated by
the Board or until January, 2006.
The consideration for each award under the plan is established by the
Compensation Committee, and in no event shall the exercise price for ISOs be
less than 100% of the fair market value of the underlying stock on the date of
grant. Awards have such terms and are exercisable in such manner and at such
times as the Compensation Committee may determine. Typically, an option granted
under the plan vests with respect to one-fourth of the shares subject to the
option on the first anniversary of the grant date and with respect to 1/36 of
the remaining shares vest each month thereafter. However, the Compensation
Committee may, in its discretion, permit an optionee to exercise unvested
options, provided that such shares are subjected to a right of repurchase in
favor of CommTouch Software, Inc. according to the original vesting schedule.
Each ISO expires not more than 10 years from the date of grant.
The 1996 CSI Stock Option Plan had originally reserved 1,000,000 shares for
issuance under the plan. In April of 1999, the Board of Directors amended the
Plan to provide for a pool of 5,000,000 shares which may be issued under the
1996 CSI Stock Option Plan, the 1999 Israeli Share Option Plan, and the Israeli
Option Agreements issued to Israeli employees.
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ISRAELI OPTION AGREEMENTS AND 1999 ISRAELI SHARE OPTION PLAN
To date we have granted options to Israeli employees and consultants pursuant to
individual option agreements (the "Israeli Option Agreements") rather than
pursuant to a stock option plan. Typically, options granted pursuant to the
Israeli Option Agreements vest in four equal annual installments and expire no
later than ten years from the date of grant. Substantially all of the Israeli
Option Agreements provide that only the grantee can exercise options under the
Israeli Option Agreements, and the grantee cannot assign or transfer the
options. Moreover, if a grantee ceases to be employed by CommTouch on a full
time basis, then the grantee will have a limited period from the cessation of
employment in which to exercise any vested options. Grantees are responsible for
paying all taxes and mandatory payments upon the exercise of options.
In connection with this offering, the Board of Directors has approved the 1999
Section 3(i) Share Option Plan (the "1999 Israeli Share Option Plan"). The 1999
Israeli Share Option Plan will be administered by the Board of Directors, or by
a Share Option Committee appointed by the Board of Directors (currently the
Compensation Committee). The Board or the committee has full power to designate
the persons entitled to receive options and the terms and provisions of the
option agreements (including the number and price of shares subject to each
grant and the acceleration of the right of an optionee to exercise in whole or
in part any previously granted option). Typically, an option granted under the
plan vests with respect to one-fourth of the shares subject to the option on the
first anniversary of the grant date and with respect to one-36th of the
remaining shares each month thereafter. Options are exercisable only during the
lifetime of the optionee, and are not transferable other than by will or laws of
descent.
As of March 31, 1999, 694,860 stock options had been granted under Israeli
Option Agreements and the 1996 CSI Stock Option Plan. Such options have exercise
prices ranging from $0.01 to $1.45 per share and a weighted average per share
exercise price of $1.25, and were held by 59 persons.
Certain of the option agreements for options granted to employees (pursuant to
the Israeli Option Agreements) and to key employees (pursuant to the 1996 CSI
Stock Option Plan) provide for acceleration of vesting in a change of control.
Pursuant to these agreements, 50 percent of such an employee's unvested options
will vest at the closing of the change of control. In such event, the remainder
of the unvested options, if granted pursuant to an Israeli Option Agreement,
shall be subject to the vesting provisions set forth in the Israeli Option
Agreement, and if granted pursuant to the 1996 CSI Stock Option Plan, shall vest
on the first anniversary of the change of control.
The total number of shares which can be issued under our 1999 Israeli Share
Option Plan, 1996 CSI Stock Option Plan and the Israeli Option Agreements
previously issued to Israeli employees is 5,000,000. Of that number, 694,860
shares are subject to be issued pursuant to outstanding Israeli Option
Agreements and 662,680 shares have been issued upon the exercise of stock
options. The remaining 3,642,460 shares will be allocated from time to time by
the Board of Directors to the 1999 Israeli Share Option Plan and the 1996 CSI
Stock Option Plan.
EMPLOYEE STOCK PURCHASE PLAN
Our 1999 Employee Stock Purchase Plan, or ESPP, which was adopted by our board
of directors on April 18, 1999 and was approved by our shareholders on June 2,
1999, will take effect upon the closing of this offering. The ESPP provides
employees with an opportunity to purchase ordinary shares of CommTouch through
accumulated payroll deductions. We have reserved 150,000 ordinary shares for
issuance under the ESPP, none of which have been issued. The number of ordinary
shares reserved shall be increased each January 1 by 110 percent of the number
of shares purchased under the ESPP in the previous year. The ESPP is intended to
qualify for favorable tax treatment under Section 423 of the Internal Revenue
Code. Generally, the ESPP will be implemented through a series of offering
periods of 24 months' duration, with new offering periods commencing on the
first trading day on or after February 15 and August 15 of each year. However,
the first offering period will commence on the first business day on which price
quotations for CommTouch's ordinary shares are available on the Nasdaq National
Market and will expire on August 14, 2001. Each 24-month Offering Period will
contain four six-
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month Purchase Periods, starting on each February 15 and August 15. However, the
first Purchase Period will commence on the first trading day after the closing
of the offering and will end on February 14, 2000. Shares may be purchased at
the end of each purchase period.
The ESPP will be administered by a plan administrator appointed by our Board of
Directors. Each employee of ours or of any majority-owned subsidiary of ours who
is customarily employed by us or a majority-owned subsidiary for more than 20
hours per week and more than five months per calendar year will be eligible to
participate in the ESPP. No employee shall be permitted to participate in the
ESPP:
- if such employee, immediately after his or her election to participate,
would own shares possessing five percent or more of the total combined
voting power or value of all classes of stock of the Company; or
- if under the terms of the ESPP the right of the employee to purchase
shares would accrue at a rate that exceeds $25,000 of the fair market
value of such shares for each calendar year for which such right is
outstanding.
The ESPP permits an eligible employee to purchase ordinary shares through
payroll deductions, which may not exceed 15 percent of his or her base
compensation, excluding incentive compensation, commissions and other bonuses.
The shares are purchased at a price equal to 85 percent of the lesser of:
- the fair market value of the ordinary shares at the beginning of the
offering period (provided, however, in the case of the first offering
period, this number shall be the price per share at which the ordinary
shares are offered to the public in this offering); or
- the fair market value of the ordinary shares at the end of each purchase
period.
Employees may terminate their participation in the ESPP at any time during the
offering period; they may change their level of participation in the ESPP only
one time during the offering period. Participation in the ESPP terminates
automatically on the participant's termination of employment with us.
In the event of a merger, consolidation, dissolution or liquidation of the
Company, the ESPP shall terminate unless the plan of merger, consolidation or
reorganization provides otherwise. The Board of Directors shall have the right
to amend, modify or terminate the ESPP at any time, except in cases where
shareholder approval is required by law.
1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
Our 1999 Nonemployee Directors Stock Option Plan (Directors Plan), which was
adopted by our board of directors on April 18, 1999 and was approved by our
shareholders on June 2, 1999, will take effect upon the closing of this
offering. Under the 1999 Nonemployee Directors Stock Option Plan, nonemployee
members of the board of directors will be eligible for automatic option grants.
The Directors Plan will continue in effect until terminated by the Board or
until the tenth anniversary of its effective date.
A maximum of 250,000 ordinary shares has been authorized for issuance under the
Directors Plan. No shares have yet been issued under the Directors Plan. The
Board of Directors, or a committee consisting of at least two nonemployee
directors, will make all administrative determinations under the Directors Plan.
Each individual who first joins the Board of Directors as a nonemployee director
on or after the effective date of this offering will receive at that time an
option grant for 10,000 ordinary shares. In addition, on the date of the first
board meeting immediately following the annual shareholders meeting, commencing
with the annual shareholders meeting held in 2000, the Company shall grant to
each nonemployee director then in office (other than nonemployee directors who
received their initial 10,000 share grant under the plan on or after the record
date for such annual meeting) an option to purchase 10,000 ordinary shares. In
1999, the grant shall be made on the first business day on which price
quotations for CommTouch's ordinary shares are available on the Nasdaq National
Market, and the fair market value of the ordinary shares on that day shall be
the price at which ordinary shares were offered to the public on that day. Each
option granted under the Directors Plan shall become exercisable with respect to
one fourth of the number of
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shares covered by such option three months after the date of grant and with
respect to one third of the remaining shares subject to the option every three
months thereafter. Each option will have an exercise price equal to the fair
market value of the ordinary shares on the grant date of such option. Each
option will have a maximum term of ten years, but will terminate earlier if the
optionee ceases to be a member of the Board of Directors. In the event of such
earlier termination, an optionee may exercise options held at the date of
termination to the extent then exercisable, within three months after such date,
but not thereafter; provided, however, the optionee has two years from the date
of termination to exercise vested options if such termination is due to death or
disability. Each option will vest automatically upon a change in control.
401(K) PLAN
In May 1999, the Company adopted the CommTouch Software, Inc. 401(k) Savings
Plan (the "401(k) Plan"), which is intended to qualify under Section 401 of the
Internal Revenue Code of 1986, as amended. All employees of CommTouch Software,
Inc. are eligible to participate in the 401(k) Plan at any time after their date
of hire. Participants may make pre-tax contributions to the 401(k) Plan of up to
20% of their gross wages, subject to a statutory prescribed annual limit. Each
participant is fully vested in his or her contributions. The Company may make
matching contributions on a discretionary basis to fund the 401(k) Plan. Any
employer contributions would be vested under a 6-year graded schedule.
Contributions by the Company, if any, are generally deductible by the Company
when made. The Company has not made any contributions as of June 2, 1999.
Contributions by the participants or the Company to the 401(k) Plan and the
income earned on such contributions are held in trust as required by law.
Individual participants may direct the trustee to invest their accounts in
authorized investment alternatives.
APPROVAL OF CERTAIN TRANSACTIONS
Israeli law requires that transactions between a company and its Office Holders
(or that benefit its Office Holders) be approved as provided for in the
company's articles of association. Approval by a majority of the disinterested
members of the audit committee and of the board of directors is generally
required, and in certain circumstances shareholder approval may also be
required.
Israeli law requires that an Office Holder of a company first promptly disclose
any personal interest that he may have and all related material information
known to him, in connection with any existing or proposed transaction by the
company. Once the Office Holder complies with these disclosure requirements, the
company may approve the transaction in accordance with the provisions of its
articles of association. If the transaction is with a third party in which the
Office Holder has a personal interest, the approval must confirm that the
transaction is not adverse to the company's interest. Furthermore, if the
transaction is an extraordinary transaction (that is, a transaction other than
in the ordinary course of business, otherwise than on market terms, or that is
likely to have a material impact on the company's profitability, assets or
liabilities), then, in addition to any approval stipulated by the articles of
association, it also must be approved by the company's audit committee and then
by its board of directors. Under certain circumstances, shareholder approval is
required. For example, shareholders must approve all compensation paid to
directors in whatever capacity. An Office Holder with a personal interest in any
matter may not be present at any audit committee or Board of Directors meeting
where such matter is being approved, and may not vote. For information
concerning the direct and indirect personal interests of certain Office Holders
and principal shareholders of CommTouch in certain transactions with CommTouch,
see "Certain Transactions."
The new Israeli Companies Law, which will become effective on February 1, 2000,
extends the disclosure requirements applicable to an Office Holder to a
shareholder that holds 25% or more of the voting rights in a public company,
including an Israeli company that is publicly traded outside of Israel such as
on Nasdaq. Certain transactions between a public company and a 25% shareholder,
or transactions in which a 25% shareholder of the company has a personal
interest but which are between a public company and another entity, require the
approval of the Board of Directors and of the shareholders. Moreover, an
extraordinary transaction with a 25% shareholder or the terms of compensation of
a 25% shareholder must
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be approved by the audit committee, the Board of Directors and shareholders. The
shareholder approval for an extraordinary transaction must include at least one
third of the shareholders who have no personal interest in the transaction and
are present at the meeting; the transaction can be approved by shareholders
without this one third approval, if the total share holdings of those who vote
against the transaction do not represent more than one percent of the voting
rights in the company.
INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATIONS ON LIABILITY
Israeli law permits a company to insure an Office Holder in respect of
liabilities incurred by him as a result of the breach of his duty of care to the
company or to another person, or as a result of the breach of his fiduciary duty
to the company, to the extent that he acted in good faith and had reasonable
cause to believe that the act would not prejudice the company. A company can
also insure an Office Holder for monetary liabilities as a result of an act or
omission that he committed in connection with his serving as an Office Holder.
Moreover, a company can indemnify an Office Holder for monetary liability in
connection with his activities as an Office Holder.
The Articles of Association of CommTouch allow CommTouch to insure and indemnify
Office Holders to the fullest extent permitted by law.
Certain members of our management team are officers of our subsidiary, CommTouch
Software, Inc. a California corporation, or reside in California. The Articles
of Incorporation of CommTouch Software, Inc. provide that the liability of the
directors of the corporation CommTouch Software, Inc. for monetary damages shall
be eliminated to the fullest extent permissible under California law and that is
authorized to provide for the indemnification of agents of the corporation, as
defined in Section 317 of the California General Corporation Law, in excess of
that expressly permitted by Section 317 for breach of duty to the corporation
and its shareholders to the fullest extent permissible under California law.
With respect to all proceedings other that shareholder derivative actions,
Section 317 permits a California corporation to indemnify any of its directors,
officers or other agents only if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation
and, in the case of a criminal proceeding, had no reasonable cause to believe
the conduct of such person was unlawful. In the case of derivative actions, a
California corporation may indemnify any of its directors, officers or agents
only if such person acted in good faith and in a manner such person believed to
be in the best interests of the corporation and its shareholders. Furthermore,
in derivative actions, no indemnification is permitted (i) with respect to any
matter with respect to which the person to be indemnified has been held liable
to the corporation, unless such indemnification is approved by the court; (ii)
of amounts paid in settling or otherwise disposing of a pending action without
court approval; or (iii) of expenses incurred in defending a pending action
which is settled or otherwise disposed of without court approval. To the extent
that a director, officer or agent of a corporation has been successful on the
merits in defense of any proceeding for with indemnification if permitted by
Section 317, a corporation is obligated by Section 317 to indemnify such person
against expenses actually and reasonably incurred by him in connection with the
proceeding.
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CERTAIN TRANSACTIONS
ORDINARY SHARE FINANCINGS
Mr. Yiftah Atir, a director of CommTouch, is a Managing Director of Evergreen
Canada Management Ltd., the general partner of Harbour Vest-Evergreen L.P.
Pursuant to several Share Purchase Agreements we issued and sold ordinary shares
to Evergreen Canada Israel Investments and Company Ltd., Yarok Ad Fund
Investment Partnership L.P. and Gmul Investment Company Ltd (the "Evergreen
Investors"). These shares were subsequently converted into Series A Convertible
Preferred Shares and certain of these shares were transferred to
HarbourVest-Evergreen L.P.
PREFERRED SHARE FINANCINGS
Series B Convertible Preferred Shares. Mr. Yoseph Sela, a director of CommTouch,
is an Executive Vice President of Gemini Capital Fund Management, which manages
Gemini Israel Fund L.P. ("GIF"), and Mr. Allan Barkat, also a director of
CommTouch, is a Managing Director of Apax-Leumi Partners, which is the
investment advisor to Israel Growth Fund L.P. ("IGF"). Pursuant to a Preferred
Share Purchase Agreement entered into in January 1996, we issued and sold 51,085
Series B Convertible Preferred Shares and 13,873 warrants for Series B
Convertible Preferred Shares to IGF, GIF, Dr. Ed Mlavsky, Mr. Yosef Sela, and
certain of the Evergreen Investors for a total investment of approximately
$2,250,000. The Evergreen Investors subsequently transferred their shares to
HarbourVest Evergreen L.P.
Series C Convertible Preferred Shares. Mr. Yair Safrai, a director of CommTouch,
is a Managing Partner of Concord Ventures, which manages the Concord Funds (as
defined below). Pursuant to Preferred Share Letter Agreements entered into in
December 1998 and February 1999, we issued and sold (i) 41,570 Series C
Convertible Preferred Shares to k.t. Concord Venture Fund (Cayman) L.P., k.t.
Concord Venture Fund (Israel) L.P., k.t. Concord Venture Advisors (Cayman) L.P.
and k.t. Concord Venture Advisors (Israel) L.P., (the "Concord Funds") for a
total investment of approximately $3,000,000; (ii) 16,249 Series C Convertible
Preferred Shares to IGF for a total investment of approximately $1,173,000; and
(iii) 12,779 Series C Convertible Preferred Shares to GIF for approximately
$922,000.
OPTION EXERCISES AND PURCHASES OF SHARES SUBJECT TO REPURCHASE BY CERTAIN
OFFICERS
Gideon Mantel is the Chief Executive Officer and a Director of CommTouch. On
March 17, 1999, Mr. Mantel exercised certain options granted to him by
CommTouch. In consideration for the Ordinary Shares purchased pursuant to the
exercise of the options, he provided CommTouch with a full-recourse promissory
note dated March 17, 1999 in the original principal amount of $341,272. The
promissory note bears interest at 4.83%, with payments of interest only due on
December 31 of each year and with the balance due and payable on the fourth
anniversary of the date of the promissory note. This loan was used by Mr. Mantel
to purchase 286,120 ordinary shares of CommTouch at a weighted average purchase
price of $1.19 per share. The promissory note is secured by a pledge of the
stock purchased.
Isabel Maxwell is the President of CommTouch Software, Inc. On March 17, 1999,
Ms. Maxwell exercised certain options granted to her by CommTouch. As
consideration for the Ordinary Shares purchased pursuant to the exercise of the
options, she provided CommTouch with a full-recourse promissory note dated March
17, 1999 in the original principal amount of $295,858. The promissory note bears
interest at 4.83%, with payments of interest only due on December 31 of each
year and with the balance due and payable on the fourth anniversary of the date
of the promissory note. This loan was used by Ms. Maxwell to purchase 204,040
Ordinary Shares of CommTouch at a purchase price of $1.45 per share. The
promissory note is secured by a pledge of the stock purchased.
James Collins is the Chief Financial Officer of CommTouch. On March 17, 1999,
Mr. Collins exercised certain options granted to him by CommTouch. As
consideration for the Ordinary Shares purchased pursuant to the exercise of the
options, Mr. Collins provided CommTouch with a full-recourse promissory note
dated March 17, 1999 in the original principal amount of $137,112. The
promissory note bears interest at 4.83% with payments of interest only due on
December 31 of each year and with the balance
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due and payable on the fourth anniversary of the date of the promissory note.
This loan was used by Mr. Collins to purchase 94,560 ordinary shares of
CommTouch at a purchase price of $1.45 per share. The promissory note is secured
by a pledge of the stock purchased.
Robert "Rip" Gerber is the Vice President of Marketing of CommTouch Software,
Inc. On March 17, 1999, Mr. Gerber exercised certain options granted to him by
CommTouch. As consideration for the Ordinary Shares purchased pursuant to the
exercise of the options, Mr. Gerber provided CommTouch with a promissory note
dated March 17, 1999 in the original principal amount of $103,617. The
full-recourse promissory note bears interest at 4.83% with payments of interest
only due on December 31 of each year and with the balance due and payable on the
fourth anniversary of the date of the promissory note. This loan was used by Mr.
Gerber to purchase 71,460 ordinary shares of CommTouch at a purchase price of
$1.45 per share. The promissory note is secured by a pledge of the stock
purchased.
LOAN TO DR. NAHUM SHARFMAN AND RELATIONSHIP AMONG COMMTOUCH AND DEALTIME.COM
LTD., DR. NAHUM SHARFMAN AND AMIR ASHKENAZI
Dr. Nahum Sharfman was a co-founder of CommTouch and served as a director and
Chairman of the Board of Directors of CommTouch from inception until January
1999. Dr. Sharfman also served as the Chief Executive Officer of CommTouch until
March 31, 1998. On December 31, 1995, CommTouch made a loan of approximately
$58,000 to Dr. Sharfman. The loan plus linkage to the Israeli Consumer Price
Index was to have been repaid within three years, or within 30 days of the
termination of Dr. Sharfman's employment, if earlier. At December 31, 1998 the
outstanding balance of this loan was approximately $55,000, payable in NIS.
In 1997 Dr. Sharfman established DealTime.com Ltd. (formerly known as Papricom),
together with Mr. Amir Ashkenazi, a former employee of CommTouch.
During an interim period in which CommTouch and DealTime.com Ltd. were
negotiating a technology exchange agreement, which ultimately was not signed,
CommTouch provided DealTime.com Ltd. with certain services (office and
secretarial services, computers and other facilities including, without
limitation, all payments made for or on behalf of DealTime.com Ltd.) and access
to certain of CommTouch's technology. At the request of DealTime.com Ltd.,
CommTouch also entered into a Product Distribution Agreement (the "Stock Alert
Agreement") with News Alert Inc. DealTime.com has provided technical support and
services to News Alert Inc. in connection with the Stock Alert Agreement.
CommTouch has entered into three agreements to clarify the rights and
obligations of CommTouch, DealTime.com, Dr. Sharfman and Mr. Amir Ashkenazi.
Under the first agreement, Dr. Sharfman and Mr. Ashkenazi acknowledge that
CommTouch is the sole owner of all of their inventions invented during their
employment with CommTouch and for two years following the termination of their
employment, which inventions relate to CommTouch's business and research
activities as of April 1, 1998 (except in the field of commerce). They also
acknowledge CommTouch's rights to inventions that result from work that they
performed for CommTouch at any time, or which are the subject matter of a
specified patent application. Dr. Sharfman and Mr. Ashkenazi also agreed not to
compete with CommTouch's actual business and research activities as they were on
April 1, 1998 (except in the field of ecommerce), through March 31, 2000.
The second agreement, which is between CommTouch and DealTime.com Ltd., confirms
that DealTime.com Ltd. shall be solely responsible for all obligations of
CommTouch under the Stock Alert Agreement. DealTime.com Ltd. also acknowledges
that CommTouch is the sole owner of the Multimedia Desktop Software Technology
that CommTouch developed and that was licensed to News Alert Inc., and CommTouch
grants DealTime.com Ltd. a royalty-free, non-exclusive, limited license to use
that technology to provide support services under the Stock Alert Agreement.
DealTime.com Ltd. also agreed to pay $50,000 to CommTouch for all of the
services rendered by CommTouch and for the license fees that DealTime.com Ltd.
received under the Stock Alert Agreement, and to divide any future revenues and
license fees received under the Stock Alert Agreement equally with CommTouch.
CommTouch, for its part, waived any claim to an equity interest in DealTime.com
Ltd., and agreed that it does not own
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<PAGE> 61
intellectual property developed by DealTime.com Ltd. other than in breach of the
agreements with DealTime.com Ltd. and Messrs. Sharfman and Ashkenazi.
Finally, CommTouch and Dr. Sharfman entered into a Termination of Employment
Agreement requiring the repayment by Dr. Sharfman of CommTouch's loan to him by
December 31, 1999 and the release to Dr. Sharfman of funded and unfunded
severance pay within 20 days of the date of approval of the Termination of
Employment Agreement by our shareholders and containing a waiver by Dr. Sharfman
of any rights under stock options that were granted to him.
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<PAGE> 62
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of ordinary shares as of March 31, 1999, on a pro forma basis to
reflect (1) the conversion into ordinary shares of the Series D Convertible
Preferred Shares issuable upon conversion of Convertible Promissory Notes issued
in April 1999 and (2) the automatic conversion upon completion of this offering
of all outstanding preferred shares into ordinary shares by:
- each person or entity known to CommTouch to own beneficially more than
five percent of CommTouch's ordinary shares,
- each of our directors and officers known to CommTouch to own beneficially
more than one percent of CommTouch's ordinary shares, and
- all executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
ORDINARY SHARES(1)
--------------------
TOTAL SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OFFERING OFFERING
------------------------------------ --------------------- -------- --------
<S> <C> <C> <C>
Yiftah Atir............................................ 1,429,040 15.4% 11.7%
HarbourVest-Evergreen L.P.(2)
55 St. Claire Avenue West, Suite 225
Toronto, Ontario M4V 247
Allan Barkat........................................... 1,211,260 13.1% 9.9%
Israel Growth Fund L.P.(3)
c/o Apax-Leumi Inc.
15 Portland Place
London, England
Yoseph Sela............................................ 838,780 9.0% 6.8%
Entities affiliated with Gemini Israel Fund L.P.(4)
11 Galgaley Haplada St. Bldg. 3
P.O. Box 12226, Herzelia
46733 Israel
Yair Safrai............................................ 831,400 9.0% 6.8%
Entities affiliated with Concord Group(5)
11 Galgaley Haplada St. Bldg. 3
P.O. Box 12226, Herzelia
46733 Israel
Nahum Sharfman......................................... 788,420 8.5% 6.4%
22 Hameyasdim St., Karkur
37064 Israel
Gideon Mantel(6)....................................... 501,140 5.4% 4.1%
c/o CommTouch Software, Inc.
3945 Freedom Circle, Suite 730
Santa Clara, California 95054
Amir Lev(7)............................................ 407,120 4.3% 3.3%
c/o CommTouch Software Ltd.
10 Technology Avenue
Ein Vered 40696, Israel
Isabel Maxwell(8)...................................... 204,040 2.2% 1.7%
c/o CommTouch Software, Inc.
3945 Freedom Circle, Suite 730
Santa Clara, California 95054
James Collins(9)....................................... 94,560 1.0% 0.8%
c/o CommTouch Software, Inc.
3945 Freedom Circle, Suite 730
Santa Clara, California 95054
All directors and executive officers as a group (15 5,571,960 58.6% 44.5%
persons).............................................
</TABLE>
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<PAGE> 63
- -------------------------
(1) Assumes no exercise of the underwriters' over-allotment option. Applicable
percentage ownership is based on 9,258,120 ordinary shares outstanding as of
March 31, 1999 and 12,258,120 shares outstanding immediately following
completion of this offering. Beneficial ownership is determined in
accordance with the rules and regulations of the Securities and Exchange
Commission. Includes shares subject to options exercisable within 60 days
after March 31, 1999 as if such shares were outstanding on March 31, 1999
and assumes that no other person has exercised any outstanding options.
Except as pursuant to applicable community property laws, each shareholder
named in the table has sole voting and investment power with respect to the
shares set forth opposite such shareholder's name.
(2) Represents 1,429,040 ordinary shares owned by HarbourVest-Evergreen L.P. Mr.
Atir, a director of the Company, is the Managing Director of Evergreen
Canada Management Ltd., the general partner of HarbourVest-Evergreen L.P.
and, as such, may be deemed to beneficially own such ordinary shares. Mr.
Atir disclaims beneficial ownership of all such ordinary shares except to
the extent of his proportional interest therein.
(3) Represents 1,211,260 ordinary shares owned by Israel Growth Fund, L.P.,
which is advised by Apax-Leumi Partners, its investment advisor. Mr. Barkat,
a director of the Company, is the Managing Director of Apax-Leumi Partners
and, as such, may be deemed to beneficially own such ordinary shares. Mr.
Barkat disclaims beneficial ownership of all such ordinary shares except to
the extent of his proportional interest therein.
(4) Represents 660,420 ordinary shares owned by Gemini Israel Fund L.P. ("GIF"),
166,280 ordinary shares owned by Gemini Israel II Parallel Fund L.P.
("GIPF"), 6,040 ordinary shares owned by Yoseph Sela and 6,040 ordinary
shares owned by Dr. Ed Mlavsky, the President of Gemini Capital Fund
Management, which manages GIF and GIPF. Mr. Sela, a director of the Company,
is the Executive Vice President of Gemini Capital Fund Management, and, as
such, may be deemed to beneficially own such ordinary shares. Mr. Sela
disclaims beneficial ownership of all of Dr. Mlavsky's ordinary shares and
of all of the ordinary shares owned by GIF and GIPF except to the extent of
his proportional interests therein.
(5) Includes 687,280 ordinary shares owned by k.t. Concord Venture Fund
(Cayman), L.P. ("CVF"), 137,400 ordinary shares owned by k.t. Concord
Venture Fund (Israel), L.P. ("CVF Israel"), 5,620 ordinary shares owned by
k.t. Concord Venture Advisors (Cayman), L.P. ("CVA"), and 1,100 ordinary
shares owned by k.t. Concord Venture Advisors (Israel), L.P. ("CVA Israel").
Mr. Safrai, a director of the Company, is the Managing Partner of Concord
Ventures, which manages CVF, CVF Israel, CVA and CVA Israel, and, as such,
may be deemed to beneficially own such ordinary shares. Mr. Safrai disclaims
beneficial ownership of all such ordinary shares except to the extent of his
proportional interest therein.
(6) Certain of such shares are subject to a right of repurchase in favor of
CommTouch Software, Inc. Does not include 80,000 ordinary shares subject to
an option granted to Mr. Mantel under the 1996 CSI Stock Option Plan on
April 23, 1999, with an exercise price of $15.75 per share. The option will
vest with respect to one-fourth of the shares on April 23, 2000, and with
respect to 1/36 of the remaining shares each month thereafter.
(7) Does not include 50,000 ordinary shares subject to an option granted to Mr.
Lev under an Israeli Option Agreement on April 23, 1999, with an exercise
price of $15.75 per share. The option will vest with respect to one-fourth
of the shares on April 23, 2000, and with respect to 1/36 of the remaining
shares each month thereafter.
(8) Certain of such shares are subject to a right of repurchase in favor of
CommTouch Software, Inc. Does not include 5,000 ordinary shares subject to
an option granted to Ms. Maxwell under the 1996 CSI Stock Option Plan on
April 23, 1999, with an exercise price of $15.75 per share. The option will
vest with respect to one-fourth of the shares on April 23, 2000, and with
respect to 1/36 of the remaining shares each month thereafter.
(9) Certain of such shares are subject to a right of repurchase in favor of
CommTouch Software, Inc. Does not include 10,000 ordinary shares subject to
an option granted to Mr. Collins under the 1996 CSI Stock Option Plan on
April 23, 1999, with an exercise price of $15.75 per share. The option will
vest with respect to one-fourth of the shares on April 23, 2000, and with
respect to 1/36 of the remaining shares each month thereafter.
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<PAGE> 64
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 the Registration Statement of which this prospectus forms a
part.
As of March 31, 1999, our authorized share capital consisted of 10,683,600
ordinary shares, NIS 0.05 par value and 200,000 Series A Convertible Preferred
Shares, 200,000 Series B Convertible Preferred Shares and 165,820 Series C
Convertible Preferred Shares, (collectively, the Convertible Preferred Shares),
NIS 1.0 par value. As of March 31, 1999, there were 2,148,320 ordinary shares,
97,878 Series A Convertible Preferred Shares, (convertible into 1,957,560
ordinary shares) 62,438 Series B Convertible Preferred Shares (convertible into
1,248,760 ordinary shares) and 153,093 Series C Convertible Preferred Shares
(convertible into 3,061,860 ordinary shares) issued and outstanding. In April
1999 we issued $13.2 million worth of Convertible Promissory Notes that will
convert into 42,081 Series D Convertible Preferred Shares upon the obtaining of
certain Israeli governmental approvals. Each preferred share will convert
automatically into twenty ordinary shares upon the closing of the offering. In
connection with this offering our shareholders have approved an increase in our
authorized share capital, and the number of ordinary shares authorized has been
increased to 20,000,000. At the closing of the offering, 12,258,120 ordinary
shares will be issued and outstanding (12,708,120 ordinary shares if the
Underwriters' over-allotment option is exercised in full). No preferred shares
will be outstanding after the Offering.
DESCRIPTION OF ORDINARY SHARES
All issued and outstanding ordinary shares of CommTouch are, and the ordinary
shares offered hereby when issued and paid for will be, duly authorized and
validly issued, fully paid and nonassessable. The ordinary shares do not have
preemptive rights. Neither the Memorandum of Association or Articles of
Association of CommTouch 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, when issued, will be entitled to
their full proportionate of any cash or share dividend declared from the date of
the consummation of the offering.
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. See "Dividend Policy."
In case of a stock 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.
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<PAGE> 65
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. As of the closing of this offering, all of the
outstanding preferred shares will convert into ordinary shares, and there will
be no authorized but unissued shares with preferential rights over the ordinary
shares. Any change in the registered capital of CommTouch, including the
creation of a new class of shares with rights superior or inferior to existing
classes of shares may be adopted by a "special resolution" (the resolution of
the holders of 75 percent or more of the shares participating in a general
meeting). 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-third 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 Chairman may determine with the consent of the holders of a
majority of the shares present in person or by proxy and voting on the question
of adjournment. At such reconvened meeting any two shareholders present in
person or by proxy (and not in default under the articles) will constitute a
quorum.
Most shareholder resolutions, including resolutions for the election of
directors, the declaration of dividends, the appointment of auditors or the
approval of transactions with Office Holders as required by the Companies
Ordinance (See "Management -- Approval of Certain Transactions"), will be deemed
adopted if approved by the holders of a majority of the voting power represented
at the meeting, in person or by proxy, and voting thereon. Certain corporate
actions such as:
- amending the Articles of Association;
- amending the Memorandum of Association;
- changing our name;
- making changes in the capital structure of CommTouch, such as a reduction
of capital, increase of capital or share split;
- merger or consolidation;
- voluntary winding up; and
- authorizing a new class of shares or changing special rights of a class
of shares
must be approved by a "special resolution" and will be deemed adopted only if
approved by the holders of not less than 75 percent of the voting power
represented in person or by proxy at the meeting and voting thereon, and in some
cases 75 percent of the voting power of the affected class of shares.
Upon completion of this offering, our executive officers, directors and five
percent or greater shareholders will own beneficially an aggregate of
approximately 44.5 percent of the Company's outstanding ordinary shares
(approximately 43.8 percent if the underwriters' over-allotment option is
exercised in full). See "Principal Shareholders."
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
62
<PAGE> 66
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 less than 24 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 WARRANTS
As of March 31, 1999, CommTouch has outstanding warrants to purchase 13,873
Series B Convertible Preferred Shares held by investors at a weighted average
exercise price of $44.04, which warrants expire at the closing of an initial
public offering. We also have outstanding warrants to purchase 568 Series B
Convertible Preferred Shares issued to Imperial Bank and Imperial Bancorp and
warrants to purchase a total of 350 Series B Convertible Preferred Shares issued
to various consultants, which warrants expire on various dates in 2002. We also
have outstanding warrants to issue 346 Series C Convertible Preferred Shares
issued to Imperial Bank and Imperial Bancorp, and warrants to purchase a total
of 543 Series C Convertible Preferred Shares issued to various consultants, of
which 300 warrants expire on December 2002 and 243 warrants expire on July 2005.
We granted Bank Lepituach Ha Taasia warrants, exercisable for three years at the
nominal price of NIS 0.05 for each share, with the number of warrants linked to
the amount of the credit made available by the bank under this warrant. As of
March 31, 1999, Bank Lepituach Ha Taasia had warrants to purchase 96,340
ordinary shares. In April 1999 CommTouch paid in full the outstanding balance
under its line of credit with Bank Lepituach Ha Taasia and does not intend to
draw on this line of credit in the future.
REGISTRATION RIGHTS
The holders of convertible preferred shares convertible into 7,109,800 ordinary
shares (the "Registrable Securities") 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 this
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 when such form becomes available to CommTouch, 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.
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<PAGE> 67
The registration rights described in the preceding three paragraphs expire five
years after the closing date of this Offering.
All of the holders of Registrable Securities have agreed that they will not
exercise any right with respect to any registration for a period of 180 days
after the date of this prospectus, without the prior written consent of US
Bancorp Piper Jaffray.
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
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 Norwest Bank
Minnesota, N.A.
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<PAGE> 68
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, CommTouch will have outstanding 12,258,120
ordinary shares based upon shares outstanding at April 22, 1999, assuming no
exercise of the underwriters' over-allotment option and assuming conversion of
the convertible preferred shares into 7,109,800 ordinary shares upon the closing
of this offering. Excluding the 3,000,000 ordinary shares offered hereby and
assuming no exercise of the underwriters' over-allotment option, as of the
effective date of the registration statement, there will be 9,258,120 ordinary
shares outstanding, all of which are "restricted" shares under the Securities
Act. All restricted shares are subject to lock-up agreements with the
underwriters pursuant to which the holders of the restricted shares have agreed
not to sell, pledge or otherwise dispose of such shares for a period of 180 days
after the date of this prospectus. U.S. Bancorp Piper Jaffray may release the
shares subject to the lock-up agreements in whole or in part at any time with or
without notice. However, U.S. Bancorp Piper Jaffray has no current plans to do
so.
The following table indicates approximately when the 9,258,120 ordinary shares
of CommTouch that are not being sold in the offering but which will be
outstanding at the time the offering is complete will be eligible for sale into
the public market:
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN PUBLIC MARKET
<TABLE>
<S> <C>
At effective Date............................... 0
180 days after Effective Date................... 7,825,360
After 180 days post-effective date.............. 2,530,440
---------
</TABLE>
Most of the restricted shares that will become available for sale in the public
market beginning 180 days after the effective date will be subject to certain
volume and other resale restrictions pursuant to Rule 144 because the holders
are affiliates of CommTouch. The general provisions of Rule 144 are described
below.
In general, under Rule 144, an affiliate of CommTouch, or person (or persons
whose shares are aggregated) 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
- 1% of the then outstanding ordinary shares (approximately 122,581 shares
immediately after this offering) or
- the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
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 (or persons whose shares are aggregated) who is not deemed
to have been an affiliate of CommTouch any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at least
two years is entitled to sell such shares pursuant to Rule 144(k) without regard
to the limitations described above. 1,728,040 of the restricted shares may be
resold under Rule 144(k) beginning 180 days after the effective date of the
offering.
The holders of convertible preferred shares convertible into 7,109,800 ordinary
shares have certain rights to register those shares under the Securities Act,
pursuant to registration rights agreements entered into between CommTouch and
those holders.
In addition to the restriction imposed by the securities laws, 436,680 of the
restricted shares were issued to certain officers and directors of CommTouch
pursuant to restricted stock agreements. Pursuant to the provisions of these
agreements, CommTouch Software, Inc. has a repurchase option on any unvested
shares. CommTouch Software, Inc.'s repurchase option with respect to such shares
lapses ratably over
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<PAGE> 69
time. At the 180th day after the effective date, approximately 420,600 of those
shares will remain subject to the repurchase option.
As of April 22, 1999, 5,000,000 shares were reserved for issuance under our
stock option plans, of which options to purchase 694,860 shares were then
outstanding. Beginning 180 days after the effective date, approximately 268,700
shares issuable upon the exercise of vested options will become eligible for
sale.
In June 1999, our shareholders approved:
- an increase of 4,000,000 shares in the number of ordinary shares reserved
under the stock option plans,
- a reserve of 250,000 shares for options under the Directors Plan and
- a reserve of 150,000 shares under the ESPP
We intend to file, within 180 days after the date of this prospectus, a Form S-8
registration statement under the Securities Act to register shares issued in
connection with option exercises and shares reserved for issuance under all
stock plans. Ordinary shares issued upon exercise of options after the effective
date of the Form S-8 will be available for sale in the public market, subject to
Rule 144 volume limitations applicable to affiliates and to lock-up agreements.
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<PAGE> 70
U.S. TAX CONSIDERATIONS REGARDING ORDINARY SHARES
ACQUIRED BY U.S. TAXPAYERS
The following discussion summarizes the material U.S. federal income tax
consequences arising from the purchase, ownership and sale of the ordinary
shares. This summary is based on the provisions of the Internal Revenue Code of
1986, as amended (the "Code"), final, temporary and proposed U.S. Treasury
Regulations promulgated thereunder, and administrative and judicial
interpretations thereof, in effect as of the date of this prospectus, all of
which are subject to change, possibly with retroactive effect. CommTouch will
not seek a ruling from the Internal Revenue Service with regard to the United
States federal income tax treatment relating to investment in the ordinary
shares and, therefore, no assurance exists that the Internal Revenue Service
will agree with the conclusions set forth below. The summary below does not
purport to address all federal income tax consequences that may be relevant to
particular investors. This summary does not address the consequences that may be
applicable to particular classes of taxpayers, including investors that hold
ordinary shares as part of a hedge, straddle or conversion transaction,
insurance companies, banks or other financial institutions, broker-dealers,
tax-exempt organizations and investors who own (directly, indirectly or through
attribution) 10% or more of CommTouch's outstanding voting stock. Further, it
does not address the alternative minimum tax consequences of an investment in
ordinary shares or the indirect consequences to U.S. Holders, as defined below,
of equity interests in investors in ordinary shares. This summary is addressed
only to holders that hold ordinary shares as a capital asset within the meaning
of Section 1221 of the Code, are U.S. citizens, individuals resident in the
United States for purposes of U.S. federal income tax, domestic corporations or
partnerships and estates or trusts treated as "United States persons" under
Section 7701 of the Code ("U.S. Holders").
EACH INVESTOR SHOULD CONSULT WITH HIS OR HER OWN TAX ADVISOR AS TO THE
PARTICULAR U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND
SALE OF ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
TAX BASIS OF ORDINARY SHARES
A U.S. Holder's tax basis in his or her ordinary shares will be the purchase
price paid therefor by such U.S. Holder. The holding period of each ordinary
share owned by a U.S. Holder will commence on the day following the date of the
U.S. Holder's purchase of such ordinary share and will include the day on which
the ordinary share is sold by such U.S. Holder.
SALE OR EXCHANGE OF ORDINARY SHARES
A U.S. Holder's sale or exchange of ordinary shares will result in the
recognition of gain or loss by such U.S. Holder in an amount equal to the
difference between the amount realized and the U.S. Holder's basis in the
ordinary shares sold. Subject to the following discussion of the consequences of
CommTouch being treated as a Passive Foreign Investment Company or a Foreign
Investment Company, such gain or loss will be capital gain or loss if such
ordinary shares are a capital asset in the hands of the U.S. Holder. Gain or
loss realized on the sale of ordinary shares will be long-term capital gain or
loss if the ordinary shares sold had been held for more than one year at the
time of their sale. Long-term capital gains recognized by certain taxpayers
generally are subject to a reduced rate of federal tax (currently a maximum of
20%). If the U.S. Holder's holding period on the date of the sale or exchange
was one year or less, such gain or loss will be short-term capital gain or loss.
Short-term capital gains generally are subject to tax at the same rates as
ordinary income. In general, any capital gain recognized by a U.S. Holder upon
the sale or exchange of ordinary shares will be treated as U.S.-source income
for U.S. foreign tax credit purposes.
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See discussion under "Israeli Taxation and Investment Programs -- Capital Gains
and Income Taxes Applicable to Non-Israeli Shareholders" for a discussion of
taxation by Israel of capital gains realized on sales of capital assets.
TREATMENT OF DIVIDEND DISTRIBUTIONS
For U.S. federal income tax purposes, gross dividends (including the amount of
any Israeli taxes withheld therefrom) paid to a U.S. Holder with respect to his
or her ordinary shares will be included in his or her ordinary income to the
extent made out of current or accumulated earnings and profits of CommTouch, as
determined based on U.S. tax principles, at the time the dividends are received
and will be treated as foreign source dividend income for purposes of the
foreign tax credit limitation described below. Such dividends will not be
eligible for the dividends received deduction allowed to U.S. corporations under
Section 243 of the Code. Dividend distributions in excess of CommTouch's current
and accumulated earnings and profits will be treated first as a non-taxable
return of the U.S. Holder's tax basis in his or her ordinary shares to the
extent thereof and then as a gain from the sale of ordinary shares. Dividends
paid in NIS will be includible in income in a U.S. dollar amount based on the
exchange rate at the time of their receipt, and any gain or loss resulting from
currency fluctuations during the period from the date a dividend is paid to the
date such payment is converted into U.S. dollars generally will be treated as
ordinary income or loss.
Any Israeli withholding tax imposed on dividends paid to a U.S. Holder will be a
foreign income tax eligible for credit against such U.S. Holder's U.S. federal
income tax liability subject to certain limitations. Alternatively, a U.S.
Holder may claim a deduction for such amount, but only for a year in which a
U.S. Holder elects to do so with respect to all foreign income taxes. The
overall limitation on foreign taxes eligible for credit is calculated separately
with respect to specific classes of income. Dividends distributed by CommTouch
with respect to ordinary shares will generally constitute "passive income".
Foreign income taxes exceeding the credit limitation for the year of payment or
accrual may be carried back for two taxable years and forward for five taxable
years in order to reduce U.S. federal income taxes, subject to the credit
limitation applicable in each of such years. Other restrictions on the foreign
tax credit include a general prohibition on the use of the credit to reduce
liability for the U.S. individual and corporation alternative minimum taxes by
more than 90% and an allowance of foreign tax credits for alternative minimum
tax purposes only to the extent of foreign-source alternative minimum taxable
income. See "Israeli Taxation and Investment Programs -- Capital Gains and
Income Taxes Applicable to Non-Israeli Shareholders."
INFORMATION REPORTING AND BACKUP WITHHOLDING
Any dividends paid on, or proceeds derived from a sale of, the ordinary shares
to, or by, U.S. Holders may be subject to U.S. information reporting
requirements and the 31% U.S. backup withholding tax unless the holder (i) is a
corporation or other exempt recipient or (ii) provides a United States taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with any applicable withholding requirements.
Any amounts withheld under the U.S. backup withholding tax rules will be allowed
as a refund or a credit against the U.S. Holder's U.S. federal income tax,
provided the required information is furnished to the U.S. Internal Revenue
Service.
TAX STATUS OF COMMTOUCH FOR U.S. FEDERAL INCOME TAX PURPOSES
Passive Foreign Investment Company. If CommTouch were deemed to be a passive
foreign investment company (a "PFIC") for U.S. federal income tax purposes, any
gain recognized by a U.S. Holder upon the sale of ordinary shares (or the
receipt of certain distributions) generally would be treated as ordinary income,
such income would be allocated over such U.S. Holder's holding period for such
ordinary shares and an interest charge would be imposed on the amount of
deferred tax on such income which is allocated to prior taxable years.
Generally, CommTouch will be treated as a PFIC for any tax year if, in such tax
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year or any prior tax year, either (i) 75% or more of its gross income is
passive in nature, or (ii) on average, 50% or more of its assets (by value or,
if CommTouch elects or if CommTouch is treated as a "controlled foreign
corporation" under the Code, by their adjusted basis for computing earnings and
profits) produce or are held for the production of passive income. CommTouch
does not believe it satisfies either of the tests for PFIC status for any tax
year to date and, although CommTouch is acquiring substantial cash in connection
with this Offering, it expects that the majority of its assets will continue to
generate sufficient levels of income to avoid PFIC treatment for U.S. federal
income tax purposes. However, since the determination whether CommTouch is a
PFIC will be made annually based on facts and circumstances that, to some
extent, may be beyond CommTouch's control, there can be no assurance that
CommTouch will not become a PFIC at some time in the future. If CommTouch were
determined to be a PFIC, however, a U.S. Holder could elect to treat his or her
ordinary shares as an interest in a qualified electing fund (a "QEF Election"),
in which case, the U.S. Holder would be required to include in income currently
his or her proportionate share of CommTouch's earnings and profits in years in
which CommTouch is a PFIC whether or not distributions of such earnings and
profits are actually made to such U.S. Holder, but any gain subsequently
recognized upon the sale by such U.S. Holder of his or her ordinary shares
generally would be taxed as a capital gain. Alternatively, a U.S. Holder may
elect to mark the ordinary shares to market annually, recognizing ordinary
income or loss (subject to certain limitations) equal to the difference between
the fair market value of its ordinary shares and the adjusted basis of such
stock. See "U.S. Consequences Regarding ordinary shares Acquired by U.S.
Taxpayers--Sale or Exchange of Ordinary Shares" above. U.S. Holders should
consult with their own tax advisers regarding the eligibility, manner and
advisability of making a QEF Election if CommTouch is treated as a PFIC.
Controlled Foreign Corporations. Sections 951 through 964 and Section 1248 of
the Code relate to controlled foreign corporations ("CFC"). The CFC provisions
may impute some portion of such a corporation's undistributed income to certain
U.S. shareholders on a current basis and convert into dividend income some
portion of gains on dispositions of stock which would otherwise qualify for
capital gains treatment. In general, the CFC provisions will apply to CommTouch
only if U.S. shareholders, who are U.S. Holders and who own, directly or
indirectly, 10% or more of the total combined voting power of all classes of
voting stock own in the aggregate (or are deemed to own after application of
complex attribution rules) more than 50% (measured by voting power or value) of
the outstanding stock of CommTouch. CommTouch does not believe that it will be a
CFC after this Offering. It is possible that CommTouch could become a CFC in the
future. Even if CommTouch were classified as a CFC in a future year, however,
the CFC rules referred to above would apply only with respect to U.S.
shareholders, who are U.S. Holders and who own, directly or indirectly, 10% or
more of the total combined voting power of all classes of voting stock of
CommTouch.
Personal Holding Company/Foreign Personal Holding Company/Foreign Investment
Company. A corporation will be classified as a personal holding company, or a
PHC, if (i) five or fewer individuals at any time during the last half of a tax
year (without regard to their citizenship or residence) directly or indirectly
or by attribution own more than 50% in value of the corporation's stock and (ii)
at least 60% of its ordinary gross income for the taxable year, as specially
adjusted, consists of personal holding company income (defined generally to
include dividends, interest, royalties, rents and certain other types of passive
income). A PHC is subject to a United States federal income tax of 39.6% on its
undistributed personal holding company income (generally limited, in the case of
a foreign corporation, to United States source income).
A corporation will be classified as a foreign personal holding company, or an
FPHC and not a PHC if at any time during a tax year (i) five or fewer individual
United States citizens or residents directly or indirectly or by attribution own
more than 50% of the total combined voting power or value of the corporation's
stock and (ii) at least 60% of its gross income consists of (50% for years
following the first year it becomes a FPHC) FPHC income (defined generally to
include dividends, interest, royalties, rents and certain other types of passive
income). Each United States shareholder in an FPHC is required to include in
gross income, as a dividend, an allocable share of the FPHC's undistributed
foreign personal holding company income (generally the taxable income of the
FPHC, as specially adjusted).
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A corporation will be classified as a foreign investment company, or an FIC if
for any taxable year it (i) is registered under the Investment Company Act of
1940, as amended, as a management company or unit investment trust or is engaged
primarily in the business of investing or trading in securities or commodities
(or any interest therein) and (ii) 50% or more of the total value or the total
combined voting power of all classes of the corporation's stock is owned
directly or indirectly (including stock owned through the application of
attribution rules) by United States persons. In general, unless an FIC elects to
distribute 90% or more of its taxable income (determined under United States tax
principles as specially adjusted) to its shareholders, any gain on the sale or
exchange of stock in a foreign corporation, which was a FIC at any time during
the period during which a taxpayer held such stock, is treated as ordinary
income (rather than capital gain) to the extent of such shareholder's ratable
share of the corporation's accumulated earnings and profits.
CommTouch believes that it is not and will not be a PFIC, PHC, FPHC or FIC after
this Offering. However, no assurance can be given as to CommTouch's future
status.
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ISRAELI TAXATION AND INVESTMENT PROGRAMS
The following discussion summarizes the material current tax laws of the State
of Israel as they relate to CommTouch, its shareholders and ownership and
disposition of its ordinary shares. This summary does not discuss all aspects of
Israeli tax law that may be relevant to a particular investor in light of his
personal investment circumstances or to certain types of investors subject to
special treatment under Israeli law (for example, traders in securities or
persons that own, directly or indirectly, 10% or more of CommTouch's outstanding
voting shares). The following also includes a discussion of certain Israeli
government programs benefiting various Israeli businesses such as CommTouch. To
the extent that the discussion is based on new legislation yet to be subject to
judicial or administrative interpretation, there can be no assurance that the
views expressed herein will accord with any such interpretation in the future.
This discussion does not cover all possible tax consequences or situations, and
investors should consult their tax advisors regarding the tax consequences
unique to their situation.
GENERAL CORPORATE TAX STRUCTURE
CommTouch is subject to corporate tax in Israel. Commencing in the tax year 1993
through and including 1996, the regular rate of corporate tax to which Israeli
companies are subject decreased each year, i.e. from 39% in 1993 down to 36% in
1996 and thereafter. However, the effective rate payable by a company which
derives income from an Approved Enterprise (as further discussed below) may be
considerably less. See "Law for the Encouragement of Capital Investments, 1959."
Our tax loss carryforwards were approximately $10.4 million as of December 31,
1998. The amount of our tax loss carryforwards will be reduced by any future
income of CommTouch that would be fully tax exempt.
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment for
Inflation Law") attempts to overcome some of the problems experienced in a
traditional tax system by an economy experiencing rapid inflation, which was the
case in Israel at the time the Adjustment for Inflation Law was enacted.
Generally, the Adjustment for Inflation Law was designed to neutralize for
Israeli tax purposes the erosion of capital investments in businesses and to
prevent unintended tax benefits resulting from the deduction of inflationary
financing expenses. The Adjustment for Inflation Law applies a supplementary set
of inflationary adjustments to a normal taxable profit computed according to
regular historical cost principles.
The Adjustment for Inflation Law introduced a special adjustment for the
preservation of equity for the tax purpose based on changes in the Israeli CPI,
whereby corporate assets are classified broadly into fixed (inflation resistant)
assets and non-fixed assets. Where shareholders' equity, as defined in the
Adjustment for Inflation Law, exceeds the depreciated cost of fixed assets, a
corporate tax deduction which takes into account the effect of inflationary
change on such excess is allowed (up to a ceiling of 70% of taxable income in
any single tax year, with the unused portion permitted to be carried forward on
an inflation-linked basis with no ceiling). If the depreciated cost of fixed
assets exceeds shareholders' equity, then such excess multiplied by the annual
rate of inflation is added to taxable income.
In addition, subject to certain limitations, depreciation on fixed assets and
loss carried forwards are adjusted for inflation based on changes in the Israeli
CPI. The net effect of the Adjustment for Inflation Law on CommTouch might be
that CommTouch's taxable income, as determined for Israeli corporate tax
purposes, will be different from CommTouch's U.S. dollar income, as reflected in
its financial statements, due to the difference between the annual changes in
the CPI and in the NIS exchange rate with respect to the U.S. Dollar, causing
changes in the actual tax rate.
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LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
CommTouch currently qualifies as an "Industrial Company" within the meaning of
the Law for the Encouragement of Industry (Taxes), 1969 (the "Industry
Encouragement Law"). According to the Industry Encouragement Law, an "Industrial
Company" is a company resident in Israel, at least 90% of the income of which in
any tax year, determined in Israeli currency (exclusive of income from defense
loans, capital gains, interest and dividends) is derived from an "Industrial
Enterprise" that it owns. An "Industrial Enterprise" is defined by that law as
an enterprise whose major activity in a given tax year is industrial production
activity.
Included among the tax benefits for an Industrial Company are deductions of
12.5% per annum of the purchase price of a patent or of know-how, an election
under certain conditions to file a consolidated return and accelerated
depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industry Encouragement Law is not subject
to receipt of prior approval from any governmental authority. No assurance can
be given that CommTouch will continue to qualify as an "Industrial Company" or
that the benefits described above will be available in the future.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The Law for the Encouragement of Capital Investments, 1959, as amended (the
"Investment Law"), provides that a capital investment in production facilities
(or other eligible facilities) may, upon application to the Israel Investment
Center, be designated as an Approved Enterprise. Each certificate of approval
for an Approved Enterprise relates to a specific capital investment program
delineated both by its financial scope, including its capital sources, and its
physical characteristics, i.e. the equipment to be purchased and utilized
pursuant to the program. The tax benefits derived from any such certificate of
approval relate only to taxable profits attributable to the specific Approved
Enterprise.
CommTouch's investment plans have been granted the status of an Approved
Enterprise under the Investment Law, in two separate investment programs. These
programs provide CommTouch with certain tax benefits as described below; with
regard to the first program, CommTouch also received long-term loans guaranteed
by the State of Israel. Under the terms of CommTouch's Approved Enterprise
programs, income earned by CommTouch from its Approved Enterprises will be tax
exempt for a period of two years, commencing with the year in which it first
earns taxable income, and subject to a reduced corporate tax rate of 10% to 25%
for an additional period of five to eight years (provided that the total period
of tax benefits will not extend past (i) 12 years from the year of commencement
of production or (ii) 14 years from the year of approval of approved enterprise
status). The reduced corporate tax rate, to which CommTouch's Approved
Enterprise program will be subject is dependent on the level of foreign
investment in CommTouch. In the event a company operates under more than one
approval or only part of its capital investments are approved (a "Mixed
Enterprise"), its effective corporate tax rate is the result of a weighted
combination of the various applicable rates. Notwithstanding these tax benefits,
to the extent CommTouch receives income from countries other than Israel, such
income may be subject to withholding tax.
The implementation of the investments under the first plan was finalized by
CommTouch in 1995. The implementation of the second plan is expected to be
finalized in 1999.
If dividends are distributed out of tax-exempt profit from CommTouch's Approved
Enterprises, CommTouch will be liable for corporate tax at the rate which would
have been applied if it had not chosen the alternative tax benefits (currently
25% for an Approved Enterprise). Therefore, income derived from CommTouch's
Approved Enterprises would be subject to tax if distributed to shareholders as a
dividend. See Note 8 to the Consolidated Financial Statements.
The dividend recipient will be taxed at the reduced rate applicable to dividends
from Approved Enterprises (currently 15%), if the dividend is distributed during
the tax exemption period or within a specified period
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thereafter, or for an unlimited period in the case of a "Foreign Investors'
Company" -- a company more than 25% foreign owned with an Approved Enterprise.
This tax must be withheld by the company at source regardless of whether the
dividend is converted into foreign currency. See "-- Capital Gains and Income
Taxes Applicable to Non-Israeli Shareholders." Subject to certain provisions
concerning income eligible for exemption if retained, all dividends are
considered to be attributable to the entire enterprise, and the effective tax
rate is the result of a weighted combination of the various applicable tax
rates.
The Investment Law also provides that a company with an Approved Enterprise is
entitled to accelerated depreciation on its property and equipment included in
an approved investment program.
Future applications to the Investment Center will be reviewed separately, and
decisions as to whether or not to approve such applications will be based, among
other things, on the then prevailing criteria set forth in the Investment Law,
on the specific objectives of the applicant company set forth in such
applications and on certain financial criteria of the applicant company.
Accordingly, there can be no assurance that any such applications will be
approved. In addition, the benefits available to an Approved Enterprise are
conditional upon the fulfillment of certain conditions stipulated in the
Investment Law and its regulations and the criteria set forth in the specific
certificate of approval, as described above. In the event that these conditions
are violated, in whole or in part, the Company would be required to refund the
amount of tax benefits, with the addition of the CPI linkage adjustment and
interest.
CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI RESIDENT SHAREHOLDERS
Under existing regulations any capital gain realized by an individual
shareholder with respect to the Ordinary Shares acquired on or after the listing
of such shares for trading will be exempt from Israeli capital gains tax if the
Ordinary Shares are listed on an approved foreign securities market (which
includes Nasdaq in the United States), provided that the company continues to
qualify as an Industrial Company under Israeli law and provide the individual
does not hold such shares for business purposes.
If we do not maintain our status as an Industrial Company, then subject to any
applicable tax treaty the Israeli capital gains tax rates would be up to 50% for
non-Israeli resident individuals and 36% for companies.
Upon a distribution of dividends other than bonus shares (stock dividends),
income tax is generally withheld at source at the rate of 25% (or the lower rate
payable with respect to Approved Enterprises), unless a double taxation treaty
is in effect between Israel and the shareholder's country of residence that
provides for a lower tax rate in Israel on dividends.
A tax treaty between the United States and Israel (the "Treaty"), provides for a
maximum tax of 25% on dividends paid to a resident of the United States (as
defined in the Treaty). Dividends distributed by an Israeli company and derived
from the income of an approved enterprise are subject to a 15% dividend
withholding tax. The Treaty further provides that a 12.5% Israeli dividend
withholding tax applies to dividends paid to a United States corporation owning
10% or more of an Israeli company's voting shares throughout the current year to
the date the dividend is paid and the preceding taxable year (as applicable).
The 12.5% rate applies only on dividends from a company that does not have an
Approved Enterprise in the applicable period.
If for any reason shareholders do not receive the above exemption for a sale of
shares in an Industrial Company, the Treaty provides U.S. resident investors
with an exemption from Israeli capital gains tax in certain circumstances (there
may still be U.S. taxes) upon a disposition of shares in CommTouch if they held
under 10% of the Company's voting stock throughout the 12 months before the
share disposition. If Israeli capital gains tax is payable, it can be credited
against U.S. federal tax under the circumstances specified in the Treaty.
A non-resident of Israel who has had dividend income derived or accrued in
Israel from which the applicable tax was withheld at source is currently exempt
from the duty to file an annual Israeli tax return
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with respect to such income, provided such income was not derived from a
business carried on in Israel by such non-resident and that such non-resident
does not derive other non-passive income from sources in Israel.
TAX BENEFITS FOR RESEARCH AND DEVELOPMENT
Israeli tax law allows under certain conditions a tax deduction in the year
incurred for expenditures (including depreciation on capital expenditures but
excluding depreciable capital expenditures) in scientific research and
development projects, if the expenditures are approved by the relevant Israeli
Government Ministry (determined by the field of research) and the research and
development is for the promotion of the enterprise. Expenditures not so approved
are deductible over a three-year period. However, expenditures made out of the
proceeds of government grants are not deductible, i.e. CommTouch will be able to
deduct the unfunded portion of the research and development expenditures and not
the gross amount.
LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 1984
Under the Law for the Encouragement of Industrial Research and Development, 1984
(the "Research Law") and the Instructions of the Director General of the
Ministry of Industry and Trade, research and development programs and the plans
for the intermediate stage between research and development, and manufacturing
and sales approved by a governmental committee of the Office of Chief Scientist
(OCS)(the "Research Committee") are eligible for grants of up to 50% of the
project's expenditure if they meet certain criteria. These grants are issued in
return for the payment of royalties from the sale of the product developed in
accordance with the program as follows: 3% of revenues during the first three
years, 4% of revenues during the following three years, and 5% of revenues in
the seventh year and thereafter, with the total royalties not to exceed 100% of
the dollar value of the OCS grant (or in some cases up to 300%). Following the
full payment of such royalties, there is no further liability for payment.
The Israeli government further requires that products developed with government
grants be manufactured in Israel. However, in the event that any portion of the
manufacturing is not conducted in Israel, if approval is received from the OCS,
the Company would be required to pay royalties that are adjusted in proportion
to manufacturing outside of Israel as follows: when the manufacturing is
performed outside of Israel by the Company or an affiliate company, the
royalties are to be paid as described above with the addition of 1%, and when
the manufacturing outside of Israel is not performed by the Company or an
affiliate the royalties paid shall be equal to the ratio of the amount of grant
received from the OCS divided by the amount of grant received from the OCS and
the investment(s) made by the Company in the project. The payback will also be
adjusted to 120%, 150% or 300% of the grant if the portion of manufacturing that
is performed outside of Israel is up to 50%, between 50% and 90%, or more than
90%, respectively. The technology developed pursuant to the terms of these
grants may not be transferred to third parties without the prior approval of the
Research Committee. Such approval is not required for the export of any products
resulting from such research or development. Approval of the transfer of
technology may be granted only if the recipient abides by all the provisions of
the Research Law and regulations promulgated thereunder, including the
restrictions on the transfer of know-how and the obligation to pay royalties in
an amount that may be increased.
In order to meet certain conditions in connection with the grants and programs
of the OCS, the Company has made certain representations to the Israel
government about the Company's future plans for its Israeli operations. From
time to time the extent of the Company's Israeli operations has differed and may
in the future differ, from the Company's representations. If, after receiving
grants under certain of such programs, the Company fails to meet certain
conditions to those benefits, including, with respect to grants received from
the OCS, the maintenance of a material preserve in Israel, or if there is any
material deviation from the representations made by the Company to the Israeli
government, the Company could be required to refund to the State of Israel tax
or other benefits previously received (including interest and CPI linkage
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difference) and would likely be denied receipt of such grants or benefits, and
participation of such programs, thereafter.
The Company participates in programs sponsored by the OCS for the support of
research and development activities. Through December 31, 1998, the Company had
recorded grants from OCS aggregating $653,000 for certain of the Company's
research and development projects. The Company is obligated to pay royalties to
the OCS of 3% to 5% of the sales of the products and other related revenues
developed from such projects, up to an amount equal to 100% of the grants
received. Through March 31, 1999, the Company has accrued and paid royalties to
the OCS in the aggregate amount of $253,000. At March 31, 1999, the aggregate
OCS contingent liability was $400,000.
Each application to the OCS is reviewed separately, and grants are based on the
program approved by the Research Committee. Expenditures supported under other
incentive programs of the State of Israel are not eligible for OCS grants. As a
result, there can be no assurance that applications to the OCS will be approved
or, if approved, what the amounts of the grants will be.
FUND FOR THE ENCOURAGEMENT OF MARKETING ACTIVITIES
The Company has received grants relating to its overseas marketing expenses from
the Marketing Fund. These grants are awarded for specific expenses incurred by
the Company for overseas marketing and are based upon the expenses reported by
the Company to the Marketing Fund. All marketing grants recorded from the
Marketing Fund until 1997 are linked to the dollar and are repayable as
royalties at the rate of 3% of the amount of increases in export sales realized
by the Company from the Marketing Fund. Grants recorded beginning January 1,
1998 bear royalties of 4% plus interest at LIBOR rates. The Company will face
royalty obligations on grants from the Marketing Fund only to the extent it
actually achieves increases in export sales. The proceeds of these grants are
presented in the Company's consolidated Financial Statements as offsets to
marketing expenses. Through December 31, 1998, the Company had received grants
from the Marketing Fund in the amount of approximately $279,000. At March 31,
1999 the aggregate contingent liability was approximately $110,000.
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CONDITIONS IN ISRAEL
CommTouch is incorporated under the laws of the State of Israel, and
substantially all of our research and development and significant executive
facilities are located in Israel. Accordingly, CommTouch is directly affected by
political, economic and military conditions in Israel. Our operations would be
materially adversely affected if major hostilities involving Israel should occur
or if trade between Israel and its present trading partners should be curtailed.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors. A state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. However, a peace agreement between
Israel and Egypt was signed in 1979, a peace agreement between Israel and Jordan
was signed in 1994 and, since 1993, several agreements between Israel and
Palestinian representatives have been signed. In addition, Israel and several
Arab States have announced their intention to establish trade and other
relations and are discussing certain projects. Israel has not entered into any
peace agreement with Syria or Lebanon, and there have been difficulties in the
negotiations with the Palestinians. We cannot be certain as to how the peace
process will develop or what effect it may have upon CommTouch.
Despite the progress towards peace between Israel and its Arab neighbors and the
Palestinians, certain countries, companies and organizations continue to
participate in a boycott of Israeli firms. CommTouch does not believe that the
boycott has had a material adverse effect on CommTouch, but restrictive laws,
policies or practices directed towards Israel or Israeli businesses may have an
adverse impact on the expansion of CommTouch's business.
Generally, all male adult citizens and permanent residents of Israel under the
age of 51 are obligated to perform up to 39 days, or longer under certain
circumstances, of military reserve duty annually. Additionally, all such
residents are subject to being called to active duty at any time under emergency
circumstances. Currently, a majority of our officers and employees are obligated
to perform annual reserve duty. While we have operated effectively under these
requirements since we began operations, no assessment can be made as to the full
impact of such requirements on our workforce or business if conditions should
change, and no prediction can be made as to the effect on us of any expansion or
reduction of such obligations.
ECONOMIC CONDITIONS
Israel's economy has been subject to numerous destabilizing factors, including a
period of rampant inflation in the early to mid-1980s, low foreign exchange
reserves, fluctuations in world commodity prices, military conflicts and civil
unrest. The Israeli government has, for these and other reasons, intervened in
various sectors of the economy, employing, among other means, fiscal and
monetary policies, import duties, foreign currency restrictions and controls of
wages, prices and foreign currency exchange rates. The current Israeli
government elected in 1996 has expressed its intention to reduce government
involvement in the economy by various means, including relaxation of foreign
currency controls and certain budgetary restraints, and privatization of certain
government-owned companies. The Israeli government has periodically changed its
policies in all these areas.
Until May 1998, Israel imposed restrictions on transactions in foreign currency.
These restrictions affected our operations in various ways, and also affected
the right of non-residents of Israel to convert into foreign currency amounts
they received in Israeli currency, such as the proceeds of a judgment enforced
in Israel. Despite these restrictions, foreign investors who purchased shares
with foreign currency were able to repatriate in foreign currency both dividends
(after deduction of withholding tax) and the proceeds from the sale of the
shares. There are currently no Israeli currency control restrictions on
remittances of
76
<PAGE> 80
dividends on the ordinary shares or the proceeds from the sale of the shares;
however, legislation remains in effect pursuant to which currency controls can
be imposed by administrative action at any time.
TRADE AGREEMENTS
Israel is a member of the United Nations, the International Monetary Fund, the
International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is also a signatory to the General Agreement on
Tariffs and Trade, which provides for reciprocal lowering of trade barriers
among its members. In addition, Israel has been granted preferences under the
Generalized System of Preferences from Australia, Canada and Japan. These
preferences allow Israel to export the products covered by such programs either
duty-free or at reduced tariffs.
Israel has entered into preferential trade agreements with the European Union,
the United States and the European Free Trade Association. In recent years,
Israel has established commercial and trade relations with a number of the other
nations, including Russia, China and India, with which Israel had not previously
had such relations.
ASSISTANCE FROM THE UNITED STATES
Israel receives significant amounts of economic and military assistance from the
United States, averaging approximately $3 billion annually over the last several
years. In addition, in 1992, the United States approved the issuance of up to
$10 billion of loan guarantees during U.S. fiscal years 1993 to 1998 to help
Israel absorb a large influx of new immigrants, primarily from the republics of
the former Soviet Union. Under the loan guarantee program, Israel may issue up
to $2 billion in principal amount of guaranteed loans each year, subject to
reduction in certain circumstances. There is no assurance that foreign aid from
the United States will continue at or near amounts received in the past. If the
grants for economic and military assistance or the United States loan guarantees
are eliminated or reduced significantly, the Israeli economy could suffer
material adverse consequences.
77
<PAGE> 81
UNDERWRITING
The underwriters named below, for whom U.S. Bancorp Piper Jaffray, Prudential
Securities Incorporated and Warburg Dillon Read LLC, a subsidiary of UBS AG, are
acting as representatives, have agreed to buy, subject to the terms of the
underwriting agreement, the number of shares listed opposite their names below.
The underwriters are committed to purchase and pay for all of the shares if any
are purchased, other than those shares covered by the over-allotment option
described below.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
U.S. Bancorp Piper Jaffray Inc. ............................
Prudential Securities Incorporated..........................
Warburg Dillon Read LLC, a subsidiary of UBS AG.............
--------
Total.............................................
</TABLE>
The underwriters have advised us that they propose to offer the shares to the
public at $ per share. The underwriters propose to offer the shares to
certain dealers at the same price less a concession of not more than $ per
share. The underwriters may allow and the dealers may reallow a concession of
not more than $ per share on sales to certain other brokers and dealers.
After the offering, these figures may be changed by the representatives.
Of the 3,000,000 ordinary shares offered by us, up to 150,000 shares will be
reserved for sale to persons designated by us. Shares not sold to these persons
will be reoffered immediately by the underwriters to the public at the initial
public offering price. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
We have granted to the underwriters an option to purchase up to an additional
450,000 ordinary shares from us at the same price to the public, and with the
same underwriting discount, as set forth above. The underwriters may exercise
this option any time during the 30-day period after the date of this prospectus,
but only to cover over-allotments, if any. To the extent the underwriters
exercise the option, each underwriter will become obligated, subject to certain
conditions, to purchase approximately the same percentage of the additional
shares as it was obligated to purchase under the underwriting agreement.
The following table shows the underwriting fees to be paid by us to the
underwriters and the expenses to be paid by us in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
over-allotment option.
<TABLE>
<CAPTION>
TOTAL
---------------------------
PER SHARE NO EXERCISE FULL EXERCISE
--------- ----------- -------------
<S> <C> <C> <C>
Underwriting discounts and commissions....... $ $ $
Expenses..................................... $ -- $ $
</TABLE>
We have agreed to indemnify the underwriters against certain liabilities,
including civil liabilities under the Securities Act, or to contribute to
payments that the underwriters may be required to make in respect of those
liabilities.
We and each of our directors, executive officers, principal shareholders and
optionholders have agreed to certain restrictions on our ability to sell
additional ordinary shares for a period of 180 days after the date of this
prospectus. We have agreed not to directly or indirectly offer, pledge, sell,
offer to sell, contract to sell, sell any option or contract to purchase,
purchase any option to sell, or otherwise transfer or dispose of, directly or
indirectly, any ordinary shares, or any securities convertible into, or
exercisable or exchangeable
78
<PAGE> 82
for, ordinary shares, without the prior written consent of U.S. Bancorp Piper
Jaffray. The agreements provide exceptions for our sales in connection with the
exercise of options granted and the granting of options to purchase shares under
our existing stock option plans and certain other exceptions. However, U.S.
Bancorp Piper Jaffray may, in its sole discretion and at any time without
notice, release all or any portion of the securities subject to the lock-up
agreements. As of the date of this prospectus, there are no agreements between
the representatives and any of our shareholders providing consent by the
representatives to the sales of ordinary shares prior to the expiration of the
lock-up period.
Prior to the offering, there has been no established trading market for the
ordinary shares. The initial public offering price for the ordinary shares
offered by this prospectus was negotiated by us and the underwriters. The
factors considered in determining the initial public offering price include the
history of and the prospects for the industry in which we compete, our past and
present operations, our historical results of operations, our prospects for
future earnings, the recent market prices of securities of generally comparable
companies and the general condition of the securities markets at the time of the
offering and other relevant factors. There can be no assurance that the initial
public offering price of the ordinary shares will correspond to the price at
which the ordinary shares will trade in the public market subsequent to this
offering or that an active public market for the ordinary shares will develop
and continue after this offering.
To facilitate the offering, the underwriters may engage in transactions that
stabilize, maintain or otherwise affect the price of the ordinary shares during
and after the offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the ordinary shares for their own account
by selling more ordinary shares than have been sold to them by us. The
underwriters may elect to cover any such short position by purchasing ordinary
shares in the open market or by exercising the over-allotment option granted to
the underwriters. In addition, the underwriters may stabilize or maintain the
price of the ordinary shares by bidding for or purchasing ordinary shares in the
open market and may impose penalty bids. If penalty bids are imposed, selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if ordinary shares previously distributed in the
offering are repurchased, whether in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price of the ordinary shares at a level above that which might
otherwise prevail in the open market. The imposition of a penalty bid may also
effect the price of the ordinary shares to the extent that it discourages
resales of the ordinary shares. The magnitude or effect of any stabilization or
other transactions is uncertain. These transactions may be effected on the
Nasdaq National Market or otherwise and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
Certain legal matters with respect to United States law are being passed upon
for CommTouch by McCutchen, Doyle, Brown & Enersen, LLP, Palo Alto, California.
The validity of the ordinary shares offered hereby is being passed upon for
CommTouch by Naschitz, Brandes & Co., Tel-Aviv, Israel. Certain legal matters in
connection with this offering will be passed upon for the underwriters by Wilson
Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California, with
respect to United States law, and by Yigal Arnon & Co., Tel-Aviv, Israel, with
respect to Israeli law. The partners of McCutchen, Doyle, Brown & Enersen, LLP,
beneficially own an aggregate of 13,840 ordinary shares.
EXPERTS
The consolidated financial statements of CommTouch Software Ltd. as of December
31, 1997 and 1998 and for each of the three years in the period ended December
31, 1998 appearing in this prospectus and Registration Statement have been
audited by Kost, Forer & Gabbay, a member of Ernst & Young International,
independent auditors, as set forth in their report thereon appearing elsewhere
herein and are included in reliance upon such report given on the authority of
such firm as experts in auditing and accounting.
79
<PAGE> 83
ISA EXEMPTION
The Israel Securities Authority has granted CommTouch an exemption from the
obligation to publish this prospectus in the manner required pursuant to the
prevailing laws of the State of Israel, and from the obligation to file periodic
reports with the Israel Securities Authority. CommTouch will make a copy of each
report filed in accordance with United States law available for public review at
its principal office in Israel.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form F-1 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 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. When we complete this offering, we will
also be required to file annual, quarterly 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. Information contained on the
CommTouch websites does not constitute part of this prospectus.
After the offering, we will become subject to certain of the informational
requirements of the Securities Exchange Act of 1934, as amended (the Exchange
Act). We, as a "foreign private issuer," 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 annual, quarterly 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.
ENFORCEABILITY OF CIVIL LIABILITIES
We are incorporated in Israel, and most of our directors and many of the
executive officers and the Israeli experts named herein are not residents of the
United States and substantially all of their assets and our assets are located
outside the United States. Service of process upon our non-U.S. resident
directors and executive officers or the Israeli experts named herein and
enforcement of judgments obtained in the United States against us, and our
directors and executive officers, or the Israeli experts named herein, may be
difficult to obtain within the United States. CommTouch Software 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
80
<PAGE> 84
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.
81
<PAGE> 85
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED FINANCIAL STATEMENTS AS OF MARCH 31, 1999
IN U.S. DOLLARS
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statement of Changes in Shareholders' Equity
(Deficit)................................................. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 86
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
COMMTOUCH SOFTWARE LTD.
We have audited the accompanying consolidated balance sheets of CommTouch
Software Ltd. and its subsidiary as of December 31, 1997 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity
(deficit), and cash flows for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards, in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Company's management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the consolidated financial statements, referred to above,
present fairly, in all material respects, the consolidated financial position of
CommTouch Software Ltd. and its subsidiary as of December 31, 1997 and 1998, and
the consolidated results of their operations, and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles in the United States.
Tel-Aviv, Israel
March 15, 1999
(Except for Note 11, as to which the date is )
The foregoing report is in the form that will be signed upon the completion of
the recapitalization described in Note 11 of the consolidated financial
statements.
<TABLE>
<S> <C>
Tel-Aviv, Israel KOST, FORER & GABBAY
A member of Ernst & Young International
</TABLE>
F-2
<PAGE> 87
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
DECEMBER 31, EQUITY AS OF
----------------- MARCH 31, MARCH 31,
1997 1998 1999 1999
------ -------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.......................... $ 324 $ 834 $ 3,226
Trade receivables.................................. 49 133 321
Prepaid expenses................................... 13 96 375
Government authorities............................. 38 45 61
Other accounts receivable.......................... 29 103 93
------ -------- --------
Total current assets....................... 453 1,211 4,076
Severance Pay Fund................................... 214 223 240
Property and Equipment, net.......................... 398 932 1,709
------ -------- --------
$1,065 $ 2,366 $ 6,025
====== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term bank line of credit..................... $ 733 $ 1,328 $ 1,086
Current portion of bank loans and capital leases... 66 112 118
Trade payables..................................... 355 446 464
Employees and payroll accruals..................... 252 313 303
Government authorities............................. 232 246 274
Deferred revenue................................... -- 74 132
Other liabilities.................................. 79 132 281
------ -------- --------
Total current liabilities.................. 1,717 2,651 2,658
------ -------- --------
Long-term Portion of Bank Loans and Capital Leases... 28 164 133
Accrued Severance Pay................................ 338 366 427
------ -------- --------
366 530 560
------ -------- --------
Commitments and Contingent Liabilities...............
Shareholders' Equity (Deficit)
Convertible Preferred shares --
Series A, B and C Convertible Preferred
Shares -- Authorized: 565,820 shares of NIS 1
par value; Issued and outstanding: 183,637,
221,265 and 313,409 shares as of December 31,
1997, 1998 and March 31, 1999, respectively;
Aggregate liquidation preference of
approximately $13,200 and $23,200 as of
December 31, 1998 and March 31, 1999
(unaudited), respectively; Issued and
outstanding pro forma: no shares as of March
31, 1999...................................... 63 74 96 --
Ordinary Shares --
Authorized: 12,000,000, 11,515,000 and
10,683,600 shares of NIS 0.05 par value as of
December 31, 1997 and 1998 and March 31, 1999,
respectively; Issued and outstanding:
1,450,040 shares as of December 31, 1997, 1998
and 2,148,320 shares as of March 31, 1999,
respectively; Issued and outstanding pro
forma: 8,416,500 shares as of March 31,
1999.......................................... 27 27 35 131
Additional Paid-in Capital........................... 6,295 11,256 24,910 24,910
Stock-Based Employee Deferred Compensation........... -- (418) (7,282) (7,282)
Notes Receivable from Shareholders................... (77) (77) (964) (964)
Accumulated Deficit.................................. (7,326) (11,677) (13,988) (13,988)
------ -------- -------- --------
Total Shareholders' Equity (Deficit)....... (1,018) (815) 2,807 $ 2,807
------ -------- -------- --------
$1,065 $ 2,366 $ 6,025
====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 88
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Email Services.............................. $ -- $ -- $ 389 $ 32 $ 346
Software licenses........................... 2,641 711 -- -- --
Software maintenance and services........... 493 188 -- -- --
------- ------- ------- ------ -------
Total revenue....................... 3,134 899 389 32 346
------- ------- ------- ------ -------
Cost of revenues:
Email Services.............................. -- -- 569 59 405
Software licenses........................... 79 21 -- -- --
Software maintenance and services........... 384 144 -- -- --
------- ------- ------- ------ -------
Total cost of revenues.............. 463 165 569 59 405
------- ------- ------- ------ -------
Gross profit (loss)........................... 2,671 734 (180) (27) (59)
------- ------- ------- ------ -------
Operating expenses:
Research and development, net............... 1,479 1,108 1,149 266 307
Sales and marketing......................... 1,965 2,202 2,001 459 481
General and administrative.................. 465 829 604 138 807
Amortization of stock-based employee
deferred compensation.................... -- -- 91 2 386
------- ------- ------- ------ -------
Total operating expenses............ 3,908 4,139 3,845 865 1,981
------- ------- ------- ------ -------
Operating loss................................ (1,237) (3,405) (4,025) (892) (2,040)
Interest expense and other, net............... (45) (68) (326) (27) (271)
------- ------- ------- ------ -------
Net loss...................................... $(1,282) $(3,473) $(4,351) $ (919) $(2,311)
======= ======= ======= ====== =======
Basic and diluted net loss per share.......... $ (0.66) $ (2.40) $ (3.00) $(0.63) $ (1.50)
======= ======= ======= ====== =======
Weighted average number of shares used in
computing basic and diluted net loss per
share....................................... 1,934 1,450 1,450 1,450 1,546
======= ======= ======= ====== =======
Pro forma basic and diluted net loss per share
(unaudited)................................. $ (0.78) $ (0.32)
======= =======
Weighted average number of shares used in
computing pro forma basic and diluted net
loss per share (unaudited).................. 5,594 7,313
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 89
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED STATEMENT OF
CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE STOCK-BASED
PREFERRED SHARES ORDINARY SHARES ADDITIONAL EMPLOYEE
---------------- ------------------- PAID-IN DEFERRED NOTES
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION RECEIVABLE
------- ------ ---------- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1996........... -- $-- 3,372,760 $ 63 $ 1,935 $ -- $ (77)
Conversion of Ordinary shares into
Convertible Preferred shares........ 97,878 36 (1,922,720) (36) -- -- --
Issuance of shares.................... 62,438 20 -- -- 2,689 -- --
Net loss.............................. -- -- -- -- -- -- --
------- --- ---------- ---- ------- ------- -----
Balance as of December 31, 1996......... 160,316 56 1,450,040 27 4,624 -- (77)
Issuance of shares.................... 23,321 7 -- -- 1,625 -- --
Warrants issued for services received
and bank line of credit............. -- -- -- -- 46 -- --
Net loss.............................. -- -- -- -- -- -- --
------- --- ---------- ---- ------- ------- -----
Balance as of December 31, 1997......... 183,637 63 1,450,040 27 6,295 -- (77)
Issuance of shares.................... 37,628 11 -- -- 4,061 -- --
Warrants issued for services received
and bank line of credit............. -- -- -- -- 391 -- --
Deferred compensation related to
options issued to employees......... -- -- -- -- 509 (509) --
Amortization of deferred
compensation........................ -- -- -- -- -- 91 --
Net loss.............................. -- -- -- -- -- -- --
------- --- ---------- ---- ------- ------- -----
Balance as of December 31, 1998......... 221,265 74 1,450,040 27 11,256 (418) (77)
------- --- ---------- ---- ------- ------- -----
Issuance of shares (unaudited)........ 92,144 22 -- -- 5,270 -- --
Issuance of shares upon exercise of
warrants (unaudited)................ -- -- 35,600 * -- -- --
Ordinary shares issued for notes
receivable (unaudited).............. -- -- 662,680 8 879 -- (887)
Warrants issued for services and bank
line of credit (unaudited).......... -- -- -- -- 255 -- --
Deferred compensation related to
options issued to employees
(unaudited)......................... -- -- -- -- 7,250 (7,250) --
Amortization of deferred
compensation........................ -- -- -- -- -- 386 --
Net loss (unaudited).................. -- -- -- -- -- -- --
------- --- ---------- ---- ------- ------- -----
Balance as of March 31, 1999
(unaudited)........................... 313,409 $96 2,148,320 $ 35 $24,910 $(7,282) $(964)
======= === ========== ==== ======= ======= =====
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
----------- -------
<S> <C> <C>
Balance as of January 1, 1996........... $ (2,571) $ (650)
Conversion of Ordinary shares into
Convertible Preferred shares........ -- --
Issuance of shares.................... -- 2,709
Net loss.............................. (1,282) (1,282)
-------- -------
Balance as of December 31, 1996......... (3,853) 777
Issuance of shares.................... -- 1,632
Warrants issued for services received
and bank line of credit............. -- 46
Net loss.............................. (3,473) (3,473)
-------- -------
Balance as of December 31, 1997......... (7,326) (1,018)
Issuance of shares.................... -- 4,072
Warrants issued for services received
and bank line of credit............. -- 391
Deferred compensation related to
options issued to employees......... -- --
Amortization of deferred
compensation........................ -- 91
Net loss.............................. (4,351) (4,351)
-------- -------
Balance as of December 31, 1998......... (11,677) (815)
-------- -------
Issuance of shares (unaudited)........ -- 5,292
Issuance of shares upon exercise of
warrants (unaudited)................ * --
Ordinary shares issued for notes
receivable (unaudited).............. -- --
Warrants issued for services and bank
line of credit (unaudited).......... -- 255
Deferred compensation related to
options issued to employees
(unaudited)......................... -- --
Amortization of deferred
compensation........................ -- 386
Net loss (unaudited).................. $ (2,311) $(2,311)
-------- -------
Balance as of March 31, 1999
(unaudited)........................... $(13,988) $ 2,807
======== =======
</TABLE>
- ----------------
* Represents amount less than one thousand dollars
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 90
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------
1996 1997 1998 1998 1999
------- ------- ------- ----- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(1,282) $(3,473) $(4,351) $(918) $(2,311)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 303 206 236 44 173
Amortization of stock-based employee deferred
compensation and warrants issued for service
received and bank line of credit............ -- 46 482 34 641
Decrease (increase) in trade receivables...... (509) 738 (84) (16) (188)
Decrease (increase) in other accounts
receivable and prepaid expenses............. (61) 14 (164) (27) (285)
Increase (decrease) in trade payables......... 181 99 91 (176) 18
Increase (decrease) in other liabilities...... 27 (147) 128 42 167
Increase in deferred revenue.................. -- -- 74 25 58
Increase (decrease) in accrued severance pay,
net......................................... 28 (54) 19 (3) 44
Other......................................... 8 -- -- -- --
------- ------- ------- ----- -------
Net cash used in operating activities....... (1,305) (2,571) (3,569) (995) (1,683)
------- ------- ------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (427) (93) (442) (57) (950)
------- ------- ------- ----- -------
Net cash used in investing activities....... (427) (93) (442) (57) (950)
------- ------- ------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank line of credit, net.............. (157) 733 595 78 (242)
Short-term shareholders' loans................... (121) -- -- -- --
Principal payment of bank loans.................. (63) (67) (94) (12) --
Payment of capital lease......................... -- -- (52) -- (25)
Proceeds from issuance of shares................. 2,709 1,632 4,072 760 5,292
------- ------- ------- ----- -------
Net cash provided by financing activities... 2,368 2,298 4,521 826 5,025
------- ------- ------- ----- -------
Increase (decrease) in cash and cash equivalents... 636 (366) 510 (226) 2,392
Cash and cash equivalents at the beginning of the
period........................................ 54 690 324 324 834
------- ------- ------- ----- -------
Cash and cash equivalents at the end of the
period........................................... $ 690 $ 324 $ 834 $ 98 $ 3,226
======= ======= ======= ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITY:
Cash paid during the year:
Interest........................................... $ 10 $ 48 $ 97 $ 5 $ 33
======= ======= ======= ===== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Capital lease obligations........................ $ -- $ -- $ 328 $ -- $ --
======= ======= ======= ===== =======
Ordinary shares issued for notes receivable from
shareholders.................................. $ -- $ -- $ -- $ -- $ 887
======= ======= ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 91
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CommTouch Software Ltd. (the "Company" or "CommTouch") was incorporated under
the laws of Israel in 1991. The Company, together with its United States
subsidiary, CommTouch Software Inc., ("CSI") a California corporation, is a
provider of Web-based email and communications solutions to business partners
(customers) who in turn offer those solutions to their end-users. From inception
through 1997, the Company generated revenues primarily from sale maintenance and
service of stand-alone email client software products for both mainframe and
personal computers. From 1998, the Company began to generate revenues by
providing email services to its business partners. Email service revenues are
derived from contracts that provide for a minimum service commitment fee,
revenue sharing from advertising, direct marketing and communications services,
and a per emailbox fee.
Revenues derived from the Company's largest business partner represent 54% of
the Company's revenues in 1998.
In 1998, a majority of the Company's sales were made in Europe, the Far East and
North America.
The consolidated financial statements have been prepared in accordance with
generally accepted accounting policies in the United States, and include the
accounts of the Company and its wholly-owned subsidiary. Intercompany
transactions and balances have been eliminated.
The majority of the Company's sales are made in U.S. dollars ("dollars"). In
addition, a substantial portion of the Company's costs are incurred in dollars.
Since the dollar is the primary currency of the economic environment in which
the Company operates, the dollar is its functional and reporting currency. Non
dollar transactions and balances have been remeasured using the foreign exchange
rate at the balance sheet date. Operational accounts and non-monetary balance
sheet accounts are measured and recorded at the rate in effect at the date of
the transaction. The effects of foreign currency remeasurement are reported in
the statements of operations.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents:
The Company considers all highly liquid investments originally purchased with
maturities of three months or less to be cash equivalents.
Property and Equipment:
Property and equipment are stated at cost and depreciated using the straight
line method over the estimated useful lives of the assets ranging from three to
seven years. Leasehold improvements are amortized on a straight line basis over
the lease term.
The Company periodically assesses the recoverability of the carrying amount of
property and equipment and provides for any possible impairment loss based upon
the difference between the carrying amount and fair value of such assets. As of
December 31, 1998, no impairment losses have been identified.
F-7
<PAGE> 92
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Research and Development:
Research and development costs are charged to the statement of operations as
incurred. Statement of Financial Accounting Standards Board No. 86 "Accounting
for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed",
requires capitalization of certain software development costs subsequent to the
establishment of technological feasibility.
Based on the Company's product development process, technological feasibility is
established upon completion of a working model. The Company does not incur any
costs between the completion of the working model and the point at which the
product is ready for general release. Therefore, through December 31, 1998, the
Company has charged all software development costs to research and development
expense in the period incurred.
Revenue Recognition:
Commencing 1998, the Company derives its revenues from providing web-based email
services. Revenues from contracts that are not dependent upon the number of
mailboxes and provide non-refundable fixed payments are recognized ratably over
the contract term. Revenues from contracts specifying a contractual rate per
mailbox per month are recognized monthly for mailboxes covered by the respective
contracts. Revenues from contracts based on a share of advertising revenues
earned by business partners are recognized when such revenues are earned.
Revenues from set up and installation fees are recognized upon installation.
Amounts billed or received in advance of service delivery are recorded as
deferred revenue.
Revenues from software products sales which occurred through 1997 were
recognized upon delivery of the software master for reproduction and
distribution, provided no significant vendor obligations remained, and
collection of the related receivable was probable in accordance with Statement
of Position 91-1.
Royalty-Bearing Grants:
Royalty-bearing grants from the Government of Israel for funding approved
research and development projects are recognized at the time the Company is
entitled to such grants, when expenses under such approved projects are
incurred. Development grants amounted to none in 1996, $288,000 in 1997 and none
in 1998.
Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade receivables and cash equivalents. The
majority of the Company's cash and cash equivalents are invested in dollar and
dollar linked investments and are deposited in major banks in Israel and in the
United States. Management believes that the financial institutions that hold the
Company's investments are financially sound and, accordingly, minimal credit
risk exists with respect to these investments.
The Company's trade receivables are derived from sales to customers located
primarily in Europe, the Far East and North America. The Company performs
ongoing credit evaluations of its customers. In 1997, the Company wrote off
approximately $170,000 of account receivables uncollectible.
F-8
<PAGE> 93
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Accounting for Stock-Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion No. 25
("APB 25"), "Accounting for Stock Issued to Employees", in accounting for its
employee stock option plans. Under APB 25, when the exercise price of the
Company's stock options equals or is above the market value of the underlying
stock on the date of grant, no compensation expense is recognized.
In accounting for warrants granted to other than employees, the provisions of
Statement of Financial Accounting Standard Board ("SFAS") No. 123, "Accounting
for Stock based Compensation" were applied.
Basic and Diluted Loss Per Share:
Basic and diluted net loss per share are presented in accordance with SFAS No.
128, "Earnings per Share" ("SFAS 128"), for all periods presented.
Basic net loss per share has been computed using the weighted-average number of
ordinary shares outstanding during the period. Diluted net loss per share is
computed based on the weighted average number of ordinary shares outstanding
during each year, plus the weighted average number of dilutive potential
ordinary shares considered outstanding during the year. Basic and diluted pro
forma net loss per share, as presented in the statements of operations, have
been computed as described above and also give effect to the automatic
conversion of the Convertible Preferred shares that will convert upon the
closing of an initial public offering (using the as-if converted method from
original date of issuance).
All convertible preferred shares, outstanding stock options, and warrants have
been excluded from the calculation of the diluted loss per share because all
such securities are antidilutive for all periods presented. The total number of
shares related to the outstanding options and warrants excluded from the
calculations of diluted net loss per share were 734,980, 911,680 and 1,236,100
for the years ended December 31, 1996, 1997 and 1998.
Unaudited Pro Forma Shareholders' Equity (Deficit)
If the offering contemplated by this Prospectus is consummated, all of the
convertible preferred stock outstanding will automatically be converted into
ordinary shares. Unaudited pro forma shareholders' equity at March 31, 1999, as
adjusted for the assumed conversion of those shares outstanding at March 31,
1999 is disclosed on the balance sheet.
Comprehensive Income:
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income ("SFAS 130")." SFAS 130 establishes new rules for the
reporting and display of comprehensive income and its components, however, the
adoption of this Statement had no impact on the financial statements, as the
Company had no items of other comprehensive income in any period presented.
Severance Pay:
The Company's liability for severance pay is calculated pursuant to Israeli
severance pay law based on the most recent salary of the employees multiplied by
the number of years of employment as of the balance sheet date. Employees are
entitled to one month's salary for each year of employment or a portion thereof.
F-9
<PAGE> 94
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's liability for all of its employees, is fully provided by monthly
deposits with severance pay funds insurance policies and by an accrual.
The deposited funds include profits accumulated up to the balance sheet date.
The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israeli severance pay law or labor agreements. The value of the
deposited funds are based on the cash surrendered value of these policies, and
include immaterial profits.
Fair Value of Financial Instruments:
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents -- The carrying amounts of these items approximate
their fair value due to the short-term maturity of such instruments.
Short-term bank credit, long-term bank loans and capital leases -- The carrying
amounts of the Company's borrowing arrangements approximate their fair value.
Fair values were estimated using discounted cash flow analyses, based on the
Company's incremental borrowing rates for similar types of borrowing
arrangements.
Impact of Recently Issued Accounting Standards:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). The Company is required to
adopt SFAS 133 for the year ending December 31, 2000. SFAS 133 establishes
methods of accounting for derivative financial instruments and hedging
activities. Because the Company currently holds no derivative financial
instruments as defined by SFAS 133 and does not currently engage in hedging
activities, adoption of SFAS 133 is expected to have no material effect on the
Company's financial condition and results of operations.
Unaudited Information:
The financial statements include the unaudited consolidated balance sheets and
the related consolidated statements of operations, changes in shareholders
equity (deficit) and cash flows for the three months ended March 31, 1999. This
unaudited information has been prepared by the Company on the same basis as the
audited consolidated financial statements and, in management's opinion, reflects
all adjustments (consisting only of normal recurring accruals) necessary for a
fair presentation of the financial information, in accordance with generally
accepted accounting principles, for the period presented. Results for interim
periods are not necessarily indicative of the results to be expected for the
entire year.
F-10
<PAGE> 95
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
---- ------
(IN THOUSANDS)
<S> <C> <C>
Cost:
Computers and peripheral equipment........................ $518 $1,260
Office furniture and equipment............................ 85 90
Motor vehicles............................................ 103 118
Leasehold improvements.................................... 129 137
---- ------
835 1,605
Less accumulated depreciation............................... 437 673
---- ------
$398 $ 932
==== ======
</TABLE>
Computers and peripheral equipment under various capital lease agreements
amounted to approximately $328,000 and their accumulated depreciation amounted
to approximately $38,000 as of December 31, 1998.
Depreciation expenses amounted to approximately $137,000, $145,000, and $236,000
for the years ended December 31, 1996, 1997 and 1998, respectively.
3. SHORT-TERM BANK LINE OF CREDIT
As of December 31, 1998, the Company has an authorized line of credit in the
amount of $1,300,000 which was fully utilized. The credit line bears interest at
an annual rate of LIBOR + 3%. For overdrawn amounts in excess of the Company's
authorized line of credit, the Company is subject to an annual interest rate of
LIBOR + 8%.
Weighted average interest for 1997 and 1998 was LIBOR +3%.
In consideration of the line of credit, the bank is entitled to receive warrants
for ordinary shares at an exercise price equal to the par value subject to the
outstanding utilized line of credit per month (see Note 9).
As collateral for all the Company's liabilities to the bank, a floating charge
(security interest on all assets of the Company as they exist from time to time)
has been placed on all assets of the Company, and the Company's authorized share
capital, goodwill and insurance rights are pledged at fixed charges.
F-11
<PAGE> 96
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. LONG-TERM BANK LOANS AND CAPITAL LEASES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
----- ------
(IN THOUSANDS)
<S> <C> <C>
Bank loans -- Israeli CPI, interest rates range from
5.3% - 6.3%............................................... $ 64 $ --
Bank loans -- U.S. Dollar, interest rates range from
8.3% - 9.7%............................................... 30 --
Capital leases.............................................. -- 276
---- -----
94 276
Less current portion........................................ 66 112
---- -----
$ 28 $ 164
==== =====
</TABLE>
In 1998, the Company has repaid its Bank loans.
CSI has leased computers and peripheral equipment under various capital lease
agreements, with an option to purchase the equipment upon the expiration of the
initial lease term, for the fair market value prevailing at that time, not to
exceed 10% of the original cost of the equipment. The annual interest rate of
such capital leases ranges between 19.5% and 21.9%.
Future minimum lease commitments for the years ending December 31, are as
follows, in thousands:
<TABLE>
<S> <C>
1999........................................ $158
2000........................................ 136
2001........................................ 23
2002........................................ 23
2003........................................ 17
----
357
Less amount representing interest........... 81
----
$276
====
</TABLE>
5. ACCRUED SEVERANCE PAY
The Company's liability for severance pay, pursuant to Israeli law, is fully
provided. Part of the liability is funded through insurance policies which are
designated only for severance payments. The value of these policies is recorded
as an asset in the Company's balance sheet. Severance expenses for the years
ended December 31, 1996, 1997, and 1998, were approximately $105,000, $73,000
and $62,000, respectively.
6. COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases:
The facilities of the Company and CSI are leased under operating leases for
periods ending in 2005.
F-12
<PAGE> 97
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease commitments under non-cancelable operating leases for the
years ending December 31, are as follows, in thousands:
<TABLE>
<S> <C>
1999.......................................... $197
2000.......................................... 170
2001.......................................... 154
2002.......................................... 89
2003.......................................... 53
----
$663
====
</TABLE>
Rent expenses for the years ended December 31, 1996, 1997 and 1998 were
approximately $49,000, $55,000 and $56,000, respectively. CSI expanded its
facilities by entering into an additional office lease starting 1999, for which
the commitment is reflected above.
Royalties:
The Company is required to pay royalties on grants received from the Government
of Israel for research and development projects and marketing activities at the
rate of 3% - 5% of total revenues, up to an amount equal to 100% to 150% of the
original amount received linked to the dollar.
As of December 31, 1998, the Company had an outstanding contingent obligation to
pay royalties in the aggregate amount of $532,000.
7. RELATED PARTIES
During 1995, the Company issued ordinary shares to three of its directors in
exchange for notes receivables. The notes are linked to the Israeli CPI with no
additional interest and at December 31, 1998, the total amount outstanding was
approximately $77,000 to be repaid by December 31, 1999. These notes are
recorded as an offset to additional paid-in capital. The Company believes that
the terms under which these notes have been provided by the Company are as
favorable to those that could be agreed upon with an unaffiliated party.
8. INCOME TAXES
Israeli Income Tax:
The Company has been granted "Approved Enterprise" status in two separate
investment programs approved in 1993 and 1995 by the Israeli Government under
the Law for Encouragement of Capital Investments, 1959 ("the Law").
Undistributed Israeli income derived from each of its "Approved Enterprise"
programs entitle the Company to tax-exemption for a period of two years
commencing the first year it will earn taxable income (not commenced yet) and to
a reduced tax rate of 10% - 25% for an additional period of eight years
(depending on the level of foreign-investment in the Company). These tax
benefits, are subject to a limitation of the earlier of twelve years from
commencement of operation, or fourteen years from receipt of approval.
Thereafter, the Company's income will be subject to the regular income tax rate
of 36%.
The Company's first investment program commenced operation in 1995, while the
second program has not yet been completed.
F-13
<PAGE> 98
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax exempt income attributable to the "Approved Enterprise" can be
distributed to shareholders without subjecting the Company to taxes only upon
the complete liquidation of the Company. The Company's board of directors has
determined that such tax exempt income will not be distributed as dividends.
Income from sources other than the "Approved Enterprise," during the benefit
period, will be subject to tax at regular corporate tax rates of 36%.
The Company is an "industrial company" under the Law for the Encouragement of
Industry (Taxation), 1969 and as such is entitled to certain tax benefits,
including accelerated rate of depreciation and deduction of public offering
expenses.
As of December 31, 1998, Israeli net operating loss carryforwards amounted to
approximately $5,700,000. Such net operating loss may be carried forward
indefinitely and offset against future taxable income. The Company expects that
during the period in which these tax losses are utilized its income would be
substantially tax exempt. Accordingly there will be no tax benefit available
from such losses and no deferred income taxes have been included in these
financial statements.
U.S. Income Tax:
As of December 31, 1998, CSI has U.S. federal net operating loss carryforwards
of approximately $4,700,000. The net operating loss expires in various amounts
between the years 2010 and 2016.
Utilization of U.S. net operating losses may be subject to the substantial
annual limitation due to the "change in ownership" provisions of the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of net operating losses before utilization.
Deferred Taxes:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1998
------ ------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
U.S. operating loss carryforwards........................... $1,052 $1,656
Reserves and allowances not currently deductible............ 6 15
------ ------
Net deferred tax asset before valuation allowance........... 1,058 1,671
Valuation allowance......................................... (1,058) (1,671)
------ ------
Net deferred tax asset...................................... $ -- $ --
====== ======
</TABLE>
For the year ended December 31, 1998 the valuation allowance increased by
approximately $613,000. No utilization of CSI's tax losses carryforwards is
expected in the foreseeable future, because of its history of operating losses.
In 1996, 1997 and 1998, the Company provided a 100% valuation allowance against
the deferred tax assets in respect of these tax loss carryforward and other
temporary differences because of the uncertainty of realizing these deferred tax
assets.
F-14
<PAGE> 99
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pretax loss:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1997 1998
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.................................................... $ 809 $1,602 $2,497
Foreign..................................................... 473 1,871 1,854
------ ------ ------
$1,282 $3,473 $4,351
====== ====== ======
</TABLE>
9. SHARE CAPITAL
Convertible Preferred Shares:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------------------------------------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 MARCH 31, 1999
ORIGINAL ------------------------ ------------------------ ------------------------
ISSUANCE ISSUED AND ISSUED AND ISSUED AND
PRICE AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING AUTHORIZED OUTSTANDING
-------- ---------- ----------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Series A............... $17.02 200,000 97,878 200,000 97,878 200,000 97,878
Series B............... $44.04 200,000 62,438 200,000 62,438 200,000 62,438
Series C............... $72.17 100,000 23,321 124,250 60,949 165,820 153,093
------- ------- ------- ------- ---------- ---------
500,000 183,637 524,250 221,265 565,820 313,409
======= ======= ======= ======= ========== =========
</TABLE>
Conversion
Each share of Series A, B and C Convertible Preferred share is convertible into
ordinary shares on a twenty-to-one basis (reflecting the April 1999 stock split
and subject to adjustment for stock splits, stock dividends and alike).
All Convertible Preferred shares shall be automatically converted immediately
prior to the consummation of an initial public offering ("IPO") in which the
proceeds to the Company are not less than $10,000,000 and in which the Company's
valuation is not less than $30,000,000.
The pro forma shareholders' deficit gives effect to the conversion of all
outstanding Convertible Preferred shares as if such conversion occurred on
December 31, 1998.
Voting Rights
The holders of Convertible Preferred shares are entitled to vote on all matters
submitted to the shareholders with such number of votes which is equal to the
number of ordinary shares into which such Preferred shares could be converted.
Liquidation Preference
The Convertible Preferred shares have preference over the Ordinary shares, in
the event of any liquidation, dissolution or winding up of the Company, either
voluntary or involuntary. The liquidation preference is equal to the greater of
the full amount originally paid multiplied by 1.5, together with declared but
unpaid dividends in respect thereof or the pro rata amount that would have been
received had all of the Convertible Preferred shares been converted into
ordinary shares immediately prior to such distribution.
F-15
<PAGE> 100
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Dividends
The holders of any series of the convertible preferred shares shall be entitled
to receive dividends as and when declared for the holders of ordinary shares,
pari passu, calculated on the basis of the number of Ordinary shares into which
such Convertible Preferred shares could then be converted, out of any assets
legally available.
In the event that cash dividends are declared in the future, such dividends will
be paid in NIS. The Company does not intend to pay cash dividends in the
foreseeable future.
Warrants Issued for Services Received and Bank Lines of Credit:
In 1997, 1998 and in the three months ended March 31, 1999, the Company granted
warrants in connection with a bank line of credit, loans, and consulting
services received. Warrants outstanding at March 31, 1999:
<TABLE>
<CAPTION>
WARRANTS FOR
--------------------------- EXERCISE
IN CONNECTION ORDINARY CONVERTIBLE PRICE PER EXERCISABLE
ISSUE DATE WITH SHARES PREFERRED SHARES SHARE THROUGH
---------- ------------- -------- ---------------- --------- -------------
<S> <C> <C> <C> <C> <C>
December 1997 bank line 59,060 par value December 2000
through October 1998 of credit
November 1998 through March bank line 30,160 par value October 2001
1999 of credit
December 1997 bank loan 346 Series C $72.17 December 2002
June 1997 bank loan 568 Series B $44.04 June 2002
September 1997 consulting 300 Series C par value (1)
services
April 1998 consulting 350 Series B par value (l)
services
July 1998 lease 243 Series C $72.17 July 2005
commitment
------ --------------
89,220 1,807
-------- -------
-------- -------
</TABLE>
(1) The earlier of December 2002 or an IPO with net proceeds to the Company of
$10,000,000, or a merger or an acquisition.
In addition, in February 1998, in consideration of consulting services received,
the Company issued warrants for 35,600 ordinary shares at $0.36 per share. The
warrants were exercised in October 1998, with the ordinary shares issued in the
first quarter of 1999 (see Note 11).
In connection with the amounts of the warrants:
The Company recorded $17,000, $264,000 and $255,000 as compensation expense in
1997, 1998 and the three months ended March 31, 1999, that were included in
interest expense, and $21,000 and $135,000 in 1997 and 1998 that were included
for operating expenses.
F-16
<PAGE> 101
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warrants to Investors:
The Company issued to certain Series B Convertible Preferred shares investors
13,873 warrants to Series B Convertible Preferred shares in consideration of
their investment in the Company. The warrants have an exercise price of $44.04
per share and are exercisable through the earlier of the consummation of an IPO
with net proceeds to the Company of at least $10,000,000 or the consummation of
the sale of all or substantially all of the assets or shares of the Company. The
warrants may be exercised for cash or on a net exercise basis.
Issuance of Ordinary Shares against Promissory Notes:
On March 17, 1999, several employees and officers exercised 662,680 options
granted to them by CommTouch. In consideration for the ordinary shares purchased
pursuant to the exercise of the options, they provided CommTouch with full
recourse Promissory Notes dated March 17, 1999 in the original principal amount
of approximately $887,000. The Promissory Notes bear interest at 4.83%, with
payments of interest due on December 31 of each year and with the balance due
and payable on the fourth anniversary of the date of the promissory notes. The
shares purchased are restricted shares, and are subject to a right of repurchase
in favor of CommTouch according to the original vesting schedule of the options
exercised, generally four years.
Stock Options:
The Company issued options to purchase ordinary shares to its Israeli employees
pursuant to individual agreements. In 1996, the Company adopted the 1996 CSI
Stock Option Plan for granting options to its U.S. employees to purchase
ordinary shares of the Company. As of December 31, 1998 the Company has reserved
2,000,000 ordinary shares. Options granted under such plan and agreements expire
generally after 10 years from the date of grant and terminate upon termination
of the optionee's employment or other relationship with the Company. The options
vest generally ratably over a 4 year period. The exercise price of the options
granted under the individual agreements may not be less than the nominal value
of the shares into which such options are exercisable or in the case of the
subsidiary's plan it may not be less than fair market value. Any options which
are canceled or not exercised within the options period become available for
future grant.
F-17
<PAGE> 102
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
A summary of the Company's stock option activity, and related information is as
follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES EXERCISE PRICE
------------------------------------------ ------------------------------------
YEARS ENDED THREE MONTHS THREE MONTHS
DECEMBER 31, ENDED YEARS ENDED ENDED
--------------------------- MARCH 31, --------------------- MARCH 31,
1996 1997 1998 1999 1996 1997 1998 1999
------- ------- ------- ------------ ----- ----- ----- ------------
(UNAUDITED) (UNAUDITED)
------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period........................ 31,000 457,520 607,040 849,520 $1.45 $0.99 $1.10 $1.20
Granted....................... 426,520 213,820 251,900 508,020 0.96 1.45 1.45 1.45
Exercised..................... -- -- -- (662,680) -- -- -- 1.34
Forfeited..................... -- (64,300) (9,420) -- -- 1.45 1.45 --
------- ------- ------- --------- ----- ----- ----- -----
Outstanding at end of period.... 457,520 607,040 849,520 694,860 $0.99 $1.10 $1.20 $1.25
======= ======= ======= ========= ===== ===== ===== =====
Exercisable at end of period.... 7,760 165,480 375,580 403,880 $1.45 $1.45 $1.45 $1.45
======= ======= ======= ========= ===== ===== ===== =====
Deemed fair value of options
granted at an exercise price
of:
-- Less than fair value at
date of grant.............. $ -- $ -- $ 2.46
======= ======= =======
-- Equals to fair market value
at date of grant........... $ 0.45 $ 0.61 $ --
======= ======= =======
-- Exceeds fair value at date
of grant.................... $ 0.23 $ -- $ --
======= ======= =======
</TABLE>
The options outstanding as of December 31, 1998, have been separated into ranges
of exercise price, as follows:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE WEIGHTED
OUTSTANDING AS OF REMAINING AVERAGE EXERCISE
EXERCISE PRICE DECEMBER 31, 1998 CONTRACTUAL LIFE PRICE
-------------- ----------------- ---------------- ----------------
<S> <C> <C> <C>
$0.01 101,520 7.20 $0.01
$1.10 - $1.45 676,480 8.67 $1.27
$2.20 71,520 7.58 $2.20
- ------------ ======= ==== =====
- ------------
$0.01 - $2.20 849,520 8.40 $1.20
</TABLE>
Under SFAS 123, pro forma information regarding net income and earnings per
share is required (for grants issued after December 1994), and has been
determined as if the Company had accounted for its employee stock option under
the fair value method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes Option Pricing Model with
the following weighted-average assumptions for 1996, 1997 and 1998: risk-free
interest rates of approximately 6%, dividend yields of 0%, volatility factors of
the expected market price of the Company's Ordinary shares of 0.5 for 1996, 1997
and 1998 and an expected life of the option of 3.5 years, 2.5 years and 1.5
years after the option is vested for 1996,1997 and 1998, respectively, but not
sooner than December 1999.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
F-18
<PAGE> 103
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Pro forma information under SFAS 123:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss as reported........................................ $(1,282) $(3,473) $(4,351)
======= ======= =======
Pro forma net loss.......................................... $(1,368) $(3,600) $(4,402)
======= ======= =======
Pro forma basic and diluted net loss per share.............. $ (0.71) $ (2.48) $ (3.04)
======= ======= =======
</TABLE>
The Company recorded deferred compensation representing the difference between
the exercise price and the deemed fair value of the Company's ordinary share at
the date of grant. Such amount is being amortized based on an accelerated
vesting method over the vesting period of the options, generally 4 years.
<TABLE>
<CAPTION>
DEFERRED
COMPENSATION
--------------
(IN THOUSANDS)
<S> <C>
Balance as of January 1, 1998............................... $ --
Deferred compensation related to options issued to
employees................................................. 509
Less amortization of deferred compensation.................. 91
----
Balance as of December 31, 1998............................. $418
====
</TABLE>
10. SELECTED STATEMENTS OF OPERATIONS DATA
Geographic information:
The Company manages its business on the basis of one reportable segment and
attributes revenues based on the customers' location, as follows:
<TABLE>
<CAPTION>
REVENUES
----------------------
1996 1997 1998
------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Israel...................................................... $ 522 $ 1 $ --
U.S.A....................................................... 2,072 543 109
Europe...................................................... 19 28 130
Japan....................................................... 380 282 103
Other....................................................... 141 45 47
------ ---- ----
$3,134 $899 $389
====== ==== ====
</TABLE>
The Company's long-lived assets are as of December 31, are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Israel...................................................... $ 434 $365 $291
U.S.A....................................................... 48 33 641
------ ---- ----
$ 482 $398 $932
====== ==== ====
</TABLE>
11. SUBSEQUENT EVENTS
Series C Convertible Preferred Shares Financing and Exercise of Warrants to
Ordinary Shares
In the first quarter of 1999, the Company issued 92,144 Series C Convertible
Preferred Shares of NIS 1.0 par value and 35,000 ordinary shares in connection
with the exercise of warrants in consideration of approximately
F-19
<PAGE> 104
COMMTOUCH SOFTWARE, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$6,596,000 in net proceeds to the Company. An aggregate amount of $1,304,000 was
received in October and December 1998 in respect of those shares and was
recorded in additional paid in capital.
Convertible Notes Financing
In April 1999, the Company issued convertible promissory Notes (the "Notes") to
investors resulting in estimated net cash proceeds of approximately $13,237,000.
The Notes will convert into 42,081 Series D Convertible Preferred Shares upon
obtaining of certain governmental approvals, and will further convert into
841,620 ordinary shares upon the completion of the IPO. If the Company does not
consummate an IPO or a sale of more than 50% of the shares of the Company within
twelve months of the closing of the Series D Convertible Preferred Shares, a
ratchet provision will come into effect, providing the shareholders with 42,081
additional Series D Convertible Preferred Shares with no additional
consideration.
In April 1999, subsequent to the Convertible Notes financing, the Company fully
repaid its short-term bank line of credit.
Proposed Public Offering and Related Matters:
The Board of Directors has authorized the Company to file a registration
statement with the United States Securities and Exchange Commission for an IPO
of its ordinary shares.
In April 1999, the Board of Directors approved a twenty for one ordinary stock
split. The stock split will be effected prior to the effective date of the IPO.
All Ordinary share numbers, ordinary share option and warrant numbers and
Convertible Preferred Shares Conversion ratios have been retroactively adjusted
to reflect the stock split. In connection with the IPO, all of CommTouch's
Convertible Preferred Shares outstanding will be converted into Ordinary Shares.
Employee Stock Purchase Plan
The CommTouch 1999 Employee Stock Purchase Plan was adopted by the Board of
Directors on April 18, 1999 to be effective upon the completion of CommTouch's
IPO of its ordinary shares, subject to shareholders' approval. CommTouch has
reserved a total of 150,000 shares for issuance under the plan. Eligible
employees may purchase Ordinary Shares at 85% of the lesser of the market value
of CommTouch's ordinary shares on the first day of the applicable offering
period or the last day of the applicable purchase period.
Non-Employee Directors Stock Option Plan
The CommTouch 1999 Non-Employee Director Stock Option Plan was adopted, subject
to shareholder approval, by the Board of Directors on April 18, 1999 to be
effective upon the completion of a CommTouch IPO. CommTouch has reserved a total
of 250,000 shares for issuance under this plan. Each individual who first joins
the Board of Directors as a nonemployee director on or after the effective date
of this offering will receive an option grant for 10,000 ordinary shares. Each
option granted under the Non-Employee Directors Plan shall become exercisable
with respect to one-fourth of the number of shares covered by such option three
months after the date of grant and with respect to one-third of the remaining
shares subject to the option every three months thereafter. Each option will
have an exercise price equal to the fair market value of the ordinary shares on
the grant date of such option. Each option will have a maximum term of ten
years, but will terminate earlier if the optionee ceases to be a member of the
Board of Directors.
F-20
<PAGE> 105
[DESCRIPTION OF COVER GRAPHICS]
DESCRIPTION OF INSIDE FRONT FLAP GRAPHIC
The inside front flap consists of a box in the upper right-hand corner that
contains seven smaller boxes with checks inside each box. Next to each of the
boxes is a short phrase. These phrases are: "customized branded email, 14
languages, integrated unified messaging, turnkey e-marketing, scalable to
millions of users, cost effective, rapid deployment." Running down the left-hand
side of the page from the top to the middle in large type is the phrase "For all
email and messaging needs . . ." Beneath this box is an arrow pointing towards
an envelope. Extending to the right of the envelope is an arrow pointing to the
right-hand side of the page. Within this arrow is the company logo (the word
"commtouch" with the second "m" tilted and encircled).
DESCRIPTION OF INSIDE FRONT COVER GRAPHIC
The inside front cover consists of a two-page spread. In the middle of the
spread on the right-hand side, and aligned to the right in large type, are the
words: ". . . I need CommTouch." There are several images and text paragraphs on
the spread. Starting from the upper left corner of the spread and working
clockwise, there is an image of a mailbox. To the right of this image is a
heading in large bold text that reads "Customized Branded Email." Below the
heading is italicized text that reads "Email is one of the most widely used
applications on the Internet. A company can build its brand online with
CommTouch's highly customized solutions. CommTouch can put that brand name on
millions of emails each day." Continuing clockwise is a heading in large bold
text that reads "Integrated Unified Messaging." Below the heading is italicized
text that reads "Our technology delivers a fully integrated email solution -- a
platform for unified messaging that includes email, voice, fax, and pager
communications, all synchronized with today's offline client applications, with
integrated features such as calendaring and encryption on the way." To the right
of this text is an image of a laptop computer. In the upper right-hand corner
and proceeding down the length of the page on the right side are eleven logos
representing some of the company's customers. These logos are: BusinessWeek,
Talk City, Medscape, Excite, Sohu, ZDNet, First USA, NTT, VerticalNet, LookSmart
and Grolier. To the left of this list there is a heading in large bold text that
reads "Powerful Partnerships." Below the heading is italicized text that reads,
"Some of the largest and best-known brands, web-based companies, and Internet
businesses across the globe have turned to CommTouch for their messaging needs.
Our technology delivers solutions to companies online, from small businesses to
multinational corporations. You're in good company with CommTouch." In the
middle of the right page is a heading in large bold text that reads "Secure
Scalable Technology." Below the heading is italicized text that reads "With over
eight years of email application development behind us, we provide one of the
most scalable and flexible email hosting platforms available. Our modular
environment and proprietary programming code deliver superior performance levels
in email service." To the left of this text is an image of a Greek structure. At
the bottom of the right page is a wheelbarrow full of dollar bills. Above and to
the left of this image is a heading in large bold text that reads "Building
Revenues." Below the heading is italicized text that reads "With CommTouch,
business partners and webmasters can enable turnkey e-marketing and create
e-commerce opportunities immediately. Our Premium Services are designed to help
you build lasting, profitable relationships with their customers online. To the
left of this is a heading in large bold text that reads "Instant Community."
Below the heading is italicized text that reads "Through our ZapZone Network
service, membership/affinity websites and personal homepage owners can provide
the CommTouch solution to their online users in less than ten minutes. Today,
over 70,000 such websites are Powered By CommTouch." To the left of this text is
a stopwatch. Beneath this text is the company's logo, and underneath the logo is
the company's website address (www.commtouch.com). To the left of the logo in
the lower-left hand corner of the page is a partial image of a globe. Above the
globe and extending up along the left side of the page are eight country flags.
To the right of the flags is a heading in large bold text that reads "The Global
Solution." Below it is italicized text that reads "Email in 14 languages, with,
more coming online; deployed by customers in over
<PAGE> 106
150 countries worldwide . . . that's CommTouch." Connecting the images in the
background are dashed lines.
DESCRIPTION OF INSIDE BACK COVER GRAPHIC
The inside back cover has three screen shots representing examples of the
company's email services. Starting from the upper-right hand corner, the upper
screen shot shows an image from the website of Excite Japan (www.excite.co.jp),
one of the company's business partners. To the left of this image is a large
bold heading that reads "Community." Below the heading is text that reads
"Excite Japan needed multiple localized email services to build its
international online community. CommTouch delivers." Halfway down the page, the
middle screen shot shows an image from the website of Talk City
(www.talkcity.com), one of the company's business partners. To the right of this
image is a large bold heading that reads "Commerce." Below the heading is text
that reads "Talk City needed a high level of customization to build its brand
with its online audience and help build ecommerce. CommTouch delivers." On the
bottom of the page, the lower screen shot shows an image from the website of the
company's ZapZone Network service (www.zzn.com). To the right of this image is a
large bold heading that reads "Commitment." Below the heading is text that reads
"Thousands of webmasters and homepage owners around the world need a turnkey
web-based email solution. CommTouch delivers." In the background there is a
shaded "m" from the company's logo. At the bottom of the page is the company's
logo and website address.
DESCRIPTION OF OUTSIDE BACK COVER GRAPHIC
The outside back cover has the company's logo, the phrase "The global email
messaging solution" and the company's website address, www.commtouch.com.
[DESCRIPTION OF INTERIOR GRAPHICS]
On page 32, there is a graphic representing the "CommTouch Solution." At the
top, there is text reading "CommTouch Solution." Below the text there are three
large arrows pointing down to three boxes. Starting from the left, the first box
is labeled "WEB BASED COMPANIES." In this box there is text reading "Companies
conducting business on the Internet seeking to offer web-based email to their
online customers." Below this text are the names of five CommTouch business
partners: EXCITE, TALK CITY, FORTUNE CITY, LOOKSMART, AND MEDSCAPE.
The middle box is labeled "SMALL SITE/AFFINITY GROUPS." In this box there is
text reading "Personal home pages and small online communities seeking to offer
web-based email to their end users." Below this text are the names of five
ZapZone Network service users: OIL LINK, BABY.COM, DIABETES.COM, SOCCER.COM, and
OXFORD ONLINE.
The box on the right is labeled "BUSINESSES." In this box there is text reading
"Businesses seeking to outsource their internal email systems." Below this text
are the names of three businesses with which CommTouch has an email agreement:
WEBFLIER, NIKU, and ESCHOOLHOUSE.
On page 42, there is a graphic labeled "Hardware Infrastructure." Starting from
the top, there are cylinders labeled "Database" and "User's Mailboxes." Below
these cylinders are pictures of computers labeled SQL Servers, Mail Servers, and
Web Servers. The Database cylinder is connected with a line to the SQL Servers,
and the User's Mailboxes cylinder is connected with a line to the Mail Servers.
Below the servers, there are lines connecting the servers to icons of computer
hardware. Below the SQL Servers is text reading "ODBC Compliant Database," and a
line connecting the SQL Servers to an icon labeled "Local Routers." Below the
Mail Servers is text reading "IMAP4 Compliant," and a line connecting the Mail
Servers to an icon labeled "Router." Below the Web Servers, there is text
reading
<PAGE> 107
"Microsoft - IIS," and a line connecting the Web Servers to an icon labeled
"DNS." The DNS and Router icons are connected by a line to a cloud labeled
"Internet."
On page 44, there is a graphic labeled "ADML Flow Chart." This is a flow chart
with five levels. Starting from the left of the top row, there is a cylinder
labeled "Languages Resource Database." In the middle of the top row is a
rectangle labeled "ADML files." On the right of the top row is a cylinder
labeled "Company-Dependent Database." The top row is connected, with lines and
an arrow pointing downward, to an oval labeled "ADML CommTouch Compiler." This
is connected, with an arrow pointing downward, to a rectangle labeled "ASP
files." On the left of this rectangle is a cylinder labeled " User-Dependent
Database." These two shapes are connected to each other, and to an arrow
pointing down towards an oval labeled "ASP Interpreter." This oval is connected,
with an arrow pointing downwards, to a rectangle labeled "HTML files."
<PAGE> 108
3,000,000 ORDINARY SHARES
COMMTOUCH SOFTWARE LTD.
LOGO
---------------------------
PROSPECTUS
---------------------------
Until , 1999, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
U.S. Bancorp Piper Jaffray
Prudential Securities
Warburg Dillon Read LLC
, 1999
<PAGE> 109
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses payable by the Company (the
"Registrant") in connection with the offering of the securities being
registered, other than the underwriting discounts and commissions. All of the
amounts are estimates except for the SEC registration fee, the NASD filing fee
and the Nasdaq National Market filing fee.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 16,680
NASD filing fee............................................. 6,500
Nasdaq National Market filing fee........................... 48,750
Blue Sky fees and expenses.................................. 10,000
Printing and engraving expenses............................. 300,000
Israeli Stamp Duty.......................................... 500,000
Legal fees and expenses..................................... 700,000
Accounting fees and expenses................................ 300,000
Transfer agent and registrar fees and expenses.............. 10,000
Miscellaneous expenses...................................... 208,070
----------
Total............................................. $2,100,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Articles of Association provide that the Registrant will indemnify any
Office Holder of the Registrant as defined in the Companies Ordinance out of the
assets of the Registrant against all liabilities incurred bona fide by such
Office Holder in the line of his duties for the Registrant or related thereto.
Reference is made to Section of the Underwriting Agreement, a copy of
which is filed as Exhibit 1.1 hereto, which provides for indemnification of the
directors and officers of the Registrant who sign the Registration Statement by
the Underwriters against certain liabilities, including those arising under the
Securities Act, in certain circumstances.
In addition, the Registrant intends to secure insurance for its directors and
officers.
Certain members of our management team are officers of our subsidiary, CommTouch
Software Inc., a California Corporation, or reside in California. The Articles
of Incorporation of CommTouch Software Inc. provide that the liability of the
directors of the corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law and that the corporation is
authorized to provide for the indemnification of agents of the corporation, as
defined in Section 317 of the California General Corporation Law, in excess of
that expressly permitted by Section 317 for breach of duty to the corporation
and its shareholders to the fullest extent permissible under California law.
With respect to all proceedings other than shareholder derivative actions,
Section 317 permits a California corporation to indemnify any of its directors,
officers or other agents only if such person acted in good faith and in a manner
such person reasonably believed to be in the best interests of the corporation
and, in the case of a criminal proceeding, had no reasonable cause to believe
the conduct of such person was unlawful. In the case of derivative actions, a
California corporation may indemnify any of its directors, officers or agents
only if such person acted in good faith and in a manner such person believed to
be in the best interests of the corporation and its shareholders. Furthermore,
in derivative actions, no indemnification is permitted (i) with respect to any
matter with respect to which the person to be indemnified has been held liable
to the corporation, unless such indemnification is approved by the court; (ii)
of amounts paid in settling or otherwise disposing of a pending action without
court approval; or (iii) of expenses incurred in defending a pending action
which is settled or otherwise disposed of without court approval. To the extent
that a director, officer or agent of a corporation has been successful on the
merits in defense of any
II-1
<PAGE> 110
proceeding for which indemnification is permitted by Section 317, a corporation
is obligated by Section 317 to indemnify such person against expenses actually
and reasonably incurred by him in connection with the proceeding.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since April 1996, we have sold and issued the securities listed below without
registering the securities under the Securities Act of 1933, as amended. None of
these transactions involved any underwriters underwriting discounts or
commissions, or any public offering.
(1) In May 1996, we issued and sold for cash 11,353 Series B Convertible
Preferred Shares at a price of $44.04 per share to C.S.K. Venture Capital Co.
Ltd. ("C.S.K."). In connection with this issuance, we also issued warrants to
purchase 2,522 Series B Convertible Preferred Shares at an exercise price of NIS
1 per share to C.S.K.
(2) Between July 1997 and March 1999, we issued and sold for cash 153,093
Series C Convertible Preferred Shares at a price of $72.17 per share to 22
investors.
(3) In April 1999, we issued Convertible Promissory Notes that will convert
into 42,081 Series D Convertible Preferred Shares upon the obtaining of certain
Israeli governmental approvals. The effective price for each Series D Preferred
Share was $314.56.
We believe that each transaction listed above was exempt from the registration
requirements of the Securities Act of 1933, as amended, by virtue of Section
4(2) of the Securities Act, Regulation D, promulgated under the Securities Act
or Rule 701 with respect to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipients of securities in each
such transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates and warrants issued in such transactions. All recipients had
adequate access, through their relationships with us, to information about us.
II-2
<PAGE> 111
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Memorandum of Association of the Registrant.
3.2 Articles of Association of the Registrant.
4.1 Specimen Certificate of Ordinary Shares.
4.2 Amended and Restated Registration Rights Agreement dated as
of April 19, 1999.
4.3 Form of Tag-Along Rights (Right of First Refusal and
Co-Sale) Agreement dated as of December 23, 1998.
4.4 Form of Drag-Along Letter dated as of April 15, 1999.
5.1 Opinion of Naschitz, Brandes & Co., Israeli counsel to the
Registrant, as to certain legal matters with respect to the
legality of the shares.
10.1 Registrant's 1996 CSI Stock Option Plan and forms of
agreements thereunder.
10.2 Registrant's form of Stock Option Agreement for Israeli
Employees.
10.3 Registrant's 1999 Stock Option Plan and form of agreement
thereunder.
10.4 CommTouch Software Ltd. 1999 Nonemployee Directors Stock
Option Plan.
10.5 CommTouch Software Ltd. 1999 Employee Stock Purchase Plan
and forms thereunder.
10.6 Sublease between ASCII of America, Inc. and CommTouch for
CommTouch's offices in Santa Clara, California, dated
December 16, 1998.
10.7 Lease between DeAnza Building and CommTouch for CommTouch's
offices in Sunnyvale, California, dated February 5, 1996, as
amended.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Kost, Forer & Gabbay, independent auditors.
23.2 Consent of Naschitz, Brandes & Co. (contained in Exhibit
5.1.)
23.3 Consent of McCutchen, Doyle, Brown & Enersen, LLP.
*24.1 Power of Attorney.
</TABLE>
* Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES.
Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the financial statements
or notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 297(h) under the Securities Act shall be deemed to be
part of this Registration Statement at the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the Underwriters at
the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 112
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has
duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Palo Alto,
state of California, on June 3, 1999.
COMMTOUCH SOFTWARE LTD.
By /s/ GIDEON MANTEL
------------------------------------
Gideon Mantel
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ GIDEON MANTEL Chief Executive Officer and Director June 3, 1999
- ------------------------------------------------ (Principal Executive Officer)
Gideon Mantel
/s/ JAMES E. COLLINS Chief Financial Officer June 3, 1999
- ------------------------------------------------ (Principal Financial Officer)
James E. Collins
/s/ MISHAEL MATZRAFI Controller June 3, 1999
- ------------------------------------------------
Mishael Matzrafi
/s/ AMIR LEV Director June 3, 1999
- ------------------------------------------------
Amir Lev
/s/ YIFTAH ATIR Director June 3, 1999
- ------------------------------------------------
Yiftah Atir
/s/ ALLAN C. BARKAT Director June 3, 1999
- ------------------------------------------------
Allan C. Barkat
/s/ YAIR SAFRAI Director June 3, 1999
- ------------------------------------------------
Yair Safrai
/s/ YOSEPH SELA Director June 3, 1999
- ------------------------------------------------
Yoseph Sela
/s/ JAMES E. COLLINS Attorney-in-fact June 3, 1999
- ------------------------------------------------ and Authorized U.S. Representative
James E. Collins
</TABLE>
II-5
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Memorandum of Association of the Registrant.
3.2 Articles of Association of the Registrant.
4.1 Specimen Certificate of Ordinary Shares.
4.2 Amended and Restated Registration Rights Agreement dated as
of April 19, 1999.
4.3 Form of Tag-Along Rights (Right of First Refusal and
Co-Sale) Agreement dated as of December 23, 1998.
4.4 Form of Drag-Along Letter dated as of April 15, 1999.
5.1 Opinion of Naschitz, Brandes & Co., Israeli counsel to the
Registrant, as to certain legal matters with respect to the
legality of the shares.
10.1 Registrant's 1996 CSI Stock Option Plan and forms of
agreements thereunder.
10.2 Registrant's form of Stock Option Agreement for Israeli
Employees.
10.3 Registrant's 1999 Stock Option Plan and form of agreement
thereunder.
10.4 CommTouch Software Ltd. 1999 Nonemployee Directors Stock
Option Plan.
10.5 CommTouch Software Ltd. 1999 Employee Stock Purchase Plan
and forms thereunder.
10.6 Sublease between ASCII of America, Inc. and CommTouch for
CommTouch's offices in Santa Clara, California, dated
December 16, 1998.
10.7 Lease between DeAnza Building and CommTouch for CommTouch's
offices in Sunnyvale, California, dated February 5, 1996, as
amended.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Kost, Forer & Gabbay, independent auditors.
23.2 Consent of Naschitz, Brandes & Co. (contained in Exhibit
5.1.)
23.3 Consent of McCutchen, Doyle, Brown & Enersen, LLP.
*24.1 Power of Attorney.
</TABLE>
* Previously filed.
<PAGE> 1
EXHIBIT 1.1
__________ SHARES(1)
COMMTOUCH SOFTWARE LTD.
ORDINARY SHARES
PURCHASE AGREEMENT
_____________________, 1999
U.S. BANCORP PIPER JAFFRAY
Prudential Securities Incorporated
Warburg Dillon Read LLC,
A subsidiary of UBS AG As Representatives of the several
Underwriters named in Schedule II hereto
c/o U.S. Bancorp Piper Jaffray
Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
CommTouch Software Ltd., a corporation organized under the laws of
Israel (the "Company") proposes to sell to the several Underwriters named in
Schedule I hereto (the "Underwriters") an aggregate of __________ shares (the
"Firm Shares") of the Company's authorized but unissued ordinary shares, nominal
value New Israeli Shekels ("NIS") 1.0 per share (herein called "Ordinary
Shares"). The Company has also granted to the several Underwriters an option to
purchase up to __________ additional shares of Common Stock on the terms and for
the purposes set forth in Section 3 hereof (the "Option Shares"). The Firm
Shares and any Option Shares purchased pursuant to this Purchase Agreement are
herein collectively called the "Securities."
The Company hereby confirms its agreement with respect to the sale of
the Securities to the several Underwriters, for whom you are acting as
Representatives (the "Representatives").
1. Registration Statement and Prospectus. A registration statement on
Form F-1 (File No. 33-___________) with respect to the Securities, including a
preliminary form of prospectus, has been prepared by the Company in conformity
with the requirements of the Securities Act of 1933, as amended (the "Act"), and
the rules and regulations ("Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder and has been filed with the
Commission; one or more amendments to such registration statement have also been
so prepared and have been, or will be, so filed; and, if the Company has elected
to rely upon Rule 462(b) of the Rules and Regulations to increase the size of
the offering registered
- --------
(1) Plus an option to purchase up to ________ additional shares to cover
over-allotments.
<PAGE> 2
under the Act, the Company will prepare and file with the Commission a
registration statement with respect to such increase pursuant to Rule 462(b).
Copies of such registration statement(s) and amendments and each related
preliminary prospectus have been delivered to you.
If the Company has elected not to rely upon Rule 430A of the Rules and
Regulations, the Company has prepared and will promptly file an amendment to the
registration statement and an amended prospectus (including a term sheet meeting
the requirements of Rule 434 of the Rules and Regulations). If the Company has
elected to rely upon Rule 430A of the Rules and Regulations, it will prepare and
file a prospectus (or a term sheet meeting the requirements of Rule 434)
pursuant to Rule 424(b) that discloses the information previously omitted from
the prospectus in reliance upon Rule 430A. Such registration statement as
amended at the time it is or was declared effective by the Commission, and, in
the event of any amendment thereto after the effective date and prior to the
First Closing Date (as hereinafter defined), such registration statement as so
amended (but only from and after the effectiveness of such amendment), including
a registration statement (if any) filed pursuant to Rule 462(b) of the Rules and
Regulations increasing the size of the offering registered under the Act and
information (if any) deemed to be part of the registration statement at the time
of effectiveness pursuant to Rules 430A(b) and 434(d) of the Rules and
Regulations, is hereinafter called the "Registration Statement." The prospectus
included in the Registration Statement at the time it is or was declared
effective by the Commission is hereinafter called the "Prospectus," except that
if any prospectus (including any term sheet meeting the requirements of Rule 434
of the Rules and Regulations provided by the Company for use with a prospectus
subject to completion within the meaning of Rule 434 in order to meet the
requirements of Section 10(a) of the Rules and Regulations) filed by the Company
with the Commission pursuant to Rule 424(b) (and Rule 434, if applicable) of the
Rules and Regulations or any other such prospectus provided to the Underwriters
by the Company for use in connection with the offering of the Securities
(whether or not required to be filed by the Company with the Commission pursuant
to Rule 424(b) of the Rules and Regulations) differs from the prospectus on file
at the time the Registration Statement is or was declared effective by the
Commission, the term "Prospectus" shall refer to such differing prospectus
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations) from and after the time such prospectus is filed with the
Commission or transmitted to the Commission for filing pursuant to such Rule
424(b) (and Rule 434, if applicable) or from and after the time it is first
provided to the Underwriters by the Company for such use. The term "Preliminary
Prospectus" as used herein means any preliminary prospectus included in the
Registration Statement prior to the time it becomes or became effective under
the Act and any prospectus subject to completion as described in Rule 430A or
434 of the Rules and Regulations.
2. Representations and Warranties of the Company.
(a) The Company represents and warrants to, and agrees with, the
several Underwriters as follows:
(i) No order preventing or suspending the use of any
Preliminary Prospectus has been issued by the Commission and each Preliminary
Prospectus, at the time of filing thereof, did not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; except that the
foregoing shall not apply to statements in or omissions from any Preliminary
Prospectus in reliance upon, and in conformity with, written information
furnished to the Company by you, or by any Underwriter through you, specifically
for use in the preparation thereof.
-2-
<PAGE> 3
(ii) As of the time the Registration Statement (or any
post-effective amendment thereto, including a registration statement (if any)
filed pursuant to Rule 462(b) of the Rules and Regulations increasing the size
of the offering registered under the Act) is or was declared effective by the
Commission, upon the filing or first delivery to the Underwriters of the
Prospectus (or any supplement to the Prospectus (including any term sheet
meeting the requirements of Rule 434 of the Rules and Regulations)) and at the
First Closing Date and Second Closing Date (as hereinafter defined), (A) the
Registration Statement and the Prospectus (in each case, as so amended and/or
supplemented) conformed or will conform in all material respects to the
requirements of the Act and the Rules and Regulations, (B) the Registration
Statement (as so amended) did not or will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (C) the Prospectus
(as so supplemented) did not or will not include an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances in which
they are or were made, not misleading; except that the foregoing shall not apply
to statements in or omissions from any such document in reliance upon, and in
conformity with, written information furnished to the Company by you, or by any
Underwriter through you, specifically for use in the preparation thereof. If the
Registration Statement has been declared effective by the Commission, no stop
order suspending the effectiveness of the Registration Statement has been
issued, and no proceeding for that purpose has been initiated or, to the
Company's knowledge, threatened by the Commission.
(iii) The consolidated financial statements of the
Company, together with the notes thereto, set forth in the Registration
Statement and the Prospectus comply in all material respects with the
requirements of the Act and fairly present the consolidated financial condition
of the Company and its consolidated subsidiaries indicated and the results of
operations and changes in cash flows for the periods therein specified in
conformity with United States generally accepted accounting principles
consistently applied throughout the periods involved (except as otherwise stated
therein); and the supporting schedules included in the Registration Statement
present fairly the information required to be stated therein. No other financial
statements or schedules are required to be included in the Registration
Statement or Prospectus. Kost, Forer & Gabbay (a member of Ernst & Young
International), which has expressed its opinion with respect to the financial
statements and schedules filed as a part of the Registration Statement and
included in the Registration Statement and the Prospectus, are independent
public accountants as required by the Act and the Rules and Regulations. The
summary financial and other data included in the Registration Statement and the
Prospectus present fairly the information shown therein and have been compiled
on a basis consistent with the financial statements presented therein.
(iv) Each of the Company and its subsidiaries has been
duly organized and is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation. Each of the Company and its
subsidiaries has full corporate power and authority to own its properties and
conduct its business as currently being carried on and as described in the
Registration Statement and the Prospectus, and is duly qualified to do business
as a foreign corporation in good standing in each jurisdiction in which it owns
or leases real property or in which the conduct of its business makes such
qualification necessary and in which the failure to so qualify would have a
material adverse effect on the assets or properties, business, results of
operations, prospects or condition (financial or otherwise) of the Company and
its subsidiaries, taken as a whole (a "Material Adverse Effect").
(v)Except as contemplated in the Registration Statement
and the Prospectus, subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, neither the Company
nor any of its subsidiaries has incurred any material liabilities or
obligations, direct or contingent, or entered into any material transactions, or
declared or paid any dividends or made any
-3-
<PAGE> 4
distribution of any kind with respect to its capital stock; and there has not
been any change in the capital stock (other than a change in the number of
outstanding Ordinary Shares due to the issuance of shares upon the exercise of
outstanding options or warrants), or any material change in the short-term or
long-term debt, or any issuance of options, warrants, convertible securities or
other rights to purchase the capital stock, of the Company or any of its
subsidiaries, or any change that had a Material Adverse Effect, or any
development involving a prospective Material Adverse Effect.
(vi) Except as set forth in the Registration Statement
and the Prospectus, there is not pending or, to the knowledge of the Company,
threatened or contemplated, any action, suit or proceeding to which the Company
or any of its subsidiaries is a party or to which any property or assets of the
Company or any of its subsidiaries is subject before or by any court or
governmental agency, authority or body, or any arbitrator, which might result in
a Material Adverse Effect.
(vii) There are no contracts or documents of the Company
or any of its subsidiaries that are required to be described in the Prospectus
or to be filed as exhibits to the Registration Statement by the Act or by the
Rules and Regulations that have not been so described or filed.
(viii) This Agreement has been duly authorized, executed
and delivered by the Company, and constitutes a valid, legal and binding
obligation of the Company, enforceable in accordance with its terms, except as
rights to indemnity hereunder may be limited by federal or state securities laws
and except as such enforceability may be limited by bankruptcy, insolvency,
reorganization or similar laws affecting the rights of creditors generally and
subject to general principles of equity. The execution, delivery and performance
of this Agreement and the consummation of the transactions herein contemplated
will not result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any agreement or instrument to which
the Company is a party or by which it is bound or to which any of its property
is subject, the Company's charter or by-laws, or any order, rule, regulation or
decree of any court or governmental agency or body having jurisdiction over the
Company or any of its properties; no consent, approval, authorization or order
of, or filing with, any court or governmental agency or body is required for the
execution, delivery and performance of this Agreement or for the consummation of
the transactions contemplated hereby, including the issuance or sale of the
Securities by the Company, except such as may be required under the Act or state
securities or blue sky laws; and the Company has full power and authority to
enter into this Agreement and to authorize, issue and sell the Securities as
contemplated by this Agreement.
(ix) All of the issued and outstanding shares of capital
stock of the Company, including the outstanding Ordinary Shares, are duly
authorized and validly issued, fully paid and nonassessable, have been issued in
compliance with all federal and state securities laws (including, without
limitation, applicable Israeli securities laws and the rules and regulations of
the Tel Aviv Stock Exchange), were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities, and
the holders thereof are not subject to personal liability by reason of being
such holders; and the capital stock of the Company, including the Ordinary
Shares, conforms to the description thereof in the Registration Statement and
Prospectus. Except as otherwise stated in the Registration Statement and
Prospectus, there are no preemptive rights or other rights to subscribe for or
to purchase, or any restriction upon the voting or transfer of, any Ordinary
Shares pursuant to the Company's charter, by-laws or any agreement or other
instrument to which the Company is a party or by which the Company is bound. All
of the issued and outstanding shares of capital stock of each of the Company's
subsidiaries have been duly and validly authorized and issued and are fully paid
and nonassessable, and, except as otherwise described in the Registration
Statement and the Prospectus, the Company owns of record and beneficially, free
and clear of any security interests, claims, liens, proxies, equities or other
encumbrances, all of the issued and outstanding
-4-
<PAGE> 5
shares of such stock. Except as described in the Registration Statement and the
Prospectus, there are no options, warrants, agreements, contracts or other
rights in existence to purchase or acquire from the Company or any subsidiary of
the Company any shares of the capital stock of the Company or any subsidiary of
the Company. The Company has an authorized and outstanding capitalization as set
forth in the Registration Statement and the Prospectus.
(x) The Securities which may be sold hereunder by the
Company have been duly authorized and, when issued, delivered and paid for in
accordance with the terms hereof, will have been validly issued and will be
fully paid and nonassessable, and the holders thereof will not be subject to
personal liability by reason of being such holders, and conforms to the
description thereof in the Registration Statement and the Prospectus. No further
approval or authority of the shareholders of the Company or the Board of
Directors of the Company is required for the sale and issuance of the Securities
hereunder.
(xi) Neither the filing of the Registration Statement
nor the offering or sale of the Securities as contemplated by this Agreement
gives rise to any rights for or relating to the registration of any Ordinary
Shares or other securities of the Company and no person or entity holds a right
to require registration under the Securities Act of shares of capital stock of
the Company at any other time, except as disclosed in the Registration Statement
and the Prospectus.
(xii) The Company and each of its subsidiaries holds,
and is operating in compliance in all material respects with, all franchises,
grants, authorizations, licenses, permits, easements, consents, certificates and
orders of any governmental or self-regulatory body required for the conduct of
its business and all such franchises, grants, authorizations, licenses, permits,
easements, consents, certifications and orders are valid and in full force and
effect; and the Company and each of its subsidiaries is in compliance in all
material respects with all applicable federal, state, local and foreign laws,
regulations, orders and decrees.
(xiii) The Company and its subsidiaries have good and
marketable title to all property described in the Registration Statement and the
Prospectus as being owned by them, in each case free and clear of all liens,
claims, security interests or other encumbrances except such as are described in
the Registration Statement and the Prospectus; the property held under lease by
the Company and its subsidiaries is held by them under valid, subsisting and
enforceable leases with only such exceptions with respect to any particular
lease as do not interfere in any material respect with the conduct of the
business of the Company or its subsidiaries.
(xiv) The Company and each of its subsidiaries owns or
possesses all patents, patent applications, trademarks, service marks,
tradenames, trademark registrations, service mark registrations, copyrights,
licenses, inventions, trade secrets know-how, proprietary techniques, processes
and rights ("Intellectual Property") used in the conduct of the business of the
Company and its subsidiaries as currently carried on (including products,
services and technology contemplated by current research and development
projects) and as described in the Registration Statement and the Prospectus.
Except as stated in the Registration Statement and the Prospectus, no name which
the Company or any of its subsidiaries uses and no other aspect of the business
of the Company or any of its subsidiaries will involve or give rise to any
infringement of, or license or similar fees for, any Intellectual Property of
others material to the business or prospects of the Company and neither the
Company nor any of its subsidiaries has received any notice alleging any such
infringement or fee. To the knowledge of the Company, its Intellectual Property
is not being infringed by any third parties which infringement could reasonably
be expected, whether singly or in the aggregate, to have a Material Adverse
Effect.
-5-
<PAGE> 6
(xv) Neither the Company nor any of its subsidiaries (i)
is in violation of its respective charter, by-laws or other organizational
documents (ii) in breach of or otherwise in default in the performance of any
obligation, agreement or condition contained in any bond, debenture, note,
indenture, loan agreement or any other contract, lease or other instrument to
which any of them is subject or by which any of them may be bound, or to which
any of the property or assets of the Company or any of its subsidiaries is
subject, nor has any event occurred nor condition exist that with the notice
and/or the passage of time would give rise to such a breach or default or (iii)
is in violation of any law, ordinance, government rule, regulation or court
order or decree to which any of them is subject or by which any of them may be
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, except in the case of clauses (ii) and (iii) for such
breaches, defaults or violations that individually or in the aggregate would not
have a Material Adverse Effect.
(xvi) The Company and its subsidiaries have filed all
federal, state, local and foreign income and franchise tax returns required to
be filed and are not in default in the payment of any taxes which were payable
pursuant to said returns or any assessments with respect thereto, other than any
which the Company or any of its subsidiaries is contesting in good faith.
(xvii) The Company has not distributed and will not
distribute any prospectus or other offering material in connection with the
offering and sale of the Securities other than any Preliminary Prospectus or the
Prospectus or other materials permitted by the Act to be distributed by the
Company.
(xviii) The Securities have been duly authorized for
quotation on the NASDAQ National Market System, subject to official notice of
issuance, and, on the date the Registration Statement became or becomes
effective, the Company's Registration Statement on Form 8-A or other applicable
form under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
became or will become effective.
(xix) The Company has no subsidiary or subsidiaries and
the Company owns no capital stock or other equity or ownership or proprietary
interest in any corporation, partnership, limited liability company, joint
venture association, trust or other entity except for the subsidiaries listed in
Exhibit 21 to the Registration Statement.
(xx) The Company maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to assets is
permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(xxi) Other than as contemplated by this Agreement, the
Company has not incurred any liability for any finder's or broker's fee or
agent's commission in connection with the execution and delivery of this
Agreement or the consummation of the transactions contemplated hereby.
(xxii) Neither the Company nor any of its affiliates is
presently doing business with the government of Cuba or with any person or
affiliate located in Cuba.
-6-
<PAGE> 7
(xxiii) No labor dispute with the employees of the
Company or any of its subsidiaries exists or, to the knowledge of the Company,
is threatened; and the Company is not aware of any existing or imminent labor
disturbance by the employees of any of its principal suppliers or contractors
which could have a Material Adverse Effect. Neither the Company nor any of its
subsidiaries has violated any applicable safety or similar law applicable to its
business nor any federal or state law relating to discrimination in the hiring,
promotion or pay of employees, nor any applicable federal or state wage and
hours law, nor any provisions of the Employee Retirement Income Security Act or
the rules and regulations promulgated thereunder, the violation of any of which
could have a Material Adverse Effect. The Company is not aware of any threatened
or pending litigation between the Company or any of its subsidiaries and any of
its executive officers which, if adversely determined, could have a Material
Adverse Effect, and has no reason to believe that such officers will not remain
in the employment of the Company during the next twelve months.
(xxiv) No transaction has occurred or relationship
exists between or among the Company or any of its subsidiaries and any of their
officers or directors or any affiliate or affiliates of any such officer or
director that is required to be described in and is not described in the
Registration Statement and the Prospectus.
(xxv) The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks in such amounts as are customary in the business in which they are
engaged; and neither the Company nor any subsidiary has any reason to believe
that it will not be able to renew its existing insurance coverage as and when
such coverage expires or to obtain similar coverage from similar insurers as may
be necessary to continue their business at a cost that would not have a Material
Adverse Effect.
(xxvi) There are no affiliations with the National
Association of Securities Dealers, Inc. (the "NASD") among the Company's
officers, directors or, to the best knowledge of the Company, any five percent
or greater shareholder of the Company, except as set forth in the Registration
Statement and the Prospectus or otherwise disclosed in writing to the
Representatives.
(xxvii) Neither the Company nor any of its subsidiaries
is an "investment company" nor a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended, and the
rules and regulations thereunder (the "Investment Company Act").
(xxviii) Neither the Company nor any of its subsidiaries
or, to the knowledge of the Company, any other person associated with or acting
on behalf of the Company or any of its subsidiaries including, without
limitation, any director, officer, agent or employee of the Company or any of
its subsidiaries has, directly or indirectly, while acting on behalf of the
Company or any of its subsidiaries, (i) used any corporate funds for unlawful
contributions, gifts, entertainment or other unlawful expenses relating to
political activity; (ii) made any unlawful payment to foreign or domestic
government officials or employees or to foreign or domestic political parties or
campaigns from corporate funds; (iii) violated any provision of the Foreign
Corrupt Practices Act of 1977, as amended; or (iv) made any other unlawful
payment.
(xxix) The Company has reviewed its operations and that
of its subsidiaries and any third parties with which the Company or any of its
subsidiaries has a material relationship to evaluate the extent to which the
business or operations of the Company or any of its subsidiaries will be
affected by the Year 2000 Problem (defined below). As a result of such review,
the Company has no reason to believe, and
-7-
<PAGE> 8
does not believe, that the Year 2000 Problem will have a Material Adverse
Effect, or result in any material loss or interference with the Company's
business or operations. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000.
(xxx) The Company does not believe that it is, and upon
the consummation of the transactions contemplated hereby and the application of
the proceeds as described in the Registration Statement and the Prospectus under
the caption "Use of Proceeds" does not believe that it will become, a "passive
foreign investment company" (herein called a PFIC) as defined in Section 1296 of
the Internal Revenue Code of 1986, as amended (herein called the Code).
(xxxi) The Company has not taken and will not take,
directly or indirectly, any action designed to or that might reasonably be
expected to cause or result in stabilization or manipulation of the price of the
Ordinary Shares to facilitate the sale or resale of the Stock.
(xxxii) The Company has received from the Israel
Securities Authority an exemption from the requirement to publish a prospectus
in Israel for the offer of the Securities in the manner required by the
applicable laws of the State of Israel, which exemption was in full force and
effect on the date hereof and which shall be in full force and effect on the
date of the Prospectus, on the date that any post-effective amendment to the
Registration Statement shall become effective, when any supplement or amendment
to the Prospectus is filed with the Commission, and at each Closing Date. It is
further understood that no public offering (as defined under the laws of the
State of Israel) pursuant to the Prospectus will be made within the State of
Israel by the Company.
(xxxiii) Each of the Company and its subsidiaries is in
material compliance with all conditions and requirements stipulated by the
instruments of approval issued by the Investment Center of the Ministry of
Industry and Commerce granted entitling it or any of its operations to the
status of "approved enterprise" under Israeli law and by Israeli laws and
regulations relating to such approved enterprise status except as would not have
a Material Adverse Effect. All information supplied by the Company with respect
to such applications was true, correct and complete in all material respect when
supplied to the appropriate authorities. The Company does not know of any reason
or circumstance that would lead to revocation of its status as an "approved
enterprise."
(xxxiv) Neither the Company nor any of its subsidiaries
is in violation of any conditions or requirements stipulated by the instruments
of approval granted to any of them by the Office of the Chief Scientist in the
Ministry of Industry & Commerce, with respect to any research and development
grants given to it by such office, which violation, individually or in the
aggregate, would have a Material Adverse Effect.
(xxxv) No transfer tax, stamp duty or similar tax is
payable by or on behalf of the Underwriters in connection with: (i) the issuance
by the Company of the Stock; (ii) the purchase by the Underwriters of the Stock
from the Company; (iii) the consummation by the Company of any of its
obligations under this Agreement; or (iv) resale of the Stock by the
Underwriters in connection with the distribution contemplated hereby.
-8-
<PAGE> 9
(b)Any certificate signed by any officer of the Company and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
3. Purchase, Sale and Delivery of Securities.
(a)On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company agrees to issue and sell __________ Firm Shares, and each
Selling Stockholder agrees, severally and not jointly, to sell the number of
Firm Shares set forth opposite the name of such Selling Stockholder in Schedule
I hereto, to the several Underwriters, and each Underwriter agrees, severally
and not jointly, to purchase from the Company the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto. The purchase
price for each Firm Share shall be $_____ per share. The obligation of each
Underwriter to the Company shall be to purchase from the Company that number of
Firm Shares set forth opposite the name of such Underwriter in Schedule I
hereto. In making this Agreement, each Underwriter is contracting severally and
not jointly; except as provided in paragraph (c) of this Section 3 and in
Section 8 hereof, the agreement of each Underwriter is to purchase only the
respective number of Firm Shares specified in Schedule I.
The Firm Shares will be delivered by the Company to you for the
accounts of the several Underwriters against payment of the purchase price
therefor by certified or official bank check or other next day funds payable to
the order of the Company, as appropriate, at the offices of U.S. Bancorp Piper
Jaffray, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or
such other location as may be mutually acceptable, at 9:00 a.m. Central time on
the third (or if the Securities are priced, as contemplated by Rule 15c6-1(c)
under the Exchange Act, after 4:30 p.m. Eastern time, the fourth) full business
day following the date hereof, or at such other time and date as you and the
Company determine pursuant to Rule 15c6-1(a) under the Exchange Act, such time
and date of delivery being herein referred to as the "First Closing Date." If
the Representatives so elect, delivery of the Firm Shares may be made by credit
through full fast transfer to the accounts at The Depository Trust Company
designated by the Representatives. Certificates representing the Firm Shares, in
definitive form and in such denominations and registered in such names as you
may request upon at least two business days' prior notice to the Company, will
be made available for checking and packaging not later than 10:30 a.m., Central
time, on the business day next preceding the First Closing Date at the offices
of U.S. Bancorp Piper Jaffray, Piper Jaffray Tower, 222 South Ninth Street,
Minneapolis, Minnesota, or such other location as may be mutually acceptable.
(b)On the basis of the representations, warranties and
agreements herein contained, but subject to the terms and conditions herein set
forth, the Company hereby grants to the several Underwriters an option to
purchase all or any portion of the Option Shares at the same purchase price as
the Firm Shares, for use solely in covering any over-allotments made by the
Underwriters in the sale and distribution of the Firm Shares. The option granted
hereunder may be exercised at any time (but not more than once) within 30 days
after the effective date of this Agreement upon notice (confirmed in writing) by
the Representatives to the Company setting forth the aggregate number of Option
Shares as to which the several Underwriters are exercising the option, the names
and denominations in which the certificates for the Option Shares are to be
registered and the date and time, as determined by you, when the Option Shares
are to be delivered, such time and date being herein referred to as the "Second
Closing" and "Second Closing Date", respectively; provided, however, that the
Second Closing Date shall not be earlier than the First Closing Date nor earlier
than the second business day after the date on which the option shall have been
exercised. The number of Option Shares to be purchased by each Underwriter shall
be the same percentage of the total number of Option Shares to be purchased by
the several Underwriters as the number of Firm Shares to be purchased by such
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<PAGE> 10
Underwriter is of the total number of Firm Shares to be purchased by the several
Underwriters, as adjusted by the Representatives in such manner as the
Representatives deem advisable to avoid fractional shares. No Option Shares
shall be sold and delivered unless the Firm Shares previously have been, or
simultaneously are, sold and delivered.
The Option Shares will be delivered by and the Company, to you
for the accounts of the several Underwriters against payment of the purchase
price therefor by certified or official bank check or other next day funds
payable to the order of the Company, as appropriate, at the offices of U.S.
Bancorp Piper Jaffray, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota, or such other location as may be mutually acceptable at 9:00 a.m.,
Central time, on the Second Closing Date. If the Representatives so elect,
delivery of the Option Shares may be made by credit through full fast transfer
to the accounts at The Depository Trust Company designated by the
Representatives. Certificates representing the Option Shares in definitive form
and in such denominations and registered in such names as you have set forth in
your notice of option exercise, will be made available for checking and
packaging not later than 10:30 a.m., Central time, on the business day next
preceding the Second Closing Date at the office of U.S. Bancorp Piper Jaffray,
Piper Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota, or such
other location as may be mutually acceptable.
(c) It is understood that you, individually and not as
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment to the Company, on behalf of any Underwriter for the Securities to
be purchased by such Underwriter. Any such payment by you shall not relieve any
such Underwriter of any of its obligations hereunder. Nothing herein contained
shall constitute any of the Underwriters an unincorporated association or
partner with the Company.
(d) Notwithstanding anything else in this Agreement, the
Underwriters shall not solicit offers to purchase Securities in Israel from more
than 35 solicitees in the aggregate and will obtain confirmation from such
solicitees that they are purchasing such Securities for investment purposes only
and not with a view toward distribution or sale. On or before the date two days
after the Closing Date, provide that such date is not more than six days after
the date of this Agreement, the Underwriters shall furnish the Company, its
counsel and the Securities Authority of the State of Israel (the "ISA") with a
list of such solicitees, if any (including their name and addresses), so as to
enable the Company to comply with the terms of the exemption issued by the ISA.
4. Covenants
(a) The Company covenants and agrees with the several
Underwriters as follows:
(i)If the Registration Statement has not already been
declared effective by the Commission, the Company will use its best efforts to
cause the Registration Statement and any post-effective amendments thereto to
become effective as promptly as possible; the Company will notify you promptly
of the time when the Registration Statement or any post-effective amendment to
the Registration Statement has become effective or any supplement to the
Prospectus (including any term sheet within the meaning of Rule 434 of the Rules
and Regulations) has been filed and of any request by the Commission for any
amendment or supplement to the Registration Statement or the Prospectus or
additional information; if the Company has elected to rely on Rule 430A of the
Rules and Regulations, the Company will prepare and file a Prospectus (or term
sheet within the meaning of Rule 434 of the Rules and Regulations) containing
the information omitted therefrom pursuant to Rule 430A of the Rules and
Regulations with the Commission within the time period required by, and
otherwise in accordance with the provisions of, Rules 424(b), 430A
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<PAGE> 11
and 434, if applicable, of the Rules and Regulations; if the Company has elected
to rely upon Rule 462(b) of the Rules and Regulations to increase the size of
the offering registered under the Act, the Company will prepare and file a
registration statement with respect to such increase with the Commission within
the time period required by, and otherwise in accordance with the provisions of,
Rule 462(b); the Company will prepare and file with the Commission, promptly
upon your request, any amendments or supplements to the Registration Statement
or the Prospectus (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations) that, in your opinion, may be necessary or advisable
in connection with the distribution of the Securities by the Underwriters; and
the Company will not file any amendment or supplement to the Registration
Statement or Prospectus (including any term sheet within the meaning of Rule 434
of the Rules and Regulations) to which you shall reasonably object by notice to
the Company after having been furnished a copy a reasonable time prior to the
filing.
(ii) The Company will advise you, promptly after it
shall receive notice or obtain knowledge thereof, of the issuance by the
Commission the ISA, the Tel Aviv Stock Exchange, or any Israeli or other foreign
regulatory body of any stop order suspending the effectiveness of the
Registration Statement, of the suspension of the qualification of the Securities
for offering or sale in any jurisdiction, or of the initiation or threatening of
any proceeding for any such purpose; and the Company will promptly use its best
efforts to (i) prevent the issuance of any stop order or to obtain its
withdrawal if such a stop order should be issued and (ii) maintain in effect the
exemption granted by the ISA and, if such exemption shall at any time not be
effective, to obtain the reinstatement thereof at the earliest possible moment.
(iii) Within the time during which a prospectus
(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations) relating to the Securities is required to be delivered under the
Act, the Company will comply as far as it is able with all requirements imposed
upon it by the Act, as now and hereafter amended, and by the Rules and
Regulations, as from time to time in force, so far as necessary to permit the
continuance of sales of or dealings in the Securities as contemplated by the
provisions hereof and the Prospectus. If during such period any event occurs as
a result of which in the opinion of counsel for the Company or of counsel for
the Underwriters the Prospectus would include an untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances then existing, not misleading, or if during
such period it is in the opinion of counsel for the Company of counsel for the
Underwriters necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act, the Company will promptly notify you and will
forthwith amend the Registration Statement or supplement the Prospectus (at the
expense of the Company) so as to correct such statement or omission or effect
such compliance.
(iv) The Company will use its best efforts to qualify
the Securities for sale under the securities laws of such jurisdictions as you
reasonably designate and to continue such qualifications in effect so long as
required for the distribution of the Securities, except that the Company shall
not be required in connection therewith to qualify as a foreign corporation or
to execute a general consent to service of process in any state. The Company
will, from time to time, prepare and file such statements, reports, and other
documents as are or may be required to continue such qualifications in effect
for so long a period as you may reasonably request for distribution of the
Securities.
(v) The Company will furnish to the Underwriters copies
of the Registration Statement (three of which will be signed and will include
all exhibits), each Preliminary Prospectus, the Prospectus, and all amendments
and supplements (including any term sheet within the meaning of Rule 434 of the
Rules and Regulations) to such documents, in each case as soon as available and
in such quantities as you may from time to time reasonably request. Prior to the
filing thereof with the Commission, the Company
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<PAGE> 12
will submit to you, for your information, a copy of any post-effective amendment
to the Registration Statement and any supplement to the Prospectus or any
amended prospectus proposed to be filed.
(vi) During a period of five years commencing with the
date hereof, the Company will (i) submit to the Commission quarterly reports,
which will include unaudited quarterly consolidated financial information, on
Form 6-K for the first three quarters of each fiscal year, and file its annual
report on Form 20-F within the time period prescribed under Section 13 of the
Exchange Act for the filing by domestic issuers of quarterly reports on Form
10-Q and annual reports on Form 10-K, respectively and (ii) furnish to you, and
to each Underwriter who may so request in writing, copies of all periodic and
special reports furnished to shareholders of the Company and of all information,
documents and reports filed with the Commission (including the Report on Form SR
required by Rule 463 of the Commission under the Securities Act), the Nasdaq
National Market, the NASD, the ISA or the Tel Aviv Stock Exchange. Reports to
the ISA or the Tel Aviv Stock Exchange may be furnished to you and to any such
Underwriter in Hebrew if such reports are not available in English.
(vii) The Company will make generally available to its
security holders as soon as practicable, but in any event not later than 15
months after the end of the Company's current fiscal quarter, an earnings
statement (which need not be audited) covering a 12-month period beginning after
the effective date of the Registration Statement that shall satisfy the
provisions of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations.
(viii) The Company, whether or not the transactions
contemplated hereunder are consummated or this Agreement is prevented from
becoming effective under the provisions of Section 9(a) hereof or is terminated,
will pay or cause to be paid (A) all expenses (including transfer taxes
allocated to the respective transferees) incurred in connection with the
delivery to the Underwriters of the Securities, (B) all expenses and fees
(including, without limitation, fees and expenses of the Company's accountants
and counsel but, except as otherwise provided below, not including fees of the
Underwriters' counsel) in connection with the preparation, printing, filing,
delivery, and shipping of the Registration Statement (including the financial
statements therein and all amendments, schedules, and exhibits thereto), the
Securities, each Preliminary Prospectus, the Prospectus, and any amendment
thereof or supplement thereto, and the printing, delivery, and shipping of this
Agreement and other underwriting documents, including Blue Sky Memoranda, (C)
all filing fees and fees and disbursements of the Underwriters' counsel incurred
in connection with the qualification of the Securities for offering and sale by
the Underwriters or by dealers under the securities or blue sky laws of the
states and other jurisdictions which you shall designate in accordance with
Section 4(d) hereof, (D) the fees and expenses of any transfer agent or
registrar, (E) the filing fees incident to any required review by the NASD of
the terms of the sale of the Securities, (F) listing fees, if any, and (G) all
other costs and expenses incident to the performance of its obligations
hereunder that are not otherwise specifically provided for herein. If the sale
of the Securities provided for herein is not consummated by reason of action by
the Company pursuant to Section 9(a) hereof which prevents this Agreement from
becoming effective, or by reason of any failure, refusal or inability on the
part of the Company to perform any agreement on its or their part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company is not fulfilled, the Company
will reimburse the several Underwriters for all out-of-pocket disbursements
(including fees and disbursements of counsel) incurred by the Underwriters in
connection with their investigation, preparing to market and marketing the
Securities or in contemplation of performing their obligations hereunder. The
Company shall not in any event be liable to any of the Underwriters for loss of
anticipated profits from the transactions covered by this Agreement.
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<PAGE> 13
(ix) The Company will apply the net proceeds from the
sale of the Securities to be sold by it hereunder for the purposes set forth in
the Prospectus and will file such reports with the Commission with respect to
the sale of the Securities and the application of the proceeds therefrom as may
be required in accordance with Rule 463 of the Rules and Regulations.
(x) The Company will not, without your prior written
consent, for a period of 180 days after the commencement of the public offering
of the Securities by the Underwriters (the "Lock-Up Period") offer for sale,
sell, contract to sell, grant any option for the sale of or otherwise issue or
dispose of any Ordinary Shares or any securities convertible into or
exchangeable for, or any options or rights to purchase or acquire, Common Stock,
except to the Underwriters pursuant to this Agreement and except for the
issuance of options pursuant to the Company's __________ Plan (provided that no
such options shall vest and become exercisable prior to the expiration of the
Lock-Up Period) __________ Employee Stock Purchase Plan and pursuant to the
exercise of stock options or warrants outstanding on the date hereof. The
Company agrees not to accelerate the vesting of any option or warrant or the
lapse of any repurchase right prior to the expiration of the Lock-Up Period.
(xi) The Company either has caused to be delivered to
you or will cause to be delivered to you prior to the effective date of the
Registration Statement a letter (the "Lock-Up Agreement") from each of the
Company's directors, officers and other shareholders and each holder of
securities convertible into or exercisable for shares of the Company's capital
stock stating that such person agrees that, from the date of execution of this
Agreement and continuing to and including the date 180 days after the date of
the Prospectus, he or she will not publicly or privately announce any intention
to, will not allow any affiliate or subsidiary, if applicable, to, and will not
itself, without the prior written consent of U.S. Bancorp Piper Jaffray on
behalf of the Underwriters, (i) offer, pledge, sell, offer to sell, contract to
sell, sell any option or contract to purchase, purchase any option to sell,
grant any option, right or warrant to purchase, or otherwise transfer or dispose
of, directly or indirectly, any Ordinary Shares or any securities convertible
into, or exercisable or exchangeable for, Ordinary Shares, or (ii) enter into
any swap or other agreement that transfers, in whole or in part, any of the
economic consequences of ownership of any Ordinary Shares or any securities
convertible into, or exercisable or exchangeable for, Ordinary Shares (whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Ordinary Shares or such other securities, in cash or otherwise), in
each case, beneficially owned (within the meaning of Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) or otherwise controlled by the
shareholder on the date of the Lock-Up Agreement or thereafter acquired;
provided, however, that, if the shareholder is an individual, the shareholder
may, without the prior written consent of U.S. Bancorp Piper Jaffray on behalf
of the Underwriters, transfer Ordinary Shares or any securities convertible
into, or exercisable or exchangeable for, Ordinary Shares either during his or
her lifetime or, on death, by will or intestacy to members of the shareholder's
immediate family or to trusts exclusively for the benefit of members of the
shareholder's immediate family or in connection with bona fide gifts, provided
that, prior to any such transfer, such transferee executes an agreement,
satisfactory to U.S. Bancorp Piper Jaffray, pursuant to which such transferee
agrees to receive and hold such shares subject to the provisions of the Lock-Up
Agreement and that there shall be no further transfer except in accordance with
the provisions of the Lock-Up Agreement. For purposes of this paragraph,
"immediate family" shall mean the shareholder's spouse, lineal descendant,
father, mother, brother or sister.
(xii) The Company has not taken and will not take,
directly or indirectly, any action designed to or which might reasonably be
expected to cause or result in, or which has constituted, the stabilization or
manipulation of the price of any security of the Company to facilitate the sale
or resale of the Securities, and has not effected any sales of Common Stock
which are required to be disclosed in response to Item 701 of Regulation S-K
under the Act which have not been so disclosed in the Registration Statement.
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<PAGE> 14
(xiii) The Company will not incur any liability for any
finder's or broker's fee or agent's commission in connection with the execution
and delivery of this Agreement or the consummation of the transactions
contemplated hereby.
(xiv) The Company will inform the Florida Department of
Banking and Finance at any time prior to the consummation of the distribution of
the Securities by the Underwriters if it commences engaging in business with the
government of Cuba or with any person or affiliate located in Cuba. Such
information will be provided within 90 days after the commencement thereof or
after a change occurs with respect to previously reported information.
(xv) The Company will use its best efforts to ensure
that it will not become a PFIC to the extent consistent with its other business
objectives. If it believes it is a PFIC, the Company will promptly notify each
U.S. holder of the Ordinary Shares (the "U.S. Holders") in order to enable U.S.
Holders to consider whether to make a QEF election or a mark to market election.
The Company will further comply with the applicable information reporting
requirements for U.S. Holders to make such elections.
(xvi) The Company is familiar with the Investment
Company Act and will conduct its affairs in such a manner to ensure that the
Company was not and will not be an "investment company" or a company
"controlled" by an "investment company" within the meaning of the Investment
Company Act.
(xvii) To the extent that, and for as long as, the laws
of Israel or any other foreign jurisdiction require any permit for approval by,
or exemption of any local authority of the transactions contemplated hereby to
be legally permitted and to remain effective, the Company will obtain and
maintain each such permit, approval or exemption valid and in full force and
effect.
(xviii) In any suit (whether in a court in the United
States or any other jurisdiction) seeking enforcement of this Agreement, or
provisions of this Agreement, (i) no defense (other than a procedural defense)
given or allowed by the laws of any other state or country shall be interposed
in any suit, action or proceeding hereon unless such defense is also given or
allowed by the laws of the State of California or of the United States, (ii) if
the plaintiffs therein seek a judgment in United States dollars, the Company
will not interpose any defense or objection to or otherwise oppose judgment, if
any, being awarded in such currency, and (iii) if the plaintiffs therein seek to
have any judgment (or any aspect thereof) awarded in foreign currency linked,
for the period from entry of such judgment until actual payment thereof in full
has been made, to the changes in the foreign currency-United States dollar
exchange rate, the Company will not interpose any defense or objection to or
otherwise oppose inclusion of such linkage in any such judgment. The Company
agrees that it will not initiate or seek to initiate any action, suit or
proceeding, in Israel or in any other jurisdiction other than the United States,
seeking damages or for the purpose of obtaining any injunction or declaratory
judgment against the enforcement of or a declaratory judgment concerning any
alleged breach by the Company of or other claim by you in respect of, this
Agreement or any of your rights under this Agreement, including without
limitation any action, suit or proceeding challenging the enforceability of or
seeking to invalidate in any respect the submission by the Company hereunder to
the jurisdiction of federal or California State courts or the designation of the
laws of the State of California as the law applicable to this Agreement.
(xix) If any payment of any sum due under this Agreement
from the Company is made to or received by the Underwriters or any controlling
person of any Underwriter in a currency other than freely transferable United
States dollars, whether by judicial judgment or otherwise, the obligations of
the Company under this Agreement shall be discharged only to the extent of the
net amount of freely transferable
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<PAGE> 15
United States dollars that the Underwriters or such controlling persons, as the
case may be, in accordance with normal bank procedures, are able to lawfully
purchase with such amount of such other currency. To the extent that the
Underwriters or such controlling persons are not able to purchase sufficient
United States dollars with such amount of such other currency to discharge the
obligations of the Company to the Underwriters or such controlling persons, as
the case may be, shall not be discharged with respect to such difference, and
any such undischarged amount will be due as a separate obligation and shall not
be affected by payment or of judgment being obtained for any other sums due
under or in respect of this Agreement.
(xx) The Company will use its best efforts to effect and
maintain the quotation of the Ordinary Shares on the Nasdaq National Market.
5. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters hereunder are subject to the accuracy, as of the date
hereof and at each of the First Closing Date and the Second Closing Date (as if
made at such Closing Date), of and compliance with all representations,
warranties and agreements of the Company and the Selling Stockholders contained
herein, to the performance by the Company and the Selling Stockholders of their
respective obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 5:00 p.m., Central time, on the date of this Agreement, or such later
time and date as you, as Representatives of the several Underwriters, shall
approve and all filings required by Rules 424, 430A and 434 of the Rules and
Regulations shall have been timely made; no stop order suspending the
effectiveness of the Registration Statement or any amendment thereof shall have
been issued; no proceedings for the issuance of such an order shall have been
initiated or threatened; and any request of the Commission for additional
information (to be included in the Registration Statement or the Prospectus or
otherwise) shall have been complied with to your satisfaction.
(b) The legality and sufficiency of the sale of the Securities
hereunder and the validity and form of the certificates representing the Stock,
all corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior to
the Closing Date by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
U.S. counsel for the Underwriters, and Yigal Arnon & Co., Israeli counsel for
the Underwriters.
(c) No Underwriter shall have advised the Company that the
Registration Statement or the Prospectus, or any amendment thereof or supplement
thereto (including any term sheet within the meaning of Rule 434 of the Rules
and Regulations), contains an untrue statement of fact which, in your opinion,
is material, or omits to state a fact which, in your opinion, is material and is
required to be stated therein or necessary to make the statements therein not
misleading.
(d) Except as contemplated in the Prospectus, subsequent to the
respective dates as of which information is given in the Registration Statement
and the Prospectus, neither the Company nor any of its subsidiaries shall have
incurred any material liabilities or obligations, direct or contingent, or
entered into any material transactions, or declared or paid any dividends or
made any distribution of any kind with respect to its capital stock; and there
shall not have been any change in the capital stock (other than a change in the
number of outstanding Ordinary Shares due to the issuance of shares upon the
exercise of outstanding options or warrants), or any material change in the
short-term or long-term debt of the Company, or any issuance of options,
warrants, convertible securities or other rights to purchase the capital stock
of the Company or any of its subsidiaries, or any material adverse change or any
development involving a prospective material adverse change (whether or not
arising in the ordinary course of business), in the general affairs, condition
(financial
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<PAGE> 16
or otherwise), business, key personnel, property, prospects, net worth or
results of operations of the Company and its subsidiaries, taken as a whole,
that, in your judgment, makes it impractical or inadvisable to offer or deliver
the Securities on the terms and in the manner contemplated in the Registration
Statement or the Prospectus.
(e) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, the opinion of McCutchen,
Doyle, Brown & Emerson LLP, U.S. counsel for the Company, dated such Closing
Date and addressed to you, covering the matters set forth in Schedule II hereto.
In rendering such opinion such counsel may rely (i) as to matters of law
other than California and federal law, upon the opinion or opinions of local
counsel provided that the extent of such reliance is specified in such opinion
and that such counsel shall state that such opinion or opinions of local counsel
are satisfactory to them and that they believe they and you are justified in
relying thereon and (ii) as to matters of fact, to the extent such counsel deems
reasonable upon certificates of officers of the Company and its subsidiaries
provided that the extent of such reliance is specified in such opinion.
(f) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, the opinion of Naschitz,
Brandes & Co, Israeli counsel for the Company, dated such Closing Date and
addressed to you, covering the matters set forth in Schedule III hereto
In rendering such opinion such counsel may rely (i) as to matters of law
other than Israeli law, upon the opinion or opinions of local counsel provided
that the extent of such reliance is specified in such opinion and that such
counsel shall state that such opinion or opinions of local counsel are
satisfactory to them and that they believe they and you are justified in relying
thereon and (ii) as to matters of fact, to the extent such counsel deems
reasonable upon certificates of officers of the Company and its subsidiaries
provided that the extent of such reliance is specified in such opinion.
(g) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, such opinion or opinions
from Wilson Sonsini Goodrich & Rosati, Professional Corporation, U.S. counsel
for the several Underwriters, and Yigal Arnon & Co., Israeli counsel for the
several Underwriters, dated such Closing Date and addressed to you, with respect
to the validity of the Securities, the Registration Statement, the Prospectus
and other related matters as you reasonably may request, and such counsel shall
have received such papers and information as they request to enable them to pass
upon such matters.
(h) On each Closing Date you, as Representatives of the several
Underwriters, shall have received a letter of Kost, Forer & Gabbay (a member of
Ernst & Young International), dated such Closing Date and addressed to you:
(i) confirming that they are independent public
accountants within the meaning of the Act and are in compliance with the
applicable requirements relating to the qualifications of accountants under Rule
2-01 of Regulation S-X of the Commission,
(ii) stating that, in their opinion, the audited
consolidated financial statements and schedules examined by them and included in
the Registratio Statement and the Prospectus comply in form in all material
respects with the applicable accounting requirements of the Act and the Rules
and Regulations,
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<PAGE> 17
(iii) stating, as of the date of such letter (or, with
respect to matters involving changes or developments since the respective dates
as of which specified financial information is given in the Prospectus, as of a
date not more than five days prior to the date of such letter), the conclusions
and findings of said firm with respect to the financial information and other
matters covered by its letter delivered to you concurrently with the execution
of this Agreement, and the effect of the letter so to be delivered on such
Closing Date shall be to confirm the conclusions and findings set forth in such
prior letter,
(iv) stating that, at a specific date not more than five
business days prior to the date of such letter, there were any changes in the
capital stock or long-term debt of the Company or any decrease in net current
assets or shareholders' equity of the Company in each case compared with amounts
shown on the December 31, 1998 audited consolidated balance sheet included in
the Registration Statement and the Prospectus, or for the period from January 1,
1998 to such specified date there were any decreases, as compared with the
comparable period of the prior fiscal quarter, in total sales of services and
license fees, income before taxes or total or per share amounts of net income of
the Company, except in all instances for changes, decreases or increases set
forth in such letter,
(v) stating that they have carried out certain specified
procedures, not constituting an audit, with respect to certain amounts,
percentaged and financial information that are derived from the general
accounting records of the Company and are included in the Registration Statement
and the Prospectus, including the amounts, percentages and financial information
included under the captions "Summary Consolidated Financial and Operating Data,"
"Capitalization," "Selected Consolidated Financial and Operating Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and have compared such amounts, percentages and financial
information with such records of the Company and with information derived from
such records and have found them to be in agreement, excluding any questions of
legal interpretation.
(i) On each Closing Date, there shall have been furnished to
you, as Representatives of the Underwriters, a certificate, dated such Closing
Date and addressed to you, signed by the chief executive officer and by the
chief financial officer of the Company, to the effect that:
(i) The representations and warranties of the Company in
this Agreement are true and correct, in all material respects, as if made at and
as of such Closing Date, and the Company has complied with all the agreements
and satisfied all the conditions on its part to be performed or satisfied at or
prior to such Closing Date;
(ii) No stop order or other order suspending the
effectiveness of the Registration Statement or any amendment thereof or the
qualification of the Securities for offering or sale has been issued, and no
proceeding for that purpose has been instituted or, to the best of their
knowledge, is contemplated by the Commission or any state or regulatory body;
and
(iii) The signers of said certificate have carefully
examined the Registration Statement and the Prospectus, and any amendments
thereof or supplements thereto (including any term sheet within the meaning of
Rule 434 of the Rules and Regulations), and (A) such documents contain all
statements and information required to be included therein, the Registration
Statement, or any amendment thereof, does not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and the Prospectus,
as amended or supplemented, does not include any untrue statement of material
fact or omit to state a material fact necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading, (B)
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<PAGE> 18
since the effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or supplemented prospectus which
has not been so set forth, (C) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus, neither
the Company nor any of its subsidiaries has incurred any material liabilities or
obligations, direct or contingent, or entered into any material transactions,
not in the ordinary course of business, or declared or paid any dividends or
made any distribution of any kind with respect to its capital stock, and except
as disclosed in the Prospectus, there has not been any change in the capital
stock (other than a change in the number of outstanding shares of Common Stock
due to the issuance of shares upon the exercise of outstanding options or
warrants), or any material change in the short-term or long-term debt, or any
issuance of options, warrants, convertible securities or other rights to
purchase the capital stock, of the Company, or any of its subsidiaries, or any
Material Adverse Effect or any development involving a prospective Material
Adverse Effect, and (D) except as stated in the Registration Statement and the
Prospectus, there is not pending, or, to the knowledge of the Company,
threatened or contemplated, any action, suit or proceeding to which the Company
or any of its subsidiaries is a party before or by any court or governmental
agency, authority or body, or any arbitrator, which might result in any Material
Adverse Effect.
(j) Subsequent to the execution of this Agreement or, if
earlier, the dates as of which information is given in the Registration
Statement (exclusive of any amendment thereto) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change or decrease
specified in the letter or letters referred to in subparagraph (h) of this
Section 5 or (ii) any change, or any development involving a prospective change
(including without limitation a change in management or control of the Company),
in or affecting the business or properties of the Company and its subsidiaries
the effect of which, in any case referred to in clause (i) or (ii) above, is, in
the judgment of the Representatives, so material and adverse as to make it
impractical or inadvisable to proceed with the offering or delivery of the
Securities as contemplated in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto);
(k) At the execution of this Agreement, the Company shall have
furnished to the Representatives a letter from each director, executive officer,
shareholder and holder of securities convertible or exercisable for shares of
capital stock of the Company an executed copy of the Lock-Up Agreement addressed
to the Representatives;
(l) Prior to the commencement of the offering of the Securities,
the Securities shall have been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance; and
(m) The Company shall have furnished to you and counsel for the
Underwriters such additional documents, certificates and evidence as you or they
may have reasonably requested.
All such opinions, certificates, letters and other documents
will be in compliance with the provisions hereof only if they are satisfactory
in form and substance to you and counsel for the Underwriters. The Company will
furnish you with such conformed copies of such opinions, certificates, letters
and other documents as you shall reasonably request.
6. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter against any losses, claims, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the Act or
otherwise (including in settlement of any litigation if such settlement is
effected with the written
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<PAGE> 19
consent of the Company), insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, including the information deemed to be a part of the
Registration Statement at the time of effectiveness pursuant to Rules 430A and
434(d) of the Rules and Regulations, if applicable, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement thereto (including any term sheet
within the meaning of Rule 434 of the Rules and Regulations), or arise out of or
are based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse each Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending against
such loss, claim, damage, liability or action; provided, however, that the
Company shall not be liable in any such case to the extent that any such loss,
claim, damage, liability or action arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or any
such amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof.
In addition to their other obligations under this Section 6(a),
the Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
this Section 6(a), they will reimburse each Underwriter on a monthly basis for
all reasonable legal fees or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Underwriter that received such payment shall promptly return it to
the party or parties that made such payment, together with interest, compounded
daily, determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) announced from time to time
by ____________________ (the "Prime Rate"). Any such interim reimbursement
payments which are not made to an Underwriter within 30 days of a request for
reimbursement shall bear interest at the Prime Rate from the date of such
request. This indemnity agreement shall be in addition to any liabilities which
the Company or the Selling Stockholders may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise (including in settlement of any
litigation, if such settlement is effected with the written consent of such
Underwriter), insofar as such losses, claims, damages or liabilities (or actions
in respect thereof) arise out of or are based upon an untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (including any term sheet within the meaning of Rule 434 of
the Rules and Regulations), or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by you, or by such Underwriter through you,
specifically for use in the preparation thereof, and will reimburse the Company
for any legal or other expenses reasonably incurred by the Company in connection
with investigating or defending against any such loss, claim, damage, liability
or action.
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<PAGE> 20
(c)Promptly after receipt by an indemnified party under
subsection (a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under such subsection, notify the indemnifying party in
writing of the commencement thereof; but the omission so to notify the
indemnifying party shall not relieve the indemnifying party from any liability
that it may have to any indemnified party. In case any such action shall be
brought against any indemnified party, and it shall notify the indemnifying
party of the commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of the indemnifying party's
election so to assume the defense thereof, the indemnifying party shall not be
liable to such indemnified party under such subsection for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation; provided, however,
that if, in the sole judgment of the Representatives, it is advisable for the
Underwriters to be represented as a group by separate counsel, the
Representatives shall have the right to employ a single counsel to represent the
Representatives and all Underwriters who may be subject to liability arising
from any claim in respect of which indemnity may be sought by the Underwriters
under subsection (a) of this Section 6, in which event the reasonable fees and
expenses of such separate counsel shall be borne by the indemnifying party or
parties and reimbursed to the Underwriters as incurred (in accordance with the
provisions of the second paragraph in subsection (a) above). An indemnifying
party shall not be obligated under any settlement agreement relating to any
action under this Section 6 to which it has not agreed in writing.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in subsection (a) or (b) above, (i)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the Underwriters on
the other in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Underwriters on the other shall be deemed to be in the same proportion
as the total net proceeds from the offering (before deducting expenses) received
by the Company bear to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. The relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters and the parties'
relevant intent, knowledge, access to information and opportunity to correct or
prevent such untrue statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (d) were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in the first sentence of this subsection (d). The amount paid by an
indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending against any action or claim
which is the subject of this subsection (d). Notwithstanding the provisions of
this subsection (d), no Underwriter shall be required to contribute any amount
in excess of the amount by which the total price at which the Securities
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages
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<PAGE> 21
that such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in this
subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e)The obligations of the Company under this Section 6 shall be
in addition to any liability which the Company may otherwise have and shall
extend, upon the same terms and conditions, to each person, if any, who controls
any Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 6 shall be in addition to any liability that the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company (including any person who, with
his consent, is named in the Registration Statement as about to become a
director of the Company), to each officer of the Company who has signed the
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
7. Representations and Agreements to Survive Delivery. All
representations, warranties, and agreements of the Company herein or in
certificates delivered pursuant hereto, and the agreements of the several
Underwriters and the Company contained in Section 6 hereof, shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any Underwriter or any controlling person thereof, or the
Company or any of its officers, directors, or controlling persons, and shall
survive delivery of, and payment for, the Securities to and by the Underwriters
hereunder.
8. Substitution of Underwriters.
(a)If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to
be purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased does not aggregate
more than 10% of the total amount of Firm Shares set forth in Schedule II
hereto, the remaining Underwriters shall be obligated to take up and pay for (in
proportion to their respective underwriting obligations hereunder as set forth
in Schedule II hereto except as may otherwise be determined by you) the Firm
Shares that the withdrawing or defaulting Underwriters agreed but failed to
purchase.
(b) If any Underwriter or Underwriters shall fail to take up and
pay for the amount of Firm Shares agreed by such Underwriter or Underwriters to
be purchased hereunder, upon tender of such Firm Shares in accordance with the
terms hereof, and the amount of Firm Shares not purchased aggregates more than
10% of the total amount of Firm Shares set forth in Schedule II hereto, and
arrangements satisfactory to you for the purchase of such Firm Shares by other
persons are not made within 36 hours thereafter, this Agreement shall terminate.
In the event of any such termination the Company shall not be under any
liability to any Underwriter (except to the extent provided in Section
4(a)(viii), Section 4(b)(ii) and Section 6 hereof) nor shall any Underwriter
(other than an Underwriter who shall have failed, otherwise than for some reason
permitted under this Agreement, to purchase the amount of Firm Shares agreed by
such Underwriter to be purchased hereunder) be under any liability to the
Company (except to the extent provided in Section 6 hereof).
If Firm Shares to which a default relates are to be purchased by
the non-defaulting Underwriters or by any other party or parties, the
Representatives or the Company shall have the right to postpone the First
Closing Date for not more than seven business days in order that the necessary
changes in the Registration Statement, Prospectus and any other documents, as
well as any other arrangements, may be
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<PAGE> 22
effected. As used herein, the term "Underwriter" includes any person substituted
for an Underwriter under this Section 8.
9. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at 10:00 a.m., Central
time, on the first full business day following the effective date of the
Registration Statement, or at such earlier time after the effective time of the
Registration Statement as you in your discretion shall first release the
Securities for sale to the public; provided, that if the Registration Statement
is effective at the time this Agreement is executed, this Agreement shall become
effective at such time as you in your discretion shall first release the
Securities for sale to the public. For the purpose of this Section, the
Securities shall be deemed to have been released for sale to the public upon
release by you of the publication of a newspaper advertisement relating thereto
or upon release by you of telexes offering the Securities for sale to securities
dealers, whichever shall first occur. By giving notice as hereinafter specified
before the time this Agreement becomes effective, you, as Representatives of the
several Underwriters, or the Company may prevent this Agreement from becoming
effective without liability of any party to any other party, except that the
provisions of Section 4(a)(viii), Section 4(b)(ii) and Section 6 hereof shall at
all times be effective.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time at or prior to the First Closing Date, and the option
referred to in Section 3(b), if exercised, may be cancelled at any time prior to
the Second Closing Date, if (i) the Company shall have failed, refused or been
unable, at or prior to such Closing Date, to perform any agreement on its part
to be performed hereunder, (ii) any other condition of the Underwriters'
obligations hereunder is not fulfilled, (iii) trading on the New York Stock
Exchange or the American Stock Exchange shall have been wholly suspended, (iv)
minimum or maximum prices for trading shall have been fixed, or maximum ranges
for prices for securities shall have been required, on the New York Stock
Exchange or the American Stock Exchange, by such Exchange or by order of the
Commission or any other governmental authority having jurisdiction, (v) a
banking moratorium shall have been declared by Federal or New York authorities,
or (vi) there has occurred any material adverse change in the financial markets
in the United States or an outbreak of major hostilities (or an escalation
thereof) in which the United States is involved, a declaration of war by
Congress, any other substantial national or international calamity or any other
event or occurrence of a similar character shall have occurred since the
execution of this Agreement that, in your judgment, makes it impractical or
inadvisable to proceed with the completion of the sale of and payment for the
Securities. Any such termination shall be without liability of any party to any
other party except that the provisions of Section 4(a)(viii), Section 4(b)(ii)
and Section 6 hereof shall at all times be effective.
(c) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section, the
Company and an Attorney-in-Fact, on behalf of the Selling Stockholders, shall be
notified promptly by you by telephone or telegram, confirmed by letter. If the
Company elects to prevent this Agreement from becoming effective, you and an
Attorney-in-Fact, on behalf of the Selling Stockholders, shall be notified by
the Company by telephone or telegram, confirmed by letter.
10. Default by the Company. If the Company shall fail at the First
Closing Date to sell and deliver the number of Securities which it is obligated
to sell hereunder, then this Agreement shall terminate without any liability on
the part of any non-defaulting party.
No action taken pursuant to this Section shall relieve the Company so
defaulting from liability, if any, in respect of such default.
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<PAGE> 23
11. Information Furnished by Underwriters. The statements set forth in
the last paragraph of the cover page and under the caption "Underwriting" in any
Preliminary Prospectus and in the Prospectus constitute the written information
furnished by or on behalf of the Underwriters referred to in Section 2 and
Section 6 hereof.
12. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to the Representatives c/o U.S. Bancorp
Piper Jaffray, Piper Jaffray Tower, 222 South Ninth Street, Minneapolis,
Minnesota 55402, except that notices given to an Underwriter pursuant to Section
6 hereof shall be sent to such Underwriter at the address stated in the
Underwriters' Questionnaire furnished by such Underwriter in connection with
this offering; if to the Company, shall be mailed, telegraphed or delivered to
it at ____________________ Attention: _______________; or in each case to such
other address as the person to be notified may have requested in writing. All
notices given by telegram shall be promptly confirmed by letter. Any party to
this Agreement may change such address for notices by sending to the parties to
this Agreement written notice of a new address for such purpose.
13. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of and be binding upon the parties hereto and their respective
successors and assigns and the controlling persons, officers and directors
referred to in Section 6. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any provision
herein contained. The term "successors and assigns" as herein used shall not
include any purchaser, as such purchaser, of any of the Securities from any of
the several Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota.
[Signature Page Follows]
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<PAGE> 24
Please sign and return to the Company the enclosed duplicates of this
letter whereupon this letter will become a binding agreement between the
Company, the Selling Stockholders and the several Underwriters in accordance
with its terms.
Very truly yours,
**[Name of Issuer]
By__________________________________
**[Title]
Confirmed as of the date first above mentioned, on behalf of themselves and the
other several Underwriters named in Schedule II
hereto.
U.S. BANCORP PIPER JAFFRAY
By________________________________
Managing Director
Prudential Securities Incorporated
By________________________________
Managing Director
Warburg Dillon Read LLC,
A subsidiary of UBS AG
By________________________________
Managing Director
<PAGE> 25
SCHEDULE I
<TABLE>
<CAPTION>
Underwriter Number of Firm Shares (1)
- ----------- -------------------------
<S> <C>
-----------
Total.............................................
===========
</TABLE>
(1) The Underwriters may purchase up to an additional __________ Option
Shares, to the extent the option described in Section 3(b) of the
Agreement is exercised, in the proportions and in the manner described
in the Agreement.
<PAGE> 26
SCHEDULE II
MATTERS TO BE COVERED IN THE OPINION OF
MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
U.S. COUNSEL FOR THE COMPANY
(i) CommTouch Software Inc. ("CommTouch Inc.") is a
corporation duly organized, validly existing and in good standing under
the laws of the State of California. Each of the Company and its
subsidiaries are duly qualified to transact business and are in good
standing as a foreign corporation in each state of the United States
where the character of their activities requires such qualification,
except where the failure to be so qualified would not have a Material
Adverse Effect. CommTouch Inc. has all has full corporate power and
authority to own its properties and conduct its business as currently
being carried on and as described in the Registration Statement and the
Prospectus.
(ii) All of the issued and outstanding shares of capital stock
of CommTouch Inc. are duly authorized, validly issued, fully paid and
nonassessable, and are owned of record beneficially by the Company.
There are no outstanding securities of CommTouch Inc. convertible into
or evidencing the right to purchase or subscribe for any shares of
capital stock of CommTouch Inc., there are no outstanding or authorized
options, warrants, rights or any other agreements of any character
obligating CommTouch Inc. to issue and shares of its capital stock or
any securities convertible into or evidencing the right to purchase or
subscribe for any shares of such stock.
(iii) The Registration Statement has become effective under
the Securities Act; any required filing of the Prospectus, and any
supplements thereto, pursuant to Rule 424(b) has been made in the
manner and within the time period required by Rule 424(b), or if the
Rule 434 Term Sheet was used, the required filing has been made in the
manner and within the time period required by Rule 434; and, to the
best of such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing
the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or, to such counsel's
knowledge, are contemplated by the Commission;
(iv) The Registration Statement and the Prospectus (except as
to the financial statements and schedules and other financial data
contained therein, as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the
Securities Act and with the Rules and Regulations;
(v) The registration of the Company's Ordinary Shares under
Section 12(g) of the Exchange Act has become effective;
<PAGE> 27
(vi) The Company is not an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in
the Investment Company Act;
(vii) Neither the issue and sale by the Company of
theSecurities sold by the Company as contemplated by this Agreement nor
the execution of this Agreement by the Company nor the consummation of
any other transactions contemplated by this Agreement will (with or
without the passage of time and/or notice) conflict with, or result in
a breach or violation of or constitute a default under (A) the Articles
of Incorporation or bylaws of CommTouch, Inc., (B) any agreement or
instrument filed as an exhibit to the Registration Statement, or known
to such counsel and made available to such Counsel in English, to which
the Company or any of such subsidiaries is a party or by which it is
bound, (C) any applicable United States federal or state law or
regulation, or (D) so far as is known to such counsel, any order, writ,
injunction or decree, of any jurisdiction, court or governmental
instrumentality applicable to the Company or any of its subsidiaries;
(viii) The information required to be set forth in the
Registration Statement in answer to Item 10 (insofar as it relates to
such counsel) of Form F-1 is to the best of such counsel's knowledge
accurately and adequately set forth therein in all material respects or
no response is required with respect to such Item, and the description
of the Option Plans and the options granted and which may be granted
thereunder set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to said plans and
options to the extent required by the Securities Act and the Rules and
Regulations;
(ix) Such counsel does not know of any franchises, contracts,
leases or other documents which in the opinion of such counsel are of a
character required to be described or referred to in the Registration
Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described, referred to and filed
as required;
(x) To such counsel's knowledge, there is no pending or
threatened action, suit, investigation or proceeding before andy court
or governmental agency, authority or body or any arbitrator involving
the Company or any of its subsidiaries or any of their property or
assets of a character required to be disclosed in the Registration
Statement which is not adequately disclosed in the Prospectus, and the
statements in the Prospectus under the heading "Shares Eligible for
Future Sale" are correct in all material respects;
(xi) No consent, approval, waiver, license, authorization,
order or other action by or filing with any United States federal or
state court or governmental agency, body or authority is required in
connection with the execution and delivery by the Company of the this
Agreement or for the issue and sale of the Securities by the Company or
the consummation of any others transactions contemplated by this
Agreement, except for filings and other actions required pursuant to
the Securities Act and/or the Exchange Act, as amended, and the Rules
and Regulations, required by the NASD and such as may be required
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<PAGE> 28
under state securities or blue sky laws in connection with the purchase
and distribution of the Securities by the Underwriters;
(xii) To such counsel's knowledge, the Company meets the test
to qualify as a "foreign private issuer" set forth in Rule 405, and, as
no other form is authorized or prescribed for use by the Company, the
Company meets all the conditions necessary for the use of Form F-1;
(xiii) The statements made the Prospectus under the caption
"U.S. Federal Income Taxes," to the extent that they constitute matters
of law or legal conclusions, have been reviewed by us and fairly
reflect the status of such provisions purported to be summarized and
are correct in all material aspects;
(xiv) To the best of such counsel's knowledge, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered to any other registration statement filed by the
Company under the Securities Act;
(xv) The description of the Option Plans and options granted
and which may be granted thereunder and the options granted otherwise
than under such plans set forth in the Prospectus accurately and fairly
presents the information with respect to such plans and options;
(xvi) To the best of such counsel's knowledge, neither the
Company nor any of its subsidiaries (A) is in violation of its
Memorandum or Articles of Association, or other governing documents,
(B) is in default in any material respect, and no event has occurred
which, with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement of other agreement or instrument to which it is a party or by
which it is bound or to which any of its properties or assets is
subject or (C) is in violation in any material respect of any law,
ordinance, governmental rule, regulation or court decree to which it or
its property or assets may be subject or has failed to obtain any
material license, permit, certificate, franchise or other governmental
authorization or permit necessary to the ownership of its property or
to the conduct of its business, except in the case of clauses (B) and
(C) for such violations or failures that, individually or in the
aggregate, would not have a Material Adverse Effect;
(xvii) This Agreement has been duly authorized, executed,
delivered by the Company and constitutes a valid, legal and binding
obligation of the Company enforceable in accordance with its terms
(except as rights to indemnity hereunder may be limited by federal
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<PAGE> 29
or state securities laws and except as such enforceability may be
limited by bankruptcy, insolvency, reorganization or similar laws
affecting the rights of creditors generally and subject to general
principles of equity) and all corporate authorizations and consents
necessary for the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been given;
(xviii) To the best of such counsel's knowledge, neither the
Company nor any of its subsidiaries own any real property except as
otherwise described in the Prospectus; and all real property and
buildings held under lease by CommTouch Software, Inc.and the Company's
U.S.subsidiaries are held by them under valid, subsisting and
enforceable leases, with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property
and buildings by the Company and its subsidiaries;
(xix) To the best knowledge of such counsel, there are no
material contracts, indentures, mortgages, loan agreements, notes,
leases or other agreements or instruments or other documents which are
not described or referred to in or filed with the Registration
Statement and the Prospectuses; the statements in the Registration
Statement and the Prospectus, insofar as such statements refer to
material contracts, indentures, mortgages, loan agreements, notes,
leases, plans pertaining to option arrangements, employment agreements
and other agreements, arrangements or instruments to which the Company
is a party, are accurate and adequate in all material respects;
(xx) To the best knowledge of such counsel, there is no
litigation, action, suit or governmental proceeding or investigation
pending, threatened or contemplated to which the Company or any of its
subsidiaries is a party or to which any property of the Company or any
of its subsidiaries is subject or that seeks to restrain, enjoin or
prevent the execution and delivery of this Agreement, or the
consummation of the transactions contemplated thereby, or that
questions the legality or validity of any such transaction or that
seeks to recover damages or obtain other relief in connection with any
such transactions, or which would could be reasonably be expected to
have a Material Adverse Effect, if determined adversely to the Company
or its subsidiaries;
(xxi) The Company has duly and irrevocably appointed
____________, Inc., a corporation organized under the laws of the State
of California, as its agent to receive service of process in any
section against it in any federal or state court sitting in the county
of San Francisco, California arising out of or in connection with the
offering; and
(xxii) The Ordinary Shares have been duly approved for
inclusion on The Nasdaq National Market, subject to the consummation of
the transactions contemplated by this Agreement and to official notice
of issuance.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that nothing has
come to the attention of such counsel that leads
-4-
<PAGE> 30
them to believe that the Registration Statement (except as to the financial
statements and schedules and other financial data contained or incorporated by
reference therein, as to which such counsel need not express any opinion or
belief) at the Effective Date contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or financial
statements and schedules and other financial data contained or incorporated by
reference therein, as to which such counsel need not express any opinion or
belief) as of its date or at the Closing Date (or any later date on which Option
Stock is purchased), contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Counsel rendering the foregoing opinion may also rely as to questions
of law not involving the laws of the United Stated or of the State of
California, upon opinions of local counsel satisfactory in form and scope to
counsel for the Underwriters. Copies of any opinions so relied upon shall be
delivered to the Representatives and to counsel for the Underwriters and the
foregoing opinion shall also state that counsel knows of no reason the
Underwriters are not entitled to relay upon the opinions of such local counsel.
-5-
<PAGE> 31
SCHEDULE III
MATTERS TO BE COVERED IN THE OPINION OF NASCHITZ BRANDES & CO.,
ISRAELI COUNSEL FOR THE COMPANY AND ITS ISRAELI SUBSIDIARIES
(i) Each of the Company and its Israeli subsidiaries (the
"Israeli Subsidiaries") has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Israel, is
duly qualified to do business as a foreign corporation in each
jurisdiction in which its ownership or leasing of property or the
conduct of its business requires such qualification, except where any
failure to so qualify or be in good standing, individually or in the
aggregate, would not have a Material Adverse Effect, and has full
corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement;
(ii) All the issued and outstanding capital stock of each of
the Israeli Subsidiaries of the Company has been duly authorized and
validly issued and is fully paid and nonassessable, and is owned of
record by the Company free and clear of all liens, encumbrances and
security interests. To the best of such counsel's knowledge, no
options, warrants or other rights to purchase, agreements or other
obligations to issue other rights to convert any obligations into
shares of capital stock or ownership interests in such subsidiaries are
outstanding, except as otherwise described in the Prospectus;
(iii) The authorized capital stock of the Company consists of
_________ Ordinary Shares, nominal value NIS 1.0 per share, of which
there are outstanding ____________ shares (including, upon the issuance
and delivery thereof and payment therefor, the Securities); the capital
stock of the Company conforms as to legal matters to the description
thereof contained in the Prospectus under the caption "Description of
Capital Stock" ; proper corporate proceedings have been taken to
validly authorize such authorized capital stock; all of the outstanding
shares of such capital stock (including the Securities) have been duly
and validly issued and are fully paid and nonassessable; and no
preemptive rights of, or rights of refusal in favor of, shareholders
exist with respect to the Securities, or the issue and sale thereof,
pursuant to the Memorandum or Articles of Association and other
governing documents of the Company and, to the knowledge of such
counsel, there are no contractual preemptive rights that have not been
waived, rights of first refusal or rights of co-sale which exist with
respect to the issue and sale of the Securities, except as otherwise
described in the Prospectus;
(iv) The Securities to be issued and old by the Company
hereunder have been duly authorized and, when issued, delivered and
paid for in accordance with the terms of this Agreement, will have been
validly issued and will be fully paid and nonassessable, and the
holders thereof will not be subject to personal liability by reason of
being such holders. Except as otherwise stated in the Registration
Statement and Prospectus, there are no
<PAGE> 32
preemptive rights or other rights to subscribe for or to purchase, or
any restriction upon the voting or transfer of, any Ordinary Shares
pursuant to the Company's charter, by-laws or any agreement or other
instrument known to such counsel to which the Company is a party or by
which the Company is bound.
(v) The information in the Registration Statement in the
Prospectus with respect to interest of named experts and counsel
(insofar as they relate to such counsel) are to the best of such
counsel's knowledge accurately and adequately set forth in all material
respects or there is no such information required with respect to such
counsel;
(vi) The description of the Option Plans and options granted
and which may be granted thereunder and the options granted otherwise
than under such plans set forth in the Prospectus accurately and fairly
presents the information with respect to such plans and options;
(vii) Neither the execution and delivery of this Agreement,
the issue and sale by the Company of the shares of Stock sold by the
Company as contemplated by this Agreement nor the consummation of any
other transactions contemplated by this Agreement will (with or without
notice and/or the passageof time) conflict with, result in a violation
of, constitute a default under or result in a breach of (A) the
Articles of Association or other governing documents of the Company or
any of its Israeli subsidiaries, (B) any agreement, indenture or
instrument known to such counsel to which the Company or any of such
subsidiaries is a party or by which it is bound or to which any of
their properties is subject, (C) any applicable law, rule, regulation,
administrative regulation or decree or (D) so far as is known to such
counsel, any order, writ, injunction or decree, or any jurisdiction,
court or governmental instrumentality;
(viii) To the best of such counsel's knowledge, the Company
and each of its subsidiaries holds, and is operating in compliance in
all material respects with, all franchises, grants, authorizations,
licenses, permits, easements, consents, certificates and orders of any
governmental or self-regulatory body required for the conduct of its
business and all such franchises, grants, authorizations, licenses,
permits, easements, consents, certifications and orders are valid and
in full force and effect.
(ix) To the best of such counsel's knowledge, all holders of
securities of the Company having rights to the registration of Ordinary
Shares, or other securities, because of the filling of the Registration
Statement by the Company have waived such rights or such rights have
expired by reason of lapse of time following notification of the
Company's intent to file the Registration Statement; to the best of
such counsel's knowledge, there are no contracts, agreements or
understandings between the Company and any person granting such person
the right to require the Company to file a registration statement under
the Securities Act with respect to any securities of the Company owned
or to be owned by such person or to require the Company to include such
securities in the securities registered pursuant to the
-2-
<PAGE> 33
Registration Statement except as described in the Registration
Statement; to such counsel's knowledge, neither the filing of the
Registration Statement nor the offering or sale of the Ordinary Shares
as contemplated by this Agreement gives rise to any rights for or
relating to the registration of any Ordinary Shares or other securities
of the Company, except as otherwise described in the Prospectus;
(x) No consent, approval, authorization, exemption or order of
any court or Israeli governmental agency or body or to the best of our
knowledge, any financial institution, is required for the issuance and
sale of the Stock as contemplated by this Agreement and the
consummation of the other transactions contemplated in this Agreement,
except such as have been obtained in connection with the purchase and
distribution of the Securities by the Underwriters or such consents,
approvals, authorizations, exemptions or orders, the lack of which will
not have a Material Adverse Effect; to the best knowledge of such
counsel, no proceedings to rescind or modify such consents, approvals,
authorizations, exemptions or orders have been instituted and are
pending or contemplated by any Israeli authority; a draft prospectus
has been filed with the ISA and an exemption, permitting the
publication of the Prospectus in connection with the offering
contemplated by the Registration Statement without a permit from the
ISA, has been granted;
(xi) The Registration Statement has become effective under the
Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been
issued and no proceeding for that purpose has been instituted or
threatened by the Commission.
(xii) Upon issuance and delivery of the Ordinary Shares being
sold by the Company against payment therefor pursuant to this
Agreement, the Underwriters will in each case acquire good and valid
title to such Ordinary Shares in each case (so far as it depends on the
Company) free and clear of all liens, encumbrances, equities,
preemptive rights and other claims arising through the Company; the
Ordinary Shares conform in all material respects to the description
thereof contained in the Prospectus; no further approval or authority
of the shareholders or the Board of Directors of the Company is
required for the issuance and sale of the Ordinary Shares;
(xiii) To the best of such counsel's knowledge, neither the
Company nor any Israeli Subsidiary (i) is in violation of its
Memorandum or Articles of Association, or other governing documents,
(ii) is in default in any material respect, and no event has occurred
which, with notice or lapse of time or both, would constitute such a
default, in the due performance or observance of any term, covenant or
condition contained in any indenture, mortgage, deed of trust, loan
agreement of other agreement or instrument to which it is a party or by
which it is bound or to which any of its properties or assets is
subject or (iii) is in violation in any material respect of any law,
ordinance, governmental rule, regulation or court decree to which it or
its property or assets may be subject or has failed to obtain any
material license, permit, certificate, franchise or other governmental
authorization or permit necessary
-3-
<PAGE> 34
to the ownership of its property or to the conduct of its business,
except in the case of clauses (ii) and (iii) for such violations or
failures that, individually or in the aggregate, would not have a
Material Adverse Effect;
(xiv) The Company has full power and authority to enter into
this Agreement; this Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid, legal and binding
obligation of the Company enforceable in accordance with its terms
(except as rights to indemnity hereunder may be limited by federal or
state securities laws and except as such enforceability may be limited
by bankruptcy, insolvency, reorganization or similar laws affecting the
rights of creditors generally and subject to general principles of
equity) and all corporate authorizations and consents necessary for the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been given;
(xv) The Company has all requisite corporate power and
authority to issue, sell and deliver the Ordinary Shares being issued
and sold by it in accordance with and upon the terms and conditions set
forth in this Agreement; all corporate action required to be taken by
the Company for the due and proper authorization, issuance, sale and
deposit of the Ordinary Shares, and the offering, sale and delivery of
the Ordinary Shares, has been validly and sufficiently taken; the
filing of the Registration Statement and the Prospectus with the
Commission and to the extent required, with the appropriate Israeli
authorities, has been duly authorized by and on behalf of the Company
and has been duly executed in accordance with Israeli law;
(xvi) To the best of such counsel's knowledge, neither the
Company nor any of the Israeli Subsidiaries own any real property
except as otherwise described in the Prospectus; and all real property
and buildings held under lease by the Company and the Israeli
Subsidiaries are held by them under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and
buildings by the Company and the Israeli Subsidiaries.
(xvii) To the best knowledge of such counsel, there are no
material contracts, indentures, mortgages, loan agreements, notes,
leases or other agreements or instruments or other documents which are
not described or referred to in or filed with the Registration
Statement and the Prospectuses; the statements in the Registration
Statement and the Prospectus, insofar as such statements refer to the
Company's Memorandum or Articles of Association or other governing
documents or to material contracts, indentures, mortgages, loan
agreements, notes, leases, plans pertaining to option arrangements,
employment agreements and other agreements, arrangements or instruments
to which the Company is a party, are accurate and adequate in all
material respects thereunder insofar as such statements refer to
statements of Israeli law or legal conclusions;
-4-
<PAGE> 35
(xviii) To the best knowledge of such counsel, there is no
litigation, action, suit or governmental proceeding or investigation
pending, threatened or contemplated to which the Company or any of the
Israeli Subsidiaries is a party or to which any property of the Company
or any of the Israeli Subsidiaries is subject or that seeks to
restrain, enjoin or prevent the execution and delivery of this
Agreement, or the consummation of the transactions contemplated
thereby, or that questions the legality or validity of any such
transaction or that seeks to recover damages or obtain other relief in
connection with any such transactions, or which would could be
reasonably be expected to have a Material Adverse Effect, if determined
adversely to the Company;
(xix) The certificates for the Stock to be sold by the Company
and delivered on the Closing Date, are in due and proper form under
Israeli law;
(xx) The information required to be set forth in the
Registration Statement in response to Item 10 of Form F-1, insofar as
it relates to such counsel, is, to such counsel's knowledge, accurately
and adequately set forth therein in all material respects, or no
reponse is required with respect to such Item;
(xxi) The statements set forth in the Prospectuses describing
Israeli statutes and regulations and the statements in the Registration
Statement and the Prospectuses with respect to matters of Israeli law,
including the statements describing Israeli law under the captions
[CONFORM THE FOLLOWING LIST] "Risk Factors--Risks Related to Location
in Israel," "Dividend Policy," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Income Taxes; Effective
Corporate Tax Rate," "Management," "Description of Ordinary Shares,"
"Israeli Taxation, Foreign Exchange Regulation and Investment
Programs," "Conditions in Israel" and "Indemnification of Directors and
Officers" are insofar as they describe Israeli statutes, rules, or
legal conclusions and insofar as they describe the contents of certain
provisions of the Company's Memorandum of Association, Articles of
Association or other organizational documents, do not contain any
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
(xxii) The Registration Statement and its filing with the
Commission, and the Prospectus and its filing with the appropriate
Israeli authorities, have been duly authorized by and on behalf of the
Company, and the Registration Statement has been duly executed pursuant
to such authorization, by and on behalf of the Company;
(xxiii) No Israeli stamp or other issuance or transfer taxes
or duties and capital gains, income withholding or other taxes are
payable by or on behalf of the Underwriters to any Israeli taxing
authority in connection with: (a) the issuance of the Stock; (b) the
sale and delivery by the Company of the Stock in the manner
contemplated in the Agreement; or
-5-
<PAGE> 36
(c) the sale and delivery outside of Israel by the Underwriters to the
initial purchasers thereof in the manner contemplated by the Agreement;
(xxiv) To the best knowledge of such counsel, there is no tax
deficiency that has been asserted against the Company or the Israeli
subsidiaries that could, if adversely determined, have a Material
Adverse Effect;
(xxv) To the best of such counsel's knowledge, neither the
Company nor any Israeli Subsidiary is in violation of any condition or
requirement stipulated by (i) the instruments of approval granted to
any of them by any Israeli authority with respect to the "approved
enterprise" status of any of its facilities or (ii) Israeli laws and
regulations relating to such approved enterprise status, which
violation, individually or in the aggregate, could have a Material
Adverse Effect; to the best of such counsel's knowledge, neither the
Company nor the Israeli Subsidiaries has received any notice of
proceeding relating to revocation or modification of the approved
enterprise status of any of its facilities which notice is currently in
effect;
(xxvi) The Company has duly and irrevocably appointed
____________, Inc., a corporation organized under the laws of the State
of California, as its agent to receive service of process in any
section against it in any federal or state court sitting in the county
of San Francisco, California arising out of or in connection with the
offering;
(xxvii) To the best of such counsel's knowledge, neither the
Company nor any Israeli Subsidiary is in violation of any conditions or
requirements stipulated by the instruments of approval granted to any
of them by the Office of the Chief Scientist in the Ministry of
Industry & Trade, with respect to any research and development grants
given to it by such office, which violation, individually or in the
aggregate, could have a Material Adverse Effect;
(xxviii) Under the laws of Israel, the submission by the
Company to the jurisdiction of any federal or state court sitting in
the county of San Francisco and the designation of the law of the state
of California to apply to this Agreement is binding upon the Company
and, if properly brought to the attention of the court or
administrative body in accordance with the laws of Israel, would be
enforceable in any judicial or administrative proceeding in Israel; and
(xxix) Such counsel does not know of any material franchises,
contracts, leases, documents or legal or governmental proceedings,
pending or threatened, which are not described or referred to in or
filed with the Registration Statement of the Prospectus;
(xxx) Subject to certain time limitations, Israeli courts are
empowered to enforce foreign (including United States) final executory
judgments for liquidated amounts in civil matters, obtained after
completion of due process before a court of competent jurisdiction
-6-
<PAGE> 37
which recognizes and enforces similar Israeli judgments, provided such
judgments or the enforcement thereof are not contrary to Israeli law,
public policy, security or the sovereignty of the State of Israel; the
enforcements of judgments is conditioned upon (a) adequate service of
process being effected and the defendant having had reasonably
opportunity to be heard, (b) such judgment having been obtained before
a court of competent jurisdiction according to the rules of private
international law prevailing in Israel (c) such judgment not being in
conflict with any other valid judgment in the same matter between the
same parties, (d) such judgment not having been obtained by fraudulent
means and (e) an action between the same parties in the same matter is
not pending in any Israeli court at the time the lawsuit is instituted
in the foreign court.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also provide a statement to the effect that nothing has
come to the attention of such counsel that leads them to believe that the
Registration Statement (except as to the financial statements and schedules and
other financial data contained or incorporated by reference therein, as to which
such counsel need not express an opinion or belief) at the Effective Date
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus (except as to the financial statements
and scheduled and other financial data contained or incorporated by reference
therein, as to which such counsel need not express any opinion or belief) as of
its date or at the Closing Date (or any later date on which Option Stock is
purchased, contained or contains any untrue statement of a material fact or
omitted or omits to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
Counsel rendering the foregoing opinion may also rely as to questions
of law not involving the laws of the State of Israel, upon opinions of local
counsel satisfactory in form and scope to counsel for the Underwriters. Copies
of any opinions so relied upon shall be delivered to the Representatives and to
Counsel for the Underwriters and the foregoing opinion shall also state that
counsel knows of no reason the Underwriters are not entitled to rely upon the
opinions of such local counsel.
-7-
<PAGE> 1
EXHIBIT 3.1
THE COMPANIES ORDINANCE (NEW VERSION) 5743 - 1983
A PRIVATE COMPANY LIMITED IN SHARES
MEMORANDUM OF ASSOCIATION OF INTOUCH LTD.
1. The Company's Name: Intouch Ltd.
2. The objectives for which the Company was established are:
(a) To initiate, establish, develop, manage and maintain businesses for
research, development, design, manufacture, testing, marketing, selling,
distribution, importing, exporting, lease, maintenance, repair and provision of
services and auxiliary services and engage in any way in software and hardware
systems for electronic communication, to provide consulting and management
services for the above, and carry out any type of commercial activity, in Israel
and abroad with respect to the above.
(b) To initiate, establish, promote, organize, manage and engage in any
way and mode in engineering and economic consulting.
(c) To serve as agents, proxies and representatives of companies and firms
engaged in the Company's fields or other fields, and enter into partnerships,
share assets, joint investments, and establish companies, and act in any other
way or mode of businesses with other bodies and people.
(d) To finance import and export transactions and any other commercial
transactions.
(e) Initiate, consult, promote, advertise, organize and manage any
business and carry out any action with respect to matters mentioned in
sub-paragraphs a-d above and for any other purpose even if not specified
explicitly, in Israel and abroad.
(f) To manage businesses as capital owners, assets holders,
concessionaires, and financiers. Accept upon itself manage and carry out any
capital businesses and investments.
<PAGE> 2
(g) Undertake upon itself to carry out, manage and engage in manufacture,
and all businesses of agency, brokerage, trust, and purchase agencies,
representations, brokerages of any type, and hold, manage, and develop them;
(h) Manage businesses of any type (whether manufacturing, commerce and
industry or others) which to Company's discretion can be managed and is suitable
for management with respect to the above, or which may, directly or indirectly,
increase the value or profits of any Company's assets or rights; provided that
the above are within the Company's objectives.
(i) To receive and purchase all or any part of the businesses, assets,
obligations and rights of any person, or Company or corporation maintaining any
businesses that the Company is allowed to maintain or holding any assets which
suit the objectives of this Company.
(j) In general, buy, rent, lease, replace or acquire in any way property,
which at Company's discretion fits or required the Company's objectives or
businesses, provided that the above are within the objectives of the Company.
(k) To enter into any partnership or share and participate in any
arrangement for profit sharing. Join interests, mutual action, cooperation,
joint ventures, and mutual and other venture with any person or corporation or
Company engaged or dealing or intending to engage and deal in a business, trade
or any transaction, which this Company is supposed to engage with in a way
benefiting the Company directly or indirectly.
(l) Sell the Company's rights, assets or property or any part of them, for
any consideration as the Company sees fit, and specifically for shares,
debentures or sureties of any other Company whose objectives are similar, partly
or wholly, to those of this Company.
(m) Borrow or get funds for securities or mortgages without guarantees and
if this is necessary for securing re-payment of amounts borrowed or attained, in
a way the Company sees fit, by lien, mortgage, guarantee, deed of guarantee,
debenture on all or part of Company's assets, or its rights and property,
including the uncalled capital or by transferring general deed of guarantee or
issuing debentures or stock debentures,
<PAGE> 3
permanent or others, guaranteeing any part of Company's assets (present or
future) and redeem or pay for any such guarantees, and lend moneys to others the
guarantee them
(n) Give options on and/or sell, improve, deal in, develop, manage, rent,
lease, mortgage, release, transfer, dispose of, make accounts and/or deal
otherwise in any part of Company's property.
(o) Carry out any other actions related to said objectives or which might
help in achieving the said objectives or any of them.
(p) Make any arrangement with any governments or other high authorities,
municipal, local or other authorities, as the Company sees fit for any of its
objectives.
(q) Make any contribution for development, research, science, security,
charity, welfare, national settlements and institutions, and assist any of them
towards its objectives.
(r) Act for the implementation of any other objective as will be decided
in the Company's general Meetings at any time by extraordinary resolution duly
adopted.
(s) Carry out any action and use any power and the objectives listed in
the second Addendum of the Companies Ordinance which were not specified in this
memorandum, as if they were integral part of the Company's objectives specified
in it and take all actions related to or stemming from or leading to or
beneficial to the attainment of any objective listed in this memorandum.
The objectives listed in the various paragraphs of this document shall not be
limited in any way by comparison to any other paragraph or paragraphs, or by
Company's name and it will be allowed to carry them out effectively and fully
and they will be interpreted in the broadest way as if in these paragraphs
objectives of other companies were defined in any case of doubt matters shall be
interpreted in a way broadening as far as possible the Company's objectives.
3. Members' Liability The members' liability is limited.
4. The Share Capital of the Company The Share Capital of the Company will be
as follows:
(a) NIS 16,000 (sixteen thousands New Shekels) divided to 16,000 ordinary
NIS 1 nominal value shares.
(b) The Company may increase the share capital by issuing new shares and
issue shares of different types, including shares with different, preferred,
deferred or additional rights, in the way stated in the Company's by-laws of
association.
(c) The rights related from time to time to any type of shares, in the
original capital or increased capital of the Company, may be changed only as
stated in the Company's by-laws of association.
We, the undersigned, would like to incorporate as per this memorandum of
association and take the number of shares listed by our names below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Signatories I.D. # Address Description Number of Signature
shares taken
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nahum Sharfman 556711 22 Hameyasdim Engineer 900 Shares of (signed)
St., Carcour NIS 1
37000
- ------------------------------------------------------------------------------------------------------------
Gideon Mantel 5600618-2 5 Hashloshim Economist 100 Shares of (signed)
Vehamesh St., NIS 1
Ramat Gan 52224
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Total shares taken: 1000 ordinary shares, NIS 1 each
Today, February 5, 1991 Witness to above signatures: (Signed)
Reuven Heller
<PAGE> 4
THE COMPANIES ORDINANCE
Company's Name: Intouch Ltd.
Company No.: 51-154534-5
Submitted for registration by: M. Porat & Co., Advocates and Notaries
10 Karlibach St., Tel-Aviv 67132
Tel. 03-5610111, Fax 03-5610934
NOTICE OF SPECIAL RESOLUTION
At an extraordinary Meeting of the Company duly convened and held on August 13,
1995, the following resolution was adopted as a special resolution:
SPECIAL RESOLUTION
To approve unanimously the change of the Company's name to COMMTOUCH SOFTWARE
LTD., or a similar name to be approved by the Companies Registrar.
/s/ Nahum Sharfman
- ---------------------------
<PAGE> 1
EXHIBIT 3.2
THE COMPANIES ORDINANCE
A COMPANY LIMITED BY SHARES
ARTICLES OF ASSOCIATION
OF
COMMTOUCH SOFTWARE LTD.
(the "Company")
---------------------------
PRELIMINARY
1. Table "A" Excluded
The regulations contained in the second schedule to the Companies
Ordinance (New Version), 5743-1983 (the "Companies Ordinance") shall not apply
to the Company.
2. Public Company
This Company is a Public Company, as such term is defined in the
Companies Ordinance.
SHARE CAPITAL
3. Share Capital
(a) The authorized share capital of the Company is NIS 2,000,000
divided into forty million (40,000,000) Ordinary Shares, nominal value NIS 0.05
per share.
(b) The Ordinary Shares all rank pari passu.
Page 1 of 29
<PAGE> 2
4. Increase of Authorized Share Capital
(a) The Company may, from time to time, by Special Resolution,
whether or not all the shares then authorized have been issued, and whether or
not all the shares previously issued have been called up for payment, increase
its authorized share capital. Any such increase shall be in such amount and
shall be divided into shares of such nominal amounts, and such shares shall
confer such rights and preferences, and shall be subject to such restrictions,
as such Special Resolution shall provide.
(b) Except to the extent otherwise provided in such Special
Resolution, any new shares included in the authorized share capital so increased
shall be subject to all the provisions of these Articles which are applicable to
shares of such class included in the existing share capital without regard to
class (and, if such new shares are of the same class as a class of shares
included in the existing share capital, to all of the provisions which are
applicable to shares of such class included in the existing share capital).
5. Special Rights; Modification of Rights
(a) Subject to the provisions of the Memorandum of Association of
the Company, and without prejudice to any special rights previously conferred
upon the holders of existing shares in the Company, the Company may, from time
to time, by Special Resolution, provide for shares with such preferred or
deferred rights or rights of redemption, or other special rights and/or such
restrictions, whether in regard to dividends, voting, repayment of share capital
or otherwise, as may be stipulated in such Special Resolution.
(b) (i) If at any time the share capital is divided into
different classes of shares, the rights attached to any class, unless otherwise
provided by these Articles, may be modified or abrogated by the Company, by
Special Resolution, subject to the consent in writing of the holders of
seventy-five percent (75%) of the issued shares of such class.
(ii) The provisions of these Articles relating to General
Meetings shall, mutatis mutandis, apply to any separate General Meeting of the
holders of the shares of a particular class; provided, however, that the
requisite quorum at any such separate General Meeting shall be two or more
members present in person or proxy and holding not less than seventy-five
percent (75%) of the issued shares of such class.
(iii) Unless otherwise provided by these Articles, the
enlargement of an authorized class of shares, or the issuance of additional
shares thereof out of the authorized and unissued share capital, shall not be
deemed, for purposes of this Article 5(b), to modify or abrogate the rights
attached to previously issued shares of such class or of any other class.
<PAGE> 3
6. Consolidation, Subdivision, Cancellation and Reduction of Share Capital
(a) The Company may, from time to time, by Special Resolution
(subject, however, to the provisions of Article 5(b) hereof and to applicable
law):
(i) consolidate and divide all or any part of its issued
or unissued authorized share capital into shares of a per share nominal value
which is larger than the per share nominal value of its existing shares;
(ii) subdivide its shares (issued or unissued) or any of
them, into shares of smaller nominal value than is fixed by the Memorandum of
Association (subject, however, to the provisions of Section 144(4) of the
Companies Ordinance);
(iii) cancel any shares which, at the date of the adoption
of such Special Resolution, have not been taken or agreed to be taken by any
person, and diminish the amount of its share capital by the amount of the shares
so cancelled; or
(iv) reduce its share capital in any manner, subject to
any consent required by law.
(b) With respect to any consolidation of issued shares of a
larger nominal value per share, and with respect to any other action which may
result in fractional shares, the Board of Directors may settle any difficulty
which may arise with regard thereto, as it deems fit, and in connection with any
such consolidation or other action which would result in fractional shares may,
without limiting its power:
(i) determine, as to the holder of the shares so
consolidated, which issued shares shall be consolidated into a share of a larger
nominal value per share;
(ii) allot, in contemplation of or subsequent to such
consolidation or other action, shares or fractional shares sufficient to
preclude or remove fractional share holdings;
(iii) redeem, in the case of redeemable preference shares
and subject to applicable law, such fractional shares sufficient to preclude or
remove fractional share holdings;
(iv) cause the transfer of fractional shares by certain
shareholders of the Company to other shareholders so as to most expediently
preclude or remove any fractional shareholdings, and cause the transferees of
such fractional shares to pay the transferors thereof the fair value thereof,
and the Board of Directors is hereby authorized to act in connection with such
transfer as agent for the transferors and transferees of any
<PAGE> 4
such fractional shares, with full power of substitution, for the purposes of
implementing the provisions of this sub-Article 6(b)(iv).
SHARES
7. Issuance of Share Certificates; Replacement of Lost Certificates
(a) Share certificates shall be issued under the corporate seal
of the Company and shall bear the signature of one Director, or of any other
person or persons authorized by the Board of Directors.
(b) Each member shall be entitled to one numbered certificate for
all the shares of any class registered in his name, and if the Board of
Directors so approves, to several certificates, each for one or more of such
shares. Each certificate shall specify the serial numbers of the shares
represented thereby and may also specify the amount paid up thereon.
(c) A share certificate registered in the names of two or more
persons shall be delivered to the person first named in the Register of Members
in respect of such co-ownership.
(d) A share certificate which has been defaced, lost or destroyed
may be replaced, and the Company shall issue a new certificate to replace such
defaced, lost or destroyed certificate, upon payment of such fee, and upon the
furnishing of such evidence of ownership and such indemnity, as the Board of
Directors in its discretion deems fit.
8. Registered Holder
Except as otherwise provided in these Articles, the Company shall
be entitled to treat the registered holder of each share as the absolute owner
thereof, and accordingly shall not, except as ordered by a court of competent
jurisdiction or as required by statute, be obligated to recognize any equitable
or other claim to, or interest in, such share on the part of any other person.
9. Allotment of Shares
The unissued shares from time to time shall be under the control
of the Board of Directors. The Board of Directors shall have the power to allot,
issue or otherwise dispose of shares to such persons, on such terms and
conditions (including terms relating to calls as set forth in Article 11(f)
hereof), and either at par or at a premium, or, subject to the provisions of the
Companies Ordinance, at a discount and/or
<PAGE> 5
with payment of commission, and at such times, as the Board of Directors deems
fit. The Board of Directors shall also have the power to give to any person the
option to acquire from the Company any shares, either at par or at a premium,
or, subject as aforesaid, at a discount and/or with payment of commission,
during such time and for such consideration as the Board of Directors deems fit.
10. Payment in Installments
If, pursuant to the terms of the allotment or issue of any share,
all or any portion of the price thereof shall be payable in installments, every
such installment shall be paid to the Company on the due date thereof by the
then registered holder(s) of the share or the person(s) then entitled thereto.
11. Calls on Shares
(a) The Board of Directors may, from time to time, as it in its
discretion deems fit, make calls for payment upon members in respect of any sum
which has not been paid up in respect of shares held by such members and which
is not, pursuant to the terms of allotment or issue of such shares or otherwise,
payable at a fixed time, and each member shall pay the amount of every call so
made upon him (and of each installment thereof if the same is payable in
installments) to the person(s) and at the time(s) and place(s) designated by the
Board of Directors, as any such time(s) may be thereafter extended and/or such
person(s) or place(s) changed. Unless otherwise stipulated in the resolution of
the Board of Directors (and in the notice hereafter referred to), each payment
in response to a call shall be deemed to constitute a pro rata payment on
account of all the shares in respect of which such call was made.
(b) Notice of any call for payment by a member shall be given in
writing to such member not less than fourteen (14) days prior to the time of
payment fixed in such notice, and shall specify the time and place of payment,
and the person to whom such payment is to be made. Prior to the time for any
such payment fixed in a notice of a call given to a member, the Board of
Directors may in its absolute discretion, by notice in writing to such member,
revoke such call in whole or in part, or stipulate different place of payment or
person to whom payment is to be made. In the event of a call payable in
installments, only one notice thereof need be given.
(c) If, pursuant to the terms of allotment or issue of a share or
otherwise, an amount is made payable at a fixed time (whether on account of such
share or by way of premium), such amount shall be payable at such time as if it
were payable by virtue of a call made by the Board of Directors and for which
notice was given in accordance with paragraphs (a) and (b) of this Article 11,
and the provisions of these Articles with regard to calls (and the non-payment
thereof) shall be applicable to such amount (and the non-payment thereof).
<PAGE> 6
(d) Joint holders of a share shall be jointly and severally
liable to pay all calls for payment in respect of such share and all interest
payable thereon.
(e) Any amount called for payment which is not paid when due
shall bear interest from the date fixed for payment until actual payment
thereof, at such rate (not exceeding the then prevailing debitory rate charged
by leading commercial banks in Israel) and payable at such time(s) as the Board
of Directors may prescribe.
(f) Upon the allotment of shares, the Board of Directors may
provide for differences among the allottees of such shares as to the amounts and
times for payment of calls for payment in respect of such shares.
12. Prepayment
With the approval of the Board of Directors, any member may pay
to the Company any amount not yet payable in respect of his shares, and the
Board of Directors may approve the payment by the Company of interest on any
such amount until the same would be payable if it had not been paid in advance,
at such rate and time(s) as may be approved by the Board of Directors. The Board
of Directors may at any time cause the Company to repay all or any part of the
money so advanced, without premium or penalty. Nothing in this Article 12 shall
derogate from the right of the Board of Directors to make any call for payment
before or after receipt by the Company of any such advance.
13. Forfeiture and Surrender
(a) If any member fails to pay an amount payable by virtue of a
call, or interest thereon as provided for in these Articles, on or before the
day fixed for payment of the same, the Board of Directors may, at any time after
the day fixed for such payment, so long as such amount (or any portion thereof)
or interest thereon (or any portion thereof) remains unpaid, forfeit all or any
of the shares in respect of which such payment was called. All expenses incurred
by the Company in attempting to collect any such amount or interest thereon,
including without limitation attorneys' fees and costs of legal proceedings,
shall be added to, and shall for all purposes (including the accrual of interest
thereon) constitute a part of, the amount payable to the Company in respect of
such call.
(b) Upon the adoption of a resolution as to the forfeiture of a
member's share, the Board of Directors shall cause notice thereof to be given to
such member, which notice shall state that, in the event of the failure to pay
the entire amount so payable by a date specified in the notice (which date shall
be not less than fourteen (14) days after the date such notice is given and
which may be extended by the Board of Directors), such shares shall be ipso
facto forfeited; provided, however, that prior to such date, the Board of
Directors may nullify such resolution of forfeiture, but no such nullification
shall stop
<PAGE> 7
the Board of Directors from adopting a further resolution of forfeiture in
respect of the non-payment of the same amount.
(c) Without derogating from Articles 54 and 59 hereof, whenever
shares are forfeited as herein provided, all dividends, if any, previously
declared in respect thereof and not actually paid shall be deemed to have been
forfeited at the same time.
(d) The Company, by resolution of the Board of Directors, may
accept the voluntary surrender of any share.
(e) Any share forfeited or surrendered as provided herein shall
become the property of the Company, and the same, subject to the provisions of
these Articles, may be sold, re-allotted or otherwise disposed of as the Board
of Directors deems fit.
(f) Any member whose shares have been forfeited or surrendered
shall cease to be a member in respect of the forfeited or surrendered shares,
but shall nevertheless be liable to pay, and shall immediately pay to the
Company, all calls, interest and expenses owing on or in respect of such shares
at the time of forfeiture or surrender, together with interest thereon from the
time of forfeiture or surrender until actual payment, at the rate prescribed in
Article 11(e) above. The Board of Directors in its discretion may, but shall not
be obligated to, enforce the payment of such moneys or any part thereof. In the
event of such forfeiture or surrender, the Company, by resolution of the Board
of Directors, may accelerate the date(s) of payment of any or all amounts then
owing to the Company by the member in question (but not yet due) in respect of
all shares owned by such member, solely or jointly with another.
(g) The Board of Directors may at any time, before any share so
forfeited or surrendered shall have been sold, re-allotted or otherwise disposed
of, nullify the forfeiture or surrender on such conditions as it deems fit, but
no such nullification shall stop the Board of Directors from re-exercising its
powers of forfeiture pursuant to this Article 13.
14. Lien
(a) Except to the extent the same may be waived or subordinated
in writing, the Company shall have a first and paramount lien upon all the
shares registered in the name of each member (without regard to any equitable or
other claim or interest in such shares on the part of any other person), and
upon the proceeds of the sale thereof, for his debts, liabilities and
obligations to the Company arising from any amount payable by such member in
respect of any unpaid or partly paid share, whether or not such debt, liability
or obligation has matured. Such lien shall extend to all dividends from time to
time declared or paid in respect of such share. Unless otherwise provided, the
registration by the Company of a transfer of shares shall be deemed to be a
waiver on the part of the Company of the lien (if any) existing on such shares
immediately prior to such transfer.
<PAGE> 8
(b) The Board of Directors may cause the Company to sell a share
subject to such a lien when the debt, liability or obligation giving rise to
such lien has matured, in such manner as the Board of Directors deems fit, but
no such sale shall be made unless such debt, liability or obligation has not
been satisfied within fourteen (14) days after written notice of the intention
to sell shall have been served on such member, his executors or administrators.
(c) The net proceeds of any such sale, after payment of the costs
thereof, shall be applied in or toward satisfaction of the debts, liabilities or
obligations of such member in respect of such share (whether or not the same
have matured), and the residue (if any) shall be paid to the member, his
executors, administrators or assigns.
15. Sale after Forfeiture or Surrender or in Enforcement of Lien
Upon any sale of a share after forfeiture or surrender or for
enforcing a lien, the Board of Directors may appoint any person to execute an
instrument of transfer of the share so sold and cause the purchaser's name to be
entered in the Register of Members in respect of such share. The purchaser shall
be registered as the shareholder and shall not be bound to see to the regularity
of the sale proceedings, or to the application of the proceeds of such sale, and
after his name has been entered in the Register of Members in respect of such
share the validity of the sale shall not be impeached by any person and the
remedy of any person aggrieved by the sale shall be in damages only and against
the Company exclusively.
16. Redeemable Shares
The Company may, subject to applicable law, issue redeemable
shares and redeem the same.
17. Conversion of Shares into Stock
(a) The Board of Directors may, with the sanction of the members
previously given by Special Resolution, convert any paid-up shares into stock,
and may with like sanction reconvert any stock into paid-up shares of any
denomination.
(b) The holders of stock may transfer the same, or any part
thereof, in the same manner and subject to the same regulations as the shares
from which the stock arose might have been transferred prior to conversion, or
as near thereto as circumstances admit; provided, however, that the Board of
Directors may from time to time fix the minimum amount of stock so transferable,
and restrict or forbid the transfer of fractions of such minimum, but the
minimum shall not exceed the nominal value of each of the shares from
<PAGE> 9
which such stock arose.
(c) The holders of stock shall, in accordance with the amount of
stock held by them, have the same rights and privileges as regards the minimum
amount of stock so transferable, and restrict or forbid the transfer of
fractions of such minimum, but the minimum shall not exceed the nominal value of
each of the shares from which such stock arose.
(d) The holders of stock shall, in accordance with the amount of
stock held by them, have the same rights and privileges as regards dividends,
voting at meetings of the Company and other matters as if they held the shares
from which such stock arose, but no such right or privilege except participation
in the dividends and profits of the Company shall be conferred by any such
aliquot part of such stock as would not, if existing in shares, have conferred
that right or privilege.
(e) Such of the Articles of the Company as are applicable to
paid-up shares shall apply to stock, and the words "share" and "shareholder" (or
"member") therein shall include "stock" and "stockholder."
TRANSFER OF SHARES
18. Registration of Transfer
(a) No transfer of shares shall be registered unless a proper
writing or instrument of transfer (in any customary form or any other form
satisfactory to the Board of Directors) has been submitted to the Company (or
its transfer agent), together with the share certificate(s) and such other
evidence of title as the Board of Directors may reasonably require. Until the
transferee has been registered in the Register of Members in respect of the
shares so transferred, the Company may continue to regard the transferor as the
owner thereof.
(b) The Board of Directors may, in its discretion to the extent
it deems necessary, close the Register of Members for registrations of transfers
of shares during any year for a period determined by the Board of Directors,
provided that the Register of Members shall be closed for no longer than
fourteen (14) days prior to any general meeting of the shareholders of the
Company and for no more than thirty (30) days in any calendar year, and no
registrations of transfers of shares shall be made by the Company during any
such period during which the Register of Members is so closed.
<PAGE> 10
19. Record Date for Notices of General Meetings
Notwithstanding any other contrary provision of these Articles,
the Board of Directors may fix a date, not exceeding ninety (90) days prior to
the date of any General Meeting, as the date as of which shareholders entitled
to notice of and to vote at such meetings shall be determined, and all persons
who were holders of record of voting shares on such date and no others shall be
entitled to notice of and to vote at such meeting.
<PAGE> 11
TRANSMISSION OF SHARES
20. Decedent's Shares
(a) In case of a share registered in the names of two or more
holders, the Company may recognize the survivor(s) as the sole owner(s) thereof
unless and until the provisions of Article 21(b) have been effectively invoked.
(b) Any person becoming entitled to a share in consequence of the
death of any person, upon producing evidence of the grant of probate or letters
of administration or declaration of succession (or such other evidence as the
Board of Directors may reasonably deem sufficient), shall be registered as a
member in respect of such share, or may, subject to the regulations as to
transfer contained in these Articles, transfer such share.
21. Receivers and Liquidators
(a) The Company may recognize any receiver, liquidator or similar
official appointed to wind-up, dissolve or otherwise liquidate a corporate
member, and a trustee, manager, receiver, liquidator or similar official
appointed in bankruptcy or in connection with the reorganization of, or similar
proceeding with respect to, a member or its properties, as being entitled to the
shares registered in the name of such member.
(b) Such receiver, liquidator or similar official appointed to
wind-up, dissolve or otherwise liquidate a corporate member and such trustee,
manager, receiver, liquidator, or similar official appointed in bankruptcy or in
connection with the reorganization of, or similar proceedings with respect to, a
member or its properties, upon producing such evidence as the Board of Directors
may deem sufficient to his authority to act in such capacity or under this
Article, shall with the consent of the Board of Directors (which the Board of
Directors may grant or refuse in its absolute discretion), be registered as a
member in respect of such shares, or may, subject to the regulations as to
transfer contained in these Articles, transfer such shares.
22. Business
(a) The Board of Directors shall be permitted to engage the
Company in any one or more of the businesses in which the Company is permitted
to engage under its Memorandum of Association or Articles of Association or
under the law, or to discontinue such engagement, at any time that they shall
deem appropriate.
(b) The registered office of the Company shall be at such place
as the
<PAGE> 12
Board of Directors shall from time to time select.
GENERAL MEETINGS
23. Annual General Meeting
An Annual General Meeting shall be held once in every calendar
year at such time (within a period of not more than fifteen (15) months after
the last preceding Annual General Meeting) and at such place, either within or
out of the State of Israel, as may be determined by the Board of Directors.
24. Extraordinary General Meetings
All General Meetings other than Annual General Meetings shall be
called "Extraordinary General Meetings." The Board of Directors may, whenever it
thinks fit, convene an Extraordinary General Meeting, at such time and place,
within or out of the State of Israel, as may be determined by the Board of
Directors, and shall be obliged to do so upon a request in writing in accordance
with Section 109 of the Companies Ordinance.
25. Notice of General Meetings; Omission to Give Notice
(a) Not less than seven (7) days' prior notice shall be given of
every General Meeting; provided, however, that a Special Resolution shall not be
passed unless at least twenty-one (21) days' prior notice shall have been given
of the meeting at which it is proposed to pass the same. Each such notice shall
specify the place and the day and hour of the meeting and the general nature of
each item to be acted upon, such notice to be given to all members who would be
entitled to attend and vote at such meeting. Anything herein to the contrary
notwithstanding, with the consent of all members entitled to vote thereon a
resolution may be proposed and passed at such meeting although a lesser notice
than prescribed above has been given.
(b) The accidental omission to give notice of a meeting to any
member, or the non-receipt of notice sent to such member, shall not invalidate
the proceedings at such meeting.
PROCEEDINGS AT GENERAL MEETINGS
26. Quorum
(a) No business shall be transacted at a General Meeting, or at
any
<PAGE> 13
adjournment thereof, unless the quorum required under these Articles for such
General Meeting or such adjourned meeting, as the case may be, is present when
the meeting proceeds to business.
(b) In the absence of contrary provisions in these Articles, two
or more members (not in default in payment of any sum referred to in Article
32(a) hereof), present in person or by proxy and holding shares conferring in
the aggregate more than one third of the voting power of the Company, shall
constitute a quorum of General Meetings.
(c) If within half an hour from the time appointed for the
meeting a quorum is not present, the meeting, if convened upon request under
Section 109 of the Companies Ordinance, shall be dissolved, but in any other
case it shall be adjourned to the same day in the next week, at the same time
and place, or to such day and at such time and place as the Chairman may
determine with the consent of the holders of a majority of the shares present in
person or by proxy and voting on the question of adjournment. No business shall
be transacted at any adjourned meeting except business which might lawfully have
been transacted at the meeting as originally called. At such adjourned meeting
(other than an adjourned separate meeting of a particular class of shares as
referred to in Article 5 of these Articles), any two (2) members (not in default
as aforesaid) present in person or by proxy shall constitute a quorum.
27. Chairman
The Chairman, if any, of the Board of Directors shall preside as
Chairman at every General Meeting of the Company. If at any meeting the Chairman
is not present within fifteen (15) minutes after the time fixed for holding the
meeting or is unwilling to act as Chairman, the Co-Chairman shall preside at the
meeting. If at any such meeting both the Chairman and the Co-Chairman are not
present or are unwilling to act as Chairman, members present shall choose
someone of their number to be Chairman. The office of Chairman shall not, by
itself, entitle the holder thereof to vote at any General Meeting nor shall it
entitle such holder to a second or casting vote (without derogating, however
from the rights of such Chairman to vote as a shareholder or proxy of a
shareholder if, in fact, he is also a shareholder or such proxy).
28. Adoption of Resolutions at General Meetings
(a) (i) An Ordinary Resolution shall be deemed adopted if
approved by the holders of a majority of the voting power represented at the
meeting in person or by proxy and voting thereon.
(ii) A Special or Extraordinary Resolution shall be deemed
adopted if approved by the holders of not less then seventy-five per cent (75%)
of the voting power represented at the meeting in person or by proxy and voting
thereon.
<PAGE> 14
(b) Every question submitted to a General Meeting shall be
decided by a show of hands, but if a written ballot is demanded by any member
present in person or by proxy and entitled to vote at the meeting, the same
shall be decided by such ballot. A written ballot may be demanded before the
proposed resolution is voted upon or immediately after the declaration by the
Chairman of the results of the vote by a show of hands. If a vote by written
ballot is taken after such declaration, the results of the vote by a show of
hands shall be of no effect, and the proposed resolution shall be decided by
such written ballot. The demand for a written ballot may be withdrawn at any
time before the same is conducted, in which event another member may then demand
such written ballot. The demand for a written ballot shall not prevent the
continuance of the meeting for the transaction of business other than the
question on which the written ballot has been demanded.
(c) A declaration by the Chairman of the meeting that a
resolution has been carried unanimously, or carried by a particular majority, or
lost, and an entry to that effect in the minute book of the Company, shall be
conclusive evidence of the fact without proof of the number or proportion of the
votes recorded in favor of or against such resolution.
29. Resolutions in Writing
A resolution in writing signed by all members of the Company then
entitled to attend and vote at General Meetings or to which all such members
have given their written consent (by letter, telegram, telex, facsimile or
otherwise) shall be deemed to have been unanimously adopted by a General Meeting
duly convened and held.
30. Power to Adjourn
The Chairman of a General Meeting at which a quorum is present
may, with the consent of the holders of a majority of the voting power
represented in person or by proxy and voting on the question of adjournment (and
shall if so directed by the meeting), adjourn the meeting from time to time and
from place to place, but no business shall be transacted at any adjourned
meeting except business which might lawfully have been transacted at the meeting
as originally called.
31. Voting Power
Subject to the provisions of Articles 3(b) and 32(a) and subject
to any other provision conferring special rights as to voting, or restricting
the right to vote, every member shall have one vote for each share held by him
of record, on every resolution, without regard to whether the vote thereon is
conducted by a show of hands, by written
<PAGE> 15
ballot or by any other means.
32. Voting Rights
(a) No member shall be entitled to vote at any General Meeting
(or be counted as a part of the quorum) unless all calls then payable by him in
respect of his shares in the Company have been paid, but this Article 32(a)
shall not apply to separate General Meetings of the holders of a particular
class of shares pursuant to Article 5(b).
(b) A company or other corporate body being a member of the
Company may duly authorize any person to be its representative at any meeting of
the Company or to execute or deliver a proxy on its behalf. Any person so
authorized shall be entitled to exercise on behalf of such member all the power
which the latter could have exercised if it were an individual shareholder. Upon
the request of the Chairman of the meeting, written evidence of such
authorization (in form acceptable to the Chairman) shall be delivered to him.
(c) Any member entitled to vote may vote either in person or by
proxy (who need not be a member of the Company) or, if the member is a company
or other corporate body, by a representative authorized pursuant to Article
32(b).
(d) If two or more persons are registered as joint holders of any
shares, the vote of the senior who tenders a vote, in person or by proxy, shall
be accepted to the exclusion of the vote(s) of the other joint holder(s). For
the purpose of this Article 32(d), seniority shall be determined by the order of
registration of the joint holders in the Register of Members.
PROXIES
33. Instrument of Appointment
(a) An instrument appointing a proxy shall be in writing and
shall be substantially in the following form:
"I_______________________ of ______________________________________
(Name of Shareholder) (Address of Shareholder)
being a member of CommTouch Software Ltd. hereby appoint
_______________________ of _____________________________
(Name of Proxy) (Address of Proxy)
<PAGE> 16
as my Proxy to vote for me and on my behalf at the General Meeting of
the Company to be held on the _________ day of ___________, ________ and
at any adjournment(s) thereof.
Signed this _____________ day of _______________, ____________.
______________________________
(Signature of Appointor)"
or in any usual or common form or in such other form as may be approved by the
Board of Directors. Such proxy shall be duly signed by the appointor or such
person's duly authorized attorney or, if such appointor is a company or other
corporate body, under its common seal or stamp or the hand of its duly
authorized agent(s) or attorney(s).
(b) The instrument appointing a proxy (and the power of attorney
or other authority, if any, under which such instrument has been signed) shall
either be delivered to the Company (at its registered office, at its principal
place of business, at the offices of its registrar or transfer agent, or at such
place as the Board of Directors may specify) not less than 24 hours before the
time fixed for the meeting at which the person named in the instrument proposes
to vote, or presented to the Chairman at such meeting. An instrument appointing
a proxy which is not limited in time shall expire 12 months after the date of
its execution. If the appointment shall be for a limited period, whether in
excess of 12 months or not, the instrument shall be valid for the period stated
therein.
34. Effect of Death of Appointor or Transfer of Share and/or Revocation of
Appointment
(a) A vote cast in accordance with an instrument appointing a
proxy shall be valid notwithstanding the prior death or bankruptcy of the
appointing member (or of his attorney-in-fact, if any, who signed such
instrument), or the transfer of the share in respect of which the vote is cast,
unless written notice of such matters shall have been received by the Company or
by the Chairman of such meeting prior to such vote being cast.
(b) An instrument appointing a proxy shall be deemed revoked (i)
upon receipt by the Company or the Chairman, subsequent to receipt by the
Company of such instrument, of written notice signed by the person signing such
instrument or by the member appointing such proxy cancelling the appointment
thereunder (or the authority pursuant to which such instrument was signed) or of
an instrument appointing a different proxy (and such other documents, if any,
required under Article 33(b) for such new appointment), provided such notice of
cancellation or instrument appointing a different proxy were so received at the
place and within the time for delivery of the instrument
<PAGE> 17
revoked thereby as referred to in Article 33(b) hereof, or (ii) if the
appointing member is present in person at the meeting for which such instrument
of proxy was delivered, upon receipt by the Chairman of such meeting of written
notice from such member of the revocation of such appointment, or if and when
such member votes at such meeting. A vote cast in accordance with an instrument
appointing a proxy shall be valid notwithstanding the revocation or purported
cancellation of the appointment, or the presence in person or vote of the
appointing member at a meeting for which it was rendered, unless such instrument
of appointment was deemed revoked in accordance with the foregoing provisions of
this Article 34(b) at or prior to the time such vote was cast.
BOARD OF DIRECTORS
35. Powers of Board of Directors
(a) In General
The management of the business of the Company shall be vested in
the Board of Directors, which may exercise all such powers and do all such acts
and things as the Company is authorized to exercise and do, and are not hereby
or by law required to be exercised or done by the Company by action of its
members at a General Meeting. The authority conferred on the Board of Directors
by this Article 35 shall be subject to the provisions of the Companies
Ordinance, these Articles and any regulation or resolution consistent with these
Articles adopted from time to time by the Company by action of its members at a
General Meeting; provided, however, that no such regulation or resolution shall
invalidate any prior act done by or pursuant to a decision of the Board of
Directors which would have been valid if such regulation or resolution had not
been adopted.
(b) Borrowing Power
The Board of Directors may from time to time, at its discretion,
cause the Company to borrow or secure the payment of any sum or sums of money
for the purposes of the Company, and may secure or provide for the repayment of
such sum or sums in such manner, at such times and upon such terms and
conditions as it deems fit, and, in particular, by the issuance of bonds,
perpetual or redeemable debentures, debenture stock, or any mortgages, charges
or other securities on the undertaking or the whole or any part of the property
of the Company, both present and future, including its uncalled or called but
unpaid capital for the time being.
(c) Reserves
The Board of Directors may, from time to time, set aside any
amount(s) out of the profits of the Company as a reserve or reserves for any
purpose(s) which the
<PAGE> 18
Board of Directors, in its absolute discretion, shall deem fit, and may invest
any sum so set aside in any manner and from time to time deal with and vary such
investments and dispose of all or any part thereof, and employ any such reserve
or any part thereof in the business of the Company without being bound to keep
the same separate from other assets of the Company, and may subdivide or
redesignate any reserve or cancel the same or apply the funds therein for
another purpose, all as the Board of Directors may from time to time think fit.
36. Exercise of Powers of Board of Directors
(a) A meeting of the Board of Directors at which a quorum is
present shall be competent to exercise all the authorities, powers and
discretion vested in or exercisable by the Board of Directors.
(b) A resolution proposed at any meeting of the Board of
Directors shall be deemed adopted if approved by a majority of the Directors
present when such resolution is put to a vote and voting thereon.
(c) A resolution in writing signed by all of Directors then in
office and lawfully entitled to vote thereon or to which all such Directors have
given their written consent (by letter, telegram, telex, facsimile, electronic
mail or otherwise) shall be deemed to have been unanimously adopted by a meeting
of the Board of Directors duly convened and held.
37. Delegation of Powers
(a) The Board of Directors may, subject to the provisions of the
Companies Ordinance, delegate any or all of its powers to committees, each
consisting of one or more persons (who are Directors), and it may from time to
time revoke such delegation or alter the composition of any such committee. Any
Committee so formed (in these Articles referred to as a "Committee of the Board
of Directors"), shall, in the exercise of the powers so delegated, conform to
any regulations imposed on it by the Board of Directors. The meetings and
proceedings of any such Committee of the Board of Directors shall, mutatis
mutandis, be governed by the provisions contained in these Articles for
regulating the meetings of the Board of Directors, so far as not superseded by
any regulations adopted by the Board of Directors under this Article. Unless
otherwise expressly provided by the Board of Directors in delegating powers to a
Committee of the Board of Directors, such Committee shall not be empowered to
further delegate such powers.
(b) Without derogating from the provisions of Article 50, the
Board of Directors may from time to time appoint a Secretary to the Company, as
well as officers, agents, employees and independent contractors, as the Board of
Directors deems fit, and
<PAGE> 19
may terminate the service of any such person. The Board of Directors may,
subject to the provisions of the Companies Ordinance, determine the powers and
duties, as well as the salaries and emoluments, of all such persons, and may
require security in such cases and in such amounts as it deems fit.
(c) The Board of Directors may from time to time, by power of
attorney or otherwise, appoint any person, company, firm or body of persons to
be the attorney or attorneys of the Company at law or in fact for such purpose
(s) and with such powers, authorities and discretion, and for such period and
subject to such conditions, as it deems fit, and any such power of attorney or
other appointment may contain such provisions for the protection and convenience
of persons dealing with any such attorney as the Board of Directors deems fit,
and may also authorize any such attorney to delegate all or any of the powers,
authorities and discretions vested in him.
38. Number of Directors
The Board of Directors shall consist of nine (9)directors, or
such greater number as may be determined from time to time by an ordinary
resolution of the shareholders.
39. Election and Removal of Directors
Directors shall be elected at the Annual General Meeting by the
vote of the holders of a majority of the voting power represented at such
meeting in person or by proxy and voting on the elections of directors, and each
Director shall serve, subject to Article 42 hereof, and with respect to a
Director appointed pursuant to Article 41 hereof subject to such Article, until
the Annual General Meeting next following the Annual General Meeting or General
Meeting at which such Director was elected pursuant to this Article or Article
41 hereof and until his successor is elected, or until his earlier removal
pursuant to this Article 39. The holders of a majority of the voting power
represented at a General Meeting in person or by proxy and voting thereon at
such Meeting shall be entitled to remove any Director(s) from office, to elect
Directors instead of Directors so removed or to fill any vacancy, however
created, in the Board of Directors.
40. Qualification of Directors
No person shall be disqualified to serve as a Director by reason
of his not holding shares in the Company or by reason of his having served as a
Director in the past.
41. Continuing Directors in the Event of Vacancies
<PAGE> 20
In the event of one or more vacancies in the Board of Directors,
the continuing Directors may continue to act in every matter and, pending the
filling of any vacancy pursuant to the provisions of Article 39, may appoint
Directors to temporarily fill any such vacancy; provided, however, that if they
number less than a majority of the number provided for pursuant to Article 38
hereof, they may only act in an emergency or to fill the office of director
which has become vacant up to the minimum number or in order to call a General
Meeting of the Company for the purpose of electing Directors to fill any or all
vacancies, so that at least a majority of the number of Directors provided for
pursuant to Article 38 hereof are in office as a result of said meeting.
42. Vacation of Office
(a) The office of a Director shall be vacated, ipso facto, upon
his death, or if he be found lunatic or become of unsound mind, or if he becomes
bankrupt, or if the Director is a company upon its winding-up.
(b) The office of a Director shall be vacated by his written
resignation. Such resignation shall become effective on the date fixed therein,
or upon the delivery thereof to the Company, whichever is later.
43. Remuneration of Directors
A Director shall be paid remuneration by the Company for his
services as Director to the extent such remuneration shall have been approved by
a General Meeting of the Company and in accordance with the Companies Ordinance.
44. Conflict of Interests
Subject to the provisions of the Companies Ordinance, no Director
shall be disqualified by virtue of his office from holding any office or place
of profit under the Company or under any company in which the Company shall be a
shareholder or otherwise interested, or from contracting with the Company as
vendor, purchaser or otherwise, nor shall any such contract, or any contract or
arrangement entered into by or on behalf of the Company in which any Director
shall be in any way interested, be avoided, nor, other than as required under
the Companies Ordinance, shall any Director be liable to account to the Company
for any profit arising from any such office or place of profit or realized by
any such contract or arrangement by reason only of such Director's holding that
office or of the fiduciary relations thereby established, but the nature of his
interest, as well as any material fact or document, must be disclosed by him at
the meeting of the Board of Directors at which the contract or arrangement is
first considered, if his interest then exists, or, in any other case, no later
than at the first meeting of the Board of
<PAGE> 21
Directors after the acquisition of his interest.
45. Alternate Directors
(a) A Director may, by written notice to the Company given in the
manner set forth in Article 45(b) below, appoint any individual (whether or not
such person is then a member of the Board of Directors) as an alternate for
himself (in these Articles referred to as "Alternate Director"), remove such
Alternate Director and appoint another Alternate Director in place of any
Alternate Director appointed by him whose office has been vacated for any reason
whatsoever. Unless the appointing Director, by the instrument appointing an
Alternative Director or by written notice to the Company, limits such
appointment to a specified period of time or restricts it to a specified meeting
or action of the Board of Directors, or otherwise restricts its scope, the
appointment shall be for all purposes, and for a period of time concurrent with
the term of the appointing Director.
(b) Any notice to the Company pursuant to Article 45(a) shall be
given in person to, or by sending the same by mail to the attention of, the
General Manager of the Company at the principal office of the Company, to such
other persons or place as the Board of Directors shall have determined for such
purpose, and shall become effective on the date fixed therein or upon the
receipt thereof by the Company, whichever is later.
(c) An Alternate Director shall have all the rights and
obligations of the Director who appointed him; provided, however, that (i) he
may not in turn appoint an alternate for himself (unless the instrument
appointing him otherwise expressly provides), (ii) an Alternate Director shall
have no standing at any meeting of the Board of Directors or any committee
thereof while the Director who appointed him is present, and (iii) the Alternate
Director is not entitled to remuneration.
(d) Any individual, whether or not he be a member of the Board of
Directors, may act as an Alternate Director. One person may act as Alternate
Director for several Directors, and in such event he shall have a number of
votes (and shall be treated as the number of persons for purposes of
establishing a quorum) equal to the number of Directors for whom he acts as
Alternative Director. If an Alternate Director is also a Director in his own
right, his rights as an Alternate Director shall be in addition to his rights as
a Director.
(e) An Alternate Director shall alone be responsible for his own
acts and defaults, and he shall not be deemed the agent of the Director(s) who
appointed him.
(f) The office of an Alternate Director shall be vacated under
the circumstances, mutatis mutandis, set forth in Article 42, and such office
shall ipso facto be vacated if the Director who appointed such Alternate
Director ceases to be a Director.
<PAGE> 22
PROCEEDINGS OF THE BOARD OF DIRECTORS
46. Meetings
(a) The Board of Directors may meet and adjourn its meeting and
otherwise regulate such meetings and proceedings as the Directors think fit.
(b) Any Director may at any time, and the Secretary, upon the
request of such Director, shall, convene a meeting of the Board of Directors,
but not less than seven (7) days' notice shall be given of any meeting so
convened. Notice of any such meeting may be given orally, by telephone, in
writing or by mail, electronic mail, telex, cablegram or facsimile.
Notwithstanding anything to the contrary herein, failure to deliver notice to a
Director of any such meeting in the manner required hereby may be waived by such
Director, and a meeting shall be deemed to have been duly convened
notwithstanding such defective notice if such failure or defect is waived prior
to action being taken at such meeting by all Directors entitled to participate
at such meeting to whom notice was not duly given as aforesaid.
47. Quorum
Until otherwise unanimously decided by the Board of Directors, a
quorum at a meeting of the Board of Directors shall be constituted by the
presence in person or by telephone conference of a majority of the Directors
then in office who are lawfully entitled to participate in the meeting. No
business shall be transacted at a meeting of the Board of Directors unless the
requisite quorum is present (in person or by telephone conference) when the
meeting proceeds to business.
48. Chairman of the Board of Directors
The Board of Directors may from time to time elect one of its
members to be the Chairman of the Board of Directors and another of its members
to be the Co-Chairman, remove such Chairman and Co-Chairman from office, and
appoint others in their place. The Chairman of the Board of Directors shall
preside at every meeting of the Board of Directors, but if there is no such
Chairman, or if at any meeting he is not present within fifteen (15) minutes of
the time fixed for the meeting or if he is unwilling to take the chair, the
Co-Chairman shall preside. If both the Chairman and the Co-Chairman are not
present or are unwilling to take the chair, the Directors present shall choose
one of their number to be the chairman of such meeting.
49. Validity of Acts Despite Defects
<PAGE> 23
All acts done bona fide at any meeting of the Board of Directors,
or of a Committee of the Board of Directors, or by any person (s) acting as
Director (s), shall, notwithstanding that it may afterwards be discovered that
there was some defect in the appointment of the participants in such meetings or
any of them or any person(s) acting as aforesaid, or that they or any of them
were disqualified, be as valid as if there were no such defect of
disqualification.
CHIEF EXECUTIVE OFFICER AND PRESIDENT
50. Chief Executive Officer and President
The Board of Directors may from time to time appoint one or more
persons, whether or not Directors, as Chief Executive Officer or Officers,
General Manager or Managers, or President of the Company and may confer upon
such person(s), and from time to time modify or revoke, such title(s) and such
duties and authorities of the Board of Directors as the Board of Directors may
deem fit, subject to such limitations and restrictions as the Board of Directors
may from time to time prescribe. Unless otherwise determined by the Board of
Directors, the Chief Executive Officer shall have authority with respect to the
management of the Company in the ordinary course of business. Such appointment
(s) may be either for a fixed term or without any limitation of time, and the
Board of Directors may from time to time (subject to the provisions of the
Companies Ordinance and of any contract between any such person and the Company)
fix his or their salaries and emoluments, remove or dismiss him or them from
office and appoint another or others in his or their place or places.
MINUTES
51. Minutes
(a) Minutes of each General Meeting and of each meeting of the
Board of Directors and Committee of the Board of Directors shall be recorded and
duly entered in books provided for that purpose, and shall be held by the
Company at its registered office or such other place as shall have been
determined by the Board of Directors. Such minutes shall, in all events, set
forth the names of the persons present at the meeting and all resolutions
adopted thereat.
(b) Any minutes as aforesaid, if purporting to be signed by the
chairman of the meeting or by the chairman of the next succeeding meeting, shall
constitute prima
<PAGE> 24
facie evidence of the matters recorded therein.
DIVIDENDS
52. Declaration of Dividends
The Board of Directors may from time to time declare, and cause
the Company to pay, such interim dividend as may appear to the Board of
Directors to be justified by the profits of the Company. The final dividend in
respect of any fiscal period shall be proposed by the Board of Directors and
shall be payable only after the same has been approved by Ordinary Resolution of
the Company, but no such resolution shall provide for the payment of an amount
exceeding that proposed by the Board of Directors for the payment of such final
dividend, and no such resolution or any failure to approve a final dividend
shall affect any interim dividend previously declared and paid. The Board of
Directors shall determine the time for payment of such dividends, both interim
and final, and the record date for determining the shareholders entitled
thereto.
53. Funds Available for Payment of Dividends
No dividend shall be paid otherwise than out of the profits of
the Company.
54. Amount Payable by Way of Dividends
(a) Subject to the rights of the holders of shares as to
dividends, any dividend paid by the Company shall be allocated among the members
entitled thereto 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 such dividend is being paid, without taking into account the
premium paid up for the shares. The amount paid up on account of a share which
has not yet been called for payment or fallen due for payment and upon which the
Company pays interest to the shareholder shall not be deemed, for the purposes
of this Article, to be a sum paid on account of the share.
(b) Whenever the rights attached to any shares or the terms of
issue of the share do not provide otherwise, shares which are fully paid up or
which are credited as fully or partly paid within any period in respect of which
dividends are paid shall entitle the holders thereof to a dividend in proportion
to the amount paid up or credited as paid up in respect of the nominal value of
such shares and to the date of payment thereof (pro rata temporis).
<PAGE> 25
55. Interest
No dividend shall carry interest as against the Company.
56. Payment in Specie
Upon the recommendation of the Board of Directors approved by
Ordinary Resolution of the Company, the Company (i) may cause any moneys,
investments, or other assets forming part of the undivided profits of the
Company, standing to the credit of a reserve fund, to the credit of a reserve
fund for the redemption of capital or in the hands of the Company and available
for dividends, or representing premiums received on the issuance of shares and
standing to the credit of the share premium account, to be capitalized and
distributed among such of the shareholders as would be entitled to receive the
same if distributed by way of dividend and in the same proportion, on the
footing that they become entitled thereto as capital, or may cause any part of
such capitalized fund to be applied on behalf of such shareholders in paying up
in full, either at par or at such premium as the resolution may provide, any
unissued shares or debentures or debenture stock of the Company which shall be
distributed accordingly, in payment, in full or in part, of the uncalled
liability on any issued shares or debentures or debenture stock; and (ii) may
cause such distribution or payment to be accepted by such shareholders in full
satisfaction of their interest in the said capitalized sum.
57. Implementation of Powers under Article 56
For the purpose of giving full effect to any resolution under
Article 56, and without derogating from the provisions of Article 6(b) hereof,
the Board of Directors may settle any difficulty which may arise in regard to
the distribution as it thinks expedient, and, in particular, may issued
fractional certificates, and may fix the value for distribution of any specific
assets, and may determine that cash payments shall be made to any member upon
the footing of the value so fixed, or that fractions of less value than the
nominal value of one share may be disregarded in order to adjust the right of
all parties, and may vest any such cash, shares, debentures, debenture stock or
specific assets in trustees upon such trusts for the persons entitled to the
dividend or capitalized fund as may seem expedient to the Board of Directors.
Where requisite, a proper contract shall be filed in accordance with Section 130
of the Companies Ordinance, and the Board of Directors may appoint any person to
sign such contract on behalf of the persons entitled to the dividend or
capitalized fund.
58. Dividends on Unpaid Shares
Without derogating from Article 54 hereof, the Board of Directors
may give an instruction which shall prevent the distribution of a dividend to
the holders of
<PAGE> 26
shares whose full nominal amount has not been paid up.
59. Retention of Dividends
(a) The Board of Directors may retain any dividend or other
moneys payable or property distributable in respect of a share on which the
Company has a lien, and may apply the same in or toward satisfaction of the
debts, liabilities or obligations in respect of which the lien exists.
(b) The Board of Directors may retain any dividend or other
moneys payable or property distributable in respect of a share in respect of
which any person is, under Articles 20 or 21, entitled to become a member, or
which any person is, under said Articles, entitled to transfer, until such
person shall become a member in respect of such share or shall transfer the
same.
60. Unclaimed Dividends
All unclaimed dividends or other moneys payable in respect of a
share may be invested or otherwise made use of by the Board of Directors for the
benefit of the Company until claimed. The payment by the Directors of any
unclaimed dividend or such other moneys into a separate account shall not
constitute the Company a trustee in respect thereof. The principal (and only the
principal) of an unclaimed dividend or such other moneys shall be, if claimed,
paid to a person entitled thereto.
61. Mechanics of Payment
Any dividend or other moneys payable in cash in respect of a
share may be paid by check or warrant sent through the post to, or left at, the
registered address of the person entitled thereto or by transfer to a bank
account specified by such person (or, if two or more persons are registered as
joint holders of such share or are entitled jointly thereto in consequence of
the death or bankruptcy of the holder or otherwise, to the joint holder whose
name is registered first in the Register of Members of his bank account or the
person who the Company may then recognize as the owner thereof or entitled
thereto under Article 20 or 21 hereof, as applicable, or such person's bank
account), or to such person and at such other address as the person entitled
thereto may be writing direct. Every such check or warrant shall be made payable
to the order of the person to whom it is sent, or to such person as the person
entitled thereto as aforesaid may direct, and payment of the check or warrant by
the banker upon whom it is drawn shall be a good discharge to the Company.
62. Receipt from a Joint Holder
<PAGE> 27
If two or more persons are registered as joint holders of any
share, or are entitled jointly thereto in consequence of the death or bankruptcy
of the holder or otherwise, any one of them may give effectual receipts for any
dividend or other moneys payable or property distributable in respect of such
shares.
ACCOUNTS
63. Books of Account
The Board of Directors shall cause accurate books of account to
be kept in accordance with the provisions of the Companies Ordinance and of any
other applicable law. Such books of account shall be kept at the Registered
Office of the Company, or at such other place or places as the Board of
Directors may think fit, and they shall always be open to inspection by all
Directors. No member, not being a Director, shall have any right to inspect any
account or book or other similar document of the Company, except as conferred by
law or authorized by the Board of Directors or by Ordinary Resolution of the
Company.
64. Audit
At least once in every fiscal year the accounts of the Company
shall be audited and the correctness of the profit and loss account and balance
sheet certified by one or more duly qualified auditors.
65. Auditors
The appointment, authorities, rights and duties of the auditor(s)
of the Company shall be regulated by applicable law; provided, however, that in
exercising its authority to fix the remuneration of the auditor(s), the members
in General Meeting may, by Ordinary Resolution, act (and in the absence of any
action in connection therewith shall be deemed to have so acted) to authorize
the Board of Directors to fix such remuneration subject to such criteria or
standards, if any, as may be provided in such Ordinary Resolution, and if no
such criteria or standards are so provided, such remuneration shall be fixed in
an amount commensurate with the volume and nature of the services rendered by
such auditor(s).
<PAGE> 28
BRANCH REGISTERS
66. Branch Registers
Subject to and in accordance with the provisions of Sections 71
to 80, inclusive, of the Companies Ordinance and to all orders and regulations
issued thereunder, the Company may cause branch registers to be kept in any
place outside Israel as the Board of Directors may think fit, and, subject to
all applicable requirements of law, the Board of Directors may from time to time
adopt such rules and procedures as it may think fit in connection with the
keeping of such branch registers.
AUDIT COMMITTEE
67. Audit Committee
(a) For purposes of these Articles the terms "Office Holder,"
"Personal Interest" and "Relative" shall be defined as set forth in Section
96(24) of the Companies Ordinance.
(b) The Board of Directors shall appoint an Audit Committee which
shall be composed of three members, none of whom shall be Chairman or
Co-Chairman of the Board of Directors, the Chief Executive Officer, Controller,
Secretary or any other Office Holder who is an employee of the Company, and the
majority of whom shall not be shareholders of the Company holding more than 5%
(five percent) of the issued and outstanding share capital of the Company, or
their relatives.
(c) All of the following matters shall be brought before the
Audit Committee, and no action in respect thereof shall be taken prior to
receiving the Audit Committee's and the Board of Director's approval. Approval
of the Board of Directors may be given only following the Audit Committee's
approval:
(i) proposed transactions to which the Company intends to
be a party in which an Officer Holder has a direct or indirect Personal
Interest;
(ii) actions which may otherwise be deemed to constitute a
breach of fiduciary duty or the duty of care, as defined in Section 96(27) of
the Companies Ordinance, of an Office Holder of the Company;
(iii) agreements with directors as to the terms of their
services; and
(iv) indemnification of Office Holders.
<PAGE> 29
(d) Approval by the majority of the Members of the Audit
Committee shall be deemed approval of the Audit Committee for the purposes of
this Article.
(e) The Audit Committee shall meet upon receiving at least seven
days' prior written notice from the Board of Directors of a meeting. Such prior
written notice shall contain details of the action in respect of which the
meeting will be convened.
(f) Should a majority of the Audit Committee of the Board of
Directors have a Personal Interest in any of the matters detailed in Section
67(c) above, the action shall be raised at the next General Meeting, and shall
be subject to approval of the General Meeting.
(g) Any Office Holder whose interest is brought before the Audit
Committee and the Board of Directors for approval shall not be present nor shall
he have a vote at any meeting at which his interest shall be discussed or voted
upon.
INDEMNITY AND INSURANCE
68. Indemnity and Insurance
Subject to the provisions of the Companies Ordinance, the Company
may (i) procure insurance for, or indemnify any Office Holder, to the fullest
extent permitted and not prohibited by Sections 96(41) and 96(42) of the
Companies Ordinance, or any successor provisions; provided, however, that the
procurement of any such insurance or provision of any such indemnification, as
the case may be, is approved by the Audit Committee of the Company and otherwise
as required by law; or (ii) procure insurance for or indemnify any person who is
not an Office Holder, including, without limitation, any employee, agent,
consultant or contractor of the Company who is not an Office Holder.
WINDING UP
69. Winding up
If the Company is wound up, then, subject to applicable law and
to the rights of the holders of shares with special rights upon winding up, the
assets of the Company available for distribution among the members shall be
distributed to them in proportion to the nominal value of their respective
holdings of the shares in respect of which such distribution is being made.
<PAGE> 30
RIGHTS OF SIGNATURE, STAMP AND SEAL
70. Rights of Signature, Stamp and Seal
(a) The Board of Directors shall be entitled to authorize any
person or persons (who need not be Directors) to act and sign on behalf of the
Company, and the acts and signature of such person(s) on behalf of the Company
shall bind the Company insofar as such person(s) acted and signed within the
scope of his or their authority.
(b) The Board of Directors may provide for a seal. If the Board
of Directors so provides, it shall also provide for the safe custody thereof.
Such seal shall not be used except by the authority of the Board of Directors
and in the presence of the person(s) authorized to sign on behalf of the
Company, who shall sign every instrument to which such seal is affixed.
(c) The Company may exercise the powers conferred by Section 102
of the Companies Ordinance regarding a seal for use abroad, and such powers
shall be vested in the Board of Directors.
NOTICES
71. Notices
(a) Any written notice or other document may be served by the
Company upon any member either personally or by sending it by prepaid mail
(airmail if sent internationally) addressed to such member at his address as
described in the Register of Members or such other address as he may have
designated in writing for the receipt of notices and other documents. Any
written notice or other document may be served by any member upon the Company by
tendering the same in person to the Secretary or the General Manager of the
Company at the principal office of the Company or by sending it by prepaid
registered mail (airmail if posted outside Israel) to the Company at its
registered office. Any such notice or other document shall be deemed to have
been served forty-eight (48) hours after it has been posted (seven (7) business
days if sent internationally), or when actually received by the addressee if
sooner than forty-eight hours or seven days, as the case may be, after it has
been posted, or when actually tendered in person, to such member (or to the
Secretary or the General Manager). Notice sent by cablegram, telex, facsimile or
electronic mail shall be deemed to have been served when actually received by
such member (or by the Company). If a notice is, in fact, received by the
addressee, it shall be deemed to have been duly served when received,
<PAGE> 31
notwithstanding that it was defectively addressed or failed, in some other
respect, to comply with the provisions of this Article 71(a).
(b) All notices to be given to the members shall, with respect to
any share to which persons are jointly entitled, be given to whichever of such
persons is named first in the Register of Members, and any notice so given shall
be sufficient notice to the holders of such share.
(c) Any member whose address is not described in the Register of
Members, and who shall not have designated in writing an address for the receipt
of notices, shall not be entitled to receive any notice from the Company.
(d) Notwithstanding anything to the contrary contained herein,
notice by the Company of a General Meeting which is published in at least two
daily newspapers in the State of Israel within the time otherwise required for
giving notice of such meeting under Article 25 hereof and containing the
information required to be set forth in such notice under such Article shall be
deemed to be a notice of such meeting duly given, for purposes of these
Articles, to any member whose address as registered in the Register of Members
is located in the State of Israel.
<PAGE> 1
EXHIBIT 4.1
[COMMTOUCH SOFTWARE LTD. SHARE CERTIFICATE]
INCORPORATED UNDER THE LAWS OF THE STATE OF ISRAEL
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY
SEE REVERSE FOR CERTAIN DEFINITIONS
CUSIP
THIS CERTIFIES THAT
IS THE REGISTERED HOLDER OF
FULLY PAID AND NON-ASSESSABLE ORDINARY SHARES OF THE PAR VALUE OF 0.05 NEW
ISRAELI SHEKELS EACH, OF
- -------------------------------COMMTOUCH SOFTWARE LTD.--------------------------
Transferable on the books of the Corporation by the holder hereof in portion or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate and the shares represented hereby are issued and
shall be held subject to all the provisions of the Memorandum of Association and
Articles of Association and amendments thereto of the Corporation, to all of
which the holder by acceptance hereof assents. This certificate is not valid
unless countersigned and registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
CHIEF FINANCIAL OFFICER [COMMTOUCH SOFTWARE LTD. CHIEF EXECUTIVE OFFICER
INCORPORATED IN
ISRAEL
1991
SEAL]
COUNTERSIGNED AND REGISTERED;
NORWEST BANK MINNESOTA, N.A.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
COMMTOUCH SOFTWARE LTD.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- ___________ Custodian __________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of
survivorship and not as under Uniform Gifts to Minors
tenants in common Act ____________________________________
UNIF TRF MIN ACT -- ___________ Custodian (until age _______)
(Cust)
_______________ under Uniform Transfers
to Minors Act __________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
_______________________________________
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________ Ordinary Shares
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
______________________________________________________________________ Attorney
to transfer the said Ordinary Shares on the books of the within-named
Corporation with full power of substitution in the premises.
Dated ________________________
X __________________________________________
X __________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _________________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM). PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 4.2
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT is made as of the
19th day of April, 1999 by and among CommTouch Software Ltd., an Israeli
company (the "COMPANY") having its principal executive offices at 10 Technology
Avenue, Ein Vered 40696, Israel, the investors identified in Exhibit A to this
Agreement (the "ORIGINAL INVESTORS") and the investors identified in Exhibit B
to this Agreement (the "NEW INVESTORS"; the Original Investors and the New
Investors are sometimes referred to in this Agreement collectively as the
"INVESTORS," the "PREFERRED SHAREHOLDERS" and individually as a "PREFERRED
SHAREHOLDER").
WHEREAS the New Investors are purchasing 42,081 Series D Preferred Shares
of the Company pursuant to a Series D Preferred Share Purchase
Agreement dated the date hereof (the "PURCHASE AGREEMENT"); and
WHEREAS the Company wishes to have the New Investors purchase the Series D
Preferred Shares; and
WHEREAS in order to induce the New Investors to purchase the Series D
Preferred Shares, and in order to convince the Original Investors to
agree to certain changes to their rights required in order to allow
the Company to enter into the Purchase Agreement and related
agreements, the Company is entering into this Agreement;
THEREFORE, the parties agree as follows:
For purposes of this Agreement, the term "SERIES D PREFERRED SHARES"
refers to the Series D Preferred Shares issued and sold under the Purchase
Agreement at the Closing (as such term is defined in the Purchase Agreement);
and "SHARES" refers to the Series A Preferred Shares, the Series B Preferred
Shares, the Series C Preferred Shares, the Series D Preferred Shares, any shares
of the Company issued upon the exercise of Warrants issued under the Preferred
Shares Purchase Agreements dated as of January 25, 1996, and April 22, 1996 and
any other shares or equity securities of the Company distributed in respect of,
in substitution for or upon the conversion of such shares.
<PAGE> 2
1. REGISTRATION UPON REQUEST. Promptly upon the written request by
the holders of a majority of the Shares, as one group, made at any time or from
time to time, and, in any event, within 90 days of such request, the Company
shall use its reasonable efforts to file a registration statement under the
United States Securities Act of 1933 and the rules and regulations thereunder,
all as amended from time to time (collectively, the "Act"), covering all Shares
that any Preferred Shareholders desire to register, and shall use its reasonable
efforts to cause such registration statement to become effective as soon as
practicable. The Company shall promptly notify any Preferred Shareholders who
are then holders of Shares, other than those requesting the registration, and
afford them the opportunity of including in the registration such Shares owned
by them as they shall specify in a written notice delivered to the Company
within 30 days after their receipt of the Company's notice of the proposed
filing. No other persons shall be entitled to include any securities in any
registration pursuant to this Section 1 without the consent of a majority in
interest of the Investors participating in the registration. The Company shall
not be required to effect more than an aggregate of two registrations pursuant
to this Section 1, shall not be required to effect more than one registration
during any 12-month period pursuant to this Section 1, and shall not be required
to effect any registration for any Preferred Shareholder who could dispose of
all of its Shares within 12 months without registration pursuant to Rule 144
promulgated under the Act. In addition, the Company shall not be required to
effect any registration pursuant to this Section 1 prior to the second
anniversary of the closing of the Company's first public offering of its
securities registered under the Act. The Company shall have the right to defer
filing a registration statement under the Act pursuant to this Section 1 not
more than once in any 12-month period if the Board of the Directors of the
Company shall determine that it would be seriously detrimental to the Company to
file such registration statement at the date the filing would otherwise be
required under this Agreement, in which case the Company shall have an
additional period of not more than 120 days within which to file such
registration statement.
2. INCIDENTAL REGISTRATION. If the Company at any time proposes to
register any of its equity securities under the Act for its own account or for
the account of any security holders (other than any registration pursuant to
Section 1, or any registration of an offering to employees, consultants or other
persons providing services to the Company or its subsidiaries, or any
registration on Form F-4 or a successor form), it shall promptly give written
notice to each Preferred Shareholder who is then a holder of Shares of its
intention to do so, and if within 30 days after receipt of such notice any such
Preferred Shareholder so requests in writing, the Company shall include in such
registration all shares that such Preferred Shareholders shall specify in
writing to the Company. However, if the proposed registration is to be
underwritten (whether on a "best efforts" or a "firm commitment" basis), the
managing underwriter shall have the right to exclude Shares from such
registration if it advises the Company that such exclusion is necessary to avoid
interfering with the successful marketing of the underwritten portion of the
public offering, provided that the securities to be included in any such
registration other than those for which the Company initiated such registration
and those which are being sold by the Company shall be allocated pro rata among
the affected holders in proportion to their respective share holdings prior to
giving effect to the sale of shares pursuant to such registration.
3. FORM F-3 REGISTRATION. On the written request of Investors
holding a majority of the Shares that the Company effect a registration of
Shares on Form F-3, the Company shall, as promptly as practicable, use its
reasonable efforts to effect the registration of such Shares as are specified in
such request; provided, however, that the Company shall not be obligated to
effect any such registration pursuant to this Section 3 if (i) Form F-3 is not
available for such offering; or (ii) the Board of the Directors of the Company
shall determine that it would be seriously detrimental to the Company to file
2
<PAGE> 3
such registration statement at the date the filing would otherwise be required
under this Agreement, in which case the Company shall have an additional period
of not more than 120 days within which to file such registration statement. The
Company's obligation under this Section 3 shall be limited to a Form F-3
registration that will, in the opinion of the Company's counsel, meet the legal
requirements for allowing the Preferred Shareholders to dispose of their Shares
in a non-underwritten transaction, and the Company's obligations in such case
under Section 4 shall be limited accordingly.
4. CONDITIONS. Registrations of Shares pursuant to Sections 1, 2 or 3
shall be subject to the following:
(a) FILING OF AMENDMENTS. The Company shall file such amendments and
supplements to the registration statement and the related prospectus and take
such other action as may be necessary to keep the registration statement
effective and to comply with the Act for such period, in the case of
registrations under Sections 1 and 2 above, not exceeding six months from the
original effective date of the registration statement, and, in the case of
registrations under Section 3, not less than the period ending 60 months from
the date of the Company's initial public offering under the Act, as a majority
in interest of the participating Preferred Shareholders may request.
(b) FURNISH COPIES. The Company shall furnish to the participating
Preferred Shareholders such reasonable number of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request to facilitate the
disposition of the Shares being registered.
(c) BLUE SKY. The Company shall take such action under the securities
laws of such states of the United States as any participating Preferred
Shareholder shall reasonably request; provided, however, that the Company shall
not be required to qualify to do business as a foreign corporation, or to file
any general consent to service of process, in any state.
(d) UNDERWRITING. In the event of an underwritten public offering, the
Company shall enter into and perform its obligations under an underwriting
agreement, in usual and customary form, with the managing underwriter. Each
participating holder shall also enter into and perform its obligations under
the underwriting agreement.
(e) NOTIFICATION. The Company shall notify each participating holder at
any time when a prospectus is required to be delivered under the Act of the
happening of any event as a result of which the prospectus included in the
registration statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in the light of the
circumstances then existing.
(f) COUNSEL AND ACCOUNTANT'S OPINION. The Company shall furnish, at the
request of any participating Preferred Shareholder, on the date the registered
Shares are delivered to the underwriters for sale through underwriters, or, if
such Shares are not being sold through underwriters, on the date that the
registration statement becomes effective: (i) an opinion, dated such date, of
the counsel representing the Company for the purposes of such registration, in
form and substance as is customarily given to the underwriters in an
underwritten public offering, addressed to the underwriters, if any, and to the
participating Investors; and (ii) a letter, dated such date, of the independent
certified public accountants of the Company, in form and substance as is
customarily given by independent
3
<PAGE> 4
certified public Accountants to the underwriters in an underwritten public
offering, addressed to the underwriters, if any, and to the participating
Preferred Shareholders.
(g) EXPENSES. The Company shall bear the cost of all registrations,
including, but not limited to, all registration and filing fees, printing
expenses and fees, expenses and disbursements of counsel and accountants for
the Company (subject, however, to subsection (h) below), except that each
Preferred Shareholder shall pay the fees, expenses and disbursements of any
counsel retained by such Preferred Shareholder and the underwriting fees and
selling commissions applicable to such Preferred Shareholder's Shares.
(h) AUDITS. The Company shall not be required to furnish any audited
financial statements at the request of any proposed seller of Shares other than
those statements customarily prepared at the end of its fiscal year, unless (i)
the requesting proposed sellers shall agree to reimburse the Company for the
out-of-pocket costs incurred by the Company in the preparation of such other
audited financial statements, or (ii) such other audited financial statements as
shall be required by the United States Securities and Exchange Commission (the
"COMMISSION") as a condition to ordering a registration statement effective
under the Act.
(i) INDEMNIFICATION. (1) The Company shall indemnify and hold harmless
each seller of Shares, any underwriter (as defined in the Act) and each person
who under the Act is deemed a controlling person of such seller or underwriter,
against any losses, claims, damages or liabilities to which any such seller,
underwriter or controlling person may become subject under the Act or
otherwise, to the extent that such losses, claims, damages or liabilities (or
actions in respect thereto) shall arise out of or be based upon any untrue or
allegedly untrue statement of any material fact contained in the registration
statement, any related prospectus or preliminary prospectus or any amendment or
supplement to the registration statement or any prospectus or preliminary
prospectus or upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and shall reimburse any legal or other expenses reasonably
incurred by any such seller, underwriter or controlling person in connection
with investigating or defending against any such loss, claim, damage, liability
or action; provided, however, that the Company shall not be liable to any such
seller, underwriter or controlling person for any losses, claims, damages,
liabilities or actions to the extent the same shall arise out of or be based
upon any such untrue statement or omission made in reliance upon and in
conformity with written information furnished by such seller, underwriter or
controlling person seeking indemnification hereunder to the Company for use in
the registration statement, prospectus, preliminary prospectus, amendment or
supplement.
(2) Each seller of Shares shall similarly indemnify and hold harmless the
Company and its controlling persons against any such losses, claims, damages,
liabilities or actions, but only to the extent that the same shall arise out of
or be based upon any untrue or allegedly untrue statement, or any omission or
alleged omission, made in reliance upon and in conformity with written
information furnished by such indemnifying person to the Company for use in the
registration statement, prospectus, preliminary prospectus, amendment or
supplement; provided, that the liability under this Section 4(i)(2) of each
seller of Shares shall not exceed such seller's gross proceeds from such sale.
(3) Each party entitled to indemnification hereunder (the "INDEMNIFIED
PARTY") shall give notice to the party required to provide indemnification (the
"INDEMNIFYING PARTY") promptly after such
4
<PAGE> 5
Indemnified Party becomes aware of any claim or potential claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom. The Indemnified
Party may participate in such defense at its own expense. No Indemnified Party
shall consent to entry of any judgment or settle such claim or litigation
without the prior, written consent of the Indemnifying Party.
(4) If the indemnification provided for in this Section 3(i) is held by
a court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any losses, claims, damages or liabilities referred to herein for
reasons of public policy, the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall to the extent permitted by applicable law
contribute to the amount paid or payable by such Indemnified Party as a result
of such loss, claim, damage or liability in such proportion as is appropriate to
reflect the relative fault of the Indemnifying Party on the one hand and the
Indemnified Party on the other, in connection with the matters that resulted in
such loss, claim, damage or liability, as well as any other relevant equitable
considerations. The relative fault of the Indemnifying Party and the Indemnified
Party shall be determined by a court of law by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Indemnifying Party or by the Indemnified Party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission.
(j) INFORMATION CONCERNING PREFERRED SHAREHOLDERS. Each Preferred
Shareholder that participates in a registration of Shares shall furnish to the
Company such information regarding such Preferred Shareholder and the
distribution proposed by such Preferred Shareholder as the Company may
reasonably request and as shall be required in connection with any registration,
qualification or compliance referred to herein.
(k) SAME EXCHANGE. The Company shall cause all Shares registered
hereunder to listed on each securities exchange on which similar securities
issued by the Company are then listed.
(l) TRANSFER AGENT. The Company shall provide a transfer agent and
registrar for all Shares registered pursuant to this Agreement and a CUSIP
number for all such Shares, in each case not later than the effective date of
such registration.
5. REPORTS UNDER SECURITIES EXCHANGE ACT OF 1934. With a view to making
available to the Preferred Shareholders the benefits of Rule 144 promulgated
under the Act and any other rule or regulation of the Commission that may at any
time permit an Investor to sell Shares to the public without registration, the
Company agrees to:
(a) use its reasonable efforts to make and keep public information
available, as those terms are understood and defined in Commission Rule 144, at
all times after 90 days after the effective date of the first registration
statement filed by the Company for the offering of its securities to the general
public in the United States;
(b) use its reasonable efforts to file with or submit to the Commission
in a timely manner all reports and other documents required of the Company under
the Act and the United States Securities Exchange Act of 1934 (the "1934 ACT");
and
5
<PAGE> 6
(c) furnish to any Preferred Shareholder promptly upon request (i) a
written statement by the Company as to whether or not it has complied with the
reporting requirements of Commission Rule 144 (at any time after 90 days after
the effective date of the first registration statement filed by the Company for
the offering of its securities to the general public in the United States), the
Act and the 1934 Act (at any time after it has become subject to such reporting
requirements), (ii) a copy of the most recent annual or quarterly report of the
Company and such other reports and documents so filed by the Company, and (iii)
such other information as may reasonably be requested in availing such holder
of any rule or regulation of the Commission which permits the selling of any
such securities without registration.
6. NON-ASSIGNABILITY OF REGISTRATION RIGHTS. The rights to cause the
Company to register the Shares shall not be assignable except with the prior
written consent of the Company, except that any Preferred Shareholder may
assign its rights to cause the Company to register shares pursuant to this
Agreement to a permitted transferee under the Company's Articles of Association
of all or any part of its Shares. The transferor shall, within thirty (30) days
after such transfer, furnish the Company with notice of the name and address of
such transferee and the securities with respect to which such registration
rights are being assigned and the transferee's written agreement to be bound by
this Agreement.
7. AMENDMENT OF REGISTRATION. Any provision of these registration rights
may be amended, and the exercise of any rights under this Agreement may be
waived (either generally or in a particular instance, and either retroactively
or prospectively) only with the written consent of the Company, and a 75%
majority in interest of the holders of the Shares, except that any party may
waive as to itself the exercise of any rights under this Agreement.
8. "MARKET STAND-OFF" AGREEMENT. Holders of Shares, if requested by the
Company and the underwriters of the Company's securities, shall agree not to
sell or otherwise transfer or dispose of any ordinary shares or other securities
of the Company held by such holders during the 7-day period prior to and the
180-day period (or such shorter period as is required by the underwriters)
following the effective date of a registration statement of the Company filed
under the Act in connection with an underwritten public offering (except for
any securities of the Company sold by them pursuant to such registration
statement). The obligation of this Section 8 shall apply only if such agreement
is also entered into by the Company's founders.
9. EXPIRATION. The Preferred Shareholders' rights to cause the Company
to register the Shares pursuant to this agreement shall expire on the fifth
anniversary of the closing of the Company's first public offering of its
securities.
10. RIGHTS GRANTED TO SUBSEQUENT INVESTORS. Without the prior written
consent of the holders of a 75% majority in interest of the Shares, the Company
shall not grant any registration rights which are more favorable that those
granted herein to the Preferred Shareholders, to any party other than the
Preferred Shareholders and their permitted transferees under the Company's
Articles of Association.
11. FUTURE INVESTORS. Future investors that invest in the Company in
consideration of Preferred Shares of the Company (the "Future Investors" and
collectively with the Investors are sometimes referred to in this Agreement as
the "Preferred Shareholders" and individually as a Preferred Shareholder") may
become a party to this Agreement as of the date of their execution of an
<PAGE> 7
addendum substantially in the form of Exhibit C to this Agreement and thereby
shall be bound by, and entitled to the benefits of, this Agreement. Upon
receipt of such documents the Company shall deliver a copy thereof to all
parties to this Agreement (including future Investors who have previously
become parties to this Agreement).
12. MISCELLANEOUS.
(a) GOVERNING LAW; FORUM FOR DISPUTE RESOLUTION. This Agreement shall be
governed by the laws of Israel, with any terms relating to United States
securities laws to be interpreted in accordance with the federal laws of the
United States of America. Any dispute arising, under or with respect to this
Agreement shall be resolved exclusively in the appropriate court in Tel-Aviv,
Israel.
(b) ENTIRE AGREEMENT. This Agreement, together with the Purchase
Agreement, constitutes the entire agreement among the parties regarding the
transactions contemplated herein and therein, and may not be amended except in
writing.
(c) NOTICES. All communications provided for in this Agreement shall be in
writing and shall be sent to each party at the address set forth at the
beginning of this Agreement, or to such other address as a party may from time
to time designate in writing to the other parties. Notices shall be sent by
personal delivery, by registered air mail, return receipt requested, or by
express courier.
(d) HEADINGS. The headings contained in this Agreement are solely for
convenience of reference and shall not affect the interpretation of this
Agreement.
(e) COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(f) SUCCESSORS AND ASSIGNS. The Company shall not sell, assign transfer,
or otherwise convey any of its rights or delegate any of its duties under this
Agreement, except to a company which has succeeded to substantially all of the
business and assets of the Company in compliance with this Agreement and has
assumed in writing its obligations under this Agreement. This Agreement shall
be binding upon and inure to the benefit of and be enforceable by the Preferred
Shareholders and the Company and their respective successors and assigns. A
Preferred Shareholder may only assign its rights and duties to a party that is
a permitted assignee or transferee under, and has acquired the shares of the
Preferred Shareholder in accordance with, the Articles of Association of the
Company.
(g) DELAYS OR OMISSIONS; WAIVER. No delay or omission to exercise any
right, power, or remedy accruing to either the Company or the Investors upon
any breach or default by the other under this Agreement shall impair any such
right, or remedy nor shall it be construed to be a waiver of any such breach or
default, or any acquiescence therein or in any similar breach or default
thereafter occurring.
(h) FURTHER ACTIONS. At any time and from time to time, each part, agrees,
without further consideration, to take such actions and to execute and deliver
such documents as may be reasonably necessary to effectuate the purposes of
this Agreement.
<PAGE> 8
(i) AMENDED AND RESTATED AGREEMENT. This Amended and Restated
Registration Rights Agreement supersedes the Registration Rights Agreement
dated _______________________, 19__, between the Company and the Original
Investors.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMMTOUCH SOFTWARE LTD. [ ]
By: /s/ Gideon Mantel
-----------------------------
Name: Gideon Mantel ------------------------------------
Titles: Chief Executive Officer [formerly DATAMARK HOLDING, INC.]
Dr. Ed Mlavsky GEMINI ISRAEL FUND, L.P.
- --------------------------------- by its general partner, GEMINI CAPITAL
Dr. Ed Mlavsky FUND MANAGEMENT, LTD.
/s/ Yosef Sela By: /s/ Yosef Sela
- --------------------------------- --------------------------------
Yosef Sela Name: Yosef Sela
Title: Executive Vice President
A.M.T. COMPUTING LTD. HOSEN AMOT LTD.
By: /s/ Shraga Sharak By: /s/ Moti Hanochi
----------------------------- ---------------------------------
Name: Shraga Sharak Name: Moti Hanochi
Title: Managing Director Title: Manager
HARBOURVEST-EVERGREEN L.P.
By: /s/ Jacob Barak
-----------------------------
Name: Jacob Barak
Title:
GEMUL INVESTMENT
COMPANY LTD.
By:
-----------------------------
Name: Victor Amara By: /s/ Ariel Aven
---------------------------------
Name: Ariel Aven
Title: Investment Manager
ISRAEL GROWTH FUND, L.P. by its SEMEL INVESTMENTS LTD.
general partner, APAX-LEUMI Inc.
By: /s/ Allan Barkat By:
----------------------------- ---------------------------------
Name: Allan Barkat Name:
<PAGE> 9
Title: Title:
YAMAICHI UNI VEN NO.6 YAMAICHI UNI VEN NO.6-S
INVESTMENT PARTNERSHIP INVESTMENT PARTNERSHIP
By: By:
-------------------------------- --------------------------------
Senior Managing Director Senior Managing Director
Phoenix Capital Management Phoenix Capital Management
Co. Ltd., Co. Ltd.,
its Managing Partner its Managing Partner
JAFCO CO. LTD.
By: /s/ Mitsumasa Murase
--------------------------------
President
GEMINI ISRAEL II PARALLEL
FUND, L.P.
By: /s/ Yosef Sela
--------------------------------
/s/ Ed Mlavsky
--------------------------------
its general partner,
Gemini Capital Associates, L.P.,
by its general partner
Gemini Capital Fund Management
Ltd.
YVC - YOZMA MANAGEMENT AND
INVESTMENTS LTD.
By: /s/ Yigol Erlich
--------------------------------
THE CHALLENGE FUND-ETGAR L.P.
INVESTMENT PARTNERSHIP
By:
--------------------------------
its general partner
Challenge Partners, L.P.,
by its general partner
Atidim Etgar Nihul Kranot Ltd.
k.t. CONCORD VENTURE k.t. CONCORD VENTURE
FUND (CAYMAN) L.P. FUND (ISRAEL) L.P.
By: /s/ M. Steingert By: /s/ M. Steingert
-------------------------------- -----------------------------
its general partner its general partner
9
<PAGE> 10
k.t. Concord Investment Partners Ltd. k.t. Concord Investment Partners Ltd.
k.t. CONCORD VENTURE k.t. CONCORD VENTURE
ADVISORS (CAYMAN) L.P. ADVISORS (ISRAEL) L.P.
By: /s/ M. STEINGERT By: M. STEINGERT
---------------------------------- ----------------------------------
its general partner its general partner
k.t. Concord Investment Partners Ltd. k.t. Concord Investment Partners Ltd.
- -------------------------------------
C. R. Fredrick
<PAGE> 11
BPPA CTSL LLC
/s/ Emilio Bassini
- ----------------------------
Managing Member
EMV CTSL LLC
By: Emerging Markets Ventures, I, L.P.,
its managing member
By: EMV MGP LLC,
its managing general partner
By: Bassini Playfair Capital LLC,
its managing member
By: Bassini Playfair & Associates LLC,
its class A member
/s/ Emilio Bassini
- ----------------------------
Managing Principal
NOMURA INTERNATIONAL PLC
/s/ Kazo Yamazoe
- ----------------------------
Managing Director
CSK VENTURE CAPITAL LTD.
/s/ Kinya Nakagome
- ----------------------------
YVC - YOZMA MANAGEMENT AND
INVESTMENTS LTD.
/s/ Yigol Erlich
- ----------------------------
k.t. CONCORD VENTURE
FUND (CAYMAN) L.P.
/s/ M. Steingert
- ----------------------------
General Partner
k.t. CONCORD VENTURE
FUND (ISRAEL) L.P.
/s/ M. Steingert
- ----------------------------
JAFCO CO. LTD.
/s/ Mitsumasa Murase
- ----------------------------
President
<PAGE> 12
Investor International (Cayman) Ltd.
/s/ ALAIN ANDREY
- -------------------------------
Attorney in fact
WOLFCOMM.Com PARTNERS
/s/ AARON WOLFSON
- -------------------------------
General Partner
WOLFSON EQUITIES
/s/ AARON WOLFSON
- -------------------------------
General Partner
Ottley Properties, LLC
/s/ MICHAEL B. WHITE
- -------------------------------
The LaCroix, LLC
/s/ H. HUNTER WHITE III
- -------------------------------
Manager
Navesink Equity Derivative Fund, LDC
/s/ John Burke
- -------------------------------
Advisor
OCEANIC BANK AND TRUST LIMITED
/s/ H. GOODY
- -------------------------------
Chairman
HULL OVERSEAS, Ltd.
/s/ J. MITCHELL HULL
- -------------------------------
Director
OTP LLC
/s/ MARK H. RAIHSLY
- -------------------------------
Manager
<PAGE> 13
SYNERGY VENTURES MANAGEMENT, INC.
/s/ Yariv H. Zahool
YOZMA VENTURE CAPITAL, LTD.
/s/ Avi Levy
DSJ International Trust
/s/ Stuart Feldman
President
/s/ Gerald L. Golub
/s/ David Gol
<PAGE> 14
EXHIBIT A
ORIGINAL INVESTORS
Gemini Israel Fund, L.P.
A.M.T. Computing Ltd.
Hosen Amot Ltd.
Evergreen Canada Israel Investments and Company Ltd.
Yarok Ad Fund Investment Partnership, L.P.
Investech Ltd.
Gemul Investment Company Ltd.
Semel Investments Ltd.
CSK
Israel Growth Fund
Ed Mlavsky
Yossi Sela
C.R. Fredrick
[________](formerly Datamark Holdings, Inc.)
Yamaichi Uni Ven No. 6 Investment Partnership
Yamaichi Uni Ven No. 6-S Investment Partnership
JAFCO Co. Ltd.
YVC - YOZMA MANAGEMENT AND INVESTMENTS LTD.
The Challenge Fund-Etgar L.P.
k.t. Concord Venture Fund (Cayman) L.P.
11
<PAGE> 15
k.t. Concord Venture Fund (Israel) L.P.
k.t. Concord Venture Advisors (Cayman) L.P.
k.t. Concord Venture Advisors (Israel) L.P.
12
<PAGE> 16
EXHIBIT B
NEW INVESTORS
13
<PAGE> 17
EXHIBIT C
ADDENDUM
________________ (Name of Future investor) hereby agrees to become a
party, as of the date hereof to the Registration Rights Agreement dated as of
_________, 1999, to be bound by and to be entitled to the benefits of such
Registration Rights Agreement as if it were an original party thereof.
14
<PAGE> 1
EXHIBIT 4.3
December 23, 1998
To:
Amara Victor
CSK Venture Capital Ltd.
Datamark Holding, Inc.
E&M Computing Ltd.
Dr. Ed Mlavsky
C.R. Fedrick
Gemini Israel Fund L.P.
Gemul Investment Company Ltd.
Hosen Amot Ltd.
HarbourVest-Evergreen L.P.
Israel Growth Fund, L.P.
Yossi Sela
Semel Investments Ltd.
Yamaichi Uni Ven No. 6 and S-6 Investment Partnerships, c/o Phoenix Capital
Management Co. Ltd.
The Challenge Fund-Etgar, L.P.
JAFCO CO, Ltd.
JAFCO G7A Investment Enterprize Partnership
JAFCO G7B Investment Enterprize Partnership
Gemini Israel II Parallel Fund L.P.
The Challenge Fund-Etgar L.P.
Yozma II (Israel) L.P.
Yozma II (B.V.I.) L.P.
Poalim Capital Markets (Funds) Ltd.
(the above are referenced to collectively as the "Existing Investors")
k.t. Concord Venture Fund (Cayman), L.P.
k.t. Concord Venture Fund (Israel), L.P.
k.t. Concord Venture Advisors (Cayman) L.P.
k.t. Concord Venture Advisors (Israel) L.P.
<PAGE> 2
Ladies and Gentlemen:
This letter agreement shall replace and supersede the letter agreements
providing tag-along rights to the Existing Investors dated February 12, 1996,
July 2, 1997, September 4, 1997, May 18, 1998, September __, 1998 and November
17, 1998. We hereby agree as follows:
In the event that any one of us (the "SELLER") wishes to sell any of our
shares in CommTouch Software Ltd. (the "COMPANY") for value, other than a
transfer by one of us to the other, to a member of our immediate families, or to
a company controlled by any of us, or a sale or series of sales of shares in
which a Seller sells less than 10% of the shares he holds in the Company, then
the Seller shall promptly deliver to the Company and to you written notice of
the proposed disposition and the basic terms and conditions thereof, including
the number of shares proposed to be sold (the "TARGET SHARES"), the proposed
purchase price and the identity of the proposed purchaser (the "PURCHASER").
In the event that the Target Shares are not acquired by you or by other
shareholders of the Company pursuant to the right of first refusal provisions
contained in the Company's Articles of Association, then you shall, for a period
of 20 calendar days following the latest date on which the Target Shares could
have been acquired pursuant to such right of first refusal, have the right to
notify the Seller of your intention to exercise your rights under this letter
agreement and to add your shares to the shares being sold by the Seller to the
Purchaser, in an amount equal to your relative share holdings in the Company and
upon the same terms and conditions specified in the notice referred to in the
preceding paragraph. In the event you exercise your rights hereunder, the Seller
must cause the Purchaser to add such shares to the Target Shares to be purchased
by the Purchaser, as part of the sale agreement, or to reduce the number of the
Seller's Target Shares from the number of shares to be purchased by the
Purchaser, and either conclude the transaction in accordance with such revised
structure or withdraw from completing the transaction.
The provisions of this letter agreement shall expire upon the consummation
of the initial public offering of the Company, and shall expire with respect to
each of us at such time as such individual holds less than 33% of the number of
shares in the Company held by such individual on the date hereof. For all
purposes of this letter agreement, the number of shares in the Company shall be
calculated to include the Series A Preferred Shares, the Series B Preferred
Shares and the Series C Preferred Shares, on an as-converted basis.
If the foregoing correctly sets for our understanding, please countersign
below and return the enclosed copy of this letter agreement.
Sincerely,
<PAGE> 1
EXHIBIT 4.4
April 15, 1999
CommTouch Software Ltd. and
each of the holders of ordinary shares or
preferred shares of CommTouch Software Ltd.
c/o CommTouch Software Inc.
3945 Freedom Circle, Ste. 730
Santa Clara, CA 95054
Ladies and Gentlemen:
This letter agreement (the "Letter Agreement") is being delivered to
CommTouch Software Ltd. (the "Company") and all of the holders of ordinary
shares and holders of preferred shares of the Company (collectively, the
"Shareholders") in connection with the purchase by the undersigned (the
"Investor") of Series D Preferred Shares of the Company pursuant to the Share
Purchase Agreement between the Company and the Investor dated April 15, 1999.
(The ordinary shares and preferred shares of the Company shall be referred to
collectively herein as the "Company Shares.") For purposes of this Agreement,
the Investor shall be deemed to be a "Shareholder."
The Investor hereby agrees that if Shareholders holding 80 percent or more
of the outstanding Company Shares (the "Majority Shareholders") determine to
sell their Company Shares in a transaction approved by the Board of Directors of
the Company, the Majority Shareholders have the right, upon giving ten calendar
days' written notice thereof to the other shareholders of the Company, to
require the other shareholders to participate in such transaction and sell their
Company Shares, provided that the disposition of Company Shares by the Majority
Shareholders is at the same consideration per share and on the same terms and
conditions as the disposition of the other shareholders' Company Shares, and the
other shareholders shall receive their pro rata portion of any other
consideration received by the Majority Shareholders in respect of such
transaction. Each Shareholder hereby agrees to deliver such shareholder's
Company Shares free and clear of all liens and encumbrances in connection with a
disposition pursuant to this Letter Agreement.
Very truly yours,
<PAGE> 1
EXHIBIT 5.1
C/255/60
Tel-Aviv, June 3, 1999
CommTouch Software Ltd.
10 Technology Avenue
Ein Vered 40696
Israel
Ladies and Gentlemen:
We refer to Amendment no. 1 to the registration statement on Form F-1,
Registration No. 333-78531 (the "Registration Statement"), initially filed by
CommTouch Software Ltd. (the "Company") on June 3, 1999 with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, in connection
with the sale of up to 3,000,000 Ordinary Shares, nominal value NIS 0.01 per
share, of the Company (the "Firm Shares") to the Underwriters as described in
the Registration Statement for resale to the public. The Company will issue and
sell these 3,000,000 Firm Shares. The Underwriters may, as described in the
Registration Statement, purchase up to an additional 450,000 Ordinary Shares,
nominal value NIS 0.01 per share, of the
<PAGE> 2
2
Company (the "Option Shares" and, together with the Firm Shares, the "Shares) at
the initial public offering price less the underwriting discount.
As special Israeli counsel to the Company in connection with the
offering of the Shares pursuant to the Registration Statement, we have examined
such corporate records and documents and such questions of law as we have
considered necessary or appropriate for the purpose of this opinion.
Upon the basis of such examination, we are of the opinion that the
Shares to be issued and sold by the Company, as contemplated by the Prospectus
included in the Registration Statement, are duly and validly authorized and,
when issued and sold in the manner contemplated by the Underwriting Agreement
filed as an exhibit to the Registration Statement (the "Underwriting Agreement")
and upon receipt by the Company of payment therefor as provided in the
Underwriting Agreement, will be legally and validly issued, fully paid and
non-assessable.
We consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the Prospectus contained in the Registration Statement and
elsewhere in the Registration Statement and Prospectus.
Very truly yours,
/s/ Naschitz, Brandes & Co.
Naschitz, Brandes & Co.
<PAGE> 1
EXHIBIT 10.1
COMMTOUCH SOFTWARE LTD.
1996 CSI STOCK OPTION PLAN
<PAGE> 2
COMMTOUCH SOFTWARE LTD.
1996 CSI STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Plan are to attract and
retain the best available personnel, to provide additional incentive to
Employees and Consultants of the Company and its Subsidiary and to promote the
success of the Company and the Subsidiary's business. Options granted under the
Plan may be Incentive Stock Options or Nonstatutory Stock Options, as determined
by the Administrator at the time of grant of an Option and subject to the
applicable provisions of Section 422 of the Code and the regulations promulgated
thereunder. Shares Purchase Rights may also be granted under the Plan. The
Options and Shares Purchase Rights offered pursuant to the Plan are a matter of
separate inducement and are not in lieu of salary or other compensation.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Administrator" means the Board or any of its Committees
appointed pursuant to Section 4 of the Plan, in its capacity as an administrator
of the Plan.
(b) "Board" means the Board of Directors of the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Committee" means a Committee appointed by the Board in
accordance with Section 4 of the Plan.
(e) "Company" means CommTouch Software Ltd., an Israeli company.
(f) "Consultant" means any person who is not an Employee and who
is engaged by the Company or the Subsidiary to render consulting or advisory
services and is compensated for such services, and any Director of the Company
or the Subsidiary whether compensated for such services or not. If the Company
registers any class of any equity security pursuant to the Exchange Act, the
term Consultant shall thereafter not include Directors who are not compensated
for their services or are paid only a Director's fee.
(g) "Continuous Status as an Employee or Consultant" means that
the employment or consulting relationship with the Company or the Subsidiary is
not interrupted or terminated. Continuous Status as an Employee or Consultant
shall not be considered interrupted in the case of (i) any leave of absence
approved by the Company or the Subsidiary or (ii) transfers between locations of
the Company or the Subsidiary or between the Subsidiary and the Company or any
successor. A leave of absence shall include sick leave, military leave, or any
other personal leave approved by an authorized representative of the Company or
the Subsidiary, as applicable. For purposes of Incentive Stock Options, no such
leave may exceed 90 days, unless reemployment upon expiration of such leave is
guaranteed by statute or contract, including policies of the Company or the
Subsidiary, as applicable. If reemployment upon expiration of a leave of absence
approved by the Company or the Subsidiary is not so guaranteed, on the 181st day
of such leave any Incentive Stock Option held by the Optionee shall cease to be
treated as an Incentive Stock Option and shall be treated for tax purposes as a
Nonstatutory Stock Option.
<PAGE> 3
(h) "CSI" means CommTouch Software, Inc., a California
corporation.
(i) "Director" means a member of either of the boards of
directors of the Company or the Subsidiary.
(j) "Employee" means any person, including Officers and
Directors, employed by the Company or the Subsidiary. The payment of a
Director's fee by the Company or the Subsidiary shall not be sufficient to
constitute "employment."
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(l) "Fair Market Value" means, as of any date, the value of the
Ordinary Shares determined as follows:
(i) If the Ordinary Shares are listed on any established
stock exchange or a national market system, including without
limitation the Nasdaq National Market of the National Association of
Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, its
Fair Market Value shall be the closing sales price for such stock (or
the closing bid, if no sales were reported) as quoted on such exchange
or system for the last market trading day prior to the time of
determination and reported in The Wall Street Journal or such other
source as the Administrator deems reliable;
(ii) If the Ordinary Shares are quoted on the NASDAQ
System (but not on the Nasdaq National Market thereof) or regularly
quoted by a recognized securities dealer but selling prices are not
reported, its Fair Market Value shall be the mean between the high bid
and low asked prices for the Ordinary Shares on the last market trading
day prior to the day of determination; or
(iii) In the absence of an established market for the
Ordinary Shares, the Fair Market Value thereof shall be determined in
good faith by the Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code.
(n) "Nonstatutory Stock Option" means an option not intended to
qualify as an Incentive Stock Option.
(o) "Officer" means a person who is an officer of the Company or
the Subsidiary within the meaning of Section 16 of the Exchange Act and the
rules and regulations promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
(q) "Optioned Stock" means the Ordinary Shares subject to an
Option or a Shares Purchase Right.
(r) "Optionee" means an Employee or Consultant who receives an
Option or Shares Purchase Right.
(s) "Ordinary Shares" means the Ordinary Shares of stock of the
Company.
2
<PAGE> 4
(t) "Plan" means the 1996 CSI Stock Option Plan.
(u) "Restricted Shares" means each of the Ordinary Shares
acquired pursuant to a grant of a Shares Purchase Right under Section 11 below.
(v) "Section 16(b)" means Section 16(b) of the Exchange Act.
(w) "Shares Purchase Right" means a right to purchase Ordinary
Shares pursuant to Section 11 below.
(x) "Subsidiary" means CommTouch Software, Inc., a California
corporation, the Company's wholly-owned U.S. subsidiary.
3. Shares Subject to the Plan. Subject to the provisions of Section 13
of the Plan, the aggregate number of Ordinary Shares that may be subject to
option and sold under this Plan is 5,000,000, unless amended by the shareholders
of the Company. The Ordinary Shares may be authorized but unused, or reacquired
Ordinary Shares.
If an Option or Shares Purchase Right expires or becomes
unexercisable without having been exercised in full, or is surrendered pursuant
to an option exchange pursuant to Section 4(c)(viii) or otherwise, the
unpurchased Ordinary Shares which were subject thereto shall become available
for future grant or sale under the Plan (unless the Plan has terminated).
However, Ordinary Shares that have actually been issued under the Plan, upon
exercise of either an Option or Shares Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan.
4. Administration of the Plan.
(a) Initial Plan Procedure. Prior to the date, if any, upon which
the Company becomes subject to the Exchange Act, the Plan shall be administered
by the Board or a Committee appointed by the Board.
(b) Plan Procedure After the Date, if any, upon which the Company
becomes Subject to the Exchange Act.
(i) Multiple Administrative Bodies. If permitted by Rule
16b-3, the plan may be administered by different bodies with respect to
Directors, Officers and Employees who are neither Directors nor
Officers.
(ii) Administration With Respect to Directors and
Officers. With respect to grants of Options and Shares Purchase Rights
to Employees who are also Officers or Directors, the Plan shall be
administered by (A) the Board if the Board may administer the Plan in
compliance with applicable Israeli securities laws, the rules under Rule
16b-3 promulgated under the Exchange Act or any successor thereto ("Rule
16b-3") relating to the disinterested administration of employee benefit
plans under which Section 16(b) exempt discretionary grants and awards
of equity securities are to be made, or (B) a Committee designated by
the Board to administer the Plan, which Committee shall be constituted
to comply with the applicable laws of Israel, rules under Rule 16b-3
relating to the disinterested administration of employee benefit plans
under which Section 16(b) exempt discretionary grants and awards of
equity securities are to be made. Once appointed, such Committee shall
continue to serve in its designated capacity until otherwise directed by
the Board. From time to time the Board may increase the size of the
Committee and
3
<PAGE> 5
appoint additional members thereof, remove members (with or without
cause) and appoint new members in substitution therefor, fill vacancies,
however caused, and remove all members of the Committee and thereafter
directly administer the Plan, all to the extent permitted by applicable
laws of Israel, the rules under Rule 16b-3 relating to the disinterested
administration of employee benefit plans under which Section 16(b)
exempt discretionary grants and awards of equity securities are to be
made.
(iii) Administration With Respect to Other Employees and
Consultants. With respect to grants of Options and Shares Purchase
Rights to Employees or Consultants who are neither Directors nor
Officers, the Plan shall be administered by (A) the Board or (B) a
Committee designated by the Board, which committee shall be constituted
in such a manner as to satisfy the legal requirements relating to the
administration of incentive stock option plans, if any, of the laws and
regulations of Israel, of California laws and regulations, of the Code,
and of any applicable stock exchange (collectively, the "Applicable
Laws"). Once appointed, such Committee shall continue to serve in its
designated capacity until otherwise directed by the Board. From time to
time the Board may increase the size of the Committee and appoint
additional members thereof, remove members (with or without cause) and
appoint new members in substitution therefor, fill vacancies, however
caused, and remove all members of the Committee and thereafter directly
administer the Plan, all to the extent permitted by the Applicable Laws.
(iv) Compliance with Section 162(m). If, at any time,
awards made under the Plan shall be subject to Section 162(m) of the
Code, the Plan shall be administered by a committee comprised solely of
"outside directors" (within the meaning of Prop. Treas. Reg. Section
1.162-27(e)(3)) or such other persons as may be permitted from time to
time under Section 162(m) of the Code and the Treasury Regulations
promulgated thereunder.
(c) Powers of the Administrator. Subject to the provisions of the
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities,
including the approval, if required, of any stock exchange upon which the
Ordinary Shares are listed, the Administrator shall have the authority in its
discretion:
(i) to determine the Fair Market Value of the Ordinary
Shares, in accordance with Section 2(1) of the Plan;
(ii) to select the Consultants and Employees to whom
Options and Shares Purchase Rights may from time to time be granted
hereunder;
(iii) to determine whether and to what extent Options and
Shares Purchase Rights or any combination thereof are granted hereunder;
(iv) to determine the number of Ordinary Shares to be
covered by each such award granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vii) to reduce the exercise price of any Option to the
then current Fair Market Value if the Fair Market Value of the Ordinary
Shares covered by such Option has declined since the date the Option was
granted; and
4
<PAGE> 6
(viii) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan.
(d) Effect of Administrator's Decision. All decisions,
determinations and interpretations of the Administrator shall be final and
binding on all Optionees and any other holders of any Options or Shares Purchase
Rights.
5. Eligibility.
(a) Nonstatutory Stock Options and Shares Purchase Rights may be
granted to Employees and Consultants. Incentive Stock Options may be granted
only to Employees. An Employee or Consultant who has been granted an Option or
Shares Purchase Right may, if otherwise eligible, be granted additional Options
or Shares Purchase Rights.
(b) Each Option shall be designated in the written option
agreement as either an Incentive Stock Option or a Nonstatutory Stock Option.
However, notwithstanding such designation, to the extent that the aggregate Fair
Market Value of the Ordinary Shares with respect to which Incentive Stock
Options are exercisable for the first time by any particular Optionee during any
calendar year (under all plans of the Company and the Subsidiary) exceeds
$100,000, such Options shall be treated as Nonstatutory Stock Options. For
purposes of this Section 5(b), Incentive Stock Options shall be taken into
account in the order in which they were granted. The Fair Market Value of the
Ordinary Shares shall be determined as of the time the Option with respect to
such Ordinary Shares is granted.
(c) Neither the Plan nor any Option or Shares Purchase Right
shall confer upon any Optionee any right with respect to continuation of his or
her employment or consulting relationship with the Company or the Subsidiary, as
applicable, nor shall it interfere in any way with his or her right or the
Company or the Subsidiary's right to terminate his or her employment or
consulting relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board or its approval by the shareholders of the
Company, as described in Section 18 of the Plan. It shall continue in effect for
a term of ten (10) years unless sooner terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be the term stated in
the option agreement; provided, however, that the term shall be no more than ten
(10) years from the date of grant thereof. In the case of an Incentive Stock
Option granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or the Subsidiary, the term of the Option shall be five (5)
years from the date of grant thereof or such shorter term as may be provided in
the option agreement.
5
<PAGE> 7
8. Option Exercise Price and Consideration.
(a) The per share exercise price for the Ordinary Shares to be
issued upon exercise of any Option shall be such price as is determined by the
Administrator, but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of
grant of such Option, owns stock representing more than ten
percent (10%) of the voting power of all classes of stock of the
Company or of the Subsidiary, the per share exercise price shall
be no less than 110% of the Fair Market Value per Ordinary Share
on the date of grant.
(B) granted to any other Employee, the per share
exercise price shall be no less than 100% of the Fair Market
Value per Ordinary Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a person who, at the time of grant
of such Option, owns stock representing more than ten percent
(10%) of the voting power of all classes of stock of the Company
or of the Subsidiary, the per share exercise price shall be no
less than 110% of the Fair Market Value per Ordinary Share on the
date of the grant.
(B) granted to any other person, the per share
exercise price shall be no less than 85% of the Fair Market Value
per Ordinary Share on the date of grant.
(b) The consideration to be paid for the Ordinary Shares to be
issued upon exercise of an Option, including the method of payment, shall be
determined by the Administrator (and, in the case of an Incentive Stock Option,
shall be determined at the time of grant). Such consideration may consist of (1)
cash, (2) check, (3) promissory note (to the extent permitted by Applicable
Laws) in the form attached hereto as Exhibit A, secured by a pledge of the
shares issued pursuant to a share pledge in the form attached hereto as Exhibit
B, or (4) any combination of the foregoing methods of payment. In making its
determination as to the type of consideration to accept, the Administrator shall
consider if acceptance of such consideration may be reasonably expected to
benefit the Company. Optionee shall also deliver a properly executed exercise
notice together with such other documentation as the Administrator and a broker,
if applicable, shall require to effect an exercise of the Option.
9. Exercise of Option.
(a) Procedure for Exercise: Rights as a Shareholder. Any Option
granted hereunder shall be exercisable at such times and under such conditions
as determined by the Administrator, including performance criteria with respect
to the Company and/or the Optionee, and as shall be permissible under the terms
of the Plan, but in no case at a rate of less than 20% per year over five (5)
years from the date the Option is granted.
An Option may not be exercised for a fraction of an Ordinary
Share.
An Option shall be deemed to be exercised when written notice of
such exercise in the form attached hereto as Exhibit C has been given to the
Company in accordance with terms of the Option by the person entitled to
exercise the Option and full payment for the Ordinary Shares with respect to
which the Option is exercised has been received by the Company. Full payment
may, as authorized by the
6
<PAGE> 8
Administrator, consist of any consideration and method of payment allowable
under Section 8(b) hereof. Until the issuance (as evidenced by the appropriate
entry on the books of the Company or of a duly authorized transfer agent of the
Company) of the stock certificate evidencing such Ordinary Shares, no right to
vote, receive dividends or any other rights as a shareholder shall exist with
respect to the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly upon
exercise of the Option. No adjustment shall be made for a dividend or other
right for which the record date is prior to the date the stock certificate is
issued, except as provided in Section 13 hereof.
Exercise of an Option in any manner shall result in a decrease in
the number of Ordinary Shares which thereafter may be available, both for
purposes of the Plan and for sale under the Option, by the number of Ordinary
Shares as to which the Option is exercised.
(b) Termination of Employment or Consulting Relationship. In the
event of termination of an Optionee's Continuous Status as an Employee or
Consultant (but not in the event of an Optionee's change of status from Employee
to Consultant (in which case an Employee's Incentive Stock Option shall
automatically convert to a Nonstatutory Stock Option on the date three (3)
months and one day following such change of status) or from Consultant to
Employee), such Optionee may, but only within such period of time as is
determined by the Administrator, of at least thirty (30) days, with such
determination in the case of an Incentive Stock Option not exceeding three (3)
months after the date of such termination (but in no event later than the
expiration date of the term of such Option as set forth in the option
agreement), exercise his or her Option to the extent that the Optionee was
entitled to exercise it at the date of such termination. To the extent that the
Optionee was not entitled to exercise the Option at the date of such
termination, or if the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event of termination of an
Optionee's Continuous Status as an Employee or Consultant as a result of his or
her disability, the Optionee may, but, only within twelve (12) months from the
date of such termination (and in no event later than the expiration date of the
termination of such Option as set forth in the option agreement), exercise the
Option to the extent otherwise entitled to exercise it at the date of such
termination. However, in the event of termination of an Optionee's Continuous
Status as an Employee or Consultant as a result of his or her "permanent
disability" as such term is defined in Section 22(e)(3) of the Code, the
Optionee shall be entitled, but only within twelve (12) months from the date of
such termination (and in no event later than the expiration date of the term of
such Option as set forth in the option agreement), to exercise all Options such
Employee or Consultant would have been entitled to exercise had such Employee or
Consultant remained employed for two (2) years from the date of such
termination. If such disability is not a "permanent disability," in the case of
an Incentive Stock Option such Incentive Stock Option shall automatically cease
to be treated as an Incentive Stock Option and shall be treated for tax purposes
as a Nonstatutory Stock Option on the day three months and one day following
such termination. If the Optionee does not exercise such Option to the extent so
entitled within the time specified herein, the Option shall terminate, and the
Ordinary Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. In the event of the death of an Optionee,
the Optionee's estate or any person who acquired the right to exercise the
Option by bequest or inheritance shall be entitled, but only within twelve (12)
months from the date of such termination (and in no event later than the
expiration date of the term of such Option as set forth in the option
agreement), to exercise all Options such Employee or Consultant would have
received had such Employee or Consultant remained employed for two (2) years
from the date of such termination. All remaining Ordinary Shares covered by the
unexercisable portion of
7
<PAGE> 9
the Option shall immediately revert to the Plan. If, after the Optionee's death,
the Optionee's estate or a person who acquires the right to exercise the Option
by bequest or inheritance does not exercise the Option within the time specified
herein, the Option shall terminate, and the Ordinary Shares covered by such
Option shall revert to the Plan.
(e) Rule 16b-3. Options granted to a person subject to Section
16(b) of the Exchange Act must comply with Rule 16b-3 and shall contain such
additional conditions or restrictions as may be required thereunder to qualify
for the maximum exemption from Section 16 of the Exchange Act with respect to
Plan transactions.
10. Non-Transferability of Options and Shares Purchase Rights. Options
and Shares Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Restricted Shares.
(a) Awards of Restricted Shares.
The Committee may, in its discretion, permit an Optionee
to exercise an Option prior to the time the Option would otherwise be
exercisable under Section 9. Without limiting the generality of the foregoing,
the Committee may provide that if an Option is exercised prior to satisfaction
of the vesting requirements of Section 9, the Shares issued upon such exercise
shall remain subject to vesting as described in Section 11(c) and shall be
subject to a right, but not an obligation, of repurchase by the Company with
respect to all unvested Shares if the Optionee ceases to be an Employee for any
reason.
(b) Restrictions.
(i) Restricted Shares may not be sold, assigned,
transferred, pledged, encumbered, or otherwise disposed of, either voluntarily
or involuntarily, until the release of such Shares from the Company's repurchase
option under Section 11(c), other than by will or the laws of descent and
distribution.
(ii) Optionees receiving Restricted Shares shall be
entitled to dividend and voting rights for the Restricted Shares even though
they are not vested, provided that such rights shall terminate immediately as to
any Restricted Shares that are repurchased by the Company.
(iii) With respect to each receipt of Restricted Shares by
an Optionee, such Optionee shall execute a Restricted Share Purchase Agreement
in the form attached hereto as Exhibit D.
(c) Vesting.
If the Optionee ceases to be an Employee for any reason,
the Company shall have the right, but not the obligation, to repurchase certain
of the Shares at their original Exercise Price. The Company's right to
repurchase the Shares at their original Exercise Price shall lapse, unless the
stock option agreement provides otherwise, as to one-fourth (1/4) of the Shares
at the end of the first year of continuous employment and as to one forty-eighth
(1/48) of the Shares per month of continuous
8
<PAGE> 10
employment over the next thirty-six (36) months. Shares that are subject to
repurchase at their original Exercise Price are referred to as "Restricted
Shares."
(d) Section 83(b) Election.
Within 30 days after the issuance of Restricted Shares to
an Optionee under the Plan, the Optionee shall decide whether or not to file an
election pursuant to Section 83(b) of the Code and Treasury Regulation section
1.83-2 (and state law counterparts) with respect to the Restricted Shares. If
the Optionee does file such an election, the Optionee shall promptly furnish a
copy of such election to the Company.
12. Shares Purchase Rights.
(a) Rights to Purchase. Shares Purchase Rights may be issued
either alone, in addition to, or in tandem with other awards granted under the
Plan and/or cash awards made outside of the Plan. After the Administrator
determines that it will offer Shares Purchase Rights under the Plan, it shall
advise the offeree in writing of the terms, conditions and restrictions related
to the offer, including the number of Ordinary Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer, which shall in no event exceed thirty (30) days
from the date upon which the Administrator makes the determination to grant the
Shares Purchase Right. The offer shall be accepted by execution of a Restricted
Stock purchase agreement in the form determined by the Administrator.
(b) Other Provisions. The Restricted Stock purchase agreement
shall contain such other terms, provisions and conditions not inconsistent with
the Plan as may be determined by the Administrator in its sole discretion. In
addition, the provisions of Restricted Stock purchase agreements need not be the
same with respect to each purchaser.
(c) Rights as a Shareholder. Once the Shares Purchase Right is
exercised, the purchaser shall have rights equivalent to those of a shareholder
of the Company and shall be a shareholder of the Company when his or her
purchase is entered upon the records of the duly authorized transfer agent of
the Company. No adjustment shall be made for a dividend or other right for which
the record date is prior to the date the Shares Purchase Right is exercised,
except as provided in Section 13 of the Plan.
13. Adjustments Upon Changes in Capitalization or Merger.
(a) Changes in Capitalization. Subject to any required action by
the shareholders of the Company, the number of Ordinary Shares covered by each
outstanding Option or Shares Purchase Right, and the number of Ordinary Shares
which have been authorized for issuance under the Plan but as to which no
Options or Shares Purchase Rights have yet been granted or which have been
returned to the Plan upon cancellation or expiration of an Option or Shares
Purchase Right, as well as the price for each Ordinary Share covered by each
such outstanding Option or Shares Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued Ordinary Shares
resulting from a stock split, reverse stock split, stock dividend, combination
or reclassification of the Ordinary Shares, or any other increase or decrease as
determined by the Administrator. The conversion of any convertible securities of
the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
9
<PAGE> 11
adjustment by reason thereof shall be made with respect to, the number of
Ordinary Shares subject to an Option or Shares Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify the
Optionee at least fifteen (15) days prior to such proposed action. To the extent
it has not been previously exercised, the Option or Shares Purchase Right shall
terminate immediately prior to the consummation of such proposed action.
(c) Merger. In the event of a merger of the Company with or into
another corporation, each outstanding Option or Shares Purchase Right may be
assumed or an equivalent option or right may be substituted by such successor
corporation or a parent or subsidiary of such successor corporation. If, in such
event, an Option or Shares Purchase Right is not assumed or substituted, the
Option or Stock Purchases Right shall terminate as of the date of the closing of
the merger. For the purposes of this paragraph, the Option or Shares Purchase
Right shall be considered assumed if, following the merger, the Option or Shares
Purchase Right confers the right to purchase or receive, for each share of
Optioned Stock subject to the Option or Shares Purchase Right immediately prior
to the merger, the consideration (whether stock, cash, or other securities or
property) received in the merger by holders of Ordinary Shares for each share
held on the effective date of the transaction (and if the holders are offered a
choice of consideration, the type of consideration received in the merger is not
solely common stock of the successor corporation or its parent). The
Administrator may, with the consent of the successor corporation, provide for
the consideration to be received upon the exercise of the Option or Shares
Purchase Right, for each share of Optioned Stock subject to the Option or Shares
Purchase Right, to be solely common stock of the successor corporation or its
parent equal in fair market value to the per share consideration received by
holders of Ordinary Shares in the merger.
(d) Compliance with Incentive Stock Option Provisions.
Notwithstanding anything to the contrary herein, each adjustment made to an
Incentive Stock Option pursuant to this Section 13 shall comply with the rules
of Section 424(a) of the Code, and no adjustment shall be made that would cause
any Incentive Stock Option to become a Nonstatutory Stock Option.
14. Time of Granting Options and Shares Purchase Rights. The date of
grant of an Option or Shares Purchase Right shall, for all purposes, be the date
on which the Administrator makes the determination granting such Option or
Shares Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Employee or Consultant to
whom an Option or Shares Purchase Right is so granted within a reasonable time
after the date of such grant.
15. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or discontinue the Plan, but no amendment, alteration, suspension
or discontinuation shall be made which would impair the rights of any Optionee
under any grant theretofore made, without his or her consent. In addition, to
the extent necessary and desirable to comply with Rule 16b-3 under the Exchange
Act or with Section 422 of the Code (or any other applicable law or regulation,
including the requirements of the NASD or an established stock exchange), the
Company shall obtain shareholder approval of any Plan amendment in such a manner
and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options or Shares Purchase Rights
already granted, and such Options and Shares Purchase Rights shall remain in
full force and effect as if this Plan had not been amended or terminated,
10
<PAGE> 12
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
16. Conditions Upon Issuance of Ordinary Shares. Ordinary Shares shall
not be issued pursuant to the exercise of an Option or Shares Purchase Right
unless the exercise of such Option or Shares Purchase Right and the issuance and
delivery of such Ordinary Shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, the laws of Israel, the
Securities Act of 1933, as amended, the Exchange Act, the rules and regulations
promulgated thereunder, and the requirements of any stock exchange upon which
the Ordinary Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option or Shares Purchase Right,
the Company may require the person exercising such Option or Shares Purchase
Right to represent and warrant at the time of any such exercise that the
Ordinary Shares are being purchased only for investment and without any present
intention to sell or distribute such Ordinary Shares if, in the opinion of
counsel for the Company, such a representation is required by any of the
aforementioned relevant provisions of law.
17. Reservation of Ordinary Shares. During the term of this Plan, the
Company shall at all times reserve and keep available such number of Ordinary
Shares as shall be sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by Company counsel to be
necessary to the lawful issuance and sale of any Ordinary Shares hereunder,
shall relieve the Company of any liability in respect of the failure to issue or
sell such Ordinary Shares as to which such requisite authority shall not have
been obtained.
18. Agreements. Options and Shares Purchase Rights shall be evidenced by
written agreements in such form as the Administrator shall approve from time to
time.
19. Shareholder Approval. Continuance of the Plan shall be subject to
approval by the shareholders of the Company within twelve (12) months before or
after the date the Plan is adopted. Such shareholder approval shall be obtained
in the degree and manner required under Applicable Laws.
20. Information to Optionees and Purchasers. The Company shall provide
to each Optionee and to each individual who acquires Ordinary Shares pursuant to
the Plan, not less frequently than annually during the period such Optionee has
one or more Options or Shares Purchase Rights outstanding, and, in the case of
an individual who acquires Ordinary Shares pursuant to the Plan, during the
period such individual owns such Ordinary Shares, copies of annual financial
statements. The Company shall not be required to provide such statements to key
employees whose duties in connection with the Company assure their access to
equivalent information.
Approved by the Board of Directors: January 1, 1996
Approved by the Shareholders: January 1, 1996
Amended by the Board of Directors: April 18, 1999
Amendment approved by the Shareholders: _________, 1999
11
<PAGE> 13
COMMTOUCH SOFTWARE LTD.
1996 CSI STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Capitalized terms used without definition in this Stock Option Agreement
(the "OPTION AGREEMENT") shall have the meanings given such terms in the
CommTouch Software Ltd. 1996 CSI Stock Option Plan (the "PLAN").
I.
NOTICE OF STOCK OPTION GRANT
Name
OPTION. You have been granted an option to purchase ordinary shares (the
"ORDINARY SHARES") of CommTouch Software Ltd., an Israeli corporation, subject
to the terms and conditions of the Plan and this Option Agreement, as follows:
<TABLE>
<S> <C>
Date of Grant:
--------------------
Exercise Price per Share: $
--------------------
Total Number of Ordinary Shares Granted:
--------------------
Total Exercise Price: $
--------------------
Type of Option:
--------------------
Expiration Date: ,
------------ -------
</TABLE>
VESTING; TERMINATION. This Option will vest with respect to one fourth
of the Ordinary Shares subject to the Option on the first anniversary of the
Date of Grant, and with respect to an additional one thirty-sixth of the
remaining Ordinary Shares subject to the Option each month thereafter, and will
therefore be fully vested on __________ __, ____. This Option may be exercised,
in whole or in part, with respect to any vested shares, on or before __________
__, ____.
II.
AGREEMENT
1. GRANT OF OPTION. CommTouch Software Ltd., an Israeli corporation
(the "COMPANY"), hereby grants to the Optionee (the "OPTIONEE")
named in the Notice of Stock Option Grant set forth above (the
"NOTICE OF GRANT") an option (the "OPTION") to purchase the total
number of Ordinary Shares set forth in the Notice of Grant, at the
exercise price per share set forth in the Notice of Grant (the
"EXERCISE PRICE"), subject to the terms, definitions and provisions
of the Plan, which is incorporated herein by reference. Capitalized
terms used without definition in this Option Agreement shall have
the meanings given such terms in the Plan.
1
<PAGE> 14
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and with
the applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
notice (in the form attached hereto as Exhibit A), which shall state the
election to exercise the Option, the number of Ordinary Shares with respect to
which the Option is being exercised, and such other representations and
agreements as to the Optionee's investment intent with respect to the Ordinary
Shares as may be required by the Company pursuant to the provisions of the Plan.
The written notice shall be signed by the Optionee and shall be delivered in
person or by certified mail to the Company's Chief Financial Officer. The
written notice shall be accompanied by payment of the Exercise Price. This
Option shall be deemed to be exercised upon receipt by the Company of such
written notice accompanied by the Exercise Price.
(c) COMPLIANCE WITH LAW. No Ordinary Shares will be issued pursuant to
the exercise of any Option unless such issuance and such exercise shall comply
with all relevant provisions of law and the requirements of any stock exchange
upon which the Ordinary Shares may then be listed. Assuming such compliance, for
income tax purposes the Ordinary Shares shall be considered transferred to the
Optionee on the date on which the Option is exercised with respect to such
shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Ordinary Shares
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company, concurrently with the
exercise of all or any portion of this Option, deliver to the Company his or her
Investment Representation Statement in the form attached hereto as Exhibit B.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by cash or
check or by a combination thereof, at the election of the Optionee. In the event
there is a public market for Ordinary Shares, Optionee shall also deliver a
properly executed exercise notice together with such other documentation as the
Administrator and the broker, if applicable, shall require to effect an exercise
of the Option.
5. NON-TRANSFERABILITY OF OPTION; RIGHT OF REPURCHASE. This Option may
not be transferred in any manner otherwise than by will or by the laws of
descent or distribution and may be exercised during the lifetime of Optionee
only by Optionee. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
6. TERM OF OPTION. This Option may be exercised only in accordance with
the terms set out in the Notice of Grant, and may be exercised prior to its
expiration date only, in accordance with the Plan and the terms of this Option
Agreement.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company, the Subsidiary
and the Optionee with respect to the subject matter hereof, and may not be
modified adversely to the Optionee's interest except by means of a writing
signed by the Company and Optionee.
2
<PAGE> 15
In case of conflict between the provisions in the Plan and this Option
Agreement, the provisions in the Plan shall prevail. This Option Agreement is
governed by California law except for that body of law pertaining to conflict of
laws.
8. ACKNOWLEDGMENTS OF OPTIONEE.
(a) NO RIGHT OF EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE
VESTING OF ORDINARY SHARES PURSUANT TO THE OPTION IS EARNED ONLY BY CONTINUING
CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY OR THE SUBSIDIARY, AS THE
CASE MAY BE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING ORDINARY SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMMTOUCH SOFTWARE LTD. [19__] CSI
STOCK OPTION PLAN THAT IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON
OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY
THE COMPANY OR THE SUBSIDIARY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S
RIGHT OR THE COMPANY'S OR THE SUBSIDIARY'S RIGHT TO TERMINATE OPTIONEE'S
EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
(b) RECEIPT OF PLAN. Optionee acknowledges receipt of a copy of the Plan
and represents that he or she is familiar with the terms and provisions thereof,
and hereby accepts this Option subject to all of the terms and provisions
thereof. Optionee has reviewed the Plan and this Option in their entirety, has
had an opportunity to obtain the advice of counsel prior to executing this
Option and fully understands all provisions of the Option. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions arising under the Plan
or this Option. Optionee further agrees to notify the Company upon any change in
the residence address indicated below.
Date: __________, 19__
COMMTOUCH SOFTWARE LTD.
By: ___________________________________
Its: Chief Executive Officer
_______________________________________
_______________________________________
(name)
3
<PAGE> 16
COMMTOUCH SOFTWARE LTD.
1996 CSI STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Capitalized terms used without definition in this Stock Option Agreement
(the "OPTION AGREEMENT") shall have the meanings given such terms in the
CommTouch Software Ltd. 1996 CSI Stock Option Plan (the "PLAN").
I.
NOTICE OF STOCK OPTION GRANT
Name
OPTION. You have been granted an option to purchase ordinary shares (the
"ORDINARY SHARES") of CommTouch Software Ltd., an Israeli corporation, subject
to the terms and conditions of the Plan and this Option Agreement, as follows:
Date of Grant:
--------------------
Exercise Price per Share: $
--------------------
Total Number of Ordinary Shares Granted:
--------------------
Total Exercise Price: $
--------------------
Type of Option:
--------------------
Expiration Date: ,
------------ -------
VESTING; TERMINATION. This Option will vest with respect to one fourth
of the Ordinary Shares subject to the Option on the first anniversary of the
Date of Grant, and with respect to an additional one thirty-sixth of the
remaining Ordinary Shares subject to the Option each month thereafter, and will
therefore be fully vested on __________ __, ____; provided, however, that if the
Company (a) sells all or substantially all of its assets or (b) merges with
another corporation and such merger results in the shareholders immediately
prior to such transaction holding less than 50 percent of the voting power of
the merged entity after the transaction (in either case, a "CHANGE OF CONTROL"),
then 50 percent of the Optionee's unvested shares shall vest immediately prior
to the effectiveness of the Change of Control and the remaining unvested shares
shall vest on the earlier to occur of (i) any termination of the Optionee's
employment other than voluntary termination which does not qualify as
termination for "Good Reason," as defined in Exhibit A to this agreement or
termination for "Cause," as defined in such Exhibit A or (ii) the one-year
anniversary of the Change of Control. This Option may be exercised, in whole or
in part, with respect to any vested shares, on or before __________ __, ____.
1
<PAGE> 17
II.
AGREEMENT
1. GRANT OF OPTION. CommTouch Software Ltd., an Israeli corporation (the
"COMPANY"), hereby grants to the Optionee (the "OPTIONEE") named in the Notice
of Stock Option Grant set forth above (the "NOTICE OF GRANT") an option (the
"OPTION") to purchase the total number of Ordinary Shares set forth in the
Notice of Grant, at the exercise price per share set forth in the Notice of
Grant (the "EXERCISE PRICE"), subject to the terms, definitions and provisions
of the Plan, which is incorporated herein by reference. Capitalized terms used
without definition in this Option Agreement shall have the meanings given such
terms in the Plan.
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable during its term
in accordance with the Vesting Schedule set out in the Notice of Grant and with
the applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written
notice (in the form attached hereto as Exhibit A), which shall state the
election to exercise the Option, the number of Ordinary Shares with respect to
which the Option is being exercised, and such other representations and
agreements as to the Optionee's investment intent with respect to the Ordinary
Shares as may be required by the Company pursuant to the provisions of the Plan.
The written notice shall be signed by the Optionee and shall be delivered in
person or by certified mail to the Company's Chief Financial Officer. The
written notice shall be accompanied by payment of the Exercise Price. This
Option shall be deemed to be exercised upon receipt by the Company of such
written notice accompanied by the Exercise Price.
(c) COMPLIANCE WITH LAW. No Ordinary Shares will be issued pursuant to
the exercise of any Option unless such issuance and such exercise shall comply
with all relevant provisions of law and the requirements of any stock exchange
upon which the Ordinary Shares may then be listed. Assuming such compliance, for
income tax purposes the Ordinary Shares shall be considered transferred to the
Optionee on the date on which the Option is exercised with respect to such
shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Ordinary Shares
purchasable pursuant to the exercise of this Option have not been registered
under the Securities Act of 1933, as amended, at the time this Option is
exercised, Optionee shall, if required by the Company, concurrently with the
exercise of all or any portion of this Option, deliver to the Company his or her
Investment Representation Statement in the form attached hereto as Exhibit B.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by cash or
check or by a combination thereof, at the election of the Optionee. In the event
there is a public market for Ordinary Shares, Optionee shall also deliver a
properly executed exercise notice together with such other documentation as the
Administrator and the broker, if applicable, shall require to effect an exercise
of the Option.
5. NON-TRANSFERABILITY OF OPTION; RIGHT OF REPURCHASE. This Option may
not be transferred in any manner otherwise than by will or by the laws of
descent or distribution and may be exercised during the lifetime of Optionee
only by Optionee. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
2
<PAGE> 18
6. TERM OF OPTION. This Option may be exercised only in accordance with
the terms set out in the Notice of Grant, and may be exercised prior to its
expiration date only, in accordance with the Plan and the terms of this Option
Agreement.
7. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company, the Subsidiary
and the Optionee with respect to the subject matter hereof, and may not be
modified adversely to the Optionee's interest except by means of a writing
signed by the Company and Optionee. In case of conflict between the provisions
in the Plan and this Option Agreement, the provisions in the Plan shall prevail.
This Option Agreement is governed by California law except for that body of law
pertaining to conflict of laws.
8. ACKNOWLEDGMENTS OF OPTIONEE.
(a) NO RIGHT OF EMPLOYMENT. OPTIONEE ACKNOWLEDGES AND AGREES THAT THE
VESTING OF ORDINARY SHARES PURSUANT TO THE OPTION IS EARNED ONLY BY CONTINUING
CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY OR THE SUBSIDIARY, AS THE
CASE MAY BE (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING ORDINARY SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMMTOUCH SOFTWARE LTD. [19__] CSI
STOCK OPTION PLAN THAT IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON
OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY
THE COMPANY OR THE SUBSIDIARY, NOR SHALL IT INTERFERE IN ANY WAY WITH OPTIONEE'S
RIGHT OR THE COMPANY'S OR THE SUBSIDIARY'S RIGHT TO TERMINATE OPTIONEE'S
EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
3
<PAGE> 19
(b) RECEIPT OF PLAN. Optionee acknowledges receipt of a copy of the Plan
and represents that he or she is familiar with the terms and provisions thereof,
and hereby accepts this Option subject to all of the terms and provisions
thereof. Optionee has reviewed the Plan and this Option in their entirety, has
had an opportunity to obtain the advice of counsel prior to executing this
Option and fully understands all provisions of the Option. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions arising under the Plan
or this Option. Optionee further agrees to notify the Company upon any change in
the residence address indicated below.
Date: __________, 19__
COMMTOUCH SOFTWARE LTD.
By: ___________________________________
Its: Chief Executive Officer
_______________________________________
_______________________________________
(name)
<PAGE> 20
COMMTOUCH SOFTWARE INC.
1996 STOCK OPTION PLAN
EXERCISE NOTICE
CommTouch Software Ltd.
c/o CommTouch Software Inc.
3945 Freedom Circle, Ste. 730
Santa Clara, CA 95054
Attention: Secretary
1. Exercise of Option. Effective as of today, ____________, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_____ ordinary shares (the "Shares") of CommTouch Software Ltd. (the "Company")
under and pursuant to the CommTouch Software Inc. 1996 Stock Option Plan (the
"Plan") and the CommTouch Software Inc. Stock Option Agreement dated
_____________ ( the "Stock Option Agreement") at a price of $___ per Share, or
an aggregate price of $_________ (the "Exercise Price").
2. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Stock Option Agreement and agrees
to abide by and be bound by their terms and conditions.
3. Tax Consultation. Optionee understands that Optionee may suffer
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
4. Further Instruments. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
5. Delivery of Payment. Optionee herewith delivers to the Company a
[check/promissory] in the amount of the Exercise Price for the Shares.
Submitted by: Accepted by:
OPTIONEE: CommTouch Software Ltd.
By:________________________________
___________________________________ Its:_______________________________
<PAGE> 21
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : COMMTOUCH SOFTWARE LTD.
SECURITY : ORDINARY SHARES
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the undersigned
Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Securities. Optionee
is acquiring these Securities for investment and not with a view to, or for
resale in connection with, any "distribution" thereof within the meaning of the
Securities Act of 1933, as amended (the "Securities Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's representations as expressed herein. Optionee further
understands that the Securities must be held indefinitely unless they are
subsequently registered under the Securities Act or an exemption from such
registration is available. Optionee further acknowledges and understands that
the Company is under no obligation to register the Securities. Optionee
understands that the certificate evidencing the Securities will be imprinted
with a legend which prohibits the transfer of the Securities unless they are
registered or exempt from registration.
(c) Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act.
Unless an exemption from registration is otherwise available, the
Securities may only be resold in certain limited circumstances subject to the
provisions of Rule 144, which requires the resale to occur not less than one
year after the later of the date the Securities were sold by the Company or the
date the Securities were sold by an affiliate of the Company, within the meaning
of Rule 144; and, in the case of acquisition of the Securities by an affiliate,
or by a non-affiliate who subsequently holds the Securities less than two years,
the satisfaction of certain of the conditions specified by Rule 144, including:
(1) the resale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Exchange Act); and, in the case of an affiliate, (2) the
availability of certain public information about the Company, (3) the amount of
Securities being sold during any three month period not exceeding the
limitations specified in Rule 144(e), and (4) the timely filing of a Form 144,
if applicable.
<PAGE> 22
Signature of Optionee:
___________________________________
Date: _________________
<PAGE> 23
RESTRICTED SHARE PURCHASE AGREEMENT
This Restricted Share Purchase Agreement dated as of March 17,
1999 (the "Agreement") is entered into by and between CommTouch Software Ltd., a
corporation formed under the laws of Israel (the "Company") whose executive
offices are located at 10 Technology Avenue, Ein Vered, Israel, and
_____________ ("Purchaser"), an employee of the Company, whose address is set
forth below his signature at the end of this Agreement.
W I T N E S S E T H:
WHEREAS, Purchaser is an employee of the Company and the Company
desires to provide Purchaser the opportunity to acquire share ownership in the
Company; and
WHEREAS, the Company desires to issue and Purchaser desires to
purchase Ordinary Shares of the Company as herein described, on the terms and
conditions hereinafter set forth:
NOW, THEREFORE, it is agreed between the parties as follows:
1. (a) Purchaser hereby agrees to purchase from the Company and
the Company agrees to sell and issue to Purchaser ______ Ordinary Shares of the
Company, nominal value NIS 1.00 per share (the "Shares") for a purchase price of
$______ per share, or an aggregate purchase price of $______________, payable by
delivery at the Closing (as hereinafter defined) of Purchaser's Promissory Note
in the form attached as Exhibit A and the Share Pledge and Security Agreement in
the form attached as Exhibit B.
(b) The closing of the transactions contemplated hereby
(the "Closing") shall occur at the offices of the Company, or at such other time
and place as the parties may mutually agree upon in writing (the "Closing
Date").
(c) At the Closing, Purchaser shall deliver the Promissory
Note and the Share Pledge and Security Agreement to the Company and the Company
shall issue and deliver to the Trustee (as hereinafter defined) a certificate or
certificates for the Shares in the name of the Purchaser. In addition, the
parties shall execute and deliver the items specified in Section 4(a) of this
Agreement.
2. The Shares to be purchased by the Purchaser pursuant to this
Agreement shall be subject to the following option (the "Purchase Option"):
(a) In the event the Purchaser ceases to be continuously
employed by the Company, or a parent or subsidiary of the Company, for any
reason, with or without cause, the Trustee may exercise the Purchase Option.
Shares subject to the Purchase Option are hereinafter sometimes referred to as
the "Option Shares." For the purpose of this Agreement, Purchaser's "continuous
employment" shall cease when he ceases to be actively employed by the Company or
a parent or subsidiary of the Company, as determined by and in the sole
discretion
<PAGE> 24
of the Board of Directors of the Company. A leave of absence, regardless of the
reason therefor, shall be deemed to constitute the cessation of Purchaser's
active employment unless such leave is authorized by the Company in writing upon
approval of the Company's Board of Directors and Purchaser returns to work
within the time specified in such authorization; provided, however, that if the
Purchaser dies or becomes totally and permanently disabled during any such leave
of absence, the Purchaser's continuous employment will be deemed to have
terminated as of the date of his death or the date the Board of Directors
determines him to be totally and permanently disabled.
(b) Purchaser understands that the Shares are being sold
in order to induce Purchaser to become and/or remain employed by the Company and
to work diligently for the continued success of the Company. Accordingly, the
unvested portion of the Shares shall be subject to a right of repurchase by the
Trustee. The Trustee shall have the right at any time within sixty (60) calendar
days after the later of Purchaser's termination or the date any approved leave
terminates (if Purchaser fails to return within the time specified) to purchase
from the Purchaser at a price equal to the original purchase price of the Shares
on the date of such termination or expiration of approved leave (such price
hereinafter referred to as the "Option Price"), any Shares which have not become
vested shares based on the following vesting schedule (as such vesting schedule
may be modified pursuant to Section 2(c)):
The purchase price may be paid by the Trustee at its discretion in cash, check
or wire transfer or by assumption of the unpaid balance of the Promissory Note,
or by a combination of any of the foregoing.
(c) In the event of a Change of Control, as defined below,
50% of the then unvested Shares shall immediately vest and the remaining
unvested Shares shall become fully vested on the earlier of (i) the date
Purchaser's employment is terminated (A) by the Company (or any successor)
without Cause, as defined below, or (B) by Purchaser for Good Reason (as defined
below), or (ii) one year following the date of the Change of Control.
"Change of Control" shall mean (i) the acquisition of 50%
or more of the outstanding shares of the Company pursuant to a lawful tender
offer validly made by a third party, (ii) a merger, consolidation or other
reorganization of the Company (other than reincorporation of the Company), if
after giving effect to such merger, consolidation, or other reorganization of
the Company, the shareholders of the Company immediately prior to such merger,
consolidation, or other reorganization do not represent a majority in interest
of the holders of voting securities (on a fully diluted basis) with the ordinary
power to elect directors of the surviving entity after such merger,
consolidation or other reorganization, or (iii) the sale of all or substantially
all of the assets of the Company to a third party who is not an affiliate of the
Company.
2
<PAGE> 25
"Cause" shall mean (i) failure or refusal to perform a
directive of the Chief Executive Officer that is consistent with Purchaser's
duties and responsibilities, provided the Company provides Purchaser with
written notice specifying the nature of such failure or refusal and the actions
needed by Purchaser to cure the same and such failure or refusal is not cured
within 30 days of receipt of such notice, (ii) Purchaser shall have been
determined to be guilty of misconduct or be in material violation of his
fiduciary obligations to the Company (provided that the Company provides to
Purchaser written notice specifying the nature of such breach and actions needed
to be taken by Purchaser to cure the same and such breach is not cured by
Purchaser within 10 days of receipt of such notice), (iii) Purchaser performs
his duties in a grossly negligent manner, or (iv) Purchaser is convicted of a
crime that has a material adverse impact on (A) Purchaser's ability to perform
his duties, (B) the Company, or (C) the Company's business.
"Good Reason" shall be deemed to exist if (i)(A) there is
a material adverse change in Purchaser's position causing such position to be of
significantly less stature or of significantly less responsibility, (B) there is
a reduction of more than 20% of Purchaser's base compensation, or (C) Purchaser
refuses to relocate to a facility or location that is more than 50 miles from
the Company's current location, and (ii) within the 30 days immediately
following such material change, reduction, or refusal Purchaser elects to
terminate his employment voluntarily.
(d) If Purchaser's employment is terminated (i) by the
Company without Cause, or (ii) by Purchaser for Good Reason, prior to the
effective date of the initial public offering of the Company's Ordinary Shares
under the Securities Act of 1933, then 50% of the then unvested shares shall
immediately vest.
(e) Nothing in this Agreement shall affect in any manner
whatsoever the right or power of the Company, or a parent or subsidiary of the
Company, to terminate Purchaser's engagement, for any reason, with or without
cause.
3. The Purchase Option shall be exercised by written notice
delivered or mailed as provided in Section 12 of this Agreement and as provided
for and defined in Section 16 of the Joint Escrow Instructions attached as
Exhibit C to this Agreement.
4. (a) As security for his faithful performance of the terms of
this Agreement and to insure the availability for delivery of Purchaser's Option
Shares upon exercise of the Purchase Option, Purchaser agrees to deliver to the
Trustee named in the Joint Escrow Instructions, attached hereto as Exhibit C,
the certificate or certificates evidencing the Option Shares and two Share
Transfer Deeds duly executed (with date and number of shares in blank) in the
form attached hereto as Exhibit D. Such documents are to be held by the Trustee
and delivered by the Trustee pursuant to the Joint Escrow Instructions, which
instructions shall also be delivered to the Trustee at the Closing hereunder.
3
<PAGE> 26
(b) Within thirty (30) calendar days after payment in full
of the Promissory Note, and within thirty (30) days after each June 30 and
December 31 following the payment in full of the Promissory Note, if Purchaser
so requests, the Trustee will deliver to Purchaser certificates representing as
many of the Shares as are no longer subject to the Purchase Option (less such
shares as have been previously delivered). Ninety (90) calendar days after
cessation of Purchaser's continuous employment by the Company, the Company will
direct the Trustee to deliver to Purchaser a certificate or certificates
representing the number of shares of Option Shares not repurchased by the
Trustee pursuant to exercise of the Purchase Option (less such shares as have
been previously delivered).
5. If, from time to time during the term of the Purchase Option:
(a) there is any stock dividend or liquidating dividend of
cash and/or property, stock split or other change in the character or amount of
any of the outstanding securities of the Company, or
(b) there is any consolidation, merger or sale of all or
substantially all, of the assets of the Company, then, in such event, any and
all new, substituted or additional securities or other property to which
Purchaser is entitled by reason of his ownership of the Option Shares shall be
immediately subject to such Purchase Option and be included in the term "Option
Shares" for all purposes of the Purchase Option with the same force and effect
as the shares of Option Shares from time to time subject to the Purchase Option.
While the total Option Price shall remain the same after each such event, the
Option Price per Option Share upon exercise of the Purchase Option shall be
appropriately adjusted as determined by the Board of Directors of the Company.
6. If the Trustee makes available, at the time and place and in
the amount and form provided in this Agreement, the consideration for the Shares
to be repurchased in accordance with the provisions of Section 2 of this
Agreement, then from and after such time the person from whom such shares are to
be repurchased shall no longer have any rights as a holder of such shares (other
than the right to receive payment of such consideration in accordance with this
Agreement). Such shares shall be deemed to have been repurchased in accordance
with the applicable provisions of this Agreement, whether or not the
certificate(s) therefor have been delivered as required by this Agreement.
7. All certificates representing the Shares purchased under this
Agreement shall, where applicable, have endorsed thereon legends in
substantially the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW
TO DISTRIBUTION OR RESALE, AND MAY NOT BE
4
<PAGE> 27
SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF
AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SHARES UNDER SAID
ACT OR AN OPINION OF COUNSEL SATISFACTORY TO THE ISSUER THAT
REGISTRATION IS NOT REQUIRED.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
CERTAIN OPTIONS TO PURCHASE SUCH SHARES SET FORTH IN AN AGREEMENT
BETWEEN THE ISSUER AND THE REGISTERED HOLDER. SUCH AGREEMENT
GRANTS CERTAIN REPURCHASE RIGHTS UPON TERMINATION OF SERVICE WITH
THE ISSUER. A COPY OF SUCH AGREEMENT IS ON FILE AT THE PRINCIPAL
OFFICE OF THE ISSUER AND WILL BE FURNISHED UPON WRITTEN REQUEST
TO THE SECRETARY OF THE ISSUER BY THE HOLDER OF RECORD OF THE
SHARES REPRESENTED BY THIS CERTIFICATE.
and any legend required to be placed thereon by the California Commissioner of
Corporations and any applicable state securities law or Israeli securities law.
8. (a) This Agreement is made with Purchaser in reliance upon
Purchaser's representation to the Company, which by his acceptance hereof he
confirms, that the Shares which he will receive will be acquired for investment
for an indefinite period for his own account, not as a nominee or agent, and not
with a view to the sale or distribution of any part thereof, and that he has no
present intention of selling, granting participation in, or otherwise
distributing the same, but subject, nevertheless, to any requirement of law that
the disposition of his property shall at all times be within his control. By
executing this Agreement, Purchaser further represents (i) that he does not have
any contract, understanding or agreement with any person to sell, transfer or
grant participations, to such person or to any third person, with respect to any
of the Shares, (ii) that his current residence address is as set forth on the
signature page hereto, and (iii) that all communications between the parties
concerning the purchase and sale of the Shares have taken place within the State
of California.
(b) Purchaser understands that the Shares will not be
registered under the Securities Act on the ground that the sale provided for in
this Agreement is exempt pursuant to Section 4(2) of the Securities Act, and
that the Company's reliance on such exemption is predicated on his
representations set forth herein.
(c) Purchaser agrees that in no event will he make a
disposition of any of the Shares unless and until (a) he shall have notified the
Company of the proposed disposition and shall have furnished the Company with a
statement of the circumstances surrounding the
5
<PAGE> 28
proposed disposition, and (b) he shall have furnished the Company with an
opinion of counsel satisfactory to the Company to the effect that (i) such
disposition will not require registration of such Shares under the Securities
Act, or (ii) that appropriate action necessary for compliance with the
Securities Act has been taken, or (c) the Company shall have waived, expressly
and in writing, its rights under clauses (a) and (b) of this Section 8.
(d) In connection with the investment representations made
herein, Purchaser represents that he has heretofore discussed or had the
opportunity to discuss the Company's plans, operations and financial condition
with the Company's officers and has heretofore received all such information as
he deems necessary and appropriate to enable him to evaluate the financial risks
inherent in his investment. The Purchaser further represents that he has
received satisfactory and complete information concerning the business and
financial condition of the Company in response to all inquiries in respect
thereof, and by reason of the Purchaser's business or financial experience or
the business or financial experience of the Purchaser's professional advisors
who are unaffiliated with and who are not compensated by the Company or any
affiliate or selling agent of the Company, directly or indirectly, the Purchaser
has the capacity to protect his own interest in connection with the transactions
contemplated by this Agreement.
(e) Purchaser understands that if the Company does not
register with the Securities and Exchange Commission pursuant to Section 12 of
the Securities Exchange Act of 1934 (the "Exchange Act") or if a registration
statement covering the Shares (or a filing pursuant to the exemption from
registration under Regulation A of the Securities Act) under the Securities Act
is not in effect when he desires to sell the Shares, he may be required to hold
the Shares for an indeterminate period. Purchaser also acknowledges that he
understands that any sale of the Shares which might be made by him in reliance
upon Rule 144 under the Securities Act may be made only in limited amounts in
accordance with the terms and conditions of that Rule 144.
9. The Company covenants and agrees that (a) at all times after
it first becomes subject to the reporting requirements of Section 13 or 15(d) of
the Exchange Act it will use its best efforts to comply with the current public
information requirements of Rule 144(c)(1) under the Securities Act and that if
prior to becoming subject to such reporting requirements an over-the-counter
market develops for the Shares, it will make publicly available the information
required by Rule 144(c)(2), (b) it will furnish Purchaser upon request with all
information required for the preparation and filing of Form 144, and (c) it will
on a timely basis use its best efforts to file all reports required to be filed
and make all disclosures, including disclosures of material adverse information,
required to permit Purchaser to make the required representations in Form 144.
10. Except as otherwise provided herein, Purchaser shall, during
the term of this Agreement, be entitled to exercise all rights and privileges of
a shareholder of the Company with respect to the Shares.
6
<PAGE> 29
11. The parties agree to execute such further documents or
agreements and to take such further action as may reasonably be necessary to
carry out the intent of this Agreement.
12. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon the earliest of personal
delivery, actual receipt or the third full business day following deposit in the
United States mail with postage and fees prepaid, addressed to the other party
to this Agreement at such other party's address shown below his or her signature
or at such other address as such party may designate by ten (10) calendar days'
advance written notice to the other party to this Agreement.
13. This Agreement shall inure to the benefit of the successors
and assigns of the Company and, subject to the restrictions on transfer herein
set forth, be binding upon Purchaser, his heirs, executors, administrators,
successors and assigns. No waiver of any breach or condition of this Agreement
shall be deemed to be a waiver of any other or subsequent breach or condition,
whether of a like or different nature.
14. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
15. No modification of this Agreement shall be valid unless made
in writing and signed by the parties to this Agreement.
16. This Agreement constitutes the entire agreement between the
Company and the Purchaser regarding the purchase of the Shares. Any and all
prior agreements and negotiations concerning the subject matter of this
Agreement are merged herein. Should any part, term or provision of this
Agreement be declared invalid, void or unenforceable, all remaining parts, terms
and provisions of this Agreement shall remain in full force and effect and shall
in no way be invalidated, impaired or affected thereby. Nothing in this
Agreement, express or implied, is intended to confer on any person other than
the parties to this Agreement or their respective successors and permitted
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day and year first above written.
COMMTOUCH SOFTWARE LTD.: PURCHASER:
By ________________________________ ___________________________________
Its _______________________________
Address:
7
<PAGE> 30
EXHIBIT C
JOINT ESCROW INSTRUCTIONS
__________________, 1999
________________________
________________________
________________________
Dear Sir:
As Trustee for both CommTouch Software Ltd., a corporation formed
under the laws of Israel (the "Company") and _____________ ("Purchaser"), you
are hereby authorized and directed to hold the documents delivered to you
pursuant to the terms of that certain Restricted Share Purchase Agreement (the
"Agreement") of even date herewith between the Company and Purchaser, to which a
form of these Joint Escrow Instructions is attached as Exhibit C, in accordance
with the following instructions:
1. In the event you shall elect to exercise the Purchase Option
set forth in the Agreement, you shall give to Purchaser a written notice as
provided in the Agreement. Purchaser hereby irrevocably authorizes and directs
you to close the transaction contemplated by such notice, including prompt
delivery of stock certificates.
2. At such closing, you are directed (a) to date the Share
Transfer Deed or Deeds necessary for the transfer in question, (b) to fill in
the number of shares being transferred, and (c) to deliver same, together with
the certificate or certificates evidencing the shares to be transferred, to the
Company against the simultaneous delivery by you to Purchaser of the purchase
price (by certified or bank cashier's check or assumption of the Promissory
Note) for the number of shares being purchased pursuant to the exercise of the
Purchase Option.
3. Purchaser irrevocably authorizes the Company to deposit with
you any certificates evidencing shares to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as his or her
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents and documents or agreements necessary or
appropriate to make such securities negotiable and to complete any transaction
herein contemplated. Subject to the provisions of this Section 3, Purchaser
shall be entitled to exercise all rights and privileges of a shareholder of the
Company while the certificates representing the shares are held by you.
4. In accordance with the terms of Section 4 of the Agreement,
you shall, upon request from time to time after the Promissory Note has been
paid in full, deliver to
<PAGE> 31
Purchaser a certificate or certificates representing so many shares as are no
longer subject to the Purchase Option.
5. This escrow shall terminate upon the release of all shares
held under the terms and provisions hereof.
6. If at the time of termination of this escrow you should have
in your possession any documents, securities or other property belonging to
Purchaser, you shall deliver all of same to Purchaser and shall be discharged
from all further obligations hereunder.
7. Your duties hereunder may be altered, amended, modified or
revoked only by a writing signed by all of the parties hereto.
8. You shall be obligated only for the performance of such duties
as are specifically set forth herein and may rely and shall be protected in
relying or refraining from acting on any instrument reasonably believed by you
to be genuine and to have been signed or presented by the proper party or
parties. You shall not be personally liable for any act you may do or omit to do
hereunder as Trustee or as attorney-in-fact of Purchaser while acting in good
faith and in the exercise of your own good judgment, and any act done or omitted
by you pursuant to the advice of your own attorneys shall be conclusive evidence
of such good faith.
9. You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law, and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree of any
court, you shall not be liable to any of the parties hereto or to any other
person, firm or corporation by reason of such compliance, notwithstanding any
such order, judgment or decree being subsequently reversed, modified, annulled,
set aside, vacated or found to have been entered without jurisdiction.
10. You shall not be liable in any respect on account of the
identity, authority or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or papers
deposited or called for hereunder.
11. You shall not be liable for the outlawing of any rights under
any statute of limitations with respect to these Joint Escrow Instructions or
any documents deposited with you.
12. You shall be entitled to employ such legal counsel and other
experts as you may deem necessary to properly advise you in connection with your
obligations hereunder and you may rely upon the advice of such counsel.
13. Your responsibilities as Trustee hereunder shall terminate if
you resign by written notice to each party. In the event of any such
termination, the Company shall appoint another person as successor Trustee.
2
<PAGE> 32
14. If you reasonably require other or further documents or
agreements in connection with these Joint Escrow Instructions or obligations in
respect hereto, the necessary parties hereto shall join in furnishing such
documents or agreements.
15. It is understood and agreed that should any dispute arise
with respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such dispute shall have been settled either by mutual written agreement of
the parties concerned or by a final order, decree or judgment or a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
16. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail, by registered or certified mail with postage
and fees prepaid, addressed to each of the other parties entitled at the
following addresses, or at such other addresses as a party may designate by ten
(10) calendar days' advance written notice to each of the other parties hereto.
COMPANY: CommTouch Software Ltd.
10 Technology Avenue
Ein Vered, Israel
PURCHASER: Notices to Purchaser shall be sent to the address
set forth below Purchaser's signature on these
Joint Escrow Instructions.
TRUSTEE: ________________________
________________________
17. By signing these Joint Escrow Instructions, you become a
party hereto only for the purpose of said Joint Escrow Instructions; you do not
become a party to the Agreement.
18. This Agreement shall be governed by and construed in
accordance with the laws of the State of California and the laws of Israel.
3
<PAGE> 33
19. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and permitted assigns.
Very truly yours,
COMMTOUCH SOFTWARE LTD.
By ________________________________
Its ____________________________
PURCHASER
___________________________________
Address:
TRUSTEE
___________________________________
4
<PAGE> 34
EXHIBIT D
SHARE TRANSFER DEED
The undersigned, __________________ (the "Transferor"), in
consideration of the sum of NIS _____ paid to the Transferor by ________________
(the "Transferee"), does hereby transfer to the Transferee ____ Ordinary Shares,
nominal value NIS 1 per share, in COMMTOUCH SOFTWARE LTD., an Israeli company
(the "Company"), to be held unto the said Transferee, his executors,
administrators, heirs and assigns, upon all of the terms and conditions subject
to which the Transferor held such shares, and the said Transferee does hereby
agree to take such shares subject to the above terms and conditions.
AS WITNESS our hand the ___ day of __________________.
___________________ TRANSFEREE
____________________ By: __________________
Witness to signature: Witness to signature:
____________________ ______________________
5
<PAGE> 35
CONSENT OF SPOUSE
OF PURCHASER OF ORDINARY SHARES OF
COMMTOUCH SOFTWARE LTD.
The undersigned, as spouse to the Purchaser of shares of
COMMTOUCH SOFTWARE LTD., hereby acknowledges that she has read and reviewed the
terms of the Restricted Share Purchase Agreement between COMMTOUCH SOFTWARE LTD.
and the Purchaser and hereby agrees to be bound by the terms and conditions
thereof, as if the undersigned had executed said Agreement as an original party
thereto.
Dated: _______________, 1999
________________________________________
Name (please print): ___________________
6
<PAGE> 36
Internal Revenue Service Center Election Under Section 83(b)
Fresno, CA 93888 of the Internal Revenue Code
of 1986
Gentlemen:
I hereby elect under section 83(b) of the Internal Revenue Code of 1986 to
include in gross income any excess of fair market value over purchase price with
respect to the transfer of the property described below:
1. Name:
2. Address:
3. Social Security Number: ____________________
4. Tax Year of Election: Calendar year of 1999.
5. Description of Property: __________ Ordinary Shares of CommTouch
Software Ltd., a corporation formed under the laws of Israel.
6. Date of Property Transfer:
7. Nature of Property Restrictions: Property is subject to a declining
right to repurchase the stock at the undersigned's original purchase
price if the undersigned ceases to be employed with CommTouch Software
Ltd., which right will lapse over a 48-month period.
8. Fair Market Value at the Time of Transfer: $______ per share for an
aggregate of $__________. The Fair Market Value at the time of transfer
was determined without regard to any lapse restrictions as defined in
section 1.83-3(i) of the Income Tax Regulations.
9. Amount Paid for Property: $_____ per share for an aggregate of
$_________.
10. A copy of this election has been furnished to CommTouch Software Ltd.,
the person for whom the services are performed.
____________________, 1999 ____________________________
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<PAGE> 37
SHARE PLEDGE AND SECURITY AGREEMENT
THIS SHARE PLEDGE AND SECURITY AGREEMENT (the "Agreement"), dated
as of _______________, is made by and between ________________ ledgor") and
CommTouch Software Ltd., a corporation formed under the laws of Israel ("Secured
Party").
R E C I T A L S
A. Pledgor is the owner of _____ shares of common stock of
Secured Party (the "Pledged Shares").
B. As security for the "Obligations" described in Section 2
below, Pledgor has agreed to make the pledge contemplated by this Agreement.
IT IS AGREED:
1. PLEDGE. Pledgor hereby pledges and delivers to
_________________ ("Trustee") on behalf of Secured Party, and grants to Secured
Party a security interest in, all of the following (the "Pledged Collateral"):
(a) The Pledged Shares and the certificates representing the
Pledged Shares, and all dividends, cash, instruments and other property from
time to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Shares; and
(b) All additional shares of stock or other securities of Secured
Party from time to time acquired by Pledgor in connection with any stock split,
stock dividend or other distribution or exchange in respect of any shares of
stock pledged hereunder, and the certificates representing such additional
shares or other securities, and all dividends, cash, instruments and other
property from time to time received, receivable or otherwise distributed in
respect of or in exchange for any or all of such shares.
The inclusion of proceeds in this Agreement does not authorize Pledgor to sell,
dispose of or otherwise use the Pledged Collateral in any manner not
specifically authorized hereby.
2. SECURITY FOR OBLIGATIONS. This Agreement secures the payment
and performance of (i) all indebtedness evidenced by, and all liabilities and
obligations of Pledgor to Secured Party under, that certain Promissory Note
executed by Pledgor dated March 17, 1999, in favor of Secured Party (the
"Note"), and all modifications, renewals, extensions and rearrangements thereof
and substitutions and replacements therefor, and (ii) all indebtedness,
liabilities and obligations of Pledgor now or hereafter existing under this
Agreement (all of the foregoing collectively the "Obligations").
3. DELIVERY OF PLEDGED COLLATERAL. All certificates representing
the Pledged Collateral, accompanied by instruments of transfer or assignment
duly executed in blank by Pledgor, have been delivered to the Trustee and shall
be held on behalf of Secured Party pursuant hereto, all in form and substance
satisfactory to Secured Party. Upon the occurrence and during the continuation
of an event which, with the giving of notice or the lapse of time, or both,
would become an Event of Default (as defined in Section 7 hereof), Secured Party
shall have the right,
<PAGE> 38
in its discretion and without notice to Pledgor, to direct the Trustee to
transfer to or to register in its name or the name of a nominee any or all of
the Pledged Collateral, subject only to the revocable rights specified in
Section 5(a) hereof. In addition, Secured Party shall have the right at any time
to exchange certificates representing the Pledged Collateral in the Trustee's
possession for certificates of smaller or larger denominations.
4. REPRESENTATIONS AND WARRANTIES. Pledgor represents and
warrants as follows:
(a) Pledgor is a resident of the State of California and has full
power and authority to enter into and perform all of his obligations under this
Agreement.
(b) The execution, delivery and performance by Pledgor of this
Agreement does not violate any provision of any statute, law, rule, regulation,
judgment, order or decree binding upon Pledgor and will not conflict with, or
constitute a breach or default under, any indenture, loan agreement, contract or
other agreement or instrument to which Pledgor is a party or by which Pledgor or
any of his property is bound.
(c) No authorization, consent or approval or other action by, and
no notice to or other filing with, any governmental authority or regulatory body
is required either (i) for the execution and delivery by Pledgor of this
Agreement, the pledge by Pledgor of the Pledged Collateral pursuant hereto or
the performance by Pledgor of any of his obligations hereunder, or (ii) for the
exercise by Secured Party of the voting or other rights provided for in this
Agreement or the remedies in respect of the Pledged Collateral pursuant hereto
(except as may be required in connection with such disposition by laws affecting
the offering and sale of securities generally).
(d) Pledgor is, and in the case of any Pledged Collateral other
than the Pledged Shares will be, the legal and beneficial owner of the Pledged
Collateral free and clear of any lien, security interest, option, charge or
encumbrance, except for the security interest created by this Agreement.
(e) The pledge of the Pledged Shares creates a valid and
perfected first priority security interest in the Pledged Collateral, securing
payment of the Obligations.
5. VOTING RIGHTS; DIVIDENDS; ETC.
(a) So long as no Event of Default or event which, with the
giving of notice or the lapse of time, or both, would become an Event of Default
shall have occurred and be continuing:
(i) Pledgor shall be entitled to exercise any and all
voting and other consensual rights pertaining to the Pledged Collateral
or any part thereof for any purpose not inconsistent with the terms of
this Agreement or any document, agreement or instrument entered into in
connection with the Note.
(ii) Pledgor shall be entitled to receive and retain any
and all cash dividends paid in respect of the Pledged Collateral;
provided, however, that all other dividends and stock, property or
otherwise, including dividends representing stock or
2
<PAGE> 39
liquidating dividends, or a distribution or return of capital upon or in
respect of the Pledged Collateral, or any part thereof, or resulting
from a split-up revision or reclassification of the Pledged Shares or
any part thereof, or received in exchange for the Pledged Shares or any
part thereof as a result of a merger, consolidation or otherwise, shall
be paid, delivered and transferred directly to Secured Party immediately
upon receipt thereof by Pledgor, or, if received by Secured Party, shall
be retained by Secured Party as part of the Pledged Shares.
(b) Upon the occurrence and during the continuation of an event
which, with the giving of notice or the lapse of time, or both, would become an
Event of Default:
(i) All rights of Pledgor to exercise the voting and other
consensual rights which he would otherwise be entitled to exercise
pursuant to Section 5(a)(i) shall cease, and all such rights shall
thereupon become vested in Secured Party who shall thereupon have the
sole right to exercise such voting and other consensual rights.
(ii) Secured Party shall be entitled to receive and retain
any and all cash dividends paid in respect of the Pledged Collateral
until the Obligations shall have been paid and performed in full.
(iii) All dividends and other distributions which are
received by Pledgor contrary to the provisions of this Agreement shall
be received in trust for the benefit of Secured Party, shall be
segregated from other funds of Pledgor and shall be forthwith paid over
to Secured Party as payment in respect of the Obligations (with any
necessary endorsements).
6. TRANSFERS AND OTHER LIENS; ADDITIONAL SHARES.
(a) Pledgor agrees that he will not (i) sell or otherwise dispose
of, or grant any option with respect to, any of the Pledged Collateral, or (ii)
create or permit to exist any lien, security interest or other charge or
encumbrance upon or with respect to any of the Pledged Collateral, except for
the security interest created by this Agreement.
(b) Pledgor agrees that he will pledge hereunder, immediately
upon his acquisition (directly or indirectly) thereof, any and all additional
shares of stock or other securities he may acquire in connection with any stock
split, stock dividend or other distribution or exchange in respect of any shares
of stock or other securities pledged hereunder.
7. EVENTS OF DEFAULT. Pledgor shall be in default under this
Agreement upon the happening of any of the following events (each an "Event of
Default"):
(a) Pledgor fails to pay or perform when due any of the
Obligations;
(b) Any representation or warranty made by Pledgor in connection
with this Agreement proves to be false in any material respect when made;
(c) Pledgor makes an assignment for the benefit of creditors,
admits in writing his inability to pay his debts as they mature, applies to any
court for the appointment of a trustee
3
<PAGE> 40
or receiver of any substantial part of his properties, or commences any
voluntary proceedings under any bankruptcy, reorganization, arrangement,
insolvency, readjustment of debt, dissolution, liquidation or other similar law
of any jurisdiction; or
(d) Any such application or any such proceedings described in (c)
above are filed or commenced against Pledgor and Pledgor indicates his approval,
consent of acquiescence thereto, or an order is entered adjudicating Pledgor
bankrupt or insolvent and such order remains in effect for thirty (30) days.
8. RIGHTS AND REMEDIES UPON DEFAULT. If any Event of Default
shall have occurred:
(a) Secured Party shall have, in addition to other rights and
remedies provided for herein or otherwise available to it, all the rights and
remedies of a secured party on default under the Uniform Commercial Code (the
"Code") in effect in the State of California at that time, and Secured Party may
also, without notice except as specified below, sell the Pledged Collateral or
any part thereof in one or more private sales, at any of Secured Party's offices
or elsewhere, for cash, on credit or for future delivery, and upon such other
terms as Secured Party may deem commercially reasonable. Secured Party is
authorized at any such sale, if Secured Party deems it advisable, to restrict
the prospective bidders or purchasers to persons who will represent and agree
that they are purchasing for their own account and not with a view to the
distribution or sale of any such Pledged Collateral. Each purchaser at any such
sale shall hold the Pledged Collateral acquired at such sale absolutely free
from any claim or right of any kind, including any equity or right of redemption
of Pledgor, and Pledgor hereby expressly waives all rights of redemption, stay
or appraisement which he has or may have under any rule, law or statute now or
hereafter existing. Pledgor agrees that, to the extent notice of sale shall be
required by law, at least five (5) days' notice to Pledgor of the time after
which any private sale is to be made shall constitute reasonable notification.
Secured Party shall not be obligated to make any sale of Pledged Collateral
regardless of notice of sale having been given. Secured Party may adjourn any
private sale from time to time by announcement at the time and place fixed
therefor, and such sale may, without further notice, be made at the time and
place to which it was so adjourned. Secured Party may, instead of exercising the
powers of sale provided for herein and under the Code, proceed by a suit or
suits, at law or in equity, to foreclose the pledge of this Agreement and sell
the Pledged Collateral, or any portion thereof, under a judgment or decree of
any court or courts of competent jurisdiction.
(b) Any cash held by Secured Party as Pledged Collateral and all
cash proceeds received by Secured Party in respect of any sale of, collection
from or other realization upon all or any part of the Pledged Collateral may, in
the discretion of Secured Party, be held by Secured Party as collateral for,
and/or then or at any time thereafter applied in whole or in part by Secured
Party against, the Obligations in such order as Secured Party shall elect. Any
surplus of such cash or cash proceeds held by Secured Party and remaining after
payment in full of the Obligations shall be paid over to Pledgor or to
whomsoever may be lawfully entitled to receive such surplus.
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<PAGE> 41
(c) All rights and remedies of Secured Party expressed herein are
in addition to all other rights and remedies possessed by Secured Party in any
other agreement or instrument entered into in connection with or relating to the
Obligation or by law.
(d) Pledgor acknowledges and agrees that any such private sale
may result in prices and other terms less favorable to the seller than if such
sale were a public sale and, notwithstanding such circumstances, agrees that any
such private sale shall, to the extent permitted by law, be deemed to have been
made in a commercially reasonable manner.
(e) Pledgor further agrees that a breach of any of the covenants
contained in this Section will cause irreparable injury to Secured Party, and
that Secured Party has no adequate remedy at law in respect of any such breach
and, as a consequence, agrees that each and every covenant contained in this
Section shall be specifically enforceable against Pledgor, and Pledgor hereby
waives and agrees not to assert any defenses against an action for specific
performance of such covenants except for a defense that no Event of Default has
occurred.
9. CONTINUING PLEDGE. This Agreement shall create a continuing
security interest in the Pledged Collateral and shall (i) remain in full force
and effect until payment in full of the Obligations, (ii) be binding upon
Pledgor and his successors and assigns, and (iii) inure to the benefit of
Secured Party and its successors, transferees and assigns. Without limiting the
generality of the foregoing clause (iii), Secured Party may assign or otherwise
transfer any of its rights under this Agreement to any other person, and such
person shall thereupon become vested with all the benefits in respect thereof
granted to Secured Party herein or otherwise. Upon payment in full of the
Obligations, Pledgor shall be entitled to the return, at Pledgor's expense, of
such of the Pledged Collateral as shall not have been sold or otherwise applied
pursuant to the terms hereof.
10. FURTHER ASSURANCES. Pledgor agrees that he will, at his own
expense, promptly execute, acknowledge and deliver all such documents and
instruments, and take all such actions, as the Secured Party may from time to
time request in order to perfect and protect any security interest granted or
purported to be granted hereby or to enable Secured Party to exercise and
enforce its rights and remedies hereunder and otherwise to effectuate the
purposes of this Agreement and carry out the terms hereof.
11. WAIVERS; REMEDIES CUMULATIVE. No failure on the part of
Secured Party to exercise, and no delay in exercising, any right or remedy
hereunder shall operate as a waiver thereof; nor shall any single or partial
exercise of any right or remedy hereunder by Secured Party preclude any other or
further exercise thereof or the exercise of any other right or remedy. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
12. NOTICES. All notices, requests, demands and other
communications under this Agreement shall be in writing and shall be delivered
by hand or mailed by first class mail, registered or certified, return receipt
requested, postage prepaid, and properly addressed, to the party at the
addresses set forth below.
(a) If to Pledgor:
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<PAGE> 42
(b) If to Secured Party at:
CommTouch Software Ltd.
10 Technology Avenue
Ein Vered, Israel
All such notices, requests, demands and other communications shall be effective
only upon receipt. Any party may change its address for notice given in
accordance with this Section 12.
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of California applicable to
contracts made and to be performed in the State of California, except to the
extent that the validity or perfection of the security interest hereunder, or
remedies hereunder, in respect of any particular Pledged Collateral are governed
by the laws of a jurisdiction other than the State of California. Whenever
possible, each provision of this Agreement shall be interpreted in such manner
as to be effective and valid under applicable law, but if any provision of this
Agreement shall be prohibited or invalid under applicable law, such provision
shall be ineffective only to the extent of such prohibition or invalidity,
without invalidating the remainder of such provision or the remaining provisions
of this Agreement. This Agreement shall be given a fair and reasonable
construction in accordance with the intention of the parties and without regard
to, or aid of, Section 1654 of the California Civil Code.
14. MISCELLANEOUS. Neither this Agreement nor any provision
hereof may be changed, waived, discharged or terminated, except by an instrument
in writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. The captions in this Agreement have been
inserted for convenience only and shall not control or affect the meaning or
construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties have executed this Stock Pledge
and Security Agreement as of the date first above written.
PLEDGOR: SECURED PARTY:
___________________________________ CommTouch Software Ltd.
By:________________________________
Its:_______________________________
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<PAGE> 43
Exhibit A
PROMISSORY NOTE
$__________ ________, 19__
FOR VALUE RECEIVED, the undersigned, _______________ ("Debtor"),
promises to pay to CommTouch Software Ltd., a corporation formed under the laws
of Israel ("Holder"), the principal amount of $_________, together with accrued
interest thereon calculated from time to time at the rate of [the applicable
federal rate as determined under Section 1274 of the Internal Revenue Code] per
annum, compounded annually. Accrued interest shall be paid on December 31 of
each year beginning with the year in which this Note is executed. Principal and
any unpaid interest shall be due and payable on the fourth anniversary of the
date of this Note.
Notwithstanding anything to the contrary set forth in this note,
(i) in the event of the termination of Debtor's employment with Holder for any
reason, Holder, at its option, may declare a portion of the principal balance of
this Note, plus accrued interest on such portion of the principal balance, to be
immediately due and payable in full, such portion of the principal to be equal
to the number of Holder's vested Ordinary Shares which have been paid for by
this Note, multiplied by the price per share paid by Debtor for such shares; or
(ii) in the event that Debtor sells any of Holder's Ordinary Shares, which have
been paid for by this Note, Holder, at its option, may declare the principal and
accrued interest then outstanding to be immediately due and payable to the
extent of the cash and fair market value of any property received by Debtor in
such sale.
Debtor may at any time prepay all or any portion of the amounts
owing hereunder.
If any of the following events (each an "Event of Default") shall
occur and be continuing, then Holder may, at its option and without notice to
Debtor or any other person, declare the outstanding principal balance of this
note, together with any accrued interest and/or other sums that Debtor may owe
to Holder under or in connection with this note, immediately due and payable
and, if Holder exercises such option, Holder shall so advise Debtor in writing
and Debtor shall pay all such sums owed:
(i) Debtor fails to pay when due any principal, interest or other
amounts owing hereunder;
(ii) Any representation or warranty made by Debtor in any
agreement, document or instrument delivered in connection with this note or the
indebtedness evidenced hereby proves to be false in any material respect when
made;
(iii) Debtor violates any other covenant, agreement or condition
contained in any agreement, document or instrument executed in connection with
or given as security for this note, and such violation shall continue for a
period of 15 days after notice of such violation is given by Holder to Debtor;
(iv) Debtor makes an assignment for the benefit of creditors;
(v) Debtor admits in writing his inability to pay his debts as
they mature, applies to any tribunal for the appointment of a trustee or
receiver of any substantial part of his assets, or
<PAGE> 44
commences any proceedings with respect to himself under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, liquidation or
other similar law of any jurisdiction; or
(vi) Any such application or any such proceedings described in
(v) above are filed or commenced against Debtor, and Debtor indicates his
approval, consent or acquiescence, or an order is entered adjudicating Debtor
bankrupt or insolvent, or approving the application or petition in any such
proceedings, and such order remains in effect for 30 days.
Debtor hereby waives grace (except as expressly provided herein),
demand, presentment for payment, notice of demand, notice of nonpayment or
dishonor, protest and notice of protest and shall pay all costs of collection
when incurred, including without limitation, reasonable attorneys' fees, costs
and other expenses. Neither any failure to exercise, nor any delay in
exercising, any right under this note on the part of Holder shall operate as a
waiver thereof; nor shall any single or partial exercise of any right under this
note preclude any other or further exercise thereof or the exercise of any other
right. No waiver or amendment of this note shall be effective unless made in a
writing, specifying such waiver or amendment signed by the party hereto against
which such waiver or amendment is being enforced.
All payments shall be in lawful money of the United States of
America. Holder shall be entitled to set off any amounts owed by Holder to
Debtor against any payments due and payable from Debtor to Holder. The rights
and duties of the parties hereunder shall be interpreted and construed pursuant
to and in accordance with the laws of the State of California.
This note is secured by a Share Pledge and Security Agreement of
even date herewith by and between Debtor and Holder.
___________________________________
2
<PAGE> 1
EXHIBIT 10.2
SHARE OPTION AGREEMENT
This SHARE OPTION AGREEMENT (the "Agreement") is between COMMTOUCH
SOFTWARE LTD., an Israeli company (the "Company"), and the Grantee whose name
appears on the attached Schedule (the "Grantee").
In order to provide an incentive to the Grantee to exert his or her
utmost efforts on behalf of the Company, the Grantee has been awarded one or
more Options on the terms and conditions set forth in this Agreement and in the
attached Schedule, which forms an integral part of this Agreement. For purposes
of United States taxation, if applicable, it is intended that the Options
constitute "Non-Qualified Share Options" that are not "Incentive Stock Options"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended.
SECTION 1 OPTIONS
The Grantee is hereby granted Options to purchase the number of
Ordinary Shares, nominal value NIS 1 per share, of the Company (the "Shares")
specified in the Schedule. The Options are exercisable at the exercise price per
Share as determined by the company from time to time.
SECTION 2 EXERCISE OF RIGHTS
2.1 Times when Shares can be Purchased
Subject to the terms and conditions of this Agreement, the Options
will become exercisable at such times, and shall remain exercisable for such
periods, as are specified in the Schedule. Without derogating from the
provisions of Section 3 of this Agreement, if any Option has not been exercised
and the Shares covered thereby not paid for by the expiration date specified in
the Schedule, such Option and the right to acquire such Shares shall terminate,
and all interests and rights of the Grantee in and to the same shall ipso facto
expire. Notwithstanding any provision of this Agreement or the Schedule to the
contrary, upon any change of control of the Company one-half of all unvested
Options then held by the Grantee shall immediately vest and become exercisable,
with the remaining unvested Options to be subject to the regular vesting
provisions of the Schedule. For purposes of this Section 2.1, a "change of
control" shall mean the sale or other disposition of a majority of the
outstanding Shares or a sale or other disposition of a majority of the Company's
assets, within any 18-month period.
2.2 Notice
If the Grantee of an Option wishes to exercise any of the Grantee's
rights, the Grantee must give notice of exercise to the Company at the Company's
principal office. The Grantee must give the notice in writing, in form
satisfactory to the Company, in respect of a whole number of Shares. The Grantee
must include with the notice full payment for any Shares being purchased and any
taxes and other mandatory payments due under Section 2.3 hereof.
<PAGE> 2
2.3 Payment
2.3.1 Payment of the option price for any Shares being
purchased under an Option, as specified in the Schedule, must be made in cash or
by bank check, or in such other manner as the Company determines.
2.3.2 The Grantee cannot buy any Shares under an Option
unless, at the time the Grantee gives notice of exercise to the Company, the
Grantee includes with such notice payment in cash or by bank check of all
withholding taxes due, and any other mandatory payments, if any, on account of
his or her buying Shares under the Option or gives other assurance satisfactory
to the Company of the payment of those withholding taxes.
2.4 Certificates for Shares
2.4.1 The Company shall deliver certificates for Shares
bought under an Option as soon as practicable after receiving payment for the
Shares and for any taxes under Section 2.3 hereof, and all documents required
under this Agreement. The certificates will be made out in the name of the
Grantee.
2.4.2 If any law, regulation or interpretation requires the
Company to take any action regarding the Shares before the Company issues
certificates for the Shares being purchased, the Company may delay delivering
the certificates for the Shares for the period necessary to take that action.
SECTION 3 TERMINATION OF EMPLOYMENT
3.1 In General
Subject to the provisions of Section 3.2 hereof, if a Grantee should,
for any reason, cease to be employed by the Company on a full-time basis, all of
his or her rights, if any, in respect of all Options previously granted to him
or her under this Agreement that are not exercisable then or within two weeks
after such cessation of employment shall ipso facto terminate; all of his or her
rights in respect of such Options that are exercisable then or within two weeks
after such cessation of employment on a full-time basis, but which are not
exercised within two weeks after such cessation of employment on a full-time
basis, shall terminate upon the expiration of such two-week period. In the event
of resignation or discharge of a Grantee from the employ of the Company or a
subsidiary thereof, his or her employment shall, for the purposes of this
Section 3.1, be deemed to have ceased upon the delivery to the employer of
notice of resignation, or upon the delivery to the employee of notice of
discharge, as the case may be, irrespective of the effective date of such
resignation or discharge. In the event the employment of a Grantee is terminated
by the Company for cause, such Grantee shall not be entitled to exercise the
Options subsequent to the time of delivery of the notice of discharge.
2
<PAGE> 3
3.2 Death, Disability, Retirement Anything herein to the contrary
notwithstanding:
(a) If a Grantee should die, the estate or other
successors to whom the rights of a Grantee in respect
of Options or Shares purchasable pursuant to the
exercise thereof are transferred (by operation of law
or by will) shall be entitled to exercise such
Options (or portions thereof) that were exercisable
on dates after the death of such Grantee and purchase
Shares pursuant to the exercise thereof (or pursuant
to the exercise of Options previously exercised by
the Grantee) to the same extent and on the same terms
as the deceased Grantee could have done but for his
or her death; except that, so long as the rights in
such Options or to purchase such Shares did not
expire prior to the date of death of the Grantee, (i)
the estate or such successor may exercise any such
Options that were otherwise exercisable on a date
after the date of death of such Grantee and purchase
such Shares, at any time within 3 months from the
date of death of the Grantee, and (ii) the rights in
any such Options or Shares purchasable pursuant to
the exercise thereof shall ipso facto terminate to
the extent they are not exercised and such Shares are
not paid for by the estate or successors within 3
months from the date of death of such Grantee.
(b) If a Grantee is unable to continue to be employed by
the Company by reason of his or her becoming
incapacitated while in the employ of the Company as a
result of an accident or illness or other cause,
which incapacitation is approved by the Company, such
Grantee shall, subject to approval of the Company
(which shall not unreasonably be withheld), continue
to enjoy rights under this Agreement on such terms
and conditions as the Company in its discretion may
determine.
(c) If a Grantee should retire upon reaching mandatory
retirement age, he or she shall, subject to the
approval of the Company, continue to enjoy such
rights, if any, under this Agreement and on such
terms and conditions as the Company in its discretion
may determine.
3
<PAGE> 4
SECTION 4 RIGHT OF PURCHASE
Should the holders of more than 50% of the outstanding shares of the
Company (the "Selling Shareholders") determine to sell their shares to an
unaffiliated third party, and should they wish to sell the Shares which the
Grantee then holds or to which the Grantee may be entitled upon the exercise of
Options, then the Selling Shareholders shall have the right, for this purpose,
to purchase (i) any Shares then held by the Grantee pursuant to the previous
exercise of Options, and (ii) any unexpired but unexercised (whether or not yet
exercisable) Options then held by the Grantee. Such right may be exercised only
concurrently with or immediately prior to the sale by the Selling Shareholders
of their shares in the Company. The purchase price for each Share or Option
shall be equivalent to the purchase price per share to be received by the
Selling Shareholders, less any component of such price per share attributable to
a control premium. The determination of the purchase price per Share or Option
to be paid to the Grantee shall be made by the Company's independent certified
public accountant, whose determination shall be final and binding. In order to
secure the Grantee's obligation under this section, the Grantee shall deposit
share transfer deeds, signed in blank, with the Company. The Grantee
acknowledges that the provisions of this section are designed to create rights
in favor of the Selling Shareholders and agrees to their enforcement hereof. The
provisions of this section shall cease to have effect upon the consummation of
the Company's initial public offering.
SECTION 5 ADJUSTMENTS
5.1 Upon the occurrence of any of the following described events,
a Grantee's rights to purchase Shares under this Agreement shall be adjusted as
hereinafter provided:
5.2 Upon the Company's initial public offering, the exercise of
the options will be subject to any regulations and restrictions issued by any
securities regulatory or stock exchange authority.
5.3 In the event the shares of the Company shall be subdivided or
combined into a greater or smaller number of shares or if, upon a merger,
consolidation, reorganization, recapitalization or the like, the shares of the
Company shall be exchanged for other securities of the Company or of another
corporation, each Grantee shall be entitled, subject to the conditions herein
stated, to purchase such number of Shares or amount of other securities of the
Company or such other corporation as were exchangeable for the number of Shares
of the Company that such Grantee would have been entitled to purchase on such
date except for such action, and appropriate adjustments shall be made in the
purchase price per share to reflect such subdivision, combination or exchange;
provided, however, that any fractional shares so resulting shall be cancelled.
5.4 In the event that the Company shall issue any of its shares
or other securities as bonus shares (or stock dividends) upon or with respect to
any shares, each Grantee upon subsequently exercising an Option shall be
entitled to receive (for the purchase price payable upon such exercise), the
Shares as to which he or she is exercising his or her right and, in addition
thereto (at no additional cost), such number of shares as is equal to the amount
of Shares which he or she would have received had he or she been the holder of
the
4
<PAGE> 5
Shares as to which he or she is exercising his or her said right at all times
between the date of the granting of such right and the date of its exercise;
provided, however, that any fractional shares so resulting shall be cancelled.
5.5 The Company shall determine the specific adjustments to be
made under this Section 5, and its determination shall be conclusive.
SECTION 6 VOTING, ASSIGNABILITY AND SALE OF SHARES
6.1 The Grantee shall have no voting rights as a shareholder of
the Company until the consummation of the initial public offering of Shares (the
"IPO"). Until the IPO, the Grantee's Shares shall be voted by a proxy pursuant
to the direction of the Board of Directors of the Company. Simultaneously with
each exercise of an Option, the Grantee shall execute an irrevocable proxy in a
form acceptable to the Board of Directors of the Company, to the person or
persons then designated by the Board of Directors, to vote the Shares acquired
upon the exercise of the Option, with such proxy to remain in effect (or be
renewed) until the Company consummates its IPO. In addition, until the
consummation of the Company's IPO, and unless and until released by the Board of
Directors for particular action, the Grantee's right as a shareholder to consent
to or approve action by the Company (whether such right is expressly granted by
the Articles of Association or is otherwise implied by virtue of the nature of
the action to be taken) shall be exercised pursuant to the direction of the
Board of Directors by a power of attorney issued by the Grantee as set forth
herein. Simultaneously with each exercise of an Option, the Grantee shall
execute an irrevocable power of attorney in a form acceptable to the Board of
Directors of the Company, to the person or persons then designated by the Board
of Directors, to act on behalf of the Grantee as a shareholder, with such power
of attorney to remain in effect (or be renewed) until the Company consummates
its IPO. The Grantee may not transfer or sell Shares issued upon the exercise of
an Option to any third party unless such third party furnishes the Company with
an irrevocable proxy and an irrevocable power of attorney as described in this
section, prior to such sale or transfer.
6.2 No Options, and no Shares purchasable under this Agreement
that were not fully paid for, shall be assignable or transferable by the
Grantee; and during the lifetime of the Grantee each and all of his or her
rights to purchase shares under this Agreement shall be exercisable only by him
or her. For avoidance of doubt, the foregoing shall not be deemed to restrict
the transfer of a Grantee's rights in respect of Options or Shares purchasable
pursuant to the exercise thereof upon the death of such Grantee to his or her
estate or other successors by operation of law or will, whose rights therein
shall be governed by Section 3.2 hereof.
6.3 Until such time as the Company consummates its IPO, the
Grantee shall not be allowed to sell or transfer any Shares purchased pursuant
to the exercise of Options granted under this Agreement, except in accordance
with the Company's Articles of Association and the following provisions:
6.3.1 The sale or transfer shall be subject to a right of
first refusal, in favor of such person or persons as the Company may indicate.
The Grantee shall be advised whether or not the right of first refusal is being
exercised within 30 days of his or her
5
<PAGE> 6
notification to the Company of the intention to sell or transfer and the terms
of the proposed sale or transfer.
6.3.2 In the event the right of first refusal is not
exercised, the Grantee may sell or transfer the Shares within 7 days. If the
Grantee does not sell or transfer the Shares within 7 days, all of the
provisions of this section shall again apply to any subsequent sale or transfer.
6.3.3 In any case, the sale or transfer shall not directly or
indirectly be to a competitor of the Company, shall be allowed only if the
Grantee is not then in breach of any of his or her obligations to the Company,
shall be with respect to all of the Shares then held by the Grantee, and shall
be subject to the approval of the Company's Board of Directors (which shall not
unreasonably be withheld).
SECTION 7 REPRESENTATIONS, WARRANTIES AND COVENANTS
The Grantee hereby represents, warrants and covenants that until such
time as the Company consummates its initial public offering, upon the Company's
request the Grantee will consent to any resolution requested or approved by the
Company, will sign any document and will take any other action which may be
necessary or desirable to the consummation of an offering, whether public or
private. The Grantee hereby authorizes the Company to sign any document on his
or her behalf in order to implement the foregoing, and the Grantee will not
assert any claim against the Company or anyone else in this regard.
SECTION 8 MISCELLANEOUS
8.1 Entire Agreement
This Agreement contains all of the understandings between the Company
and the Grantee concerning all Options granted under this Agreement, and include
all earlier negotiations and understandings. The Company and the Grantee have
made no promises, agreements, conditions or understandings, either orally or in
writing, that are not included in this Agreement.
8.2 Interpretation
The interpretation and construction by the Company of any provision
of this Agreement or of any Option thereunder shall be final and conclusive.
8.3 Employment
By granting Options under this Agreement, the Company does not give
the Grantee any right to continue to be employed by the Company or to be
entitled to any remuneration or benefits not set forth in this Agreement. None
of the provisions of this Agreement will interfere with or limit the right of
the Company to end the Grantee's employment at any time. Furthermore, it is
agreed by the parties that no income or any other benefit flowing from this
Agreement will be taken in account in respect of the Grantee's social rights or
any other rights deriving from his or her being an employee.
6
<PAGE> 7
8.4 Captions
The captions and section numbers appearing in this Agreement are
inserted only as a matter of convenience. They do not define, limit, construe or
describe the scope or intent of the provisions of this Agreement.
8.5 Counterparts
This Agreement may be executed in counterparts, each of which when
signed by the Company and the Grantee will be deemed an original and all of
which together will be deemed the same agreement.
8.6 Notice
Any notice or communication having to do with this Agreement must be
given by personal delivery or by registered mail, return receipt requested,
addressed - if to the Company, to the principal office of the Company and, if to
the Grantee, to the Grantee's last known address on the personnel records of the
Company.
8.7 Succession and Transfer
Each and all of the provisions of this Agreement are binding upon and
shall inure to the benefit of the Company and the Grantee (and, to the extent
specifically provided in this Agreement, the Grantee's heirs). The Grantee may
not sell, give, transfer, encumber or assign, or use as collateral, any of the
holder's rights under this Agreement.
8.8 Governing Law
This Agreement shall be governed by and construed exclusively in
accordance with the law of the State of Israel applicable to agreements to be
performed in the State of Israel.
8.9 Tax Consequences
Any tax consequences arising from the grant or exercise of any
Option, from the payment for Shares covered thereby or from any other event or
act (of the Company or the Grantee) hereunder, shall be borne solely by the
Grantee. Furthermore, the Grantee shall agree to indemnify the Company and hold
it harmless against and from any and all liability for any such tax or interest
or penalty thereon, including without limitation, liabilities relating to the
necessity to withhold, or to have withheld, any such tax from any payment made
to the Grantee.
7
<PAGE> 8
IN WITNESS WHEREOF the Company and the Grantee have caused this Agreement to be
signed and delivered as of the date set forth below.
COMMTOUCH SOFTWARE LTD.
By: __________________________
______________________________
GRANTEE
Effective Date: _________________
8
<PAGE> 9
COMMTOUCH SOFTWARE LTD.
SHARE OPTION AGREEMENT SCHEDULE
Identification:
1. Name of Grantee: ___________________________________
2. Address of Grantee: ________________________________
________________________________
3. Date of Option Agreement: __________________________
Terms of Option Awards:
1. Number of Ordinary Shares: _________________________
2. Option Exercise Price per Ordinary Share: __________
3. Time(s) at which Options become exercisable: __________________________
_______________________________________________________________________
_______________________________________________________________________
4. Expiration Date: ____________________
5. Special Conditions, if any:
_______________________________________________________________________
_______________________________________________________________________
_______________________________________________________________________
9
<PAGE> 1
EXHIBIT 10.3
3(i) OPTION AGREEMENT
(the "OPTION AGREEMENT")
Made as of the ______________ day of ______, 1999
By and between
COMMTOUCH SOFTWARE LTD.
an Israeli Company located at
10 Technology Avenue
Ein Vered, Israel
(the "COMPANY")
of the first part
AND
___________
ID______________________
(the "OPTIONEE")
of the second part
PREAMBLE
WHEREAS In _____, 1999, the Company adopted its 1999 Section 3(i) Share
Option Plan (the "OPTION PLAN"), a copy of which is attached
hereto as EXHIBIT A, forming an integral part hereof; and
WHEREAS The Company has determined that the Optionee be granted Options
under the Option Plan to buy Shares of the Company, and the
Optionee has agreed to such grant, all on the terms and subject
to the conditions set forth in the Option Plan and in this
Option Agreement.
NOW, THEREFORE, it is agreed as follows:
1. PREAMBLE AND DEFINITIONS
1.1 The preamble to this Option Agreement constitutes an
integral part hereof.
1.2 Unless otherwise defined herein, capitalized terms used
herein shall have the meaning ascribed to them in the
Option Plan.
Page 1 of 21
<PAGE> 2
2. GRANT OF OPTION
2.1 The Company hereby grants the Optionee the number of
Options set forth in Section 2 of EXHIBIT B attached
hereto to purchase Shares at the price per Share set forth
in Section 3 of EXHIBIT B attached hereto (the "OPTION
PRICE"), on the terms and subject to the conditions
hereinafter provided.
The Option Price will be paid in NIS in accordance with
the representative rate of exchange of the U.S. dollar,
last published by the Bank of Israel and known at the time
of giving the notice of exercise (as set forth in Section
5.1 below).
2.2 The Optionee is aware that the Company intends to issue
additional shares in the future to various entities and
individuals, as the Company in its sole discretion shall
determine.
3. PERIOD OF OPTION AND CONDITIONS OF EXERCISE
3.1 The term of this Option Agreement shall commence on the
date hereof (the "DATE OF GRANT") and terminate on the
Expiration Date (as defined in Section 6 below), or at the
time at which all of the Options have expired or been
terminated pursuant to the terms of the Option Plan or
pursuant to this Option Agreement.
3.2 The Options may be exercised by the Optionee in whole at
any time or in part from time to time, as determined by
the Board, and to the extent that the Options become
vested in accordance with Section 4 of Exhibit B, prior to
the Expiration Date, and provided that, subject to the
provisions of Section 3.4 below, the Optionee is an
employee of the Company or a Subsidiary of the Company or
a company or a Parent or a subsidiary company of such
company issuing or assuming the Options in a transaction
described in Section 7.1 of the Agreement (the foregoing
collectively, the "GROUP" ), or continuing to provide
services to the Group, at all times during the period
beginning with the granting of the Option and ending upon
the date of exercise.
The term "PARENT" shall mean for the purposes of the
Option Agreement and the Option Plan: any company (other
than the Company) in an unbroken chain of companies ending
with the Company if, at the time of granting an Option,
each of the companies (other than the Company), owns stock
possessing fifty percent (50%) or more of total combined
voting power of all classes of stock in one of the other
companies in such chain.
3.3 Subject to the provisions of Section 3.4 below, in the
event of termination of the Optionee's employment with the
Company the Group, or, if applicable, the termination of
the provision of services by the Optionee to the Group,
all Options granted to the Optionee will immediately
expire. A notice of termination of employment or services
by either the Group or the Optionee shall be deemed to
constitute termination of employment or services.
Page 2 of 21
<PAGE> 3
3.4 Notwithstanding anything to the contrary previously
stated, an Option may be exercised after the date of
termination of the Optionee's service or employment with
Group, during an additional period of time beyond the date
of such termination, but only with respect to the number
of Options already vested at the time of such termination
according to the Vesting Dates, if:
3.4.1 termination is without Cause, in which event
any Options still in force and unexpired may be
exercised within a period of 90 (ninety) days
from the date of such termination.
3.4.2 termination is the result of death or
disability of the Optionee, in which event any
Options still in force and unexpired may be
exercised within a period of 90 (ninety) days
from the date of termination.
3.4.3 prior to the date of such termination, the
Committee shall authorize an extension of the
terms of all or part of the Options beyond the
date of such termination for a period not to
exceed the period during which the Options by
their terms would otherwise have been
exercisable.
The term "CAUSE" shall mean any action,
omission or state of affairs related to the
Optionee which the Committee or the Boards
decides, in its sole discretion, is against the
interests of the Company.
3.5 The Options may be exercised only to purchase whole
Shares, and in no case may a fraction of a Share be
purchased. If any fractional Shares would be deliverable
upon exercise, such fraction shall be rounded up if
one-half or more, or otherwise rounded down, to the
nearest whole number.
4. VESTING
Subject to the requirements as to the number of Shares for which an
Option is exercisable as set forth in Section 2.1 above, and unless
EXHIBIT B hereto provides otherwise, one-fourth (1/4) of the Options
shall vest (i.e., Options shall become exercisable) at the end of the
first year of the Optionee's continuous service or employment with
the Group and one-thirty-sixth (1/36) of the remaining Options shall
vest at the end of each month of such continuous service or
employment over the next thirty-six months
5. METHOD OF EXERCISE
5.1 The Options shall be exercised by the Optionee by giving
written notice to the Company, in such form and method as
may be determined by the Company and the Trustee (the
"EXERCISE NOTICE"), which exercise shall be effective upon
receipt of the Exercise Notice by the Company at its
principal office. The Exercise Notice shall specify the
number of Shares with respect to which the Options are
being exercised.
Page 3 of 21
<PAGE> 4
5.2 The Shares shall immediately be issued to the Trustee and
be held by the Trustee in accordance with the provisions
of Section 5 of the Option Plan. The Trustee shall not
transfer any Options to the Optionee prior to the exercise
of the Options into Shares, and thereafter, the Trustee
will transfer the Shares to the Optionee upon demand. If
any law or regulation requires the Company to take any
action with respect to the Shares so demanded before the
issuance thereof, then the date of their issuance shall be
extended for the period necessary to take such action. The
Optionee hereby authorizes the Trustee to sign an
agreement with the Company whereby Shares will not be
transferred without deduction of taxes at source. The
Optionee hereby undertakes to exempt the Trustee from any
liability in respect of any action or decision duly taken
and bona fide executed in relation with the Option Plan,
or any Option or Share granted to the Optionee thereunder.
6. TERMINATION OF OPTION
6.1 Except as otherwise stated in this Option Agreement, the
Options, to the extent not previously exercised, shall
terminate forthwith upon the earlier of: (i) the date set
forth in Section 4 of EXHIBIT B hereto; and (ii) the
expiration of any extended period in any of the events set
forth in Section 3.4 above (and such earlier date shall be
hereinafter referred to as the "EXPIRATION DATE").
6.2 Without derogating from the above, the Committee may, with
the prior written consent of the Optionee, from time to
time cancel all or any portion of the Options then subject
to exercise, and the Company's obligation in respect of
such Options may be discharged by (i) payment to the
Optionee of an amount in cash equal to the excess, if any,
of the Fair Market Value of the Shares pertaining to such
canceled Options, at the date of such cancellation, over
the aggregate purchase price of such Shares, (ii) the
issuance or transfer to the Optionee of Shares of the
Company with a Fair Market Value at the date of such
transfer equal to any such excess, or (iii) a combination
of cash and Shares with a combined value equal to any such
excess, all determined by the Committee in its sole
discretion.
7. ADJUSTMENTS
7.1 In the event of a merger of the Company with or into
another corporation, or the sale of substantially all of
the assets of the Company while unexercised Options remain
outstanding under the Option Plan the successor
corporation or a Parent or subsidiary of such successor
corporation or the purchasing corporation may assume the
unexercised Options outstanding under the Option Plan or
may substitute for the Shares subject to the unexercised
portions of such outstanding Options an appropriate number
of shares of each class of shares or other securities of
the successor or
Page 4 of 21
<PAGE> 5
purchasing corporation or cash or property which were
distributed to the shareholders of the Company in respect
of such shares. In the event of substitution of shares or
securities appropriate adjustments shall be made to the
purchase price per share to reflect such action, all as
will be determined by the Committee whose determination
shall be final. In the event that the successor or
purchasing corporation does not agree to assume or
substitute as described in this section 7.1, the Options
shall terminate as of the date of the closing the above
merger or sale, as applicable.
7.2 In the event of the proposed liquidation or dissolution of
the Company, the Company shall notify the Optionee at
least fifteen (15) days prior to such proposed action. To
the extent not previously exercised, the Options shall
terminate immediately prior to the consummation of such
proposed action.
7.3 If the outstanding shares of the Company shall at any time
be changed or exchanged by declaration of a stock
dividend, stock split, combination or exchange of shares,
re-capitalization, or any other like event by or of the
Company, and as often as the same shall occur, then the
number, class and kind of Shares subject to the Option
therefore granted, and the Option Price, shall be
appropriately and equitably adjusted so as to maintain the
proportionate number of Shares without changing the
aggregate Option Price; provided, however, that no
adjustment shall be made by reason of the distribution of
subscription rights on outstanding stock, all as will be
determined by the Board who's determination shall be
final.
7.4 Anything herein to the contrary notwithstanding, if prior
to the consummation of an initial public offering of the
securities of the Company all or substantially all of the
shares of the Company are to be sold, or upon a merger or
reorganization or the like, the shares of the Company, or
any class thereof, are to be exchanged for securities of
another Company, then in such event, the Optionee shall be
obliged to sell or exchange (in accordance with the value
of his Shares in accordance with the deal) as the case may
be, the Shares such Optionee purchased hereunder, in
accordance with the instructions then issued by the Board,
whose determination shall be final.
8. RIGHTS PRIOR TO EXERCISE OF OPTION; LIMITATIONS AFTER PURCHASE OF
SHARES
8.1 Subject to the provisions of Sections 8.2 and 8.4 below,
the Optionee shall not have any of the rights or
privileges of shareholders of the Company in respect of
any Shares purchasable upon the exercise of any part of an
Option unless and until, following exercise, but in case
of Options and Shares held by the Trustee, subject always
to the provisions of Section 5 of the Option Plan,
registration of the Optionee as holder of such Shares in
the Company's register of members.
8.2 With respect to all Shares )contrary to unexercised
Options) issued upon the exercise of Options purchased by
the Optionee and held by the Trustee, the Optionee shall
be entitled to receive dividends in accordance with the
quantity of such Shares, and subject to any applicable
taxation on distribution of dividends. During the period
in which Shares issued to the Trustee on behalf of the
Optionee are held by the Trustee, the cash dividends paid
with respect thereto shall be paid directly to the
Optionee.
Page 5 of 21
<PAGE> 6
8.3 No Option purchasable hereunder, whether fully paid or
not, shall be assignable, transferable or given as
collateral or any right with respect to them given to any
third party whatsoever, and during the lifetime of the
Optionee each and all of the Optionee's rights to purchase
Shares hereunder shall be exercisable only by the
Optionee.
As long as the Shares are held by the Trustee in favor of
the Optionee, all rights the Optionee possesses over the
Shares are personal, can not be transferred, assigned,
pledged or mortgaged, other than by will or laws of
descent and distribution.
Any such action made directly or indirectly, whether for
immediate or future validity, shall be void.
8.4 Until the consummation of an IPO, Shares shall be voted by
a proxy pursuant to the directions of the Board, such
proxy to be to the person or persons designated by the
Board. A copy of the proxy is attached hereto as EXHIBIT
C.
8.5 The Optionee acknowledges that once the Company's shares
will be traded in any public market, his right to sell his
Shares may be subject to some limitations, as required by
the Company's underwriters. In such event, the Optionee
will unconditionally agree to any such limitations.
8.6 The Optionee shall not dispose of any Shares in
transactions which violate, in the opinion of the Company,
any applicable rules and regulations.
8.7 The Optionee agrees that the Company shall have the
authority to endorse upon the certificate or certificates
representing the Shares such legends referring to the
foregoing restrictions, and any other applicable
restrictions, as it may deem appropriate (which do not
violate the Optionee's rights according to this Option
Agreement).
9. GOVERNMENT REGULATIONS
The Option Plan, and the granting and exercise of the Options
thereunder, and the Company's obligation to sell and deliver Shares
or cash under the Option Plan, are subject to all applicable laws,
rules and regulations, whether of the State of Israel or of the
United States or any other State having jurisdiction over the Company
and the Optionee, including the registration of the Shares under the
United States Securities Act of 1933, and to such approvals by any
governmental agencies or national securities exchanges as may be
required.
10. CONTINUANCE OF EMPLOYMENT
Nothing in this Option Agreement shall be construed to impose any
obligation on the Company or a subsidiary, consultant or contractor
thereof to continue the Optionee's employment with it, to confer upon
the Optionee any right to continue in the employ of the
Page 6 of 21
<PAGE> 7
Company or a subsidiary thereof, or to restrict the right of the
Company or a subsidiary thereof to terminate such employment at any
time.
11. GOVERNING LAW & JURISDICTION
This Option Agreement shall be governed by and construed and enforced
in accordance with the laws of the State of Israel applicable to
contracts made and to be performed therein, without giving effect to
the principles of conflict of laws. The competent courts of Tel-Aviv,
Israel shall have sole jurisdiction in any matters pertaining to this
Option Agreement.
12. TAX CONSEQUENCES
Any tax consequences arising from the grant or exercise of any
Option, from the payment for Shares covered thereby or from any other
event or act (of the Company, the Trustee or the Optionee),
hereunder, shall be borne solely by the Optionee. The Company and/or
the Trustee shall withhold taxes according to the requirements under
applicable laws, rules, and regulations, including the withholding of
taxes at source. Furthermore, the Optionee shall agree to indemnify
the Company and the Trustee and hold them harmless against and from
any and all liability for any such tax or interest or penalty
thereon, including without limitation, liabilities relating to the
necessity to withhold, or to have withheld, any such tax from any
payment made to the Optionee.
The Committee and/or the Trustee shall not be required to release any
Share certificate to an Optionee until all required payments have
been fully made.
13. FAILURE TO ENFORCE NOT A WAIVER
The failure of any party to enforce at any time any provisions of
this Option Agreement shall in no way be construed to be a waiver of
such provision or of any other provision hereof.
14. PROVISIONS OF THE OPTION PLAN
The Options provided for herein are granted pursuant to the Option
Plan, and said Options and this Option Agreement are in all respects
governed by the Option Plan and subject to all of the terms and
provisions whether such terms and provisions are incorporated in this
Option Agreement solely by reference or are expressly cited herein.
Any interpretation of this Option Agreement will be made in
accordance with the Option Plan but in the event of any contradiction
between the provisions of this Option Agreement and the Option Plan,
the provisions of this Option Agreement will prevail.
15. BINDING EFFECT
This Option Agreement shall be binding upon the heirs, executors,
administrators, and successors of the parties hereof.
Page 7 of 21
<PAGE> 8
16. NOTICES
Any notice required or permitted under this Option Agreement shall be
deemed to have been duly given if delivered, faxed or mailed, if
delivered by certified or registered mail or return receipt
requested, either to the Optionee at his or her address set forth
above or such other address as he or she may designate in writing to
the Company, or to the Company at the address set forth above or such
other address as the Company may designate in writing to the
Optionee, within one week.
17. ENTIRE AGREEMENT
This Option Agreement and the Option Plan exclusively concludes all
of the terms of the Optionee's option plan and, subject to the
provisions of Section 19 of the Option Plan, annuls and supersedes
any other agreement, arrangement or understanding whether oral or in
writing, relating to the grant of options in the Company to the
Optionee. Any change of any kind to this Option Agreement will be
valid only if made in writing and signed by both the Optionee and the
Company's authorized representative and approved by the Board.
Page 8 of 21
<PAGE> 9
IN WITNESS WHEREOF, the Company has executed this Option Agreement in duplicate
on the day and year first above written.
COMMTOUCH SOFTWARE LTD.
By:______________________
The undersigned hereby accepts, and agrees to, all terms and provisions of the
foregoing Option Agreement.
_________________________
The Optionee
Page 9 of 21
<PAGE> 10
EXHIBIT A TO THE OPTION AGREEMENT
COMMTOUCH SOFTWARE LTD.
THE 1999
SECTION 3(I) SHARE OPTION PLAN
Page 10 of 21
<PAGE> 11
COMMTOUCH SOFTWARE LTD.
THE 1999
SECTION 3(i) SHARE OPTION PLAN
1. NAME
This share option plan, as amended from time to time, shall be known
as the CommTouch Software Ltd. 1999 Section 3(i) Share Option Plan
(the "OPTION PLAN").
2. PURPOSE OF THE OPTION PLAN
The Option Plan is intended as an incentive to retain in the employ
of CommTouch Software Ltd. (the "COMPANY") or a Subsidiary of the
Company which now exists or hereafter is organized or acquired by the
Company, persons of training, experience, and ability, to attract
new directors, employees, consultants and contractors, whose services
are considered valuable, to encourage the sense of proprietorship of
such persons, and to stimulate the active interest of such persons in
the development and financial success of the Company by providing
them with opportunities to purchase shares in the Company (the
"OPTIONS"), pursuant to this Option Plan approved by the Board of
Directors of the Company (the "BOARD").
The term "PARENT" shall mean for the purposes of the Option Agreement
and the Option Plan: any company (other than the Company) in an
unbroken chain of companies ending with the Company if, at the time
of granting an Option, each of the companies (other than the
Company), owns stock possessing fifty percent (50%) or more of total
combined voting power of all classes of stock in one of the other
companies in such chain.
The term "SUBSIDIARY" shall mean for the purposes of the Plan: any
company (other than the Company) in an unbroken chain of companies
beginning with the Company if, at the time of granting an option,
each of the companies other than the last company in the unbroken
chain owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
companies in such chains.
3. ADMINISTRATION OF THE OPTION PLAN
The Board or a share option committee appointed and maintained by the
Board for such purpose (the "COMMITTEE") shall have the power to
administer the Option Plan. Notwithstanding the above, the Board
shall automatically have a residual authority if no Committee shall
be constituted or if such Committee shall cease to operate for any
reason whatsoever.
Page 11 of 21
<PAGE> 12
The Committee shall consist of such number of members (not less than
two (2) in number) as may be fixed by the Board. The Committee shall
select one of its members as its chairman (the "CHAIRMAN") and shall
hold its meetings at such times and places as the Chairman shall
determine. The Committee shall keep records of its meetings and shall
make such rules and regulations for the conduct of its business as it
shall deem advisable.
Any member of such Committee shall be eligible to receive Options
under the Option Plan while serving on the Committee, unless
otherwise specified herein.
The Committee shall have full power and authority to:
3.1 Designate participants.
3.2 Determine the terms and provisions of respective Option
agreements (which need not be identical) including, but
not limited to, the number of shares in the Company to be
covered by each Option, provisions concerning the time or
times when and the extent to which the Options may be
exercised and the nature and duration of restrictions as
to transferability or restrictions constituting
substantial risk of forfeiture.
3.3 Accelerate the right of an Optionee to exercise, in whole
or in part, any previously granted Option.
3.4 Interpret the provisions and supervise the administration
of the Option Plan;
3.5 Determine the Fair Market Value (as defined below) of the
Shares (as defined below).
3.6 Determine any other matter which is necessary or desirable
for, or incidental to administration of the Option Plan.
The Committee shall have the authority to grant, in its discretion,
to the holder of an outstanding Option, in exchange for the surrender
and cancellation of such Option, a new Option having a purchase price
equal to, lower than or higher than the purchase price provided in
the Option so surrendered and canceled, and containing such other
terms and conditions as the Committee may prescribe in accordance
with the provisions of the Option Plan.
All decisions and selections made by the Board or the Committee
pursuant to the provisions of this Option Plan shall be made by a
majority of its members except that no member of the Board or the
Committee shall vote on, or be counted for quorum purposes, with
respect to any proposed action of the Board or the Committee relating
to any Option to be granted to that member. Any decision reduced to
writing and signed by a majority of the members who are authorized to
make such decision shall be fully effective as if it had been made by
a majority at a meeting duly held.
Page 12 of 21
<PAGE> 13
The interpretation and construction by the Committee of any provision
of the Option Plan or of any Option thereunder shall be final and
conclusive unless otherwise determined by the Board.
Subject to the Company's decision, each member of the Board or the
Committee shall be indemnified and held harmless by the Company
against any cost or expense (including counsel fees) reasonably
incurred by him, or any liability (including any sum paid in
settlement of a claim with the approval of the Company) arising out
of any act or omission to act in connection with the Option Plan
unless arising out of such member's own fraud or bad faith, to the
extent permitted by applicable law. Such indemnification shall be in
addition to any rights of indemnification the member may have as a
director or otherwise under the Company's Articles of Association,
any agreement, any vote of shareholders or disinterested directors,
insurance policy or otherwise.
"FAIR MARKET VALUE" shall mean in the Plan, as of any date, the value
of a Share determined as follows:
(i) If the Shares are listed on any established stock exchange
or a national market system, including without limitation
the Nasdaq National Market system, or The Nasdaq SmallCap
Market of the Nasdaq Stock Market , the Fair Market Value
shall be the closing sales price for such Shares (or the
closing bid, if no sales were reported), as quoted on such
exchange or system for the last market trading day prior
to time of determination, as reported in the Wall Street
Journal, or such other source as the Administrator deems
reliable.
(ii) If the Shares are regularly quoted by a recognized
securities dealer but selling prices are not reported ,
the Fair Market Value shall be the mean between the high
bid and low asked prices for the Shares on the last market
trading day prior to the day of determination, or;
(iii) In the absence of an established market for the Shares,
the Fair Market Value thereof shall be determined in good
faith by the committee.
4. DESIGNATION OF PARTICIPANTS
The persons eligible for participation in this Option Plan as
recipients of Options may include any employees, directors and
consultants of the Company, or a Subsidiary of the Company or a
company or a Parent or a subsidiary company of such company issuing
or assuming the Options in a transaction described in Section 9.1 of
this Option Plan (the foregoing collectively, the "GROUP"). The grant
of an Option hereunder shall neither entitle the recipient thereof to
participate nor disqualify him from participating in any other grant
of Options pursuant to this Option Plan or any other option or stock
plan of the Company or any of its affiliates.
Anything in the Option Plan to the contrary notwithstanding, all
grants of Options to directors and office holders ("NOSEI MISRA" - as
such term is defined in the Companies
Page 13 of 21
<PAGE> 14
Ordinance (New Version), 1983 (the "COMPANIES ORDINANCE")) shall be
authorized and implemented only in accordance with the provisions of
the Companies Ordinance, as in effect from time to time.
5. TRUSTEE
The Options which shall be granted to employees consultants and
contractors of the Group or any Shares (as defined below) issued upon
exercise of such Options and/or other shares received subsequently
following any realization of rights, shall be issued to a Trustee
nominated by the Committee (the "TRUSTEE") and held for the benefit
of the Optionees from the date of grant.
Anything to the contrary notwithstanding, the Trustee shall not
release any Options and/or any Shares issued upon exercise of
Options, prior to the full payment of the Optionee's tax liabilities
arising from Options which were granted to him and/or any Shares
issued upon exercise of such Options.
Upon receipt of the Option, the Optionee will sign an undertaking to
exempt the Trustee from any liability in respect of any action or
decision duly taken and bona fide executed in relation with the
Option Plan, or any Option or Share granted to him thereunder.
6. SHARES RESERVED FOR THE OPTION PLAN; RESTRICTION THEREON
6.1 The Company has reserved 250,000 authorized but unissued
Ordinary Shares nominal value NIS 1.00 per share, of the
Company (the "SHARES"), for purposes of the Option Plan
(subject to adjustment as set forth in paragraph 9 below),
the 1996 CommTouch Software, Inc. Stock Option Plan and
Israeli Option Agreements previously issued to Israeli
employees. Any of such Shares which may remain unissued
and which are not subject to outstanding Options at the
termination of the Option Plan shall cease to be reserved
for the purpose of the Option Plan, but until termination
of the Option Plan the Company shall at all times reserve
sufficient number of Shares to meet the requirements of
the Option Plan. Should any Option for any reason expire
or be canceled prior to its exercise or relinquishment in
full, the Shares subject to such Option may again be
subjected to an Option under the Option Plan.
6.2 An optionee who purchased Shares hereunder upon exercise
of Options shall have no voting rights as a shareholder
(in any and all matters whatsoever) until the consummation
of an initial public offering of the Company's securities
(an "IPO"). Until an IPO, such Shares shall be voted by a
proxy pursuant to the directions of the Board, such proxy
to be to the person or persons designated by the Board.
All Shares issued upon exercise of the Options shall
entitle the holder thereof to receive dividends and other
distributions thereon.
Page 14 of 21
<PAGE> 15
7. VESTING
Unless Exhibit B to the Option Agreement provides otherwise,
one-fourth (1/4) of the Options shall vest (i.e., Options shall
become exercisable) at the end of the first year of an Optionee's
continuous services or employment with the group, and
one-thirty-sixth (1/36) of the remaining Options shall vest per month
of such continuous employment over the next thirty-six months (the
"VESTING DATES").
8. OPTION PRICE
8.1 The purchase price of each Share subject to an Option or
any portion thereof shall be determined by the Committee
in its sole and absolute discretion in accordance with
applicable law, subject to any guidelines as may be
determined by the Board from time to time.
8.2 The Option price shall be payable upon the exercise of the
Option in a form satisfactory to the Committee, including
without limitation, by cash or check. The Committee shall
have the authority to postpone the date of payment on such
terms as it may determine.
9. ADJUSTMENTS
Upon the occurrence of any of the following described events, the
Optionee's rights to purchase Shares under the Option Plan shall be
adjusted as hereafter provided:
9.1 In the event of a merger of the Company with or into
another corporation, or the sale of substantially all of
the assets of the Company while unexercised Options remain
outstanding under the Option Plan the successor
corporation or a Parent or subsidiary of such successor
corporation or the purchasing corporation may assume the
unexercised Options outstanding under the Option Plan or
may substitute for the Shares subject to the unexercised
portions of such outstanding Options an appropriate number
of shares of each class of shares or other securities of
the successor or purchasing corporation or cash or
property which were distributed to the shareholders of the
Company in respect of such shares. In the event of
substitution of shares or securities appropriate
adjustments shall be made to the purchase price per share
to reflect such action, all as will be determined by the
Committee whose determination shall be final. In the event
that the successor or purchasing corporation does not
agree to assume or substitute as described in this Section
9.1, the Options shall terminate as of the date of the
closing of the above merger or sale, as applicable.
9.2 In the event of the proposed liquidation or dissolution of
the Company, the Company shall notify the Optionee at
least fifteen (15) days prior to such proposed action. To
the extent not previously exercised, the Options shall
terminate immediately prior to the consummation of such
proposed action.
Page 15 of 21
<PAGE> 16
9.3 If the outstanding shares of the Company shall at any time
be changed or exchanged by declaration of a stock
dividend, stock split, combination or exchange of shares,
recapitalization, or any other like event by or of the
Company, and as often as the same shall occur, then the
number, class and kind of Shares subject to this Option
Plan or subject to any Options therefore granted, and the
Option prices, shall be appropriately and equitably
adjusted so as to maintain the proportionate number of
Shares without changing the aggregate Option price,
provided, however, that no adjustment shall be made by
reason of the distribution of subscription rights on
outstanding shares. Upon the occurrence of any of the
foregoing, the class and aggregate number of Shares
issuable pursuant to this Option Plan (as set forth in
Section 6 hereof), in respect of which Options have not
yet been exercised, shall be appropriately adjusted, all
as may be determined by the Board who's determination
shall be final.
9.4 Anything herein to the contrary notwithstanding, if prior
to the completion of an IPO, all or substantially all of
the shares of the Company are to be sold, or upon a merger
or reorganization or the like, the shares of the Company,
or any class thereof, are to be exchanged for securities
of another Company, then in such event, each Optionee
shall be obliged to sell or exchange, as the case may be,
the shares such Optionee purchased under the Option Plan,
in accordance with the instructions then issued by the
Board whose determination shall be final.
10. TERM AND EXERCISE OF OPTIONS
10.1 The Options shall be exercised by the Optionee by giving
written notice to the Company, in such form and method as
may be determined by the Company and the Trustee, which
exercise shall be effective upon receipt of such notice by
the Company at its principal office. The notice shall
specify the number of Shares with respect to which Options
are being exercised.
10.2 Each Option granted under this Option Plan shall be
exercisable following the exercise dates and for the
number of Shares as shall be provided in EXHIBIT B to the
Option Agreement. However no Option shall be exercisable
after the Expiration Date, as defined for each Optionee in
his Option Agreement.
10.3 Options granted under the Option Plan shall not be
transferable by Optionees other than by will or laws of
descent and distribution, and during an Optionee's
lifetime shall be exercisable only by that Optionee.
10.4 The Options may be exercised by the Optionee in whole at
any time or in part from time to time, to the extent that
the Options become vested, prior to the Expiration Date,
and provided that, subject to the provisions of Section
10.6 below, the Optionee is an employee a consultants or a
contractor of the Group at all times during the period
beginning with the granting of the Option and ending upon
the date of exercise.
Page 16 of 21
<PAGE> 17
10.5 Subject to the provisions of Section 10.6 below, in the
event of termination of the Optionee's employment or
services with the Group , c all Options granted to the
Optionee will immediately expire. A notice of termination
of employment or services shall be deemed to constitute
termination of employment or services with Group.
10.6 Notwithstanding anything to the contrary previously
stated, an Option may be exercised after the date of
termination of the Optionee's services or employment with
the Group during an additional period of time beyond the
date of such termination, but only with respect to the
number of Options already vested according to the Vesting
Dates, if:
10.6.1 termination is without Cause, in which event
any Options still in force and unexpired may be
exercised within a period of 90 (ninety) days
from the date of such termination.
10.6.2 termination is the result of death or
disability of the Optionee, in which event any
Options still in force and unexpired may be
exercised within a period of 90 (ninety) days
from the date of termination.
10.6.3 prior to the date of such termination, the
Committee shall authorize an extension of the
terms of all or part of the Options beyond the
date of such termination for a period not to
exceed the period during which the Options by
their terms would otherwise have been
exercisable.
The term "CAUSE" shall mean any action,
omission or state of affairs related to the
Optionee which the Committee or the Boards
decides, in its sole discretion, is against the
interests of the Company.
10.7 To avoid doubt, the holders of Options shall not have any
of the rights or privileges of shareholders of the Company
in respect of any Shares purchasable upon the exercise of
any part of an Option, nor shall they be deemed to be a
class of shareholders or creditors of the Company for
purpose of the operation of section 233 of the Companies
Ordinance or any successor to such section, until
registration of the Optionee as holder of such Shares in
the Company's register of members.
10.8 Any form of Option Agreement authorized by this Option
Plan may contain such other provisions as the Committee
may, from time to time, deem advisable. Without limiting
the foregoing, the Committee may, with the consent of the
Optionee, from time to time cancel all or any portion of
any Option then subject to exercise, and the Company's
obligation in respect of such Option may be discharged by
(i) payment to the Optionee of an amount in cash equal to
the excess, if any, of the Fair Market Value of the Shares
at the date of such cancellation subject to the portion of
the Option so canceled over the aggregate purchase price
of such Shares, (ii) the issuance or transfer to the
Optionee of Shares of the Company with a Fair Market Value
at the date of such transfer equal to any such excess, or
(iii) a combination of
Page 17 of 21
<PAGE> 18
cash and shares with a combined value equal to any such
excess, all as determined by the Committee in its sole
discretion.
11. DIVIDENDS
With respect to all Shares (but not unexercised Options) issued upon
the exercise of Options purchased by the Optionee and held by the
Trustee, the Optionee shall be entitled to receive dividends in
accordance with the quantity of such Shares, and subject to any
applicable taxation on distribution of dividends. During the period
in which Shares issued to the Trustee on behalf of a Optionee are
held by the Trustee, the cash dividends paid with respect thereto
shall be paid directly to the Optionee.
12. ASSIGNABILITY AND SALE OF OPTIONS
No Option, purchasable hereunder, whether fully paid or not, shall be
assignable, transferable or given as collateral or any right with
respect to them given to any third party whatsoever, and during the
lifetime of the Optionee each and all of such Optionee's rights to
purchase Shares hereunder shall be exercisable only by the Optionee.
As long as the Shares are held by the Trustee in favor of the
Optionee, then all rights the Optionee possesses over the Shares are
personal, can not be transferred, assigned, pledged or mortgaged,
other than by will or laws of descent and distribution.
13. TERM OF THE OPTION PLAN
The Option Plan shall be effective as of the day it was adopted by
the Board and shall terminate at the end of 60 months from such day
of adoption.
14. AMENDMENTS OR TERMINATION
The Board may, at any time and from time to time, subject to the
written consent of the Trustee, amend, alter or discontinue the
Option Plan, except that no amendment or alteration shall be made
which would impair the rights of the holder of any Option therefore
granted, without his consent.
15. GOVERNMENT REGULATIONS
The Option Plan, and the granting and exercise of Options hereunder,
and the obligation of the Company to sell and deliver Shares under
such Options, shall be subject to all applicable laws, rules, and
regulations, whether of the State of Israel or of the United States
or any other State having jurisdiction over the Company and the
Optionee, including the registration of the Shares under the United
States Securities Act of 1933, and to such approvals by any
governmental agencies or national securities exchanges as may be
required.
Page 18 of 21
<PAGE> 19
16. CONTINUANCE OF EMPLOYMENT OR HIRED SERVICES
Neither the Option Plan nor the Option Agreement with the Optionee
shall impose any obligation on the Group, to continue any Optionee in
its employ or the hiring by the Group of the Optionee's services, and
nothing in this Option Plan or in any Option granted pursuant thereto
shall confer upon any Optionee any right to continue in the employ or
service of the Group or restrict the right of the Group to terminate
such service or employment at any time.
17. GOVERNING LAW & JURISDICTION
This Option Plan shall be governed by and construed and enforced in
accordance with the laws of the State of Israel applicable to
contracts made and to be performed therein, without giving effect to
the principles of conflict of laws. The competent courts of Tel-Aviv,
Israel shall have sole jurisdiction in any matters pertaining to this
Option Plan.
18. TAX CONSEQUENCES
Any tax consequences arising from the grant or exercise of any
Option, from the payment for Shares covered thereby or from any other
event or act (of the Company, the Trustee or the Optionee),
hereunder, shall be borne solely by the Optionee. The Company and/or
the Trustee shall withhold taxes according to the requirements under
the applicable laws, rules, and regulations, including withholding
taxes at source. Furthermore, the Optionee shall agree to indemnify
the Company and the Trustee and hold them harmless against and from
any and all liability for any such tax or interest or penalty
thereon, including without limitation, liabilities relating to the
necessity to withhold, or to have withheld, any such tax from any
payment made to the Optionee. The Committee and/or the Trustee shall
not be required to release any Share certificate to an Optionee until
all required payments have been fully made.
19. NON-EXCLUSIVITY OF THE OPTION PLAN
The adoption of the Option Plan by the Board shall not be construed
as amending, modifying or rescinding any previously approved
incentive arrangements or as creating any limitations on the power of
the Board to adopt such other incentive arrangements as it may deem
desirable, including, without limitation, the granting of stock
options otherwise than under the Option Plan or under the Share
Option Agreements previously issued to Israeli employees, and such
arrangements may be either applicable generally or only in specific
cases.
20. MULTIPLE AGREEMENTS
The terms of each Option may differ from other Options granted under
this Option Plan at the same time, or at any other time. The
Committee may also grant more than one Option to a given Optionee
during the term of this Option Plan, either in addition to, or in
substitution for, one or more Options previously granted to that
Optionee.
Page 19 of 21
<PAGE> 20
EXHIBIT B TO THE OPTION AGREEMENT
TERMS OF THE OPTION
1. NAME OF THE OPTIONEE: _______________________________________
2. NUMBER OF OPTIONS GRANTED: _______________________________________
3. PRICE PER SHARE: _______________________________________
4. EXPIRATION DATE: _______________________________________
5. DATE OF GRANT: _______________________________________
Page 20 of 21
<PAGE> 21
EXHIBIT C TO THE OPTION AGREEMENT
PROXY
Mr.____________ and Mr. ______________, or any of them, with power of
substitution in each, are hereby authorized to represent the undersigned at any
and all general meetings of CommTouch Software Ltd. )the "Company") (including
general meetings convened for the purpose of adopting extraordinary resolutions)
and to vote thereat on any and all matters the same number of Ordinary Shares of
the Company as the undersigned would be entitled to vote if then personally
present.
___________________________ ___________________________
NAME DATE
___________________________
SIGNATURE
Page 21 of 21
<PAGE> 1
EXHIBIT 10.4
COMMTOUCH SOFTWARE LTD.
1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
1. PURPOSE.
The purpose of this Plan is to offer Nonemployee Directors of
CommTouch Software Ltd. an opportunity to acquire a proprietary interest in the
success of the Company, or to increase such interest, by purchasing Ordinary
Shares of the Company. This Plan provides for the grant of Options to purchase
Shares. Options granted hereunder shall be "Nonstatutory Options," and shall not
include "incentive stock options" intended to qualify for treatment under
Sections 421 and 422 of the Internal Revenue Code of 1986, as amended.
2. DEFINITIONS.
As used herein, the following definitions shall apply:
(a) "ADMINISTRATOR" shall mean the entity, either the Board or the
committee of the Board, responsible for administering this Plan, as provided in
Section 3.
(b) "AFFILIATE" means a parent or subsidiary corporation as defined
in Sections 424(e) and (f) of the Code.
(c) "ANNUAL OPTION" shall have the meaning set forth in Section 6(b).
(d) "BOARD" shall mean the Board of Directors of the Company, as
constituted from time to time.
(e) "CHANGE IN CONTROL" shall mean the occurrence of any one of the
following:
(i) any "person," as such term is used in Sections 13(d) and
14(d) of the Exchange Act (other than the Company, an Affiliate, or a Company
employee benefit plan, including any trustee of such plan acting as trustee) is
or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding securities;
(ii) the election of any director of the Company who was not a
candidate proposed by a majority of the Board in office prior to the time of
such election; or
(iii) the dissolution or liquidation (partial or total) of the
Company or a sale of assets involving 50% or more of the assets of the Company,
or any merger or reorganization of the Company, whether or not another entity is
the survivor, or other transaction
<PAGE> 2
pursuant to which the holders, as a group, of all of the shares of the Company
outstanding prior to the transaction hold, as a group, less than 50% of the
shares of the Company outstanding after the transaction.
(f) "CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and any successor statute.
(g) "COMPANY" shall mean CommTouch Software Ltd., an Israeli
corporation.
(h) "DISABILITY" means permanent and total disability as determined
by the Administrator in accordance with the standards set forth in Section
22(e)(3) of the Code.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended from time to time, and any successor statute.
(j) "EXPIRATION DATE" shall mean the last day of the term of an
Option established under Section 6(e).
(k) "FAIR MARKET VALUE" means as of any given date (a) the closing
price of the Ordinary Shares as reported by the Nasdaq National Market; (b) if
the Ordinary Shares are no longer quoted on the Nasdaq National Market but are
listed on an established stock exchange or quoted on any other established
interdealer quotation system, the closing price for the Ordinary Shares on such
exchange or system, as reported in the Wall Street Journal; or (c) if the
Ordinary Shares are not traded on an exchange or quoted on the Nasdaq National
Market or a successor quotation system, the fair market value of an Ordinary
Share as determined by the Board in good faith. Such determination shall be
conclusive and binding on all persons.
(l) "INITIAL OPTION" shall have the meaning set forth in Section
6(a).
(m) "NONEMPLOYEE DIRECTOR" shall mean any person who is a member of
the Board but is not an employee of the Company or any Affiliate of the Company
and has not been an employee of the Company or any Affiliate of the Company at
any time during the preceding 12 months. Service as a director does not in
itself constitute employment for purposes of this definition.
(n) "OPTION" shall mean a stock option granted pursuant to this Plan.
Each Option shall be a nonstatutory option not intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code.
(o) "OPTION AGREEMENT" shall mean the written agreement described in
Section 6 evidencing the grant of an Option to a Nonemployee Director and
containing the terms, conditions and restrictions pertaining to such Option.
(p) "OPTIONEE" shall mean a Nonemployee Director who holds an Option.
2
<PAGE> 3
(q) "ORDINARY SHARES" shall mean the Ordinary Shares of the Company.
(r) "PLAN" shall mean this CommTouch Software Ltd. 1999 Nonemployee
Directors Stock Option Plan, as it may be amended from time to time.
(s) "SECTION" unless the context clearly indicates otherwise, shall
refer to a Section of this Plan.
(t) "SHARES" shall mean the Ordinary Shares subject to an Option
granted under this Plan.
(u) "TAX DATE" means the date defined in Section 7(c).
(v) "TERMINATION" means, for purposes of the Plan, with respect to an
Optionee, that the Optionee has ceased to be, for any reason, a director of the
Company.
3. ADMINISTRATION.
(a) ADMINISTRATOR. The Plan shall be administered by the Board or,
upon delegation by the Board, by a committee consisting of not fewer than two
non-employee directors (as such term is defined in Rule 16b-3(b)(3)(i) of the
Exchange Act) (in either case, the "Administrator"). The Administrator shall
have no authority, discretion or power to select the Nonemployee Directors who
will receive Options hereunder or to set the number of shares to be covered by
each Option granted hereunder, the exercise price of such Option, the timing of
the grant of such Option or the period within which such Option may be
exercised; provided, however, that the Administrator shall have the discretion
to change the exercise price of an outstanding option granted under the Plan or
to issue new options under the Plan with a lower exercise price in exchange for
outstanding options granted under the Plan in connection with a general
repricing by the Company of outstanding options. In connection with the
administration of the Plan, the Administrator shall have the powers possessed by
the Board. The Administrator may act only by a majority of its members. The
Administrator may delegate administrative duties to such employees of the
Company as it deems proper, so long as such delegation is not otherwise
prohibited by Rule 16b-3 under the Exchange Act. The Board at any time may
terminate the authority delegated to any committee of the Board pursuant to this
Section 3(a) and revest in the Board the administration of the Plan.
(b) ADMINISTRATOR DETERMINATIONS BINDING. Subject to the limitations
set forth in Section 3(a), the Administrator may adopt, alter and repeal
administrative rules, guidelines and practices governing the Plan as it from
time to time shall deem advisable, may interpret the terms and provisions of the
Plan, any Option and any Option Agreement and may otherwise supervise the
administration of the Plan. All decisions made by the Administrator under the
Plan shall be binding on all persons, including the Company and Optionees. No
member of the Administrator shall be liable for any action that he or she has in
good faith taken or failed to take with respect to this Plan or any Option.
3
<PAGE> 4
4. ELIGIBILITY.
Only Nonemployee Directors may receive Options under this Plan.
5. SHARES SUBJECT TO PLAN.
(a) AGGREGATE NUMBER. Subject to Section 9, the total number of
Ordinary Shares reserved and available for issuance pursuant to Options under
this Plan shall be 180,000 shares. Such shares may consist, in whole or in part,
of authorized and unissued shares or shares reacquired in private transactions
or open market purchases, but all shares issued under the Plan regardless of
source shall be counted against the 180,000 share limitation. If any Option
terminates or expires without being exercised in full, the shares issuable under
such Option shall again be available for issuance in connection with other
Options. If Ordinary Shares issued pursuant to an Option are repurchased by the
Company, such Ordinary Shares shall not again be available for issuance in
connection with Options. To the extent the number of Ordinary Shares issued
pursuant to an Option is reduced to satisfy withholding tax obligations, the
number of shares withheld to satisfy the withholding tax obligations shall not
be available for later grant under the Plan.
(b) NO RIGHTS AS A SHAREHOLDER. An Optionee shall have no rights as a
shareholder with respect to any Shares covered by his or her Option until an
electronic transfer (as evidenced by the appropriate entry on the books of the
Company or its duly authorized transfer agent) of such Shares is effected.
Subject to Section 9, no adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property), distributions, or
other rights for which the record date is prior to the date the certificate is
issued.
6. GRANT OF OPTIONS.
(a) MANDATORY INITIAL OPTION GRANTS. Subject to the terms and
conditions of this Plan, if any person who is not, and has not been in the
preceding 12 months, an officer or employee of the Company and who has not
previously been a member of the Board is elected or appointed a member of the
Board, then on the effective date of such appointment or election the Company
shall grant to such new Nonemployee Director an Option to purchase 10,000 shares
at an exercise price equal to the Fair Market Value of such Shares on the date
of such option grant. Any Option granted pursuant to this Section 6(a) shall be
referred to as an "Initial Option."
(b) MANDATORY ANNUAL OPTION GRANTS. Subject to the terms and
conditions of this Plan, on May 17 the date of the first meeting of the Board
immediately following the annual meeting of shareholders of the Company (even if
held on the same day as the meeting of shareholders) commencing in 1999, the
Company shall grant to each Nonemployee Director then in office (other than a
Nonemployee Director who received a grant under Section 6(a) on or after the
record date for such annual meeting) an Option to purchase 10,000 shares at an
exercise price equal to the Fair Market Value of such shares on the date of such
option grant; provided, however, the grant date for grants made in connection
with the annual shareholders meeting in
4
<PAGE> 5
1999 shall be May 17, 1999; provided, however, that all grants under this Plan
shall be null and void if the shareholders of the Company do not approve the
Plan on or before April 18, 2000. Any Option granted pursuant to this Section
6(b) shall be referred to as an "Annual Option."
(c) VESTING OF INITIAL OPTION AND ANNUAL OPTION. Each Option granted
under Section 6(a) or 6(b) shall become exercisable with respect to one fourth
of the number of Shares covered by such Option three months after the date of
grant and with respect to one third of the remaining shares subject to the
Option every three months thereafter, so that the Option shall be fully
exercisable on the first anniversary of the date such Option was granted.
(d) TERM. Subject to the other provisions of this Plan, each Option
granted pursuant to this Plan shall have a term of ten years.
(e) LIMITATION ON OTHER GRANTS. The Administrator shall have no
discretion to grant Options under this Plan other than as set forth in Sections
6(a) and 6(b).
(f) OPTION AGREEMENT. As soon as practicable after the grant of an
Option, the Optionee and the Company shall enter into a written Option Agreement
which specifies the date of grant, the number of Shares, the option price, and
the other terms and conditions applicable to the Option.
(g) TRANSFERABILITY. No Option shall be transferable otherwise than
by will or the laws of descent and distribution, and an Option shall be
exercisable during the Optionee's lifetime only by the Optionee.
(h) LIMITS ON EXERCISE. Subject to the other provisions of this Plan,
an Option shall be exercisable in such amounts as are specified in the Option
Agreement.
(i) EXERCISE PROCEDURES. To the extent the right to purchase Shares
has accrued, Options may be exercised, in whole or in part, from time to time,
by written notice from the Optionee to the Company stating the number of Shares
being purchased, accompanied by payment of the exercise price for the Shares,
and other applicable amounts, as provided in Section 7.
(j) TERMINATION. In the event of Termination, Options held at the
date of Termination, to the extent then exercisable, may be exercised in whole
or in part at any time within three months after the date of Termination, (but
in no event after the Expiration Date), but not thereafter. Notwithstanding the
foregoing, if Termination is due to death or Disability, Options held at the
date of Termination, to the extent then exercisable, may be exercised in whole
or in part at any time within two years from the date of Termination (but in no
event after the Expiration Date) by the Optionee or by the Optionee's guardian
or legal representative in the case of Disability or in the case of death, by
the person to whom the Option is transferred by will or the laws of descent and
distribution.
5
<PAGE> 6
7. PAYMENT AND TAXES UPON EXERCISE OF OPTIONS.
(a) PURCHASE PRICE. The purchase price of Shares issued under this
Plan shall be paid in full at the time an Option is exercised.
(b) DELIVERY OF PURCHASE PRICE. Optionees may make all or any portion
of any payment due to the Company upon exercise of an Option or with respect to
federal, state, local or foreign tax payable in connection with the exercise of
an Option, by delivery of cash or check. Exercise of an Option may be made
pursuant to a "cashless exercise/sale" procedure pursuant to which funds to pay
for exercise of the Option are delivered to the Company by a broker upon receipt
of stock from the Company, or pursuant to which Optionees obtain margin loans
from brokers to fund the exercise of the Option.
(c) TAX WITHHOLDING. The Optionee shall pay to the Company in cash,
promptly upon exercise of an Option or, if later, the date that the amount of
such obligations becomes determinable (in either case, the "Tax Date"), all
applicable federal, state, local and foreign withholding taxes that the
Administrator, in its discretion, determines will result upon exercise of an
Option or from a transfer or other disposition of the Ordinary Shares acquired
upon exercise of an Option or otherwise related to an Option or the Ordinary
Shares acquired in connection with an Option.
A person who has exercised an Option may make an election to have
the Ordinary Shares to be obtained upon exercise of the Option withheld by the
Company on behalf of the Optionee, to pay the amount of tax that the
Administrator, in its discretion, determines to be required to be withheld by
the Company.
Any Ordinary Shares tendered to or withheld by the Company will be valued
at Fair Market Value on such date. The value of the Ordinary Shares tendered or
withheld may not exceed the required federal, state, local and foreign
withholding tax obligations as computed by the Company.
8. USE OF PROCEEDS.
Proceeds from the exercise of Options pursuant to this Plan shall be
used for general corporate purposes.
9. ADJUSTMENT OF SHARES.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, stock split or other change in corporate
structure affecting the Ordinary Shares, appropriate adjustments shall be made
by the Administrator in the aggregate number and kind of shares of stock
reserved for issuance under the Plan and in the number, kind and exercise price
of shares subject to outstanding Options; provided, however, that the number of
shares subject to any Option shall always be a whole number.
6
<PAGE> 7
10. EFFECT OF CHANGE IN CONTROL.
In the event of a "Change in Control," any Options outstanding as of
the date such Change in Control is determined to have occurred and not then
exercisable and vested shall become fully exercisable and vested.
11. NO RIGHT TO DIRECTORSHIP.
Neither this Plan nor any Option granted hereunder shall confer upon
any Optionee any right with respect to continuation of the Optionee's membership
on the Board or shall interfere in any way with provisions in the Company's
Memorandum of Association and Articles of Association relating to the election,
appointment, terms of office, and removal of members of the Board.
12. LEGAL REQUIREMENTS.
The Company shall not be obligated to offer or sell any Shares upon
exercise of any Option unless the Shares are at that time effectively registered
or exempt from registration under the federal securities laws and the offer and
sale of the Shares are otherwise in compliance with all applicable securities
laws and the regulations of any stock exchange on which the Company's securities
may then be listed. The Company shall have no obligation to register the
securities covered by this Plan under the federal securities laws or take any
other steps as may be necessary to enable the securities covered by this Plan to
be offered and sold under federal or other securities laws. Upon exercising all
or any portion of an Option, an Optionee may be required to furnish
representations or undertakings deemed appropriate by the Company to enable the
offer and sale of the Shares or subsequent transfers of any interest in the
Shares to comply with applicable securities laws. Certificates or records of
electronic transfers evidencing Shares acquired upon exercise of Options shall
bear any legend required by, or useful for purposes of compliance with,
applicable securities laws, this Plan or the Option Agreements.
13. DURATION AND AMENDMENTS.
(a) DURATION. This Plan shall become effective upon the closing of
the Company's initial public offering, provided that it has been adopted by the
Board and approved by the shareholders of the Company, either by written consent
or by approval of shareholders voting at a validly called shareholders' meeting.
The Plan shall terminate automatically on the tenth anniversary of its effective
date.
(b) AMENDMENT AND TERMINATION. The Board may amend, alter or
discontinue the Plan or any Option, but no amendment, alteration or
discontinuance shall be made which would impair the rights of an Optionee under
an outstanding Option without the Optionee's consent. No amendment shall require
shareholder approval except (i) an increase in the total number of shares
reserved for issuance under the Plan, (ii) to the extent required by applicable
laws, rules or regulations or (iii) to the extent that the Board otherwise
concludes that shareholder approval is advisable.
7
<PAGE> 8
(c) EFFECT OF AMENDMENT OR TERMINATION. No Shares shall be issued or
sold under this Plan after the termination hereof, except upon exercise of an
Option granted before termination. Termination or amendment of this Plan shall
not affect any Shares previously issued and sold or any Option previously
granted under this Plan.
14. RULE 16B-3.
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with the applicable
conditions of Rule 16b-3 under the Exchange Act. To the extent any provision of
this Plan or action by the Administrator fails to so comply, it shall be
adjusted to comply with Rule 16b-3, to the extent permitted by law and deemed
advisable by the Administrator. It shall be the responsibility of persons
subject to Section 16 of the Exchange Act, not of the Company or the
Administrator, to comply with the requirements of Section 16 of the Exchange
Act; and neither the Company nor the Administrator shall be liable if this Plan
or any transaction under this Plan fails to comply with the applicable
conditions of Rule 16b-3, or if any such person incurs any liability under
Section 16 of the Exchange Act.
Approved by the Board of Directors on ___________ __, 1999.
Approved by the Shareholders of the Company on ___________ __, 1999, to be
effective on the date of the closing of the Company's initial public
offering of its ordinary shares.
8
<PAGE> 9
COMMTOUCH SOFTWARE LTD.
1999 NONEMPLOYEE DIRECTORS STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Capitalized terms used without definition in this Stock Option Agreement
(the "OPTION AGREEMENT") shall have the meanings given such terms in the
CommTouch Software Ltd. 1999 Nonemployee Directors Stock Option Plan (the
"PLAN").
I.
NOTICE OF STOCK OPTION GRANT
[Name of Optionee]
OPTION. You have been granted an option to purchase ordinary shares of
CommTouch Software Ltd., an Israeli company (the "ORDINARY SHARES"), subject to
the terms and conditions of the Plan and this Option Agreement, as follows:
<TABLE>
<S> <C>
Date of Grant: __________________
Exercise Price per Share: $_______
Total Number of Ordinary Shares Granted: 10,000
Total Exercise Price: $_______
Type of Option: NSO
Expiration Date: __________________
</TABLE>
VESTING; TERMINATION. This Option will vest with respect to 2,500 ordinary
shares three months after the date of grant and will vest with respect to 2,500
ordinary shares every three months thereafter, provided that the Optionee
continues to serve as a Director of the Company. This Option may be exercised,
in whole or in part, with respect to any vested shares, on or before
[_______________].
II.
AGREEMENT
1. GRANT OF OPTION. CommTouch Software Ltd., an Israeli company (the
"COMPANY"), hereby grants to the Optionee (the "OPTIONEE") named in the Notice
of Stock Option Grant set forth above (the "NOTICE OF GRANT") an option (the
"OPTION") to purchase the total number of Ordinary Shares set forth in the
Notice of Grant, at the exercise price per share set forth in the Notice of
Grant (the "EXERCISE PRICE"), subject to the terms, definitions and provisions
of the Plan, which is incorporated herein by reference. Capitalized terms used
without definition in this Option Agreement shall have the meanings given such
terms in the Plan.
<PAGE> 10
2. EXERCISE OF OPTION.
(a) RIGHT TO EXERCISE. This Option shall be exercisable during its term in
accordance with the Vesting schedule set out in the Notice of Grant and with the
applicable provisions of the Plan and this Option Agreement.
(b) METHOD OF EXERCISE. This Option shall be exercisable by written notice
(in the form attached hereto as Exhibit A), which shall state the election to
exercise the Option, the number of Ordinary Shares with respect to which the
Option is being exercised, and such other representations and agreements as to
the Optionee's investment intent with respect to the Ordinary Shares as may be
required by the Company pursuant to the provisions of the Plan. The written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed to be
exercised upon receipt by the Company of such written notice accompanied by the
Exercise Price.
(c) COMPLIANCE WITH LAW. No Ordinary Shares will be issued pursuant to the
exercise of any Option unless such issuance and such exercise shall comply with
all relevant provisions of law and the requirements of any stock exchange upon
which the Ordinary Shares may then be listed. Assuming such compliance, for
income tax purposes the Ordinary Shares shall be considered transferred to the
Optionee on the date on which the Option is exercised with respect to such
shares.
3. METHOD OF PAYMENT. Payment of the Exercise Price shall be by cash or
check or by a combination thereof, at the election of the Optionee. Optionee
shall also deliver a properly executed exercise notice together with such other
documentation as the Administrator and the broker, if applicable, shall require
to effect an exercise of the Option. Exercise of an Option may be made pursuant
to a "cashless exercise/sale" procedure pursuant to which funds to pay for
exercise of the Option are delivered to the Company by a broker upon receipt of
stock from the Company, or pursuant to which Optionee obtains a margin loan from
a broker to fund the exercise of the Option.
4. NON-TRANSFERABILITY OF OPTION; RIGHT OF REPURCHASE. This Option may not
be transferred in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by
Optionee. The terms of this Option shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
5. TERM OF OPTION. This Option may be exercised only in accordance with
the terms set out in the Notice of Grant, and may be exercised prior to its
expiration date only, in accordance with the Plan and the terms of this Option
Agreement.
6. ENTIRE AGREEMENT; GOVERNING LAW. The Plan is incorporated herein by
reference. The Plan and this Option Agreement constitute the entire agreement of
the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and the Optionee
with respect to the subject matter hereof, and may not be modified adversely to
the Optionee's interest except by means of a writing signed by the Company and
Optionee. In case of conflict between the provisions in the Plan and this Option
Agreement, the provisions in the Plan shall prevail. This Option Agreement is
governed by California law except for that body of law pertaining to conflict of
laws.
<PAGE> 11
7. ACKNOWLEDGMENTS OF OPTIONEE.
(a) NO RIGHT TO CONTINUATION OF BOARD MEMBERSHIP. OPTIONEE ACKNOWLEDGES
AND AGREES THAT THE VESTING OF ORDINARY SHARES PURSUANT TO THE OPTION IS EARNED
ONLY BY CONTINUING BOARD MEMBERSHIP AT THE WILL OF THE COMPANY (NOT THROUGH THE
ACT OF BEING APPOINTED TO THE BOARD OF DIRECTORS, BEING GRANTED THIS OPTION OR
ACQUIRING ORDINARY SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMMTOUCH SOFTWARE LTD. 1999
NONEMPLOYEE DIRECTORS STOCK OPTION PLAN THAT IS INCORPORATED HEREIN BY
REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF
BOARD MEMBERSHIP BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH
OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S BOARD MEMBERSHIP
AT ANY TIME, WITH OR WITHOUT CAUSE.
(b) RECEIPT OF PLAN. Optionee acknowledges receipt of a copy of the Plan
and represents that he or she is familiar with the terms and provisions thereof,
and hereby accepts this Option subject to all of the terms and provisions
thereof. Optionee has reviewed the Plan and this Option in their entirety, has
had an opportunity to obtain the advice of counsel prior to executing this
Option and fully understands all provisions of the Option. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Administrator upon any questions arising under the Plan
or this Option. Optionee further agrees to notify the Company upon any change in
the residence address indicated above.
Date: COMMTOUCH SOFTWARE LTD.
-----------------
--------------------------------------
Gideon Mantel
Chief Executive Officer
--------------------------------------
[Name of Optionee]
<PAGE> 1
EXHIBIT 10.5
COMMTOUCH SOFTWARE LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Establishment of the Plan................................... 1
Section 2. Definitions................................................. 1
Section 3. Shares Authorized........................................... 2
Section 4. Administration.............................................. 3
Section 5. Eligibility and Participation............................... 3
Section 6. Offering and Purchase Periods............................... 4
Section 7. Purchase Price.............................................. 4
Section 8. Employee Contributions...................................... 4
Section 9. Plan Accounts; Purchase of Shares........................... 5
Section 10. Withdrawal From the Plan.................................... 5
Section 11. Taxes....................................................... 6
Section 12. Effect of Termination of Employment or Death................ 6
Section 13. Rights Not Transferable..................................... 6
Section 14. Recapitalization, Etc....................................... 7
Section 15. Limitation on Stock Ownership............................... 7
Section 16. No Rights as an Employee.................................... 7
Section 17. Rights as a Shareholder..................................... 7
Section 18. Use of Funds................................................ 8
Section 19. Amendment or Termination of the Plan........................ 8
Section 20. Governing Law............................................... 8
</TABLE>
<PAGE> 3
COMMTOUCH SOFTWARE LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
SECTION 1. ESTABLISHMENT OF THE PLAN.
The CommTouch Software Ltd. qualified 1999 Employee Stock Purchase Plan
(the "Plan") was established to provide Eligible Employees with an opportunity
to purchase the Company's Ordinary Shares so that they may increase their
proprietary interest in the success of the Company. The Plan, which provides for
the purchase of stock through after-tax payroll withholding, is intended to
qualify under Section 423 of the Code.
SECTION 2. DEFINITIONS.
(a) "Board of Directors" or "Board" means the Board of Directors of the
Company, or an authorized committee of the Board.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Company" means CommTouch Software Ltd., a corporation formed under
the laws of the State of Israel.
(d) "Compensation" means the base compensation paid to a Participant in
cash, including overtime and shift differential; provided, however, that for
purposes of determining a Participant's compensation, any election by such
Participant to reduce his or her regular cash remuneration under Sections 125 or
401(k) of the Code shall be treated as if the participant did not make such
election. Incentive compensation, commissions and other bonuses and other forms
of compensation for work outside the regular work schedule are excluded.
(e) "Eligible Employee" means any Employee of a Participating Company
(i) who is employed by the Participating Company on or prior to the Offering
Date, (ii) who is customarily employed for more than 20 hours per week, and
(iii) who is customarily employed for more than five months per calendar year.
In the event an Eligible Employee fails to remain in the continuous
employ of a Participating Company customarily for at least 20 hours per week
during an Offering Period or at least five months per calendar year, he or she
will be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to his or her account will be returned to him or her;
provided that a Participant who goes on an unpaid leave of absence shall be
permitted to remain in the Plan with respect to an Offering Period which
commenced prior to such leave of absence. If such Participant is not guaranteed
reemployment by contract or statute and the leave of absence extends beyond 90
days, such Participant shall be deemed to have terminated employment on the 91st
day of such leave of absence. Payroll deductions for a Participant who has been
on an unpaid leave of absence will resume at the same rate as in effect prior to
such leave upon return to work unless changed by such Participant or unless the
Participant has been on an unpaid leave of absence either throughout an entire
Offering Period or for more than 90 days, in which case the Participant shall
not be permitted to re-enter the Plan until a
<PAGE> 4
participation agreement is filed with respect to a subsequent Offering Period
that commences after such Participant has returned to work from the unpaid leave
of absence.
(f) "Employee" means any employee of a Participating Company.
(g) "Fair Market Value" shall mean (i) the closing price of an Ordinary
Share on the principal exchange on which the Ordinary Shares are trading, or
(ii) if the Ordinary Shares are not traded on an exchange but are quoted on the
Nasdaq National Market or a successor quotation system, the closing price on the
Nasdaq National Market or such successor quotation system, or (iii) if the
Ordinary Shares are not traded on an exchange or quoted on the Nasdaq National
Market or a successor quotation system, the fair market value of an Ordinary
Share as determined by the Plan Administrator in good faith. Such determination
shall be conclusive and binding on all persons.
(h) "Offering Date" means the first day of an Offering Period.
(i) "Offering Period" means a period during which contributions may be
made toward the purchase of Ordinary Shares under the Plan, as determined
pursuant to Section 6.
(j) "Ordinary Shares" means the Ordinary Shares, par value NIS 1.0, of
the Company.
(k) "Participant" means an Eligible Employee who elects to participate
in the Plan, as provided in Section 5.
(l) "Participating Company" means the Company and such present or future
Subsidiaries of the Company as the Board of Directors shall from time to time
designate.
(m) "Plan Account" means the account established for each Participant
pursuant to Section 9(a).
(n) "Plan Administrator" means the administrator appointed by the Board
pursuant to Section 4.
(o) "Purchase Price" means the price at which Participants may purchase
Ordinary Shares under Section 5 of the Plan, as determined pursuant to Section
7.
(p) "Purchase Date" means the last day of each Purchase Period.
(q) "Purchase Period" means a period commencing on the Offering Date or
on the day after a Purchase Date and ending on a Purchase Date, as described in
Section 6.
(r) "Subsidiary" means a subsidiary corporation as defined in Section
424 of the Code.
SECTION 3. SHARES AUTHORIZED.
Subject to adjustment as provided in Section 14, the maximum aggregate
number of Ordinary Shares that may be offered under the Plan shall initially be
150,000; provided, however, that the number of Ordinary Shares that may be
offered under the Plan shall be increased as of January 1 of each year by 110
percent of the number of shares purchased under the Plan in the previous
calendar year.
2
<PAGE> 5
SECTION 4. ADMINISTRATION.
(a) The Plan shall be administered by a Plan Administrator appointed by
the Board of Directors. The interpretation and construction by the Plan
Administrator of any provision of the Plan or of any right to purchase Ordinary
Shares hereunder shall be conclusive and binding on all persons.
(b) No member of the Board or the Plan Administrator shall be liable for
any action or determination made in good faith with respect to the Plan or the
right to purchase Ordinary Shares hereunder. The Plan Administrator shall be
indemnified by the Company against the reasonable expenses, including attorney's
fees, actually and necessarily incurred in connection with the defense of any
action, suit or proceeding, or in connection with any appeal therein, to which
it may be a party by reason of any action taken or failure to act under or in
connection with the Plan or any stock purchased thereunder, and against all
amounts paid by it in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by it in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that the Plan Administrator is liable for gross negligence or
misconduct in the performance of its duties; provided that within 60 days after
institution of any such action, suit or proceeding, the Plan Administrator shall
in writing offer the Company the opportunity, at the Company's own expense, to
handle and defend the same.
(c) All costs and expenses incurred in administering the Plan shall be
paid by the Company. The Board or the Plan Administrator may request advice for
assistance or employ such other persons as are necessary for proper
administration of the Plan.
SECTION 5. ELIGIBILITY AND PARTICIPATION.
(a) Any person who qualifies or will qualify as an Eligible Employee on
the Offering Date with respect to an Offering Period may elect to participate in
the Plan for such Offering Period. An Eligible Employee may elect to participate
by executing the participation agreement prescribed for such purpose by the Plan
Administrator. The participation agreement shall be filed with the Plan
Administrator no later than two weeks prior to the applicable Offering Date or
such other deadline as is prescribed by the Plan Administrator. The Eligible
Employee shall designate in the participation agreement the percentage of his or
her Compensation which he or she elects to have withheld for the purchase of
Ordinary Shares, which may be any percentage of the Participant's Compensation
up to a maximum of 15 percent. In the event that the Fair Market Value of
Ordinary Shares on the last trading day before the commencement of the Offering
Period in which the Participant is enrolled is higher than on the last trading
day before the commencement of any subsequent Offering Period, the Participant
shall automatically be re-enrolled for such subsequent Offering Period, unless
the Participant elects to withdraw during the current Offering Period by
delivering a written notice, in form satisfactory to the Board, to the Plan
Administrator. When a Participant reaches the end of an Offering Period but his
or her participation is to continue, then such Participant shall automatically
be re-enrolled for the Offering Period that commences immediately after the end
of the prior Offering Period.
(b) By enrolling in the Plan, a Participant shall be deemed to have
elected to purchase the maximum number of whole Ordinary Shares that can be
purchased with the amount of the Participant's Compensation which is withheld
during each Purchase Period.
3
<PAGE> 6
(c) Once enrolled, a Participant will continue to participate in the
Plan for each succeeding Purchase and Offering Period until he or she terminates
participation or ceases to qualify as an Eligible Employee. A Participant who
withdraws from the Plan in accordance with Section 10 may again become a
Participant, if he or she then is an Eligible Employee, by following the
procedure described in Section 5(a).
SECTION 6. OFFERING AND PURCHASE PERIODS.
The Plan shall be implemented by one or more Offering Periods of not
more than 24 months each. The Board of Directors may determine the duration of
each Offering Period and the commencement dates. The Board may determine to
include one or more Purchase Periods within an Offering Period. The first
Offering Period shall commence on the first business day on which price
quotations for the Company's Ordinary Shares are available on the Nasdaq
National Market and shall end on August 14, 2001, and shall contain four
Purchase Periods commencing on the first day of the first Offering Period,
February 15, 2000, August 15, 2000 and February 15, 2001. Thereafter, unless
changed by the Board, the duration of each subsequent Offering Period shall be
two years, commencing on February 15 or August 15 and ending 24 months later on
February 14 or August 14, and shall contain four Purchase Periods commencing on
each February 14 and August 14 during each such Offering Period.
SECTION 7. PURCHASE PRICE.
The Purchase Price for each Ordinary Share shall be the lesser of (i)
85% of the Fair Market Value of such Ordinary Share on the last trading day
before the Offering Date (provided, however, in the case of the first Offering
Period, this number shall be 85% of the price per share at which the Company's
Ordinary Shares are initially offered for sale to the public by the Company's
underwriters in the initial public offering of the Company's Ordinary Shares
pursuant to a registration statement filed with the SEC) or (ii) 85% of the Fair
Market Value of such Ordinary Share on the last trading day of the applicable
Purchase Period.
SECTION 8. EMPLOYEE CONTRIBUTIONS.
A Participant may purchase Ordinary Shares under the Plan solely by
means of payroll deductions. Payroll deductions, as designated by the
Participant pursuant to Section 5(a), shall commence with the first paycheck
issued during the Offering Period and shall be deducted from each subsequent
paycheck throughout the Offering Period. If a Participant desires to change the
rate of payroll withholding during the Offering Period, he or she may do so, if
permitted by the Plan Administrator, only one time during an Offering Period by
filing a new participation agreement with the Plan Administrator. Such a change
may be either an increase or a decrease and will be effective no later than the
first day of the second payroll period which begins following the receipt of the
new participation agreement. If a Participant desires to increase or decrease
the rate of payroll withholding more than one time during the participation
period, he or she may do so effective for the next Offering Period by filing a
new participation agreement with the Plan Administrator on or before the date
specified by the Plan Administrator, and if none is stated, then no later than
the first day of the Offering Period for which such change is to be effective.
SECTION 9. PLAN ACCOUNTS; PURCHASE OF SHARES.
4
<PAGE> 7
(a) The Company will maintain a Plan Account on its books in the name of
each Participant. At the close of each pay period, the amount deducted from the
Participant's Compensation will be credited to the Participant's Plan Account.
No interest shall accrue on any amounts held in the Participant's Plan Account.
(b) As of the last day of each Purchase Period, the amount then in the
Participant's Plan Account will be divided by the Purchase Price, and the number
of whole shares which results (subject to the limitations described in Sections
5(b), 9(c) and 15) shall be purchased from the Company with the funds in the
Participant's Plan Account. Foreign currencies will be converted to U.S. dollars
based on the foreign currency exchange rate as quoted in the Wall Street Journal
on the Purchase Date, or such other reasonable method selected by the Plan
Administrator that does not prevent the Plan from satisfying the requirements of
Section 423 of the Code. Shares representing the number of Ordinary Shares so
purchased shall be electronically delivered to a brokerage account designated by
the Plan Administrator and kept in such account pursuant to a participation
agreement between each Participant and the Company and subject to the conditions
described therein, which may include a requirement that Ordinary Shares be held
and not sold for certain time periods.
(c) In the event that the aggregate number of Ordinary Shares that all
Participants elect to purchase during a Purchase Period shall exceed the number
of shares remaining available for issuance under the Plan, then the number of
shares to which each Participant shall become entitled shall be determined by
multiplying the number of shares available for issuance by a fraction, the
numerator of which is the sum of the number of shares the Participant has
elected to purchase during that Purchase Period pursuant to Section 5, and the
denominator of which is the sum of the number of shares which all employees have
elected to purchase during that Purchase Period pursuant to Section 5. Any cash
amount remaining in the Participant's Plan Account under these circumstances
shall be refunded to the Participant.
(d) Any amount remaining in the Participant's Plan Account caused by a
surplus due to fractional shares after deducting the amount of the Purchase
Price for the number of whole shares issued to the Participant shall be carried
over in the Participant's Plan Account for the succeeding Purchase Period,
without interest. Any amount remaining in the Participant's Plan Account caused
by anything other than a surplus due to fractional shares shall be refunded to
the Participant in cash, without interest.
(e) As soon as practicable following the end of each Purchase Period,
the Company shall deliver to each Participant a Plan Account statement setting
forth the amount of payroll deductions, the Purchase Price, the number of shares
purchased and the remaining cash balance, if any.
SECTION 10. WITHDRAWAL FROM THE PLAN.
A Participant may elect to withdraw from participation in a Purchase
Period at any time up to the last day of the Purchase Period by filing the
prescribed form with the Plan Administrator. A Participant may elect to withdraw
(or not withdraw) from participation in an Offering Period at any time up to the
last day of the Offering Period by filing the prescribed form with the Plan
Administrator. As soon as practicable after a withdrawal, payroll deductions
shall cease and all amounts credited to the Participant's Plan Account will be
refunded in cash, without interest. A Participant who has
5
<PAGE> 8
withdrawn from an Offering Period shall not be a Participant in future Offering
Periods, unless he or she again enrolls in accordance with the provisions of
Section 5.
SECTION 11. TAXES.
The Participant shall make such arrangements as the Company may require
for the satisfaction of any federal, state, local or foreign tax obligations
that may arise in connection with the disposition of the Ordinary Shares
acquired under the Plan. If required by the applicable tax authority, these
arrangements may include withholding (or tendering back) of Ordinary Shares, or
withholding amounts from the Participant's compensation.
SECTION 12. EFFECT OF TERMINATION OF EMPLOYMENT OR DEATH.
(a) Termination of employment as an Eligible Employee for any reason,
including death, shall be treated as an automatic withdrawal from the Plan under
Section 10. A transfer from one Participating Company to another shall not be
treated as a termination of employment.
(b) A Participant may file a written designation of a beneficiary who is
to receive any cash from the Participant's Plan Account in the event of such
Participant's death prior to the last day of a Purchase Period. A Participant
may also file a written designation of a beneficiary who is to receive shares
and cash, if any, from the Participant's Plan Account in the event of such
Participant's death subsequent to the purchase of shares but prior to delivery
to his or her account of such shares and cash.
(c) A designation of beneficiary may be changed by the Participant at
any time by written notice. In the event of the death of a Participant in the
absence of a valid designation of a beneficiary who is living at the time of
such Participant's death, the Company shall deliver such cash and/or shares to
the executor or administrator of the estate of the Participant; or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such cash and/or shares to the
spouse or to any one or more dependents or relatives of the Participant; or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
SECTION 13. RIGHTS NOT TRANSFERABLE.
The rights or interests of any Participant in the Plan, or in any
Ordinary Shares or money to which he or she may be entitled under the Plan,
shall not be transferable by voluntary or involuntary assignment or by operation
of law, or by any other manner other than as permitted by the Code or by will or
the laws of descent and distribution. If a Participant attempts to transfer,
assign or otherwise encumber his or her rights or interest under the Plan, other
than as permitted by the Code or by will or the laws of descent and
distribution, such act shall be treated as an automatic withdrawal under Section
10.
SECTION 14. RECAPITALIZATION, ETC.
(a) The aggregate number of Ordinary Shares offered under the Plan, the
number and price of shares which any Participant has elected to purchase
pursuant to Section 5 and the maximum number of shares which a Participant may
elect to purchase under the Plan in any Offering Period shall be
6
<PAGE> 9
proportionately adjusted for any increase or decrease in the number of issued
Ordinary Shares resulting from a subdivision or consolidation of shares or any
other capital adjustment, the payment of a stock dividend, or other increase or
decrease in such shares effected without receipt of consideration by the
Company.
(b) In the event of a dissolution or liquidation of the Company, or a
merger or consolidation to which the Company is a constituent corporation, this
Plan shall terminate unless the plan of merger, consolidation or reorganization
provides otherwise, and all amounts paid by each Participant toward the Purchase
Price of Ordinary Shares hereunder shall be refunded, without interest.
(c) The Plan shall in no event be construed to restrict in any way the
Company's right to undertake a dissolution, liquidation, merger, consolidation
or other reorganization.
SECTION 15. LIMITATION ON STOCK OWNERSHIP.
Notwithstanding any provision herein to the contrary, no Participant
shall be permitted to elect to participate in the Plan (i) if such Participant,
immediately after his or her election to participate, would own stock possessing
five percent or more of the total combined voting power or value of all classes
of stock of the Company or any parent or Subsidiary of the Company, or (ii) if
under the terms of the Plan the right of the Employee to purchase Ordinary
Shares under this Plan and all other qualified employee stock purchase plans of
the Company or its Subsidiaries would accrue at a rate that exceeds $25,000 of
the Fair Market Value of such Ordinary Shares (determined at the time such right
is granted) for each calendar year for which such right is outstanding at any
time. For purposes of this Section 15, ownership of stock shall be determined by
the attribution rules of Section 424(d) of the Code, and Participants shall be
considered to own any Ordinary Shares which they have a right to purchase under
this or any other stock plan.
SECTION 16. NO RIGHTS AS AN EMPLOYEE.
Nothing in the Plan shall be construed to give any person the right to
remain in the employ of a Participating Company. Each Participating Company
reserves the right to terminate the employment of any person at any time and for
any reason.
SECTION 17. RIGHTS AS A SHAREHOLDER.
A Participant shall have no rights as a shareholder with respect to any
shares he or she may have a right to purchase under the Plan until the date of
issuance of the stock to the brokerage account designated by the Plan
Administrator for Ordinary Shares issued pursuant to the Plan.
SECTION 18. USE OF FUNDS.
All payroll deductions received or held by the Company under the Plan
may be used by the Company for general corporate purposes, and the Company shall
not be obligated to segregate such payroll deductions in separate accounts.
SECTION 19. AMENDMENT OR TERMINATION OF THE PLAN.
7
<PAGE> 10
The Board of Directors shall have the right to amend, modify or
terminate the Plan at any time without notice. An amendment of the Plan shall be
subject to shareholder approval only to the extent required by applicable laws,
regulations or rules. Amendments to the Plan to comply with the requirements of
a foreign country may be adopted by the Plan Administrator to the extent those
amendments do not prevent the Plan from satisfying the requirements of Section
423 of the Code.
SECTION 20. GOVERNING LAW.
The Plan shall be governed by, and construed and interpreted in
accordance with, the laws of the State of California.
* * * *
Approved by the Board of Directors on _____________ __, 1999.
Approved by the Shareholders of the Company on _____________ __, 1999.
8
<PAGE> 11
COMMTOUCH SOFTWARE LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
SUBSCRIPTION AGREEMENT
_____ Original Application Enrollment Date: _______________
_____ Change of Beneficiary(ies) Offering Period: _______________
1. ________________________ hereby elects to participate in the CommTouch
Software Ltd. (the "Company") 1999 Employee Stock Purchase Plan (the
"Employee Stock Purchase Plan") and subscribes to purchase the Company's
Ordinary Shares in accordance with this Subscription Agreement and the
Employee Stock Purchase Plan.
2. I hereby authorize payroll deductions from each paycheck in the amount of
(1% up to 15%, whole percentage only) _____% of my Compensation on each
payday during the indicated Offering Period in accordance with the
Employee Stock Purchase Plan.
3. I understand that said payroll deductions shall be accumulated for the
purchase of Ordinary Shares at the applicable Purchase Price determined in
accordance with the Employee Stock Purchase Plan. I understand that if I
do not withdraw from an indicated Offering Period, any accumulated payroll
deductions will be used to automatically purchase shares for me.
4. I have received a copy of the complete "Employee Stock Purchase Plan." I
understand that my participation in the Employee Stock Purchase Plan is in
all respects subject to the terms of the Plan.
5. Shares purchased for me under the Employee Stock Purchase Plan should be
issued in the name(s) of (Employee or Employee and Spouse Only):
-----------------------------------------------
(Names)
-----------------------------------------------
6. I understand that if I dispose of any shares received by me pursuant to
the Plan within 2 years after the first day of the indicated Offering
Period during which I purchased such shares, or within 1 year after the
date on which such shares were purchased by me, I will be treated for
federal income tax purposes as having received ordinary income at the
time of such disposition in an amount equal to the excess of the fair
market value of the shares at the time such shares were purchased by me
over the price which I paid for the shares. I
<PAGE> 12
hereby agree to notify the Company in writing within 30 days after the
date of any disposition of shares and I will make adequate provision for
Federal, state or other tax withholding obligations, if any, which arise
upon the disposition of the Ordinary Shares. The Company may, but will not
be obligated to, withhold from my compensation the amount necessary to
meet any applicable withholding obligation including any withholding
necessary to make available to the Company any tax deductions or benefits
attributable to sale or early disposition of Common Stock by me. If I
dispose of such shares at any time after the expiration of the 2-year
holding period, I understand that I will be treated for federal income tax
purposes as having received income only at the time of such disposition,
and that such income will be taxed as ordinary income only to the extent
of an amount equal to the lesser of (1) the excess of the fair market
value of the shares at the time of such disposition over the purchase
price which I paid for the shares, or (2) the excess of the fair market
value of the shares on the first day of the Offering Period or Purchase
Period over the purchase price that I paid for the shares. The remainder
of the gain, if any, recognized on such disposition will be taxed as
capital gain.
7. I hereby agree to be bound by the terms of the Employee Stock Purchase
Plan. The effectiveness of this Subscription Agreement is dependent upon
my eligibility to participate in the Employee Stock Purchase Plan.
8. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the
Employee Stock Purchase Plan:
NAME: (Please print)
------------------------------------------------------------
(First) (Middle) (Last)
- ------------------------- --------------------------------------------
Relationship
--------------------------------------------
(Address)
NAME: (Please print)
------------------------------------------------------------
(First) (Middle) (Last)
- ------------------------- --------------------------------------------
Relationship
--------------------------------------------
(Address)
Employee's Social Security Number:
--------------------------------------------
Employee's Address:
--------------------------------------------
<PAGE> 13
--------------------------------------------
--------------------------------------------
I UNDERSTAND THAT THIS SUBSCRIPTION AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT
SUCCESSIVE OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:
--------------------- --------------------------------------------
Signature of Employee
--------------------------------------------
Spouse's Signature (If beneficiary other
than spouse)
<PAGE> 14
COMMTOUCH SOFTWARE LTD.
1999 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
The undersigned participant in the Offering Period or Purchase Period
(circle one) of the CommTouch Software Ltd. Employee Stock Purchase Plan which
began on _______________ 19____ (the "Enrollment Date") hereby notifies the
Company that he or she hereby withdraws from the Offering Period or Purchase
Period. He or she hereby directs the Company to pay to the undersigned as
promptly as practicable all the payroll deductions credits to his or her account
with respect to such Offering Period or Purchase Period. The undersigned
understands and agrees that his or her option for such Offering Period or
Purchase Period will be automatically terminated. The undersigned understands
further that no further payroll deductions will be made for the purchase of
shares in the current Offering Period or Purchase Period and the undersigned
shall be eligible to participate in succeeding Offering Periods or Purchase
Periods only by delivery to the Company a new Subscription Agreement.
Name and Address of Participant: Signature:
- ------------------------------ -----------------------------------
- ------------------------------ -----------------------------------
Date:
- ------------------------------
<PAGE> 1
EXHIBIT 10.6
SUBLEASE
This Sublease ("Sublease") is made this 14TH day of NOVEMBER, 1998 by and
between ASCII OF AMERICA, INC., a CALIFORNIA corporation ("Sublandlord") and
COMMTOUCH, INC., a CALIFORNIA corporation ("Subtenant").
RECITALS
A. Sublandlord, as Tenant, is leasing from MCCANDLESS TOWERS, PHASE
I ("Landlord") those certain premises located at 3945 FREEDOM CIRCLE, SUITE
730, SANTA CLARA, California ("Premises") pursuant to that certain lease dated
JANUARY 13, 1996 ("Master Lease"). Subtenant acknowledges having received and
reviewed a copy of the Master Lease.
B. Sublandlord desires to lease to Subtenant and Subtenant desires to
lease from Sublandlord a portion of the Premises consisting of approximately
3,275 square feet (the "Sublease Premises") as shown on Exhibit A attached
hereto, on the terms and conditions set forth in this Sublease.
NOW, THEREFORE, the parties hereto agree as follows:
1. PREMISES
Sublandlord leases to Subtenant and Subtenant hires from
Sublandlord the Premises, together with the appurtenances thereto.
2. INCORPORATION OF MASTER LEASE
This Sublease is subject to all of the terms and conditions of the
Master Lease and Subtenant hereby accepts, assumes and agrees to perform all
the obligations of Sublandlord as Tenant under the Master Lease and all of the
terms and conditions of this Sublease (with each reference therein to Landlord
and Tenant to be deemed to refer to Sublandlord and Subtenant, respectively),
excepting only paragraphs: 2, 4 (a), 4(c), 4(d), 4(e), 5(a) 54 AND 55.
Subtenant shall not commit or permit to be committed on the Sublease Premises
any act or omission which shall violate any term or condition of the Master
Lease. In the event of the termination for any reason of Sublandlord's interest
as Tenant under the Master Lease, then this Sublease shall terminate therewith
without any liability of Sublandlord to Subtenant; except that if this Sublease
terminates as a result of a default of one of the parties hereto, whether under
this Sublease, the Master Lease, or both, the defaulting party shall be liable
to the non-defaulting party for all damages suffered by the non-defaulting
party resulting from such termination.
3. TERM
The term of this Sublease shall be for a period of FORTY-TWO (42)
MONTHS commencing on JANUARY 1, 1999 and ending on JUNE 30, 2002. In the event
Sublandlord is unable to deliver possession of the Sublease Premises at the
commencement of the term, Sublandlord shall not be liable for any damage caused
thereby, nor shall this Sublease be void or voidable nor shall the term hereof
be extended by such delay; provided, however, that Subtenant shall not be
liable for rent until such time as Sublandlord offers to deliver possession of
the Sublease Premises to Subtenant. Notwithstanding the foregoing, should the
Premises be undelivered by January 15, 1999, then Subtenant shall have the
right, but not the obligation, to terminate this Sublease Agreement and all
deposits and prepaid rent shall be returned within five (5) business days.
<PAGE> 2
4. USE
Subtenant shall use the Sublease Premises for GENERAL OFFICE USES AND
for no other purpose.
5. RENTAL
(a) Subtenant shall pay to Sublandlord as rent for the Sublease
Premises, in advance, on the first day of each calendar month of the term of
this Sublease, without deduction, offset, prior written notice or demand; in
lawful money of the United States, the sum of TEN THOUSAND FOUR HUNDRED EIGHTY
AND NO/100 DOLLARS ($10,480.00). Of this sum, SEVEN THOUSAND TWO HUNDRED FIVE
AND NO/100 DOLLARS ($7,205.00) shall be payable and subject to fixed increases
of ONE HUNDRED SIXTY THREE AND 75/100 DOLLARS ($163.75) as defined in the
attached rent schedule "I" (Addendum). Approximately THREE THOUSAND TWO HUNDRED
SEVENTY FIVE AND NO/100 DOLLARS ($3,275.00) shall be applied to Subtenant's
estimated pro-rata share of direct expenses as defined in Master Lease
Paragraph 4, Sub-Paragraph (b), and reconciled with Sublandlord's annual
reconciliation on a pro-rata basis. If the commencement and/or termination date
is not the first day of the month, a prorated monthly installment shall be paid
at the then current rate for the fractional month during which the Sublease
commences and/or terminates.
(b) Sublandlord acknowledges receipt from Subtenant, on the
execution hereof, the sum of TEN THOUSAND FOUR HUNDRED EIGHTY AND NO/100
DOLLARS ($10,480.00) to be applied against rent for the first full month of the
term.
(c) Concurrently with Subtenant's execution of this Sublease,
Subtenant shall deposit with Sublandlord the sum of ELEVEN THOUSAND AND NO/100
DOLLARS ($11,000.00) as a non-interest bearing security deposit for Subtenant's
performance under this Sublease. In the event Subtenant has performed all of
the terms and conditions of this Sublease throughout the term, the amount paid
as security deposit shall be returned to Subtenant upon Subtenant vacating the
Premises, after first deducting any sums owing to Sublandlord.
6. SURRENDER AT END OF TERM
Subtenant agrees to surrender the Sublease Premises on expiration or
earlier termination of the term hereof, in good condition and repair,
reasonable wear and tear excepted.
7. LANDLORD'S WRITTEN CONSENT
This Sublease is conditioned upon and effective only upon obtaining
the written consent of Landlord.
8. NOTICES
All notices and demands of any kind required to be given by
Sublandlord or Subtenant hereunder shall be in writing and effective
twenty-four (24) hours after depositing same in the United States mail, postage
prepaid, and addressed to Sublandlord or Subtenant, as the case may be, at the
address set forth below their respective signature or at such other address as
they may designate from time to time.
9. INSURANCE
Insurance requirements pertaining to Sublandlord as Tenant under
paragraph 11 of the Master Lease shall also apply to Subtenant.
<PAGE> 3
10. BROKER
Upon execution of this Sublease, Sublessor shall pay Wayne Mascia
Associates, a licensed real estate broker, fees set forth in a separate
agreement between Sublessor and Broker for brokerage services rendered by
Broker to Sublessor in this transaction. Contingent on lease becoming effective.
SUBLANDLORD: SUBTENANT:
ASCII OF AMERICA, INC., COMMTOUCH, INC.,
a California corporation a California corporation
By: /s/ SADA CHIDAMBARAM By: /s/ GIDEON MANTEL
------------------------------ -------------------------------
Name: Sada Chidambaram Name: Gideon Mantel
---------------------------- -----------------------------
Title: President Title: Chief Executive Officer
--------------------------- ----------------------------
Date: December 4, 1998 Date: 12/1/98
---------------------------- -----------------------------
By: By:
------------------------------ -------------------------------
Name: Name:
---------------------------- -----------------------------
Title: Title:
--------------------------- ----------------------------
Date: Date:
---------------------------- -----------------------------
Address: Address:
-------------------------- ---------------------------
- ---------------------------------- -----------------------------------
<PAGE> 4
ADDENDUM TO THE SUBLEASE DATED NOVEMBER 14, 1998 BY AND BETWEEN ASCII OF
AMERICA, INC. AS SUBLESSOR, AND COMMTOUCH, INC., A CALIFORNIA CORPORATION AS
SUBLESSEE FOR THE APPROXIMATELY 3,275 RENTABLE SQUARE FEET OF PROPERTY FURTHER
DESCRIBED AS SUITE 730 AT 3945 FREEDOM CIRCLE, SANTA CLARA, CALIFORNIA.
I. RENTAL SCHEDULE*
<TABLE>
<CAPTION>
Period Price/SF Rent/Month
------ -------- ----------
<S> <C> <C>
01/01/99 - 06/30/99 $3.20 $10,480.00
07/01/99 - 06/30/00 $3.25 $10,643.75
07/01/00 - 06/30/01 $3.30 $10,807.50
07/01/01 - 06/30/02 $3.35 $10,971.25
</TABLE>
* Lessee shall share any other expenses described in Master Lease on a pro
rata basis.
II. CONDITION OF PREMISES
Sublessee shall take the space on an "as is" basis subject to the carpet
being vacuumed and the space being left in a clean and tenantable
condition.
III. OPTIONS TO EXPAND
Sublessee shall have two (2) options to expand into the adjoining Suite
740 (as shown on Exhibit A) of approximately 1,555 square feet during the
term of the sublease at the same terms and conditions as the original
transaction. The first option shall be exercisable on January 1, 2000 and
if not exercised, the second option shall be exercisable on January 1,
2001. Options require Sublessee to notify Sublessor in writing at least
120 days prior to the exercise date. Both parties agree that these notices
therefore must be dated October 1, 1999 and October 1, 2000 or prior.
IV. ADDITIONAL PARKING
Sublandlord hereby assigns its two additional underground parking cards
to Subtenant, at Subtenant's sole cost.
V. FUNDING CONTINGENCY
This sublease is conditional upon Sublessee receiving additional funding
of approximately $3M by December 24, 1998. Should funding not be received
by this date, then Sublandlord shall have the right, but not the
obligation, to terminate this agreement and all deposits, and prepaid rent
shall be returned within five (5) business days.
[INIT]
<PAGE> 5
APPROXIMATELY 3,275 RENTABLE SQUARE FEET
SUITE 730
EXHIBIT A
[SUITE 730 DIAGRAM]
Approx. 1,555 Sq. Ft. = Suite 740
Approx. 3,275 Sq. Ft.
[MAP]
o AVAILABLE NOW
o $3.20 PSF Fully Serviced
o Sublease Term through 6/30/02
o Longer Term Available Through Landlord
o Full Athletic Club
o Conference Facility
o Indoor Lap Pool and Jacuzzi
o Aerobics Classes
o Underground Parking
o Private Helipad
o 24-Hour Security
o On-Site Management
[INIT]
<PAGE> 6
LANDLORD'S CONSENT TO SUBLEASE
THIS CONSENT ("Consent") is given by MCCANDLESS TOWERS, PHASE-I,
("Landlord") to that certain Sublease dated November 14th, 1998 (the
"Sublease") by and between ASCII OF AMERICA, INC. a California corporation
("Sublandlord") and COMMTOUCH, INC., a California corporation ("Subtenant"),
subject to the following terms and conditions:
1. All capitalized terms not otherwise defined herein shall have the
meaning ascribed to them in the Sublease.
2. Landlord is not a party to the Sublease and has no obligations or
duties to Subtenant or Sublandlord under the Sublease and any provisions
therein purporting to obligate and/or bind Landlord or limit Landlord's rights
under the Master Lease in any way are deemed null and void. Notwithstanding any
provision to the contrary in the Sublease, Subtenant shall have no greater
rights than Sublandlord has as Tenant under the Master Lease.
3. This Consent shall only apply to this Sublease and shall not be
deemed to be a consent to any other or further sublease or a waiver of any of
the provisions of the Master Lease.
4. By consenting to the Sublease, Landlord waives none of its rights
against the Sublandlord as Tenant under the Master Lease. The Sublease is and
shall remain at all times subject to and subordinate in all respects to the
Lease.
5. This Consent shall not modify or amend or be deemed to modify or amend
the Lease in any way, or to impose on Landlord any obligation to provide notice
to, or obtain consent from, Subtenant with respect to amendments, defaults,
waivers or any other matters pertaining to the Master Lease or to the Premises
covered by the Master Lease. Any waiver by Landlord of its rights shall be made
only in writing and signed by Landlord.
6. Upon the expiration or earlier termination of the Master Lease, the
Sublease shall automatically and without notice or demand, terminate and
Subtenant agrees promptly to surrender the Sublease Premises to Landlord upon
such termination without compensation from Landlord.
7. This Consent shall not be effective until receipt by Landlord of a
counterpart or counterparts of this Consent duly executed by Sublandlord and
Subtenant, each acknowledging its agreement to the terms and conditions
specified in this Consent.
<PAGE> 7
Landlord:
McCANDLESS TOWERS, PHASE-I
a California limited partnership
By: McCandless Group (MTI),
a California general partnership
a General Partner
By: /s/ BIRK S. MCCANDLESS
-------------------------------
Birk S. McCandless, as Trustee
under the Birk S. McCandless
and Mary McCandless Inter
Vivos Trust Agreement dated
February 17, 1982,
a General Partner
EACH OF THE UNDERSIGNED HEREBY ACKNOWLEDGE THAT IT HAS READ AND UNDERSTANDS THE
TERMS AND CONDITIONS SPECIFIED IN THE FOREGOING CONSENT AND AGREES TO ALL SUCH
TERMS AND CONDITIONS.
SUBLANDLORD: SUBTENANT:
ASCII OF AMERICA, INC. COMMTOUCH, INC.
a California corporation a California corporation
By: /s/ Sada Chidambaram By: /s/ Gideon Mantel
--------------------------- --------------------------
Name: Sada Chidambaram Name: Gideon Mantel
------------------------- --------------------------
Title: President Title: President
------------------------ -------------------------
Date: December 10, 1998 Date:
------------------------- --------------------------
By: By:
--------------------------- --------------------------
Name: Name:
------------------------- --------------------------
Title: Secretary Title: Secretary
------------------------ -------------------------
Date: Date:
------------------------- --------------------------
<PAGE> 8
EXHIBIT
McCANDLESS TOWERS, PHASE I
AND
ASCII OF AMERICA, INC.
LEASE
<PAGE> 9
SUMMARY OF LEASE
MCCANDLESS TOWERS, PHASE I
<TABLE>
<S> <C>
1. DATE OF LEASE: 1/13/96
2. LANDLORD: McCandless Towers, Phase I
3945 Freedom Circle, Suite 640
Santa Clara, California 95054
3. TENANT: ASCII of America, Inc.,
a California corporation
4. PREMISES: 3945 Freedom Circle, Suites 730 and 740
Santa Clara, California 95054
5. SQUARE FEET: 4,830 sq. ft.
6. PERMITTED USE: General office
7. TERM: Five (5) years
(a) SCHEDULED COMMENCEMENT DATE: July 1, 1997
(b) SCHEDULED EXPIRATION DATE: June 30, 2002
8. RENT:
(a) BASIC RENT: $ 9,080.40 per month (Lease months 1-12) $2.75
$ 9,321.90 per month (Lease months 13-24) $2.80
$ 9,563.40 per month (Lease months 25-36) $2.85
$ 9,804.90 per month (Lease months 37-48) $2.90
$10,046.40 per month (Lease months 49-60) $2.95
(b) TENANT'S ESTIMATED SHARE OF
COMMON AREA CHARGES: $ 4,202.10 per month
9. SECURITY DEPOSIT: $14,248.50
10. PARKING SPACES PROVIDED: Seventeen (17)
11. OTHER IMPORTANT PROVISIONS: Tenant Improvement Allowance
Early Access
</TABLE>
THIS SUMMARY OF LEASE IS INTENDED TO SUMMARIZE CERTAIN KEY PROVISIONS IN THE
ATTACHED LEASE. IN THE EVENT OF ANY CONFLICT OR INCONSISTENCY BETWEEN THE
PROVISIONS OF THIS SUMMARY AND THE LEASE, THE PROVISIONS OF THE LEASE SHALL
GOVERN.
<PAGE> 10
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM PAGE
- ---- ----
<S> <C>
1. USE
2. TERM
3. POSSESSION
4. MONTHLY RENT
5. ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES
6. RESTRICTION ON USE
7. COMPLIANCE WITH LAWS
8. ALTERATIONS
9. REPAIR AND MAINTENANCE
10. LIENS
11. INSURANCE
12. UTILITIES AND SERVICE
13. TAXES AND OTHER CHARGES
14. ENTRY BY LANDLORD
15. COMMON AREA; PARKING
16. DAMAGE BY FIRE; CASUALTY
17. INDEMNIFICATION
18. ASSIGNMENT AND SUBLETTING
19. DEFAULT
20. LANDLORD'S RIGHT TO CURE TENANT'S DEFAULT
21. EMINENT DOMAIN
22. NOTICE AND COVENANT TO SURRENDER
23. TENANT'S QUITCLAIM
24. HOLDING OVER
25. SUBORDINATION
26. CERTIFICATE OF ESTOPPEL
27. SALE BY LANDLORD
28. ATTORNMENT TO LENDER OR THIRD PARTY
29. DEFAULT BY LANDLORD
30. CONSTRUCTION CHANGES
31. MEASUREMENT OF PREMISES
32. ATTORNEY FEES
33. SURRENDER
34. WAIVER
35. EASEMENTS; AIRSPACE RIGHTS
36. RULES AND REGULATIONS
37. NOTICES
38. NAME
39. GOVERNING LAW; SEVERABILITY
40. DEFINITIONS
41. TIME
42. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE
43. ENTIRE AGREEMENT
44. CORPORATE AUTHORITY
45. RECORDING
46. REAL ESTATE BROKERS
47. EXHIBITS AND ATTACHMENTS
48. ENVIRONMENTAL MATTERS
49. SIGNAGE
50. SUBMISSION OF LEASE
51. PREMISES TAKEN "AS IS"
52. ADDITIONAL RENT
53. LANDLORD'S OPTION TO RELOCATE PREMISES
54. TENANT IMPROVEMENT ALLOWANCE
55. EARLY ACCESS
</TABLE>
<PAGE> 11
McCANDLESS TOWERS
OFFICE LEASE
THIS LEASE is made this 13th day of January, 1996 by and between
McCANDLESS TOWERS, PHASE I, a California limited partnership ("Landlord"), and
ASCII OF AMERICA, INC., a California corporation ("Tenant").
W I T N E S S E T H :
Landlord leases to Tenant and Tenant leases from Landlord those certain
premises outlined in red on Exhibit A (the "Premises"), which Premises are
commonly known as 3945 Freedom Circle, Suites 730 and 740, Santa Clara,
California and, which Landlord and Tenant hereby agree consists of
approximately four thousand eight hundred thirty (4,830) square feet on the
seventh floor. As used herein the term "Project" shall mean and include all of
the land as outlined in red on Exhibit B and all the buildings, improvements,
fixtures and equipment now or hereafter situated on said land.
Tenant covenants, as a material part of the consideration of this
lease, to perform and observe each and all of the terms, covenants and
conditions set forth below, and this lease is made upon the condition of such
performance and observance.
1. USE. Subject to the restrictions contained in paragraph 6,
Tenant shall use the Premises for general office use and shall not use or
permit the Premises to be used for any other purpose.
2. TERM. The term shall be for five (5) years and, subject to
paragraph 3, shall commence on the date (the "Lease Commencement Date") that is
the later of (i) July 1, 1997 or (ii) twenty-one (21) days after the date that
Landlord is able to permit Tenant early occupancy as provided in paragraph 55
of this lease and shall terminate five (5) years after the Lease Commencement
Date.
3. POSSESSION
(a) If Landlord for any reason cannot deliver possession of the
Premises to Tenant by the scheduled commencement date set forth in paragraph 2,
this lease shall not be void or voidable, Landlord shall not be liable to
Tenant for any loss or damage on account thereof and Tenant shall not be liable
for rent until Landlord delivers possession of the Premises to Tenant. The
expiration date of the term shall be extended by the same number of days that
Tenant's possession of the Premises was delayed from that set forth in
paragraph 2. If the term commences on a date other than specified in paragraph
2 above, then the parties shall immediately execute an amendment to this lease
stating the actual date of commencement and the revised expiration date.
(b) Tenant's inability or failure to take possession of the
Premises when delivery is tendered by Landlord shall not delay the commencement
of the term of this lease or Tenant's obligation to pay rent. Tenant
acknowledges that Landlord shall incur significant expenses upon the execution
of this lease, even if Tenant never takes possession of the Premises, including
without limitation brokerage commissions and fees, legal fees and other
professional fees. Tenant acknowledges that all of said expenses shall be
included in measuring Landlord's damages should Tenant breach the terms of this
lease.
4. MONTHLY RENT
(a) Basic Rent. Tenant shall pay to Landlord as basic rent for
the premises, in advance and subject to adjustment as provided in paragraph 5,
the sum of Nine Thousand Eighty and 40/100 Dollars ($9,080.40) on or before the
first day of the first full calendar month of the term and on or before the
first day of each and every successive calendar month. Basic rent for any
partial month shall be payable in advance and shall be prorated based on the
actual number of days during the lease term occurring in such month divided by
the total number of days in such month.
(b) Direct Expenses. In addition to the above basic rent Tenant
shall pay to Landlord as additional rent, subject to adjustment and
reconciliation as provided in paragraph 5(b) of this lease, the sum of Four
Thousand Two Hundred Two and 10/100 Dollars ($4,202.10) on or before the first
day of the first full calendar month of the term and on the first day of each
and every successive calendar month, said sum representing Tenant's estimated
payment of its proportionate share of direct expenses as provided for in
paragraph 5(b) to this lease. Payment for direct expenses for any partial month
shall be payable in advance and shall be prorated based on the actual number of
days during he lease term occurring in each month divided by the total number
of days in such month.
(c) Manner and Place of Payment. All payments of basic rent and
direct expenses shall be paid to Landlord, without deduction or offset, in
lawful money of the United States of America, at the office of Landlord at 3945
Freedom Circle, Suite 640, Santa Clara, California, 95054, or to such other
person or place as Landlord may from time to time designate in writing.
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(d) First Month's Rent. Concurrently with Tenant's execution of this
lease, Tenant shall deposit with Landlord the sum of Thirteen Thousand Two
Hundred Eighty-two and 50/100 Dollars ($13,282.50) to be applied against the
basic rent and direct expenses for the first lease month of the term.
(e) Security Deposit. Concurrently with Tenant's execution of this
lease, Tenant shall deposit with Landlord the sum of Fourteen Thousand Two
Hundred Forty-Eight and 50/100 Dollars ($14,246.50), which sum shall be held by
Landlord as a security deposit for the faithful performance by Tenant of all of
the terms, covenants and conditions of this lease to be kept and performed by
Tenant. If defaults with respect to any provision of this lease, including but
not limited to the provisions relating to the payment of basic rent and direct
expenses, Landlord may (but shall not be required to) use, apply or retain all
or any part of this security deposit for the payment of any amount which
Landlord may spend by reason of Tenant's default or to compensate Landlord for
any other loss or damage which Landlord may suffer by reason of Tenant's
default. If any portion of said deposit is so used, Tenant shall, within ten
(10) days after written demand therefor, deposit cash with Landlord in the
amount sufficient to restore the security deposit to its original amount;
Tenant's failure to do so shall be a material breach of this lease.
Landlord shall not be required to keep this security deposit separate
from its general funds and Tenant shall not be entitled to interest on such
deposit. If Tenant is not in default at the expiration or termination of this
lease, the security deposit or any balance thereof shall be returned to Tenant
after Tenant has vacated the Premises. In the event of termination of
Landlord's interest in this lease, Landlord shall transfer said deposit to
Landlord's successor in interest, and Tenant agrees that Landlord shall
thereupon be released from liability for the return of such deposit or any
accounting therefor.
5. ADJUSTMENT OF BASIC RENT AND DIRECT EXPENSES
(a) Adjustments to Basic Rent
The basic rent provided for in paragraph 4(a) shall be adjusted
periodically and the monthly basic rent for each period shall be as set forth
below:
Lease months 1-12 $ 9,080.40 per month
Lease months 13-24 $ 9,321.90 per month
Lease months 25-36 $ 9,563.40 per month
Lease months 37-48 $ 9,804.90 per month
Lease months 49-60 $10,046.40 per month
(b) Adjustments to Direct Expenses. Tenant's proportionate share of
direct expenses shall be two and forty-eight one-hundredths percent (2.48%) of
all direct expenses as defined below.
Tenant shall be required to pay to Landlord, as additional rent in
accordance with paragraph 4(b) of this lease, Tenant's proportionate share of
direct expenses for each calendar year (or portion thereof) during the term of
this lease. Tenant's estimated share of the monthly direct expenses payable by
Tenant during the calendar year in which the term commences is set forth in
paragraph 4(b) of this lease. A written estimate of Tenant's monthly share of
direct expenses for each succeeding calendar year shall be delivered to Tenant
prior to the commencement of each such succeeding calendar year (or as soon as
practicable thereafter). Tenant shall pay to Landlord in accordance with
paragraph 4(b) of this lease its monthly share of direct expenses as estimated
by Landlord. Landlord reserves the right to revise such written estimate during
a calendar year if Landlord's actual or projected direct expenses shows an
increase or decrease in excess of ten percent (10%) from that of an earlier
written estimate delivered to Tenant, and if Landlord elects to revise the
earlier estimate, Landlord shall deliver the revised estimate to Tenant,
together with an explanation of the reasons therefor, and Tenant shall revise
its payments accordingly. Statements of the actual direct expenses for the
calendar year in which the term commences and for each succeeding calendar year
(herein called "statement of actual direct expenses") shall be delivered to
Tenant within one hundred twenty (120) days following the expiration of each
such calendar year (or as soon as practicable thereafter). If the statement of
actual direct expenses for any such calendar year shows that Tenant's
proportionate share of actual direct expenses for the year is in excess of the
aggregate amount Tenant has paid as direct expenses for that calendar year,
Tenant shall pay such excess to Landlord within ten (10) days after receipt of
the statement of actual direct expenses. If Tenant fails to pay such excess
amount due within said ten (10) day period, Tenant shall pay an additional ten
percent (10%) of the amount due as a penalty. In the event that any statement
of actual direct expenses shall show that Tenant has paid Landlord an aggregate
amount in excess of the actual direct expenses for the preceding calendar year
and Tenant is not in default in the performance or observance of any of the
terms, covenants or conditions of this lease at the time such statement of
actual direct expenses is delivered, Landlord shall, at its option, promptly
either refund such excess to Tenant or credit the amount thereof to the monthly
direct expenses next becoming due from Tenant. The respective obligations of
Landlord and Tenant under this paragraph shall survive the expiration or other
termination of this lease.
As used in this lease, "direct expenses" shall include, but not be limited
to, (i) real property taxes, assessments, and other costs identified as direct
expenses in paragraph 13; (ii) insurance premiums and other costs identified as
direct expenses in paragraph 11, (iii) the cost of all utilities and services
including water, gas and sewer charges, electricity, heat, air conditioning,
refuse collection, and janitorial services identified as direct expenses in
paragraph 12; (iv) the costs of operating and maintaining the Common Area
identified as direct expenses in paragraph 15, including, but not limited to,
the landscaping, elevators, parking lots, paving, sidewalks, health club
facilities (including the pool, spa, showers, locker rooms, exercise rooms and
exercise equipment) and security and exterminator services; (v) the costs and
expenses of maintaining and repairing the Project identified as direct expenses
in paragraph 9, including, but not limited to, mechanical, electrical,
plumbing, and sewage systems, windows, glazing, gutters, downspouts, heating
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and ventilating and air conditioning systems, walls, floorcoverings and the cost
of maintenance contracts and supplies, materials, equipment and tools used in
connection therewith; (vi) the cost of alterations identified as direct expenses
in paragraph 8; (vii) amortization of such capital improvements having a useful
life greater than one year as Landlord may have installed for the purpose of
reducing operating costs and/or to comply with all laws, rules and regulations
of federal, state, county, municipal and other governmental authorities now or
hereafter in effect (Tenant's share of such capital improvement shall equal
Tenant's proportionate share of the fraction of the cost of such capital
improvement equal to the remaining term of the lease over the useful life of
such capital improvement); (viii) wages, salaries, employee benefits (including
union benefits) and related expenses of all on-site and off-site personnel
directly engaged in the operation, management and maintenance of the Project (or
the building in which the Premises are located), payroll taxes applicable
thereto and all costs incurred to maintain a management office in or near the
Project (including, without limitation, rental payments therefor or the
reasonable rental value of the space so occupied); (ix) a management cost
recovery as determined by Landlord equal to three percent (3%) of the sum of the
basic rent and the aggregate of all other direct expenses for the Project; (x)
supplies, materials, equipment and tools used or required in connection with the
operation and maintenance of the Project; (xi) licenses, permits and inspection
fees; (xii) a reasonable reserve for repairs and replacement of equipment used
in the maintenance and operation of the Project; and (xiii) all other costs
which Landlord shall pay or become obligated to pay because of or in connection
with the ownership, maintenance and operation of the Project and such additional
facilities now and in subsequent years as may be determined by Landlord to be
necessary to the Project; provided, however, that direct expenses shall not
include any such costs or expenses to the extent they are billed or metered
directly to Birk's Restaurant, (or, if not separately billed or metered, the
extent they contribute to the restaurant's allocable share of such costs and
expenses, as determined by Landlord). Notwithstanding anything above to the
contrary, direct expenses shall not include leasing commissions paid to any real
estate broker, salesman or agent.
6. RESTRICTION ON USE. Tenant shall not do or permit to be done in or
about the Premises or the Project, nor bring or keep or permit to be brought or
kept in or about the Premises or Project, anything which is prohibited by or
will in any way increase the existing rate of, or otherwise affect, fire or any
other insurance covering the Project or any part thereof, or any of its
contents, or will cause a cancellation of any insurance covering the Project or
any part thereof, or any of its contents. Tenant shall not do or permit to be
done anything in or about the Premises or the Project which will constitute
waste or which will in any way obstruct or interfere with the rights of other
tenants or occupants of the Project or injure or annoy them, or use or allow the
Premises to be used for any unlawful purpose, nor shall Tenant cause, maintain
or permit any nuisance on or about the Premises or the Project. No loudspeaker
or other device, system or apparatus which can be heard outside the Premises
shall be used in or at the Premises without the prior written consent of
Landlord. Tenant shall not use the Premises for sleeping, washing clothes,
cooking or in any manner that will cause or emit any objectionable odor, noise
or light into the adjoining premises or Common Area. Tenant shall not do
anything on the Premises that will cause damage to the Project and Tenant shall
not overload the floor capacity of the Premises or the Project. No machinery,
apparatus or other appliance shall be used or operated in or on the Premises
that will in any manner injure, vibrate or shake the Premises. Landlord shall be
the sole judge of whether such odor, noise, light or vibration are such as to
violate the provisions of this paragraph 6. No waste materials or refuse shall
be dumped upon or permitted to remain upon any part of the Premises or the
Project except in trash containers placed inside exterior enclosures designated
for that purpose by Landlord, or where otherwise designated by Landlord; and no
toxic or hazardous materials shall be disposed of through the plumbing or sewage
system. No materials, supplies, equipment, finished products or semi-finished
products, raw materials or articles of any nature shall be stored or permitted
to remain outside of the building proper. No retail sales shall be made on the
Premises.
7. COMPLIANCE WITH LAWS. Tenant shall, in connection with its use and
occupation of the Premises, at its sole cost and expense, promptly observe and
comply with (i) all laws, statutes, ordinances and governmental rules,
regulations and requirements of federal, state, county, municipal and other
governmental authorities, now or hereafter in effect, which shall impose any
duty upon Landlord or Tenant with respect to the use, occupancy or alteration of
the Premises, (ii) with the requirements of any board of fire underwriters or
other similar body now or hereafter constituted and (iii) with any direction or
occupancy certificate issued pursuant to law by any public authority; provided,
however, that no such failure shall be deemed a breach of those provisions if
Tenant, immediately upon notification, commences to remedy or rectify said
failure. The judgment of any court of competent jurisdiction or the admission of
Tenant in any action against Tenant (whether or not Landlord is a party
thereto), that Tenant has violated any such law, statute, ordinance or
governmental rule, regulation, requirement, direction or provision, shall be
conclusive of that fact as between Landlord and Tenant. This lease shall remain
in full force and effect notwithstanding any loss of use or other effect on
Tenant's enjoyment of the Premises by reason of any governmental laws, statutes,
ordinances, rules, regulations and requirements now or hereafter in effect.
8. ALTERATIONS. Tenant shall not make or suffer to be made any
alteration, addition or improvement to or of the Premises or any part thereof
(collectively referred to herein as "alterations") without (i) the prior written
consent of Landlord, (ii) a valid building permit issued by the appropriate
governmental authority and (iii) otherwise complying with all applicable laws,
regulations and requirements of governmental agencies having jurisdiction and
with the rules, regulations and requirements of any board of fire underwriters
or similar body. Landlord's consent to any alteration shall not create on the
part of Landlord or cause Landlord to incur any responsibility or liability for
such alteration's compliance with all laws, rules and regulations of federal,
state, county, municipal and other governmental authorities. Any alteration made
by Tenant (excluding moveable furniture and trade fixtures not attached to the
Premises) shall at once become a part of the Premises and belong to Landlord.
Without limiting the foregoing, all heating, lighting, electrical (including all
wiring, conduit, outlets, drops, buss ducts, main and subpanels), air
conditioning, partitioning, drapery, window covering and carpet installations
made by Tenant, regardless of how attached to the Premises, shall be and become
part of the Premises and belong to Landlord upon installation and shall not be
deemed trade fixtures and, subject to Landlord's right to require removal and
restoration as specified herein, shall remain upon and be surrendered with the
Premises at the termination of the lease.
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If Landlord consents to the making of any alteration by Tenant, the
same shall be made by Tenant at its sole risk, cost and expense and only after
Landlord's written approval of any contractor or person selected by Tenant for
that purpose, and the same shall be made at such time and in such manner as
Landlord may from time to time designate. Tenant shall, if required by
Landlord, secure at Tenant's cost a completion and lien indemnity bond for such
work. Upon the expiration or sooner termination of the term, Landlord may, at
its sole option, require Tenant, at Tenant's sole cost and expense, to promptly
remove any such alteration made by Tenant and designated by Landlord to be
removed, repair any damage to the Premises caused by such removal and restore
the Premises to their condition prior to Tenant's alteration. Any moveable
furniture and equipment or trade fixtures remaining on the Premises at the
expiration or other termination of the term shall become the property of the
Landlord; provided, however, in addition to all other remedies available to
Landlord at law or in equity, Landlord may (i) require Tenant to remove same or
(ii) remove same at Tenant's cost, and Tenant shall be liable to Landlord for
all damages incurred by Landlord related thereto.
If during the term any alteration, addition or change of the Premises
is required by law, regulation, ordinance or order of any public authority,
Tenant, at its sole cost and expense, shall promptly make the same. If during
the term any alterations, additions or changes to the Common Area or to the
Project in which the Premises is located is required by law, regulation,
ordinance or order of any public or quasi-public authority, and it is
impractical, in Landlord's judgment, for the affected Tenants to individually
make such alterations, additions or changes Landlord shall make such
alterations, additions or changes and the cost thereof shall be a direct
expense and Tenant shall pay its percentage share of such cost to Landlord as
provided in paragraphs 4 and 5.
9. REPAIR AND MAINTENANCE. Subject to paragraph 16, Landlord shall
maintain and keep in good repair the Common Area, as defined in paragraph 40,
and the mechanical, electrical, plumbing and sewage systems, windows, window
frames, plate glass glazing, elevators, gutters and downspouts, structural
elements and the heating, ventilating and air conditioning systems (excepting
special air conditioning of Tenant's computer room(s) as set forth below);
provided, however, that Landlord shall not be required to perform repairs made
necessary by the negligence or abuse of such improvements or property by Tenant
or its employees, agents, subtenants or permittees. The cost of all maintenance
and repairs made by Landlord pursuant to this paragraph 9, including without
limitation maintenance contracts and supplies, materials, equipment and tools
used in such repairs and maintenance, shall be direct expenses and Tenant shall
pay its percentage share of such cost to Landlord as provided in paragraphs 4
and 5.
By entry hereunder Tenant accepts the Premises and being in good and
sanitary order, condition and repair. Subject to paragraphs 16 and 21, and
excepting repairs and maintenance required by this paragraph 9 to be made by
Landlord, Tenant at its cost shall keep the Premises and every part thereof in
good and sanitary order, condition and repair, and Tenant shall be solely
responsible for the cost and maintenance of, and electricity supplied to, any
special air conditioning for Tenant's computer facilities. Further, Tenant
shall repair (or, at the option of Landlord, reimburse Landlord if Landlord
elects to repair) damage to improvements or other property located on or about
the Project where such repairs are made necessary by the negligence of, or
abuse of such improvement or other property by, Tenant or its employees,
agents, subtenants or permittees. Tenant waives all rights and benefits under
California Civil Code Sections 1932(1), 1941, and 1942 and under any similar
law, statute or ordinance now or hereafter in effect.
10. LIENS. Tenant shall keep the Premises and the Project free from any
liens arising out of any work performed, materials furnished or obligations
incurred by Tenant, its agents, employees or contractors. Upon Tenant's receipt
of a preliminary twenty (20) day notice filed by a claimant pursuant to
California Civil code Section 3097, Tenant shall immediately provide Landlord
with a copy of such notice. Should any lien be recorded against the Project,
Tenant shall give immediate notice of such lien to Landlord. In the event that
Tenant shall not, within ten (10) days following the imposition of such lien,
cause the same to be released of record, Landlord shall have, in addition to
all other remedies provided herein and by law, the right, but no obligation, to
cause the same to be released by such means as it shall deem proper, including
payment of the claim giving rise to such lien. All sums paid by Landlord for
such purposes and all expenses (including attorney fees) incurred by it in
connection therewith, shall be payable to Landlord by Tenant on demand with
interest at the rate of twelve percent (12%) per annum or the maximum rate
permitted by law, whichever is less. Landlord shall have the right at all times
to post and keep posted on the Premises any notices permitted or required by
law, or which Landlord shall deem proper for the protection of Landlord, the
Premises and the Project and any other party having an interest therein, from
mechanics' and materialmen's liens and like liens. Tenant shall give Landlord
at least fifteen (15) days' prior notice of the date of commencement of any
construction on the Premises in order to permit the posting of such notices. In
the event Tenant is required to post an improvement bond with a public agency
in connection with any work performed by Tenant on or to the Premises, Tenant
shall include Landlord as an additional obligee.
11. INSURANCE. Tenant, at its sole cost and expense, shall keep in force
during the term (i) commercial general liability and property damage insurance
with a combined single limit of at least $2,000,000 per occurrence insuring
against personal or bodily injury to or death of persons occurring in, on or
about the Premises or Project and any and all liability of the insureds with
respect to the Premises or arising out of Tenant's maintenance, use or
occupancy of the Premises and all areas appurtenant thereto, (ii) direct
physical loss-special insurance covering the leasehold improvements in the
Premises and all of Tenant's equipment, trade fixtures, appliances, furniture,
furnishings, and personal property from time to time located in, on or about
the Premises, with coverage in the amount of the full replacement cost thereof,
and (iii) Worker's Compensation Insurance as required by law, together with
employer's liability coverage with a limit of not less than $1,000,000 for
bodily injury for each accident and for bodily injury by disease for each
employee. Tenant's commercial general liability and property damage insurance
and Tenant's Workers Compensation Insurance shall be endorsed to provide that
said insurance shall not be cancelled or reduced except upon at least thirty
(30) days prior written notice to Landlord. Further, Tenant's commercial
general liability and property damage insurance shall be primary and shall be
endorsed to provide that Landlord and McCandless Management Corporation, and
their respective partners, officers, directors and employees and such other
persons or entities as directed from time to time by Landlord shall be named as
additional insureds for all liability using ISO Bureau Form
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CG20111185 (or a successor form) or such other endorsement form reasonably
acceptable to Landlord; shall contain a severability of interest clause and a
cross-liability endorsement; shall be endorsed to provide that the limits and
aggregate apply per location using ISO Bureau Form CG25041185 (or a successor
form) or such other endorsement form reasonably acceptable to Landlord; and
shall be issued by an insurance company admitted to transact business in the
State of California and rated A+VIII or better in Best's Insurance Reports (or
successor report). The deductibles for all insurance required to be maintained
by Tenant hereunder shall be satisfactory to Landlord. The commercial general
liability insurance carried by Tenant shall specifically insure the performance
by Tenant of the indemnification provisions set forth in paragraph 17 of this
lease provided, however, nothing contained in this paragraph 11 shall be
construed to limit the liability of Tenant under the indemnification provisions
set forth in said paragraph 17. If Landlord or any of the additional insureds
named on any of Tenant's insurance, have other insurance which is applicable to
the covered loss on a contributing, excess or contingent basis, the amount of
the Tenant's insurance company's liability under the policy of insurance
maintained by Tenant shall not be reduced by the existence of such other
insurance. Any insurance carried by Landlord or any of the additional insureds
named on Tenant's insurance policies shall be excess and non-contributing with
the insurance so provided by Tenant.
Tenant shall, prior to the commencement of the term and at least
thirty (30) days prior to any renewal date of any insurance policy required to
be maintained by Tenant pursuant to this paragraph, provide Landlord with a
completed Certificate of Insurance, using a form acceptable in Landlord's
reasonable judgment, attaching thereto copies of all endorsements required to
be provided by Tenant under this lease. Tenant agrees to increase the coverage
or otherwise comply with changes in connection with said commercial general
liability, property damage, direct physical loss and Worker's Compensation
Insurance as Landlord or Landlord's lender may from time to time require.
Landlord shall obtain and keep in force a policy of policies of
insurance covering loss or damage to the Premises and Project, in the amount of
the full replacement value thereof, providing protection against those perils
included within the classification of "all risk" insurance, with increased cost
of reconstruction and contingent liability (including demolition), plus a
policy of rental income insurance in the amount of one hundred percent (100%)
of twelve (12) months' rent (including sums paid as additional rent) and such
other insurance as Landlord or Landlord's lender may from time to time require.
Landlord may, but shall not be obligated to, obtain flood and/or earthquake
insurance. Landlord shall have no liability to Tenant if Landlord elects not to
obtain flood and/or earthquake insurance. The cost of all such insurance
purchased by Landlord, plus any charges for deferred payment of premiums and
the amount of any deductible incurred upon any covered loss within the Project,
shall be direct expenses and Tenant shall pay to Landlord its percentage share
of such costs as provided in paragraphs 4(b) and 5(b). If the cost of insurance
is increased due to Tenant's use of the Premises, then Tenant shall pay to
Landlord upon demand the full cost of such increase.
Landlord and Tenant hereby mutually waive any and all rights of
recovery against one another for real property loss or damage occurring to the
Premises or the Project, or any part thereof, or to any personal property
therein, from perils insured against under fire and extended insurance and any
other property insurance policies existing for the benefit of the respective
parties so long as such insurance permits waiver of liability and contains a
waiver of subrogation without additional premiums.
If Tenant does not take out and maintain insurance as required
pursuant to this paragraph 11, Landlord may, but shall not be obligated to, take
out the necessary insurance and pay the premium therefor, and Tenant shall repay
to Landlord promptly on demand, as additional rent, the amount so paid. In
addition, Landlord may recover from Tenant and Tenant agrees to pay, as
additional rent, any and all reasonable expenses (including attorney fees) and
damages which Landlord may sustain by reason of the failure of Tenant to obtain
and maintain such insurance, it being expressly declared that the expenses and
damages of Landlord shall not be limited to the amount of the premiums thereon.
12. UTILITIES AND SERVICE. Landlord shall furnish to the Premises and to
the Project, during reasonable hours on generally recognized business days, to
be determined by Landlord, and subject to the rules and regulations of the
Project, reasonable quantities of water, gas and electricity suitable for the
intended use of the Premises and the Project, heat and air conditioning
required in Landlord's judgment for the comfortable use and occupation of the
Premises and the Project, and refuse collection and janitorial services. Tenant
agrees that at all times it will cooperate fully with Landlord and abide by all
regulations and requirements that Landlord may prescribe for the proper
functioning and protection of the heating, ventilating and air conditioning
systems. The cost of all utilities and services furnished by Landlord to the
Premises and to the Project pursuant to this paragraph 12 shall be direct
expenses and Tenant shall pay its percentage share of such costs to Landlord
as provided in paragraphs 4 and 5.
Landlord shall not be liable for, and Tenant shall not be entitled to
any abatement or reduction of rent by reason of, Landlord's failure to furnish
any of the foregoing services when such failure is caused by accident,
breakage, repairs, strikes, lockouts or other labor disturbances or labor
disputes of any character, governmental moratoriums, regulations or other
governmental actions, or by any other cause, similar or dissimilar, beyond the
reasonable control of Landlord. In addition, Tenant shall not be relieved from
the performance of any covenant or agreement in this lease because of any such
failure, and no eviction of Tenant shall result from such failure.
Tenant will not, without the written consent of Landlord, use any
apparatus or device in the Premises (including, without limitation, electronic
data processing machines, punch card machines or machines using current in
excess of 110 volts) which will in any way increase the amount of electricity,
water or air conditioning usually furnished or supplied to Premises in the
Project being used as general office space, or connect with electric current
(except through existing electrical outlets in the Premises) or with water
pipes any apparatus or device for the purpose of using electric current or
water. If Tenant shall require water or electric current in excess of that
usually furnished or supplied to premises in the Project being used as
general office space, then Tenant shall first obtain the written consent of
Landlord, which consent shall not be unreasonably withheld, and Tenant shall
pay to Landlord promptly on demand the full cost of such excess use.
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Landlord may cause an electric current or water meter to be installed in the
Premises in order to measure the amount of electric current or water consumed
for any such excess use. The cost of any such meter and of the installation,
maintenance and repair thereof, and all charges for such excess water and
electric current consumed (as shown by meters and at the rates then charged by
the furnishing public utility) plus any additional expense incurred by Landlord
in keeping account of electric current or water so consumed, shall be paid by
Tenant, and Tenant agrees to pay Landlord therefor promptly upon demand by
Landlord. Whenever heat-generating machines or equipment are used in the
Premises by Tenant which affect the temperature otherwise maintained,
supplementary air conditioning units in the Premises and the cost thereof,
including the cost of installation and the cost of operation and maintenance
thereof, shall be paid by Tenant to Landlord, as additional rent, upon demand by
Landlord.
13. TAXES AND OTHER CHARGES. All real estate taxes and assessments and
other taxes, fees and charges of every kind or nature, foreseen or unforeseen,
which are levied, assessed or imposed upon Landlord and/or against the Premises,
building, Common Area or Project or any part thereof by any federal, state,
county, regional, municipal or other governmental or quasi-governmental or
special district authority, together with any increases therein whether
resulting from increased rate and/or valuation, shall be a direct expense and
Tenant shall pay its percentage share of such costs to Landlord as provided in
paragraphs 4 and 5. By way of illustration and not limitation, "other taxes,
fees and charges" as used herein include any and all taxes payable by Landlord
(other than state and federal personal or corporate income taxes measured by the
net income of Landlord from all sources, premium taxes, and Landlord's
franchise, estate, inheritance and gift taxes), whether or not now customary or
within the contemplation of the parties hereto, (i) upon, allocable to, or
measured by the rent payable hereunder, including, without limitation, any gross
income or excise tax levied by the local, state or federal government with
respect to the receipt of such rent, (ii) upon or with respect to the
possession, leading, operation, management, maintenance, alteration, repair, use
or occupancy by Tenant of the Premises or any part thereof, (iii) upon or
measured by the value of Tenant's personal property or leasehold improvements
located in the Premises, (iv) upon this transaction or any document to which
Tenant is a party creating or transferring an interest or estate in the
Premises, (v) upon or with respect to vehicles, parking or the number of persons
employed in or about the Project, and (vi) any tax, license, franchise fee or
other imposition upon Landlord which is otherwise measured by or based in whole
or in part upon the Project or any portion thereof. If Landlord contests any
such tax, fee or charge, the cost and expense incurred by Landlord thereby
(including, but not limited to, costs of attorneys and experts) shall also be
direct expenses and Tenant shall pay its percentage share of such costs to
Landlord as provided in paragraph 4 and 5.
In the event the Premises and any improvements installed therein by
Tenant or Landlord are valued by the assessor disproportionately higher than
those of other tenants in the building or Project or in the event alterations or
improvements are made to the Premises, Tenant's percentage share of such taxes,
assessments, fees and/or charges shall be readjusted upward accordingly and
Tenant agrees to pay such readjusted share. Such determination shall be made by
Landlord from the respective valuation assigned in the assessor's work sheet or
such other information as may be reasonably available and Landlord's
determination thereof shall be conclusive.
Tenant agrees to pay, before delinquency, any and all taxes levied or
assessed during the term hereof upon Tenant's equipment, furniture, fixtures and
other personal property located in the Premises, including carpeting and other
property installed by Tenant notwithstanding that such carpeting or other
property has become a part of the Premises. If any of Tenant's personal property
shall be assessed with the Project, Tenant shall pay to Landlord, as additional
rent, the amounts attributable to Tenant's personal property within ten (10)
days after receipt of a written statement from Landlord setting forth the amount
of such taxes, assessments and public charges attributable to Tenant's personal
property.
14. ENTRY BY LANDLORD. Landlord reserves, and shall at all reasonable
times have, the right to enter the premises (i) to inspect the Premises, (ii) to
supply services to be provided by Landlord hereunder, (iii) to show the Premises
with reasonable advance notice of not less than 24 hours to prospective
purchasers, lenders or tenants and to put "for sale" or "for lease" signs
thereon, (iv) to post notice required or allowed by this lease or by law, (v) to
alter, improve or repair the Premises and any portion of the Project, and (vi)
to erect scaffolding and other necessary structures in or through the Premises
or the Project where reasonably required by the character of the work to be
performed. Landlord shall not be liable in any manner for any inconvenience,
disturbance, loss of business, nuisance or other damage arising from Landlord's
entry and acts pursuant to this paragraph 14 and Tenant shall not be entitled to
an abatement or reduction of rent if Landlord exercises any rights reserved in
this paragraph 14. For each of the foregoing purposes, Landlord shall at all
times have and retain a key with which to unlock all of the doors in, on and
about the Premises (excluding Tenant's vaults, safes and similar areas
designated in writing by Tenant in advance), and Landlord shall have the right
to use any and all means which Landlord may deem proper to open said doors in an
emergency in order to obtain entry to the Premises. Any entry by Landlord to the
Premises pursuant to this paragraph 14 shall not under any circumstances be
construed or deemed to be a forcible or unlawful entry into or a detainer of the
Premises or an eviction, actual or constructive, of Tenant from the Premises or
any portion thereof.
15. COMMON AREA; PARKING. Subject to the terms and conditions of this
lease and such rules and regulations as Landlord may from time to time
prescribe, Tenant and Tenant's employees and invitees shall, in common with
other occupants of the Project and their respective employees and invitees and
others entitled to the use thereof, have the nonexclusive right to use those
areas of the Common Area provided and designated by Landlord for the general use
and convenience of the occupants of the Project (which areas and facilities
shall include but not be limited to common lobbies, corridors, restrooms and
showers, telephone, electrical, janitorial and mechanical rooms, elevators,
stairwells, vertical duct shafts, sidewalks, parking, refuse, landscaping and
place areas, roofs, building exteriors, electrical, mechanical and HVAC systems,
and storage areas, which areas are referred to herein as "common area". This
right shall terminate upon the termination of this lease.
Landlord reserves the right from time to time to make changes in the
shape, size, location, amount and extent of the Common Area. Landlord shall also
have the right at any time to change the name, number
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or designation by which the Project is commonly known. Landlord further
reserves the right to promulgate such rules and regulations relating to the use
of the Common Area, and any part thereof, as Landlord may deem appropriate for
the best interests of the occupants of the Project. The rules and regulations
shall be binding upon Tenant upon delivery of a copy of them to Tenant and
Tenant shall abide by them and cooperate in their observance. Such rules and
regulations may be amended by Landlord from time to time, with or without
advance notice.
Tenant shall have the nonexclusive use of seventeen (17) parking spaces
(8 on the plaza level and 9 on the lower level) in the Common Area as designated
from time to time by Landlord. Landlord reserves the right at its sole option to
assign and label parking spaces, but it is specifically agreed that Landlord is
not responsible for policing any such parking spaces. Tenant shall not at any
time park or permit the parking of Tenant's trucks or other vehicles, or the
trucks or other vehicles of others, adjacent to loading areas so as to interfere
in any way with the use of such areas; nor shall Tenant at any time park or
permit the parking of Tenant's vehicles or trucks, or the vehicles or trucks of
Tenant's suppliers or others, in any portion of the Common Area not designated
by Landlord for such use by Tenant. Tenant shall not park or permit any
inoperative vehicle or equipment to be parked on any portion of the Common Area.
Landlord shall operate, manage and maintain the Common Area. The manner in
which the Common Area shall be operated, managed and maintained and the
expenditures for such operation, management and maintenance shall be at the
sole discretion of Landlord. The cost of such maintenance, operation and
management of the Common Area, together with the costs of security and
exterminator services and salaries and employee benefits (including union
benefits) of on-site and accounting personnel engaged in such maintenance and
operations management, shall be a direct expense and Tenant shall pay to
Landlord its percentage share of such cost as provided in paragraphs 4 and 5.
16. DAMAGE BY FIRE; CASUALTY. In the event the Premises are damaged by any
casualty which is covered under an insurance policy required to be maintained by
Landlord pursuant to paragraph 11, Landlord shall be entitled to the use of all
insurance proceeds and shall repair such damage as soon as reasonably possible
and this lease shall continue in full force and effect.
In the event the Premises are damaged by any casualty not covered under an
insurance policy required to be maintained pursuant to paragraph 11, Landlord
may, at Landlord's option, either (1) repair such damage, at Landlord's expense,
as soon as reasonably possible, in which event this lease shall continue in full
force and effect, or (ii) give written notice to Tenant within thirty (30) days
after the date of the occurrence of such damages of Landlord's intention to
cancel and terminate this lease as of the date of the occurrence of the damages;
provided, however, that if such damage is caused by an act or omission by Tenant
or its agent, servants or employees, then Tenant shall repair such damage
promptly at its sole cost and expense. In the event Landlord elects to terminate
this lease pursuant hereto, Tenant shall have the right within ten (10) days
after receipt of the required notice to notify Landlord in writing of Tenant's
intention to repair such damage at Tenant's expense, without reimbursement from
Landlord, in which event this lease shall continue in full force and effect and
Tenant shall proceed to make such repairs as soon as reasonably possible. If
Tenant does not give such notice within the ten (10) day period, this lease
shall be cancelled and terminated as of the date of the occurrence of such
damage. Under no circumstances shall Landlord be required to repair any injury
or damage to (by fire or other cause), or to make any restoration or replacement
of, any of Tenant's personal property, trade fixtures or property leased from
third parties, whether or not the same is attached to the Premises.
If the Premises are totally destroyed during the term from any cause
(including any destruction required by any authorized public authority), whether
or not covered by the insurance required under paragraph 11, this lease shall
automatically terminate as of the date of such total destruction; provided,
however, that if the Premises can reasonably and lawfully be repaired or
restored within twelve (12) months of the date of destruction to substantially
the condition existing prior to such destruction and if the proceeds of the
insurance payable to the Landlord by reason of such destruction are sufficient
to pay the cost of such repair or restoration, then the said insurance proceeds
shall be so applied, Landlord shall promptly repair and restore the Premises and
this lease shall continue, without interruption, in full force and effect. If
the Premises are totally destroyed during the last twelve (12) months of the
term, Landlord may at Landlord's option cancel and terminate this lease as of
the date of occurrence of such damage by giving written notice to Tenant of
Landlord's election to do so within thirty (30) days after the occurrence of
such damage.
If the Premises are partially or totally destroyed or damaged and Landlord
or Tenant repair them pursuant to this lease, the rent payable hereunder for the
period during which such damage and repair continues shall be abated only in
proportion to the square footage of the Premises rendered untenantable to Tenant
by such damage or destruction. Tenant shall have no claim against Landlord for
any damage, loss or expense suffered by reason of any such damage, destruction,
repair or restoration. The parties waive the provisions of California Civil Code
Sections 1932(2) and 1933(4) (which provisions permit the termination of a lease
upon destruction of the leased premises), and hereby agree that the provisions
of this paragraph 16 shall govern in the event of such destruction.
17. INDEMNIFICATION. Landlord shall not be liable to Tenant and Tenant
hereby waives all claims against Landlord for any injury to or death of any
person to or destruction of property in or about the Premises or the Project by
or from any cause whatsoever except the failure of Landlord to perform its
obligations under the lease where such failure has persisted for an unreasonable
period of time after notice of such failure. Without limiting the foregoing,
Landlord shall not be liable to Tenant for any injury to or death of any person
or damages to or destruction of property by reason of, or arising from, any
latent defect in the Premises or Project or the act or negligence of any other
tenant of the Project. Tenant shall immediately notify Landlord of any defect in
the Premises or Project.
Except as to injury to persons or damage to property the principal cause of
which is the failure by Landlord to observe any of the terms and conditions of
this lease, Tenant shall hold Landlord
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harmless from and indemnify and defend Landlord against any claim, liability,
loss, damage or expense (including attorney fees) arising out of any injury to
or death of any person or damage to or destruction of property occurring in, on
or about the Premises from any cause whatsoever or on account of the use,
condition, occupational safety or occupancy of the Premises. Tenant shall
further hold Landlord harmless from and indemnify and defend Landlord against
any claim, liability, loss, damage or expense (including attorney fees) arising
(i) from Tenant's use of the Premises or from the conduct of its business or
from any activity or work done, permitted or suffered by Tenant or its agents
or employees in or about the Premises or Project, (ii) out of the failure of
Tenant to observe or comply with Tenant's obligation to observe and comply with
laws or other requirements as set forth in paragraph 7, (iii) by reason of
Tenant's use, handling, storage, or disposal of toxic or hazardous materials or
waste, (iv) by reason of any labor or service performed for, or materials used
by or furnished to, Tenant or any contractor engaged by Tenant with respect to
the Premises, or (v) from any other act, neglect, fault or omission of Tenant
or its agents or employees.
The provisions of this paragraph 17 shall survive the
expiration or earlier termination of this lease.
18. ASSIGNMENT AND SUBLETTING. Tenant shall not voluntarily assign,
encumber or otherwise transfer its interest in this lease or in the Premises,
or sublease all or any part of the Premises, or allow any other person or
entity to occupy or use all or any part of the Premises, without first
obtaining Landlord's written consent, which consent shall not be unreasonably
withheld, and otherwise complying with the requirements of this paragraph 18.
Any assignment, encumbrance or sublease without Landlord's consent, shall
constitute a default.
If Tenant desires to sublet or assign all or any portion of the
Premises, Tenant shall give Landlord written notice thereof, specifying the
projected commencement date of the proposed sublet or assignment (which date
shall be not less than thirty (30) days or more than ninety (90) days after the
date of Landlord's receipt of such notice), the portions of the Premises
proposed to be sublet or assigned, the terms and conditions of the proposed
assignment or sublease (including the rent to be paid by the proposed assignee
or subtenant) and the name, address and telephone number of the proposed
assignee or subtenant. Tenant shall further provide Landlord with such other
information concerning the proposed assignee or subtenant, as requested by
Landlord. For a period of thirty (30) days after Landlord's receipt of Tenant's
written notice, Landlord shall have the option, exercisable by delivering
written notice to Tenant, to terminate this lease as of the date specified in
Landlord's written notice to Tenant, which date shall not be less than thirty
(30) days nor more than ninety (90) days after the date of Landlord's written
notice to Tenant. If Landlord exercises its option to terminate this lease as
provided in the foregoing sentence, Landlord may, if it so elects, enter into a
new lease for the Premises or any portion thereof with the proposed assignee or
subtenant or any other third party on such terms as Landlord and such proposed
assignee or subtenant or other third party may agree; in such event, Tenant
shall not be entitled to any portion of the profit, if any, which Landlord may
realize on account of such termination and reletting.
If Landlord does not elect to terminate this lease as provided
hereinabove in this paragraph 18 and if Landlord consents in writing to the
proposed assignment or sublet, Tenant shall be free to assign or sublet all or a
portion of the Premises subject to the following conditions: (i) any sublease
shall be on the same terms set forth in the notice given to Landlord; (ii) no
sublease shall be on the same terms set forth in the notice given to Landlord;
(ii) no sublease shall be valid and not subtenant shall take possession of the
sublet premises until an executed counterpart of such sublease has been
delivered to Landlord; (iii) no subtenant shall have a further right to sublet;
(iv) any sums or other economic consideration received by Tenant as a result of
such assignment or sublet (except rental or other payments received which are
attributable to the amortisation over the term of this lease of the cost of
leasehold improvement constructed for such assignees or subtenant, and brokerage
fees) whether denominated rentals or otherwise, which exceed, in the aggregate,
the total sums which Tenant is obligated to pay Landlord under this lease
(prorated to reflect obligations allocable to that portion of the Premises
subject to such sublease), shall be payable to Landlord as additional rent under
this lease without affecting or reducing any other obligations of Tenant
hereunder; (v) no sublet or assignment shall release Tenant of Tenant's
obligation or alter the primary liability of Tenant to pay the rent and to
perform all other obligations to be performed by Tenant hereunder; and (vi) any
assignee or subtenant must expressly agree to assume and perform all of the
covenants and conditions of Tenant under this lease. Tenant shall pay to
Landlord promptly upon demand as additional rent, Landlord's actual attorneys'
fees and other costs incurred for reviewing, processing or documenting any
requested assignment or sublease, whether or not Landlord's consent is granted.
Tenant shall not be entitled to assign this lease or sublease all or any part of
the Premises (and any attempt to do so shall be voidable by Landlord) during any
period in which Tenant is in default under this lease.
If Tenant is a partnership, a withdrawal or change, voluntary
or involuntary or by operation of law, of any general partner or the
dissolution of the partnership shall be deemed an assignment of this lease
subject to all the conditions of this paragraph 18. If Tenant is a corporation
any dissolution, merger, consolidation or other reorganization of Tenant or the
sale or other transfer of a controlling percentage of the capital stock of
Tenant or the sale of more than fifty percent (50%) of the value of Tenant's
assets shall be an assignment of this lease subject to all the conditions of
this paragraph 18. The term "controlling percentage" means the ownership of,
and the right to vote, stock possessing more than 50% of the total combined
voting power of all classes of Tenant's capital stock issued, outstanding and
entitled to vote. This paragraph shall not apply if Tenant is a corporation the
stock of which is traded through an exchange.
The acceptance of rent by Landlord from any other person shall
not be deemed to be a waiver by Landlord of any provision hereof. Consent to
one assignment or sublet shall not be deemed consent to any subsequent
assignment or sublet. In the event of default by any assignee of Tenant or any
successor of Tenant in the performance of any of the terms hereof, Landlord may
proceed directly against Tenant without the necessity of exhausting remedies
against such assignee or successor. Landlord may consent to subsequent
assignments or sublets of this lease or amendments or modifications to this
lease with assignees of Tenant, without notifying Tenant, or any successor of
Tenant, and without obtaining its or their consent thereto and such action
shall not relieve Tenant of liability under this lease.
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No interest of Tenant in this lease shall be assignable by operation of
law (including, without limitation, the transfer of this lease by testacy or
intestacy). Each of the following acts shall be considered an involuntary
assignment: (i) if Tenant is or becomes bankrupt or insolvent, makes an
assignment for the benefit of creditors or institutes a proceeding under the
Bankruptcy Act in which Tenant is the bankrupt; or, if Tenant is a partnership
or consists of more than one person or entity, if any partner of the partnership
or other person or entity is or becomes bankrupt or insolvent, or makes an
assignment for the benefit of creditors; (ii) if a writ of attachment or
execution is levied on this lease; or (iii) if, in any proceeding or action to
which Tenant is a party, a receiver is appointed with authority to take
possession of the Premises. An involuntary assignment shall constitute a default
by Tenant and Landlord shall have the right to elect to terminate this lease, in
which case this lease shall not be treated as an asset of Tenant.
Tenant immediately and irrevocably assigns to Landlord, as security
for Tenant's obligations under this lease, all rent from any subletting of all
or a part of the Premises as permitted by this lease, and Landlord, as assignee
and as attorney-in-fact for Tenant, or a receiver of Tenant appointed on
Landlord's application, may collect such rent and apply it toward Tenant's
obligations under this lease; except that, until the occurrence of an act or
default by Tenant, Tenant shall have the right to collect such rent, subject to
promptly forwarding to Landlord any portion thereof to which Landlord is
entitled pursuant to this paragraph 18.
19. DEFAULT. The occurrence of any of the following shall constitute a
default by Tenant: (i) failure of Tenant to pay any rent or other sum payable
hereunder within three (3) days of when due; (ii) abandonment of the Premises
(Tenant's failure to occupy and conduct business in the Premises for fourteen
(14) consecutive days shall constitute an abandonment of the Premises); (iii)
failure of Tenant to deliver to Landlord any instrument, assurance, financial
statement, subordination agreement or certificate of estoppel required under
this Lease within the time period specified for such performance if the failure
continues for five (5) days after written notice of the failure from Landlord
to Tenant; or (iv) failure of Tenant to perform any other obligation under this
lease if the failure to perform is not cured within thirty (30) days after
written notice thereof has been given to Tenant (provided that if such default
cannot reasonably be cured within thirty (30) days, Tenant shall not be in
default if Tenant commences to cure such failure to perform within the thirty
(30) day period and diligently and in good faith continues to cure the failure
to perform). The notice referred to in clauses (iii) and (iv) above shall
specify the failure to perform and the applicable lease provision and shall
demand that Tenant perform the provisions of this lease within the applicable
period of time. No notice shall be deemed a forfeiture or termination of this
lease unless Landlord so elects in the notice. No notice shall be required the
event of abandonment or vacation of the Premises.
In addition to the above, the occurrence of any of the following
events shall also constitute a default by Tenant: (i) Tenant fails to pay its
debts as they become due or admits in writing its inability to pay its debts,
or makes a general assignment for the benefit of creditors (for purposes of
determining whether Tenant is not paying its debts as they become due, a debt
shall be deemed overdue upon the earliest to occur of the following: thirty
(30) days from the date a statement therefor has been rendered; the date on
which any action or proceeding therefor is commenced; or the date on which a
formal notice of default or demand has been sent); (ii) Tenant fails to
furnish to Landlord a schedule of Tenant's aged accounts payable within ten
(10) days after Landlord's written request; (iii) any financial statements
given to Landlord by Tenant, any assignee of Tenant, subtenant of Tenant, any
guarantor or successor in interest of Tenant (including, without limitation,
any schedule of Tenant's aged accounts payable) are materially false; or (iv)
any financial statement or other financial information furnished by Tenant
pursuant to the provisions of this lease or at the request of Landlord
evidences that either Tenant's net worth or its net assets are at least
twenty-five percent (25%) less than the net worth or net assets shown in either
the immediately prior financial statement or the financial statement of Tenant
furnished at the time of execution of this lease, and Tenant fails to furnish
promptly to Landlord, after notice from Landlord to Tenant, an additional
security deposit in cash equivalent to the aggregate of the basic rent and
direct expense, (without regard to any rent abatement) payable hereunder for
the twelve (12) full calendar months immediately preceding such notice. At any
time during the term of this lease Landlord, at Landlord's option, shall have
the right to receive from Tenant, upon Landlord's request, a current annual
balance sheet for Landlord's review.
In the event of a default by Tenant, then Landlord, in addition to
any other rights and remedies of Landlord at law or in equity, shall have the
right either to terminate Tenant's right to possession of the Premises (and
thereby terminate this lease) or, from time to time and without termination of
this lease, to relet the Premises or any part thereof for the account and in
the name of Tenant for such term and on such terms and conditions as Landlord
in its sole discretion may deem advisable, with the right to make alterations
and repairs to the Premises.
Should Landlord elect to keep this lease in full force and effect,
Landlord shall have the right to enforce all of Landlord's rights and remedies
under this lease, including but not limited to the right to recover and to
relet the Premises and such other rights and remedies as Landlord may have
under California Civil Code Section 1951.4 (or successor Code section) or any
other California statute. If Landlord relets the Premises, then Tenant shall
pay to Landlord, as soon as ascertained, the costs and expenses incurred by
Landlord in such reletting and in making alterations and repairs. Rentals
received by Landlord from such reletting shall be applied (i) to the payment of
any indebtedness due hereunder, other than basic rent and direct expenses, from
Tenant to Landlord; (ii) to the payment of the cost of any repairs necessary to
return the Premises to good condition, normal wear and tear excepted, including
the cost of alterations and the cost of storing any of Tenant's property left
on the Premises at the time of reletting; and (iii) to the payment of basic
rent or direct expenses due and unpaid hereunder. The residue, if any, shall be
held by Landlord and applied in payment of future rent or damages in the event
of termination as the same may become due and payable hereunder and the
balance, if any at the end of the term of this lease, shall be paid to Tenant.
Should the basic rent and direct expenses received from time to time from such
reletting during any month be less than that agreed to be paid during that
month by Tenant hereunder, Tenant shall pay such deficiency to Landlord. Such
deficiency shall be calculated and paid monthly. No such reletting of the
Premises by Landlord shall be construed as an election
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<PAGE> 20
on its part to terminate this lease unless a notice of such intention is given
to Tenant or unless the termination hereof is decreed by a court of competent
jurisdiction. Notwithstanding any such reletting without termination, Landlord
may at any time thereafter elect to terminate this lease for such previous
breach, provided it has not been cured.
Should Landlord at any time terminate this lease for any breach, in
addition to any remedy it may have, it shall have the immediate right of entry
and may remove all persons and property from the Premises and shall have all the
rights and remedies of a landlord provided by California Civil Code Section
1951.2 or any successor code section. Upon such termination, in addition to all
its other rights and remedies, Landlord shall be entitled to recover from Tenant
all damages it may incur by reason of such breach, including the cost of
recovering the Premises and including (i) the worth at the time of award of the
unpaid rent which had been earned at the time of termination; (ii) the worth at
the time of award of the amount by which the unpaid rent which would have been
earned after termination until the time of award exceeds the amount of such
rental loss that Tenant proves could have been reasonably avoided; (iii) the
worth at the time of the award of the amount by which the unpaid rent for the
balance of the term after the time of award exceeds the amount of such rental
loss that Tenant proves could be reasonably avoided; (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this lease or which in the
ordinary course of events would be likely to result therefrom. The "worth at the
time of award" of the amounts referred to in (i) and (ii) above is computed by
allowing interest at the rate of twelve percent (12%) per annum. The "worth at
the time of award" of the amount referred to in (iii) above shall be computed by
discounting such amount at the discount rate at the federal reserve bank of San
Francisco at the time of award plus one percent (1%). Tenant waives the
provisions of Section 1179 of the California Code of Civil Procedures (which
Section allows Tenant to petition a court of competent jurisdiction for relief
against forfeiture of this lease). Property removed from the Premises may be
stored in a public or private warehouse or elsewhere at the sole cost and
expense of Tenant. In the event that Tenant shall not immediately pay the cost
of storage of such property after the same has been stored for a period of
thirty (30) days or more, Landlord may sell any or all thereof at a public or
private sale in such manner and at such time and place that Landlord, in its
sole discretion, may deem proper, without notice to or demand upon Tenant.
20. LANDLORD'S RIGHTS TO CURE TENANT'S DEFAULT. Landlord, at any time
after Tenant commits a default, may, but shall not be obligated to, cure the
default at Tenant's cost. If Landlord at any time, by reason of Tenant's
default, pays any sum or does any act that requires the payment of any sum, the
sum paid by Landlord shall be due immediately from Tenant to Landlord and shall
bear interest at the rate of twelve percent (12%) per annum or the maximum rate
permitted by law, whichever is less, from the date the sum is paid by Landlord
until Landlord is reimbursed by Tenant. Amounts due Landlord hereunder shall be
additional rent.
21. EMINENT DOMAIN. If all or any part of the Premises shall be taken by
any public or quasi-public authority; under the power of eminent domain or
conveyance in lieu thereof, this lease shall terminate as to any portion of the
Premises so taken or conveyed on the date when title vests in the condemnor, and
Landlord shall be entitled to any and all payments, income, rent, award or any
interest therein whatsoever which may be paid or made in connection with such
taking or conveyance. Tenant shall have no claim against Landlord or otherwise
for the value of any unexpired term of this lease. Notwithstanding the
foregoing, Tenant shall be entitled to any compensation for depreciation to and
cost of removal of Tenant's equipment and fixtures and any compensation for its
relocation expenses necessitated by such taking, but in each case only to the
extent the condemning authority makes a separate award therefor or specifically
identifies a portion of the award as being therefor. Each party waives the
provisions of Section 1245.130 of the California Code of Civil Procedure (which
section allows either party to petition the Superior Court to terminate this
lease in the event of a partial taking of the Premises).
If any action or proceeding is commenced for such taking of the Premises or
any portion thereof or of any other space in the Project, or if Landlord is
advised in writing by any entity or body having the right of power of
condemnation of its intention to condemn the Premises or any portions thereof or
of any other space in the Project, and Landlord shall decide to discontinue the
use and operation of the Project or decide to demolish, alter or rebuild the
Project, then Landlord shall have the right to terminate this lease by giving
Tenant written notice thereof within sixty (60) days of the earlier of the date
of Landlord's receipt of such notice of intention to condemn or the commencement
of said action or proceeding. Such termination shall be effective as of the last
day of the calendar month next following the month in which such notice is given
or the date on which title shall vest in the condemnor, whichever occurs first.
In the event of a partial taking, or conveyance in lieu thereof, of the
Premises and fifty percent or more of the number of square feet in the Premises
are taken, then Tenant may terminate this lease. Any election by Tenant to so
terminate shall be by written notice given to Landlord within sixty (60) days
from the date of such taking or conveyance and shall be effective on the last
day of the calendar month next following the month in which such notice is given
or the date on which title shall vest in the condemnor, whichever occurs first.
If a portion of the Premises is taken by power of eminent domain or
conveyance in lieu thereof and neither Landlord nor Tenant terminates this lease
as provided above, then this lease shall continue in full force and effect as to
the part of the Premises not so taken or conveyed and all payments or rent shall
be apportioned as of the date of such taking or conveyance so that thereafter
the amounts to be paid by Tenant shall be in the ratio that the area of the
portion of the Premises not so taken bears to the total area of the Premises
prior to such taking.
22. NOTICE AND COVENANT TO SURRENDER. On the last day of the term or on
the effective date of any earlier termination, Tenant shall surrender to
Landlord the Premises in its condition existing as of the commencement of the
term and, except as otherwise provided by Landlord pursuant to the terms of
paragraph 8 of this lease, all of the improvements and alterations made to the
Premises in their condition existing as of the date of completion of
construction and/or installation (normal wear and tear excepted), with all
originally painted interior walls washed or repainted if marked or damaged,
interior vinyl covered walls cleaned and
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<PAGE> 21
repaired or replaced if marked or damaged, all carpets shampooed and cleaned,
and all floors cleaned and waxed; all to the reasonable satisfaction of
Landlord. On or prior to the last day of the term or the effective date of any
earlier termination, Tenant shall remove all of Tenant's personal property and
trade fixtures, together with improvements or alterations that Tenant is
obligated to remove pursuant to the provisions of paragraph 8 of this lease,
from the Premises, and all such property not removed shall be deemed abandoned.
In addition, on or prior to the expiration or earlier termination of this
lease, Tenant shall remove, at Tenant's sole cost and expense, all telephone,
other communication, computer and any other cabling and wiring of any sort
installed in the space above the suspended ceiling of the Premises or anywhere
else in the Premises and shall promptly repair any damage to the suspended
ceiling, lights, light fixtures, walls and any other part of the Premises
resulting from such removal.
If the Premises are not surrendered as required in this paragraph 22,
Tenant shall indemnify Landlord against all loss, liability and expense
(including, but not limited to, attorney fees) resulting from the failure by
Tenant in so surrendering the Premises, including, without limitation, any
claims made by any succeeding tenants. It is agreed between Landlord and
Tenant that the provisions of this paragraph 22 shall survive termination of
this lease.
23. TENANT'S QUITCLAIM. At the expiration or earlier termination of this
lease, Tenant shall execute, acknowledge and deliver to Landlord, within ten
(10) days after written demand from Landlord to Tenant, any quitclaim deed or
other document required to remove the cloud or encumbrance created by this
lease from the real property of which the Premises are a part. This obligation
shall survive said expiration or termination.
24. HOLDING OVER. Any holding over after the expiration or termination of
this lease with the written consent of Landlord shall be construed to be a
tenancy from month-to-month at the monthly rent agreed upon by Landlord and
Tenant, but in no event less than the monthly rent payable under this lease for
the last lease month before the date of such expiration or termination. All
provisions of this lease, except (i) as modified by the preceding sentence and
(ii) those provisions pertaining to the term, expansion rights and any option
to extend, shall apply to the month-to-month tenancy.
If Tenant shall retain possession of the Premises or any part thereof
without Landlord's written consent following the expiration or sooner
termination of this lease for any reason, then Tenant shall pay to Landlord for
each day of such retention one hundred fifty percent (150%) of the amount of the
daily rental in effect during the last lease month prior to the date of such
expiration or termination. The term "daily rental" as used in the preceding
sentence shall mean the monthly rental divided by thirty. Tenant shall also
indemnify and hold Landlord harmless from any loss, liability and expense
(including, but not limited to, attorneys fees) resulting from delay by Tenant
in surrendering the Premises, including without limitation any claims made by
any succeeding tenant founded on such delay. Acceptance of rent by Landlord
following expiration or termination shall not constitute a renewal of this
lease, and nothing contained in this paragraph shall waive Landlord's right of
re-entry or any other right. Tenant shall be only a Tenant at sufferance,
whether or not Landlord accepts any rent from tenant, while Tenant is holding
over without Landlord's written consent.
The provisions of this paragraph 24 are in addition to, and do not
affect, Landlord's right of re-entry or other rights hereunder or provided by
law. Nothing in this paragraph 24 shall be construed as implied consent by
Landlord to any holding over by Tenant. Landlord expressly reserves the right
to require Tenant to surrender possession of the Premises to Landlord as
provided in this Lease on expiration or other termination of this Lease. The
provisions of this paragraph 24 shall not be considered to limit or constitute
a waiver of any other rights or remedies of Landlord provided in this Lease or
at law. The provisions of this paragraph 24 shall survive the expiration or
early termination of this lease.
25. SUBORDINATION. In the event Landlord's title or leasehold interest is
now or hereafter encumbered in order to secure a loan to Landlord, Tenant
shall, at the request of Landlord or the lender, execute in writing an
agreement subordinating its rights under this lease to the lien of such
encumbrance, or, if so requested, agreeing that the lien of lender's
encumbrance shall be or remain subject and subordinate to the rights of Tenant
under this lease. Tenant hereby irrevocably appoints Landlord the
attorney-in-fact of Tenant to execute, deliver and record any such instrument
or instruments for and in the name and on behalf of Tenant. Notwithstanding any
such subordination, Tenant's possession under this lease shall not be disturbed
if Tenant is not in default and so long as Tenant shall pay all amounts due
hereunder and otherwise observe and perform all provisions of this lease. In
addition, if in connection with any such loan the lender shall request
reasonable modifications in this lease as a condition to such financing, Tenant
will not unreasonably withhold, delay or defer its consent thereof, provided
that such modifications do not increase the obligations of Tenant hereunder or
materially adversely affect the leasehold interest hereby created or Tenant's
rights hereunder.
26. CERTIFICATE OF ESTOPPEL. Tenant shall, within five (5) calendar days
after request thereof, execute and deliver to Landlord, in recordable form, a
certificate stating that the lease is unmodified and in full force and effect,
or in full force and effect as modified and stating the modifications. The
certificate shall also state the amount of the monthly rent, the date to which
monthly rent has been paid in advance, the amount of the security deposit
and/or prepaid monthly rent, and, if the request is made by Landlord, shall
include such other items as Landlord or Landlord's lender may reasonably
request. Failure to deliver such certificates within such time shall constitute
a conclusive acknowledgement by Tenant that the lease is in full force and
effect and has not been modified except as may be represented by Landlord in
the certificate. Any such certificate requested by Landlord may be conclusively
relied upon by any prospective purchaser or encumbrancer of the Premises or
Project. If Tenant fails to execute and deliver to the Landlord a completed
certificate as required by this paragraph 26, Tenant hereby appoints the
Landlord as his attorney-in-fact to execute and deliver such certificate for
and on behalf of the Tenant. Further, within five (5) calendar days following
written request made from time to time by Landlord, Tenant shall furnish to
Landlord current financial statements of Tenant.
27. SALE BY LANDLORD. In the event the original Landlord hereunder, or
any successor owner of the Project or Premises, shall sell or convey the
Project or Premises, all liabilities and obligations on the part
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of the original Landlord, or such successor owner, under this lease accruing
thereafter shall terminate, and thereupon all such liabilities and obligations
shall be binding upon the new owner. Tenant agrees to attorn to such new owner
and to look solely to such new owner for performance of any and all such
liabilities and obligations.
28. ATTORNMENT TO LENDER OR THIRD PARTY. In the event the interest of
Landlord in the land and buildings in which the Premises are located (whether
such interest of Landlord is a fee title interest or a leasehold interest) is
encumbered by deed of trust, and such interest is acquired by a lender or any
other third party through judicial foreclosure or by exercise of a power or
sale at a private trustee's foreclosure sale, Tenant hereby agrees to release
Landlord of any obligation arising on or after any such foreclosure sale and
to attorn to the purchaser at any such foreclosure sale and to recognize such
purchaser as the Landlord under this lease.
29. DEFAULT BY LANDLORD. Landlord shall not be in default unless Landlord
fails to perform obligations required of Landlord within a reasonable time, but
in no event earlier than thirty (30) days after written notice by Tenant to
Landlord and to the holder of any first mortgage or deed of trust covering the
Premises specifying wherein Landlord has failed to perform such obligations;
provided, however, that if the nature of Landlord's obligations is such that
more than thirty (30) days are required for performance, then Landlord shall
not be in default if Landlord commences performance within such thirty (30) day
period and thereafter diligently prosecutes the same to completion.
If Landlord is in default of this lease, Tenant's sole remedy shall
be to institute suit against Landlord in a court of competent jurisdiction and
Tenant shall have no right to offset any sums expended by Tenant as a result of
Landlord's default against future rent and other sums due and payable pursuant
to this lease. If Landlord is in default of this lease, and as a consequence
Tenant recovers a money judgment against Landlord, the judgment shall be
satisfied only out of the proceeds of sale received on execution of the
judgment and levy against the right, title and interest of Landlord in the
Project of which the Premises are a part, and out of rent or other income from
such real property receivable by Landlord or out of the consideration received
by Landlord from the sale or other disposition of all or any part of Landlord's
right, title and interest in the Project of which the Premises are a part.
Neither Landlord nor any of the partners, comprising the partnership designated
as Landlord shall be personally liable for any deficiency.
30. CONSTRUCTION CHANGES. It is understood that the description of the
Premises and the location of ductwork, plumbing and other facilities therein
are subject to such changes as Landlord or Landlord's architect determines to
be desirable in the course of construction of the Premises and/or the
improvements constructed or being constructed therein, and no such change nor
any change in plans for any other portions of the Project, shall affect this
lease or entitle Tenant to any reduction of rent hereunder or result in any
liability of Landlord to Tenant.
31. MEASUREMENT OF PREMISES. Tenant understands and agrees that any
reference to square footage of the Premises is approximate only and includes
all interior partitions and columns, one-half of exterior walls, and one-half
of the partitions separating the Premises from the rest of the Project,
Tenant's proportionate share of the Common Area and, if applicable, 25% of the
area of the balcony adjoining the Premises. Tenant waives any claim against
Landlord regarding the accuracy of any such measurement and agrees that there
shall not be any adjustment in basic rent or direct expenses or other amounts
payable hereunder by reason of inaccuracies in such measurement.
32. ATTORNEY FEES. If either party commences an action against the other
party arising out of or in connection with this lease, the prevailing party
shall be entitled to have and recover from the losing party all expenses of
litigation, including, without limitation, travel expenses, attorney fees,
expert witness fees, trial and appellate court costs, and deposition and
transcript expenses. If either party becomes a party to any litigation
concerning this lease or concerning the Premises or the Project, by reason of
any act or omission of the other party or its authorized representatives, the
party that causes the other party to become involved in this litigation shall
be liable to the other party for all expenses of litigation, including, without
limitation, travel expenses, attorney fees, expert witness fees, trial and
appellate court costs, and deposition and transcript expenses.
33. SURRENDER. The voluntary or other surrender of this lease or the
Premises by Tenant, or a mutual cancellation of this lease, shall not work a
merger, and at the option of Landlord shall either terminate all or any
existing subleases or subtenancies or operate as an assignment to Landlord of
all or any such subleases or subtenancies.
34. WAIVER. No delay or omission in the exercise of any right or remedy
of Landlord on any default by Tenant shall impair such right or remedy or be
construed as a waiver. The receipt and acceptance by Landlord of delinquent
rent or other payments shall not constitute a waiver of any other default and
acceptance of partial payments shall not be construed as a waiver of the
balance of such payment due. No act or conduct of Landlord, including, without
limitation, the acceptance of keys to the Premises, shall constitute an
acceptance of the surrender of the Premises by Tenant before the expiration of
the term. Only a written notice from Landlord to Tenant shall constitute
acceptance of the surrender of the Premises and accomplish a termination of
this lease. Landlord's consent to or approval of any act by Tenant requiring
Landlord's consent or approval shall not be deemed to waive or render
unnecessary Landlord's consent to or approval of any subsequent act by Tenant.
Any waiver by Landlord of any default must be in writing and shall not be a
waiver of any other default concerning the same or any other provision of this
lease.
35. EASEMENTS; AIRSPACE RIGHTS. Landlord reserves the right to alter the
boundaries of the Project and grant easements and dedicate for public use
portions of the Project without Tenant's consent, provided that no such grant
or dedication shall interfere with Tenant's use of the Premises or otherwise
cause Tenant to incur cost or expense. From time to time, and upon Landlord's
demand, Tenant shall execute, acknowledge and
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Persons: one or more human beings, or legal entities or other
artificial persons, including, without limitation, partnerships, corporations,
trusts, estates, associations and any combination of human being and legal
entities.
Provisions: any term, agreement, covenant, condition, clause,
qualification, restriction, reservation or other stipulation in the lease that
defines or otherwise controls, establishes or limits the performance required
or permitted by either party.
Rent: basic rent, direct expenses, additional rent, and all other
amounts payable by Tenant to Landlord required by this lease or arising by
subsequent actions of the parties made pursuant to this lease.
Words used in any gender include other genders. If there be more than
one Tenant, the obligations of Tenant hereunder are joint and several. All
provisions, whether covenants or conditions, on the part of Tenant shall be
deemed to be both covenants and conditions. The paragraph headings are for
convenience of reference only and shall have no effect upon the construction or
interpretation of any provision hereof.
41. TIME. Time is of the essence of this lease and of each and all of its
provisions.
42. INTEREST ON PAST DUE OBLIGATIONS; LATE CHARGE. Any amount due from
Tenant to Landlord hereunder which is not paid when due shall bear interest at
the rate of ten percent (10%) per annum from when due until paid, unless
otherwise specifically provided herein, but the payment of such interest shall
not excuse or cure any default by Tenant under this lease. In addition, Tenant
acknowledges that late payment by Tenant to Landlord of basic rent or direct
expenses or of any other amount due Landlord from Tenant will cause Landlord to
incur costs not contemplated by this lease, the exact amount of such costs
being extremely difficult and impractical to fix. Such costs include, without
limitation, processing and accounting charges, and late charges that may be
imposed on Landlord; e.g., by the terms of any encumbrance and note secured by
any encumbrance covering the Premises. Therefore, if any such payment due from
Tenant is not received by Landlord when due, Tenant shall pay to Landlord an
additional sum of five percent (5%) of the overdue payment as a late charge.
The parties agree that this late charge represents a fair and reasonable
estimate of the costs that Landlord will incur by reason of late payment by
Tenant. Acceptance of any late charge shall not constitute a waiver of Tenant's
default with respect to the overdue amount, nor prevent Landlord from
exercising any of the other rights and remedies available to Landlord. No
notice to Tenant of failure to pay shall be required prior to the imposition of
such interest and/or late charge. Any interest and late charge imposed pursuant
to this paragraph shall be and constitute additional rent payable by Tenant to
Landlord.
43. ENTIRE AGREEMENT. This lease, including any exhibits and attachments,
constitutes the entire agreement between Landlord and Tenant relative to the
Premises and this lease and the exhibits and attachments may be altered,
amended or revoked only by an instrument in writing signed by both Landlord and
Tenant. Landlord and Tenant agree hereby that all prior or contemporaneous oral
agreements between and among themselves or their agents or representatives
relative to the leasing of the Premises are merged in or revoked by this lease.
44. CORPORATE AUTHORITY. If Tenant is a corporation, each individual
executing this lease on behalf of the corporation represents and warrants that
he is duly authorized to execute and deliver this lease on behalf of the
corporation in accordance with a duly adopted resolution of the Board of
Directors of said corporation and that this lease is binding upon said
corporation in accordance with its terms. If Tenant is a corporation, Tenant
shall deliver to Landlord, within ten (10) days of the execution of this lease,
a copy of the resolution of the Board of Directors of Tenant authorizing the
execution of this lease and naming the officers that are authorized to execute
this lease on behalf of Tenant, which copy shall be certified by Tenant's
secretary as correct and in full force and effect.
45. RECORDING. Neither Landlord nor Tenant shall record this lease or a
short form memorandum hereof without the consent of the other.
46. REAL ESTATE BROKERS. Each party represents and warrants to the other
party that it has not had dealings in any manner with any real estate broker,
finder or other person with respect to the Premises and the negotiation and
execution of this lease except Wayne Mascia Associates. Except for the
commissions and fees to be paid to Wayne Mascia Associates as provided in this
paragraph, each party shall indemnify and hold harmless the other party from all
damage, loss, liability and expense (including attorneys' fees and related
costs) arising out of or resulting from any claims for commissions or fees that
have been or may be asserted against the other party by any broker, finder or
other person with whom Tenant or Landlord, respectively, has dealt, or
purportedly has dealt, in connection with the Premises and the negotiation and
execution of this lease. Landlord shall pay broker leasing commissions to Wayne
Mascia Associates in connection with the Premises and the negotiation and
execution of this lease, to the extent agreed to between Landlord and Wayne
Mascia Associates. Landlord and Tenant agree that Landlord shall not be
obligated to pay any broker leasing commissions, consulting fees, finder fees or
any other fees or commissions arising out of or relating to any extended term of
this lease or to any expansion or relocation of the Premises at any time.
47. EXHIBITS AND ATTACHMENTS. All exhibits and attachments to this lease
are a part hereof.
48. ENVIRONMENTAL MATTERS.
A. TENANT'S COVENANTS REGARDING HAZARDOUS MATERIALS.
(1) Hazardous Materials Handling. Tenant, its agents, invitees,
employees, contractors, sublessees, assigns and/or successors shall not use,
store, dispose, release or otherwise cause to be present or permit the use,
storage, disposal, release or presence of Hazardous Materials (as defined
below) on or about the Premises or Project. As used herein "Hazardous
Materials" shall mean any petroleum or pretroleum by-products, flammable
explosives, asbestos, urea formaldehyde, radioactive materials or waste and
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any "hazardous substance", "hazardous waste", "hazardous materials", "toxic
substance" or "toxic waste" as those terms are defined under the provisions of
the California Health and Safety Code and/or the provisions of the
Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C.
Section 9601 et seq.), as amended by the Superfund Amendments and
Reauthorization Act of 1996 (42 U.S.C. Section 9601 et seq.), or any other
hazardous or toxic substance, material or waste which is or becomes regulated
by any local governmental authority, the State of California or any agency
thereof, or the United States Government or any agency thereof.
(2) NOTICES. Tenant shall immediately notify Landlord in writing of:
(i) any enforcement, cleanup, removal or other governmental or regulatory action
instituted, completed or threatened pursuant to any law, regulation or ordinance
relating to the industrial hygiene, environmental protection or the use,
analysis, generation, manufacture, storage, presence, disposal or transportation
of any Hazardous Materials (collectively "Hazardous Materials Laws"); (ii) any
claim made or threatened by any person against Tenant, the Premises, Project or
buildings within the Project relating to damage, contribution, cost recovery,
compensation, loss or injury resulting from or claimed to result from any
Hazardous Materials; and (iii) any reports made to any environmental agency
arising out of or in connection with any Hazardous Materials in, on or removed
from the Premises, Project or buildings within the Project, including any
complaints, notices, warnings, reports or asserted violations in connection
therewith. Tenant shall also supply to Landlord as promptly as possible, and in
any event within five (5) business days after Tenant first receives or sends the
same, with copies of all claims, reports, complaints, notices, warnings or
asserted violations relating in any way to the Premises, Project or buildings
within the Project or Tenant's use thereof. Tenant shall promptly deliver to
Landlord copies of hazardous waste manifests reflecting the legal and proper
disposal of all Hazardous Materials removed from the Premises.
B. INDEMNIFICATION OF LANDLORD. Tenant shall indemnify, defend (by
counsel acceptable to Landlord), protect, and hold Landlord, and each of
Landlord's partners, employees, agents, attorneys, successors and assigns, free
and harmless from and against any and all claims, liabilities, penalties,
forfeitures, losses or expenses (including attorneys' fees) for death of or
injury to any person or damage to any property whatsoever (including water
tables and atmosphere), arising from or caused in whole or in part, directly or
indirectly, by (i) the presence in, on, under or about the Premises, Project or
buildings within the Project or discharge in or from the Premises, Project or
buildings within the Project of any Hazardous Materials or Tenant's use,
analysis, storage, transportation, disposal, release, threatened release,
discharge or generation of Hazardous Materials to, in, on, under, about or from
the Premises, Project or buildings within the Project, or (ii) Tenant's failure
to comply with any Hazardous Materials Laws whether knowingly, unknowingly,
intentionally or unintentionally. Tenant's obligations hereunder shall include,
without limitation, and whether forseeable or unforseeable, all costs of any
required or necessary repair, cleanup or detoxification or decontamination of
the Premises, Project or buildings within the Project, and the preparation and
implementation of any closure, remedial action or other required plans in
connection therewith. In addition, Tenant shall reimburse Landlord for (i)
losses in or reductions to rental income resulting from Tenant's use, storage or
disposal of Hazardous Materials, (ii) all costs of refitting or other
alterations to the Premises, Project or buildings within the Project required as
a result of Tenant's use, storage, or disposal of Hazardous Materials including,
without limitation, alterations required to accommodate an alternate use of the
Premises, Project or buildings within the Project, and (iii) any diminution in
the fair market value of the Premises, Project or buildings within the Project
caused by Tenant's use, storage, or disposal of Hazardous Materials. For
purposes of this paragraph 48, any acts or omissions of Tenant, or by employees,
agents, assignees, contractors or subcontractors of Tenant or others acting for
or on behalf of Tenant (whether or not they are negligent, intentional, willful
or unlawful) shall be strictly attributable to Tenant.
c. SURVIVAL. The provisions of this paragraph 48 shall survive the
expiration or earlier termination of the term of this lease.
49. SIGNAGE. Tenant shall not, without obtaining the prior written consent
of Landlord, install or attach any sign or advertising material on any part of
the outside of the Premises, or on any part of the inside of the Premises which
is visible from the outside of the Premises, or in the halls, lobbies, windows
or elevators of the building in which the Premises are located or on or about
any other portion of the Common Area or Project. If Landlord consents to the
installation of any sign or other advertising material, the location, size,
design, color and other physical aspects thereof shall be subject to Landlord's
prior written approval and shall be in accordance with any sign program
applicable to the Project. In addition to any other requirements of this
paragraph 49, the installation of any sign or other advertising material by or
for Tenant must comply with all applicable laws, statutes, requirements, rules,
ordinances and any C.C. & R.'s or other similar requirements. With respect to
any permitted sign installed by or for Tenant, Tenant shall maintain such sign
or other advertising material in good condition and repair and shall remove such
sign or other advertising material on the expiration or earlier termination of
the term of this lease. The cost of any permitted sign or advertising material
and all costs associated with the installation, maintenance and removal thereof
shall be paid for solely by Tenant. If Tenant fails to properly maintain or
remove any permitted sign or other advertising material, Landlord may do so at
Tenant's expense. Any cost incurred by Landlord in connection with such
maintenance or removal shall be deemed additional rent and shall be paid by
Tenant to Landlord within ten (10) days following notice from Landlord. Landlord
may remove any unpermitted sign or advertising material without notice to Tenant
and the cost of such removal shall be additional rent and shall be paid by
Tenant within ten (10) days following notice from Landlord. Landlord shall not
be liable to Tenant for any damage, loss or expense resulting from Landlord's
removal of any sign or advertising material in accordance with this paragraph
49. The provisions of this paragraph 49 shall survive the expiration or earlier
termination of this lease.
50. SUBMISSION OF LEASE. The submission of this lease to Tenant for
examination or signature by Tenant is not an offer to lease the Premises to
Tenant, nor an agreement by Landlord to reserve the Premises for Tenant.
Landlord will not be bound to Tenant until this lease has been duly executed
and delivered by both Landlord and Tenant.
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51. PREMISES TAKEN "AS IS". Tenant is leasing the Premises from Landlord
"as is" in their condition existing as of the date hereof. Landlord shall have
no obligation to alter or improve the Premises.
52. ADDITIONAL RENT. All costs, charges, fees, penalties, interest and
any other payments (including Tenant's reimbursement to Landlord of costs
incurred by Landlord) which Tenant is required to make to Landlord pursuant to
the terms and conditions of this lease and any amendments to this lease shall
be and constitute additional rent payable by Tenant to Landlord when due as
specified in this lease and any amendments to this lease.
54. TENANT IMPROVEMENT ALLOWANCE. Landlord hereby grants to Tenant a
tenant improvement allowance of up to Twenty-One Thousand Two Hundred Fifty-Two
Dollars ($21,252) ("Allowance") to reimburse Tenant for the cost of tenant
improvements ("Tenant Improvements") which Tenant installs in the Premises
during the first six (6) months of the term of the Lease, subject to the
following terms and conditions:
(a) The Tenant Improvements shall be deemed alterations to the
Premises and subject to the terms and conditions of paragraph 8 of the Lease.
(b) The Tenant Improvements for which Tenant seeks reimbursement
shall be completed within six (6) months after the Lease Commencement Date.
(c) All outstanding claims for labor, materials and fixtures
relating to the Tenant Improvements shall have been paid in full by Tenant and
Tenant shall have obtained lien releases from all contractors and materialmen,
in form satisfactory to Landlord.
(d) The Tenant Improvements shall have been constructed in
accordance with all applicable laws.
(e) Tenant shall not be in default under the Lease.
Tenant shall not be entitled to any portion of the Allowance which is
not required to be disbursed in accordance with the foregoing requirements and
Tenant shall not be entitled to any credit against rent or any other payment
due Landlord under the Lease. No disbursement of any portion of the Allowance
shall be required until all of the conditions specified in items (a) through
(e) have been satisfied.
55. EARLY ACCESS. Tenant acknowledges that the Premises are currently
occupied by a third party pursuant to a lease which is scheduled to expire on
June 6, 1996. Upon obtaining possession of the Premises, Landlord shall provide
Tenant with limited access to the Premises for purposes of commencing
installation of the Tenant Improvements. Tenant's access to the Premises
pursuant to this paragraph shall be subject to all the terms and conditions of
this lease, including the insurance obligations specified in paragraph 11, and
as a condition precedent to Tenant's right to such access to the Premises,
Tenant shall provide Landlord with proof that Tenant has satisfied said
insurance requirements. Such limited access to the Premises shall not
accelerate the commencement or termination dates of this lease specified in
paragraph 2(a) hereof and Tenant shall not be obligated to pay basic rent or
direct expenses until the commencement of the term; provided, however, if
Tenant or any of Tenant's operating personnel commences operation of business
in the Premises, such operations shall accelerate the Lease Commencement Date
and the lease term shall commence on the date that such business operations are
commenced.
[Signature on Next Page]
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IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered
this lease on the date first above written.
Landlord: Tenant:
- --------- -------
McCANDLESS TOWERS, PHASE I ASCII OF AMERICA, INC.,
a California limited partnership a California corporation
By: McCandless Group, a
California general partnership,
General Partner
By: /s/ SIGNATURE By: /s/ SIGNATURE
------------------------------ ---------------------------
Birk S. McCandless, as Trustee
under the Birk S. McCandless Name: Printed Name
and Mary McCandless Inter Vivos -------------------------
Trust Agreement dated February
17, 1982, a General Partner Title: President
------------------------
Date: Date: 1-13-97
------------------------- -------------------------
By: /s/ S HYNDMAN
---------------------------
Name: S HYNDMAN
-------------------------
Title: Secretary
------------------------
Date: 1-13-97
-------------------------
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deliver to Landlord, in accordance with Landlord's instructions, any and all
documents, instruments, maps or plate necessary to effectuate Tenant's
covenants hereunder.
This lease confers no rights either with regard to the subsurface of
or airspace above the land on which the Project is located or with regard to
airspace above the building of which the Premises are a part. Tenant agrees
that no diminution or shutting off of light or view by a structure which is or
may be erected (whether or not by Landlord) on property adjacent to the
building of which the Premises are a part or to property adjacent thereto,
shall in any way affect this lease, or entitle Tenant to any reduction of rent,
or result in any liability of Landlord to Tenant.
36. RULES AND REGULATIONS. Landlord shall have the right from time to time
to promulgate reasonable rules and regulations for the safety, care and
cleanliness of the Premises, the Project, and the Common Area, or for the
preservation of good order. On delivery of a copy of such rules and regulations
to Tenant, Tenant shall comply with the rules and regulations, and a violation
of any of them shall constitute a default by Tenant under this lease. If there
is a conflict between the rules and regulations and any of the provisions of
this lease, the provisions of this lease shall prevail. Such rules and
regulations may be amended by Landlord from time to time with or without
advance notice.
37. NOTICES. Except for legal process which may also be served as
provided by law or as provided herein, all notices, demands, requests, consents
and other communications ("Notices") which may be given or are required to be
given by either party to the other shall be in writing and shall be deemed
given to and received by the party intended to receive such Notice (i) when
hand delivered, (ii) three (3) days after such Notice shall have been
deposited, postage prepaid, to the United States Mail, certified return receipt
requested, properly addressed to the address specified herein, or (iii) date of
delivery if sent to the address specified herein by reputable overnight courier
(e.g. Federal Express or other comparable service), as evidenced by such
courier's records.
Prior to the commencement date, all such Notices from Landlord to
Tenant shall be served or addressed to Tenant at 1731 Technology Drive, Suite
560, San Jose, California 95110. On or after the commencement date all such
Notices from Landlord to Tenant shall be addressed to Tenant at the Premises.
All such Notices by Tenant to Landlord shall be sent to Landlord at
its offices at 3945 Freedom Circle, Suite 640, Santa Clara, California 95054.
Either party may change its address by notifying the other of such
change.
38. NAME. Tenant shall not use the name of the Project for any purpose
other than as the address of the business conducted by Tenant in the Premises
without the prior written consent of Landlord.
39. GOVERNING LAW; SEVERABILITY. This lease shall in all respects be
governed by and construed in accordance with the laws of the State of
California. If any provision of this lease shall be held or rendered invalid,
unenforceable or ineffective for any reason whatsoever, all other provisions
hereof shall be and remain in full force and effect.
40. DEFINITIONS. As used in this lease, the following words and phrases
shall have the following meanings:
AUTHORIZED REPRESENTATIVE: any officer, agent, employee or
independent contractor retained or employed by either party, acting within
authority given him by that party.
COMMON AREA: those areas of the Project provided and designated by
Landlord for the general use and convenience of the occupants of the Project,
including but not limited to common lobbies, corridors, restrooms, elevators,
stairwells, conference rooms, parking areas, sidewalks, landscaped grounds, the
restaurant and sundries building, helipad, health club facilities (including but
not necessarily limited to the pool, spa, showers, locker rooms and exercise
rooms); together with telephone, electrical, janitorial and mechanical rooms,
mail rooms and storage areas, vertical duct shafts, building roofs and exterior
walls, the space occupied by the mechanical, plumbing, electrical and HVAC
systems, and all other areas of the Project not constituting leasable premises.
ENCUMBRANCE: any deed of trust, mortgage or other written security
device or agreement affecting the Premises or the Project that constitutes
security for the payment of a debt or performance of an obligation, and the
note or obligation secured by such deed of trust, mortgage or other written
security device or agreement.
LEASE MONTH: the period of time determined by reference to the day of
the month in which the term commences and continuing to one day short of the
same numbered day in the next succeeding month; e.g., the tenth day of one month
to and including the ninth day in the next succeeding month.
LENDER: the beneficiary, mortgagee or other holder of an encumbrance,
as defined above.
LIEN: a charge imposed on the Premises by someone other than Landlord,
by which the Premises are made security for the performance of an act. Most of
the liens referred to in this lease are mechanic's liens.
MAINTENANCE: repairs, replacement, repainting and cleaning.
MONTHLY RENT: the sum of the monthly payments of basic rent and
direct expenses.
13
<PAGE> 1
EXHIBIT 10.7
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996
BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER
REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION,
HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER,
WHO AGREE AS FOLLOWS.
PAGE 1 OF 10
1) DESCRIPTION OF PREMISES:
Landlord Leases to Tenant and Tenant leases from Landlord, approximately
one thousand eight hundred twenty-two (1,822) rentable square feet, of that
building located at 298 S. Sunnyvale Avenue, Sunnyvale, Santa Clara County,
California, which premises are more particularly described in Exhibit "A"
to this lease, and are hereinafter referred to as "the premises", Suite
209.
2) USE:
Tenant shall use the premises for general office use and for no other use
without Landlord's consent.
Tenant shall not use or permit the use of the premises or any part thereof
for any purpose or purposes other than the purposes for which the premises
are leased.
3) LEASE TERM:
The Lease term shall be for thirty six months (36) commencing May 1, 1996.
Tenant to have occupancy on April 1, 1996.
4) RENT:
Tenant shall pay to Landlord as minimum monthly rent, without deduction,
set off, prior notice, or demand, the sum of Two Thousand Three Hundred
Sixty-Eight and 60/100 Dollars ($2,368.60) per month in advance on the
first day of each month commencing during the term, or the commensurate
rental for any portion of a month to be prorated.
All rent shall be paid to landlord at the address to which notices to
Landlord are given. In the event the monthly rent is not received by
Landlord within five (5) days following the date it is due and payable,
there shall be a late charge in the amount of ten (10%) percent of the
monthly rental. Such late charge will be due and payable from Tenant with
the late monthly rental, but nothing contained herein shall be construed as
relieving Tenant from Tenant's obligation to pay the monthly rent in
advance on the first day of each month. See Addendum #1 for rent schedule.
5) SECURITY DEPOSIT:
On execution of this Lease, Tenant shall deposit with Landlord as a
security deposit for the performance by Tenant of the provisions of this
Lease the total sum of Two Thousand Five Hundred and 00/100 Dollars
($2,500.00). If Tenant is in default, Landlord can use the security
deposit, or any portion of it, to cure the default or to compensate
Landlord for all damage sustained by Landlord resulting from Tenant's
default. Tenant shall immediately, on demand, pay to Landlord a sum equal
to the portion of the security deposit expanded or applied by Landlord as
provided in this paragraph so as to maintain the security deposit in the
sum initially deposited with Landlord. If Tenant is not in default at the
expiration or termination of this Lease, Landlord shall return the security
to Tenant. Landlord's obligations with respect to the security deposit are
those of a debtor and not a trustee. Landlord can maintain the security
deposit separate and apart from Landlord's general funds or can commingle
the security deposit with Landlord's general and other funds. Landlord
shall not be required to pay Tenant interest on the security deposit.
6) PREPARATION OF PREMISES:
Tenant to take space in "as-is" condition. Landlord to clean and paint as
described in Addendum #2.
7) TAXES AND ASSESSMENTS:
Tenant shall pay before delinquency all taxes, assessments, license fees
and other charges ("taxes") that are levied and assessed against Tenant's
personal property installed or located in or on the
<PAGE> 2
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5,
1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP,
HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA
CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO
GENDER OR NUMBER, WHO AGREE AS FOLLOWS.
PAGE 2 OF 10
premises, and that become payable during the term. On demand by Landlord,
Tenant shall furnish Landlord with satisfactory evidence of these payments.
If any taxes on Tenant's personal property are levied against Landlord or
Landlord's property, or if the assessed value of the building and other
improvements in which the premises are located is increased by the
inclusion of a value placed on Tenants' personal property, and if Landlord
pays the taxes on any of these items or the taxes based on the increased
assessment of these items, Tenant, on demand, shall immediately reimburse
Landlord for the sum of the taxes levied against Landlord, or the
proportion of the taxes resulting from the increase in Landlord's
assessment. Landlord shall have the right to pay these taxes, and shall be
reimbursed therefor by Tenant, regardless of the validity of the levy.
As additional rental, Tenant shall pay its proportionate share determined
as provided below of all increases in real property taxes and general and
special assessments ("real property taxes"), whether the increases result
from increased rate and/or valuation, levied and assessed against the
building, other improvements, and land of which the premises are a part,
for the base year, which is tax year 1995. Tenant's proportionate share of
such real property tax increases shall be the ratio of the increase that
total number of square feet in the premises bears to the total number of
leasable square feet in the building and other improvements in which the
premises are located. Each year Landlord shall notify Tenant of Landlord's
calculation of Tenant's proportionate share of the real property taxes and
together with such notice shall furnish Tenant with a copy of the tax bill,
including the tax bill for the base year. Tenant shall reimburse Landlord
for Tenant's proportionate share of the increase in the real property taxes
semiannually not later than thirty (30) days before the taxing authority's
delinquency date or ten (10) days after receipt of the tax bill from
Landlord, whichever is later. Tenant's liability to pay real property taxes
shall be prorated on the basis of a 365-day year to account for any
fractional portion of a fiscal tax year included in the term or extended
term at its commencement and expiration.
8) LIMITATIONS ON USE:
Tenant shall not use the premises in any manner that will constitute waste,
nuisance or unreasonable annoyance (including, without limitation, the use
of loudspeakers or sound or light apparatus that can be heard or seen
outside the premises) to owners or occupants of adjacent properties or to
other tenants in the building in which the premises are located. Tenant
shall not use the premises for sleeping, washing clothes, cooking or the
preparation, manufacture, or mixing of anything that might emit any odor or
objectionable noises or lights onto adjacent properties or into the
building in which the premises are located. Furthermore, there shall be no
smoking in the suite or in the common areas of the building in accordance
with the City of Sunnyvale smoking ordinances.
Without Landlord's written consent, Tenant shall not operate or permit to
be operated in the premises any coin or token-operated vending machines or
similar devices for the sale or leasing of goods, no auction, fire, or
bankruptcy sale may be conducted in the premises without Landlord's written
consent.
The plumbing facilities shall not be used for any other purpose than that
of which they are constructed, and no foreign substance of any kind shall
be thrown in the plumbing facilities. The expense of any breakage,
stoppage, or damage (whether within or outside the premises) resulting from
a violation of this provision, shall be borne by Tenant if Tenant or its
employees, agents, or invitees shall have caused it.
Tenant shall not do anything on the premises that will cause damage to the
premises or the building in which the premises are located. The premises
shall not be overloaded. No machinery, apparatus, or other appliance shall
be used or operated in or on the premises that will in any manner injure,
vibrate or shake the premises. In addition, there shall be no freestanding
electric heaters or large refrigerators allowed in the units.
9) ALTERATIONS:
Tenant shall not make, or suffer to be made, any alterations to the
premises without Landlord's
<PAGE> 3
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5,
1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP,
HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA
CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO
GENDER OR NUMBER, WHO AGREE AS FOLLOWS.
PAGE 3 OF 10
written consent. Any alterations made shall remain on and be surrendered
with the premises on expiration or termination of the term, except that
Landlord can elect, within thirty (30) days before expiration of the term,
or within ten (10) days after termination of the term, to require Tenant to
remove any alterations that Tenant has made to the premises.
If Landlord so elects, Tenant, at its cost, shall restore the premises to
the condition designated by Landlord in its election, before the last day
of the term, or within thirty (30) days after notice of election is given,
whichever is later.
If Tenant makes any alterations to the premises as provided in this
paragraph, the alterations shall not be commenced until three (3) days
after Landlord has received notice from Tenant stating the date the
installation of the alterations is to commence so that Landlord can post
and record an appropriate notice of non-responsibility.
10) UTILITIES AND SERVICES:
Landlord is to provide all water, electricity, heating, venting,
air-conditioning and lighting (but not telephone and the like) and
janitorial services. Air-conditioning, heating and lighting to be supplied
from 8 a.m. to 5 p.m. Monday through Friday. Landlord is responsible for
Building maintenance including landscaping, and landscaping in patio area.
Landlord shall not be liable for failure to furnish utilities or services
to the premises when the failure results from causes beyond Landlord's
reasonable steps to restore the interrupted utilities and services.
Landlord can discontinue, without notice to Tenant, any of the utilities
or services to the premises for which Tenant fails to pay as provided in
this paragraph, and no such discontinuance shall be deemed an actual or a
constructive eviction.
11) INDEMNITY AND EXCULPATION:
Tenant agrees to hold Landlord free of all liabilities and claims for
damage by reason of any injury or death to any person or persons, including
Tenant, or property of any kind whatsoever (except any liability and claim
caused solely by the negligent acts of Landlord, Landlord's agents, or
Landlord's servants) while in, upon, or connected in any way with the
premises, during the term of this Lease or any extended term thereof, or
any occupancy hereunder. Tenant hereby agrees to indemnify, save harmless
and defend Landlord from all liability, damages, loss, costs and
obligations, including court costs and counsel fees, on account of or
arising out of or alleged to have arisen out of, directly or indirectly,
any such injuries, death or losses, however occurring. Tenant agrees to
include within the insurance policy obtained under paragraph 12
hereinbelow a provision providing that the contractual obligation of
indemnification set forth in this paragraph 11 is covered in said policy.
12) INSURANCE:
Tenant, at its cost, shall maintain public liability and property damage
insurance with liability limits of not less than $100,000.00 per person
and $300,000.00 per occurrence, and property damage limits of not less
than $50,000.00 per occurrence, insuring against all liability of Tenant
and Tenant's authorized representatives arising out of and in connection
with Tenant's use or occupancy of the premises. All public liability
insurance and property damage insurance shall insure performance by Tenant
of the indemnity provisions of paragraph 11 hereinabove. Both parties to
this lease shall be named as coinsured, and the policy shall contain cross
liability endorsements.
Not more frequently than each two (2) years, if, in the opinion of
Landlord's lender or of the insurance broker retained by Landlord, the
amount of public liability and property damage insurance coverage at that
time is not adequate, Tenant shall increase the insurance coverage as
required by either Landlord's lender or Landlord's insurance broker.
<PAGE> 4
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996
BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED
TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER
REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS
FOLLOWS.
PAGE 4 OF 10
13) DESTRUCTION:
In the event of damage causing a partial destruction of the premises or
the building and other improvements in which the premises are located
during the term or extended term of this Lease from any cause and repairs
can be made within one hundred twenty (120) days from the date of the
damage under the applicable laws and regulations of governmental
authorities, Landlord shall repair said damage promptly and within a
reasonable time, but such partial destruction shall in no way void this
Lease, except that Tenant shall be entitled to a proportionate reduction
of rent while such repairs are being made, such proportionate reduction to
be based upon the extent to which the portion of the premises usable by
Tenant bears to the total area of the premises. If such repairs cannot be
made in one hundred twenty (120) days, Landlord may, at Landlord's option,
make the same within a reasonable time, this lease continuing in full
force and effect and the rent to be proportionately rebated as provided in
the previous sentence. In the event that Landlord does not elect to make
such repairs which cannot be made in one hundred twenty (120) days, or
such repairs cannot be made under such laws and regulations, this Lease
may be terminated at the option of either party. In respect to any partial
destruction which Landlord is obligated to repair or may elect to repair
under the terms of this paragraph, the provisions of any statutes or laws
permitting Tenant to terminate this Lease are waived by Tenant. In the
event that the building in which the premises are situated is destroyed to
the extent of thirty-three and one-third percent (33-1/3%) or more of the
then replacement cost thereof, Landlord may elect to terminate this Lease,
whether the premises are damaged or not. A total destruction of the
premises or of the building in which the premises are located shall
terminate this Lease.
14) CONDEMNATION:
If the whole or any part of a building of which the premises form a part
shall be taken for public or quasi-public use by right of eminent domain,
with or without litigation, or transferred by agreement in connection with
such public or quasi-public use, this Lease, in the event such taking
affects only a portion of the premises, as to the part so taken or
condemned or transferred, shall terminate as of the date title shall vest
in the condemnor and the rent payable hereunder shall be adjusted so that
Tenant shall be required to pay for the remainder of the term only such
portion of the rent as the area in the part remaining after the taking or
the condemnation bears to the area of the entire premises as of the date
title shall vest in the condemnor. In the event of such taking or
condemnation by judgment, verdict or agreement, Landlord shall have the
option to terminate this Lease of said date, or if all of the premises
shall be so taken or condemned or such part thereof be so taken or
condemned so that there does not remain a portion susceptible of occupation
hereunder, this Lease shall thereupon terminate. All compensation awarded
upon such condemnation or taking shall go to the Landlord, and Tenant shall
have no claim thereto, and Tenant hereby irrevocably assigns and transfers
to Landlord any right to compensation or damages to which the Landlord may
become entitled during the term hereof by reasons of the condemnation of
all or a part of the premises.
15) ASSIGNMENT AND SUBLETTING:
Tenant shall not voluntarily assign or encumber Tenant's interest in this
Lease or in the premises or sublease all or any part of the premises, or
allow any other person or entity to occupy or use all or any part of the
premises, without first obtaining Landlord's written consent, which
consent shall not be unreasonably withheld.
16) DEFAULT:
The occurrence of any of the following shall constitute a default by
Tenant: (a) failure to pay rent when due; (b) abandonment and vacation of
the premises (failure to occupy and operate the premises for ten (10)
consecutive working days shall be deemed an abandonment and vacation); (c)
failure to perform any other provision of this lease if the failure to
perform is not cured within fifteen (15) days after notice has been given
to Tenant. If the default cannot be reasonably cured within fifteen (15)
days, Tenant shall not be in default of this Lease if Tenant commences to
cure the default within the fifteen (15) day period and diligently and in
good faith continues to cure the default.
<PAGE> 5
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996
BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER
REFERRED TO AS "LANDLORD" AND COMMTOUCH INC., A CALIFORNIA CORPORATION,
HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER,
WHO AGREE AS FOLLOWS.
PAGE 5 OF 10
Landlord shall have the remedies hereinafter set forth in this paragraph 16
if Tenant commits a default. These remedies are not exclusive; they are
cumulative and in addition to any remedies now or later allowed by law.
Landlord can continue this Lease in full force and effect, and the Lease
will continue in effect as long as Landlord does not terminate Tenant's
right to possession, and Landlord shall have the right to collect rent when
due. During the period Tenant is in default, and only after vacating the
premises, Landlord can enter the premises and relet them, or any part of
them, to third parties for Tenant's account. Tenant shall be liable
immediately to Landlord for all costs Landlord incurs in reletting the
premises, including, without limitation, broker's commissions, expenses of
remodeling the premises required by the reletting, and like costs.
Reletting can be for a period shorter or longer than the remaining term of
this Lease. Tenant shall pay to Landlord the rent due under this Lease on
the dates the rent is due, less the rent Landlord receives from any
reletting. No act by Landlord allowed by this paragraph shall terminate
this Lease unless Landlord notifies Tenant that Landlord elects to
terminate this Lease. After Tenant's default and for as long as Landlord
does not terminate Tenant's rights to possession of the premises, if Tenant
obtains Landlord's consent, Tenant shall have the right to assign or sublet
its interest in this Lease, but Tenant shall have the right to assign or
sublet its interest in this Lease, but Tenant shall not be released from
liability. Landlord's consent to a proposed assignment or subletting shall
not be unreasonably withheld.
Landlord can terminate Tenant's right to possession of the premises at any
time. No act by Landlord other than giving notice to Tenant shall terminate
this Lease. Acts of maintenance, efforts to relet the premises, or the
appointment of a receiver on Landlord's initiative to protect Landlord's
interest under this Lease shall not constitute a termination of Tenant's
right to possession. On termination, Landlord has the right to recover from
Tenant: (a) the worth at the time of the award of the unpaid rent that had
been earned at the time of termination of this lease; (b) the worth, at the
time of the award of the amount by which the unpaid rent that would have
been earned after the time of award exceeds the amount of the loss of rent
that Tenant proves could have been reasonably avoided; and (d) any other
amount, and court costs, necessary to compensate Landlord for all detriment
proximately caused by Tenant's default. "The worth, at the time of the
award," as used in (a) and (b) of this paragraph is to be computed by
allowing interest at the rate of ten percent (10%) per annum. "The worth,
at the time of the award," as referred to in (c) of this paragraph is to be
computed by discounting the amount of the discount rate of the Federal
Reserve Bank of San Francisco at the time of the award, plus one percent
(1%).
If Tenant is in default of this Lease, Landlord shall have the right to
have a receiver appointed to collect rent and conduct Tenant's business.
Neither the filing of a petition for the appointment of a receiver nor the
appointment itself shall constitute an election by Landlord to terminate
this Lease.
Landlord, at any time after Tenant commits a default, can cure the default
at Tenant's cost. If Landlord, at any time, by reason of Tenant's default,
pays any sum or does any act that requires the payment of any sum, the sum
paid by Landlord shall be due immediately from Tenant to Landlord at the
time the sum is paid, and if paid at a later date shall bear interest at
the rate of ten percent (10%) per annum from the date the sum is paid by
Landlord until Landlord is reimbursed by Tenant. The sum, together with
interest on it, shall be additional rent.
Rent not paid when due shall bear interest at the rate of ten percent (10%)
per annum from the date due until paid. Said interest will accrue in
addition to any late charges provided under this Lease.
17) SIGNS:
Tenant shall not install, or cause to be installed, any signs in or upon
the premises or any part of the building of which the premises forms a
part. Landlord shall provide standard sign on entry door to Premises and on
appropriate building directories.
<PAGE> 6
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996
BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER
REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION,
HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER,
WHO AGREE AS FOLLOWS.
PAGE 6 OF 10
18) LANDLORD'S ENTRY ON PREMISES:
Landlord and its authorized representatives shall have the right to enter
the premises at all reasonable times for any of the following purposes:
(a) To determine whether the premises are in good condition and whether
Tenant is complying with its obligations under this lease;
(b) To do any necessary maintenance and to make any restoration to the
premises or the building and other improvements in which the premises
are located that Landlord has the right or obligation to perform;
(c) To show the premises to prospective brokers, buyers, tenant, or
persons interested in an exchange at any time during the term.
Landlord shall not be liable in any other manner for any inconvenience,
disturbance, loss of business, nuisance or other damage arising out of
Landlord's entry on the premises as provided in this paragraph except
damage resulting from the acts or omission of Landlord or its authorized
representatives.
Tenant shall not be entitled to an abatement or reduction of rent if
Landlord exercises any rights reserved in this paragraph.
Landlord shall conduct its activities on the premises as allowed in this
paragraph in a manner that will cause the least possible inconvenience,
annoyance, or disturbance to Tenant.
19) SUBORDINATION AND ESTOPPEL:
In the event any mortgagee shall elect to have this Lease a prior lien to
its mortgage, then and in such event, upon such mortgagee notifying the
Tenant in writing to that effect, this Lease shall have priority over the
lien of such mortgage to the same extent as if the same extent as if the
same had been placed on record prior to such mortgage. Tenant covenants and
agrees, in the event any proceedings are brought for the foreclosure of, or
in the event of exercise of the power of sale under any mortgage covering
the demised premises, whether or not this Lease is terminated by such
foreclosure or sale, that Tenant will, upon request by the purchaser,
attorn to the purchaser upon any foreclosure or sale and recognize any such
purchaser as the Landlord under this Lease, it being the intent hereof that
if this lease should be terminated by such foreclosure or sale, it shall,
on request by purchaser, be reinstated as a lease between the purchaser and
Tenant. Tenant, upon request of any party in interest, shall execute such
instrument or instruments as shall be requested to carry out the
requirements of this paragraph, and if Tenant fails to execute and deliver
any such instrument, Tenant irrevocably constitutes and appoints Landlord
as Tenant's special attorney-in-fact to execute and deliver any such
instrument.
Within ten (10) days after notice from Landlord, Tenant shall execute and
deliver to Landlord, in recordable form, a certificate stating that this
lease is unmodified and is in full force and effect, or in full force and
effect as modified, and stating the modifications. The certificate also
shall state the amount of minimum monthly rent, the dates to which the rent
has been paid in advance, and the amount of any security deposit, and such
other information as Landlord shall reasonably request. Failure to deliver
the certificate within the ten (10) days shall be conclusive upon the party
failing to deliver the certificate for the benefit of the party requesting
the certificate and any successor the party requesting the certificate,
that this Lease is in full force and effect and has not been modified
except as may be represented by the party requesting the certificate. If a
party fails to deliver the certificate within the ten (10) days, the party
failing to deliver the certificate irrevocably constitutes and appoints the
other party as its special attorney-in-fact to execute and deliver the
certificate to any third party.
<PAGE> 7
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5,
1996 BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP,
HEREINAFTER REFERRED TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA
CORPORATION, HEREINAFTER REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO
GENDER OR NUMBER, WHO AGREE AS FOLLOWS.
PAGE 7 OF 10
20) NOTICE:
Any notice, demand, request, consent, approval, or communication that
either party desires or is required to give to the other party or any
other person shall be in writing and either served personally or sent by
prepaid, first-class mail. Any notice, demand, request, consent, approval
or communication that either party desires or is required to give to the
other party shall be addressed to Landlord at 298 S. Sunnyvale, Suite
105-A, Sunnyvale, CA 94086 and to Tenant at 298 S. Sunnyvale, Suite 209,
Sunnyvale, CA 94086. Either party may change its address by notifying the
other party of the change of address. Notice shall be deemed communicated
within forty-eight (48) hours from the time of mailing if mailed as
provided in this paragraph.
21) ATTORNEY'S FEES:
Tenant agrees that if Landlord is involuntarily made a party to any
litigation concerning this Lease or the premises or any property of which
the premises are a part by reason of any act or omission of Tenant and not
because of any act or omission of Landlord, then Tenant shall hold
harmless landlord from all liability by reason thereof, including
reasonable attorney's fees incurred by Landlord in such litigation and all
taxable court costs. If legal action shall be brought by either Landlord
or Tenant for the unlawful detainer of the premises, for the recovery of
any rent or any other sums due under the provisions of this Lease, or
because of the breach of any term, covenant, or provision of this Lease,
the party prevailing in said action (Landlord or Tenant, as the case may
be) shall be entitled to recover from the party not prevailing costs of
suit and a reasonable attorney's fee which shall be fixed by the Judge of
the Court.
22) SURRENDER OF PREMISES: HOLDING OVER:
On expiration of ten (10) days after termination of the term, Tenant shall
surrender to Landlord the premises and all Tenant's improvements and
alterations in good condition (except for ordinary wear and tear occurring
after the last necessary maintenance made by Tenant, destruction to the
premises covered by paragraph 13, and alterations that Tenant is obligated
to remove under the provisions of paragraph 9).
23) MISCELLANEOUS:
Time is of the essence of each provision of this Lease.
Whenever consent or approval of either party is required that party shall
not unreasonably withhold such consent or approval.
Each party represents that it is has not had dealings with any real estate
broker, finder, or other person, with respect to this Lease in any manner
other than BT Commercial. Each party shall hold harmless the other party
from all damages resulting from any claims that may be asserted against
the other party by any broker, finder, or other person, with whom the
other party has or purported has dealt.
This Lease shall be construed and interpreted in accordance with the laws
of the State of California.
This Lease contains all the agreements of the parties and cannot be
amended or modified except by a written agreement.
All provisions, whether covenants or conditions, on the part of Tenant
shall be deemed to be both covenants and conditions.
The titles to the paragraphs of this Lease are not a part of this Lease
and shall have no effect upon and are not relevant to the construction or
interpretation of any part of this Lease.
<PAGE> 8
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996
BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED
TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER
REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS
FOLLOWS.
PAGE 8 OF 10
As used in this Lease, the singular or plural number shall each be deemed
to include the other whenever the context so indicates.
"Party" shall mean Landlord or Tenant; and if more than one person or
entity is Landlord or Tenant, the obligations imposed on that party shall
be joint and several.
The un-enforceability, invalidity, or illegality of any provision shall
not render the other provisions unenforceable, invalid or illegal.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease the day and
year first above written.
COMMTOUCH, INC., A CALIFORNIA CORPORATION DE ANZA BUILDING
By: /s/ SIGNATURE By: /s/ SIGNATURE
------------------------------------- ----------------------------
Date: 2/22/96 Date: March 13, 1996
----------------------------------- --------------------------
<PAGE> 9
THIS LEASE AGREEMENT IS EXECUTED AT SUNNYVALE, CALIFORNIA, ON FEBRUARY 5, 1996
BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP, HEREINAFTER REFERRED
TO AS "LANDLORD" AND COMMTOUCH, INC., A CALIFORNIA CORPORATION, HEREINAFTER
REFERRED TO AS "TENANT", ALL WITHOUT REGARD TO GENDER OR NUMBER, WHO AGREE AS
FOLLOWS.
PAGE 9 OF 10
[Suite #209 DIAGRAM]
EXHIBIT A
<PAGE> 10
THIS ADDENDUM SHALL BE ATTACHED TO AND MADE A PART OF THAT CERTAIN LEASE
AGREEMENT BETWEEN DE ANZA BUILDING, A CALIFORNIA LIMITED PARTNERSHIP AS
"LANDLORD", AND COMMTOUCH, INC., A CALIFORNIA CORPORATION. "TENANT" FOR THE
PREMISES COMMONLY KNOWN AS 298 S. SUNNYVALE AVENUE, SUITE 209, SUNNYVALE,
CALIFORNIA AND DATED FEBRUARY 5, 1996 FOR REFERENCE PURPOSES ONLY.
PAGE 10 OF 10
1) RENT SCHEDULE:
Months 01-06 $1.30 per sq. ft. full service
Months 07-12 $1.35 per sq. ft. full service
Months 13-24 $1.40 per sq. ft. full service
Months 25-36 $1.45 per sq. ft. full service
2) TENANT IMPROVEMENTS:
Landlord, at Landlord's sole expense, shall complete the following tenant
improvements prior to the Occupancy Date:
1. Shampoo the carpet.
2. Eliminate a portion of the built-in counter as noted on the attached
floorplan. The counter and walls need to be repaired and finished to
look good.
3. Wash all vinyl wall covering; if it does not clean up, all walls
shall be patched and painted with a mutually agreeable color.
4. Replace any broken or stained ceiling tiles.
5. Paint all HVAC registers and returns.
3) ADVANCED RENT:
Upon the execution of the lease, Tenant shall pay to Landlord the sum of
Two Thousand Three Hundred Sixty-Eight and 60/100 Dollars ($2,368.60) for
the first month of rent.
4) SECURITY DEPOSIT:
Upon the execution of the Lease, Tenant shall pay to Landlord the sum of
Two Thousand Five Hundred and 00/100 Dollars ($2,500.00) as a security
deposit.
5) MOLLY BOLTS:
Tenant shall not use molly bolts or any other items in the walls that will
cause large holes.
6) PROPERTY TAX:
Any increase in taxes due to resale, refinancing or change of ownership
during the lease term shall be borne by Landlord.
7) OPTION TO RENEW:
One (1) three (3) year option to renew the lease with three (3) months
prior notice. Option Rent to be agreed on at the time the option is
exercised.
8) OPTION TO CANCEL:
Tenant shall have the right to cancel this lease after the 24th month of
the lease term by giving the Landlord 120 days written notice prior to the
end of the 24th month. Should Tenant decide to cancel the last year of the
lease term, Tenant shall pay a penalty of three months rent which equals
$7,652.40, and the unamortized broker's commission which equals $1,585.14,
for a total of $9,237.54. Said amount shall be due and payable to Landlord
at the time Tenant notifies Landlord of its intent to cancel.
READ AND APPROVED:
TENANT: Commtouch, Inc., LANDLORD: De Anza Building
a California Corporation a California Limited Partnership
By: [SIG] By: [SIG]
------------------------- ------------------------------
March 13, 1996
<PAGE> 11
FIRST AMENDMENT TO LEASE
This is an amendment to the lease dated February 5, 1996 for Suite 209 between
De Anza Building as Landlord and Commtouch Inc., a California Corporation, as
Tenant. Landlord and Tenant do hereby agree to the following:
1. TERM. Lease term shall be extended for one additional year, until
April 30, 2000.
2. PREMISES. The Premises shall consist of 2,004 rentable square feet
(includes 10% loan factor--see Exhibit "A").
3. RENT. Monthly rent shall be calculated at $2.25 per rentable square foot,
fully serviced, which equals Four Thousand Five Hundred Nine Dollars and no
cents ($4,509.00) per month.
All other terms and conditions of the original lease shall remain the same.
Read and Approved:
/s/ SIGNATURE
- ----------------------------------------------- -------------------
Tenant, Gideon Mantel, CEO, Commtouch Inc. date
/s/ SIGNATURE 2-15-99
- ----------------------------------------------- -------------------
Landlord, Yun So Chang date
<PAGE> 12
THIS IS ADDENDUM NO. 2 TO THE LEASE DATED FEBRUARY 5, 1966 BETWEEN DeANZA
BUILDING, A CALIFORNIA LIMITED PARTNERSHIP AND COMMTOUCH, INC. A CALIFORNIA
CORPORATION.
SINCE ROBERT NOVAK IS NO LONGER WITH COMMTOUCH, GIDEON MANTEL, C.O.O. IS
HEREINAFTER THE RESPONSIBLE PERSON FOR THE ABOVE MENTIONED LEASE.
IT IS FURTHER AGREED THAT TONI CASTRO BE MADE THE RESPONSIBLE PERSON IN THE
ABSENCE OF MR. MANTEL. SHE CAN BE LET INTO THE SUITE AS REQUIRED (IF
ACCIDENTALLY LOCKED OUT) AND IS THE CONTACT PERSON AT ALL TIMES FOR SUITE 209.
RENT IS DUE ON THE FIRST OF THE MONTH AND LATE (CHARGES WILL APPLY) IF RECEIVED
AFTER THE TENTH. ALL OTHER TERMS OF THE ABOVE MENTIONED LEASE REMAIN IN EFFECT.
/s/ HARRISON WILLIAMS 12/10/96
- -------------------------------------- ----------
Harrison Williams, General Partner Date
DeAnza Building, a Limited Partnership
/s/ GIDEON MANTEL 12-9-96
- -------------------------------------- -----------
Gideon Mantel, C. O. O. Date
CommTouch, Inc.
<PAGE> 1
EXHIBIT 21-1
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
COMPANY STATE OF INCORPORATION
------- ----------------------
<S> <C>
CommTouch Software Inc. California
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions 'Experts," and to the
use of our report dated March 15, 1999 (Except for Note 11, as to which the date
is in Amendment No. 1 to the Registration Statement (Form F-1) and
related Prospectus of CommTouch Software Ltd. for the registration of 3,000,000
shares of its ordinary shares.
Tel-Aviv, Israel
March 15, 1999 (except for Note 11
and to which the date is )
KOST FORER & GABBAY
A member of Ernst & Young international
The foregoing Consent is in the form that will be signed upon the completion of
the Recapitalization described in note 11 to the Consolidated Financial
Statements.
Tel-Aviv, Israel
June 3, 1999
KOST FORER & GABBAY
A member of Ernst & Young international
<PAGE> 1
EXHIBIT 23.3
CONSENT OF MCCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
We consent to the references to the name of our firm under the caption "Legal
Matters" in the Registration Statement (Form F-1) and related Prospectus of
CommTouch Software Ltd. for the registration of 3,000,000 shares of its Ordinary
Shares.
MCCUTCHEN, DOYLE, BROWN & ENERSEN LLP
Palo Alto, California
June 3, 1999
