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FORM 6-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OF 15d-16 OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE MONTH OF DECEMBER 1999
(CONTAINING QUARTERLY INFORMATION FOR THE QUARTER ENDED SEPTEMBER 30, 1999)
COMMTOUCH SOFTWARE LTD.
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
6 HAZORAN STREET
POLEG INDUSTRIAL PARK, P.O. BOX 8511
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant files or will file annual
reports under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F ___
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the information to
the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.
Yes ____ No X
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COMMTOUCH SOFTWARE LTD.
FORM 6-K
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 1998 (Audited) and September 30, 1999 (Unaudited)
Condensed Consolidated Statements of Operations Three and Nine
months ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows Nine months
ended September 30, 1999 and 1998 (Unaudited)
Note to Condensed Consolidated Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibit
<TABLE>
<CAPTION>
Exhibit Description of Document
- ------- -----------------------
<S> <C>
1 October 27, 1999 Press Release: "Commtouch Revenues increase
102 percent over last quarter"
</TABLE>
Signatures
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 67,708 $ 834
Available for sale securities 4,930 --
Trade receivables 1,501 133
Prepaid marketing expenses relating to Go2Net warrant 4,386 --
Prepaid expenses and other accounts receivable 1,056 244
-------- --------
Total current assets 79,581 1,211
Severance Pay Fund 318 223
Property and Equipment, net 4,049 932
-------- --------
$ 83,948 $ 2,366
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term bank line of credit $ -- $ 1,328
Current portion of bank loans and capital leases 147 112
Trade payables 919 446
Employees and payroll accruals 941 313
Deferred revenue 435 74
Other liabilities 813 378
-------- --------
Total current liabilities 3,255 2,651
-------- --------
Long-term Portion of Bank Loans and Capital Leases 47 164
Accrued Severance Pay 418 366
-------- --------
465 530
-------- --------
Commitments and Contingent Liabilities: -- --
Shareholders' Equity (Deficit)
Convertible preferred shares -- 74
Ordinary shares 204 27
Additional paid-in capital 111,844 11,256
Stock-based employee deferred compensation (6,551) (418)
Notes receivable from shareholders (1,225) (77)
Unrealized holding gains 39 --
Accumulated deficit (24,083) (11,677)
-------- --------
Total shareholders' equity (deficit) 80,228 (815)
-------- --------
$ 83,948 $ 2,366
======== ========
</TABLE>
The accompanying note is an integral part of these condensed consolidated
financial statements.
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COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Email Services - revenue ............................ $ 1,117 $ 130 $ 2,015 $ 221
Cost of Email services - revenue .................... 1,325 166 2,371 310
------- ------- -------- -------
Gross loss .......................................... (208) (36) (356) (89)
------- ------- -------- -------
Operating expenses:
Research and development, net ..................... 797 308 1,511 879
Sales and marketing ............................... 2,006 509 3,562 1,474
General and administrative ........................ 1,485 151 3,330 426
Amortization of the prepaid marketing expenses
relating to Go2Net warrant ..................... 1,464 -- 1,464 --
Amortization of stock-based employee
deferred compensation .......................... 1,096 18 2,495 28
------- ------- -------- -------
Total operating expenses .................. 6,848 986 12,362 2,807
------- ------- -------- -------
Operating loss ...................................... (7,056) (1,022) (12,718) (2,896)
Interest income (expense) and other, net ............ 577 (28) 312 (114)
------- ------- -------- -------
Net loss ............................................ $(6,479) $(1,050) $(12,406) $(3,010)
======= ======= ======== =======
Basic and diluted net loss per share ................ $ (0.51) $ (0.72) $ (2.25) $ (2.07)
======= ======= ======== =======
Weighted average number of shares used in
computing basic and diluted net loss per
share ............................................. 12,719 1,450 5,510 1,450
======= ======= ======== =======
</TABLE>
The accompanying note is an integral part of these condensed consolidated
financial statements.
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COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
------------------------
1999 1998
-------- -------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $(12,406) $(3,010)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization ................................. 963 169
Amortization of stock-based employee deferred
compensation and warrants issued for service
received and bank line of credit ............................ 2,855 202
Amortization of warrant issued to Go2Net ...................... 1,464 --
Loss from sale of asset ....................................... 3 --
Increase in trade receivables ................................. (1,368) (42)
Increase in other accounts receivable and prepaid expenses .... (812) (197)
Increase in trade payables .................................... 473 27
Increase in other liabilities ................................. 1,063 52
Increase in deferred revenue .................................. 361 103
Increase (decrease) in accrued severance pay, net ............. (43) 29
-------- -------
Net cash used in operating activities ....................... (7,447) (2,667)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of available for sale securities ........................ (4,891) --
Sale proceeds from sale of asset ................................. 13 --
Purchase of property and equipment ............................... (4,096) (286)
-------- -------
Net cash used in investing activities ....................... (8,974) (286)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank line of credit, net .............................. (1,328) 595
Principal payment of bank loans .................................. -- (94)
Payment of notes receivable ...................................... 54 --
Payment of capital lease ......................................... (82) (26)
Proceeds from issuance of shares ................................. 84,651 3,013
-------- -------
Net cash provided by financing activities ................... 83,295 3,488
-------- -------
Increase in cash and cash equivalents .............................. 66,874 535
Cash and cash equivalents at the beginning of the period ........... 834 324
-------- -------
Cash and cash equivalents at the end of the period ................. $ 67,708 $ 859
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITY:
Cash paid during the year:
Interest ........................................................... $ 70 $ 116
======== =======
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITY:
Capital lease obligations ........................................ $ -- $ 315
======== =======
Ordinary shares issued for notes receivable from shareholders .... $ 1,202 $ --
======== =======
</TABLE>
The accompanying note is an integral part of these condensed consolidated
financial statements.
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COMMTOUCH SOFTWARE LTD.
NOTE TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
The condensed consolidated financial statements have been prepared by
Commtouch Software Ltd., without audit, and include the accounts of
Commtouch Software Ltd. and its wholly-owned subsidiary (collectively
the "Company"). Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant
to such rules and regulations. In the opinion of the Company, the
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the
financial position at September 30, 1999 and the operating results and
cash flows for the reported periods. These financial statements and
notes should be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended December 31, 1998, which
were filed with the Securities and Exchange Commission on Form F-1.
The results of operations for the three and nine months ended
September 30, 1999 are not necessarily indicative of the results that
may be expected for the future quarters or the year ending December 31,
1999.
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PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements based upon current
expectations that involve risks and uncertainties. Any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. For example, the words "believes," "anticipates,"
"plans," "expects," "intends" and similar expressions are intended to identify
forward-looking statements. CommTouch's actual results and the timing of certain
events may differ significantly from those projected in the forward-looking
statements. Factors that might cause future results to differ materially from
those projected in the forward-looking statements include, but are not limited
to, those discussed in "Risk Factors" in the Company's prospectus dated July 13,
1999.
OVERVIEW
We are a leading global provider of outsourced email and other messaging
services. Our flexible and highly customizable solutions enable us to satisfy
the different email and messaging needs of a wide range of business partners,
including websites of all sizes and businesses worldwide. As of September 30,
1999, we had approximately 137 business partners offering our Web-based email
from their sites. Our business partners include Excite, Go2Net, FortuneCity,
Talk City and Nippon Telephone and Telegraph. Through our business partners'
sites we serve approximately 5.7 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 September 30, 1999, we had registered
approximately 150,000 sites through the ZapZone Network service, and were
serving over 902,000 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.
INITIAL PUBLIC OFFERING
On July 16, 1999, the Company completed its initial public offering and raised
$70,786,000, net of underwriters commission, from the public offering (including
the exercise of the underwriters' overallotment option) and the private
placement from the strategic partnership with Go2Net and Vulcan Ventures (see
note below).
STRATEGIC TRANSACTION
Concurrently with the sale of the shares in the initial public offering, we
entered into an agreement with Go2Net, a network of branded, technology- and
community-driven websites focused on personal finance, commerce, and games.
Go2Net also develops Web-related software. Pursuant to the agreement we will
offer Go2Net's end users with a private label email service, including our
email, calendaring and other services. The services will be customized to the
look and feel of Go2Net's websites. The terms of this agreement are
substantially the same as our commercial agreements with other business partners
except that we have agreed to share a materially greater portion of our
advertising revenues with Go2Net than we are sharing under other similar
agreements. In addition, in connection with the agreement, we issued to Go2Net a
warrant to purchase 1,136,000 ordinary shares at a per share exercise price of
$12.80, subject to adjustment as set forth in the warrant. The warrant is fully
vested and non-forfeitable. The warrant will expire on July 16, 2004, the fifth
anniversary of the initial public offering. The fair value of the warrant,
estimated at $5.8 million, will be amortized to operating expenses ratably over
the minimum term of the agreement, or one year. Simultaneously with the sale of
the shares in the initial public offering, we sold 1,344,086 ordinary shares to
Go2Net and Vulcan Ventures Incorporated at $14.88 per share in a private
placement. In the future, we may have to issue in-the-money warrants to acquire
our ordinary shares to business partners who provide us with a large base of
potential end users. We may also have to provide these business partners with
more favorable commercial terms than we have previously provided to our business
partners. The issuance of in-the-money warrants and
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the grant of more favorable terms to business partners may further dilute our
shareholders, increase our operating loss in the future and cause our stock
price to fall.
RESULTS OF OPERATIONS
The following table sets forth financial data for the three month and nine month
periods ended September 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Email services revenue .............................. $ 1,117 $ 130 $ 2,015 $ 221
Cost of Email services revenue ...................... 1,325 166 2,371 310
------- ------- -------- -------
Gross loss .......................................... (208) (36) (356) (89)
------- ------- -------- -------
Operating expenses:
Research and development, net ..................... 797 308 1,511 879
Sales and marketing ............................... 2,006 509 3,562 1,474
General and administrative ........................ 1,485 151 3,330 426
Amortization of the prepaid marketing expenses
relating to Go2Net warrant ..................... 1,464 -- 1,464 --
Amortization of stock-based employee
deferred compensation .......................... 1,096 18 2,495 28
------- ------- -------- -------
Total operating expenses .................. 6,848 986 12,362 2,807
------- ------- -------- -------
Operating loss ...................................... (7,056) (1,022) (12,718) (2,896)
Interest income (expense) and other, net ............ 577 (28) 312 (114)
------- ------- -------- -------
Net loss ............................................ $(6,479) $(1,050) $(12,406) $(3,010)
======= ======= ======== =======
</TABLE>
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
Revenues. Email service revenues increased from $130,000 for the three months
ended September 30, 1998 to $1,117,000 for the three months ended September 30,
1999. Email service revenue increased from $221,000 for the nine months ended
September 30, 1998 to $2,015,000 for the nine months ended September 30, 1999.
The key factor contributing to the growth of our revenues for the three and nine
month periods ended September 30, 1999 is the increase in the number of business
partners that have contracts that are generating revenue for the Company. As of
September 30, 1999, the Company had backlog from minimum service fee contracts
amounting to approximately $6,500,000, which will be recognized as revenue over
future quarters.
Cost of Revenues. Our cost of revenues increased from $166,000 for the three
months ended September 30, 1998 to $1,325,000 for the three months ended
September 30, 1999 and increased from $310,000 for the nine months ended
September 30, 1998 to $2,371,000 for the nine months ended September 30, 1999
because of the increase in the number of business partners and one time charges
for headhunter fees. Costs of revenues consisted primarily of costs related to
Internet data center services from a third-party provider, depreciation of
equipment, Internet access, personnel and related costs. We expect cost of
revenues to increase on an absolute basis, primarily as a result of an increase
in our email service revenues, but to decrease as a percentage of email service
revenues due to economies of scale.
Research and Development Costs, Net. Research and development costs consist
primarily of personnel and related costs, depreciation of equipment, supply
costs and royalties paid to the Israeli Government for grants received in prior
years for research and development activities. These royalties are paid at rates
ranging from 3% to 5% of total revenues. We do not expect to receive further
grants from the Israeli Government. Our research and development costs increased
from $308,000 for the three months ended September 30, 1998 to $797,000 for the
three months ended September 30, 1999 and from $879,000 from the nine months
ended September 30, 1998 to $1,511,000 for the nine months ended September 30,
1999, due primarily to higher personnel and related costs. We expect that
research and development costs, net, will increase in absolute dollar amounts
due to increases in personnel costs related directly to new employees being
hired to develop new service offerings, however such costs will decrease as a
percentage of revenues.
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Sales and Marketing. Sales and marketing expenses consist primarily of personnel
and related costs, public relations, direct sales efforts, including travel
expenses and royalties paid to the Israeli Government for grants received in
prior years for marketing activities. Our sales and marketing expenses increased
from $509,000 for the three months ended September 30, 1998 to $2,006,000 for
the three months ended September 30, 1999 and increased from $1,474,000 for the
nine months ended September 30, 1998 to $3,562,000 for the nine months ended
September 30, 1999 due primarily to marketing and other costs to support the
growth of our email service revenues. We expect sales and marketing expenses to
significantly increase in the future in absolute dollar amounts due to increases
in personnel costs related directly to new employees being hired to conduct
sales to business partners and the related market support to further develop our
brand. We expect that for the next several quarters, the increase in sales and
marketing expenses will be somewhat proportionate to the increase in revenues.
If we achieve significant revenue growth, we expect that sales and marketing
expenses will start to decline as a percentage of total revenues as we hire
additional personnel and continue to support and develop the email service
business.
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 $151,000 for the three months
ended September 30, 1998 to $1,485,000 for the three months ended September 30,
1999, and increased from $426,000 for the nine months ended September 30, 1998
to $3,330,000 for the nine months ended September 30, 1999, due primarily to
substantially higher personnel and related costs, facility costs, higher fees
for outside professional services and other costs to support the growth of our
email service revenues. We expect general and administrative costs to increase
on an absolute basis due to increased personnel and related costs, higher
facility costs associated with additional personnel and other costs necessary to
support and develop the email service business. We expect that general and
administrative expenses as a percentage of total revenues will start to decline
in the next several quarters.
Amortization of the Prepaid Marketing Expenses relating to Go2Net warrant.
Amortization of the prepaid marketing expenses relating to the Go2Net warrant
was $1,464,000 for the three months, and nine months, ended September 30, 1999.
The prepaid marketing expense is being amortized using the straight line method
over the minimum term of the contract, or one year.
Amortization of Stock-based Employee Deferred Compensation. Our stock-based
employee compensation expenses increased from $18,000 for the three months ended
September 30, 1998 to $1,096,000 for the three months ended September 30, 1999
and from $28,000 for the nine months ended September 30, 1998 to $2,495,000 for
the nine months ended September 30, 1999. The deferred compensation is being
amortized using the sum-of-digits method over the vesting schedule, generally
four years, and was slightly higher in the third quarter of 1999 then decreasing
in each successive quarter.
Interest Income/(Expense) and Other Expense, Net. Our interest income/(expense)
and other expense, net, decreased from a net expense of $28,000 for the three
months ended September 30, 1998 to a net income of $577,000 for the three months
ended September 30, 1999, due primarily to increased recognized costs of
warrants granted to the Bank Lepituach Ha Taasia B'Israel Ltd. "Bank Lepituach
Ha Taasia" net of interest income earned from cash and cash equivalents since
the initial public offering. In April 1999, we fully repaid the short-term bank
line of credit to Bank Lepituach Ha Taasia, and they fully exercised all their
warrants.
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. On July 16, 1999,
the Company raised $70,786,000, net of underwriters commission ($66,177,000 net
of expenses), from the public offering (including the exercise of the
underwriters' overallotment option) and the private placement from the strategic
partnership with Go2Net and Vulcan Ventures. As of September 30, 1999, we had
$67,708,000 in cash and cash equivalents.
Net cash provided by financing activities was $83,295,000 for the nine months
ended September 30, 1999. Net cash used in operating activities was $7,447,000
for the nine months ended September 30, 1999. Net cash used for operating
activities is comprised of net loss for the nine months, partially offset by
depreciation, amortization expenses, increases in other accounts receivable and
prepaid expenses. Net cash used in investing activities was $8,974,000 for the
nine months ended September 30, 1999. These investing activities consisted of
purchases of property and equipment and purchases of available for sale
securities.
As of September 30, 1999, we had net working capital of $76,326,000. The
short-term bank line of credit was repaid in April 1999. Through March 31, 1999,
we issued to Bank Lepituach Ha Taasia warrants to purchase 96,340 ordinary
shares. Bank Lepituach Ha Taasia exercised the warrants in the second quarter of
1999.
In the first quarter of 1999, we issued Series C Convertible Preferred Shares to
investors resulting in net proceeds of $5.3 million. In the second quarter of
1999, we issued to investors Convertible Promissory Notes which later converted
into 42,081 Series D
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Convertible Preferred Shares resulting in net proceeds of approximately $13.2
million. All of our convertible preferred shares automatically converted into
ordinary shares upon the closing of our initial public offering on July 16,
1999.
YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs or
hardware that have date-sensitive software or embedded chips may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
system failures or miscalculations, causing disruptions of operations for any
company using such computer programs or hardware, including, among other things,
a temporary inability to process transactions, send invoices or engage in normal
business activities. As a result, many companies' computer systems may need to
be upgraded or replaced in order to avoid Year 2000 issues.
We are a comparatively new enterprise, and, accordingly, the majority of the
software and hardware we use to manage our business has been purchased or
developed by us within the last 24 months. While this fact does not uniformly
protect us against Year 2000 exposure, we believe we gain some mitigation from
the fact that the information technology (IT) we use to manage our business is
not based upon "legacy system" hardware and software. "Legacy system" is a term
often used to describe hardware and software systems which were developed in
previous decades when there was less awareness of Year 2000 issues. Generally,
hardware and software design in this decade and the past several years in
particular has given greater consideration to Year 2000 issues. All of the
software code we have internally developed to manage our network traffic, for
example, uses four digits to define the applicable year.
We are in the process of testing our internal IT and non-IT systems. To date, we
have only completed preliminary testing of our internally developed IT and
non-IT systems. All of the testing we have completed has been performed by our
own personnel; to date, we have not retained any outside service or consultants
to test or review our systems for Year 2000 compliance. Based on the testing we
have performed, we believe that such software is Year 2000 compliant; however,
we intend to complete more extensive testing in the fourth quarter of 1999.
In addition to our internally developed software, we utilize software and
hardware developed by third parties for both our network and internal
information systems. To date, we have not done any testing of such third-party
software or hardware to determine Year 2000 compliance. We have, however,
obtained certifications from our key suppliers of hardware and networking
equipment for our data centers that such hardware and networking equipment is
Year 2000 compliant. Additionally, we have received assurances from the
providers of key software applications for our internal operations that their
software is Year 2000 compliant. Based upon an initial evaluation of our broader
list of software and hardware providers, we believe that all of these providers
are reviewing and implementing their own Year 2000 compliance programs, and we
will work with these providers to address the Year 2000 issue and continue to
seek assurances from them that their products are Year 2000 compliant.
In addition, we rely on third party network infrastructure providers to gain
access to the Internet. If such providers experience business interruptions as a
result of their failure to achieve Year 2000 compliance, our ability to provide
Internet connectivity could be impaired, which could have a material adverse
effect on our business, results of operations and financial condition.
Our customers' success in maintaining Year 2000 compliance is also significant
to our ability to generate revenues and execute our business plan. We currently
derive revenue by charging a fixed fee per month for each mailbox we host, by
charging a service fee plus advertising sharing or by sharing advertising
revenues with our customers. In either case, interruptions in our customers'
services and online activities caused by Year 2000 problems could have a
material, adverse effect on our revenues to the extent that such interruptions
limit or delay our customers' ability to expand their base of email users.
We have not incurred any significant expenses to date, and we do not anticipate
that the total costs associated with our Year 2000 remediation efforts,
including both expenses already incurred and any to be incurred in the future,
will exceed $100,000. However, if we, our customers, our providers of hardware
and software, or our third party network providers fail to remedy any Year 2000
issues, our service could be interrupted and we could experience a material loss
of revenues that could have a material adverse effect on our business, results
of operations, and financial condition. We would consider such an interruption
to be the most reasonably likely unfavorable result of any failure by us, or the
third parties upon whom we rely, to achieve Year 2000 compliance. Presently, we
believe we are unable to reasonably estimate the duration and extent of any such
interruption, or quantify the effect it may have on our future revenues. We have
yet to develop a comprehensive contingency plan to address the issues which
could result from such an event. We are prepared to develop such a plan if our
ongoing assessment leads us to conclude we have significant exposure based upon
the likelihood of such an event.
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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. 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
4.276 for one dollar on September 30, 1999.
QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
We develop our technology in Israel and provide our services in North America,
India, Europe and the Far East. As a result, our financial results could be
affected by factors such as changes in foreign currency exchange rates or weak
economic conditions in foreign markets. As most of our sales are currently made
in U.S. dollars, a strengthening of the dollar could make our services less
competitive in foreign markets. Our interest expense on our capital lease
obligations with a U.S. leasing company is sensitive to changes in the general
level of U.S. interest rates. Due to the nature and level of our debts, we have
concluded that there is currently no material market risk exposure. Therefore,
no quantitative tabular disclosures are required.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
COMMTOUCH SOFTWARE, LTD.
-----------------------------
(Registrant)
Date December 02, 1999 By /s/ JAMES E. COLLINS
------------------------------- ----------------------------------
James E. Collins
Chief Financial Officer
10
<PAGE> 12
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description of Document
- ------- -----------------------
<S> <C>
1 October 27, 1999 Press Release: "Commtouch Revenues increase
102 percent over last quarter"
</TABLE>
<PAGE> 1
EXHIBIT 1
FOR IMMEDIATE RELEASE
COMPANY CONTACT:
Jean Marie Layton
Investor Relations Manager
CommTouch Software
408/653-4358
[email protected]
www.commtouch.com
COMMTOUCH REVENUES INCREASE 102 PERCENT OVER LAST QUARTER
Santa Clara, CA (October 27, 1999)--CommTouch Software Ltd. (Nasdaq: CTCH), a
leading provider of web-based email, today reported results for the third
quarter and nine months ended September 30, 1999. Revenues for the third quarter
of 1999 were $1.1 million, a 102% increase over second quarter revenues of $0.5
million. Revenues for the nine months ended September 30, 1999 increased 812% to
$2.0 million from $0.2 million for the nine months ended September 30, 1998. As
of September 30, 1999, the Company had a backlog from email service fee
contracts amounting to approximately $6.5 million which will be recognized as
revenue over future quarters.
"The growth we experienced this quarter once again demonstrates our leading
position in the outsourced email market worldwide," explained Gideon Mantel, CEO
of CommTouch. "We are at the center of the most important e-trends seen today:
the explosive growth of email as a primary communication channel, the rapid
adoption of outsourcing as a competitive necessity and the globalization of
business strategies," Mantel added.
Net loss for the quarter ended September 30, 1999, excluding amortization of the
prepaid marketing asset resulting from a warrant issued to Go2Net and
stock-based employee deferred compensation, was $3.92 million, or $0.31 per
share compared with a net loss, excluding charges, of $1.03 million, or $0.71
per share, in the comparable quarter a year ago.
11
<PAGE> 2
Net loss for the quarter ended September 30, 1999 was $6.5 million compared to
$1.1 million for the third quarter of 1998. Net loss for the nine months ended
September 30, 1999 was $12.4 million compared to $3.0 million for the nine
months ended September 30, 1998. Net loss per share for the quarter ended
September 30, 1999 decreased 29% to $0.51 compared to net loss per share of
$0.72 in the comparable quarter a year ago.
ABOUT COMMTOUCH
Serving 6.6 million active emailboxes around the world, CommTouch is a leading
provider of outsourced email and messaging services for corporations and
consumers worldwide. CommTouch email is designed for superior performance and
rapid scalability, offering end user interfaces in sixteen of the world's major
languages.
With more than eight years of delivering intuitive, award-winning email
software, CommTouch provides its customers a truly comprehensive turn-key email
service, together with options for premium communications services and direct
marketing opportunities.
The Company partners with internationally recognized consumer-driven
organizations, including Ericsson, Excite International (NASDAQ: ATHM),
First USA (NYSE: ONE), Go2Net (Nasdaq: GNET), McGraw Hill's BusinessWeek
Magazine (NYSE: MHP), Discovery Channel Online, Nippon Telephone &
Telegraph (NYSE: NTT), ZDNet (NYSE: ZDZ), Talk City (Nasdaq: TCTY),
Netopia (NASDAQ: NTPA), Snowball.com, Hachette Multimedia, the McClatchy
Group's Nando.net (NYSE: MNI), The Headbone Zone, News Corp's (NYSE:NWS)
People's Daily joint venture ChinaByte and the Hollinger Group's
Jerusalem Post.
Founded in 1991, CommTouch has offices in Silicon Valley, California,
New York City, London, and Tel Aviv, Israel. Additional information may
be obtained by visiting: www.commtouch.com.
-More-
(C) 1999 CommTouch Software, Ltd. All rights reserved.
CommTouch is a registered trademark of CommTouch Software Ltd.
Terms and product names in this document may be trademarks of others.
12
<PAGE> 3
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 67,708 $ 834
Available for sale securities 4,930 --
Trade receivables 1,501 133
Prepaid marketing expenses relating to Go2Net warrant 4,386 --
Prepaid expenses and other accounts receivable 1,056 244
-------- --------
Total current assets 79,581 1,211
Severance Pay Fund 318 223
Property and Equipment, net 4,049 932
-------- --------
$ 83,948 $ 2,366
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Short-term bank line of credit $ -- $ 1,328
Trade payables 919 446
Employees and payroll accruals 941 313
Deferred revenue 435 74
Other liabilities 960 490
-------- --------
Total current liabilities 3,255 2,651
-------- --------
Long-term Portion of Bank Loans and Capital Leases 47 164
Accrued Severance Pay 418 366
-------- --------
465 530
-------- --------
Commitments and Contingent Liabilities: -- --
Shareholders' Equity (Deficit)
Convertible preferred shares -- 74
Ordinary shares 204 27
Additional paid-in capital 111,844 11,256
Stock-based employee deferred compensation (6,551) (418)
Notes receivable from shareholders (1,225) (77)
Unrealized holding gains 39 --
Accumulated deficit (24,083) (11,677)
-------- --------
Total shareholders' equity (deficit) 80,228 (815)
-------- --------
$ 83,948 $ 2,366
======== ========
</TABLE>
13
<PAGE> 4
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1999 1998 1999 1998
------- ------- -------- -------
<S> <C> <C> <C> <C>
Email Services - revenue ............................ $ 1,117 $ 130 $ 2,015 $ 221
Cost of Email services - revenue .................... 1,325 166 2,371 310
------- ------- -------- -------
Gross loss .......................................... (208) (36) (356) (89)
------- ------- -------- -------
Operating expenses:
Research and development, net ..................... 797 308 1,511 879
Sales and marketing ............................... 2,006 509 3,562 1,474
General and administrative ........................ 1,485 151 3,330 426
Amortization of the prepaid marketing expenses
relating to Go2Net warrant ..................... 1,464 -- 1,464 --
Amortization of stock-based employee
deferred compensation .......................... 1,096 18 2,495 28
------- ------- -------- -------
Total operating expenses .................. 6,848 986 12,362 2,807
------- ------- -------- -------
Operating loss ...................................... (7,056) (1,022) (12,718) (2,896)
Interest income (expense) and other, net ............ 577 (28) 312 (114)
------- ------- -------- -------
Net loss ............................................ $(6,479) $(1,050) $(12,406) $(3,010)
======= ======= ======== =======
Basic and diluted net loss per share ................ $ (0.51) $ (0.72) $ (2.25) $ (2.07)
======= ======= ======== =======
Weighted average number of shares used in
computing basic and diluted net loss per
share ............................................. 12,719 1,450 5,510 1,450
======= ======= ======== =======
Net Loss
- - as adjusted (1) ................................... $(3,919) $(1,032) $ (8,447) $(2,982)
======= ======= ======== =======
Basic and diluted net loss per share
- as adjusted (1) .................................. $ (0.31) $ (0.71) $ (1.53) $ (2.06)
======= ======= ======== =======
</TABLE>
(1) Excludes charges for amortization of stock-based employee compensation and
Go2Net Warrant.
###
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