FORM 6-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 or 15d-16 OF
THE SECURITES EXCHANGE ACT OF 1934
For the month of December 2000
(containing quarterly information for the quarter ended September 30, 2000)
Commtouch Software Ltd.
(Translation of registrant's name into English)
6 Hazoran Street
Poleg Industrial Park, P.O. Box 8511
Netanya 42504, Israel
011-972-9-863-6888
(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
----- ------
<PAGE>
COMMTOUCH SOFTWARE LTD.
FORM 6-K
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at
December 31, 1999 (Audited) and September 30, 2000 (Unaudited)
Condensed Consolidated Statements of Operations for the Three
and Nine months ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine
months ended September 30, 2000 and 1999 (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 3. Information Incorporated by Reference
Item 4. Exhibits
Exhibit Description of Document
------- -----------------------
1 October 25, 2000 Press Release: "Commtouch Reports
Record Third Quarter Revenue of $8.1 Million"
Signatures
Exhibit Index
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2000 1999
--------- ---------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 33,654 $ 65,996
Marketable securities 8,589 18,050
Trade receivables 6,907 2,378
Prepaid marketing expenses 150 4,508
Prepaid expenses and other accounts receivable 3,889 1,648
--------- ---------
Total current assets 53,189 92,580
Other assets 2,292 1,608
Long-term investment 7,025 --
Property and equipment, net 20,232 6,148
--------- ---------
$ 82,738 $ 100,336
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of bank loans and capital leases 62 120
Accounts payable 2,598 1,510
Employees and payroll accruals 1,590 1,032
Other liabilities and accrued expenses 2,961 1,865
--------- ---------
Total current liabilities 7,211 4,527
--------- ---------
Long-term portion capital leases 24 44
Accrued severance pay 983 453
--------- ---------
1,007 497
--------- ---------
Minority interest 132 --
--------- ---------
Shareholders' equity:
Ordinary shares 219 213
Additional paid-in capital 139,291 133,403
Deferred compensation (3,491) (5,779)
Notes receivable from shareholders (4,148) (1,060)
Unrealized holding gains (losses) (3) 63
Accumulated deficit (57,480) (31,528)
--------- ---------
Total shareholders' equity 74,388 95,312
--------- ---------
$ 82,738 $ 100,336
========= =========
The accompanying note is an integral part of these condensed consolidated
financial statements.
<PAGE>
<TABLE>
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
(unaudited) (unaudited)
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Email services $ 6,246 $ 1,117 $ 16,429 $ 2,015
Licenses 1,870 -- 1,870 --
-------- -------- -------- --------
Total revenues 8,116 1,117 18,299 2,015
-------- -------- -------- --------
Cost of revenues:
Email services 3,025 1,043 7,930 2,083
-------- -------- -------- --------
Total cost of revenues 3,025 1,043 7,930 2,083
-------- -------- -------- --------
Gross profit (loss) 5,091 74 10,369 (68)
-------- -------- -------- --------
Operating expenses:
Research and development 2,561 857 6,824 1,707
Sales and marketing 6,587 2,368 17,737 4,339
General and administrative 3,184 1,345 7,866 2,645
Amortization of prepaid marketing expense 476 1,464 4,358 1,464
Amortization of deferred compensation (1) 763 1,096 2,288 2,495
-------- -------- -------- --------
Total operating expenses 13,571 7,130 39,073 12,650
-------- -------- -------- --------
Operating loss (8,480) (7,056) (28,704) (12,718)
Interest and other income, net 883 577 2,752 312
-------- -------- -------- --------
Net loss $ (7,597) $ (6,479) $(25,952) $(12,406)
======== ======== ======== ========
Basic and diluted net loss per share $ (0.50) $ (0.51) $ (1.70) $ (2.25)
======== ======== ======== ========
Weighted average number of shares used in
computing basic and diluted net loss per
share 15,347 12,719 15,231 5,510
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
(unaudited) (unaudited)
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(1) Stock-based employee compensation
relates to the following:
Cost of revenues $ 26 $ 37 $ 77 $ 83
Research and development 71 102 213 232
Sales and marketing 199 286 597 651
General and administrative 467 671 1,401 1,529
------ ------ ------ ------
Total $ 763 $1,096 $2,288 $2,495
====== ====== ====== ======
<FN>
The accompanying note is an integral part of these condensed
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
COMMTOUCH SOFTWARE LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Nine Months
ended
September 30,
--------------------------------
(unaudited)
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(25,952) $(12,406)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 4,187 963
Amortization of deferred compensation and warrants
issued for service received and bank line of
credit 2,288 2,855
Amortization of prepaid marketing expenses 4,358 1,464
Loss from sale of asset -- 3
Increase in trade receivables (5,196) (1,368)
Increase in other accounts receivable and prepaid
expenses (2,241) (812)
Increase (Decrease) in accounts payable (112) 473
Increase in other liabilities 725 1,063
Increase in deferred revenue 752 361
Increase (Decrease) in accrued severance pay, net 250 (43)
-------- --------
Net cash used in operating activities (20,941) (7,447)
-------- --------
Cash flows from investing activities:
Maturity/(purchase) of available for sale marketable
securities 9,395 (4,891)
Purchase of long-term investments (7,025) --
Long-term deposits (227) --
Sale of property and equipment -- 13
Purchase of property and equipment (16,404) (4,096)
-------- --------
Net cash used in investing activities (14,261) (8,974)
-------- --------
Cash flows from financing activities:
Short-term bank line of credit, net -- (1,328)
Payment of notes receivable 20 54
Payment of capital lease (78) (82)
Proceeds from issuance of shares 1,696 84,651
Proceeds from issuance of shares to minority
interest in subsidiary 1,090 --
Contribution of minority interest of consolidated
subsidiary 132 --
-------- --------
Net cash provided by financing activities 2,860 83,295
-------- --------
Increase (Decrease) in cash and cash equivalents (32,342) 66,874
Cash and cash equivalents at the beginning of the period 65,996 834
-------- --------
Cash and cash equivalents at the end of the period $ 33,654 $ 67,708
======== ========
Supplemental disclosure of cash flows activity:
Cash paid during the year:
Interest $ 11 $ 70
======== ========
Ordinary shares issued for notes receivable from
shareholders $ 3,108 $ 1,202
======== ========
<FN>
The accompanying note is an integral part of these condensed consolidated financial statements.
</FN>
</TABLE>
<PAGE>
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 majority-owned subsidiaries
(collectively "Commtouch" or "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, 2000
and the operating results and cash flows for the reported periods.
These financial statements and note should be read in conjunction with
the Company's audited financial statements and notes thereto for the
year ended December 31, 1999, which were filed with the Securities and
Exchange Commission on the Company's Form 20-F as amended.
The results of operations for the three and nine months ended September
30, 2000 are not necessarily indicative of the results that may be
expected for future quarters or the year ending December 31, 2000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the condensed
consolidated financial statements and the note thereto in Part I, Item 1 of this
quarterly report and with Management's Discussion and Analysis of Financial
Conditions and Results of Operations contained in the Company's Annual Report on
Form 20-F for the year ended December 31, 1999, as amended.
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 Annual Report on Form
20-F for the year ended December 31, 1999, as amended.
Overview
Commtouch Software Ltd. is a leading global provider of outsourced integrated
Web-based email and messaging solutions to businesses. Our solutions are
flexible, highly customizable and enable us to satisfy the unique email and
messaging needs of our customers worldwide. Our customers are large and small
businesses who offer our Web-based email through their website to their end
users. As of September 30, 2000, we had approximately 260 global customers.
Through our customers' sites we serve approximately 16.8 million active
emailboxes.
<PAGE>
Acquisition
The Company completed the acquisition of Wingra Technologies on December 7, 2000
by issuing 1.59 million shares of its Common Stock. Wingra operates as a wholly
owned subsidiary of the Company and will continue to provide its products and
services through its varied partnership channels. Wingra develops products and
services for corporations and government agencies to enable disparate email and
messaging systems to communicate with one another and to facilitate the process
of migration from in-house to outsourced solutions.
Long-Term Investments
The Company has made several strategic long-term investments. The investments
are recorded at historical cost and management believes the fair value of these
investments exceeds their carrying amount.
Minority Interest in Subsidiary
The interest of shareholders other than those of Commtouch Software Ltd. is
recorded as minority interest in the accompanying condensed consolidated balance
sheet at September 30, 2000. The impact of the minority interest on the
accompanying condensed consolidated statement of operations was insignificant
for the three and nine months ended September 30, 2000. All intercompany
balances and transactions have been eliminated in consolidation.
<TABLE>
Results of Operations
The following table sets forth financial data for the three and nine months
ended September 30, 2000 and 1999 (in thousands):
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
(unaudited) (unaudited)
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Email services $ 6,246 $ 1,117 $ 16,429 $ 2,015
Licenses 1,870 -- 1,870 --
-------- -------- -------- --------
Total revenues 8,116 1,117 18,299 2,015
-------- -------- -------- --------
Cost of revenues:
Email services 3,025 1,043 7,930 2,083
-------- -------- -------- --------
Total cost of revenues 3,025 1,043 7,930 2,083
-------- -------- -------- --------
Gross profit (loss) 5,091 74 10,369 (68)
-------- -------- -------- --------
Operating expenses:
Research and development 2,561 857 6,824 1,707
Sales and marketing 6,587 2,368 17,737 4,339
General and administrative 3,184 1,345 7,866 2,645
Amortization of prepaid marketing expenses 476 1,464 4,358 1,464
Amortization of deferred compensation 763 1,096 2,288 2,495
-------- -------- -------- --------
Total operating expenses 13,571 7,130 39,073 12,650
-------- -------- -------- --------
Operating loss (8,480) (7,056) (28,704) (12,718)
Interest and other income, net 883 577 2,752 312
-------- -------- -------- --------
Net loss $ (7,597) $ (6,479) $(25,952) $(12,406)
======== ======== ======== ========
</TABLE>
Comparison of the Three and Nine Months Ended September 30, 2000 and 1999
Revenues. Revenues increased from $1.1 million for the three months ended
September 30, 1999 to $8.1 million for the three months ended September 30,
2000. Revenue increased from $2.0 million for the nine months ended September
30, 1999 to $18.3 million for the nine months ended September 30, 2000. One of
the key factors contributing to the growth of our revenues for the three and
nine months ended September 30, 2000 is the increase in the number of business
partners with contracts generating revenue and software license revenue that did
not occur in the three and nine month periods ended September 30, 1999. During
the third quarter of 2000, only two of our customers contributed more than 10
percent of our revenues. Our firm backlog increased from $29 million at the end
of the second quarter of 2000 to $40 million at the end of the third quarter
2000, an increase of 38 percent.
<PAGE>
Cost of Revenues. Cost of revenues increased from $1.0 million for the three
months ended September 30, 1999 to $3.0 million for the three months ended
September 30, 2000 and increased from $2.1 million for the nine months ended
September 30, 1999 to $7.9 million for the nine months ended September 30, 2000.
Cost of revenues consist primarily of personnel related costs, internet data
center services from third party providers, depreciation of equipment, and
internet access. The cost of revenues from the sale of software licenses is
insignificant. We expect cost of revenues to increase on an absolute basis,
primarily as a result of an increase in our revenues, but to decrease as a
percentage of revenues due to economies of scale.
Research and Development. Research and development costs increased from $0.9
million for the three months ended September 30, 1999 to $2.6 million for the
three months ended September 30, 2000 and from $1.7 million for the nine months
ended September 30, 1999 to $6.8 million for the nine months ended September 30,
2000 due primarily to the additional personnel and related costs associated with
the development of new service offerings and the related infrastructure. We
expect that research and development costs 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 are expected to
decrease as a percentage of revenues.
Sales and Marketing. Sales and marketing expenses increased from $2.4 million
for the three months ended September 30, 1999 to $6.6 million for the three
months ended September 30, 2000 and increased from $4.3 million for the nine
months ended September 30, 1999 to $17.7 million for the nine months ended
September 30, 2000 due primarily to additional personnel and related costs and
an aggressive worldwide advertising campaign including print media, online
advertising, and trade show and conference appearances. 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 focus on channel sales
and continue to support and develop the email service business.
General and Administrative. General and administrative expenses increased from
$1.3 million for the three months ended September 30, 1999 to $3.2 million for
the three months ended September 30, 2000 and increased from $2.6 million for
the nine months ended September 30, 1999 to $7.9 million for the nine months
ended September 30, 2000 due primarily to additional personnel and related
costs, reserves for uncollectible revenues and the relocation of our subsidiary
Commtouch Inc. to larger facilities. We expect general and administrative costs
to increase on an absolute basis due to additional personnel and related costs,
higher facility costs associated with increased 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
continue to decline in the next several quarters.
Amortization of the Prepaid Marketing Expenses. Amortization of the prepaid
marketing expenses relating to the Go2Net and Microsoft warrants decreased from
$1.5 million for the three months ended September 30, 1999 to $0.5 million for
the three months ended September 30, 2000 and increased from $1.5 million for
the nine months ended September 30, 1999 to $4.4 million for the nine months
ended September 30, 2000. The prepaid marketing expense is being amortized using
the straight-line method over the minimum term of the commercial agreements with
these two companies, or one year. Amortization of these amounts will conclude
during Q4 2000.
Amortization of Deferred Compensation. Stock-based employee deferred
compensation expenses decreased from $1.1 million for the three months ended
September 30, 1999 to $0.8 million for the three months ended September 30, 2000
and from $2.5 million for the nine months ended September 30, 1999 to $2.3
million for the nine months ended September 30, 2000. The deferred compensation
is being amortized using the sum-of-digits method over the vesting schedule,
generally four years. Amortization of these amounts will conclude during Q3
2003.
Interest and Other Income (Expense), Net. Interest and other income (expense),
net increased from a net income of $0.6 million for the three months ended
September 30, 1999 to a net income of $0.9 million for the three months ended
September 30, 2000 and from a net income of $0.3 million for the nine months
ended September 30, 1999 to a net income of $2.8 million for the nine months
ended September 30, 2000, due primarily to interest income earned from cash and
cash equivalents generated from the initial public offering.
<PAGE>
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 royalty-bearing research and
development and marketing grants from the Israeli government. On July 16, 1999,
the Company raised $70.8 million, net of underwriters commission ($66.2 million
net of expenses), from the public offering (including the exercise of the
underwriters' overallotment option) and the private placement that was part of
the strategic partnership with Go2Net and Vulcan Ventures. On December 29, 1999
we raised an additional $20.0 million from the sale of ordinary shares to
Microsoft Corporation upon the exercise of a warrant issued in connection with
an email services agreement with Microsoft. As of September 30, 2000, we had
$33.7 million in cash and cash equivalents and $8.6 million in marketable
securities.
Net cash provided by financing activities was $2.9 million for the nine months
ended September 30, 2000 and primarily consisted of cash received from employees
related to the exercise of stock options and proceeds from the minority interest
in the majority-owned subsidiary. Net cash used in operating activities was
$20.9 million for the nine months ended September 30, 2000 and is comprised of
net loss for the nine months, partially offset by depreciation and amortization
expenses. Net cash used in investing activities was $14.3 million for the nine
months ended September 30, 2000 and consisted primarily of purchases of property
and equipment, maturity of available for sale securities, and purchase of
long-term investments.
We believe that the existing cash and cash equivalents and cash generated from
our operations will be sufficient to meet our working capital and capital
expenditure requirements for at least the next 12 months.
As of September 30, 2000 we had net working capital of $46.0 million.
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 in our Annual Report on Form 20-F, as
amended and filed with the Commission in December 2000. 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 five to 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, 1999, we have not yet
used the tax benefits for which we are eligible.
Proposed Tax Reform
On May 4, 2000, a committee chaired by the Director General of the Israeli
Ministry of Finance, Avi Ben-Bassat, issued a report recommending a sweeping
reform in the Israeli system of taxation. The proposed reform would
significantly alter the taxation of individuals, and would also affect corporate
taxation. In particular, the proposed reform would reduce, but not eliminate,
the tax benefits available to approved enterprises such as ours. The Israeli
cabinet has approved the recommendations in principle, but implementation of the
reform requires legislation by Israel's Knesset. The Company cannot be certain
whether the proposed reform will be adopted, when it will be adopted or what
form any reform will ultimately take.
<PAGE>
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 generally 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 our 1999 Consolidated Financial Statements in
current operations.
The representative exchange rate, as reported by the Bank of Israel, was NIS
4.024 for one dollar on September 30, 2000.
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.
PART II. OTHER INFORMATION
Item 3. Information Incorporated by Reference
The information in this Report on Form 6-K is incorporated by reference into all
Registration Statements which we have filed or which we will file in the future
under the Securities Act of 1933, as amended, which permit such reports to be so
incorporated.
Item 4. Exhibits
The exhibits listed on the Exhibit Index, attached hereto, are incorporated by
reference.
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 By
---------------------------- ---------------------------------------
James E. Collins
Chief Financial Officer
<PAGE>
Exhibit Index
Exhibit Description of Document
------- -----------------------
1 October 25, 2000 Press Release: "Commtouch Reports Record Third
Quarter Revenue of $8.1 Million"
