As filed with the Securities and Exchange Commission on March , 2000
Registration No. 333-31836
================================================================================
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.)
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6 Hazoran Street
Poleg Industrial Park, P.O. Box 8511
Netanya 42504, Israel
011-972-9-863-6888
(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 400
Santa Clara, California 95054
(408) 653-4330
(Name, address, including zip code, and telephone number, including area code,
of agent for service of process)
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Copies to:
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Lior O. Nuchi Aaron M. Lampert David B. Miller Barry P. Levenfeld
Venrice R. Palmer Noga Devesceri Spira P. Graham van der Leeuw Sheryl Silver Ochayon
Irene Song Sharkansky Naschitz, Brandes & Co. Michael K. Coddington Yigal Arnon & Co.
McCutchen, Doyle, 5 Tuval Street Faegre & Benson LLP 22 Rivlin St.
Brown & Enersen, LLP Tel Aviv 67987 Israel 90 South Seventh Street P.O. Box 33777
3150 Porter Drive Minneapolis, MN 55402 Jerusalem, 91000 Israel
Palo Alto, CA 94304
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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. [ ]
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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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 March 8, 2000
3,000,000 Shares
COMMTOUCH SOFTWARE LTD.
Ordinary Shares Commtouch (R)
$ . per share
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o Commtouch Software Ltd. is offering o Our ordinary shares are currently
1,669,000 shares and selling traded on the Nasdaq National Market
shareholders are offering 1,331,000 under the symbol "CTCH." On March 7,
shares. 2000, the last reported sales price
of an ordinary share on the Nasdaq
National Market was $62.00 per share.
-------------------------------
This investment involves risk. See "Risk Factors" beginning on page 7.
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Per Share Total
----------- -------
Public offering price ................................. $ $
Underwriting discounts ................................ $ $
Proceeds to Commtouch ................................. $ $
Proceeds to selling shareholders ...................... $ $
================================================================================
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 us 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
Thomas Weisel Partners LLC
Warburg Dillon Read LLC
William Blair & Company
The date of this prospectus is March __, 2000.
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TABLE OF CONTENTS
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Page
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Summary ............................................................................. 4
Risk Factors ........................................................................ 7
Use of Proceeds ..................................................................... 18
Market Price and Price Range for Ordinary Shares .................................... 18
Dividend Policy ..................................................................... 19
Capitalization ...................................................................... 20
Dilution ............................................................................ 21
Selected Consolidated Financial Information ......................................... 22
Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Business ............................................................................ 30
Management .......................................................................... 45
Certain Transactions ................................................................ 56
Principal and Selling Shareholders .................................................. 60
Description of Share Capital ........................................................ 62
Shares Eligible for Future Sale ..................................................... 66
U.S. Tax Considerations Regarding Ordinary Shares Acquired by U.S. Taxpayers ........ 68
Israeli Taxation and Investment Programs ............................................ 71
Conditions In Israel ................................................................ 76
Underwriting ........................................................................ 78
Legal Matters ....................................................................... 80
Experts ............................................................................. 80
ISA Exemption ....................................................................... 80
Where You Can Find More Information ................................................. 81
Enforceability of Civil Liabilities ................................................. 81
Index to Consolidated Financial Statements .......................................... F-1
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-------------------------------
You should rely only on the information contained in this prospectus. We have
not, and the underwriters have not, authorized any other person to provide you
with different information. This prospectus is not an offer to sell, nor is it
seeking an offer to buy, these securities in any state where the offer or sale
is not permitted. The information in this prospectus is complete and accurate
as of the date on the front cover, but the information may have changed since
that date.
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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. Therefore, you should also
read the more detailed information set out in this prospectus, the financial
statements and the other information incorporated by reference into this
prospectus.
Unless otherwise indicated, all references in this prospectus to "Commtouch,"
"the Company," "we," "us" or "our" are to Commtouch Software Ltd. or its
wholly-owned subsidiaries, Commtouch Software, Inc. and Commtouch (UK) Ltd.
Except as set forth in the Consolidated Financial Statements and the Notes
thereto, or as otherwise indicated, all information in this prospectus assumes
the issuance of 901,471 ordinary shares upon the assumed net exercise at an
assumed share price of $62.00 per share of an in-the-money warrant to purchase
1,136,000 ordinary shares issued to Go2Net, Inc. at an exercise price of $12.80
per share.
Commtouch
We are 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 websites to their end users and employees.
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% of Internet users access their email while online,
making this activity the most popular use of the Internet. International Data
Corporation estimates that at the end of 1999 there were over 180 million
emailboxes in the United States and over 130 million outside of the United
States. IDC projects that by the end of 2003, these numbers will increase to
over 280 million emailboxes in the United States and over 305 million
emailboxes outside the United States.
As of December 31, 1999, we had over 250 global customers. Through our
customers' sites we serve approximately 8.4 million active emailboxes. We also
serve over 1.0 million active emailboxes to small businesses and websites
through our ZapZone Network. Our comprehensive Web-based email and messaging
solutions offer the following benefits:
o Extensive email features. Our services are easy to use, and include a broad
set of email capabilities, including a highly integrated contact book and
calendar.
o Ability to support hundreds of millions of emailboxes. Our system architecture
and software platform have been designed to support hundreds of millions of
emailboxes across millions of domains while maintaining a highly reliable
service.
o Customization. Our customers use our proprietary customization tool to make
the look and feel of their Web-based email interface consistent with their own
brand image.
o Rapidly deployable and cost-effective solutions. Our solutions can be quickly
implemented and can save our customers the significant costs of developing and
maintaining an email service in-house.
o Extensive language capabilities. Our email services are available in 18
languages. Additionally, we can support more than one language on any of our
customers' websites.
o Increased website usage. We believe that our services increase the frequency
and duration of users' visits to our customers' websites.
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o Online marketing capabilities. Our customers 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.
Office Location
Our principal executive offices are located at 6 Hazoran Street, Poleg
Industrial Park, Netanya 42504, Israel, where our telephone number is
011-972-9-863-6888, and 3945 Freedom Circle, Santa Clara, California 95054,
where our telephone number is (408) 653-4330. Our website addresses are
www.commtouch.com and www.zzn.com. The information contained on our websites is
not a part of this prospectus.
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The Offering
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Ordinary shares offered:
By Commtouch Software Ltd. .................. 1,669,000 shares
By selling shareholders ..................... 1,331,000 shares
---------
Total ................................. 3,000,000 shares
Ordinary shares outstanding after the offering 18,131,449 shares
Offering price ................................. $ per share
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." We will not receive any of the
proceeds from the sale of the shares by the
selling shareholders in this offering.
NASDAQ National Market Symbol .................. CTCH
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Except as set forth in the Consolidated Financial Statements and the Notes
thereto included as part of this prospectus and as otherwise specified, all
information in this prospectus (except for the information set forth above
regarding the ordinary shares offered and the ordinary shares to be outstanding
after the offering, which includes shares being offered by the Company in this
prospectus) is based on the number of shares outstanding as of February 29,
2000,and:
o assumes the issuance of 901,471 ordinary shares upon the assumed net
exercise at an assumed share price of $62.00 per share of the
in-the-money warrant to purchase 1,136,000 ordinary shares issued to
Go2Net, at an exercise price of $12.80 per share;
o with respect to financial information, is reported in U.S. dollars;
and does not include:
o 1,370,792 ordinary shares issuable to employees and consultants upon
exercise of outstanding options under our stock option plans and stock
option agreements as of February 29, 2000 at a weighted average exercise
price of $21.20 per share;
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5
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o 2,544,439 ordinary shares available for future grant or issuance under
our stock option plans as of February 29, 2000; and
o 381,180 ordinary shares issuable upon exercise of options granted to
executive officers and directors as of February 29, 2000 at a weighted
average exercise price of $20.41 per share.
Summary Consolidated Financial Data
(in thousands, except per share data)
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The following tables set forth our summary consolidated financial data. 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."
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Year Ended December 31,
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1997 1998 1999
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(in thousands, except per share data)
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Consolidated Statement of Operations Data:
Revenues:
Email services .................................... $ -- $ 389 $ 4,251
Software licenses, maintenance and services ...... 899 -- --
-------- -------- ---------
Total revenues ................................. 899 389 4,251
Operating loss .................................... (3,405) (4,025) (21,083)
Net loss .......................................... (3,473) (4,351) (19,851)
Basic and diluted net loss per share ............... (2.40) (3.00) (2.65)
Weighted average number of shares -- basic
and diluted ....................................... 1,450 1,450 7,487
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The following data is presented:
o on an actual basis; and
o on a pro forma as adjusted basis to give effect to (1) the sale of
1,669,000 ordinary shares in this offering, at an assumed offering price
of $62.00 per share (after deducting estimated underwriting discounts and
commissions and estimated offering expenses) and (2) the issuance of
901,471 ordinary shares upon the assumed net exercise at an assumed share
price of $62.00 per share, of an in-the-money warrant held by Go2Net,
Inc. to purchase 1,136,000 ordinary shares an exercise price of $12.80
per share.
December 31, 1999
-----------------------
Pro Forma
Actual As Adjusted
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(in thousands)
Consolidated Balance Sheet Data:
Cash and cash equivalents ............................ $ 65,996 $162,912
Marketable securities ................................ 18,050 18,050
Working capital ...................................... 88,053 184,969
Total assets ......................................... 100,336 197,252
Long-term liabilities ................................ 497 497
Shareholders' equity ................................. 95,312 192,228
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6
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RISK FACTORS
You should carefully consider the following risk factors before you decide to
buy our ordinary shares. You should also consider the other information in this
prospectus. If any of the following risks actually occur, our business,
financial condition, operating results or cash flows could be materially
adversely affected. This could cause the trading price of our ordinary shares
to decline, and you could lose part or all of your investment.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to our future plans, objectives,
beliefs, expectations and intentions. In some cases, you can identify
forward-looking statements by our use of words such as "expects,"
"anticipates," "believes," "intends," "plans," "seeks" and "estimates" and
similar expressions. You will find forward-looking statements under the
captions "Summary," "Risk Factors," "Use of Proceeds," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
and elsewhere in this prospectus. Our actual results, levels of activity,
performance or achievements may differ materially from those expressed or
implied by these forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this prospectus.
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 business and prospects.
We commenced operations in 1991, but we began commercially selling Web-based
email services only in 1998 after changing our strategic focus from the sale
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 $3.5 million in 1997, $4.4 million in
1998 and $19.9 million in 1999. As of December 31, 1999, we had an accumulated
deficit of approximately $31.5 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 and fluctuations could adversely affect the
value of your investment.
Because we have a limited operating history in the provision of Web-based email
services and because of the emerging nature of the markets in which we compete,
our revenue is unpredictable. Our current and future expense levels are to a
large extent fixed. We may be unable to adjust spending quickly to compensate
for any revenue shortfall, and any significant revenue shortfall would have an
immediate negative effect on our results of operations and stock price.
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:
o the size, timing and fulfillment of orders for our email services;
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o the receipt or payment of irregular or nonrecurring revenues or expenses;
o our mix of service offerings, including our ability to successfully
implement new services;
o pricing of our services; and
o effectiveness of our customer support.
Because of 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.
We have recently changed our fee structure and cannot predict the effect this
change will have on our future revenues.
In recent months we have moved from a pricing strategy based primarily on a
share of advertising revenues with a minimum annual service fee to one based
primarily on charging a per-emailbox fee with a minimum annual commitment fee.
While we believe that this new fee structure will result in a higher and more
predictable revenue stream compared with one based on a share of advertising
revenues, we cannot predict whether this new pricing strategy will in fact be
successful in generating higher and more predictable revenues. We may need to
change our pricing strategy again from time to time.
If the market for our Web-based email services does not grow rapidly, we will
fail to generate revenues.
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, our service may not achieve
broad market acceptance. Since we have only recently introduced our services,
we do not have sufficient experience to evaluate whether they will achieve
broad market acceptance. Also, because all of our revenue is derived directly
or indirectly from our Web-based email solutions, if that market does not grow,
our business will likely fail.
If we do not expand our sales and marketing organization we will not be able to
increase our revenues.
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
customers 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. It will take time for these employees to
learn how to market our solutions and to be integrated into our sales and
marketing organization. Some of them may not succeed in making this transition.
Additionally, we are planning to introduce additional 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.
Even if our email services are successful with our customers, we may not derive
revenue from the users of the emailboxes, which would prevent our business from
growing.
Even if our services are a success with our customers, we will not succeed if
we do not derive revenue from the email users that our customers give us access
to. We plan to derive revenue from these email users primarily by charging our
customers per-emailbox fees for our email services, as well as by selling
access to email users for direct marketing services and from the sale of
advertisements that the email users will see. If one or more of these revenue
sources is not successful, we will not succeed. To
8
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date, we have generated only limited revenue from these potential revenue
sources and they may not be successful. Our existing and potential customers
may not be willing to pay for our email services. Advertisers and direct
marketers may not accept email as a means of placing advertisements and
conducting direct marketing and email users may not want to receive direct
marketing materials.
Our ability to generate revenues from the emailbox base that our customers
bring to us also depends on the emailboxes being used on a regular basis. On an
ongoing basis, many of our end users will not regularly use their emailboxes,
and a significant number will cease using our services each month. Accordingly,
there may be no relationship between the number of active emailboxes and our
revenues.
We have a strategic relationship with Go2Net pursuant to which we issued a
warrant to Go2Net that diluted our shareholders, but we may not realize
substantial revenues or other business benefits from this or any similar
transaction.
We entered into a strategic relationship with Go2Net simultaneously with the
closing of our initial public offering. Our Customized Web-Based Email Service
Agreement with Go2Net provides that we share revenues from advertising and
premium services offered to Go2Net's end users through our email service. The
terms of this agreement are substantially the same as our commercial agreements
with other customers except that we have agreed that Go2Net will receive a
materially greater portion of advertising revenues than other customers receive
under other similar agreements. As part of this transaction, we issued to
Go2Net a warrant to purchase up to 1,136,000 ordinary shares at an exercise
price of $12.80 per share. This warrant is exercisable at any time until it
expires on July 16, 2004. We agreed to register these shares, the warrant and
the shares issuable upon exercise of the warrant with the Securities and
Exchange Commission and the registration statement relating to those securities
became effective on January 7, 2000. Exercise of the warrant will cause
existing investors significant dilution. However, we may not realize any
revenues or any other business benefits from this strategic relationship with
Go2Net because we and Go2Net may not be able to sell significant amounts of
advertising and premium Web-based email services to Go2Net's end users. In the
future, we may have to issue in-the-money warrants to acquire our ordinary
shares to customers who provide us with a large base of potential end users. We
may also have to provide these customers with more favorable commercial terms
than we have previously provided to our customers. The issuance of in-the-money
warrants and the grant of more favorable terms to customers may further dilute
our shareholders, increase our operating loss in the future and cause our stock
price to fall.
We entered into an email services agreement with Microsoft Corporation in
connection with which we issued a warrant to Microsoft that diluted our
shareholders, but we may not realize substantial revenues or other business
benefits from this transaction.
We entered into an Email Services Agreement dated October 26, 1999 with
Microsoft Corporation. Under this agreement, Commtouch will, at Microsoft's
option, customize, host and maintain email services for Microsoft websites in
the U.S. and internationally. Microsoft will pay one-time fees for the set-up
and customization of the email service for each website with respect to which
Microsoft chooses to use our services, as well as quarterly service fees for
the email service based on the number of mailboxes hosted. The term of the
agreement shall continue for 12 months after the first commercial distribution
date of the email service and Microsoft may extend the initial term on a
quarterly or annual basis upon 60 days prior written notice. The agreement may
be terminated by Microsoft for convenience upon 90 days' prior written notice,
or by either party upon a material breach by the other party upon the terms
specified in the agreement. In connection with the agreement, Commtouch issued
to Microsoft a warrant, exercisable until December 29, 1999, to purchase
707,965 of Commtouch's ordinary shares at an exercise price of $28.25 per share
for an aggregate exercise price of approximately $20.0 million. On December 29,
1999, Microsoft exercised the warrant and now holds 707,965 ordinary shares. We
agreed to register these shares with the Commission. The registration became
effective on January 7, 2000. However, we may not realize any revenues or any
other business benefits from this transaction because Microsoft is not
obligated to use our services with respect to any website and has not agreed to
provide us with any other business benefits.
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We depend on our customer relationships, which are based on relatively short
term, nonexclusive agreements, and the loss of one or more customers could harm
our business.
Our ability to increase revenues depends upon successful marketing of our
services through new and existing customers. Our agreements with our customers
generally can be terminated for any or for no reason after the first year. The
agreements with our customers are non-exclusive and do not restrict them from
introducing competing services. Also, some of our relationships allow
termination earlier than one year. Loss of one or a few key customers could
damage our reputation and hurt our ability to develop new relationships. If we
fail to develop new relationships or if our customers terminate or do not renew
their contracts with us, our business will suffer, as we will lose potential
revenue from the lost customers and from their underlying base of email users.
One customer, Excite, accounted for 54% of our revenues in 1998. Revenues from
MyPoints, a permission based email service company, represented 11% of our
revenues in 1999. Customers may provide us with a large number of users but pay
a relatively small minimum annual service fee.
We have many established competitors who are offering the same or similar
services and we will not be able to compete effectively against them if they
provide superior services at better prices.
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.
In the market for email and messaging services, we compete directly with
Web-based email service providers, including Critical Path, Mail.com and
USA.NET, as well as with companies that develop and maintain in-house email
solutions. In addition, companies such as Software.com currently offer email
software products to ISPs, web hosting companies, web portals and corporations.
Furthermore, numerous small-scale email providers offer low-cost basic
services, but without scalable systems or value-added functionality. These and
other companies could potentially leverage their existing capabilities and
relationships to enter the email service industry by redesigning their system
architecture, pricing and marketing strategies to sell through to the entire
market. The ability of these competitors to offer a broader suite of
complementary services may give them a considerable advantage over us. In the
future, ISPs, web hosting companies and outsourced application companies may
broaden their service offerings to include outsourced email.
Our market's level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter
the market. In the future, as we expand our service offerings, we may encounter
increased competition in the development and delivery of these services. Many
of our current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and greater financial,
marketing and other resources than we do and may enter into strategic or
commercial relationships on more favorable terms. Further, certain of our
competitors may offer services at or below cost. In addition, new technologies
and the expansion of existing technologies may increase competitive pressures
on us. We may not be able to compete successfully against current and future
competitors and increased competition may result in reduced operating margins
and loss of market share.
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 45 on December 31, 1998
to 214 on December 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 also need to improve
or replace our existing operational, customer service and financial systems,
procedures and controls.
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The loss of our key employees would adversely affect our ability to manage our
business, therefore causing our operating results to suffer and the value of
your investment to decline.
Our success depends on the skills, experience and performance of our senior
management and other key personnel, many of whom have worked together for only a
short period of time. The loss of the services of any of our senior management
or other key personnel, including Gideon Mantel, our Chief Executive Officer,
Isabel Maxwell, the President of our United States subsidiary, and Amir Lev, our
President and Chief Technical Officer, could materially and adversely affect our
business. We do not have employment agreements with any of our senior management
or other key personnel. We cannot prevent them from leaving at any time. We do
not maintain key-person life insurance policies on any of our employees.
Because our business is based on communications and messaging services, we are
susceptible to system interruptions and capacity constraints, which could harm
our business and reputation.
Our ability to successfully receive and send our end users' email messages and
provide acceptable levels of service largely depends on the efficient and
uninterrupted operation of our computer and communications hardware and network
systems and those of our outsourced hosting service. In addition, the growth in
the use of the Internet has caused frequent interruptions and delays in
accessing the Internet and transmitting data over the Internet. We do not
possess insurance to cover losses caused by unplanned system interruptions and
software defects. In the past, we have experienced some interruptions in our
email service. We believe that these interruptions will continue to occur from
time to time. These interruptions may be due to hardware failures, unsolicited
bulk email (also known as "spam"), operating system failures, inadequate
Internet infrastructure capacity, and other mechanical and human causes. We
expect to experience occasional, temporary capacity constraints due to sharply
increased traffic, which may cause unanticipated system disruptions, slower
response times, impaired quality and degradation in levels of customer service.
If we experience frequent or long system interruptions that reduce our ability
to provide email services, we may have fewer users of our email services. In
addition, we have entered into service agreements with some of our customers
that require minimum performance standards. If we fail to meet these standards,
our customers could terminate their relationships with us.
We must continue to expand and adapt our network infrastructure to changing
requirements and increasing numbers of end users. The expansion and adaptation
of our network infrastructure will require substantial financial, operational
and managerial resources. In addition, we depend on improvements being made to
the entire Internet infrastructure to alleviate overloading and congestion of
the Internet. The ability of our network to continue to connect and manage an
expanding number of customers, end users and messages at high transmission
speeds is unproven and uncertain. We face risks related to our network's and
the Internet's ability to operate with higher use levels while maintaining
expected performance levels.
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 customers. The development of
proprietary technology and necessary service enhancements entails significant
technical and business risks and requires substantial expenditures and
lead-time. We may not be able to keep pace with the latest technological
developments. We may not be able to use new technologies effectively or adapt
our services to customer or end user requirements or emerging industry
standards. Also, in addition to addressing changing technologies and end user
needs, we must also do so more quickly than our competition.
11
<PAGE>
Our services may be adversely affected by software defects, which could cause
our customers or end users to stop using our services.
Our service offerings depend on complex software. Complex software often
contains defects, particularly when first introduced or when new versions are
released. Although we conduct extensive testing, we may not discover software
defects that affect our new or current services or enhancements until after
they are deployed. Although we have not experienced any material software
defects to date, it is possible that, despite testing by us, defects may exist
in the software we use. These defects could cause service interruptions that
could damage our reputation or increase our service costs, cause us to lose
revenue, delay market acceptance or divert our development resources, any of
which could cause our business to suffer. Some of our services are based on
software provided by third parties. We have no control over the quality of such
software.
We rely on the integrity of our network security, which may be susceptible to
breaches that could harm our reputation and business.
A fundamental requirement for online communications is the secure transmission
of confidential information over public networks. Third parties may attempt to
breach our security or that of our customers. Despite our implementation of
third party encryption technology and network security measures, our servers
are vulnerable to computer viruses, physical or electronic break-ins and
similar disruptions, which could lead to interruptions, delays or loss of data.
We may be liable to our customers and their end users for any breach in our
security, including claims for impersonation or other similar fraud claims, as
well as claims for other misuses of personal information, for example for
unauthorized marketing purposes. Also, such a breach could harm our reputation
and consequently our business. We may also be required to expend significant
capital and other resources to license encryption technology and additional
technologies to protect against security breaches or to alleviate problems
caused by any breach. Our failure to prevent security breaches could have a
material adverse effect on our business and operating results.
In addition, the Federal Trade Commission and several states have been
investigating some Internet companies regarding their use of personal
information. We could incur additional expenses if new regulations regarding
the use of personal information are introduced, if our privacy practices are
investigated or if our privacy policies are viewed unfavorably by users or
potential users.
If we fail to adequately protect our intellectual property rights or face a
claim of intellectual property infringement by a third party, we could lose our
intellectual property rights or be liable for significant damages.
We regard our copyrights, service marks, trademarks, trade secrets and similar
intellectual property as critical to our success, and rely on trademark and
copyright law, trade secret protection and confidentiality or license
agreements with our employees and customers to protect our proprietary rights.
Third parties may infringe or misappropriate our copyrights, trademarks and
similar proprietary rights. Although we have not filed any patent applications,
we may seek to patent certain software or other technology in the future. Any
such future patent applications may not be issued 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.
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.
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).
12
<PAGE>
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 and we
have referred these complainants directly to the ZapZone Network service
subscribers who are allegedly engaging in the infringing activities. However,
these complainants may seek to enforce their rights against us in addition to,
or instead of, the infringing webmasters.
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 and
professional liability insurance coverage, 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 impair the growth of the
Internet and decrease demand for our services or increase our cost of doing
business.
There are currently few laws and regulations directly applicable to the
Internet and commercial email services. However, a number of laws have been
proposed involving the Internet, including laws addressing user privacy,
pricing, content, copyright, antitrust, distribution and characteristics and
quality of products and services. Further, the growth and development of the
market for email may prompt calls for more stringent consumer protection laws
that may impose additional burdens on companies conducting business online.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
The adoption of additional laws or regulations, or the application of existing
laws or regulations to the Internet, may impair the growth of the Internet or
commercial online services. This could decrease the demand for our services and
increase our cost of doing business, or otherwise harm our business and
operating results.
Due to the global nature of the Web, it is possible that, although our
transmissions currently originate in California, the governments of other
states or foreign countries might attempt to regulate our transmissions or levy
sales or other taxes relating to our activities. The European Union recently
adopted a directive addressing data privacy that may result in limits on the
collection and use of user information.
On October 20, 1999, The Federal Trade Commission issued the final rule to
implement the Children's Online Privacy Protection Act of 1998 ("COPPA"). The
main goal of the COPPA and the rule is to protect the privacy of children using
the Internet. As of April 21, 2000, certain commercial websites and online
services directed to, or that knowingly collect information from, children must
obtain parental consent before collecting, using, or disclosing personal
information from children under 13. The COPPA regulations could reduce our
ability to engage in direct marketing. The cost to the Company of complying with
the new requirements is not known and such cost may have a material effect upon
operating results or financial condition.
We may need additional capital and raising additional capital may dilute
existing shareholders.
We believe that our existing capital resources 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
13
<PAGE>
sufficient amounts or on terms acceptable to us and may cause dilution to
existing shareholders. Also, we may raise additional capital in the future by
issuing securities that have superior rights and preferences to our ordinary
shares.
Purchasers of our ordinary shares may suffer immediate and substantial
dilution.
The offering price of the shares may 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 the ordinary shares in this offering will
experience immediate dilution of approximately $51.44, measured by the excess of
an assumed public offering price of $62.00 per share over the pro forma as
adjusted net tangible book value per share of ordinary shares. Purchasers may
also experience additional dilution upon the exercise of outstanding stock
options.
If we or any of our vendors do not adequately address "Year 2000" issues, we
may incur significant unanticipated expenses to remedy any resulting problems,
and our business and reputation 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. We have tested our internally developed software
and have made it Year 2000 compliant. Many of our customers 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. 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.
Our directors, executive officers and principal shareholders will be able to
exert significant influence over matters requiring shareholder approval and
could delay or prevent a change of control.
Our directors and affiliates of our directors, our executive officers and our
shareholders who currently own over five percent of our ordinary shares
beneficially own approximately 30% of our outstanding ordinary shares.
Immediately following the offering, they will own approximately 20% of our
outstanding ordinary shares (whether or not the underwriters' overallotment
option is exercised in full). 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.
Go2Net and Vulcan Ventures beneficially own approximately 14% of our
outstanding ordinary shares (assuming exercise of the Go2Net warrant on a net
issuance basis). Immediately following the offering, they will own
approximately 12% of our outstanding ordinary shares (whether or not the
underwriters' overallotment option is exercised in full). Vulcan Ventures is a
significant shareholder of Go2Net. Accordingly, Go2Net and Vulcan Ventures will
be able to significantly influence and possibly exercise control over most
matters requiring approval by our shareholders, including the election of
directors and approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control. Go2Net and Vulcan also have the right to name one director
to our Board as long as they continue to hold at least 620,022 shares,
including
14
<PAGE>
the shares issuable upon exercise of the Go2Net warrant. They have named Thomas
Camp to the Board under this provision. In addition, conflicts of interest may
arise as a consequence of Go2Net's control relationship with us, including:
o conflicts between Go2Net and Vulcan Ventures, as significant
shareholders, and our other shareholders, whose interests may differ with
respect to, among other things, our strategic direction or significant
corporate transactions;
o conflicts related to corporate opportunities that could be pursued by us,
on the one hand, or by Go2Net, on the other hand; or
o conflicts related to existing or new contractual relationships between
us, on the one hand, and Go2Net and its other affiliates, on the other
hand.
Our business and operating results could suffer if we do not successfully
address the risks inherent in the expansion of our international operations.
At present, we have sales offices in the United States, Israel and England. We
intend to continue to expand into international markets and to spend
significant financial and managerial resources to do so. We have limited
experience in international operations and may not be able to compete
effectively in international markets. The Company will face risks inherent in
conducting business internationally, such as:
o difficulties and costs of staffing and managing international operations;
o fluctuations in currency exchange rates;
o imposition of currency exchange controls;
o differing technology standards;
o export restrictions, including export controls relating to encryption
technologies;
o difficulties in collecting accounts receivable and longer collection
periods;
o unexpected changes in regulatory requirements;
o political and economic instability;
o potentially adverse tax consequences; and
o potentially reduced protection for intellectual property rights.
Any of these factors could adversely affect the Company's international
operations and, consequently, business and operating results. Specifically,
failure to successfully manage international growth could result in higher
operating costs than anticipated or could delay or preclude altogether the
Company's ability to generate revenues in key international markets.
Substantial sales of our ordinary shares could adversely affect our stock price.
The sale, or availability for sale, of substantial quantities of our ordinary
shares may have the effect of depressing its market price by potentially
introducing a large number of sellers into the market. A large number of our
ordinary shares are currently eligible for resale. In addition a significant
number of shares will be eligible for resale at various dates in the future.
See "Shares Eligible for Future Sale."
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
15
<PAGE>
conditions affecting Israel. Any major hostilities involving Israel, or the
interruption or curtailment of trade between Israel and its present trading
partners, could significantly harm our business, operating results and financial
condition.
Israel's economy has been subject to numerous destabilizing factors, including a
period of rampant inflation in the early to mid-1980's, low foreign exchange
reserves, fluctuations in world commodity prices, military conflicts and civil
unrest. In addition, Israel and companies doing business with Israel have been
the subject of an economic boycott by the Arab countries since Israel's
establishment. These restrictive laws and policies may have an adverse impact on
our operating results, financial condition or expansion of our business.
Since the establishment of the State of Israel in 1948, a state of hostility
has existed, varying in degree and intensity, between Israel and the Arab
countries. Although Israel has entered into various agreements with certain
Arab countries and the Palestinian Authority, and various declarations have
been signed in connection with efforts to resolve some of the economic and
political problems in the Middle East, we cannot predict whether or in what
manner these problems will be resolved.
Our results of operations may be negatively affected by the obligation of key
personnel to perform military service.
In addition, certain of our officers and employees are currently obligated to
perform annual reserve duty in the Israel Defense Forces and are subject to
being called for active military duty at any time. Although Commtouch has
operated effectively under these requirements since its inception, we cannot
predict the effect of these obligations on Commtouch in the future. Our
operations could be disrupted by the absence for a significant period of one or
more of our officers or key employees due to military service.
Because a substantial portion of our revenues are generated in U.S. dollars,
while a significant portion of our expenses are incurred in New Israeli
Shekels, our results of operations may be adversely affected by inflation and
currency fluctuations.
We generate a substantial portion of our revenues in U.S. dollars but incur a
significant portion of our expenses, principally salaries and related personnel
expenses, in New Israeli Shekels, commonly referred to as NIS. As a result, we
are exposed to the risk that the rate of inflation in Israel will exceed the
rate of devaluation of the NIS in relation to the dollar or that the timing of
any devaluation may lag behind inflation in Israel. While in recent years the
rate of devaluation of the NIS against the dollar has exceeded the rate of
inflation, which is a reversal from prior years, we cannot be sure that this
reversal will continue. If the dollar cost of our operations in Israel
increases, our dollar-measured results of operations will be adversely
affected. Our operations also could be adversely affected if we are unable to
guard against currency fluctuations in the future. Accordingly, we may enter
into currency hedging transactions to decrease the risk of financial exposure
from fluctuations in the exchange rate of the dollar against the NIS. These
measures, however, may not adequately protect us from material adverse effects
due to the impact of inflation in Israel.
Israeli courts might not enforce judgments rendered outside of Israel and it
might therefore be difficult for an investor to recover any judgment against
any of our officers or directors
resident in Israel.
We are organized under the laws of Israel, and we maintain significant
operations in Israel. Certain of our officers and directors 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
16
<PAGE>
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, which could prevent a change of control and therefore depress the
price of our stock.
Israeli corporate law regulates mergers, votes required to approve mergers and
acquisitions of shares through tender offers, requires special approvals for
transactions involving significant shareholders and regulates other matters
that may be relevant to these types of transactions. Furthermore, Israel tax
considerations may make potential transactions unappealing to us or to some of
our shareholders.
The new Israeli Companies Law imposes substantial duties on shareholders and
may cause uncertainties regarding corporate governance.
The new Israeli Companies Law, which became effective on February 1, 2000, has
brought about significant changes to Israeli corporate law. The new law includes
provisions imposing substantial duties on certain controlling and
non-controlling shareholders. (See "Management--Approval of Certain
Transactions"). In addition, there may be uncertainties regarding corporate
governance in some areas. These uncertainties will persist until this new law
has been adequately interpreted, and these uncertainties could inhibit takeover
attempts or other transactions and inhibit other corporate decisions.
17
<PAGE>
USE OF PROCEEDS
Offering by the Company and the Selling Shareholders
The net proceeds we will receive from the sale of the 1,669,000 ordinary shares
offered by us, at an assumed public offering price of $62.00 per share, after
deducting the underwriting discounts and commissions and the estimated offering
expenses payable by us (which are estimated to be $6.8 million, or $8.5 million
if the underwriters' over-allotment option is exercised in full) are estimated
to be $96.7 million ($122.9 million if the underwriters' over-allotment option
is exercised in full).
We intend to use the proceeds of this offering for the following:
o expansion of our sales and marketing activities;
o capital expenditures, including purchase of equipment, primarily for our
hosting facilities;
o expansion of research and development activities;
o expansion of our international operations; and
o 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 from
time to time to acquire or invest in businesses, products, services or
technologies complementary to our current business, through mergers,
acquisitions, joint ventures or otherwise. 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.
We will not receive any proceeds from the sale of the shares by the selling
shareholders in this offering.
MARKET PRICE AND PRICE RANGE FOR ORDINARY SHARES
The Company's ordinary shares have been quoted on the Nasdaq National Market
since July 13, 1999, under the symbol CTCH. There is no non-United States
trading market for the shares. As of December 31, 1999, there were 82 record
holders of ordinary shares, of which approximately 50 represented United States
record holders holding approximately 45% of the outstanding ordinary shares of
the Company. The Company believes that some beneficial holders of its ordinary
shares hold in nominee or street name, and that there may be more than 3,000
beneficial holders. On March 7, 2000 the last reported sales price of an
ordinary share on the Nasdaq National Market was $62.00 per share.
<TABLE>
<CAPTION>
Ordinary Share Price
-----------------------
High Low
---------- ----------
<S> <C> <C>
Fiscal Year Ended December 31, 1999
Quarter ended September 30, 1999 (from July 13, 1999) ....... $ 25.88 $ 9.75
Quarter ended December 31, 1999 ............................. $ 59.50 $ 13.88
Fiscal Year Ending December 31, 2000
Period from January 1, 2000 through March 24, 2000 .......... $ 66.50 $ 35.56
</TABLE>
18
<PAGE>
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,
so long as the Company reasonably believes that such payment will not prevent
it from paying all of its current and future debts. 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.")
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of Commtouch as of December
31, 1999:
The following data is presented:
o on an actual basis; and
o on a pro forma as adjusted basis to give effect to (1) the sale of
1,669,000 ordinary shares in this offering, at an assumed offering price
of $62.00 per share and (2) the issuance of 901,471 ordinary shares upon
the assumed net exercise at an assumed share price of $62.00 per share,
of an in-the-money warrant held by Go2Net to purchase 1,136,000 ordinary
shares at an exercise price of $12.80 per share.
<TABLE>
<CAPTION>
December 31, 1999
-------------------------
Pro forma
Actual As Adjusted
--------- -----------
(in thousands)
<S> <C> <C>
Long-term liabilities .................................................. $ 497 $ 497
Shareholders' equity:
Ordinary shares, NIS 0.05 par value; 40,000,000 shares
authorized, 15,199,344 shares issued and outstanding;
17,769,815 shares issued and outstanding pro forma as adjusted ...... 213 245
Additional paid-in capital ............................................ 133,403 230,040
Stock-based employee deferred compensation ............................ (5,779) (5,779)
Notes receivable from shareholders .................................... (1,060) (813)
Accumulated other comprehensive income ................................ 63 63
Accumulated deficit ................................................... (31,528) (31,528)
--------- ---------
Total shareholders' equity ....................................... 95,312 192,228
--------- ---------
Total capitalization ............................................. $ 95,809 192,725
========= =========
</TABLE>
The number of ordinary shares to be outstanding after this offering does not
include the following:
o 1,383,110 ordinary shares issuable upon exercise of stock options
outstanding under our stock option plans and stock option agreements as
of December 31, 1999 at a weighted average exercise price of $9.62 per
share;
o 2,876,850 ordinary shares available for future grant or issuance under
our stock option plans as of December 31, 1999;
o 773,420 ordinary shares issuable upon exercise of options granted to
executive officers and directors prior to December 31 1999 at a weighted
average price of $8.20; and
o 4,860 ordinary shares issuable upon exercise of a warrant at an exercise
price of $3.61 per share; this warrant was net exercised into 4,461
ordinary shares subsequent to December 31, 1999.
20
<PAGE>
DILUTION
<TABLE>
Our net tangible book value as of December 31, 1999 was $90.8 million or $5.97
per ordinary share. 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. 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 1,669,000 ordinary shares by Commtouch in
this offering (at an assumed public offering price of $62.00 per share and after
deducting the underwriting discounts and commissions and our estimated offering
expenses), and assuming an estimated 901,471 ordinary shares issuable upon the
net exercise of an in-the-money warrant held by Go2Net to purchase 1,136,000
ordinary shares at an exercise price of $12.80, the pro forma as adjusted net
tangible book value of Commtouch at December 31, 1999 would have been $187.7
million, or $10.56 per share. This represents an immediate increase in pro forma
as adjusted net tangible book value of $4.59 per share to the existing
shareholders and an immediate dilution of $51.44 per share to new investors
purchasing ordinary shares in this offering. The following table illustrates
this per-share dilution:
<S> <C> <C>
Assumed offering price per share ................................................. $ 62.00
Net tangible book value per share as of December 31, 1999 ........................ $ 5.97
Increase in pro forma as adjusted net tangible book value per share attributable
to this offering ............................................................... 4.92
Decrease in pro forma as adjusted net tangible book value per share attributable to
the exercise of the in-the-money warrant held by Go2Net .......................... (0.33)
--------
Pro forma as adjusted net net tangible book value per share after the offering .... 10.56
---------
Dilution per share to new investors ............................................. $ 51.44
=========
</TABLE>
The above table assumes no exercise of the underwriters' over-allotment option
and no exercise of options or warrants after December 31, 1999. As of December
31, 1999, there were outstanding options to purchase a total 1,383,110 and
773,420 ordinary shares under our stock option plans and option agreements with
our employees and consultants, and executive officers and directors,
respectively, at a weighted average exercise price of $9.62 and $8.20 per share,
respectively; 4,860 ordinary shares issuable upon exercise of outstanding
warrants at a weighted average exercise price of $3.61 per share; and 2,876,850
ordinary shares available for future grant under our stock option grants. If all
of these options and warrants had been exercised on December 31, 1999, our pro
forma as adjusted net tangible book value on that date would have been $207.4
million, or $10.41 per share, the increase in net tangible book value per share
attributable to the existing investors would have been $4.44 per share and the
dilution in net tangible book value to new investors would have been $51.59 per
share.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
The selected consolidated statements of operations data for the years ended
December 31, 1997, 1998 and 1999 and the selected consolidated balance sheet
data as of December 31, 1998 and 1999 have been derived from the Consolidated
Financial Statements of Commtouch included elsewhere in this prospectus. The
selected consolidated statement of operations data for the years ended December
31, 1995 and 1996 and the selected consolidated balance sheet data as of
December 31, 1995, 1996 and 1997 have been derived from the Consolidated
Financial Statements of Commtouch not included elsewhere in this prospectus.
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.
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
-------- --------- --------- --------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenues:
Email services ..................................... $ -- $ -- $ -- $ 389 $ 4,251
Software licenses, maintenance and services ........ 1,733 3,134 899 -- --
-------- --------- --------- --------- ---------
Total revenues ................................... 1,733 3,134 899 389 4,251
Cost of revenues:
Email services ..................................... -- -- -- 569 3,643
Software licenses, maintenance and services ........ 327 463 165 -- --
-------- --------- --------- --------- ---------
Total cost of revenues ........................... 327 463 165 569 3,643
-------- --------- --------- --------- ---------
Gross profit (loss) ................................. 1,406 2,671 734 (180) 608
-------- --------- --------- --------- ---------
Operating expenses
Research and development, net ...................... 463 1,478 1,108 1,149 2,942
Sales and marketing, net ........................... 832 1,965 2,202 2,001 7,722
General and administrative ........................ 369 465 829 604 4,328
Amortization of prepaid marketing expenses ......... -- -- -- -- 3,263
Amortization of stock-based employee
deferred compensation ............................ -- -- -- 91 3,436
-------- --------- --------- --------- ---------
Total operating expenses ......................... 1,664 3,908 4,139 3,845 21,691
Operating loss ...................................... (258) (1,237) (3,405) (4,025) (21,083)
Interest and other income (expenses), net ........... (62) (45) (68) (326) 1,232
-------- --------- --------- --------- ---------
Net loss ............................................ $ (320) $ (1,282) $ (3,473) $ (4,351) $ (19,851)
======== ========= ========= ========= =========
Basic and diluted net loss per share ................ $ (0.11) $ (0.66) $ (2.40) $ (3.00) $ (2.65)
======== ========= ========= ========= =========
Weighted average shares -- basic and diluted ........ 2,885 1,934 1,450 1,450 7,487
======== ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1995 1996 1997 1998 1999
--------- -------- ----------- ----------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents ................ $ 54 $ 690 $ 324 $ 834 $ 65,996
Marketable securities .................... -- -- -- -- 18,050
Working capital (deficit) ................ (734) 539 (1,264) (1,440) 88,053
Total assets ............................. 773 2,180 1,065 2,366 100,336
Long-term liabilities .................... 324 371 366 530 497
Shareholders' equity (deficit) ........... (650) 777 (1,018) (815) 95,312
</TABLE>
22
<PAGE>
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 "expects," "anticipates,"
"believes," "intends," "plans," "seeks" and "estimates" 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 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 and employees. As
of December 31, 1999, we had over 250 global customers. Through our customers'
sites we serve approximately 8.4 million active emailboxes. We also serve over
1.0 million active emailboxes to small businesses and websites through our
ZapZone Network.
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 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 our email client software 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 customers.
Web-Based Email Service Business (January 1998-Present). In January 1998, we
began to offer Web-based email services to customers. Our services allow our
customers to provide free Web-based email to their end users, thus enhancing
the customer's online presence, increasing the frequency and duration of visits
to the customer's website and creating an opportunity for the customer 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. Throughout 1999, we transitioned our
23
<PAGE>
revenue model from one based on advertising with minimum commitment fee to a
price per emailbox fee structure with a minimum commitment fee and also
introduced enhanced functionality which allowed us to increase prices.
Revenue Sources
Service Fees. During 1999, most of our email service revenue resulted from
contracts that required our customers to pay us either a share of advertising
revenues subject to a minimum annual revenue commitment or a monthly per
emailbox price subject to a minimum commitment fee, and fees for direct
marketing and communications services.
Prior to 1999, some of our contracts with customers provided for email service
fees based solely on a share of banner advertising revenue, recognized only
when such revenues were earned by the customers, with no minimum annual
commitment.
Direct E-marketing. Ecommerce vendors seek channels through which they can
market goods and services. Because of our installed user base and our agreements
with our customers, we can assist ecommerce companies in distributing their
services to our customers' end users who have opted to receive offers by email.
We share with our customers the revenues from this direct e-marketing, which are
earned either on a per-message basis, a referral basis, or as a commission on
products sold. In the fourth quarter of 1998, we began to offer direct
e-marketing opportunities to ecommerce vendors on a test basis. In 1999, direct
e-marketing revenues became a meaningful portion of revenue. We recognized 11%
of our total revenues from MyPoints, a permission based email service company.
Strategic Transaction with Go2Net
Concurrent with the sale of our 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 are
offering Go2Net's end users a private label email service, including our email,
calendaring and other services. The services are 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 customers 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, is being amortized to operating expenses ratably
over the minimum term of the agreement, which is one year. Simultaneously with
the sale of the shares in the initial public offering, we sold a total of
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 customers who provide
us with a large base of potential end users. We may also have to provide these
customers with more favorable commercial terms than we have previously provided
to our customers. The issuance of in-the-money warrants and the grant of more
favorable terms to customers may further dilute our shareholders, increase our
operating loss in the future and cause our stock price to fall.
Issuance of Shares Upon Exercise of Microsoft Warrant
We entered into an Email Services Agreement with Microsoft Corporation dated
October 26, 1999. Under this agreement, Commtouch will, at Microsoft's option,
customize, host and maintain email services for Microsoft websites in the U.S.
and internationally. Microsoft will pay one-time fees for the set-up and
customization of the email service for each website with respect to which
Microsoft chooses to use our services, as well as quarterly service fees for
the email service based on the number of mailboxes hosted. The term of the
agreement shall continue for 12 months after the first commercial
24
<PAGE>
distribution date of the email service and Microsoft may extend the initial
term on a quarterly or annual basis upon 60 days prior written notice. The
agreement may be terminated by Microsoft for convenience upon 90 days' prior
written notice, or by either party upon a material breach by the other party
upon the terms specified in the agreement. In connection with the agreement,
Commtouch issued to Microsoft a fully vested warrant, exercisable until
December 29, 1999, to purchase 707,965 of Commtouch's ordinary shares at an
exercise price of $28.25 per share for an aggregate exercise price of $20.0
million. On December 29, 1999, Microsoft exercised the warrant and now holds
707,965 ordinary shares. The fair value of the warrant, estimated at $1.9
million, is amortized to operating expenses over the minimum term of the
agreement (12 months).
Results of Operations
<TABLE>
The following table sets forth financial data for the years ended December 31,
1997, 1998 and 1999
(in thousands):
<CAPTION>
Year Ended December 31,
------------------------------------------
1997 1998 1999
----------- ------------ -------------
<S> <C> <C> <C>
Revenues:
Email services ............................................... $ -- $ 389 $ 4,251
Software licenses, maintenance and services .................. 899 -- --
-------- -------- ---------
Total revenues ............................................. 899 389 4,251
-------- -------- ---------
Cost of revenues:
Email services ............................................... -- 569 3,643
Software licenses, maintenance and services .................. 165 -- --
-------- -------- ---------
Total cost of revenues ..................................... 165 569 3,643
-------- -------- ---------
Gross profit (loss) .......................................... 734 (180) 608
-------- -------- ---------
Operating expenses:
Research and development, net ................................ 1,108 1,149 2,942
Sales and marketing .......................................... 2,202 2,001 7,722
General and administrative ................................... 829 604 4,328
Amortization of prepaid marketing expenses ................... -- -- 3,263
Amortization of stock-based employee deferred compensation -- 91 3,436
-------- -------- ---------
Total operating expenses ................................... 4,139 3,845 21,691
-------- -------- ---------
Operating loss ................................................ (3,405) (4,025) (21,083)
Interest and other income (expenses), net ..................... (68) (326) 1,232
-------- -------- ---------
Net loss ...................................................... $ (3,473) $ (4,351) $ (19,851)
======== ======== =========
</TABLE>
Comparison of Years Ended December 31, 1997, 1998 and 1999
In 1997, we ceased all sales of stand-alone email client software licenses,
maintenance and services and focused on developing our Web-based email service
business. Accordingly, comparisons between 1997 and 1998 are not meaningful.
Revenues. Email service revenues increased 993% from $389,000 in 1998 to $4.3
million in 1999. One customer, Excite, represented 54% of the revenue in 1998.
Revenues from MyPoints, a permission based email service company, represented
11% of total revenues during 1999. As of December 31, 1999, the Company had
backlog from contracts amounting to approximately $13.1 million, which will be
recognized as revenue over future quarters.
Cost of Revenues. Cost of revenues increased 540% from $569,000 in 1998 to $3.6
million in 1999, due to the increase in contracts with customers during 1999
and the related service provided. Cost 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.
25
<PAGE>
Research and Development Costs, Net. Research and development expenses
increased 156% from $1.1 million in 1998 to $2.9 million in 1999 due to an
increase in personnel and other related costs. In previous years, we received
royalty-bearing grants from the Israeli government, recorded as a reduction of
research and development costs. We have an obligation to pay royalties to the
Israeli government with a remaining future liability of $270,000. 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 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 increased 286% from $2.0
million in 1998 to $7.7 million in 1999, due to increased personnel and related
costs, public relations, other marketing expenses and direct sales costs to
support the growth of our email service revenues. We expect sales and marketing
expenses to increase significantly in the future in absolute dollar amounts due
to increases in personnel costs related directly to new employees being hired
to conduct sales and the related market support to further develop our brand.
Sales and marketing expenses were $2.2 million in 1997 and related only to the
software license sales that were discontinued in 1997.
General and Administrative. General and administrative expenses increased 617%
from $604,000 in 1998 to $4.3 million in 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. General and administrative expenses
were $829,000 in 1997 and related only to the software license sales that were
discontinued
in 1997.
Amortization of Prepaid Marketing Expenses. Amortization of prepaid marketing
expenses related to the Go2Net and Microsoft warrants and totaled $3.3 million
for 1999. The prepaid marketing expense is being amortized using the
straight-line method over the one-year minimum term of each of the commercial
agreements.
Amortization of Stock-based Employee Deferred Compensation. Our stock-based
employee deferred compensation expenses increased 3,676% from $91,000 for 1998
to $3.4 million for 1999. The deferred compensation is being amortized using
the sum-of-digits method over the vesting schedule, generally four years.
Interest and Other Income (Expense), Net. Our interest and other income
(expense), net, increased from a net expense of $326,000 for 1998 to a net
income of $1.2 million for 1999, due primarily to increased interest income
earned from cash equivalents and marketable securities.
Income Taxes. As of December 31, 1999, we had approximately $22.5 million of
Israeli net operating loss carryforwards and $14.2 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 2008 to 2020. The Israeli net operating loss carryforwards have no
expiration date.
26
<PAGE>
Quarterly Results of Operations
<TABLE>
The following table sets forth certain unaudited quarterly statements of
operations data for the eight quarters ended December 31, 1999. This
information has been derived from the Company'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.
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
---------- ---------- ----------- ---------- ---------- ---------- ----------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Email service revenues ............... $ 32 $ 59 $ 130 $ 168 $ 346 $ 552 $ 1,117 $ 2,236
Cost of email service revenues ....... 59 85 166 259 435 605 1,043 1,560
------ -------- -------- -------- -------- -------- -------- --------
Gross profit (loss) .................. (27) (26) (36) (91) (89) (53) 74 676
------ -------- -------- -------- -------- -------- -------- --------
Operating expenses:
Research and development,
net ............................... 266 305 308 270 340 510 857 1,235
Sales and marketing ................ 459 506 509 527 608 1,363 2,368 3,383
General and administrative .......... 138 137 151 178 617 683 1,345 1,683
Amortization of prepaid
marketing expenses ................ -- -- -- -- -- -- 1,464 1,799
Amortization of stock-based
employee compensation ............. 2 8 18 63 386 1,013 1,096 941
------ -------- -------- -------- -------- -------- -------- --------
Total operating expenses .......... 865 956 986 1,038 1,951 3,569 7,130 9,041
------ -------- -------- -------- -------- -------- -------- --------
Operating loss ....................... (892) (982) (1,022) (1,129) (2,040) (3,622) (7,056) (8,365)
Interest and other income
(expenses), net ..................... (27) (59) (28) (212) (271) 6 577 920
------ -------- -------- -------- -------- -------- -------- --------
Net loss ............................. $ (919) $(1,041) $ (1,050) $(1,341) $(2,311) $(3,616) $ (6,479) $ (7,445)
====== ======== ======== ======== ======== ======== ======== ========
</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:
o continued growth of the Internet and of email usage;
o demand for Web-based email services;
o our ability to attract and retain customers and maintain customer
satisfaction;
o our ability to upgrade, develop and maintain our systems and
infrastructure;
o the amount and timing of operating costs and capital expenditures
relating to expansion of our business and infrastructure;
o the size, timing and fulfillment of orders for our email services;
o the receipt or payment of irregular or nonrecurring revenues or expenses;
o technical difficulties or system outages;
o foreign exchange rate fluctuations;
27
<PAGE>
o the announcement or introduction of new or enhanced services by our
competitors;
o our ability to attract and retain qualified personnel with Internet
industry expertise, particularly sales and marketing personnel;
o the pricing policies of our competitors;
o failure to increase our sales; and
o 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, research and development and
royalty-bearing marketing grants from the Israeli government. 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 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. On July 16, 1999, we raised $70.8 million,
net of underwriters commissions, from our initial public offering (including
the exercise of the underwriters' overallotment option) and the private
placement of our ordinary shares in connection with 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 December 31, 1999, we had $66.0 million in cash and cash
equivalents and $18.1 million in marketable securities.
Net cash provided by financing activities was $102.9 million in 1999. Net cash
used in operating activities was $11.2 million in 1999. Net cash used for
operating activities is primarily comprised of a net loss for 1999, partially
offset by depreciation and amortization expenses, increases in other accounts
receivable and prepaid expenses. Net cash used in investing activities was
$26.5 million in 1999. These investing activities consisted primarily of
purchases of property and equipment and purchases of marketable securities.
As of December 31, 1999, we had net working capital of $88.1 million.
We believe that the net proceeds from this offering, together with existing
cash and our other financing arrangements, provide us with sufficient funds to
finance operations and continued growth through the next 12 months.
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 three 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.
28
<PAGE>
Since we have incurred tax losses in every year through 1999, 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 at prevailing exchange rates when recorded,
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 customers in Europe and Asia.
The rate of inflation in Israel was 8.1% and 10.6% in 1995 and 1996. The rate of
devaluation in Israel was 3.9% and 3.7% in 1995 and 1996. This imbalance was
reversed when the rate of inflation was 7.0% and 8.6% in 1997 and 1998. The rate
of devaluation in Israel was 8.8% and 17.6% in 1997 and 1998. In 1999, the rate
of inflation was 1.3% and the rate of devaluation in Israel was 0.2%.
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.
The representative exchange rate, as reported by the Bank of Israel, was NIS
4.153 for one dollar on December 31, 1999 (NIS 4.160 on December 31, 1998 and
NIS 3.536 on December 31, 1997).
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.
29
<PAGE>
BUSINESS
Company Overview
We are 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 December
31, 1999, we had over 250 global customers. Through our customers' sites we
serve approximately 8.4 million active emailboxes. We also serve over 1.0
million active emailboxes to small businesses and websites through our ZapZone
Network.
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 1999, there were over 80 million Web
users in the United States and over 115 million users outside of the U.S. IDC
projects that, by the end of 2003, these numbers will increase to over 175
million Web users in the United States and over 325 million users outside of
the U.S. 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% of Internet users access their email while online,
making this activity the most popular use of the Internet. IDC estimates that at
the end of 1999 there were over 180 million emailboxes in the United States and
over 130 million outside of the United States. IDC projects that by the end of
2003, these numbers will increase to over 280 million emailboxes in the United
States and over 305 million emailboxes outside the United States.
Web-based Email
Historically, 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 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 email standard is
commonly referred to as "Web-based email."
Web-based email offers the following benefits over traditional closed systems:
o anytime, anywhere (universal) access to both business and personal email
accounts;
o advanced integrated communication services over the Web, such as unified
messaging (receiving faxes and voicemail via email) and integrated
calendars and directories; and
o easy to use registration, setup and administration.
Businesses worldwide are seeking to differentiate themselves online. A
Web-based email service provides an optimal solution to address this business
need because it increases brand awareness, builds and reinforces a loyal,
connected member base and facilitates commerce in the following ways:
o 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].
30
<PAGE>
o 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.
o 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 quickly implement high quality, feature-rich
email services without having to invest internally in email management and
systems.
The Commtouch Solution
We are a leading global provider of outsourced Web-based email and other
messaging services to businesses worldwide. Our flexible and highly
customizable solutions enable us to satisfy the different email and messaging
needs of a wide range of customers.
Benefits of The Commtouch Solution
Extensive Email Features. Our solution is easy to use and provides a broad
range of industry-leading 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
maintain an integrated calendar to create distribution lists and to establish
user profiles and signatures. Our 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 customers to leverage their email as a
brand building tool. Customers offer our email and messaging services to their
end users with the customer's domain name. For example, a customer can provide
email at its website with an address such as [email protected]. This
repeated visibility of the customer's name on every email message promotes
brand awareness and customer loyalty. In addition, our customers 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.
Rapidly Deployable and Cost-Effective Solutions. Our solutions for customers
can be implemented in as few as several days.
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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 believe that this rapid time to market is
critical to our customers, who desire to realize the benefits of Web-based
email as quickly as possible. We also provide comprehensive maintenance and
administration of our email service, which eliminates the need for our
customers to undertake the significant burden of developing and maintaining an
in-house email system.
Extensive Language Capabilities. We provide email services in the following 18
languages: English, Chinese (Simplified and Traditional), Japanese, Spanish,
French, German, Portuguese, Dutch, Finnish, Danish, Norwegian, Swedish,
Russian, Hebrew, Icelandic, Korean and Italian. Additionally, we can support
multiple languages on the same site for any of our customers 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.
Increased Website Usage. Our solutions increase the potential for our customers
to generate revenue by increasing the stickiness of their websites. We believe
that traffic to our customers' websites increases as end users frequently visit
the website to check their email. The benefits of increased website stickiness
include more frequent communication with end users, enhanced customer loyalty
and the opportunity to generate revenues from advertising, direct marketing and
ecommerce transactions.
Online Marketing Capabilities. Our customers 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 customers' marketing capabilities, we
provide our MailTarget tool which enables them to select and deliver tailored
messages to targeted segments of their user population.
Commtouch Strategy
Our objective is to be the leading global provider of outsourced, Web-based
integrated email and messaging services. We plan to achieve this goal by
pursuing the following key strategies:
Focus Sales and Marketing Efforts on Acquiring New Business Customers
We are focused on selling our outsourced email communications solution to
business customers, which enables them to rapidly provide our service to their
users and customers without needing to build or maintain an infrastructure to
support the service. We target customers who are increasingly relying on the
Internet to conduct their business and communications but do not want to devote
the time and resources to develop, support, or maintain an integrated email
service. Commtouch enables our business customers to quickly implement our
co-branded "Powered by Commtouch" service with minimal upfront investment while
retaining their direct user and customer relationships.
We are focusing our business-to-business sales efforts on several target
markets which we believe are particularly receptive to using our solution.
These include application service providers (ASPs), Internet service providers
(ISPs), large corporations, and web portals. Businesses in these target markets
are experiencing increasing pressure to offer enhanced Web-based email to their
customers. However, because they need to remain focused on their own core
business operations, we believe that they will outsource their email
capabilities.
Accelerate Transition to a Price-Per-Emailbox Fee Structure
We generate an increasing share of our revenue through a pricing strategy based
on a per-emailbox fee. We believe that this fee structure results in a higher
and more predictable revenue stream compared with one based on a share of
advertising revenue. Contracts with individual business customers typically
include a guaranteed revenue component and fees per emailbox based on the total
number of emailboxes and level of service provided.
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Leverage Business Accounts Through Focused Sales Force
We believe that there is a significant opportunity for us to further penetrate
and derive increasing revenues from our existing customer base. A portion of
our sales force is dedicated to building our relationships with existing
accounts, selling them product upgrades and enhancements and keeping abreast of
their growing email and messaging requirements. As our customers grow, develop
new online strategies and expand geographically, our sales force plans to
identify new ways we can offer them enhanced messaging services. We believe
this sales effort will also serve to solidify our business relationships.
Extend International Leadership
We plan to continue to aggressively market our solutions to businesses in
non-U.S. markets that we believe will experience significant growth in
Web-based email usage. We have developed multiple language interfaces for our
email services to be used in the world's most widely used non-English
languages. We have also established marketing groups in Israel, to support our
expansion in Europe and Asia, and in the United States to support our expansion
in North America and Latin America. We have a sales office in London, England
and we plan to open a sales office in Japan. Additionally, we plan to pursue
joint ventures with local partners in attractive non-U.S. markets to accelerate
our penetration globally. We believe that our multi-language capabilities,
targeted international sales efforts and experience in penetrating non-U.S.
markets positions us favorably in non-U.S. markets.
Enhance 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 have
recently added new services, including calendar integration, webmaster
administration tools, message boards, list server features and HTML editing. We
also plan to offer new services including email message language translation
and integration of our email services with remote personal devices and wireless
access. We intend to continue to work closely with our customers to identify
new trends and functionality that will be popular with end users. In addition
to internal development, we plan to seek, partner with and invest in companies
developing leading edge technologies to enhance our existing functionality.
Maintain Our Cost-Effective Technology Platform
Our proprietary, open and 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. We will
seek to maintain this cost-effective technology platform as we add additional
functionality and features to our solution.
Leverage Relationships with Go2Net, Vulcan Ventures and Microsoft
Go2Net, Vulcan Ventures and Microsoft have invested an aggregate of $40 million
in our Company. Go2Net and Vulcan Ventures have a joint representative on our
Board of Directors and we have entered into business relationships with both
Go2Net and Microsoft. We will seek to leverage our relationships with these
customers to expand our service offerings to them and to gain access to other
potential customers with whom they have relationships.
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:
o price-per-emailbox, subject to a minimum annual service fee;
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o a minimum annual service fee plus advertising revenue sharing; or
o advertising revenue sharing only.
We also provide direct marketing and communications services for a fee.
For our ZapZone Network service members, we provide our email and messaging
solutions free of charge. We currently derive revenue from this network through
advertising and direct online marketing.
Classic Service
<TABLE>
Our Classic Service provides the following features:
<CAPTION>
- ----------------------------------------------------------------------------------------------
Feature Description
- ----------------------------------------------------------------------------------------------
<S> <C>
Web-based Emailbox 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, and establish user profiles and
signatures.
- ----------------------------------------------------------------------------------------------
Highly Customized Interface Customers offer our email services to their end users
with the customer's name included in the domain
address. This repeated visibility of the customer's name
promotes brand awareness and customer loyalty.
Additionally, our customers can design the look and feel
of their Web-based email interfaces with our proprietary
customization wizard tool.
- ----------------------------------------------------------------------------------------------
Unified Messaging This service enables the emailbox to become an
integrated communications platform allowing the user to
access email and send and receive voicemail messages,
faxes and pages via land or mobile phones or personal
computers.
- ----------------------------------------------------------------------------------------------
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 the
ability to create and manage groups and to import
personal information from the contact databases.
- ----------------------------------------------------------------------------------------------
Calendar Integration The web-based calendar feature allows users to access
their events and tasks from any browser. Functionality
includes adding, modifying, and viewing appointments,
to-do tasks, notes or events. Create recurring
appointments and tasks on a daily, weekly or monthly
basis setting notifications for upcoming events via email,
ICQ (instant messaging) or pager.
- ----------------------------------------------------------------------------------------------
Spam Protection Advanced anti-spamming controls and email filtering.
- ----------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Feature Description
- ----------------------------------------------------------------------------------------------
<S> <C>
Multiple Language Capability Our email services are provided in 18 languages:
English, Chinese (Simplified and Traditional), Japanese,
Spanish, French, German, Portuguese, Dutch, Finnish,
Danish, Norwegian, Swedish, Russian, Hebrew,
Icelandic, Korean 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, except websites using Hebrew.
- ----------------------------------------------------------------------------------------------
Kids' Email An email option that enables parents to control who
may correspond electronically with their children.
- ----------------------------------------------------------------------------------------------
Unified Registration Allows our customers to capture important demographic
information as new email users sign up in conjunction
with our customer's website registration process. As a
result, the user will be capable of entering a single
username and password for accessing other online
services offered by our customers.
- ----------------------------------------------------------------------------------------------
Integrated Instant Messaging This integrated software application enables users to
chat with one another and provide users with
notification of new messages and events.
- ----------------------------------------------------------------------------------------------
New Message Notification For the mobile professionals, important email messages
need to be alerted via offline as well as online modes.
When a new message or event arrives in a user's inbox,
a notification alert may be enabled via fax, pager, or
voicemail. Notification at login page is also available.
- ----------------------------------------------------------------------------------------------
Secure Login (SSL) Secure Socket Layer (SSL) encryption protects the
privacy of the login and password information
transferred between end-users and the email system
during sign up.
- ----------------------------------------------------------------------------------------------
Direct Marketing Tools With the Custom Mail Opt-In and Mail Target
programs, customers have access to low-cost direct
marketing tools. Includes Custom Mail Opt-In which
allows users to select specific product categories from
which to receive special offers and promotions targeted
to their interests. Also includes Mail Target which
allows our customers to send targeted marketing
messages to their email user database or to an imported
list.
- ----------------------------------------------------------------------------------------------
Online Statistics Includes around the clock online access to password
protected online email usage reports that include
detailed information on the number of daily users,
number of page views, number of active accounts, and
other important usage data for auditing and billing
purposes.
- ----------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
Premium Services
<TABLE>
Our premium services combine all of the features included in our Classic
Service, plus the following features:
<CAPTION>
- ----------------------------------------------------------------------------------------------
Feature Description
- ----------------------------------------------------------------------------------------------
<S> <C>
Offline Email Client Access End users can access their emailbox using either a Web
browser or their offline client software, such as
Microsoft Outlook or Eudora.
- ----------------------------------------------------------------------------------------------
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 Incoming emails can be automatically forwarded to an
Email Forwarding alternate emailbox based on the end user's pre-set
criteria.
- ----------------------------------------------------------------------------------------------
Automated, Rules-Based Incoming emails can be automatically forwarded to the
Pager Notification end user's pager based on the end user's pre-set criteria.
- ----------------------------------------------------------------------------------------------
</TABLE>
The unified messaging, email-by-phone and IP telephony services integrate third
party technology.
Planned Services
<TABLE>
We are developing new messaging services to complement our existing services.
We actively monitor the email and communication needs of our customers 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:
<CAPTION>
- ----------------------------------------------------------------------------------------------
Feature Description
- ----------------------------------------------------------------------------------------------
<S> <C>
Enhanced Email Security Support for SSL encryption and technologies with
enhanced anti-virus and anti-vandal security measures.
(Anticipated in the fourth quarter of 2000.)
- ----------------------------------------------------------------------------------------------
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 2000.)
- ----------------------------------------------------------------------------------------------
Email Message Language Email messages will be automatically translated between
Translation languages according to pre-defined user preferences.
(Anticipated in the fourth quarter of 2000.)
- ----------------------------------------------------------------------------------------------
</TABLE>
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<PAGE>
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.
Direct Online Marketing Services.
We have a large and growing network of end users. As of December 31, 1999,
through our customers we serve approximately 8.4 million active emailboxes and
through our ZapZone Network service, which has over 190,000 sites registered,
we were serving approximately 1.0 million active emailboxes. This extensive
user network, along with our advanced technologies and strategic relationships,
allows us to offer value-added direct marketing services to our customers and
third parties. We currently provide the following services:
Opt-in. Users can elect to receive specific newsletters or commerce
offerings. Whenever end users choose to establish a direct communication
with one of our opt-in partners, we receive a referral fee.
MailTarget. We provide our customers with a Web-based tool which enables
them to select and send tailored messages to targeted segments of their end
user base. We earn revenues by charging customers a fee for each message
sent with this tool.
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 earn revenues by charging third-party direct marketing
companies a fee for each message sent.
The ZapZone Network Email Service
Our ZapZone Network service delivers email messaging solutions to small
websites and homepages. This 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.
Customers
We offer email and messaging communications services to businesses worldwide.
As of December 31, 1999, we provided our email services to over 250 global
customers. Our customer base includes Internet-centric businesses like
community sites and portals, and companies where a significant online presence
is integral to the overall enterprise. These customers represent a broad range
of businesses and services and are geographically diverse. We also have
customers comprised of small websites and website owners who offer Web-based
email and messaging to their end users through our ZapZone Network service.
Sales and Marketing
Sales Strategy
Our sales strategy is to target businesses worldwide through a combination of
direct, indirect and online selling initiatives. While our salespeople are
responsible for selling our solutions in a geographic area, they often
collaborate to recruit new customers, particularly when dealing with
multinational organizations. Our sales offices are located in Santa Clara,
California, New York, New York, London, England, and Netanya, Israel. We plan
to extend our sales force into Europe and Japan within the next 12 months. Our
sales force includes salespeople who focus on acquiring new customers, as well
as dedicated salespeople who cultivate existing customers and seek to sell them
premium and other services. As of December 31, 1999, we had 30 salespeople. We
also plan to pursue joint ventures with local partners in attractive non-U.S.
markets to assist us in the penetration of those markets.
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<PAGE>
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. Through our "Powered by Commtouch" co-branding of our email
solution on customers' websites, we increase our brand awareness and receive a
significant number of click-through business leads. We plan to aggressively
promote our premium services to our customers and their end users and our
direct e-marketing services to our customers 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.
Customer Support
Commtouch provides its customers rapid callback technical support 24 hours a
day, seven days a week. We initally developed a proprietary software tool that
provides end users with immediate online support without intervention from
customer service representatives or technical staff and subsequently have begun
implementation of other customer relationship management applications. We
believe that this technical support model enables us to provide high quality
and cost-effective support service to our customers and end users.
Technology
We leverage our nine years of email and technology experience to create
world-class, robust, full-featured, reliable email solutions. We believe that
our Web-based email solutions possess three major advantages over other
Web-based email solutions:
Scalable and Reliable 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 customer information. These servers interact
through standard communications protocols such as HTTP, IMAP4, POP3 and SMTP
and ODBC.
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<PAGE>
Hardware Infrastructure
[GRAPHIC OMITTED]
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.
o 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.
o 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.
o 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.
o 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.
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<PAGE>
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:
o 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;
o 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
o 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.
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ADML Flow chart
[GRAPHIC OMITTED]
Advanced Proprietary Technologies
We have developed the following proprietary technologies:
o Complex Foreign Language Support. Currently, our system is fully
double-byte-enabled to handle intricate character languages such as
Chinese, Korean and Japanese, as well as right-to-left support for
languages like Hebrew and Arabic.
o 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.
o Advanced Direct Marketing Technology. Our MailTarget service is a
Web-based tool which provides customers with a user-friendly method of
selecting and delivering tailored messages to a targeted segment of their
user populations.
o 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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Competition
In the market for email and messaging services, we compete directly with
Web-based email service providers, including Critical Path, Mail.com and
USA.NET, as well as with companies that develop and maintain in-house email
solutions. In addition, companies such as Software.com currently offer email
software products to ISPs, web hosting companies, web portals and corporations.
Furthermore, numerous small-scale email providers offer low-cost basic
services, but without scalable systems or value-added functionality. These and
other companies could potentially leverage their existing capabilities and
relationships to enter the email service industry by redesigning their system
architecture, pricing and marketing strategies to sell through to the entire
market. The ability of these competitors to offer a broader suite of
complementary services may give them a considerable advantage over us. In the
future, ISPs, web hosting companies and outsourced application companies may
broaden their service offerings to include outsourced email.
Our market's level of competition is likely to increase as current competitors
increase the sophistication of their offerings and as new participants enter
the market. In the future, as we expand our service offerings, we may encounter
increased competition in the development and delivery of these services. Many
of our current and potential competitors have longer operating histories,
larger customer bases, greater brand recognition and greater financial,
marketing and other resources than we do and may enter into strategic or
commercial relationships on more favorable terms. Further, certain of our
competitors may offer services at or below cost. In addition, new technologies
and the expansion of existing technologies may increase competitive pressures
on us. Increased competition may result in reduced operating margins and loss
of market share.
We believe that our solution has the following competitive advantages:
o highly customizable and flexible;
o rapidly deployable;
o available in 18 languages;
o designed to integrate numerous messaging applications; and
o 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 other countries); 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: COMMTOUCH (Israel and other countries), ZAPZONE NETWORK, ZZN
(U.S., Israel and other countries) and PRONTO (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
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<PAGE>
infringement of the trademarks and other intellectual property rights of third
parties by us and our licensees. Such 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 have
responded by reviewing the content of the complainants' complaints, and either
(a) sought additional substantiating information (b) requested a response to
the complaint from the relevant webmaster, and/or (c) changed or deleted the
email service name in question.
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
There are currently few laws and regulations directly applicable to the
Internet and commercial email services. Examples include the Children's Online
Privacy Protection Act and related regulations in the U.S. and restrictions on
the export of personal data from the European Community. However, 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 December 31, 1999, we had 214 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.
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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 Israeli federation of
employers' organizations) apply to Commtouch's Israeli employees. These
provisions principally concern the maximum length of the work day and 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. 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
and by an accrual.
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 an amount equal to 7.5% of the
employee's base salary.
Office Locations
Our principal executive offices are located at 6 Hazoran Street, Poleg
Industrial Park, Netanya 42504, Israel, where our telephone number is
011-972-9-863-6888, and 3945 Freedom Circle, Santa Clara, California 95054,
where our telephone number is (408) 653-4330. In addition, we have sales
offices in London and New York. All of our properties are leased.
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MANAGEMENT
Executive Officers and Directors
<TABLE>
The following table sets forth certain information regarding our executive
officers and directors:
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gideon Mantel(1) ...... 40 Chief Executive Officer and Director
Amir Lev ............... 40 President, Chief Technology Officer and Director
Isabel Maxwell ......... 49 President, Commtouch Software, Inc.
James Collins ......... 41 Chief Financial Officer and Secretary
Allan Barkat(1) ......... 40 Chairman of the Board of Directors
Yair Safrai(2) ......... 41 Director
Yoseph Sela(1)(2) ...... 47 Director
Nahum Sharfman ......... 52 Director
Richard Sorkin ......... 38 Director
Thomas Camp .............. 36 Director
<FN>
- ------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
</FN>
</TABLE>
Other Management Employees
<TABLE>
The following table sets forth the names and positions of other management
employees:
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert "Rip" Gerber ........ 37 Vice President, Marketing and Ecommerce,
Commtouch Software, Inc.
Avner Amram ................ 38 Vice President, Operations, Commtouch
Software, Inc.
Yael Elish ................. 31 Vice President, Strategic Development, Commtouch
Software, Inc.
Igor Gusak ................. 44 Vice President and General Manager, Custom Mail
(US), a division of Commtouch Software, Inc.
Yuval Neria ............... 40 Vice President, International Sales
Ronen Rosenblatt ........... 34 Vice President, Research and Development
Ronni Zahavi ............... 33 Vice President, Human Resources
Scott Slater ............... 45 Vice President, Corporate Development
</TABLE>
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.
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 and in January 2000 became
President. Mr. Lev received a B.A. in Computer Science and Economics from Hebrew
University, Jerusalem.
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.
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<PAGE>
James Collins has served as the Chief Financial Officer of Commtouch since March
1999 and as the Secretary of Commtouch since April 1999. From ctober 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.
Allan Barkat has served as a Director of Commtouch since February 1996 and
Chairman of the Board of Directors since April 1999. From June 1999 to the
present, Mr. Barkat has been a Managing Director of Apax Partner Ventures
Israel, Ltd. 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 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.
Nahum Sharfman will join the Board in March 2000. Mr. Sharfman is a co-founder
of Commtouch and served as its Chief Executive Officer and Chairman of the
Board from its inception in February 1991. In November 1997 Mr. Sharfman
stepped down as Chief Executive Officer to become a founder of Dealtime.com.
Mr. Sharfman remained Chairman of the Board of Commtouch until he resigned in
January 1999. Prior to founding Commtouch, Mr. Sharfman spent eleven years with
National Semiconductor Corporation in various development and management roles.
Mr. Sharfman received a Ph.D. in High Energy Nuclear Physics from Carnegie
Mellon University and M.S. and B.S. degrees in Physics from the Technion,
Haifa.
Richard Sorkin has served as a Director of Commtouch since July 1999. 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 March 1996 he held various
executive positions with Creative Technology, Ltd., a leading provider of
multi-media hardware. Mr. Sorkin received a B.A. with honors in Economics from
Yale University and an M.B.A. from Stanford University.
Thomas Camp has served as a Director of Commtouch since July 1999. Since April
1999, Mr. Camp has served as Vice President, Business Development at Go2Net, a
network of branded, technology-and community-driven websites. From September
1990 to April 1999, he was an attorney with the law firm of Hutchins, Wheeler &
Dittmar, most recently as a stockholder. Mr. Camp received a B.A. from Tufts
University, an M.B.A. from Boston College Graduate School of Management and a
J.D. from Boston College Law School. Go2Net and Vulcan Ventures Incorporated
entered into an agreement with us in which they purchased shares and received a
warrant to purchase additional shares. Under that agreement, they have the
right to name one director to our board, as long as they continue to hold at
least 25% of their combined number of shares and the shares available to Go2Net
upon exercise of the warrant. Mr. Camp was appointed to the board pursuant to
that agreement.
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<PAGE>
Robert "Rip" Gerber has served as Vice President, Marketing and Ecommerce 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 and General Manager, Custom Mail
(US), a division 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.
Ronni Zahavi has served as a Vice President Human Resources for Commtouch
Software Ltd. since July 1999. From June 1997 to July 1999, Mr. Zehavi was
Human Resources and Training Manager at Mondex -- Electronic Cash, a subsidiary
of Mastercard International. From January 1994 to June 1997, he was an
organizational consultant. Mr. Zehavi received his BA in Educational Psychology
and History from Tel Aviv University, and received his M.A. in Organizational
Sociology from Bar-Ilan University.
Scott Slater has served as the Vice President, Corporate Development of
Commtouch since December 1999. From February 1998 to December 1999, Mr. Slater
was Senior Vice President, Business Development for NewsReal, Inc. and from
September, 1996 to February, 1998, Mr. Slater was President and Chief Executive
Officer of O2Works, Inc. Mr. Slater studied psychology at Boston University
from 1972 to 1976.
Election of Directors
Directors are elected by shareholders at the annual general meeting of the
shareholders and hold office until the annual general meeting next following
the annual general meeting or general meeting at which such Director is elected
and until his successor is elected or until he is removed. An annual general
meeting shall be held at least once in every calendar year, but not more than
fifteen months after the last preceding annual general meeting. Directors may
be removed and other directors may
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<PAGE>
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. Until a vacancy is filled by the shareholders as aforesaid,
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 or such greater number as may be determined from time to time by
an ordinary resolution of the shareholders. 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. A person who is not qualified to be appointed as a director, or a
person who already serves as a director or an alternate director, may not be
appointed as an alternate director. 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 and Outside Directors
The new Israeli Companies Law, which took effect on February 1, 2000, requires
Israeli companies with shares that have been offered to the public in or
outside of Israel to appoint at least two outside directors. No person may be
appointed as an outside director if the person or the person's relative,
partner, employer or any entity under the person's control has or had, on or
within the two years preceding the date of the person's appointment to serve as
outside director, any affiliation with the company or any entity controlling,
controlled by or under common control with the company. The term affiliation
includes:
o an employment relationship;
o a business or professional relationship maintained on a regular basis;
o control; and
o service as an office holder.
No person may serve as an outside director if the person's position or other
business activities create, or may create, a conflict of interest with the
person's responsibilities as an outside director or may otherwise interfere
with the person's ability to serve as an outside director. If, at the time
outside directors are to be appointed, all current members of the Board of
Directors are of the same gender, then at least one outside director must be of
the other gender.
Outside directors are to be elected by a majority vote at a shareholders'
meeting, provided that either:
o such majority includes at least one-third of the shares held by
non-controlling shareholders, as that term is defined in the Companies
Law, who are present and voting at the meeting; or
o the total number of shares held by non-controlling shareholders voting
against the election of the director at the meeting does not exceed one
percent of the aggregate voting rights in the company.
The initial term of an outside director is three years and may be extended for
an additional three years. Outside directors may be removed only by the same
percentage of shareholders as is required for their election, or by a court,
and then only if the outside director ceases to meet the statutory
qualifications for her appointment or if she violates her fiduciary duty to the
company. Each committee of a company's Board of Directors must include at least
one outside director. An outside director is entitled to compensation as
provided in the regulations adopted under the Companies Law and is otherwise
prohibited from receiving any other compensation, directly or indirectly, in
connection with service provided as an outside director.
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<PAGE>
In addition, the Nasdaq National Market requires us to have at least two
independent directors on our Board of Directors and to establish an audit
committee, at least a majority of whose members are independent of management.
We intend to appoint new directors who will qualify both as independent
directors under the Nasdaq National Market requirements and as outside directors
under the Companies Law at our next annual shareholders meeting, which will be
held no later than August 1, 2000.
Audit Committee
The Companies Law requires public companies to appoint an audit committee. The
responsibilities of the audit committee include identifying irregularities in
the management of the company's business and approving related party
transactions as required by law. An audit committee must consist of at least
three directors, including all of the outside directors. The chairman of the
Board of Directors, any director employed by or otherwise providing services to
the company, and a controlling shareholder or any relative of a controlling
shareholder, may not be a member of the audit committee. An audit committee may
not approve an action or a transaction with a controlling shareholder, or with
an office holder, unless at the time of approval two outside directors are
serving as members of the audit committee and at least one of the outside
directors was present at the meeting in which an approval was granted.
Internal Auditor
Under the Companies Law, the Board of Directors must appoint an internal
auditor, nominated by the audit committee. The role of the internal auditor is
to examine, among other matters, whether the company's actions comply with the
law and orderly business procedure. Under the Companies Law, the internal
auditor may be an employee of the company but not an office holder, or an
affiliate, or a relative of an office holder or affiliate, and he or she may
not be the company's independent accountant or its representative.
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.
Conflicts of interest may arise as a consequence of the relationship of one of
our directors, Thomas Camp, with Vulcan and Go2Net, including conflicts related
to corporate opportunities that could be pursued by us, on the one hand, or by
Go2Net, Vulcan Ventures or their affiliates, on the other hand, or conflicts
related to existing or new contractual relationships between us, on the one
hand, or by Go2Net, Vulcan Ventures or their affiliates, on the other hand.
Transactions between us and our officers and directors, and extraordinary
transactions between us and our principal shareholders or a third party if a
principal shareholder has a personal interest in such transaction generally
require the approval of a majority of the board of directors, including a
majority of the independent and disinterested outside directors, and in some
circumstances, audit committee and shareholder approvals as well (See "Approval
of Certain Transactions").
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 Commtouch's audit
committee, board of directors, and shareholders at a general meeting. Directors
currently do not receive cash compensation for their services as directors but
are reimbursed for their expenses for each Board of Directors meeting attended.
However, see "Nonemployee Directors Stock Option Plan," below.
The aggregate direct remuneration paid by Commtouch to all directors and
executive officers (10 persons) in 1999 was approximately $800,000. During the
same period Commtouch accrued or set
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<PAGE>
aside approximately $27,000 for the same group to provide pension, retirement
or similar benefits. As of February 29, 2000, directors and executive officers
of Commtouch (10 persons) held stock options to purchase an aggregate of
466,180 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 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.
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 the initial public 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.
Outstanding Options
As of February 29, 2000, stock options to purchase 2,829,342 ordinary shares had
been granted to employees, consultants, executive officers and nonemployed
directors under the Company's stock option plans, net of cancelled shares. Of
that number 1,751,972 had not been exercised and had exercise prices ranging
from $1.45 to $48.56 per share and a weighted average per share exercise price
of $23.26, and were held by 271 persons; these options have termination dates
ranging from April 2005 to February 2010.
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<PAGE>
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. The remaining 2,876,850
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 8,
1999, took effect upon the closing of the initial public 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, of which 26,219 shares were issued on
February 15, 2000. 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-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:
o 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
o 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 compensation,
including incentive compensation, commissions and other bonuses. The shares are
purchased at a price equal to 85 percent of the lesser of:
o 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 is the price per share at which the ordinary shares
were offered to the public in the initial public offering); or
o 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.
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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 8, 1999, took effect upon the closing of the initial
public offering. Under the 1999 Nonemployee Directors Stock Option Plan,
nonemployee members of the board of directors are 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 the initial public 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 was made on the first
business day on which price quotations for Commtouch's ordinary shares were
available on the Nasdaq National Market, and the fair market value of the
ordinary shares on that day is 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 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
The Company has 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 full-time 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 will be 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, will be
generally deductible by the Company when made. Contributions by the
participants or the Company to the 401(k) Plan and the income earned on such
contributions will be 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
The Companies Law codifies the fiduciary duties that office holders, including
directors and executive officers, owe to a company. An office holder, as
defined in the Companies Law, is a director, general
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<PAGE>
manager, chief business manager, deputy general manager, vice general manager,
chief business manager, executive vice president, vice president, other manager
directly subordinate to the managing director or any other person assuming the
responsiblities of any of the foregoing positions without regard to the
person's title. An office holder's fiduciary duties consist of a duty of care
and a duty of loyalty. The duty of loyalty includes avoiding any conflict of
interest between the office holder's position in the company and such person's
personal affairs, avoiding any competition with the company, avoiding
exploiting any corporate opportunity of the company in order to receive
personal advantage for such person or others, and revealing to the company any
information or documents relating to the company's affairs which the office
holder has received due to his or her position as an office holder. Each person
listed in the table under "Management" above is an office holder. Under the
Companies Law, all arrangements as to compensation of office holders who are
not directors require approval of the Board of Directors unless the Articles of
Association provide otherwise. Arrangements regarding the compensation of
directors also require audit committee and shareholder approval.
The Companies Law requires that an office holder promptly disclose any personal
interest that he or she may have and all related material information known to
him or her, in connection with any existing or proposed transaction by the
company. In addition, if the transaction is an extraordinary transaction, as
defined under Israeli law, the office holder must also disclose any personal
interest held by the office holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any of the foregoing, or
by any corporation in which the office holder is a five percent or greater
shareholder, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. An extraordinary
transaction is defined as a transaction not in the ordinary course of business,
a transaction that is not on market terms, or a transaction that is likely to
have a material impact on the company's profitability, assets or liabilities.
In the case of a transaction which is not an extraordinary transaction, after
the office holder complies with the above disclosure requirement, only board
approval is required unless the Articles of Association of the company provides
otherwise. Such approval must determine that the transaction is not adverse to
the company's interest. If the transaction is an extraordinary transaction,
then in addition to any approval required by the Articles of Association it
also must be approved by the audit committee and by the Board of Directors and,
under specified circumstances, by a meeting of the shareholders. An Israeli
company whose shares are publicly traded shall not be entitled to approve such
transaction unless, at the time the approval was granted, two members of the
audit committee were outside directors and at least one of them was present at
the meeting at which the audit committee decided to grant the approval. This
provision shall not apply to companies whose shares are publicly traded abroad
until August 1, 2000. An office holder who has a personal interest in a matter
that is considered at a meeting of the Board of Directors or the audit
committee generally may not be present at this meeting or vote on this matter.
The Companies Law applies the same disclosure requirements to a controlling
shareholder of a public company, which includes a shareholder that holds 25% or
more of the voting rights if no other shareholder owns more that 50% of the
voting rights in the company. Extraordinary transactions with a controlling
shareholder or in which a controlling shareholder has a personal interest, and
the terms of compensation of a controlling shareholder who is an office holder,
require the approval of the audit committee, the Board of Directors and the
shareholders of the company.
The shareholder approval must either include at least one-third of the
disinterested shareholders who are present, in person or by proxy, at the
meeting or, alternatively, the total shareholdings of the disinterested
shareholders who vote against the transaction must not represent more than one
percent of the voting rights in the company.
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<PAGE>
Under the Companies Law, a shareholder has a duty to act in good faith towards
the company and other shareholders and refrain from abusing his or her power in
the company, including, among other things, voting in the general meeting of
shareholders on the following matters:
o any amendment to the Articles of Association;
o an increase of the company's authorized share capital;
o a merger; or
o approval of interested party transactions that require shareholder
approval.
In addition, any controlling shareholder, any shareholder who can determine the
outcome of a shareholder vote and any shareholder who, under the company's
Articles of Association, can appoint or prevent the appointment of an office
holder, is under a duty to act with fairness towards the company. The Companies
Law does not describe the substance of this duty.
For information concerning the direct and indirect personal interests of some
of our office holders and principal shareholders in transactions with us, see
"Certain Relationships and Related Transactions." See also "Anti-Takeover
Provisions Under Israeli Law" below.
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 or her as a result of the breach of his or her 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 (a)
monetary liability imposed upon him in favor of other persons pursuant to a
court judgment, including a compromise judgment or an arbitrator's decision
approved by a court and (b) reasonable litigation expenses, including
attorneys' fees, actually incurred by him or imposed upon him by a court, in an
action, suit or proceeding brought against him by or on behalf of the company
or other persons, or in connection with a criminal action which does not
require criminal intent in which he was convicted, in each case 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 provided such
insurance or indemnification is approved by the Audit Committee. The
Registration Rights Agreement which we entered into with Go2Net and Vulcan,
contains certain provisions relating to indemnification of our 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 Commtouch Software, Inc. 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
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<PAGE>
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 which indemnification is
permitted by Section 317, a corporation is obligated by Section 317 to
indemnify such person against expenses actually and reasonably incurred in
connection with the proceeding.
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<PAGE>
CERTAIN TRANSACTIONS
Relationship with Go2Net
Concurrent with the closing of the initial public offering, our U.S.
subsidiary, Commtouch Software, Inc., entered into a Customized Web-based Email
Service Agreement with Go2Net. Under that agreement, we provide customer email
services, including calendaring and other products and services, to end users
of Go2Net's various properties, which may include cable subscribers of Charter
Communications and its affiliates, users of services offered by High Speed
Access Corp. and any browser, website, ISP or similar service that Go2Net
sponsors or provides content to. Under the agreement, Commtouch hosts, serves
and maintains the email, calendaring and other services and Go2Net sells
advertising to be displayed in the products and services. Go2Net will pay
Commtouch a share of revenues from advertising generated from email,
calendaring or other services and related upgrades provided by Commtouch for
Go2Net's users. The agreement between Commtouch and Go2Net has a three year
duration, but Go2Net has the right on each anniversary to terminate the
agreement. Go2Net also has the right to terminate the agreement if there are
technical problems with the products or services provided by Commtouch. The
performance specifications set forth in the agreement include requiring us to
maintain certain levels of email system availability and response time, as well
as technical support to Go2Net's email end users and to Go2Net, among other
things.
In connection with entering into the email services agreement, we issued to
Go2Net a warrant to purchase 1,136,000 ordinary shares at an exercise price of
$12.80 per share. The warrant is non-forfeitable, fully vested and immediately
exercisable, and will expire five years from the date of the email service
agreement.
Concurrent with our entering into the email services agreement, we issued $13.3
million in ordinary shares to Go2Net and $6.7 million in ordinary shares to
Vulcan Ventures in a private placement at $14.88 per share. Pursuant to the
share purchase agreement, Go2Net and Vulcan Ventures have the right to name one
director to our board as long as they continue to hold at least 25% of the
combined number of shares purchased by them in the private placement and the
shares issuable to Go2Net upon exercise of the warrant. Mr. Camp was appointed
to the board pursuant to that agreement. In connection with this transaction,
we agreed to pay U.S. Bancorp Piper Jaffray an advisory fee of $550,000 under
the terms of an engagement letter agreement dated as of July 5, 1999.
We agreed to register the shares and warrant described above promptly after the
closing of the initial public offering. The registration statement became
effective on January 7, 2000.
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. Yoseph
Sela, and certain of the Evergreen Investors for a total investment of
approximately $2.3 million. The Evergreen Investors subsequently transferred
their shares to HarbourVest Evergreen L.P.
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<PAGE>
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 $3.0 million; (ii) 16,249 Series C Convertible
Preferred Shares to IGF for a total investment of approximately $1.2 million;
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% annually, with payments of interest only
due on March 17 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 collateralized by a pledge of
the stock purchased. The outstanding principal amount of the note as of February
29, 2000 is $341,272.
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% annually, with payments of interest only due on March 17 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 collateralized by a pledge of the stock purchased. The
outstanding principal amount of the note as of February 29, 2000 is $295,858.
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% annually, with payments of interest only
due on March 17 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.
Collins to purchase 94,560 ordinary shares of Commtouch at a purchase price of
$1.45 per share. The promissory note is collateralized by a pledge of the stock
purchased. The outstanding principal amount of the note as of February 29, 2000
is $137,112.
Robert "Rip" Gerber is the Vice President of Marketing and Ecommerce 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% annually,
with payments of interest only due on March 17 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 collateralized by
a pledge of the stock purchased. The outstanding principal amount of the note as
of February 29, 2000 is $103,617.
Scott Slater is the Vice President of Corporate Development of Commtouch
Software, Inc. On December 3, 1999, Mr. Slater exercised certain options
granted to him by Commtouch. As consideration for the ordinary shares purchased
pursuant to the exercise of the options, Mr. Slater
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provided Commtouch with a full-recourse promissory note dated December 3, 1999
in the original principal amount of $150,000. The promissory note bears interest
at 4.83% annually, with payments of interest only due on December 3 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. Slater to purchase 7,500 ordinary
shares of Commtouch at a purchase price of $20.00 per share. The promissory note
is collateralized by a pledge of the stock purchased. The outstanding principal
amount of the note as of February 29, 2000 is $150,000.
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. Dr. Sharfman rejoined the Board as a director in March
2000. 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 e-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 e-commerce), 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 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
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<PAGE>
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. Dr. Sharfman repaid the loan and Commtouch released the severance payments
in the third quarter of 1999.
Loan to Amir Lev
Amir Lev has been a director and executive officer of Commtouch since its
inception in 1991. In 1999, Mr. Lev exercised options for Commtouch ordinary
shares. We loaned him $364,000 so that he could make an estimated tax payment
in connection with this option. This full recourse loan was linked to the
Israeli Consumer Price Index and interest accrued at a rate of 2% per annum.
The loan was repaid in full on February 10, 2000.
Amendment to Registration Rights Agreement
The Company and certain shareholders are parties to a registration rights
agreement. On March 10, 2000, the Company and these shareholders amended the
registration rights agreement to provide piggyback registration rights to James
Collins, Amir Lev, Gideon Mantel, Isabel Maxwell and Nahum Sharfman for this
offering as long as it is closed within 60 days of the date of the amendment.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table presents information with respect to beneficial ownership
of our ordinary shares as of February 29, 2000 and as adjusted to reflect the
sale of the shares offered by this prospectus by:
o each person or entity known to Commtouch to own beneficially more than
five percent of Commtouch's ordinary shares,
o each of our directors and officers known to Commtouch to own beneficially
more than one percent of Commtouch's ordinary shares,
o all executive officers and directors as a group, and
o the Selling Shareholders.
The table includes all shares issuable within 60 days of February 29, 2000 upon
the exercise of options, warrants and other rights beneficially owned by the
indicated shareholders on that date. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and includes
voting and investment power with respect to shares. To our knowledge, except
under applicable community property laws or as otherwise indicated, the persons
named in the table have sole voting and sole investment control with respect to
all shares beneficially owned. The applicable percentage of ownership for each
shareholder is based on 16,462,449 ordinary shares outstanding as of February
29, 2000, (assuming in each case the issuance of 901,471 ordinary shares upon
the assumed net exercise at an assumed share price of $62.00 per share of the
in-the-money warrant to purchase 1,136,000 ordinary shares issued to Go2Net at
an exercise price of $12.80 per share) and 18,131,449 ordinary shares
outstanding immediately following the completion of this offering, assuming no
exercise of the underwriters' over-allotment option, together with applicable
options and/or warrants for that shareholder. Ordinary shares issuable upon
exercise of options and other rights beneficially owned are deemed outstanding
for the purpose of computing the percentage ownership of the person holding
those options and other rights, but are not deemed outstanding for computing the
percentage ownership of any other person.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering Shares Owned After Offering
----------------------- Being -----------------------
Name of Beneficial Owner Number Percent Offered Number Percent
- ---------------------------------------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Thomas Camp(1) ......................... 2,253,057 13.7 0 2,253,057 12.4
c/o Go2Net, Inc.
999 3rd Avenue, Suite 4700
Seattle, WA 98104
Allan Barkat(2) ........................ 761,842 4.6 400,000 361,842 2.0
Israel Growth Fund L.P.
c/o Apax-Leumi Inc.
15 Portland Place
London, England
Gideon Mantel(3) ....................... 427,863 2.6 100,000 327,863 1.8
3945 Freedom Circle, Suite 730
c/o Commtouch Software, Inc.
Santa Clara, California 95054
Amir Lev(4) ............................ 422,866 2.6 100,000 322,866 1.8
c/o Commtouch Software Ltd.
6 Hazoran Street
Poleg Industrial Park, P.O. Box 8511
Netanya 42504, Israel
Yair Safrai(5) ......................... 408,900 2.5 401,400 7,500 *
Entities affiliated with Concord Group
11 Galgaley Haplada St. Bldg. 3
P.O. Box 12226, Herzelia
46733 Israel
Nahum Sharfman ......................... 365,000 2.2 165,000 200,000 1.1
22 Hameyasdim St., Karkur
37064 Israel
</TABLE>
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<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to Offering Shares Owned After Offering
------------------------------ Being -----------------------
Name of Beneficial Owner Number Percent Offered Number Percent
- ------------------------------------------------------- ------------------ --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Isabel Maxwell(6) ..................................... 207,142 1.3 50,000 157,142 *
c/o Commtouch Software, Inc.
3945 Freedom Circle, Suite 730
Santa Clara, California 95054
James E. Collins(7) ................................... 127,108 * 20,000 107,108 *
c/o Commtouch Software, Inc.
3945 Freedom Circle, Suite 730
Santa Clara, California 95054
Nomura International plc .............................. 63,580 * 31,000 32,580 *
Nomura House
1 St. Martin's-Le-Grand
London EC1A 4NP England
Oceanic Bank and Trust Limited ........................ 31,800 * 31,800 0 0
Fourth Fl., Euro Canadian Center
Malborough St. and Navy Lyon Rd.
Nassau, Bahamas
Rumson Capital, L.L.C. ................................ 31,800 * 31,800 0 0
Galleria Bldg. 1, 3rd Fl.
2 Bridge Ave.
Red Bank, NJ 07701
All executive officers and directors as a group
(10 persons) ......................................... 4,997,944(8) 30.1 1,236,400 3,761,544 20.6
All selling shareholders, including executive officers
and directors: ....................................... 5,125,124 31.1 1,331,000 3,794,124 20.9
<FN>
- ------------
* Less than one percent.
(1) Includes 896,057 shares purchased in the private placement by Go2Net and 901,471 shares exercisable under a warrant
granted to Go2Net on a net exercise basis based on the assumptions set forth in the paragraph preceding the table. All
such shares as well as the warrant itself have been registered for resale under a separate prospectus. Mr. Camp, who is
a director of the Company, is the Vice President, Business Development of Go2Net, and as such, may be deemed to
beneficially own such shares. Also includes 448,029 shares purchased in the private placement by Vulcan Ventures, which
beneficially owns approximately 30.0% of Go2Net. Mr. Camp disclaims beneficial ownership of all such ordinary shares.
Also includes 7,500 shares subject to an option held by Mr. Camp. William D. Savoy, Vice-President of Vulcan Ventures,
and Diane Daggatt, an investment analyst at Vulcan Northwest Inc., an affiliate of Vulcan Ventures, are members of the
board of directors of Go2Net.
(2) Represents 754,342 ordinary shares owned by Israel Growth Fund, L.P., which is advised by Apax-Leumi Partners, its
investment advisor and 7,500 shares subject to an option held by Mr. Barkat. 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.
(3) Certain of such shares are subject to a right of repurchase in favor of Commtouch Software, Inc. Includes 26,100 shares
subject to options held by Mr. Mantel. Does not include 185,000 ordinary shares subject to option grants to Mr. Mantel
which are subject to future vesting.
(4) Includes 40,250 shares subject to options held by Mr. Lev. Does not include 138,460 ordinary shares subject options
granted to Mr. Lev which are subject to future vesting.
(5) Includes 331,819 ordinary shares owned by k.t. Concord Venture Fund (Cayman), L.P. ("CVF"), 66,337 ordinary shares owned
by k.t. Concord Venture Fund (Israel), L.P. ("CVF Israel"), 2,713 ordinary shares owned by k.t. Concord Venture Advisors
(Cayman), L.P. ("CVA"), and 531 ordinary shares owned by k.t. Concord Venture Advisors (Israel), L.P. ("CVA Israel") and
7,500 shares subject to an option held by Mr. Safrai. 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. Includes 2,350 shares
subject to options held by Ms. Maxwell. Does not include 3,750 ordinary shares subject to an option granted to Ms.
Maxwell.
(7) Certain of such shares are subject to a right of repurchase in favor of Commtouch Software, Inc. Includes 2,500 shares
subject to an option held by Mr. Collins. Does not include 7,500 ordinary shares subject to an option granted to Mr.
Collins under the 1996 CSI Stock Option Plan.
(8) Includes 118,136 ordinary shares issuable upon exercise of options exercisable within 60 days of February 29, 2000.
</FN>
</TABLE>
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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 February 29, 2000, our authorized share capital consisted of 40,000,000
ordinary shares, NIS 0.05 par value. As of February 29, 2000, there were
16,462,449 ordinary shares (assuming the net exercise of the Go2Net warrant) and
no preferred shares issued and outstanding.
Description of Ordinary Shares
All issued and outstanding ordinary shares of Commtouch are, and the ordinary
shares offered upon exercise of the Go2Net warrant 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 our Memorandum of
Association, Articles of Association nor the laws of the State of Israel
restrict in any way the ownership or voting of ordinary shares by non-residents
of Israel, except with respect to subjects of countries which are in a state of
war with Israel.
Dividend and Liquidation Rights
The ordinary shares offered by this prospectus, when issued, will be entitled
to their full proportion 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 share dividend, holders of shares can receive shares of a class
whether such class existed prior thereto or was created therefor or shares of
the same class that conferred upon the holders the right to receive such
dividend.
Voting, Shareholder Meetings and Resolutions
Holders of ordinary shares have one vote for each ordinary share held on all
matters submitted to a vote of shareholders. Such rights may be affected by the
future grant of any special voting rights to the holders of a class of shares
with preferential rights. 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
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<PAGE>
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:
o amending the Articles of Association;
o amending the Memorandum of Association;
o changing our name;
o making changes in the capital structure of Commtouch, such as a reduction
of capital, increase of capital or share split;
o merger or consolidation;
o voluntary winding up; and
o 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.
As of December 31, 1999, our executive officers, directors, affiliates of
directors (excluding Go2Net and Vulcan) and five percent or greater
shareholders owned beneficially an aggregate of approximately 52% of the
Company's outstanding ordinary shares. See "Principal Shareholders."
Anti-Takeover Provisions Under Israeli Law
Under the Companies Law, a merger is generally required to be approved by the
shareholders and board of directors of each of the merging companies. If the
share capital of the company that will not be the surviving company is divided
into different classes of shares, the approval of each class is also required.
The Companies Law provides that the articles of association of companies, such
as ours, that were incorporated prior to February 1, 2000 are deemed to include
a provision whereby the approval of a merger requires a majority of three
quarters of those present and voting at a general meeting of shareholders. In
addition, a merger can be completed only after all approvals have been
submitted to the Israeli Registrar of Companies and seventy days have passed
from the time that a proposal for approval of the merger was filed with the
Registrar.
The Companies Law provides that an acquisition of shares in a public company
must be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 25% shareholder of the company. This rule does not
apply if there is already another 25% shareholder of the company. Similarly,
the Companies Law provides that an acquisition of shares in a public company
must be made by means of tender offer if as a result of the acquisition the
purchaser would become a 45% shareholder of the company, unless someone else
already holds a majority of the voting power of the company. These rules do not
apply if the acquisition is made by way of a merger. Regulations promulgated
under the Companies Law provide that these tender offer requirements do not
apply to companies whose shares are listed for trading outside of Israel if,
according to the law in the country in which the shares are traded, including
the rules and regulations of the stock exchange on which the shares are traded,
either:
o there is a limitation on acquistion of any level of control of the
company; or
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<PAGE>
o the acquisition of any level of control requires the purchaser to do so
by means of a tender offer to the public.
Finally, Israeli tax law treats specified acquisitions, including a
stock-for-stock swap between an Israeli company and a foreign company, less
favorably than does U.S. tax law. For example, Israeli tax law may subject a
shareholder who exchanges his ordinary shares for shares in a foreign
corporation to immediate taxation.
Transfer of Shares and Notices
Fully paid ordinary shares are issued in registered form and may be transferred
freely. Each shareholder of record is entitled to receive at least seven days'
prior notice of shareholder meetings. A special resolution can be adopted only
if shareholders are given 21 days' prior notice of the meeting at which such
resolution will be voted on (unless all shareholders entitled to vote agree
that the meeting may be held on a shorter notice period). For purposes of
determining the shareholders entitled to notice and to vote at such meeting,
the Board of Directors may fix the record date not exceeding 90 days prior to
the date of any general meeting.
Modification of Class Rights
If at any time the share capital is divided into different classes of shares,
the rights attached to any class (unless otherwise provided by our Articles of
Association) may be modified or abrogated by Commtouch by a special resolution
subject to the consent in writing of the holders of the issued shares of the
class, or by the adoption of a special resolution passed at a separate general
meeting of the holders of the shares of such class.
Description of Warrants
Description of Go2Net Warrant
In connection with the Customized Web-based Email Service Agreement entered
into between Commtouch and Go2Net, Commtouch issued to Go2Net a fully vested,
non-forfeitable, warrant to purchase 1,136,000 ordinary shares at a per-share
exercise price of $12.80, subject to adjustment as provided in the warrant. The
warrant is exercisable at any time until it expires on July 16, 2004. At
Go2Net's option, the warrant is exercisable pursuant to a cashless exercise
based on the average closing price of the ordinary shares for the five days
preceding the exercise. The Company extended registration rights to Go2Net
covering the warrant and the shares issuable upon exercise of the warrant and a
registration statement relating to the resale of the shares and the warrant
became effective on January 7, 2000.
The holder of the warrant is given the opportunity to profit from a rise in the
market price of the ordinary shares and the warrant. To the extent that the
warrant is exercised, dilution of the interests of the Company's shareholders
will occur. In addition, the warrant includes provisions which adjust the
exercise and price upon the occurrence of certain events which might otherwise
dilute the value of the warrant.
Description of Other Warrants
Commtouch and Microsoft Corporation entered into an Email Services Agreement
dated October 26, 1999. Under this agreement, Commtouch will, at Microsoft's
option, customize, host and maintain email services for Microsoft websites in
the U.S. and internationally. Microsoft will pay one-time fees for the set-up
and customization of the email service for each website with respect to which
Microsoft chooses to use our services, as well as quarterly service fees for
the email service based on the number of mailboxes hosted. The term of the
agreement shall continue for 12 months after the first commercial distribution
date of the email service and Microsoft may extend the initial term on a
quarterly or annual basis upon 60 days prior written notice. The agreement may
be terminated by Microsoft for convenience upon 90 days' prior written notice,
or by either party upon a material breach by the other party upon the terms
specified in the agreement. In connection with the agreement, Commtouch granted
Microsoft a warrant, exercisable until December 29, 1999, to purchase 707,965
of Commtouch's ordinary shares at an exercise price of $28.25 per share for an
aggregate
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<PAGE>
exercise price of $20.0 million. On December 29, 1999, Microsoft exercised the
warrant and now holds 707,965 ordinary shares. We agreed to register the resale
of these shares with the SEC. The registration statement became effective on
January 7, 2000.
As of December 31, 1999, Commtouch had outstanding a warrant to purchase 4,860
ordinary shares issued to a consultant. This warrant was net exercised into
4,461 ordinary shares in January 2000.
Registration Rights
The holders of convertible preferred shares which were converted into 7,109,800
ordinary shares (the "Registrable Securities") upon effectiveness of the initial
public offering, which include certain of the Selling Shareholders, have certain
rights to register those shares under the Securities Act. If requested by
holders of a majority of the Registrable Securities after the second anniversary
of the date of the initial public offering, Commtouch must file a registration
statement under the Securities Act covering all Registrable Securities requested
to be included by all holders of such Registrable Securities. Commtouch may be
required to effect up to two such registrations. Commtouch has the right to
delay any such registration for up to 120 days under certain circumstances, but
not more than once during any 12-month period.
In addition, if Commtouch proposes to register any of its ordinary shares under
the Securities Act other than in connection with a company employee benefit
plan or a corporate reorganization pursuant to Rule 145 under the Securities
Act, or a registration on any registration form that does not permit secondary
sales or does not include substantially the same information as would be
required to be included in a registration statement covering the sale of
Registrable Securities, the holders of Registrable Securities may require
Commtouch to include all or a portion of their shares in such registration,
although the managing underwriter of any such offering has certain rights to
limit the number of shares in such registration.
Further, a majority of the holders of Registrable Securities may require
Commtouch to register all or any portion of their Registrable Securities on
Form F-3 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.
The registration rights described in the preceding three paragraphs expire five
years after the closing date of the initial public offering. The Company filed
the registration statement of which this prospectus is a part pursuant to those
registration rights, to allow the Selling Securityholders to sell a portion of
their shareholdings.
In addition, the Company granted registration rights to Go2Net, Vulcan Ventures
and Microsoft pursuant to which their holdings in the Company were registered
on January 7, 2000.
James Collins, Amir Lev, Gideon Mantel, Isabel Maxwell and Nahum Sharfman, all
executive officers and/or directors of the Company, were granted certain
piggyback registration rights in connection with this offering. See "Certain
Transactions--Amendment to Registration Rights Agreement."
Access to Information
We file reports with the Israeli Registrar of Companies regarding our
registered address, our registered capital, our shareholders of record and the
number of shares held by each, the identity of the directors and details
regarding security interests on our assets. In addition, Commtouch must file
with the Israeli Registrar of Companies its Articles of Association and a copy
of any special resolution adopted by a general meeting of shareholders. The
information filed with the Registrar of Companies is available to the public.
In addition to the information available to the public, our shareholders are
entitled, upon request, to review and receive copies of all minutes of meetings
of our shareholders.
Transfer Agent and Registrar
The transfer agent and registrar for our ordinary shares is Norwest Bank
Minnesota, N.A.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of our ordinary shares in the public market,
or the possibility of these sales occurring, could adversely affect prevailing
market prices for our ordinary shares or our future ability to raise capital
through an offering of equity securities. Upon completion of this offering, we
will have outstanding 18,131,449 ordinary shares (18,581,449 shares if the
overallotment option is exercised), based on shares outstanding as of February
29, 2000 (assuming the issuance of 901,471 ordinary shares upon the assumed net
exercise at an assumed share price of $62.00 per share of the in-the-money
warrant to purchase 1,136,000 ordinary shares issued to Go2Net at an exercise
price of $12.80 per share). 3,000,000 ordinary shares to be sold by us and the
selling shareholders in this offering (3,450,000 ordinary shares if the
underwriters' over-allotment option is exercised in full); the 3,450,000
ordinary shares sold in our initial public offering; and the 1,344,086 ordinary
shares and the warrant exercisable for 1,136,000 ordinary shares registered in
January 2000 on behalf of Go2Net and Vulcan Ventures, as well as the 707,965
ordinary shares registered at that time on behalf of Microsoft, are freely
tradable in the public market without restriction under the Securities Act,
unless the shares are held by "affiliates" of the Company, as that term is
defined in Rule 144 under the Securities Act.
The remaining ordinary shares outstanding upon completion of this offering will
be "restricted securities" as that term is defined under Rule 144. We issued
and sold these restricted securities in private transactions in reliance on
exemptions from registration under the Securities Act. Restricted securities
may be sold in the public market only if they are registered or if they qualify
for an exemption from registration under Rule 144 or Rule 701 under the
Securities Act, as summarized below.
Shares Subject to Lock-Up Agreements and Other Restrictions
The selling shareholders have signed lock-up agreements with the underwriters
in which they have agreed not to sell, pledge or otherwise dispose of their
shares (other than shares being offered by this prospectus) for a period of 90
days from the date of this prospectus, subject to limited exceptions. U.S.
Bancorp Piper Jaffray may release this restriction wholly or partially at any
time with or without notice but has no current plans to do so. In addition to
the restrictions imposed by the securities laws, 700,180 of the restricted
shares were issued to certain Commtouch employees under agreements which give
Commtouch Software, Inc. a repurchase option on any unvested shares. The
repurchase option lapses ratably over time. As of February 29, 2000,
approximately 235,618 ordinary shares are subject to repurchase. Microsoft has
agreed with Commtouch not to sell, pledge or otherwise dispose of its 707,965
ordinary shares (or any other of our ordinary shares which it may acquire)
until after June 29, 2000.
Shares Subject to Restriction under Rule 144
Most of the restricted shares are subject to certain volume and other resale
restrictions pursuant to Rule 144 because the holders are affiliates of
Commtouch. In general, under Rule 144, an affiliate of Commtouch, or a person
(including a group of related persons whose shares must be aggregated under the
Rule) who has beneficially owned restricted shares for at least one year, will
be entitled to sell in any three-month period a number of shares that does not
exceed the greater of
* 1% of the then outstanding ordinary shares (approximately 181,314 shares
immediately following completion of the offering, assuming net exercise
of the Go2Net warrant upon the assumptions noted above), 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 who was not an affiliate of Commtouch for 90 days before
the sale and who has beneficially owned the shares for at least two years may
sell under Rule 144(k) without regard to the above limitations.
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<PAGE>
Registration Rights
Some of our shareholders have contractual rights which require us to register
their shares with the SEC. The registration statement of which this prospectus
is a part includes 832,400 ordinary shares subject to these registration rights.
Pursuant to the registration rights of Go2Net, Vulcan Ventures and Microsoft,
the Company filed a registration statement covering the resale of 1,344,086
shares and the warrant granted to Go2Net to purchase 1,136,000 ordinary shares
and the ordinary shares issuable upon exercise of the warrant, as well as the
707,965 shares issued to Microsoft. The registration statement became effective
on January 7, 2000. In addition to shares previously registered pursuant to
these rights, and shares to which this prospectus relates, the holders of an
additional approximately 2,851,240 ordinary shares have registration rights
under certain circumstances.
Shares Under Employee Benefit Plans
On January 20, 2000, we filed a Form S-8 registration statement under the
Securities Act to register 5,400,000 ordinary shares issuable in connection with
option exercises and shares reserved for issuance under all stock plans and
agreements as well as 150,000 ordinary shares under the Company's Employee Stock
Purchase Plan which the Company may issue to employees from time to time. The
Company also may issue employee and director stock options from time to time.
Such options are subject to vesting periods after which the shares may be resold
by the holders, subject to Rule 144 limitations if the holder is an affiliate.
Of 2,829,342 options issued, 125,500 option shares were vested and unexercised
as of February 29, 2000 and 1,077,370 options had been exercised.
The following table illustrates the above discussion:
<TABLE>
<CAPTION>
Shares Not Subject to Restrictions:
- -------------------------------------------------------------------------------------------------
<S> <C>
3,450,000 shares issued by the Company in initial public offering
1,344,086 shares registered on behalf of Go2Net and Vulcan Ventures offered under
separate prospectus
1,136,000 shares underlying Go2Net warrant offered under separate prospectus(1)
1,669,000 shares being registered by the Company in this offering (not including 450,000
shares covered by the over-allotment option, if exercised)
1,331,000 shares being registered by the selling shareholders in this offering
5,313,530 shares registered on Form S-8(2)
</TABLE>
<TABLE>
<CAPTION>
Other Shares:
- ---------------------------------------------------------------------------------------------------
<S> <C>
235,618 restricted shares currently held by employees and subject to Company's
repurchase option
707,965 shares registered on behalf of Microsoft (not freely tradable until
June 29, 2000)(3)
86,470 Option shares registered on Form S-8 (see above) but subject to lock-up.
1,707,571 shares held by selling shareholders not being registered in this offering and
subject to lockup agreements with underwriters expiring on June , 2000
2,646,000 shares held by other shareholders, of which 1,898,980 shares became eligible for
resale under Rule 144 through February 2000 and 747,020 shares which become
eligible for resale under Rule 144 on April 23, 2000 (approximately 2,200,000 of
these shares are subject to registration rights agreements with the Company)
<FN>
- ------------
(1) Shares are issuable at the time of exercise and are not yet outstanding.
(2) A total of 5,400,000 shares were registered, but 86,470 shares will be
subject to lock-up. Includes 5,250,000 option shares, as well as 150,000
shares under the Company's Employee Stock Purchase Plan which the Company
may issue to employees from time to time. The Company also may issue
employee and director stock options from time to time. Such options are
subject to vesting periods after which the shares may be resold by the
holders, subject to Rule 144 limitations if the holder is an affiliate. Of
2,829,342 options issued, 125,000 option shares were vested and unexercised
as of February 29, 2000 and 1,077,370 options had been exercised.
(3) Microsoft has agreed not to sell, pledge or otherwise dispose of its
707,965 ordinary shares (or any other of our ordinary shares which it may
acquire) until after June 29, 2000.
</FN>
</TABLE>
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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.
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.
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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
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 of
its pre-1999 tax years. Because Commtouch acquired substantial cash in
connection with its initial public
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offering in 1999, it is possible that Commtouch became a PFIC in its 1999 tax
year. Commtouch will not be able to determine whether it in fact became a PFIC
in its 1999 tax year until its operating results for the last quarter of 1999
are available. If Commtouch did not become a PFIC in its 1999 tax year, then
Commtouch expects that the majority of its assets will continue to generate
sufficient levels of active income for it to avoid PFIC treatment for U.S.
federal income tax purposes in post-1999 tax years. 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, if
Commtouch did not become a PFIC in its 1999 tax year, 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 or by attribution, 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 or by attribution, 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
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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).
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 will not be able to determine whether it became a PFIC in its 1999
tax year until its operating results for the last quarter of 1999 are
available. If Commtouch did not become a PFIC in its 1999 tax year, Commtouch
believes that it will not be a PFIC after this Offering. Commtouch also
believes that it is not and will not be a PHC, FPHC or FIC after this Offering.
However, no assurance can be given as to Commtouch's future status.
ISRAELI TAXATION AND INVESTMENT PROGRAMS
The following discussion summarizes the material Israeli tax consequences
relating 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
The regular general corporate tax rate in Israel is 36%. 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."
Israeli tax loss carryforwards were approximately $22.5 million as of December
31, 1999. The amount of our tax loss carryforwards will be reduced by our
future taxable income.
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
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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.
Law for the Encouragement of Industry (Taxes), 1969
Commtouch is currently considered to qualify 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:
o deductions of 12.5% per annum of the purchase price of a patent or of
know-how that is utilized in the development or advancement of its
enterprise;
o an election under certain conditions to file a consolidated return with
additional related industrial companies;
o accelerated depreciation rates on equipment and buildings; and
o deduction of expenses incurred in connection with a public issuance of
shares listed for trading over a three year period. The tax authorities
may construe this benefit to be relevant only upon a public issuance of
shares in Israel.
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 is and will continue to be considered 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
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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. In early 2000, we filed an application to supplement our
second plan and we also filed an application for a new, third plan.
Dividends paid by companies owning approved enterprises, the source of which is
income derived from an approved enterprise during the applicable benefits
period, are generally taxed at a reduced rate of 15.0% if the dividends are
paid during the benefits period or at any time up to 12 years after the
benefits period. This tax must be withheld at source by the company paying the
dividend. In the case of a "foreign investor's company," the 12 year limitation
on reduced withholding tax on dividends does not apply. Subject to various
conditions, a foreign investor's company is a company more than 25.0% of whose
share capital, in terms of shares, rights to profits, voting and appointment of
directors, and of whose combined share and loan capital is owned by non-Israeli
residents. A dividend paid from income derived from an enterprise owned by a
company which has elected the alternative benefits program during the period in
which it is exempt from tax would also generally be subject to the 15.0% tax
rate but would render the company liable for corporate tax on the amount
distributed, which is defined for this purpose as including the amount of the
corporate tax that applies as a result of the distribution, at the rate that
would have been applicable had the company not elected the alternative benefits
program, generally 25.0%. Generally, any dividends distributed 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, However,
a company may elect to attribute any dividend distributed by it only to income
not subject to the alternative benefits program.
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
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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 of 15% 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 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 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
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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. The
Company is subject to various provisions of the Research Law and regulations and
derivatives thereunder.
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 difference) and would likely be denied receipt of such grants or
benefits, and participation of such programs, thereafter.
The Company participated in programs sponsored by the OCS for the support of
research and development activities. Through December 31, 1999, 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% to 150% of the
grants received.
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, 1999, the Company had
received grants from the Marketing Fund in the amount of approximately
$279,000.
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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 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.
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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.
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UNDERWRITING
The underwriters named below, for whom U.S. Bancorp Piper Jaffray Inc., Thomas
Weisel Partners LLC, Warburg Dillon Read LLC, a subsidiary of UBS AG, and
William Blair & Company, L.L.C. 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.
Underwriters Number of Shares
------------ ------------------
U.S. Bancorp Piper Jaffray Inc. ........
Thomas Weisel Partners LLC .............
Warburg Dillon Read LLC ................
William Blair & Company, L.L.C. ........
-----------
Total ......................... 3,000,000
The underwriters have advised us and the selling shareholders 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.
Thomas Weisel Partners LLC, one of the representatives of the underwriters, was
organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners LLC has been named as a lead manager or co-manager
on 135 filed public offerings of equity securities, of which 101 have been
completed. Since that time, it also has acted as a syndicate member in an
additional 73 public offerings of equity securities. Thomas Weisel Partners LLC
does not have any material relationship with us or any of our officers,
directors or other controlling persons, except with respect to the underwriting
agreement.
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 per share and total underwriting discount to be
paid by us and the selling shareholders to the underwriters in connection with
this offering. These amounts are shown assuming both no exercise and full
exercise of the over-allotment option.
No Exercise Full Exercise
------------- ---------------
Payable by Commtouch
Per share .......................... $ $
Total ............................. $ $
Payable by the selling shareholders
Per share .......................... $ $
Total ............................. $ $
The expenses of the offering, exclusive of the underwriting discount, include
the Securities and Exchange Commission registration fee, the National
Association of Securities Dealers filing fee, the Nasdaq National Market listing
fee, printing expenses, legal fees and expenses, accounting fees and expenses,
road show expenses, Blue Sky fees and expenses, transfer agent and registrar
fees and other miscellaneous fees. We estimate these fees and expenses will be
an aggregate of approximately $ . These fees and expenses are payable
entirely by us.
78
<PAGE>
We and the selling shareholders 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.
Pursuant to the agreements granting registration rights to the selling
shareholders, the Company has agreed to indemnify the selling shareholders
against such liabilities as they may incur as a result of any untrue statement
of a material fact in the Registration Statement of which this prospectus is a
part, or any omission herein or therein to state a material fact necessary in
order to make the statements made, in light of the circumstances under which
they were made, not misleading. Such indemnification includes liabilities under
the Securities Act, the Securities Exchange Act of 1934, state securities laws
and the rules thereunder, but excludes liabilities for statements or omissions
that were based on information provided by the selling shareholders, as to
which they have agreed to indemnify the Company and any underwriter.
We and the selling shareholders have agreed to certain restrictions on our
ability to sell additional ordinary shares (other than those shares which are
offered in this prospectus) for a period of 90 days after the date of this
prospectus. We have agreed not to directly or indirectly 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
exercisable or exchangeable for, ordinary shares, without the prior written
consent of U.S. Bancorp Piper Jaffray. The agreements provide exceptions for
(1) sales to underwriters pursuant to the underwriting agreement, (2) 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 (3) 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.
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 and the
selling shareholders. 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 by us 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.
In connection with this offering, certain underwriters (and selling group
members) may also engage in passive market making transactions in the ordinary
shares on the Nasdaq National Market. Passive market making consists of
displaying bids on the Nasdaq National Market limited by the prices of
independent market makers and effecting purchases limited by such prices and in
response to order flow. Rule 103 of Regulation M promulgated by the Securities
and Exchange Commission limits the amount of net purchases that each passive
market maker may make and the displayed size of each bid. Passive market making
may stabilize the market price of the ordinary shares at a level above that
which might otherwise prevail in the open market and, if commenced, may be
discontinued at any time.
79
<PAGE>
Each selling shareholder and any other persons participating in a distribution
of securities will be subject to applicable provisions of the Securities
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, selling shareholders and
other persons participating in a distribution of securities. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
from simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distribution, subject to specified exceptions or
exemptions. All of the foregoing may affect the marketability of the securities
offered hereby.
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
Faegre & Benson LLP, Minneapolis, Minnesota with respect to United States law,
and by Yigal Arnon & Co., Jerusalem, Israel, with respect to Israeli law. The
partners of Naschitz, Brandes & Co. and McCutchen, Doyle, Brown & Enersen, LLP
beneficially own, in the aggregate, less than 1% of the outstanding shares of
the Company.
EXPERTS
The consolidated financial statements of Commtouch Software Ltd. as of December
31, 1998 and 1999 and for each of the three years in the period ended December
31, 1999 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.
ISA EXEMPTION
The Israel Securities Authority has granted us an exemption from the obligation
to publish this prospectus in the manner required pursuant to the prevailing
laws of the State of Israel. 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.
80
<PAGE>
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. We are required to file annual and
special reports and other information with the SEC.
You can read our SEC filings, including the registration statement, over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and
copy any document we file with the SEC at its public reference facilities at
450 Fifth Street, NW, Washington, DC 20549, 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. You may also obtain copies of the documents
at prescribed rates by writing to the Public Reference Section of the SEC at
450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
facilities. Our SEC filings are also available at the office of the Nasdaq
National Market. For further information on obtaining copies of our public
filings at the Nasdaq National Market, you should call (212) 656-5060.
Information contained on the Commtouch websites does not constitute part of
this prospectus.
We are subject to certain of the informational requirements of 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
quarterly reports or to file annual and current reports and financial
statements with the Securities and Exchange Commission as frequently or as
promptly as U.S. companies whose securities are registered under the Exchange
Act. However, we intend to file with the Securities and Exchange Commission,
within 180 days after the end of each fiscal year, an annual report on Form
20-F containing financial statements that will be examined and reported on,
with an opinion expressed by an independent accounting firm, as well as
quarterly reports on Form 6-K containing unaudited financial information for
the first three quarters of each fiscal year, within 60 days after the end of
each such quarter.
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 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:
o the judgment was rendered by a court which was, according to the laws of
the state of the court, competent to render the judgment,
o the judgment is no longer appealable,
81
<PAGE>
o 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
o 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.
82
<PAGE>
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
In U.S. Dollars
INDEX
Page
------
Report of Independent Auditors ................................ F-2
Consolidated Balance Sheets ................................... F-3
Consolidated Statements of Operations ........................ F-4
Statement of Changes in Shareholders' Equity (Deficit) ........ F-5
Consolidated Statements of Cash Flows ......................... F-6
Notes to Consolidated Financial Statements .................... F-7
F-1
<PAGE>
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 subsidiaries as of December 31, 1998 and 1999, 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, 1999. 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 subsidiaries as of December 31, 1998 and
1999, and the consolidated results of their operations, and their cash flows
for each of the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States.
Tel-Aviv, Israel
January 31, 2000
KOST, FORER & GABBAY
A Member of Ernst & Young International
F-2
<PAGE>
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
-------------------------
1998 1999
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ....................................... $ 834 $ 65,996
Marketable securities .......................................... -- 18,050
Trade receivables, net .......................................... 133 2,378
Prepaid marketing expenses ...................................... -- 4,508
Prepaid expenses and other accounts receivable .................. 244 1,648
--------- ---------
Total current assets ......................................... 1,211 92,580
--------- ---------
Long-term Lease Deposits ........................................... -- 1,254
Severance Pay Fund ................................................ 223 354
Property and Equipment, net ....................................... 932 6,148
--------- ---------
$ 2,366 $ 100,336
========= =========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Short-term bank credit .......................................... $ 1,328 $ --
Current portion of capital leases .............................. 112 120
Accounts payable ................................................ 446 1,510
Employees and payroll accruals .................................. 313 1,032
Deferred revenue ................................................ 74 561
Accrued expenses and other liabilities .......................... 378 1,304
--------- ---------
Total current liabilities .................................... 2,651 4,527
--------- ---------
Long-term portion of capital leases ............................. 164 44
Accrued severance pay .......................................... 366 453
--------- ---------
530 497
--------- ---------
Commitments and Contingent Liabilities (Note 6) -- --
Shareholders' Equity (Deficit)
Convertible Preferred Shares --
Authorized: 524,250 shares of NIS 1 par value as of
December 31, 1998; and none as of December 31, 1999; Issued
and outstanding: 221,265 shares as of December 31, 1998 and
none as of December 31, 1999 Aggregate liquidation preference
of approximately $13,200 as of December 31, 1998 and none as of
December 31, 1999 .............................................. 74 --
Ordinary Shares --
Authorized: 11,515,000 and 40,000,000 shares of NIS 0.05 par
value as of December 31, 1998 and 1999, respectively; Issued and
outstanding: 1,450,040 and 15,199,344 shares as of December 31,
1998 and 1999, respectively .................................... 27 213
Additional paid-in capital ...................................... 11,256 133,403
Deferred compensation .......................................... (418) (5,779)
Notes receivable from shareholders .............................. (77) (1,060)
Accumulated other comprehensive income .......................... -- 63
Accumulated deficit ............................................. (11,677) (31,528)
--------- ---------
Total shareholders' equity (deficit) ......................... (815) 95,312
--------- ---------
$ 2,366 $ 100,336
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-3
<PAGE>
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended
December 31,
---------------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Email services ........................................ $ -- $ 389 $ 4,251
Software licenses ..................................... 711 -- --
Software maintenance and services ..................... 188 -- --
--------- --------- ----------
Total revenues .................................... 899 389 4,251
--------- --------- ----------
Cost of revenues:
Email services ....................................... -- 569 3,643
Software licenses .................................... 21 -- --
Software maintenance and services ..................... 144 -- --
--------- --------- ----------
Total cost of revenues ............................. 165 569 3,643
--------- --------- ----------
Gross profit (loss) ...................................... 734 (180) 608
--------- --------- ----------
Operating expenses:
Research and development, net ........................ 1,108 1,149 2,942
Sales and marketing ................................. 2,202 2,001 7,722
General and administrative ........................... 829 604 4,328
Amortization of the prepaid marketing expenses ........ -- -- 3,263
Amortization of stock-based employee compensation ..... -- 91 3,436
--------- --------- ----------
Total operating expenses ........................... 4,139 3,845 21,691
--------- --------- ----------
Operating loss .......................................... (3,405) (4,025) (21,083)
Interest and other income (expenses), net ............... (68) (326) 1,232
--------- --------- ----------
Net loss ................................................ $ (3,473) $ (4,351) $ (19,851)
========= ========= ==========
Basic and diluted net loss per share ..................... $ (2.40) $ (3.00) $ (2.65)
========= ========= ==========
Weighted average number of shares used in computing
basic and diluted net loss per share .................... 1,450 1,450 7,487
========= ========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-4
<PAGE>
COMMTOUCH SOFTWARE LTD.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share data)
<TABLE>
<CAPTION>
Convertible
Preferred shares Ordinary shares Additional
----------------------- ------------------- paid-in
Shares Amount Shares Amount capital
--------- ------- ----------- ------ ----------
<S> <C> <C> <C> <C> <C>
Balance of January 1, 1997 ....................... 160,316 $ 56 1,450,040 $ 27 $ 4,624
Issuance of shares, net ........................ 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
Issuance of shares, net ........................ 37,628 11 -- -- 4,061
Warrants issued for services received and
bank line of credit ........................... -- -- -- -- 391
Deferred compensation ........................ -- -- -- -- 509
Amortization of deferred compensation ......... -- -- -- -- --
Net loss ....................................... -- -- -- -- --
--------- ------- ----------- ------ ----------
Balance as of December 31, 1998 .................. 221,265 74 1,450,040 27 11,256
Issuance of shares, net ........................ 134,225 33 -- -- 18,417
Issuance of shares at initial public offering,
net .......................................... -- -- 4,794,086 58 65,948
Conversion of preferred shares to ordinary
shares ....................................... (355,490) (107) 7,109,800 107 --
Fair value of warrants issued for services
and bank line of credit ........................ -- -- -- -- 8,131
Deferred compensation .......................... -- -- -- -- 8,797
Ordinary shares issued for notes ............... -- -- 670,180 8 1,029
Issuance of shares upon exercise of warrants,
net .......................................... -- -- 1,105,378 12 19,808
Issuance of shares upon exercise of options ..... -- -- 69,860 1 17
Amortization of deferred compensation ........... -- -- -- -- --
Repayment of notes receivable .................. -- -- -- -- --
Other comprehensive income--unrealized
holding gains on marketable securities ......... -- -- -- -- --
Net loss ....................................... -- -- -- -- --
Total comprehensive loss ........................ -- -- -- -- --
--------- ------- ----------- ------ ----------
Balance as of December 31, 1999 .................. -- $ -- 15,199,344 $ 213 $ 133,403
========= ======= =========== ====== ==========
<CAPTION>
Stock-based Notes Accumulated
employee receivable other
deferred from comprehensive Accumulated
compensation shareholders income deficit Total
-------------- -------------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance of January 1, 1997 ........................ $ -- $ (77) $-- $ (3,853) $ 777
Issuance of shares, net ......................... -- -- -- -- 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 ................... -- (77) -- (7,326) (1,018)
Issuance of shares, net ......................... -- -- -- -- 4,072
Warrants issued for services received and
bank line of credit ............................ -- -- -- -- 391
Deferred compensation ......................... (509) -- -- -- --
Amortization of deferred compensation .......... 91 -- -- -- 91
Net loss ........................................ -- -- -- (4,351) (4,351)
--------- --------- ----- ---------- ----------
Balance as of December 31, 1998 ................... (418) (77) -- (11,677) (815)
Issuance of shares, net ......................... -- -- -- -- 18,450
Issuance of shares at initial public offering,
net ........................................... -- -- -- -- 66,006
Conversion of preferred shares to ordinary
shares ........................................ -- -- -- -- --
Fair value of warrants issued for services
and bank line of credit ......................... -- -- -- -- 8,131
Deferred compensation ........................... (8,797) -- -- -- --
Ordinary shares issued for notes ................ -- (1,037) -- -- --
Issuance of shares upon exercise of warrants,
net ........................................... -- -- -- -- 19,820
Issuance of shares upon exercise of options ..... -- -- -- -- 18
Amortization of deferred compensation ............ 3,436 -- -- -- 3,436
Repayment of notes receivable ................... -- 54 -- -- 54
Other comprehensive income--unrealized
holding gains on marketable securities .......... -- -- 63 -- 63
Net loss ........................................ -- -- -- (19,851) (19,851)
----------
Total comprehensive loss ......................... -- -- -- -- (19,788)
- - - - -
--------- --------- ----- ---------- ----------
Balance as of December 31, 1999 ................... $ (5,779) $ (1,060) $ 63 $ (31,528) $ 95,312
========= ========= ===== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-5
<PAGE>
COMMTOUCH SOFTWARE LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
-------------------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ................................................... $ (3,473) $ (4,351) $ (19,851)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ........................... 206 236 1,709
Amortization of stock-based employee deferred
compensation and warrants issued for service
received and bank line of credit ........................ 46 482 3,796
Decrease (increase) in trade receivables, net ............ 738 (84) (2,245)
Amortization of prepaid marketing expenses ............... -- -- 3,263
Decrease (increase) in prepaid expenses and other
accounts receivable .................................... 14 (164) (1,028)
Increase in account payable .............................. 99 91 1,064
Increase (decrease) in employee and payroll accruals
and other liabilities ................................... (147) 128 1,645
Increase in deferred revenue ............................. -- 74 487
Increase (decrease) in accrued severance pay, net ........ (54) 19 (44)
Other ................................................... -- -- (12)
--------- --------- ----------
Net cash used in operating activities .......................... (2,571) (3,569) (11,216)
--------- --------- ----------
Cash flows from investing activities:
Purchase of available-for-sale marketable
securities ................................................... -- -- (17,987)
Long-term deposits .......................................... -- -- (1,254)
Advance to related party .................................... -- -- (364)
Proceeds from sale of property and equipment ............... -- -- 13
Purchase of property and equipment .......................... (93) (442) (6,938)
--------- --------- ----------
Net cash used in investing activities .......................... (93) (442) (26,530)
--------- --------- ----------
Cash flows from financing activities:
Short-term bank credit, net ................................. 733 595 (1,328)
Repayment of note receivable by shareholder ................. -- -- 54
Principal payment of capital lease .......................... (67) (146) (112)
Proceeds from issuance of shares, net ....................... 1,632 4,072 104,294
--------- --------- ----------
Net cash provided by financing activities ..................... 2,298 4,521 102,908
--------- --------- ----------
Increase (decrease) in cash and cash equivalents ............... (366) 510 65,162
Cash and cash equivalents at the beginning of the year ......... 690 324 834
--------- --------- ----------
Cash and cash equivalents at the end of the year ............... $ 324 $ 834 $ 65,996
========= ========= ==========
Supplemental disclosure of cash flows activity:
Cash paid during the year:
Interest ................................................... $ 48 $ 97 $ 117
========= ========= ==========
Supplemental disclosure of non-cash activity:
Capital lease obligations ................................... $ -- $ 328 $ --
========= ========= ==========
Ordinary shares issued for notes receivable from
shareholders ............................................... $ -- $ -- $ 1,037
========= ========= ==========
Issuance of Warrants for Prepaid Marketing Expenses ......... $ -- $ -- $ 7,771
========= ========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-6
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
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 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 customers. Email service revenues are derived from contracts
that provide for either a share of advertising revenues subject to a minimum
annual revenue commitment or a monthly per-email box fee, and fees for direct
marketing and communications services. In November 1999, the Company
established a wholly-owned subsidiary in England, Commtouch Software (UK) Ltd.
(the "UK company"). The UK company had not yet commenced operations.
During 1999, approximately 11% of the revenues were derived from a single
customer. During 1998, approximately 54% of the revenues were derived from
another single customer.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States.
a. 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.
b. Financial Statements Denominated in United States Dollars:
Most of the Company's revenues are denominated in United States dollars. In
addition, a substantial portion of the Company's costs are incurred in dollars.
Since the dollar is the primary currency in the economic environment in which
the Company and its subsidiaries operate, the dollar is their functional
currency, and, accordingly, monetary accounts maintained in currencies other
than the dollar are 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 current operations.
c. Principles of Consolidation:
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
d. Cash, Cash Equivalents and Marketable Securities:
The Company considers all highly liquid investments originally purchased with
maturities of three months or less to be cash equivalents.
The Company accounts for its marketable securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". All debt securities are designated
as available-for-sale. Available-for-sale securities are
F-7
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
carried at fair value, which is determined based upon the quoted market prices
of the securities, with unrealized gains and losses reported in shareholders'
equity, as items of other comprehensive income.
e. Prepaid Marketing Expenses:
The Company recorded prepaid marketing expenses, representing the fair value of
warrants which have been issued to Go2Net Inc. and Microsoft Corporation in
connection with commercial agreements into which the Company entered during
1999.
The prepaid marketing expenses are amortized using the straight-line method
over the minimum term of the agreements (twelve months).
In 1999, operating expenses included amortization of prepaid marketing expenses
amounting to $3.3 million.
f. 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 two to
sixteen years. Leasehold improvements are amortized by the straight-line method
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, 1999, no impairment losses have been identified.
g. 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, 1999,
the Company has charged all software development costs to research and
development expense in the period incurred.
h. Revenue Recognition:
Since 1998, the Company has derived 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 that 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.
F-8
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
i. 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 $288 in 1997 and none in 1998 and
1999.
j. Concentrations of Credit Risk:
Financial instruments that potentially subject the Company to concentrations of
credit risk consist principally of trade receivables, cash equivalents and
marketable securities. The majority of the Company's cash, cash equivalents and
marketable securities 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 transactions with companies
located primarily in North America, Europe and the Far East. The Company
maintains an allowance for doubtful trade receivables based upon the expected
collectibility of trade receivables. The allowance for doubtful accounts was
none and $405,000 at December 31, 1998 and 1999, respectively. In 1997, the
Company wrote off approximately $170,000 of trade receivables that were derived
from revenues recognized in 1996.
k. 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. The
pro-forma information with respect to the fair value of the options is provided
in accordance with the provisions of Statement No. 123.
In accounting for warrants granted to those other than employees, the Company
applied the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" and Emerging Issues Task Force ("EITF") 96-18 "Accounting for
Equity Instruments That Are Issued to other than Employees Acquiring or in
Conjunction with Selling, Goods or Services." . The fair value of these
warrants was estimated at the grant date, using the Black-Scholes
option-pricing model.
l. Basic and Diluted Net 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.
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 911,680, 1,236,100 and
2,497,470 for 1997, 1998 and 1999, respectively.
F-9
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
m. 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. 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 is based on the cash surrender value of these policies,
and includes immaterial profits.
Severance expenses for 1997, 1998 and 1999 were approximately $73,000, $62,000
and $129,000, respectively.
n. Fair Value of Financial Instruments:
The carrying amounts of cash and cash equivalents, marketable securities, trade
receivables and accounts payable, approximate their fair values due to the
short-term maturities of these instruments.
The fair value of long term deposits is estimated based on current interest
rates available to the Company for debt instruments with similar terms, degrees
of risk and remaining maturities. The carrying value of these obligations
approximates their respective fair values as of December 31, 1999.
o. Future Adoption of New Accounting Standards:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133 "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company must formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting.
The FASB has issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133".
The Statement defers for one year the effective date of SFAS No. 133. The rule
will apply to all fiscal quarters of all fiscal years beginning after June 15,
2000. The Company does not expect the impact of this new statement on the
consolidated financial statements to be material.
NOTE 3: MARKETABLE SECURITIES
December 31,
1999
--------------
Marketable securities are as follows (in thousands):
Commercial papers ................................. $ 2,230
Government securities .............................. 9,918
Corporate debt securities .......................... 5,902
---------
$ 18,050
=========
During 1999, the unrealized gross holding gains on marketable securities were
$80,000, while the unrealized gross holding losses were $17,000.
F-10
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
NOTE 4: PROPERTY AND EQUIPMENT
December 31,
--------------------
1998 1999
-------- ---------
Property and equipment are as follows (in thousands):
Computers and peripheral equipment .................. $1,260 $ 7,704
Office furniture and equipment ...................... 90 232
Motor vehicles ...................................... 118 135
Leasehold improvements .............................. 137 454
------- --------
1,605 8,525
Less accumulated depreciation ....................... 673 2,377
------- --------
$ 932 $ 6,148
======= ========
Computers and peripheral equipment under various capital lease agreements
amounted to approximately $328,000 and $328,000 as of December 31, 1998 and
1999, respectively, and their accumulated depreciation amounted to
approximately $38,000 and $185,000 as of December 31, 1998 and 1999,
respectively.
Depreciation expenses amounted to approximately $145,000, $236,000 and
$1,706,000 for 1997, 1998 and 1999, respectively.
NOTE 5: CAPITAL LEASES
During 1998, CSI 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 23%.
NOTE 6: COMMITMENTS AND CONTINGENT LIABILITIES
Operating Leases:
The facilities of the Company and CSI are leased under operating lease
agreements expiring through 2007. Future minimum lease payments under these
leases are as follows (in thousands):
2000 ............................. $ 2,251
2001 ............................. 2,803
2002 ............................. 2,889
2003 ............................. 2,782
2004 ............................. 2,770
Thereafter ....................... 6,168
--------
$ 19,663
========
Rent expenses for 1997, 1998 and 1999 were approximately $55,000, $56,000 and
$578,000, respectively. In connection with the lease agreement on an office
building, CSI deposited $1.3 million in long term lease deposits of which $1.1
million was held as collateral.
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.
F-11
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
As of December 31, 1999, the Company had an outstanding contingent obligation
to pay royalties in the aggregate amount of $275,000.
NOTE 7: INCOME TAXES
Israeli Income Tax
The Company's production facilities in Israel have been granted "Approved
Enterprise" status for two separate investment programs approved in 1992 and
1996 by the Israeli Investment Center under the Law for Encouragement of
Capital Investments, 1959 ("the Law").
The Company's first approved program commenced operation in 1995. The Company's
second program received a letter of approval in April 1996. An application for
an enlargement was submitted in February 2000 and has not yet been approved.
In February 2000 the Company submitted an application for another expansion
(third program).
Undistributed Israeli income derived from each of its "Approved Enterprise"
programs entitle the Company to a tax-exemption for a period of two years
commencing with 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 five to eight
years (depending on the level of foreign investment in the Company). These tax
benefits cannot continue beyond the earlier of twelve years from commencement
of operations, or fourteen years from receipt of approval. Thereafter, the
Company's income will be subject to the regular income tax rate of 36%. Income
that was not derived from "Approved Enterprise" in is period of benefit
mentioned above is taxed at the regular rate of 36%.
Distribution of cash dividends from income that was tax exempt due to the
"approved enterprise" status are subject to a tax of 10%-25%. In addition,
these dividends will be subject to a 15% withholding tax.
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. 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, mainly accelerated rates of depreciation and
the right to claim public issuance expenses.
As of December 31, 1999, Israeli net operating loss carryforwards amounted to
approximately $22.5 million. Such net operating loss may be carried forward
indefinitely and offset against future taxable income.
U.S. Income Tax:
CSI is taxed based upon tax laws in the U.S.
As of December 31, 1999, CSI had a U.S. federal net operating loss carryforward
of approximately $14.2 million. The net operating loss expires in various
amounts between the years 2008 and 2020.
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.
F-12
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
Deferred Taxes:
The Company expects that during the period in which its Israeli tax losses are
utilized its Israeli income would be substantially tax exempt. Accordingly
there will be no tax benefit available from such losses and no Israeli deferred
income taxes have been included in these financial statements.
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:
December 31,
----------------------
1998 1999
-------- --------
Deferred tax assets are as follows (in thousands):
U.S. operating loss carryforwards ..................... $ 1,656 $ 4,970
Reserves and allowances not currently deductible ...... 15 57
------- --------
Net deferred tax asset before valuation allowance ..... 1,671 5,027
Valuation allowance ................................... (1,671) (5,027)
------- --------
Net deferred tax asset ................................ $ -- $ --
======= ========
For the year ended December 31, 1999 the valuation allowance increased by
approximately $3.4 million. No utilization of CSI's tax losses carryforwards is
expected in the foreseeable future, because of its history of operating losses.
In 1997, 1998 and 1999, 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.
Pretax loss:
Pretax losses are as follows (in thousands):
1997 1998 1999
------- ------- --------
Israel ................................. $ 1,602 $ 2,497 $ 11,259
U.S. ................................... 1,871 1,854 8,592
------- ------- --------
$ 3,473 $ 4,351 $ 19,851
======= ======= ========
NOTE 8: SHAREHOLDERS' EQUITY
The ordinary shares of the Company are traded on the NASDAQ National Market.
a. Capital Shares:
In April 1999, the Company's Board of Directors approved: a 20 for 1 split of
ordinary shares, a change in the conversion ratio of preferred shares to
ordinary shares to 1 to 20 and an increase to the authorized ordinary shares to
40,000,000 shares of NIS 0.05 par value. The consolidated financial statements
have been retroactively adjusted to reflect such changes.
In July 1999, the Company completed an Initial Public Offering ("IPO") of its
ordinary shares. The Company sold 3,450,000 shares to the public at $16 per
share. Concurrent with the closing of the IPO, the Company sold 1,344,086
shares at $14.88 per share to Go2Net, Inc. In addition, the holders of Series
A, Series B, Series C and Series D convertible preferred shares received
ordinary shares pursuant to an automatic conversion, resulting in the issuance
of 7,109,800 ordinary shares in exchange for all outstanding convertible
preferred shares.
F-13
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
b. Warrants Issued:
Warrants to Investors. In 1996, the Company issued to certain Series B
investors warrants to purchase 13,873 Series B Convertible Preferred shares at
an exercise price of $44.04. These warrants were exercised concurrently with
the closing of the IPO.
Warrants Issued for Services Received and Financing Transactions. Through 1999,
the Company granted warrants in connection with a bank line of credit, loans
and consulting services received. At December 31, 1999, one warrant for 4,860
ordinary shares with an exercise price of $3.61 per share remained outstanding.
This warrant was net exercised into 4,461 shares in January 2000.
The Company recorded $17,000, $264,000, and $360,000 as interest expenses in
1997, 1998 and 1999, respectively. The Company recorded $29,000, $127,000 and
none in 1997, 1998 and 1999, respectively, as compensation expense and included
these amounts in operating expenses.
Warrants Issued to Strategic Partners and Customers. Concurrent with the
closing of the IPO, the Company entered into a customary commercial email
service agreement with Go2Net, a related party. Under this agreement, the
Company provides email services to the end users of Go2Net's various email
properties. In connection with this agreement, the Company issued a warrant
expiring in July 2004 to purchase 1,136,000 Ordinary Shares at an exercise
price of $12.80 per share. As of December 31, 1999, this warrant had not been
exercised. At the grant date, the fair value of this warrant was estimated as
$5.9 million and is being amortized to operating expenses over the minimum term
of the contract (twelve months).
In October 1999, the Company entered into a customary email service agreement
with Microsoft Corporation. Under this agreement, the Company delivers email
services to Microsoft Web sites. In connection with this agreement, the Company
issued a warrant to purchase 707,965 ordinary shares at an exercise price of
$28.25 per share. The warrant was exercised on December 29, 1999. At the grant
date, the fair value of this warrant was estimated at $1.9 million and is being
amortized to operating expenses over the minimum term of the contract (twelve
months).
c. Issuance of Ordinary Shares Against Promissory Notes:
During 1999, several employees and officers early exercised 670,180 options
granted to them by Commtouch. In consideration for the ordinary shares purchased
pursuant to the early exercise of the options, they provided Commtouch with full
recourse promissory notes in the original principal amount of approximately $1.0
million. The promissory notes bear interest at 4.83%, with interest payment due
at the end of each calendar year, with the principal due on the fourth
anniversary of the date of the promissory notes. The shares purchased are
subject to a right of repurchase in favor of Commtouch according to the original
vesting schedule of the options exercised, generally four years. As of December
31, 1999, approximately 279,584 shares are subject to this right of repurchase.
d. Employee Stock Purchase Plan:
Commtouch reserved a total of 150,000 shares for issuance under the plan.
Eligible employees may purchase ordinary shares at 85% of the lower of the
market value of the Company's Ordinary shares on the first day of the
applicable offering period or the last day of the applicable purchase period.
e. Stock Options:
The Company has reserved 5,000,000 ordinary shares for issuance under employee
stock option plans and agreements. Options granted under such plans 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 generally vest 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
F-14
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
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 that
are canceled or not exercised within the options period become available for
future grant.
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. The
Company issued options to purchase ordinary shares to its Israeli employees
pursuant to individual agreements. In 1999 the Company approved the 1999
Section 3(i) Share Option Plan for its Israeli employees.
A summary of the company's share option activity under the plans is as follows:
<TABLE>
<CAPTION>
Weighted Average
Number of Shares Exercise Price
---------------------------------------- -------------------------------
1997 1998 1999 1997 1998 1999
--------- -------- ---------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period ...... 457,520 607,040 849,520 $ 0.99 $ 1.10 $ 1.20
Granted ................................. 213,820 251,900 1,342,670 1.45 1.45 10.13
Exercised .............................. -- -- (740,040) -- -- 1.42
Canceled .............................. (64,300) (9,420) (69,040) 1.45 1.45 4.49
--------- -------- ---------- -------- ------- --------
Outstanding at end of period ............ 607,040 849,520 1,383,110 1.10 1.20 9.62
========= ======== ========== ======== ======= ========
Exercisable at end of period ............ 165,480 375,580 381,315 1.45 1.45 3.50
========= ======== ========== ======== ======= ========
Deemed fair value of options granted
at an exercise price of:
-- Less than fair market value at
date of grant ........................ $ -- $ 2.46 $ 3.65
========= ======== ==========
-- Equals to fair market value at
date of grant ........................ $ 0.61 $ -- $ 15.75
========= ======== ==========
-- Exceeds fair market value at
date of grant ........................ $ -- $ -- $ --
========= ======== ==========
</TABLE>
The options outstanding as of December 31, 1999, have been separated into
ranges of exercise price, as follows:
<TABLE>
<CAPTION>
Options Weighted Options Weighted Average
Outstanding as of Average Weighted Exercisable as of Price of
December 31, Remaining Average Exercise December 31, Exercisable
Exercise Price 1999 Contractual Life Price 1999 Options
- ---------------- ------------------- ------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C> <C>
$ 0.55-$ 2.50 660,760 8.23 $ 1.52 320,282 $ 1.42
$11.00-$15.75 522,500 9.56 $14.13 61,033 $14.43
$16.06-$48.56 199,850 9.84 $24.65 -- --
------------------- ------------------ ------------------ ------------------- ------------------
$ 0.55-$48.56 1,383,110 8.96 $ 9.62 381,315 $ 3.50
=================== ================== ================== =================== ==================
</TABLE>
Under SFAS 123, pro forma information regarding net income (loss) and earnings
(loss) per share is required and has been determined as if the Company had
accounted for its employee stock options 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 1997, 1998 and 1999: risk-free interest rates of 6% for 1997
and 1998 and 5.5% for 1999, dividend yields of 0%, volatility factors of the
expected market price of the Company's ordinary shares of 0.5 for 1997, 1998
and 0.5 - 0.56 for 1999 and an expected life of the option of 6 months after
the option is vested.
F-15
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
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 of 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.
Pro forma information under SFAS 123 are as follows (in thousands except per
share amounts):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Net loss as reported ................................ $ (3,473) $ (4,351) $ (19,851)
======== ======== =========
Pro forma net loss .................................. $ (3,600) $ (4,402) $ (20,224)
======== ======== =========
Pro forma basic and diluted net loss per share ...... $ (2.48) $ (3.04) $ (2.60)
======== ======== =========
</TABLE>
The Company recorded deferred compensation representing the difference between
the exercise price and the deemed fair value of the Company's ordinary shares
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.
Deferred compensation is as follows (in thousands):
Balance as of January 1, 1999 .................................... $ 418
Deferred compensation related to options issued to employees ...... 8,797
Less amortization of deferred compensation ........................ (3,436)
--------
Balance as of December 31, 1999 ................................. $ 5,779
========
f. Non-Employee Directors Stock Option Plan:
The Company adopted the 1999 Non-Employee Directors Stock Option Plan.
Commtouch reserved a total of 250,000 shares for issuance under this plan. Each
individual who first joined the Board of Directors as a nonemployee director on
or after the effective date of the initial public offering received an option
grant for 10,000 ordinary shares. Each option granted under the Non-Employee
Directors Plan would 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 has an exercise price equal to the
fair market value of the ordinary shares on the grant date of such option. Each
option has a maximum term of ten years, but will terminate earlier if the
optionee ceases to be a member of the Board of Directors.
During 1999, the Company granted 60,000 shares to directors at a weighted
average exercise price of $15.83 per share. As of December 31, 999, 25,000
exercisable and 60,000 shares were outstanding.
NOTE 9: RELATED PARTY TRANSACTION
Other accounts receivables includes an advance to an officer and director of
the Company. In October 1999, the Company advanced $364,000 to an officer who
is also a director.
The loan is linked to the Israeli Consumer Price Index, plus a 2% interest
rate. The loan was fully repaid on February 10, 2000.
F-16
<PAGE>
COMMTOUCH SOFTWARE LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued)
NOTE 10: SELECTED STATEMENTS OF OPERATIONS DATA
Geographic information:
The Company conducts its business on the basis of one reportable segment.
Revenues from external customers (in thousands):
Revenues
----------------------------
1997 1998 1999
------ ------ --------
Israel ........................................ $ 1 $ -- $ 369
U.S.A ........................................ 543 109 3,056
Europe ........................................ 28 130 344
Japan ........................................ 282 103 250
Other ........................................ 45 47 232
------ ------ --------
$ 899 $ 389 $ 4,251
====== ====== ========
The Company's long-lived assets as of December 31, are as follows (in
thousands):
1998 1999
------ --------
Israel ....................................... $ 291 $ 789
U.S.A ....................................... 641 5,359
------ --------
$ 932 $ 6,148
====== ========
F-17
<PAGE>
3,000,000 Shares
COMMTOUCH SOFTWARE LTD.
Ordinary Shares
[GRAPHIC OMITTED]
-----------------------
PROSPECTUS
-----------------------
U.S. Bancorp Piper Jaffray
Thomas Weisel Partners LLC
Warburg Dillon Read LLC
William Blair & Company
, 2000
<PAGE>
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.
SEC registration fee ................................. $ 49,468
----------
NASD filing Fee ....................................... $19,238
Nasdaq National Market filing fee .................... 17,500
Blue Sky fees and expenses ........................... 10,000
Printing and engraving expenses ....................... 50,000
Israeli stamp duty .................................... 1,034,780
Legal fees and expenses .............................. 50,000
Accounting fees and expenses .......................... 50,000
Transfer agent and registrar fees and expenses ........ 10,000
Miscellaneous expenses ................................ 343,794
----------
Total .......................................... $1,634,780
==========
Item 14. Indemnification of Directors and Officers.
Reference is made to Section 6 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.
Israeli law permits a company to insure an Office Holder in respect of
liabilities incurred by him or her as a result of the breach of his or her 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 (a)
monetary liability imposed upon him in favor of other persons pursuant to a
court judgment, including a compromise judgment or an arbitrator's decision
approved by a court and (b) reasonable litigation expenses, including
attorneys' fees, actually incurred by him or imposed upon him by a court, in an
action, suit or proceeding brought against him by or on behalf of the company
or other persons, or in connection with a criminal action which does not
require criminal intent in which he was convicted, in each case 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 provided such
insurance of indemnification is approved by the Audit Committee. The
Registration Rights Agreement which we entered into with Go2Net and Vulcan,
contains certain provisions relating to indemnification of our directors and
officers. Pursuant to these provisions, the Registrant has in effect insurance
policies in the amount of US $25 million covering 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
II-1
<PAGE>
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 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 in connection with the proceeding.
Pursuant to the terms under which the ordinary shares were issued to the Selling
Shareholders, the Company has agreed to indemnify the Selling Shareholders and
any underwriter against such liabilities as they may incur as a result of any
untrue statement of a material fact in the Registration Statement of which this
prospectus is a part, or any omission herein or therein to state a material fact
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading. Such indemnification includes
liabilities under the Securities Act, the Securities Exchange Act, state
securities laws and the rules thereunder, but excludes liabilities for
statements or omissions that were based on information provided by a Selling
Shareholder, as to which each Selling Shareholder has agreed to indemnify the
Company and any underwriter.
Item 15. Recent Sales of Unregistered Securities.
Since January 1997, 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(a)
(1) 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.
(2) In April 1999, we issued Convertible Promissory Notes that have since
converted into 42,081 Series D Convertible Preferred Shares. The effective
price for each Series D Preferred Share was $314.56.
(3) Concurrently with our initial public offering on July 16, 1999, in a
private transaction we sold 896,057 ordinary shares to Go2Net for a purchase
price of $13,333,328 and an additional 448,029 shares to Vulcan Ventures
Incorporated for a purchase price of $6,666,672. The purchase price per share
was $14.88, equal to the initial public offering price less the underwriting
discount. In addition, we issued a warrant to Go2Net to purchase 1,136,000
ordinary shares at an exercise price of $12.80 per share.
(4) In connection with an Email Services Agreement dated October 27, 1999
between Commtouch's U.S. subsidiary Commtouch Software, Inc., and Microsoft
Corporation, Commtouch granted Microsoft a warrant, exercisable until December
29, 1999, to purchase 707,964 of Commtouch's ordinary shares at an exercise
price of $28.25 per share for an aggregate exercise price of $20,000,000. On
December 29, 1999, Microsoft exercised the warrant and now holds 707,965
shares.
- ------------
(a) Share figures and price-per-share figures do not reflect the twenty-for-one
stock split which became effective concurrently with the initial public
offering.
II-2
<PAGE>
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.
<TABLE>
Item 16. Exhibits and Financial Statement Schedules.
<CAPTION>
(a) Exhibits
Exhibit
Number Description of Document
- --------- --------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement
3.1 Memorandum of Association of the Registrant.(1)
3.2 Articles of Association of the Registrant.(1)
4.1 Specimen Certificate of Ordinary Shares.(1)
4.2 Amended and Restated Registration Rights Agreement dated as of April 19, 1999.(1)
4.2.1 Amendment No. 1 to Amended and Restated Registration Rights Agreement dated as of
December 29, 1999.(5)
4.2.2 Amendment No. 2 to Amended and Restated Registration Rights Agreement dated as of
March 10, 2000.
4.3 Form of Tag-Along Rights (Right of First Refusal and Co-Sale) Agreement dated as of
December 23, 1998.(1)
4.4 Form of Drag-Along Letter dated as of April 15, 1999.(1)
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.(1)
10.2 Registrant's form of Stock Option Agreement for Israeli Employees.(1)
10.3 Registrant's 1999 Stock Option Plan and form of agreement thereunder.(1)
10.4 Commtouch Software Ltd. 1999 Nonemployee Directors Stock Option Plan.(1)
10.5 Commtouch Software Ltd. 1999 Employee Stock Purchase Plan and forms thereunder.(1)
10.6 Sublease between ASCII of America, Inc. and Commtouch for Commtouch's offices in
Santa Clara, California, dated December 16, 1998.(1)
10.7 Lease between DeAnza Building and Commtouch for Commtouch's offices in Sunnyvale,
California, dated February 5, 1996, as amended.(1)
10.8 Form of Letter Agreement between the Registrant and U.S. Bancorp Piper Jaffray.(2)
10.9 Form of Customized Web-based Email Service Agreement by and between Go2Net, Inc.
and the Registrant.(3)
10.9.1 Form of Share Warrant for Go2Net, Inc. to purchase ordinary shares of the Registrant.(3)
10.9.2 Form of Share Warrant for Microsoft Corporation to purchase ordinary shares of the
Registrant dated October 26, 1999.(5)
10.9.3 Amendment dated December 29, 1999 to Form of Share Warrant for Microsoft
Corporation to purchase ordinary shares of the Registrant.(5)
10.9.4 Lockup Agreement between the Registrant and Microsoft Corporation dated December 29,
1999.(5)
10.10 Form of Share Purchase Agreement by and among the Registrant, Go2Net, Inc. and
Vulcan Ventures Incorporated.(3)
10.10.1 Form of Registration Rights Agreement by and among the Registrant, Go2Net, Inc. and
Vulcan Ventures Incorporated.(3)
10.10.2 Form of Letter Agreement between the Registrant and Selling Securityholders extending
deadline for SEC registration.(5)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- --------------------------------------------------------------------------------------
<S> <C>
21.1 Subsidiaries of the Registrant.(1)
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 of directors and certain officers of the Registrant.**
99.1 Press Release of the Registrant, dated July 7, 1999.(2)
99.2 Memorandum of Understanding between the Registrant, Go2Net, Inc. and Vulcan Ventures
Incorporated, dated July 7, 1999.(2)
<FN>
- ------------
(1) Incorporated by reference to similarly numbered exhibit in Amendment No. 1
to Registration Statement on Form F-1 of Commtouch Software Ltd., File No.
333-78531.
(2) Incorporated by reference to similarly numbered exhibit in Amendment No. 4
to Registration Statement on Form F-1 of Commtouch Software Ltd., File No.
333-78531.
(3) Incorporated by reference to similarly numbered exhibit in Amendment No. 5
to Registration Statement on Form F-1 of Commtouch Software Ltd., File No.
333-78531.
(4) Filed with Amendment No. 1 to Registration Statement on Form F-1 of
Commtouch Software Ltd., File No. 333-89773, filed on January 5, 2000.
(5) Incorporated by reference to similarly numbered exhibit in Amendment No. 1
to Registration Statement on Form F-1 of Commtouch Software Ltd., File No.
333-89773.
* To be filed by amendment.
** Previously filed.
</FN>
</TABLE>
(b) Financial Statement Schedules.
Schedule II
Item 17. Undertakings.
(a) The undersigned Registrant hereby undertakes:
(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
497(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.
(b) 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>
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 March 13, 2000.
COMMTOUCH SOFTWARE LTD.
By: /s/ JAMES E. COLLINS
-----------------------------------
James E. Collins
Chief Financial 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 March 13, 2000
- --------------------------- (Principal Executive Officer)
Gideon Mantel
/s/ JAMES E. COLLINS* Chief Financial Officer (Principal March 13, 2000
- --------------------------- Financial Officer)
James E. Collins
/s/ DEVYANI PATEL* Controller March 13, 2000
- ---------------------------
Devyani Patel
/s/ AMIR LEV* Director March 13, 2000
- ---------------------------
Amir Lev
/s/ ALLAN C. BARKAT* Director March 13, 2000
- ---------------------------
Allan C. Barkat
/s/ YAIR SAFRAI* Director March 13, 2000
- ---------------------------
Yair Safrai
/s/ YOSEPH SELA* Director March 13, 2000
- ---------------------------
Yoseph Sela
/s/ NAHUM SHARFMAN* Director March 13, 2000
- ---------------------------
Nahum Sharfman
/s/ THOMAS CAMP* Director March 13, 2000
- ---------------------------
Thomas Camp
/s/ RICHARD SORKIN* Director March 13, 2000
- ---------------------------
Richard Sorkin
/s/ JAMES E. COLLINS * Individually and as March 13, 2000
- --------------------------- Attorney-in-fact and
James E. Collins Authorized U.S. Representative
</TABLE>
II-5
<PAGE>
COMMTOUCH SOFTWARE LTD.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
U.S. Dollars in thousands
<TABLE>
<CAPTION>
Balance at
the Charged to Balance at
beginning of costs and end of the
the period expenses Deductions period
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997:
Bad debt .................. -- 170 170 --
== ==== ==== ====
Year ended December 31, 1998:
Bad debt .................. -- -- -- --
== ==== ==== ====
Year ended December 31, 1999:
Bad debt .................. -- 405 -- 405
== ==== ==== ====
</TABLE>
S-1
<PAGE>
[ERNST & YOUNG LETTERHEAD]
To: Board of Directors Commtouch Software LTD.
We have audited the consolidated financial statements of Commtouch Software
LTD. as of December 31, 1999 and 1998, and for each of the three years in the
period ended December 31, 1999, and have issued our report thereon dated
January 31, 2000 (included elsewhere in this Registration Statement). Our
audits also included the financial statement schedule listed in Item 16(b) of
this Registration Statement. This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
/s/ KOST, FORER & GABBAY
-------------------------------------
Kost, Forer & Gabbay
A member of Ernst & Young International
Tel-Aviv, Israel
January 31, 2000
S-2
3,000,000 Shares1
Commtouch Software Ltd.
Ordinary Shares
PURCHASE AGREEMENT
March ___, 2000
U.S. BANCORP PIPER JAFFRAY INC.
THOMAS WEISEL PARTNERS LLC
WARBURG DILLON READ LLC,
A subsidiary of UBS AG
WILLIAM BLAIR & COMPANY
As Representatives of the several
Underwriters named in Schedule I hereto
c/o U.S. Bancorp Piper Jaffray
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Commtouch Software Ltd., an Israeli company (the "Company"), and the
stockholders of the Company listed in Schedule I hereto (the "Selling
Stockholders") severally propose to sell to the several Underwriters named in
Schedule II hereto (the "Underwriters") an aggregate of 3,000,000 shares (the
"Firm Shares") of ordinary shares, nominal value NIS 0.05 per share (herein
called "Ordinary Shares"), of the Company. The Firm Shares consist of 1,669,000
authorized but unissued Ordinary Shares to be issued and sold by the Company and
1,331,000 outstanding Ordinary Shares to be sold by the Selling Shareholders.
The Company has also granted to the several Underwriters an option to purchase
up to 450,000 additional Ordinary Shares 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 and the Selling Shareholders hereby confirm their agreement
with respect to the sale of the Securities to the several Underwriters, for whom
you are acting as Representatives (the "Representatives").
Registration Statement and Prospectus. A registration statement on Form
F-1 (File No. 333-31836) 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
- ------------
1 Plus an option to purchase up to 450,000 additional shares from the Company to
cover over-allotments.
<PAGE>
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 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
<PAGE>
Representations and Warranties of the Company and the Selling
Shareholders.
(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.
(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
3
<PAGE>
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 Commtouch Software Inc.,
a California corporation (the "U.S. Subsidiary"), and Commtouch Software (UK)
Ltd., an English corporation (the "UK Subsidiary," and collectively the
"Subsidiaries"), has been duly organized and is validly existing as a
corporation under the laws of its jurisdiction of incorporation and Commtouch
Software Inc. is in good standing under the laws of California. Each of the
Company and the 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 the 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 the 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 distribution of any kind with respect
to its share capital stock; and there has not been any change in the share
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 share capital stock, of the Company or the 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 the 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 the Subsidiaries that are required to be described in the Prospectus
or to be filed as exhibits to
4
<PAGE>
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 duty 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, state or
foreign securities laws or the policies underlying such 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 Memorandum of Association or Articles of Association, 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 equity
securities 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 Israeli and U.S. federal and state securities laws
(including, without limitation, applicable Israeli securities laws), 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 share capital 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 Memorandum of
Association or Articles of Association 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 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 shares of such stock. Except as described in the
Registration Statement and the Prospectus (and except for options granted after
the date of the Registration Statement and the Prospectus to employees of the
Company pursuant to the stock option plans described in the Registration
Statement and the Prospectus, which option grants have been disclosed to the
Representatives), there are no options, warrants,
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agreements, contracts or other rights in existence to purchase or acquire from
the Company or the Subsidiaries any shares of the share capital of the Company
or the Subsidiaries. The Company has an authorized and outstanding
capitalization as set forth in the Registration Statement and the Prospectus
(except for options granted after the date of the Registration Statement and the
Prospectus to employees of the Company pursuant to the stock option plans
described in the Registration Statement and the Prospectus, which option grants
have been disclosed to the Representatives).
(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 the Subsidiaries hold, and are
operating in compliance in all material respects with, all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and orders
of any governmental or 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 the Subsidiaries are in compliance in all material respects with
all applicable federal, state, local and foreign (including, without limitation,
Israeli, English and U.S.) laws, regulations, orders and decrees.
(xiii) The Company and the 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 the Subsidiaries are 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 the Subsidiaries.
(xiv) The Company and the Subsidiaries own or possess
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
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<PAGE>
of the Company and the 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 the Subsidiaries uses and no other aspect of the business of the
Company or the 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 the
Subsidiaries has received any notice alleging any such infringement or fee,
except as to matters that will not cause a Material Adverse Effect. 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.
(xv) Neither the Company nor the Subsidiaries (i) is
in violation of its respective Memorandum of Association, Articles of
Association, charter or by-laws, as the case may be, 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
Israeli, English and U.S. 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 approved for
quotation upon notice of issuance on the NASDAQ National Market.
(xix) The Company has no subsidiary or subsidiaries
other than the 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
other than the Subsidiaries.
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(xx) Each of the Company and the Subsidiaries
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.
(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 the 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.
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(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, or any shareholder which has acquired
restricted securities from the Company during the 12-month period immediately
preceeding the date of this Agreement, 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 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).
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(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 Securities.
(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 the 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 respects
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. The Company qualifies
as an "Industrial Company" within the definition of the Law for the
Encouragement of Industry (Taxes), 1969, of the State of Israel.
(xxxv) Except for Israeli stamp duty, which will be
paid by the Company on the Securities being sold by them, 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 Securities; (ii) the purchase by
the Underwriters of the Securities from the Company; (iii) the consummation by
the Company of any of its obligations under this Agreement; or (iv) assuming the
Underwriters are not subject to taxation in Israel, resale of the Securities by
the Underwriters in connection with the distribution contemplated hereby.
(xxxvi) The Company has duly and irrevocably
appointed Commtouch Software Inc., a corporation organized under the laws of the
State of California, as its agent to receive service of process in any action
against it in any United States federal or state
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court arising out of or in connection with the this Agreement or the
transactions contemplated hereby.
(xxxvii) The documents incorporated by reference in
the Prospectus, at the time they were or hereafter are filed with the
Commission, complied or when so filed will comply, as the case may be, in all
material respects with the requirements of the Securities Exchange Act of 1934,
as amended, and the rules and regulations promulgated thereunder, and, when read
together and with the other information in the Prospectus and as such documents
may be modified or superseded by the Prospectus, did not and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were or are made, not misleading.
(b) Each Selling Shareholder represents and warrants to, and
agrees with, the several Underwriters as follows:
(i) Such Selling Shareholder is the record and
beneficial owner of, and has, and on the First Closing Date will have, valid and
marketable title to the Securities to be sold by such Selling Shareholder, free
and clear of all security interests, claims, liens, restrictions on
transferability, legends, proxies, equities or other encumbrances; and upon
delivery of and payment for such Securities hereunder, the several Underwriters
will acquire valid and marketable title thereto, free and clear of any security
interests, claims, liens, restrictions on transferability, legends, proxies,
equities or other encumbrances. Such Selling Shareholder is selling the
Securities to be sold by such Selling Shareholder for such Selling Shareholder's
own account and is not selling such Securities, directly or indirectly, for the
benefit of the Company, and no part of the proceeds of such sale received by
such Selling Shareholder will inure, either directly or indirectly, to the
benefit of the Company other than as described in the Registration Statement and
Prospectus.
(ii) Such Selling Shareholder has duly authorized,
executed and delivered a Custody Agreement ("Custody Agreement"), which Custody
Agreement is a valid and binding obligation of such Selling Shareholder, to
Norwest Bank Minnesota, N.A., as Custodian (the "Custodian"); pursuant to the
Custody Agreement the Selling Shareholder has placed in custody with the
Custodian, for delivery under this Agreement, the certificates representing the
Securities to be sold by such Selling Shareholder; such certificates represent
validly issued, outstanding, fully paid and nonassessable Ordinary Shares; and
such certificates were duly and properly endorsed in blank for transfer, or were
accompanied by all documents duly and properly executed that are necessary to
validate the transfer of title thereto, to the Underwriters, free of any legend,
restriction on transferability, proxy, lien or claim, whatsoever.
(iii) Such Selling Shareholder has the power and
authority to enter into this Agreement and to sell, transfer and deliver the
Securities to be sold by such Selling Shareholder; and such Selling Shareholder
has duly authorized, executed and delivered to Allan Barkat, as attorney-in-fact
(the "Attorney-in-Fact"), an irrevocable power of attorney
11
<PAGE>
(a "Power of Attorney") authorizing and directing the Attorney-in-Fact to effect
the sale and delivery of the Securities being sold by such Selling Shareholder,
to enter into this Agreement and to take all such other action as may be
necessary hereunder.
(iv) This Agreement, the Custody Agreement and the
Power of Attorney have each been duly authorized, executed and delivered by or
on behalf of such Selling Shareholder and each constitutes a valid and binding
agreement of such Selling Shareholder, enforceable in accordance with its terms,
except as rights to indemnity hereunder or thereunder may be limited by federal
or state securities laws and except as such enforceability may be limited by
bankruptcy, insolvency, reorganization or laws affecting the rights of creditors
generally and subject to general principles of equity. The execution and
delivery of this Agreement, the Custody Agreement and the Power of Attorney and
the performance of the terms hereof and thereof and the consummation of the
transactions herein and therein contemplated will not result in a breach or
violation of any of the terms and provisions of, or constitute a default under,
any agreement or instrument to which such Selling Shareholder is a party or by
which such Selling Shareholder is bound, or any law, regulation, order or decree
applicable to such Selling Shareholder; 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, the Custody
Agreement and the Power of Attorney or for the consummation of the transactions
contemplated hereby and thereby, including the sale of the Securities being sold
by such Selling Shareholder, except such as may be required under the Act or
state securities laws or blue sky laws.
(v) Such Selling Shareholder 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 such
Selling Shareholder.
(vi) Such Selling Shareholder has reviewed the
Registration Statement and the
Prospectus and to the best knowledge of such Selling Shareholder neither the
Registration Statement nor the Prospectus contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading regarding such
Selling Shareholder, the other Selling Shareholders, the Company or otherwise.
(vii) To the best knowledge of such Selling
Shareholder, the representations and warranties of the Company contained in
paragraph (a) of this Section 2 are true and correct.
(c) 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; any certificate signed by or on behalf of any Selling
Shareholders as such and delivered to you or to counsel for the
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<PAGE>
Underwriters shall be deemed a representation and warranty by such Selling
Shareholder to each Underwriter as to the matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
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 1,669,000 Firm Shares, and each Selling
Shareholder agrees, severally and not jointly, to sell the number of Firm Shares
set forth opposite the name of such Selling Shareholder on Schedule I hereto, to
the several Underwriters, and each Underwriter agrees, severally and not
jointly, to purchase from the Company and the Selling Shareholders the number of
Firm Shares set forth opposite the name of such Underwriter in Schedule II
hereto. The purchase price for each Firm Share shall be **[$__________] per
share. The obligation of each Underwriter to each of the Company and the Selling
Shareholders shall be to purchase from each of the Company and the Selling
Shareholders that number of Firm Shares (to be adjusted by the Representatives
to avoid fractional shares) which represents the same proportion of the number
of Firm Shares to be sold by each of the Company and the Selling Shareholders
pursuant to this Agreement as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule II hereto represents to the total number of
Firm Shares to be purchased by all Underwriters pursuant to this Agreement. 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 II.
The Firm Shares will be delivered by the Company and the
Custodian 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 or the Custodian, as appropriate,
at the offices of U.S. Bancorp Piper Jaffray, 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 and the Custodian, 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, 222 South Ninth Street, Minneapolis, Minnesota, or such other location
as may be mutually acceptable.
On the basis of the representations, warranties and agreements
herein contained, but subject to the terms and conditions herein set forth, the
Company hereby
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<PAGE>
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 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 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 at the offices of U.S. Bancorp Piper Jaffray, 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, 222 South Ninth Street, Minneapolis, Minnesota, or such other location
as may be mutually acceptable.
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 or the Selling Shareholders, 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 or any Selling
Shareholder.
Notwithstanding anything else in this Agreement, the
Underwriters shall not solicit offers to purchase Securities in Israel from more
than 35 solicitees who are Israeli subjects, other than Accredited Investors (as
described in Section 15(d) of the Israel Securities Law - 1968), in the
aggregate and will obtain confirmation from such solicitees
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<PAGE>
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, 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 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, 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
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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 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
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(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, or the ISA. Reports
to the ISA 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 or the Selling Shareholders to perform any agreement on
their part to be performed, or because any other condition of the Underwriters'
obligations hereunder required to be fulfilled by the Company or the Selling
Shareholders 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>
(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 90 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, Ordinary
Shares, except to the Underwriters pursuant to this Agreement and except for the
issuance of options pursuant to the Company's 1996 CSI Stock Option Plan, 1999
Israeli Share Option Plan, 1999 Nonemployee Directors Plan and the 1999 Employee
Stock Purchase Plan (each as described in the Registration Statement and the
Prospectus) (the "Plans") and pursuant to the exercise of stock options or
warrants outstanding on the date hereof; provided, that no such option shall
vest and become exercisable prior to the end of the Lock-Up Period. 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
Selling Shareholders stating that such person agrees that, from the date of
execution of this Agreement and continuing to and including the date 90 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
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<PAGE>
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 Ordinary Shares
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.
(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 and each of the Subsidiaries 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
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<PAGE>
also given or allowed by the laws of the State of Minnesota, 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 Minnesota State courts or the designation of the
laws of the State of Minnesota 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 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.
(b) Each Selling Shareholder covenants and agrees with the
several Underwriters as follows:
(i) Except as otherwise agreed to by the Company and
the Selling Shareholder, such Selling Shareholder will pay all taxes, if any, on
the transfer and sale, respectively, of the Securities being sold by such
Selling Shareholder, the fees of such Selling Shareholder's counsel and such
Selling Shareholder's proportionate share (based upon the number of Securities
being offered by such Selling Shareholder pursuant to the Registration
Statement) of all costs and expenses (except for legal and accounting expenses
20
<PAGE>
and fees of the registrar and transfer agent) incurred by the Company pursuant
to the provisions of Section 4(a)(viii) of this Agreement; provided, however,
that each Selling Shareholder severally agrees to reimburse the Company for any
reimbursement made by the Company to the Underwriters pursuant to Section
4(a)(viii) hereof to the extent such reimbursement resulted from the failure or
refusal on the part of such Selling Shareholder to comply under the terms or
fulfill any of the conditions of this Agreement.
(ii) If this Agreement shall be terminated by the
Underwriters because of any failure, refusal or inability on the part of such
Selling Shareholder to perform any agreement on such Selling Shareholder's part
to be performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by such Selling Shareholder is not fulfilled,
such Selling Shareholder agrees to reimburse the several Underwriters for all
out-of-pocket disbursements (including fees and disbursements of counsel for the
Underwriters) 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 Selling Shareholder
shall not in any event be liable to any of the Underwriters for loss of
anticipated profits from the transactions covered by this Agreement.
(iii) The Securities to be sold by such Selling
Shareholder, represented by the certificates on deposit with the Custodian
pursuant to the Custody Agreement of such Selling Shareholder, are subject to
the interest of the several Underwriters and the other Selling Shareholders; the
arrangements made for such custody are, except as specifically provided in the
Custody Agreement, irrevocable; and the obligations of such Selling Shareholder
hereunder shall not be terminated, except as provided in this Agreement or in
the Custody Agreement, by any act of such Selling Shareholder, by operation of
law, whether by the liquidation, dissolution or merger of such Selling
Shareholder, by the death of such Selling Shareholder, or by the occurrence of
any other event. If any Selling Shareholder should liquidate, dissolve or be a
party to a merger or if any other such event should occur before the delivery of
the Securities hereunder, certificates for the Securities deposited with the
Custodian shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such liquidation, dissolution, merger or
other event had not occurred, whether or not the Custodian shall have received
notice thereof.
(iv) Selling Shareholder 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 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 Ordinary Shares which, if effected by the
Company, would be required to be disclosed in response to Item 701 of Regulation
S-K.
(v) Such Selling Shareholder shall immediately notify
you if any event occurs, or of any change in information relating to such
Selling Shareholder or the Company or any new information relating to the
Company or relating to any matter stated in the Prospectus or any supplement
thereto (including any term sheet within the meaning of
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Rule 434 of the Rules and Regulations), which results in the Prospectus (as
supplemented) including an untrue statement of a material fact or omitting to
state any material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(vi) 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 Minnesota or of the United States, (ii) if
the plaintiffs therein seek a judgment in United States dollars, the Selling
Shareholders 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 Selling Shareholders will not interpose any
defense or objection to or otherwise oppose inclusion of such linkage in any
such judgment. The Selling Shareholders 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 Selling Shareholders
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 Selling Shareholders hereunder to the jurisdiction
of federal or Minnesota State courts or the designation of the laws of the State
of Minnesota as the law applicable to this Agreement.
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 Shareholders contained
herein, to the performance by the Company and the Selling Shareholders of their
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.
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(b) The legality and sufficiency of the sale of the Securities
hereunder and the validity and form of the certificates representing the
Securities, 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 Faegre & Benson LLP, 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 share
capital; and there shall not have been any change in the share capital (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 equity
securities 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 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 & Enersen, LLP, U.S. 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 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.
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(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 IV 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 Faegre & Benson LLP, 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 Registration Statement and the Prospectus comply in form in all material
respects with the applicable accounting requirements of the Act and the Rules
and Regulations,
(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 share capital 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, 1999 audited consolidated
24
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balance sheet included in the Registration Statement and the Prospectus, or for
the period from January 1, 2000 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, percentages 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)
since the effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or
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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
share capital, and except as disclosed in the Prospectus, there has not been any
change in the share capital (other than a change in the number of outstanding
shares of 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 equity securities, 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) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, the opinion of
______________, counsel for the Selling Shareholders, dated such Closing Date
and addressed to you, to the effect that:
(i) Each of the Selling Shareholders is the sole
record and beneficial owner of the Securities to be sold by such Selling
Shareholder and delivery of the certificates for the Securities to be sold by
each Selling Shareholder pursuant to this Agreement, upon payment therefor by
the Underwriters, will pass marketable title to such Securities to the
Underwriters and the Underwriters will acquire all the rights of such Selling
Shareholder in the Securities (assuming the Underwriters have no knowledge of an
adverse claim), free and clear of any security interests, claims, liens or other
encumbrances.
(ii) Each of the Selling Shareholders has the power
and authority to enter into the Custody Agreement, the Power of Attorney and
this Agreement and to perform and discharge such Selling Shareholder's
obligations thereunder and hereunder; and this Agreement, the Custody Agreements
and the Powers of Attorney have been duly and validly authorized, executed and
delivered by (or by the Attorney-in-Fact on behalf of) the Selling Shareholders
and are valid and binding agreements of the Selling Shareholders, enforceable in
accordance with their respective terms (except as rights to indemnity hereunder
or thereunder 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 creditors' rights generally and subject to general
principles of equity).
(iii) The execution and delivery of this Agreement,
the Custody Agreement and the Power of Attorney and the performance of the terms
hereof and thereof and the consummation of the transactions herein and therein
contemplated will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, rule or regulation,
or any agreement or instrument known to such counsel to which
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such Selling Shareholder is a party or by which such Selling Shareholder is
bound or to which any of its property is subject, any such Selling Shareholder's
charter or by-laws, or any order or decree known to such counsel of any court or
government agency or body having jurisdiction over such Selling Shareholder or
any of its respective properties; and 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, the Custody
Agreement and the Power of Attorney or for the consummation of the transactions
contemplated hereby and thereby, including the sale of the Securities being sold
by such Selling Shareholder, except such as may be required under the Act or
state securities laws or blue sky laws.
(iv) Under the laws of the jurisdiction of domicile
of the Selling Shareholders, the (i) submission by the Selling Shareholders to
the jurisdiction of any federal or state court sitting in the City of
Minneapolis, Minnesota, (ii) waiver, to the fullest extent it may effectively do
so, of any objection which the Selling Shareholders may now or hereafter have to
the laying of venue of any such proceeding and (iii) submission by the Selling
Shareholders to the exclusive jurisdiction of such courts in any such suit,
action or proceeding, are binding upon the Selling Shareholders and, if properly
brought to the attention of the court or administrative body in accordance with
the laws of the jurisdiction of domicile of the Selling Shareholders, would be
enforceable in any judicial or administrative proceeding in such jurisdiction.
(v) Such other matters as you may reasonably request.
In rendering such opinion such counsel may rely (i) as to
matters of law other than the law of the jurisdiction(s) in which such counsel
is licensed to practice, 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.
(k) On each Closing Date, there shall have been furnished to
you, as Representatives of the several Underwriters, a certificate or
certificates, dated such Closing Date and addressed to you, signed by each of
the Selling Shareholders or such Selling Shareholder's Attorney-in-Fact to the
effect that the representations and warranties of such Selling Shareholder
contained in this Agreement are true and correct as if made at and as of such
Closing Date, and that such Selling Shareholder has complied with all the
agreements and satisfied all the conditions on such Selling Shareholder's part
to be performed or satisfied at or prior to such Closing Date.
(l) 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
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(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);
(m) At the execution of this Agreement, the Company shall have
furnished to the Representatives from each Selling Shareholder an executed copy
of the Lock-Up Agreement addressed to the Representatives;
(n) The Company has duly given the Nasdaq Market Notification
Form For Listing of Additional Shares required in connection with the offering
to the Nasdaq National Market.
(o) 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 and each Selling Shareholder (excluding
institutional Selling Shareholders (marked with an asterisk on Schedule I) which
do not have a representative on the Company's Board of Directors) 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 consent of the Company and/or such
Selling Shareholders, as the case may be), 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), 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, or, in the case of the Company, arise out
of or are based upon any other documents, communications or
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statements made by the Company or any third party with the consent of the
Company that may be deemed to constitute a prospectus or an offer to sell
securities, 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 neither
the Company nor any Selling Shareholder shall 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; and
further provided, however, that in no event shall any Selling Shareholder be
liable under the provisions of this Section 6 for any amount in excess of the
aggregate amount of proceeds such Selling Shareholder received from the sale of
the Securities pursuant to this Agreement.
Each institutional Selling Shareholder (marked with an
asterisk on Schedule I) which does not have a representative on the Company's
Board of Directors 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
consent of such Selling Shareholders), 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 403A 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), 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 or any Underwriter by such Selling
Shareholder, 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 in no
event shall any such Selling Shareholders be liable under the provisions of this
Section 6 for any amount in excess of the aggregate amount of proceeds such
Selling Shareholder received from the sale of the Securities pursuant to this
Agreement.
(b) In addition to their other obligations under Section 6(a),
the Company and each Selling Shareholder 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 Section 6(a), they will reimburse
each Underwriter on a monthly basis for all reasonable legal fees or other
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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 and/or the Selling Shareholder'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 Money Rates section of the Wall Street Journal (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 Shareholders may otherwise have.
(c) Each Underwriter will indemnify and hold harmless the
Company and each Selling Shareholder against any losses, claims, damages or
liabilities to which the Company and the Selling Shareholders 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 and the Selling Shareholders
for any legal or other expenses reasonably incurred by the Company or any such
Selling Shareholder in connection with investigating or defending against any
such loss, claim, damage, liability or action.
(d) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) 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
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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) or (b) 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.
(e) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a), (b) or (c) 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), (b) or (c)
above, (i) in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Shareholders 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 and
the Selling Shareholders 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 and the Selling
Shareholders 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 and the Selling Shareholders 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, the Selling Shareholders 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, the Selling Shareholders and the
Underwriters agree that it would not be just and equitable if contributions
pursuant to this subsection
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(e) 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 (e). 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 (e) 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 (e). Notwithstanding the provisions of this subsection (e), 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 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 (e) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(f) The obligations of the Company and the Selling
Shareholders under this Section 6 shall be in addition to any liability which
the Company and the Selling Shareholders 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 or
any Selling Shareholder 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, the Company and the Selling Shareholders 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, or any Selling Shareholders or any controlling person thereof, 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 fall 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
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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
neither the Company nor any Selling Shareholder shall 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 or
the Selling Shareholders (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 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
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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 the Attorney-in-Fact, on behalf of the Selling Shareholders, 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
the Attorney-in-Fact, on behalf of the Selling Shareholders, shall be notified
by the Company by telephone or telegram, confirmed by letter.
10. Default by One or More of the Selling Shareholders or the
Company. If one or more of the Selling Shareholders shall fail at the First
Closing Date to sell and deliver the number of Securities which such Selling
Shareholder or Selling Shareholders are obligated to sell hereunder, and the
remaining Selling Shareholders do not exercise the right hereby granted to
increase, pro rata or otherwise, the number of Securities to be sold by them
hereunder to the total number of Securities to be sold by all Selling
Shareholders as set forth in Schedule I, then the Underwriters may at your
option, by notice from you to the Company and the non-defaulting Selling
Shareholders, either (a) terminate this Agreement without any liability on the
part of any non-defaulting party or (b) elect to purchase the Securities which
the Company and the non-defaulting Selling Shareholders have agreed to sell
hereunder.
In the event of a default by any Selling Shareholder as referred to in
this Section 10, either you or the Company or, by joint action only, the
non-defaulting Selling Shareholders shall have the right to postpone the First
Closing Date for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
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 or
any Selling Shareholders so defaulting from liability, if any, in respect of
such default.
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
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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, 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 3945 Freedom
Circle, Santa Clara, California 95054, Attention: James Collins; if to any of
the Selling Shareholders, at the address of the Attorney-in-Fact as set forth in
the Powers of Attorney, 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 chancre 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.
15. Agent for Service of Process; Jurisdiction. Each of the
parties hereto irrevocably (i) agrees that any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby may be instituted in any Federal or State Court in the City of
Minneapolis, Minnesota, (ii) waives, to the fullest extent it may effectively do
so, any objection which it may now or hereafter have to the laying of venue of
any such proceeding and (iii) submits to the exclusive jurisdiction of such
courts in any such suit, action or proceeding. The Company hereby designates and
appoints Commtouch Software Inc. as its authorized agent (the "Authorized
Agent") upon whom process may be served in any such action arising out of or
based on this Agreement or the transactions contemplated hereby which may be
instituted in any Minnesota Court by any Underwriter or by any person who
controls any Underwriter, expressly consents to the jurisdiction of any such
court in respect of any such action, and waives any other requirements of or
objections to personal jurisdiction with respect thereto. Such appointment shall
be irrevocable unless and until a successor authorized agent acceptable to the
Underwriters in their sole and absolute discretion shall have been appointed by
the Company. The Company represents and warrants that the Authorized Agent has
agreed to act as such agent for service at process and agrees to take any and
all action, including the filing of any and all documents and
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instruments, that may be necessary to continue such appointment in full force
and effect as aforesaid. Service of process upon the Authorized Agent and
written notice of such service to the Company shall be deemed, in every respect,
effective service of process upon the Company.
16. Judgment Currency. In respect of any judgment or order given
or made for any amount due hereunder that is expressed and paid in a currency
(the "judgment currency") other than United States dollars, the Company and
Selling Shareholders, as the case may be, will indemnify each Underwriter
against any loss incurred by such Underwriter as a result of any variation as
between (i) the rate of exchange at which the United States dollar amount is
converted into the judgment currency for the purpose of such judgment or order
and (ii) the rate of exchange at which such Underwriter on the date such
judgment currency is actually received by the Underwriter is able to purchase
United States dollars with the amount of the judgment currency so received by
such Underwriter. The foregoing indemnity shall constitute a separate and
independent obligation of the Company and Selling Shareholders and shall
continue in full force and effect notwithstanding any such judgment or order as
aforesaid. The term "rate of exchange" shall include any premiums and costs of
exchange payable in connection with the purchase of or conversion into United
States dollars.
[Signature Page Follows]
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<PAGE>
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 Shareholders and the several Underwriters in accordance
with its terms.
Very truly yours,
COMMTOUCH SOFTWARE LTD.
By ______________________________
Its: ____________________________
SELLING SHAREHOLDERS
By ______________________________
Attorney-in-Fact
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
THOMAS WEISEL PARTNERS LLC
INCORPORATED
WARBURG DILLON READ, LLC
a subsidiary of UBS AG
WILLIAM BLAIR & COMPANY
BY U.S. BANCORP PIPER JAFFRAY
By ______________________________
Managing Director
37
<PAGE>
SCHEDULE I
Selling Shareholders
- -------------------------------------------------------------------------------
Number of
Firm Shares
Name to be Sold
- -------------------------------------------------------------------------------
Israel Growth Fund L.P. 400,000
- -------------------------------------------------------------------------------
k.t. Concord Venture Fund (Cayman), L.P. 331,810
- -------------------------------------------------------------------------------
k.t. Concord Venture Fund (Israel), L.P. 66,340
- -------------------------------------------------------------------------------
k.t. Concord Venture Advisors (Cayman), L.P. 2,719
- -------------------------------------------------------------------------------
k.t. Concord Venture Advisors (Israel), L.P. 531
- -------------------------------------------------------------------------------
Gideon Mantel 100,000
- -------------------------------------------------------------------------------
Amir Lev 100,000
- -------------------------------------------------------------------------------
Isabel Maxwell 50,000
- -------------------------------------------------------------------------------
James E. Collins 20,000
- -------------------------------------------------------------------------------
Nahum Sharfman 165,000
- -------------------------------------------------------------------------------
Nomura* 31,000
- -------------------------------------------------------------------------------
Oceanic Bank and Trust Ltd.* 31,800
- -------------------------------------------------------------------------------
Rumson Capital, L.L.C.* 31,800
- -------------------------------------------------------------------------------
<PAGE>
SCHEDULE II
List of Underwriters
Underwriter Number of Firm Shares1
- ----------- ----------------------
U.S. Bancorp Piper Jaffray Inc..........................
Thomas Weisel Partners LLC..............................
Warburg Dillon Read, LLC................................
William Blair & Company.................................
=======================
Total Underwriters (_____) 3,000,000
=======================
- ------------------
1 The Underwriters may purchase up to an additional 450,000 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>
SCHEDULE III
1. The U.S. Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the State of California.
Each of the Company and the U.S. Subsidiary is duly qualified to transact
business and is in good standing as a foreign corporation in each state of the
United States where the character of its activities requires such qualification,
except where the failure to be so qualified would not have a Material Adverse
Effect. The U.S. Subsidiary has full corporate power and authority to own or
lease its properties and conduct its business as currently being carried on and
as described in the Registration Statement and the Prospectus.
2. All of the issued and outstanding shares of capital stock
of the U.S. Subsidiary are duly authorized, validly issued, fully paid and
nonassessable, and are owned of record and beneficially by the Company, free and
clear of any security interests, claims, liens, proxies, equities or other
encumbrances. There are no outstanding securities of the U.S. Subsidiary
convertible into or evidencing the right to purchase or subscribe for any shares
of capital stock of the U.S. Subsidiary, there are no outstanding or authorized
options, warrants, rights or any other agreements of any character obligating
the U.S. Subsidiary to issue any shares of its capital stock or any securities
convertible into or evidencing the right to purchase or subscribe for any shares
of such stock. Except as otherwise stated in the Registration Statement and the
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 any agreement or other instrument known to us to which the
Company is a party or by which the Company is bound.
3. 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 our 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 our knowledge, are contemplated by the
Commission.
4. The Registration Statement and the Prospectus (except as to
the financial statements and schedules and other financial data contained
therein, as to which we do not express an opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the Rules
and Regulations thereunder, and the Registration Statement has been duly
executed by the Company.
5. Neither the Company nor either of the Subsidiaries is an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act.
III-1
<PAGE>
6. Neither the issue and sale by the Company of the Securities
as contemplated by the Purchase Agreement nor the execution and delivery of the
Purchase Agreement by the Company nor the consummation of any other transactions
contemplated by the Purchase 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 the
U.S. Subsidiary, (B) any agreement or instrument filed as an exhibit to the
Registration Statement, or known to us and made available to us in English, to
which the Company or either of the Subsidiaries is a party or by which it is
bound or to which any of its properties is subject, (C) any applicable United
States federal or state law or regulation, or (D) to our knowledge, any order,
writ injunction or decree, of any jurisdiction, court or governmental
instrumentality applicable to the Company or either of the Subsidiaries.
7. The information required to be set forth in the
Registration Statement in answer to Item 10 (insofar as if relates to such
counsel) of Form F-1 is to the best of our 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 Company's option plans and the
options granted and which may be granted thereunder, and the description of
options granted other than under the Company's option plans, 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.
8. To the best of our knowledge, each of the Company and the
U.S. Subsidiary 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.
9. To our knowledge, there are no franchises, contracts,
leases or other documents which 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.
10. To our knowledge, there is no pending or threatened
action, suit, investigation or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Company or either of
the 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.
11. 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 Purchase Agreement or for the issue
and sale of the Securities by the Company or the
III-2
<PAGE>
consummation of any other transactions contemplated by the Purchase 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 under state securities or blue sky laws in
connection with the purchase and distribution of the Securities by the
Underwriters.
12. To our 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.
13. The statements made in the Prospectus under the caption
"U.S. Tax Considerations Regarding Ordinary Shares Acquired by US. Taxpayers,"
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.
14. To the best of our knowledge, all holders of securities of
the Company having rights to the registration of Ordinary Shares, or other
securities, because of the filing of the Registration Statement by the Company
have waived such rights or such rights have been satisfied, or have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement; to the best of our knowledge, except as described in
the Registration Statement 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 any future registration statement of
the Company; to our knowledge, neither the filing of the Registration Statement
nor the offering or sale of the Ordinary Shares as contemplated by the Purchase
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.
15. To the best of our knowledge, neither the Company nor the
U.S. Subsidiary (A) is in violation of its Memorandum or Articles of
Association, or other governing documents, (B) neither the Company nor either of
the Subsidiaries 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 or 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.
III-3
<PAGE>
16. The Purchase 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 the Purchase Agreement and
the consummation of the transactions contemplated thereby have been given.
17. To the best of our knowledge, neither the Company nor
either of the Subsidiaries owns any real property except as otherwise described
in the Prospectus; and all real property and buildings held under lease by the
Company and the Subsidiaries are held by them under valid 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 Subsidiaries.
18. To the best of our knowledge, there are no material
contracts, indentures, mortgages, loan agreements, notes, leases or other
agreements or instruments or other documents relating to the Company and the
Subsidiaries 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, employment
agreements and other agreements, arrangements or instruments to which the
Company or either of the Subsidiaries is a party, are accurate and adequate in
all material respects.
19. To the best of our knowledge, there is no litigation,
action, suit or governmental proceeding or investigation pending, threatened or
contemplated to which the Company or either of the Subsidiaries is a party or to
which any property of the Company or the Subsidiaries is subject, or that seeks
to restrain, enjoin or prevent the execution and delivery of the Purchase
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 the Subsidiaries.
20. The statements set forth in the Prospectuses describing
U.S. statutes and regulations and the statements in the Registration Statement
and the Prospectuses with respect to matters of U.S. law, including the
statements under the captions "Risk Factors -- Risks Relating to the Company,"
"Business -- Government Regulation," "Management," "Shares Eligible for Future
Sale," and "U.S. Tax Considerations Regarding Ordinary Shares Acquired by U.S.
Taxpayers," and "Where You Can Find More Information" are insofar as they
describe U.S. statutes, rules, or legal conclusions and insofar as they describe
the contents of certain provisions of the U.S. Subsidiary's Articles of
Incorporation or bylaws or other organizational documents, do not contain any
untrue statement of a material fact or
III-4
<PAGE>
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.
21. The Company has duly and irrevocably appointed the U.S.
Subsidiary, a corporation organized under the laws of the State of California,
as its agent to receive service of process in any action against it in any
federal or state court sitting in the City of Minneapolis, Minnesota, has
waived, to the fullest extent it may do so, any objection which it may have now
or hereafter to the laying of venue of any such proceeding, and has effectively
submitted to the exclusive jurisdiction of such courts in any such suit, action
or proceeding.
22. The Company has duly given the Nasdaq National Market
Notification Form For Listing of Additional Shares required in connection with
the offering to the Nasdaq National Market.
III-5
<PAGE>
SCHEDULE IV
1. The Company has been duly incorporated and is validly
existing as a corporation under the laws of Israel, and has full corporate power
and authority to own or lease its properties and conduct its business as
described in the Registration Statement. To the best our knowledge, the Company
has no subsidiaries other than the Subsidiaries, and owns no equity interest in
any corporation, partnership, limited liability company or other entity other
than the Subsidiaries.
2. The Company has an authorized and outstanding
capitalization as set forth in the Prospectus; the share capital of the Company
conforms as to legal matters to the description thereof contained in the
Prospectus under the caption "Description of Share Capital"; proper corporate
proceedings have been taken to validly authorize such authorized share capital;
all of the outstanding Ordinary Shares have been duly and validly issued and are
fully paid and nonassessable and the holders thereof are not subject to personal
liability by reason of being such holders; 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
our knowledge, there are no contractual preemptive rights, rights of first
refusal or rights of first co-sale with respect to the issue and sale of the
Securities.
3. The Securities to be issued and sold by the Company under
the Purchase Agreement have been duly authorized and, when issued, delivered and
paid for in accordance with the terms of the Purchase 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 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 Memorandum or Articles of Association or any agreement or other
instrument known to us to which the Company is a party or by which the Company
is bound.
4. As of the date of the Purchase Agreement, we did not own
any equity security of the Company or any instrument convertible into or any
right to purchase any equity security of the Company. 5. The description of the
Company's Option plans and options granted and which may be granted thereunder
and the options granted otherwise than under such plans, all as set forth in the
Prospectus, accurately and fairly presents the information with respect to such
plans and options.
6. Neither the execution and delivery of the Purchase
Agreement, the issue and sale by the Company of the Securities sold by the
Company as contemplated by the Purchase Agreement nor the consummation of any
other transactions contemplated by the Purchase Agreement will (with or without
notice and/or the passage of time) conflict with,
IV-1
<PAGE>
result in a violation of, constitute a default under or result in a breach of
(A) the Memorandum or Articles of Association or other governing documents of
the Company, (B) any agreement, indenture or instrument known to us to which the
Company is a party or by which it is bound or to which any of its properties is
subject, (C) any applicable law, rule, regulation, administrative regulation or
decree, or (D) so far as is known to us, any order, writ, injunction or decree,
of any jurisdiction, court or governmental instrumentality.
7. To the best of our knowledge, the Company 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.
8. To the best of our knowledge, all holders of securities of
the Company having rights to the registration of Ordinary Shares, or other
securities, because of the filing of the Registration Statement by the Company
have waived such rights or such rights have been satisfied, or have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement; to the best of our knowledge, except as described in
the Registration Statement 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 any future registration statement of
the Company; to our knowledge, neither the filing of the Registration Statement
nor the offering or sale of the Ordinary Shares as contemplated by the Purchase
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.
9. 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 in connection with the
execution and delivery by the Company of the Purchase Agreement or for the
issuance and sale of the Securities as contemplated by the Purchase Agreement
and the consummation of the other transactions contemplated in the Purchase
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 of our knowledge, 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; and an
exemption in connection with the offering contemplated by the Registration
Statement has been granted by the ISA.
10. Upon issuance and delivery of the Ordinary Shares being
sold by the Company against payment therefor pursuant to the Purchase Agreement,
the Underwriters in each case acquire good and valid title to such Ordinary
Shares in each case (so far as it
IV-2
<PAGE>
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; and 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.
11. To the best of our knowledge, the Company (i) is not in
violation of its Memorandum or Articles of Association, or other governing
documents, (ii) is not 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 or other
agreement or instrument known to us to which the Company is a party or by which
it is bound or to which any of its properties or assets is subject, or (iii) is
not 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 (ii) and (iii) for such violations or failures that, individually or
in the aggregate, would not have a Material Adverse Effect.
12. The Company has full power and authority to enter into the
Purchase Agreement; the Purchase 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 thereunder may be limited by Israeli public policy 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 the Purchase Agreement and
the consummation of the transactions contemplated thereby have been given.
13. 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 the
Purchase Agreement; all corporate action required to be taken by the Company for
the due and proper authorization, issuance, 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 the Registration Statement has been duly executed by
the Company in accordance with Israeli law.
14. To the best of our knowledge, the Company does not own any
real property except as otherwise described in the Prospectus; and all real
property and buildings held under lease by the Company are held by it 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.
IV-3
<PAGE>
15. To the best of our knowledge, there is no litigation,
action, suit or governmental proceeding or investigation pending to which the
Company is a party or to which any property of the Company is subject, or that
seeks to restrain, enjoin or prevent the execution and delivery of the Purchase
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.
16. The certificates for the Securities to be sold by the
Company and delivered on the Closing Date are in due and proper form under
Israeli law.
17. The statements set forth in the Prospectus describing
Israeli statutes and regulations and the statements in the Registration
Statement and the Prospectus with respect to matters of Israeli law, including
the statements describing Israeli law under the captions "Risk Factors - Risks
Relating to Operations in Israel," "Dividend Policy," "Management's Discussion
and Analysis of Financial Condition and Result of Operations - Effective
Corporate Tax Rates," "Business - Employees," "Management," "Certain
Transactions," "Description of Share Capital," "Israeli Taxation and Investment
Programs," "Conditions in Israel," "ISA Exemption," and "Enforceability of Civil
Liabilities," 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.
18. No Israeli stamp or other issuance or transfer taxes or
duties and, assuming that none of the Underwriters is subject to taxation in
Israel, 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 Securities; (b) the sale and delivery by the Company of
the Securities in the manner contemplated in the Purchase Agreement; or (c) the
sale and delivery outside of Israel by the Underwriters to the initial
purchasers thereof in the manner contemplated by the Purchase Agreement.
19. The Company has duly and irrevocably appointed the
Subsidiary, a corporation organized under the laws of the State of California,
as its agent to receive service of process in any action against it in any U.S.
federal or state court sitting in the City of Minneapolis, Minnesota arising out
of or in connection with the Purchase Agreement or the transactions contemplated
thereby
20. Under the laws of Israel, the submission by the Company to
the jurisdiction of any federal or state court sitting in the City of
Minneapolis, Minnesota and the designation of the law of the state of Minnesota
to apply to the Purchase Agreement is binding upon the Company and, if properly
brought to the attention of the court or
IV-4
<PAGE>
administrative body in accordance with the laws of Israel,
would be enforceable in any judicial or administrative proceeding in Israel.
21. Subject to certain time limitations, an Israeli court may
declare a foreign civil judgment enforceable if it finds that: (i) the judgment
was rendered by a court which was, according to the laws of the state of the
court, competent to render the judgment, (ii) the judgment is no longer
appealable, (iii) 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 (iv) 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.
IV-5
AMENDMENT NO. 2
TO
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
This AMENDMENT NO. 2 TO AMENDED AND RESTATED REGISTRATION RIGHTS
AGREEMENT (the "Agreement") is made as of the 10th day of March, 2000 by and
among Commtouch Software Ltd., an Israeli company (the "Company") having its
principal executive offices at 10 Technology Avenue, Ein Vered 40696, Israel,
and the investors identified on the signature page to this Agreement
(collectively, the "Preferred Shareholders").
In accordance with the provisions of Section 7 of the Amended and
Restated Registration Rights Agreement (the "Original Rights Agreement"), as
amended and restated by Amendment No. 1 to Amended and Restated Registration
Rights Agreement, dated January 4, 2000 ("Amendment No. 1" and, together with
the Original Rights Agreement, as amended, the "Rights Agreement") which
provides that any provision of the Rights Agreement may be amended, and the
exercise of any rights under the Rights 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 at least a 51%
majority in interest of the holders of the Shares (as defined in the Rights
Agreement), the parties to this Agreement hereby agree as follows:
1. In the event that the Company undertakes an underwritten secondary
offering of its ordinary shares during the next sixty (60) days (the
"Offering"), the allocation of the ordinary shares to be sold in connection
therewith shall be as follows:
(a) First, to the Company, in an amount as determined by the
Board of Directors of the Company to be in the best interests of the
Company;
(b) Second, following the allocation to the Company of the
amount set forth under paragraph (a) above, the number of shares
included in the registration and underwriting will be allocated among
the holders of ordinary shares set forth in Exhibit A hereto
(individually, a "Holder" and collectively, the "Holders") requesting
registration in proportion, as nearly as practicable, to the total
number of ordinary shares offered by such Holders at the time of filing
of a registration statement in connection with the offering in an
amount equal to the balance of the ordinary shares remaining to be
sold.
2. Each Holder waived the 30 days notice provision set forth in section
2 of the Rights Agreement and shall notify the Company, within five business
days of its receipt of the Company's notice of the Offering, of the total number
of shares such Holder intends to sell and, to the extent that the underwriters
of the secondary offering determine it necessary to cutback the number of shares
offered to the public, each Holder agrees to a pro rata cutback based upon its
percentage ownership of the total number of shares requested to be sold by all
Holders in the secondary offering.
<PAGE>
3. Each Holder hereby grants power of attorney as follows:
(a) The undersigned hereby irrevocably constitutes and
appoints Gideon Mantel and James Collins (the "Attorneys-in-Fact"), and
each of them, his agent and attorney in fact, with full power of
substitution, with respect to all matters arising in connection with
the secondary offering and sale of the Company's ordinary shares,
including, but not limited to, the power and authority on behalf of the
undersigned to do or cause to be done any of the following things:
(i) negotiate, determine and agree upon (A) the price
at which the ordinary shares will be offered to the public by
the underwriters pursuant to an Underwriting Agreement for the
sale of the ordinary shares (the "Underwriting Agreement"),
(B) the underwriting discount with respect to the ordinary
shares, and (c) the price at which the ordinary shares will be
sold to the Underwriters by the Selling Stockholders pursuant
to the Underwriting Agreement, all of which shall be at the
same price or discount at which the company and other Selling
Stockholders offer or sell ordinary shares.
(ii) prepare, execute and deliver an Underwriting
Agreement, but with such insertions, changes, additions or
deletions as the Attorneys in Fact shall approve as not
materially adverse to the undersigned, such approval to be
conclusively evidenced by the execution and delivery of the
Underwriting Agreement by the Attorneys-in-Fact, including the
making of all representations and agreements provided in the
Underwriting Agreement to be made, and the exercise of all
authority thereunder vested in, the undersigned;
(iii) sell, assign, transfer and deliver the ordinary
shares to the underwriters pursuant to the Underwriting
Agreement and deliver to the underwriters certificates for the
ordinary shares so sold;
(iv) take any and all steps deemed necessary or
desirable by the Attorneys-in-Fact in connection with the
registration of the ordinary shares under the Securities Act
of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended, and under the securities or
"blue sky" laws of various states and jurisdictions,
including, without limitation, the giving or making of such
undertakings, representations, warranties, and agreements
(including, without limitations, the restriction on sales of
ordinary shares by the undersigned) and the taking of such
other steps as the Attorneys-in-Fact may deem necessary of
advisable;
(v) instruct the Company and the Company's custodian
for the ordinary shares (the "Custodian") on all matters
pertaining to the sale of the ordinary shares and delivery of
certificates therefor;
(vi) provide, in accordance with the Underwriting
Agreement, for the payment of expenses of the offering and
sale of the ordinary shares covered by a
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<PAGE>
registration statement relating thereto and filed by the
Company with the Securities and Exchange Commission;
(vii) retain legal counsel to represent the
undersigned in connection with any and all matters referred to
herein (which counsel will be McCutchen, Doyle, Brown &
Enersen, LLP);
(viii) otherwise take all actions and do all things
necessary or proper, required, contemplated or deemed
advisable or desirable by the Attorneys-in-Fact in their
discretion, including, if necessary, the endorsement (if blank
or otherwise) on behalf of the undersigned of the certificate
or certificates representing the ordinary shares or a stock
power or powers attached to such certificate or certificates
and the execution and delivery of any other documents, and
generally act for and in the name of the undersigned with
respect to the sale of the ordinary shares to the Underwriters
and the reoffering of the ordinary shares by the Underwriters
as fully as could the undersigned if then personally present
and acting.
(b) Each Attorney-in Fact may act alone in exercising the
rights and powers conferred on the Attorneys-in Fact by this Agreement,
and the act of any Attorney-in-Fact shall be considered the act of the
Attorneys-in-Fact. Each Attorney-in-Fact is hereby empowered to
determine, in his sole and absolute discretion, the time or times when,
the purposes for which, and the manner in which, any power herein
conferred upon the Attorney-in-Fact shall be exercised.
(c) The Custodian, the Company and the underwriters and all
other persons dealing with the Attorneys-in-Fact as such may rely upon
any writing believed in good faith to be signed by one or more of the
Attorneys-in-Fact.
(d) The Attorneys-in-Fact shall not receive any compensation
for their services rendered hereunder.
4. Each Holder hereby agrees (a) not to sell, transfer or otherwise
dispose of their ordinary shares remaining after the secondary offering without
the prior written consent of the underwriters for a period not to exceed 90 days
after the commencement of the offering (the length of such period to be
negotiated by the Company and the Underwriters) and (b) to execute a "lock-up"
agreement to that effect which will allow the underwriters to provide for an
orderly distribution of ordinary shares in the proposed offering and for an
orderly market thereafter.
5. 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.
6. This Agreement and the Rights Agreement shall constitute the entire
agreement among the parties regarding the transactions contemplated herein and
therein, and may not be
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<PAGE>
amended except in writing. Except as set forth herein, all of the terms of the
Rights Agreement shall remain unchanged and be in full force and effect and are
hereby ratified and confirmed in all respects. In the event of any conflict
between the provisions of this Agreement and the Rights Agreement, the
provisions of this Agreement shall control. On and after the date hereof, each
reference in the Rights Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import shall mean and be a reference to the Rights
Agreement as amended hereby.
7. 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.
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment No. 2 to
Amended and Restated Registration Rights Agreement as of the date first above
written.
COMMTOUCH SOFTWARE LTD.
By: ___________________________
Name: _________________________
Title: ________________________
PREFERRED SHAREHOLDERS:
By: ___________________________
Name: _________________________
Company: ______________________
Title: ________________________
By: ___________________________
Name: _________________________
Company: ______________________
Title: ________________________
By: ___________________________
Name: _________________________
Company: ______________________
Title: ________________________
By: ___________________________
Name: _________________________
Company: ______________________
Title: ________________________
By: ___________________________
Name: _________________________
Company: ______________________
Title: ________________________
By: ___________________________
Name: _________________________
Company: ______________________
Title: ________________________
5
<PAGE>
EXHIBIT A
LIST OF SHAREHOLDERS
Preferred Shareholders
All parties who are parties to the Registration Rights Agreement who
request participation in the secondary offering.
Ordinary Shareholders
Any of the following who request participation in the secondary offering:
1. Gideon Mantel
2. Amir Lev
3. Isabel Maxwell
4. James Collins
5. Nahum Sharfman
6
3,000,000 Shares(1)
Commtouch Software Ltd.
Ordinary Shares
PURCHASE AGREEMENT
March ___, 2000
U.S. BANCORP PIPER JAFFRAY
THOMAS WEISEL PARTNERS LLC
WARBURG DILLON READ LLC,
A subsidiary of UBS AG
WILLIAM BLAIR & COMPANY
As Representatives of the several
Underwriters named in Schedule I hereto
c/o U.S. Bancorp Piper Jaffray
222 South Ninth Street
Minneapolis, Minnesota 55402
Gentlemen:
Commtouch Software Ltd., an Israeli company (the "Company"), and the
stockholders of the Company listed in Schedule I hereto (the "Selling
Stockholders") severally propose to sell to the several Underwriters named in
Schedule II hereto (the "Underwriters") an aggregate of 3,000,000 shares (the
"Firm Shares") of ordinary shares, nominal value NIS 0.05 per share (herein
called "Ordinary Shares"), of the Company. The Firm Shares consist of 1,669,000
authorized but unissued Ordinary Shares to be issued and sold by the Company and
1,331,000 outstanding Ordinary Shares to be sold by the Selling Shareholders.
The Company has also granted to the several Underwriters an option to purchase
up to 450,000 additional Ordinary Shares 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 and the Selling Shareholders hereby confirm their agreement
with respect to the sale of the Securities to the several Underwriters, for whom
you are acting as Representatives (the "Representatives").
Registration Statement and Prospectus. A registration statement on Form F-1
(File No. 333-________) 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 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
- ----------
(1) Plus an option to purchase up to 450,000 additional shares from the Company
to cover over-allotments.
<PAGE>
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.
Representations and Warranties of the Company and the Selling Shareholders.
(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
2
<PAGE>
in conformity with, written information furnished to the Company by you, or by
any Underwriter through you, specifically for use in the preparation thereof.
(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 Commtouch Software Inc., a
California corporation, and Commtouch Software (UK) Ltd., an English corporation
(the "Subsidiaries"), has been duly organized and is validly existing as a
corporation under the laws of its jurisdiction of incorporation and Commtouch
Software Inc. is in good standing under the laws of California. Each of the
Company and the 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
3
<PAGE>
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 the 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 the
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 distribution of any kind with respect to its share capital
stock; and there has not been any change in the share 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 share capital
stock, of the Company or the 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
the 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 the
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 duty 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, state or foreign securities laws
or the policies underlying such 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 Memorandum of
Association or Articles of Association, 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 equity securities of the
Company, including the outstanding Ordinary Shares, are duly authorized and
validly issued, fully paid and nonassessable, have been issued in compliance
4
<PAGE>
with all Israeli and U.S. federal and state securities laws (including, without
limitation, applicable Israeli securities laws), 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 share capital 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 Memorandum of Association or
Articles of Association 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 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 shares of such stock. Except as described in the
Registration Statement and the Prospectus (and except for options granted after
the date of the Registration Statement and the Prospectus to employees of the
Company pursuant to the stock option plans described in the Registration
Statement and the Prospectus, which option grants have been disclosed to the
Representatives), there are no options, warrants, agreements, contracts or other
rights in existence to purchase or acquire from the Company or the Subsidiaries
any shares of the share capital of the Company or the Subsidiaries. The Company
has an authorized and outstanding capitalization as set forth in the
Registration Statement and the Prospectus (except for options granted after the
date of the Registration Statement and the Prospectus to employees of the
Company pursuant to the stock option plans described in the Registration
Statement and the Prospectus, which option grants have been disclosed to the
Representatives).
(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 the Subsidiaries hold, and are operating in
compliance in all material respects with, all franchises, grants,
authorizations, licenses, permits, easements, consents, certificates and orders
of any governmental or 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 the Subsidiaries are in compliance in all material respects with
all applicable federal, state, local and foreign (including, without limitation,
Israeli, English and U.S.) laws, regulations, orders and decrees.
5
<PAGE>
(xiii) The Company and the 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 the Subsidiaries are 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 the Subsidiaries.
(xiv) The Company and the Subsidiaries own or possess 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
the 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 the
Subsidiaries uses and no other aspect of the business of the Company or the
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 the Subsidiaries has
received any notice alleging any such infringement or fee, except as to matters
that will not cause a Material Adverse Effect. 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.
(xv) Neither the Company nor the Subsidiaries (i) is in violation
of its respective Memorandum of Association, Articles of Association, charter or
by-laws, as the case may be, 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 Israeli,
English and U.S. 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.
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<PAGE>
(xviii) The Securities have been approved for quotation upon
notice of issuance on the NASDAQ National Market.
(xix) The Company has no subsidiary or subsidiaries other than
the 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 other than
the Subsidiaries.
(xx) Each of the Company and the Subsidiaries 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.
(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 the 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
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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 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 Securities.
(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
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Israel) pursuant to the Prospectus will be made within the State of Israel by
the Company.
(xxxiii) Each of the Company and the 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 respects 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. The Company qualifies as an
"Industrial Company" within the definition of the Law for the Encouragement of
Industry (Taxes), 1969, of the State of Israel.
(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 Securities; (ii) the purchase by the Underwriters of the
Securities from the Company; (iii) the consummation by the Company of any of its
obligations under this Agreement; or (iv) assuming the Underwriters are not
subject to taxation in Israel, resale of the Securities by the Underwriters in
connection with the distribution contemplated hereby.
(xxxvi) The Company has duly and irrevocably appointed Commtouch
Software Inc., a corporation organized under the laws of the State of
California, as its agent to receive service of process in any action against it
in any United States federal or state court arising out of or in connection with
the this Agreement or the transactions contemplated hereby.
(xxxvii) The documents incorporated by reference in the
Prospectus, at the time they were or hereafter are filed with the Commission,
complied or when so filed will comply, as the case may be, in all material
respects with the requirements of the Securities Exchange Act of 1934, as
amended, and the rules and regulations promulgated thereunder, and, when read
together and with the other information in the Prospectus and as such documents
may be modified or superseded by the Prospectus, did not and will not contain an
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were or are made, not misleading.
(b) Each Selling Shareholder represents and warrants to, and agrees
with, the several Underwriters as follows:
(i) Such Selling Shareholder is the record and beneficial owner
of, and has, and on the First Closing Date will have, valid and marketable title
to the Securities to be sold by such Selling Shareholder, free and clear of all
security interests, claims, liens, restrictions on transferability, legends,
proxies, equities or other encumbrances; and upon delivery of and payment for
such Securities hereunder, the several Underwriters will acquire valid and
marketable title thereto, free and clear of any security interests, claims,
liens, restrictions on transferability, legends, proxies, equities or other
encumbrances. Such Selling Shareholder is selling the Securities to be sold by
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<PAGE>
such Selling Shareholder for such Selling Shareholder's own account and is not
selling such Securities, directly or indirectly, for the benefit of the Company,
and no part of the proceeds of such sale received by such Selling Shareholder
will inure, either directly or indirectly, to the benefit of the Company other
than as described in the Registration Statement and Prospectus.
(ii) Such Selling Shareholder has duly authorized, executed and
delivered a Custody Agreement ("Custody Agreement"), which Custody Agreement is
a valid and binding obligation of such Selling Shareholder, to Norwest Bank
Minnesota, N.A., as Custodian (the "Custodian"); pursuant to the Custody
Agreement the Selling Shareholder has placed in custody with the Custodian, for
delivery under this Agreement, the certificates representing the Securities to
be sold by such Selling Shareholder; such certificates represent validly issued,
outstanding, fully paid and nonassessable Ordinary Shares; and such certificates
were duly and properly endorsed in blank for transfer, or were accompanied by
all documents duly and properly executed that are necessary to validate the
transfer of title thereto, to the Underwriters, free of any legend, restriction
on transferability, proxy, lien or claim, whatsoever.
(iii) Such Selling Shareholder has the power and authority to
enter into this Agreement and to sell, transfer and deliver the Securities to be
sold by such Selling Shareholder; and such Selling Shareholder has duly
authorized, executed and delivered to Allan Barkat, as attorney-in-fact (the
"Attorney-in-Fact"), an irrevocable power of attorney (a "Power of Attorney")
authorizing and directing the Attorney-in-Fact to effect the sale and delivery
of the Securities being sold by such Selling Shareholder, to enter into this
Agreement and to take all such other action as may be necessary hereunder.
(iv) This Agreement, the Custody Agreement and the Power of
Attorney have each been duly authorized, executed and delivered by or on behalf
of such Selling Shareholder and each constitutes a valid and binding agreement
of such Selling Shareholder, enforceable in accordance with its terms, except as
rights to indemnity hereunder or thereunder may be limited by federal or state
securities laws and except as such enforceability may be limited by bankruptcy,
insolvency, reorganization or laws affecting the rights of creditors generally
and subject to general principles of equity. The execution and delivery of this
Agreement, the Custody Agreement and the Power of Attorney and the performance
of the terms hereof and thereof and the consummation of the transactions herein
and therein contemplated will not result in a breach or violation of any of the
terms and provisions of, or constitute a default under, any agreement or
instrument to which such Selling Shareholder is a party or by which such Selling
Shareholder is bound, or any law, regulation, order or decree applicable to such
Selling Shareholder; 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, the Custody Agreement and the Power
of Attorney or for the consummation of the transactions contemplated hereby and
thereby, including the sale of the Securities being sold by such Selling
Shareholder, except such as may be required under the Act or state securities
laws or blue sky laws.
(v) Such Selling Shareholder 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 such
Selling Shareholder.
(vi) Such Selling Shareholder has reviewed the Registration
Statement and the Prospectus and to the best knowledge of such Selling
Shareholder neither the Registration Statement nor the Prospectus contains any
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untrue statement of a material fact or omits to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
regarding such Selling Shareholder, the other Selling Shareholders, the Company
or otherwise.
(vii) To the best knowledge of such Selling Shareholder, the
representations and warranties of the Company contained in paragraph (a) of this
Section 2 are true and correct.
(c) 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;
any certificate signed by or on behalf of any Selling Shareholders as such and
delivered to you or to counsel for the Underwriters shall be deemed a
representation and warranty by such Selling Shareholder to each Underwriter as
to the matters covered thereby.
3. Purchase, Sale and Delivery of Securities.
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 1,669,000 Firm Shares, and each Selling Shareholder
agrees, severally and not jointly, to sell the number of Firm Shares set forth
opposite the name of such Selling Shareholder on Schedule I hereto, to the
several Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company and the Selling Shareholders the number of Firm Shares
set forth opposite the name of such Underwriter in Schedule II hereto. The
purchase price for each Firm Share shall be **[$__________] per share. The
obligation of each Underwriter to each of the Company and the Selling
Shareholders shall be to purchase from each of the Company and the Selling
Shareholders that number of Firm Shares (to be adjusted by the Representatives
to avoid fractional shares) which represents the same proportion of the number
of Firm Shares to be sold by each of the Company and the Selling Shareholders
pursuant to this Agreement as the number of Firm Shares set forth opposite the
name of such Underwriter in Schedule II hereto represents to the total number of
Firm Shares to be purchased by all Underwriters pursuant to this Agreement. 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 II.
The Firm Shares will be delivered by the Company and the Custodian 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 or the Custodian, as appropriate, at the
offices of U.S. Bancorp Piper Jaffray, 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 and the Custodian, will be made available for checking and packaging not
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<PAGE>
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, 222 South Ninth
Street, Minneapolis, Minnesota, or such other location as may be mutually
acceptable.
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
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 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 at the offices of U.S. Bancorp Piper Jaffray, 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, 222 South Ninth Street, Minneapolis, Minnesota, or such other location
as may be mutually acceptable.
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 or the Selling Shareholders, 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 or any Selling Shareholder.
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, the Underwriters shall furnish the Company, its counsel and the Securities
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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 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,
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
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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 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, or the ISA. Reports to the ISA 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
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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 or the Selling Shareholders to perform any agreement on their part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Shareholders 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.
(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 90 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, Ordinary Shares, except to the
Underwriters pursuant to this Agreement and except for the issuance of options
pursuant to the Company's 1996 CSI Stock Option Plan, 1999 Israeli Share Option
Plan, 1999 Nonemployee Directors Plan and the 1999 Employee Stock Purchase Plan
(each as described in the Registration Statement and the Prospectus) (the
"Plans") and pursuant to the exercise of stock options or warrants outstanding
on the date hereof; provided, that no such option shall vest and become
exercisable prior to the end of the Lock-Up Period. 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 **[Selling
Shareholders] stating that such person agrees that, from the date of execution
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<PAGE>
of this Agreement and continuing to and including the date 90 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 Ordinary Shares 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.
(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.
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(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 Minnesota, 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 Minnesota State courts or the designation of the laws of the State of
Minnesota 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 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.
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(b) Each Selling Shareholder covenants and agrees with the several
Underwriters as follows:
(i) Except as otherwise agreed to by the Company and the Selling
Shareholder, such Selling Shareholder will pay all taxes, if any, on the
transfer and sale, respectively, of the Securities being sold by such Selling
Shareholder, the fees of such Selling Shareholder's counsel and such Selling
Shareholder's proportionate share (based upon the number of Securities being
offered by such Selling Shareholder pursuant to the Registration Statement) of
all costs and expenses (except for legal and accounting expenses and fees of the
registrar and transfer agent) incurred by the Company pursuant to the provisions
of Section 4(a)(viii) of this Agreement; provided, however, that each Selling
Shareholder severally agrees to reimburse the Company for any reimbursement made
by the Company to the Underwriters pursuant to Section 4(a)(viii) hereof to the
extent such reimbursement resulted from the failure or refusal on the part of
such Selling Shareholder to comply under the terms or fulfill any of the
conditions of this Agreement.
(ii) If this Agreement shall be terminated by the Underwriters
because of any failure, refusal or inability on the part of such Selling
Shareholder to perform any agreement on such Selling Shareholder's part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by such Selling Shareholder is not fulfilled,
such Selling Shareholder agrees to reimburse the several Underwriters for all
out-of-pocket disbursements (including fees and disbursements of counsel for the
Underwriters) 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 Selling Shareholder
shall not in any event be liable to any of the Underwriters for loss of
anticipated profits from the transactions covered by this Agreement.
(iii) The Securities to be sold by such Selling Shareholder,
represented by the certificates on deposit with the Custodian pursuant to the
Custody Agreement of such Selling Shareholder, are subject to the interest of
the several Underwriters and the other Selling Shareholders; the arrangements
made for such custody are, except as specifically provided in the Custody
Agreement, irrevocable; and the obligations of such Selling Shareholder
hereunder shall not be terminated, except as provided in this Agreement or in
the Custody Agreement, by any act of such Selling Shareholder, by operation of
law, whether by the liquidation, dissolution or merger of such Selling
Shareholder, by the death of such Selling Shareholder, or by the occurrence of
any other event. If any Selling Shareholder should liquidate, dissolve or be a
party to a merger or if any other such event should occur before the delivery of
the Securities hereunder, certificates for the Securities deposited with the
Custodian shall be delivered by the Custodian in accordance with the terms and
conditions of this Agreement as if such liquidation, dissolution, merger or
other event had not occurred, whether or not the Custodian shall have received
notice thereof.
(iv) Selling Shareholder 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 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 Ordinary Shares which, if effected by the Company,
would be required to be disclosed in response to Item 701 of Regulation S-K.
(v) Such Selling Shareholder shall immediately notify you if any
event occurs, or of any change in information relating to such Selling
Shareholder or the Company or any new information relating to the Company or
relating to any matter stated in the Prospectus or any supplement thereto
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(including any term sheet within the meaning of Rule 434 of the Rules and
Regulations), which results in the Prospectus (as supplemented) including an
untrue statement of a material fact or omitting to state any material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(vi) 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 Minnesota or of the United States, (ii) if the plaintiffs therein
seek a judgment in United States dollars, the Selling Shareholders 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 Selling Shareholders will not interpose any defense or objection to or
otherwise oppose inclusion of such linkage in any such judgment. The Selling
Shareholders 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 Selling Shareholders 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
Selling Shareholders hereunder to the jurisdiction of federal or Minnesota State
courts or the designation of the laws of the State of Minnesota as the law
applicable to this Agreement.
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 Shareholders contained herein, to the
performance by the Company and the Selling Shareholders of their 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
Securities, 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 Faegre & Benson LLP, U.S. counsel
for the Underwriters, and Yigal Arnon & Co., Israeli counsel for the
Underwriters.
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(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 share capital; and there
shall not have been any change in the share capital (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 equity
securities 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 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 & Enersen, LLP, U.S. 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 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 IV 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
Faegre & Benson LLP, U.S. counsel for the several Underwriters, and Yigal Arnon
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& 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
Registration Statement and the Prospectus comply in form in all material
respects with the applicable accounting requirements of the Act and the Rules
and Regulations,
(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 share
capital 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, 1999 audited consolidated balance sheet included in the
Registration Statement and the Prospectus, or for the period from January 1,
2000 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,
percentages 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:
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(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) 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 share capital, and except
as disclosed in the Prospectus, there has not been any change in the share
capital (other than a change in the number of outstanding shares of 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 equity securities, 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) On each Closing Date, there shall have been furnished to you, as
Representatives of the several Underwriters, the opinion of ______________,
counsel for the Selling Shareholders, dated such Closing Date and addressed to
you, to the effect that:
(i) Each of the Selling Shareholders is the sole record and
beneficial owner of the Securities to be sold by such Selling Shareholder and
delivery of the certificates for the Securities to be sold by each Selling
Shareholder pursuant to this Agreement, upon payment therefor by the
Underwriters, will pass marketable title to such Securities to the Underwriters
and the Underwriters will acquire all the rights of such Selling Shareholder in
the Securities (assuming the Underwriters have no knowledge of an adverse
claim), free and clear of any security interests, claims, liens or other
encumbrances.
(ii) Each of the Selling Shareholders has the power and authority
to enter into the Custody Agreement, the Power of Attorney and this Agreement
and to perform and discharge such Selling Shareholder's obligations thereunder
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and hereunder; and this Agreement, the Custody Agreements and the Powers of
Attorney have been duly and validly authorized, executed and delivered by (or by
the Attorney-in-Fact on behalf of) the Selling Shareholders and are valid and
binding agreements of the Selling Shareholders, enforceable in accordance with
their respective terms (except as rights to indemnity hereunder or thereunder
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 creditors' rights generally and subject to general
principles of equity).
(iii) The execution and delivery of this Agreement, the Custody
Agreement and the Power of Attorney and the performance of the terms hereof and
thereof and the consummation of the transactions herein and therein contemplated
will not result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, rule or regulation, or any agreement
or instrument known to such counsel to which such Selling Shareholder is a party
or by which such Selling Shareholder is bound or to which any of its property is
subject, any such Selling Shareholder's charter or by-laws, or any order or
decree known to such counsel of any court or government agency or body having
jurisdiction over such Selling Shareholder or any of its respective properties;
and 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, the Custody Agreement and the Power of Attorney
or for the consummation of the transactions contemplated hereby and thereby,
including the sale of the Securities being sold by such Selling Shareholder,
except such as may be required under the Act or state securities laws or blue
sky laws.
(iv) Under the laws of __________________, the (i) submission by
the Selling Shareholders to the jurisdiction of any federal or state court
sitting in the City of Minneapolis, Minnesota, (ii) waiver, to the fullest
extent it may effectively do so, of any objection which the Selling Shareholders
may now or hereafter have to the laying of venue of any such proceeding and
(iii) submission by the Selling Shareholders to the exclusive jurisdiction of
such courts in any such suit, action or proceeding, are binding upon the Selling
Shareholders and, if properly brought to the attention of the court or
administrative body in accordance with the laws of _____________, would be
enforceable in any judicial or administrative proceeding in --------------.
(v) Such other matters as you may reasonably request.
In rendering such opinion such counsel may rely (i) as to matters
of law other than **[appropriate jurisdiction] 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.
(k) On each Closing Date, there shall have been furnished to you,
as Representatives of the several Underwriters, a certificate or certificates,
dated such Closing Date and addressed to you, signed by each of the Selling
Shareholders or such Selling Shareholder's Attorney-in-Fact to the effect that
the representations and warranties of such Selling Shareholder contained in this
Agreement are true and correct as if made at and as of such Closing Date, and
that such Selling Shareholder has complied with all the agreements and satisfied
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all the conditions on such Selling Shareholder's part to be performed or
satisfied at or prior to such Closing Date.
(l) 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);
(m) At the execution of this Agreement, the Company shall have
furnished to the Representatives from each Selling Shareholder an executed copy
of the Lock-Up Agreement addressed to the Representatives;
(n) 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
(o) 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 and each Selling Shareholder 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 consent of the Company and/or such
Selling Shareholders, as the case may be), 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 neither the Company nor any Selling Shareholder
shall 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
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information furnished to the Company by you, or by any Underwriter through you,
specifically for use in the preparation thereof; and further provided, however,
that in no event shall any Selling Shareholder be liable under the provisions of
this Section 6 for any amount in excess of the aggregate amount of proceeds such
Selling Shareholder received from the sale of the Securities pursuant to this
Agreement.
In addition to their other obligations under this Section 6(a), the
Company and each Selling Shareholder 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
and/or the Selling Shareholder'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 Money Rates section of
the Wall Street Journal (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 Shareholders may otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company and
each Selling Shareholder against any losses, claims, damages or liabilities to
which the Company and the Selling Shareholders 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 and the Selling Shareholders for any legal or other expenses
reasonably incurred by the Company or any such Selling Shareholder in connection
with investigating or defending against any such loss, claim, damage, liability
or action.
(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
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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 and the Selling Shareholders 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 and the
Selling Shareholders 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 and the Selling
Shareholders 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 and the Selling Shareholders 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, the Selling Shareholders 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, the Selling Shareholders 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
26
<PAGE>
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 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 and the Selling Shareholders under
this Section 6 shall be in addition to any liability which the Company and the
Selling Shareholders 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 or any Selling Shareholder 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, the Company and
the Selling Shareholders 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, or any Selling
Shareholders or any controlling person thereof, 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 fall 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 neither the Company nor any Selling
Shareholder shall 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)
27
<PAGE>
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 or the Selling Shareholders (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 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.
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<PAGE>
(c) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section, the Company and the
Attorney-in-Fact, on behalf of the Selling Shareholders, 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 the
Attorney-in-Fact, on behalf of the Selling Shareholders, shall be notified by
the Company by telephone or telegram, confirmed by letter.
10. Default by One or More of the Selling Shareholders or the Company. If
one or more of the Selling Shareholders shall fail at the First Closing Date to
sell and deliver the number of Securities which such Selling Shareholder or
Selling Shareholders are obligated to sell hereunder, and the remaining Selling
Shareholders do not exercise the right hereby granted to increase, pro rata or
otherwise, the number of Securities to be sold by them hereunder to the total
number of Securities to be sold by all Selling Shareholders as set forth in
Schedule I, then the Underwriters may at your option, by notice from you to the
Company and the non-defaulting Selling Shareholders, either (a) terminate this
Agreement without any liability on the part of any non-defaulting party or (b)
elect to purchase the Securities which the Company and the non-defaulting
Selling Shareholders have agreed to sell hereunder.
In the event of a default by any Selling Shareholder as referred to in this
Section 10, either you or the Company or, by joint action only, the
non-defaulting Selling Shareholders shall have the right to postpone the First
Closing Date for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements.
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 or any
Selling Shareholders so defaulting from liability, if any, in respect of such
default.
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, 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 3945 Freedom Circle,
Santa Clara, California 95054, Attention: James Collins; if to any of the
Selling Shareholders, at the address of the Attorney-in-Fact as set forth in the
Powers of Attorney, 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 chancre 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
29
<PAGE>
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.
15. Agent for Service of Process; Jurisdiction. Each of the parties hereto
irrevocably (i) agrees that any legal suit, action or proceeding arising out of
or based upon this Agreement or the transactions contemplated hereby may be
instituted in any Federal or State Court in the City of Minneapolis, Minnesota,
(ii) waives, to the fullest extent it may effectively do so, any objection which
it may now or hereafter have to the laying of venue of any such proceeding and
(iii) submits to the exclusive jurisdiction of such courts in any such suit,
action or proceeding. The Company hereby designates and appoints Commtouch
Software Inc. as its authorized agent (the "Authorized Agent") upon whom process
may be served in any such action arising out of or based on this Agreement or
the transactions contemplated hereby which may be instituted in any Minnesota
Court by any Underwriter or by any person who controls any Underwriter,
expressly consents to the jurisdiction of any such court in respect of any such
action, and waives any other requirements of or objections to personal
jurisdiction with respect thereto. Such appointment shall be irrevocable unless
and until a successor authorized agent acceptable to the Underwriters in their
sole and absolute discretion shall have been appointed by the Company. The
Company represents and warrants that the Authorized Agent has agreed to act as
such agent for service at process and agrees to take any and all action,
including the filing of any and all documents and instruments, that may be
necessary to continue such appointment in full force and effect as aforesaid.
Service of process upon the Authorized Agent and written notice of such service
to the Company shall be deemed, in every respect, effective service of process
upon the Company.
16. Judgment Currency. In respect of any judgment or order given or made
for any amount due hereunder that is expressed and paid in a currency (the
"judgment currency") other than United States dollars, the Company and Selling
Shareholders, as the case may be, will indemnify each Underwriter against any
loss incurred by such Underwriter as a result of any variation as between (i)
the rate of exchange at which the United States dollar amount is converted into
the judgment currency for the purpose of such judgment or order and (ii) the
rate of exchange at which such Underwriter on the date such judgment currency is
actually received by the Underwriter is able to purchase United States dollars
with the amount of the judgment currency so received by such Underwriter. The
foregoing indemnity shall constitute a separate and independent obligation of
the Company and Selling Shareholders and shall continue in full force and effect
notwithstanding any such judgment or order as aforesaid. The term "rate of
exchange" shall include any premiums and costs of exchange payable in connection
with the purchase of or conversion into United States dollars.
[Signature Page Follows]
30
<PAGE>
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 Shareholders and the several Underwriters in accordance
with its terms.
Very truly yours,
COMMTOUCH SOFTWARE LTD.
By
-----------------------------------
Its:
-----------------------------------
SELLING SHAREHOLDERS
By
-----------------------------------
Attorney-in-Fact
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
THOMAS WEISEL PARTNERS LLC
INCORPORATED
WARBURG DILLON READ, LLC
a subsidiary of UBS AG
WILLIAM BLAIR & COMPANY
BY U.S. BANCORP PIPER JAFFRAY
By
--------------------------------
Managing Director
<PAGE>
SCHEDULE I
Selling Shareholders
Number of
Firm Shares
Name to be Sold
- ---- ----------
Israel Growth Fund L.P. 400,000
k.t. Concord Venture Fund (Cayman), L.P. 331,810
k.t. Concord Venture Fund (Israel), L.P. 66,340
k.t. Concord Venture Advisors (Cayman), L.P. 2,719
k.t. Concord Venture Advisors (Israel), L.P. 531
Gideon Mantel 100,000
Amir Lev 100,000
Isabel Maxwell 50,000
James E. Collins 20,000
Nahum Sharfman 165,000
Nomura International Plc. 31,000
Oceanic Bank and Trust Ltd. 31,800
Rumson Capital, L.L.C. 31,800
31
<PAGE>
SCHEDULE II
List of Underwriters
Underwriter Number of Firm Shares(2)
- ----------- ---------------------
U.S. Bancorp Piper Jaffray Inc.........................
Thomas Weisel Partners LLC.............................
Warburg Dillon Read, LLC...............................
William Blair & Company................................
=========
Total Underwriters (_____) 3,000,000
=========
- ----------
(2) The Underwriters may purchase up to an additional 450,000 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>
SCHEDULE III
[To be provided]
<PAGE>
SCHEDULE IV
[To be provided]
