UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
20–F
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¨
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REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT
OF 1934
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OR
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 for the fiscal year ended December 31,
2008
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OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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OR
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o
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SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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Date of
event requiring this shell company report………….
For the
transition period from _________________ to ________________
Commission
file number 000–26495
COMMTOUCH
SOFTWARE LTD.
(Exact
name of Registrant as specified in its charter and
translation
of Registrant’s name into English)
Israel
(Jurisdiction
of incorporation or organization)
4A
Hazoran Street
Poleg
Industrial Park,
P.O.
Box 8511
Netanya
42504, Israel
011–972–9–863–6888
(Address
of principal executive offices)
Ron
Ela, CFO, Fax: 011-972-9-8636863. Same address as above.
(Name,
Telephone, Email and/or Facsimile number and Address of Company Contact
Person)
Securities
registered or to be registered pursuant to Section 12(b) of the
Act.
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Title of each class
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Name of each exchange on which
registered
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Ordinary
Shares, par value NIS 0.15 per share
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NASDAQ
Capital Market
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Securities
registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities
for which there is a reporting obligation pursuant to Section 15(d) of the
Act.
None
Indicate the number of outstanding
shares of each of the issuer’s classes of capital or common stock as of the
close of the period covered by the annual report (December 31,
2008).
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Ordinary
Shares, par value NIS 0.15
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25,206,659
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Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes
o
No
x
If this report is an annual or
transition report, indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Yes
o
No
x
Note:
Checking the above box will not relieve any registrant required to file reports
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.
Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer or a
non-accelerated filer. See definition of “accelerated filer and large
accelerated filer” in Rule 12b-2 of the Exchange Act. Check
one:
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Large
accelerated filer
o
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Accelerated
filer
x
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Non-accelerated
filer
o
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Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included
in this filing.
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U.S.
GAAP
x
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International
Financial Reporting Standards as issued by the International Accounting
Standards Board
o
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Other
o
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If
“Other” has been checked in response to the previous question, indicate by check
mark which financial statement item the registrant has elected to follow. Item
17
o
Item 18
o
If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
o
No
x
PART
I
Item
1. Identity of Directors, Senior Management and Advisers.
Not
applicable.
Item
2. Offer Statistics and Expected Timetable.
Not
Applicable
Item
3. Key Information.
Unless
otherwise indicated, all references in this document to “Commtouch,” “the
Company,” “we,” “us” or “our” are to Commtouch Software Ltd. or its wholly–owned
subsidiary, Commtouch Inc., as relating to consolidated financial information
contained herein.
The
selected consolidated statements of operations data for the years ended December
31, 2006, 2007 and 2008 and the selected consolidated balance sheet data as of
December 31, 2007 and 2008 have been derived from the Consolidated Financial
Statements of Commtouch included elsewhere in this report. The selected
consolidated statements of operations data for the years ended December 31, 2004
and 2005 and the selected consolidated balance sheet data as of December 31,
2004, 2005 and 2006 have been derived from the Consolidated Financial Statements
of Commtouch not included elsewhere in this report. 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 “Item 5. Operating and
Financial Review and Prospects” and the Consolidated Financial Statements and
the Notes thereto included elsewhere herein:
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Year Ended December 31,
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||||||||||||||||||||
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2004
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2005
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2006
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2007
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2008
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||||||||||||||||
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(USD
in thousands, except per share data)
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||||||||||||||||||||
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Selected
Data:
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||||||||||||||||||||
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Revenues
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$ | 1,523 | $ | 3,925 | $ | 7,234 | $ | 11,250 | $ | 14,092 | ||||||||||
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Operating
profit (loss)
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$ | (6,223 | ) | $ | (2,656 | ) | $ | (415 | ) | $ | 1,610 | $ | 1,931 | |||||||
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Net
income (loss) attributable to ordinary
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||||||||||||||||||||
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and
equivalently participating shareholders
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$ | (7,193 | ) | $ | (2,690 | ) | $ | (190 | ) | $ | 2,109 | $ | 2,270 | |||||||
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Basic
net earnings (loss) per share
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$ | (0.54 | ) | $ | (0.28 | ) | $ | (0.01 | ) | $ | 0.08 | $ | 0.09 | |||||||
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Diluted
net earnings (loss) per share
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$ | (0.54 | ) | $ | (0.28 | ) | $ | (0.01 | ) | $ | 0.08 | $ | 0.08 | |||||||
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Weighted
average number of shares used in
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||||||||||||||||||||
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computing
basic net earnings (loss) per share
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13,323 | 15,802 | 22,113 | 24,847 | 25,619 | |||||||||||||||
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Weighted
average number of shares used in
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||||||||||||||||||||
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computing
diluted net earnings (loss) per share
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13,323 | 15,802 | 22,113 | 27,591 | 26,929 | |||||||||||||||
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Total
Assets
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$ | 5,479 | $ | 7,995 | $ | 11,999 | $ | 18,210 | $ | 20,709 | ||||||||||
FORWARD
LOOKING STATEMENTS
Except
for the historical information contained in this Annual Report, the statements
contained in this Annual Report are “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995, as amended, and
other federal securities laws with respect to our business, financial condition
and results of operations. Such forward-looking statements reflect
our current view with respect to future events and financial
results.
We
urge you to consider that statements which use the terms “anticipate,”
“believe,” “expect,” “plan,” “intend,” “estimate and similar expressions are
intended to identify forward-looking statements. We remind readers
that forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors and involve known and unknown risks
that could cause the actual results, performance, levels of activity, or our
achievements, or industry results, to be materially different from any future
results, performance, levels of activity, or our achievements, or industry
results, expressed or implied by such forward-looking statements. Such
forward-looking statements appear in Item 4 – “Information on the Company” and
Item 5 – “Operating and Financial Review and Prospects,” as well as elsewhere in
this Annual Report.
Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. Except as required by applicable law,
including the securities laws of the United States, we undertake no obligation
to update or revise any forward-looking statements to reflect new information,
future events or circumstances, or otherwise after the date
hereof. We have attempted to identify significant uncertainties and
other factors affecting forward-looking statements in the Risk Factors section
that appears below.
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
report. 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. The risks described below are
not the only ones facing us. Additional risks not presently known to us, or that
we currently deem immaterial, may also impair our business
operations.
Business
Risks
If the market does not continue to
respond favorably to our current advanced email defense solutions, including our
anti-spam and anti-virus solutions and our new Uniform Resource Locator, or URL
filtering solutions, or our future solutions do not gain acceptance, we will
fail to generate sufficient revenues.
Our
success depends on the continued acceptance and use of our advanced email
defense solutions and initial interest in and acceptance of our URL filtering
solutions by current and new enterprise, Original Equipment Manufacturer or
“OEM”, and Internet Service Provider, or ISP customers and technology licensees.
We have been selling our anti-spam products for over five years, our Zero-Hour™
virus outbreak detection product for approximately four years, our IP reputation
service (our latest version being known as GlobalView™ Mail Reputation) for less
than three years and our URL filtering solutions for less than six
months.
As the
markets for email defense and web security products continue to mature and the
global economy remains in a recessionary mode, we are seeing increasing
competitive pressures and demands for even higher quality products at lower
prices. This increasing demand comes at a time when email and
web-based threats are more varied and intensive, challenging even the top end
solutions to keep their performance at an industry acceptable high level of
accuracy. If our solutions do not continue to evolve to meet market demand, or
newer products on the market prove more effective, our business could
fail. Also, if growth in the markets for email and web-based defense
solutions begins to slow, our business will suffer dramatically.
Continuing unfavorable national and
global economic conditions could have a material adverse effect on our business,
operating results and financial condition
The
recent crisis in the financial and credit markets in the United States, Europe
and Asia has led to a global economic slowdown, with the economies of the United
States and Europe showing significant signs of weakness. If the economies in any
part of the world continue to be weak or weaken further, our customers may
reduce or postpone their spending significantly. This could result in reductions
in sales of our products or services and longer sales cycles, slower adoption of
new technologies and increased price competition. In addition, weakness in the
end-user market could negatively affect the cash flow of our OEM partners,
distributors and resellers who could, in turn, delay paying their obligations to
us. This would increase our credit risk exposure and cause delays in our
recognition of revenues on future sales to these customers. Specific economic
trends, such as declines in the demand for PCs, servers, and other computing
devices, or weakness in corporate information technology spending, could have a
more direct impact on our business. Any of these events would likely harm our
business, operating results and financial condition. If global economic and
market conditions, or economic conditions in the United States or other key
markets do not improve, or continue to deteriorate, it may have a material
adverse effect on our business, operating results and financial
condition.
Tighter
governmental enforcement of regulations could decrease the distribution of
unsolicited bulk (spam) email and malicious software and decrease demand for our
solutions, or increase our cost of doing business.
On
December 16, 2003, President Bush signed into law the Controlling the Assault of
Non-Solicited Pornography and Marketing Act of 2003 (CAN-SPAM Act), which
established a framework of administrative, civil, and criminal tools to combat
spam. The law establishes both civil and criminal prohibitions to assist in
deterring the most offensive forms of spam, including unmarked sexually-oriented
messages and emails containing fraudulent headers. Under the law, senders of
email are required to honor a request by a consumer not to receive any further
unsolicited messages. While past high profile prosecutions of direct marketers
seemingly have not had much of a deterrent effect on marketers of unsolicited
email, it is not known whether or not future enforcement actions will prove
effective.
In
addition, various state legislatures have enacted laws aimed at regulating the
distribution of unsolicited email.
These and
similar legal measures may have the effect of reducing the amount of unsolicited
email and malicious software that is distributed and hence diminish the need for
our email defense solutions. Any such developments would have an adverse impact
on our revenues.
We
depend upon OEM partners and resellers and we have a limited concentration of
products.
We expect
to continue to be dependent upon resellers and OEM partners for a significant
portion of our revenues, which will be derived from sales of our email defense
and URL filtering solutions. Our operating results and financial condition may
be materially adversely affected if:
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•
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Our
limited product suite fails to remain attractive to current or prospective
distributors;
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Anticipated
orders or royalty payments from these resellers and OEM partners fail to
materialize;
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We
are unable to locate and or sign additional OEM partners (given the
limited pool of available candidates for our technology);
or
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Some
of the key resellers or OEM partners cease the promotion of our business
or begin to promote additional solutions in a layered approach to email
defense and URL filtering
management.
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•
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Some
of our key OEM partners’ businesses fail as a result of a deepening global
economic crisis.
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Our
quarterly operating results may fluctuate, which could adversely affect the
value of your investment.
A number
of factors, many of which are enumerated in this “Risk Factors” section, are
likely to cause fluctuations in our operating results or cause our share price
to decline. These factors include:
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Our
ability to successfully develop and market our email defense and URL
filtering solutions to new markets, both domestic and
international;
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Our
ability to successfully develop and market new, modified or upgraded
solutions, as may be needed;
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The
continued market acceptance of our email defense solutions and initial
acceptance of our URL filtering
solutions;
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Our
ability to expand our workforce with qualified personnel, as may be
needed;
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Unanticipated
bugs or other problems affecting the delivery of our solutions to
customers;
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The
success of our resellers’ and OEM partners’ sales efforts to potential
customers;
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The
solvency of our resellers and OEM partners and their ability to allocate
sufficient resources towards the marketing of our solutions to their
potential customers;
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Our
OEM partners’ ability to effectively integrate our solutions into their
product offerings;
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The
rate of adoption of our solutions, especially our new URL filtering
solutions, by customers;
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The
substantial decrease in information technology
spending;
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The
pricing of our solutions;
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Our
ability to timely collect fees owed by resellers and OEM
partners;
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A
continuing deepening of the global
slowdown;
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Sudden,
dramatic fluctuations in exchange rates of currencies covering the
royalties we collect from our foreign customers versus the currencies
utilized in our business (namely, the New Israeli Shekel, U.S. Dollar and
EURO);
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•
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Our
ability to add cost-effective space and equipment to our current detection
centers in a timely and effective manner to match the rate of growth in
our business, plus our ability to build new, cost-effective detection
centers as worldwide demand for our products may require;
and
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•
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The
effectiveness of our customer support, whether provided by our resellers
and OEM partners, or directly by
Commtouch.
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Our
products and services have changed many times since we commenced operations in
1991. For example, in late 2006, we announced the availability of our
IP reputation service, now known as GlobalView Mail Reputation and in late 2008;
we released the initial version of our URL filtering solutions. The above
described changes in business models required that we adjust our business
processes and workforce, which caused fluctuations in our results from
operations.
We
have many established competitors who are offering a multitude of solutions to
the problems of spam/virus distribution and web-related security
threats.
The
market for messaging security products remains intensely competitive. This has
resulted in pricing pressures and lower operating margins,, which has been a
cause in the slowing of our business’ rate of growth.
In the
market for email defense solutions, there are fewer providers offering somewhat
ineffectual “content filtering” solutions (solutions focusing solely on the
content of potential spam email) than in the past, and more sophisticated
offerings that compete with our solutions. Email defense providers offering
forms of software (gateway), multi-functional appliances and managed service
solutions and which may be viewed as both competitors and potential customers to
Commtouch include Symantec (Brightmail), TrendMicro, McAfee (including the
recently acquired Secure Computing) and Cisco (IronPort). Email
defense providers offering solutions on an OEM basis similar to Commtouch’s
business model, and which may be viewed as direct competitors, include
Cloudmark, Mailshell and Mail-Filters. As this market continues to
develop, it is likely that companies with greater resources than ours will
attempt to either enter or increase their presence in this market by acquiring
or forming strategic alliances with our competitors or business partners. Some
examples of this are the acquisitions of IronPort by Cisco, Secure Computing by
McAfee, CipherTrust by Secure Computing, Brightmail by Symantec Corp. and
Microsoft of both Frontbridge Technologies and Sybari Software.
In the
market for web security solutions, there are fewer providers offering somewhat
ineffectual “content filtering” solutions (solutions focusing solely on “Black
& White” lists) than in the past, and more advanced offerings that compete
with our URL filtering solutions. Web security defense providers offering forms
of software (gateway), multi-functional appliances and managed service solutions
and which may be viewed as both competitors and potential customers to Commtouch
include McAfee (Secure Computing), WebSense, IBM (ISS) and Cisco
(Fastdata). Web defense providers offering solutions on an OEM basis
similar to Commtouch’s business model, and which may be viewed as direct
competitors, include BrightCloud, RuleSpace and Puresight. As this market
continues to develop, it is likely that companies with greater resources than
ours will attempt to either enter or increase their presence in this market by
acquiring or forming strategic alliances with our competitors or business
partners. Some examples of this are the acquisitions of Fastdata by Cisco,
SurfControl by WebSense and Secure Computing by McAfee.
Also,
there are companies that develop and maintain in-house email defense and web
security solutions, such as Google and Yahoo. These and other companies could
potentially leverage their existing capabilities and relationships to enter the
email and/or web defense industries.
Competitors
could introduce products with superior features, scalability and functionality
at lower prices than our products and could also bundle existing or new products
with other more established products that discourage users from purchasing our
products. Our market’s level of competition has increased as current competitors
have improved the sophistication and effectiveness of their offerings and as new
participants have entered the market. In the future, as we expand our offerings,
we may encounter increased competition in the development and distribution of
these solutions. Some of our current and potential competitors have longer
operating histories, larger customer bases, greater brand recognition and
greater financial, technical, sales, marketing and other resources than we do
and may enter into strategic or commercial relationships on more favorable
terms. New technologies and the expansion of existing technologies may increase
competitive pressures on us, and we may not be able to compete successfully
against current and future competitors.
Our
ability to continue to increase our revenues will depend on our ability to
successfully execute our sales and business development plan.
The
complexity of the underlying technological base of email defense and URL
filtering solutions, and the current landscape of the markets, require highly
trained sales and business development personnel to educate prospective
resellers, OEM partners and customers regarding the use and benefits of our
solutions. It may take time for our current and future employees, OEM partners
and resellers to learn how to most effectively market our solutions. As a
result, our sales and business development personnel may not be able to compete
successfully against larger, more heavily financed and more experienced sales
and business development departments of our competitors.
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. The loss of the services of any of our
senior management or other key personnel, including Gideon Mantel, our Chief
Executive Officer, and Amir Lev, our President and Chief Technical Officer,
could materially and adversely affect our business. The loss of our software
developers or senior operations personnel may also adversely affect the
continued development and support of our email defense and URL filtering
solutions, thereby causing our operating results to suffer and the value of your
investment to decline.
We do not
have employment agreements inclusive of set periods of employment with any of
our key personnel. We cannot prevent them from leaving at any time. We do not
maintain key-person life insurance policies, listing us as a beneficiary, on any
of our employees.
Our
business and operating results could suffer if we do not successfully address
potential risks inherent in doing business overseas.
As of
December 31, 2008, we had sales offices in Israel and the United States. We also
are marketing our email defense and URL filtering solutions in international
markets by utilizing appropriate distribution channels. However, we may not be
able to compete effectively in international markets due to various risks
inherent in conducting business internationally, such as:
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Differing
technology standards;
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Inability
of distribution channels to successfully market our
solutions;
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Export
restrictions;
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Difficulties
in collecting accounts receivable and longer collection
periods;
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Unexpected
changes in regulatory requirements;
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Political
and economic instability;
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Potentially
adverse tax consequences;
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The
adoption of new legislation-backed penalties, which may discourage the
distribution of unsolicited email messages and web security threats;
and
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•
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Limited
enforcement mechanisms for protecting intellectual property
rights.
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Any of
these factors could adversely affect the Company’s prospective international
sales and, consequently, business and operating results.
Technology
Risks
We
have recently entered a new market with our URL filtering solutions, and may not
fully appreciate the needs of customers and risks inherent in this new
market
Historically,
Commtouch has focused its products solely on email based
solutions. The recent move into the web defense industry represents
our first effort at expansion into a totally new market. While we
have expended resources in educating ourselves about this new market,
nevertheless we cannot be 100% certain that we have anticipated all possible
issues that might arise with our “in the cloud” technology infrastructure and
trends affecting web-based threats. Should unanticipated issues
arise, sales of our URL filtering solutions likely will slow and our business
will suffer.
We
may not have the resources or skills required to adapt to the changing
technological requirements and shifting preferences of our customers and their
users.
Both the
email defense and URL filtering industries are characterized by difficult
technological challenges, sophisticated distributors of email and web threats,
multiple-variant viruses, unique phishing scams and constantly evolving
malevolent software distribution practices and targets that could render our
solutions and proprietary technology ineffective. Our success depends, in part,
on our ability to continually enhance our existing email defense and URL
filtering solutions and to develop new solutions, functions and technology that
address the potential needs of prospective and current customers and their
users. The development of proprietary technology and necessary 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 to OEM, customer or end user requirements or emerging
industry standards. Also, we must be able to act more quickly than our
competition, and may not be able to do so.
Our
solutions may be adversely affected by defects or denial of service attacks,
which could cause our OEM partners, customers or end users to stop using our
solutions.
Our email
defense and URL filtering solutions are based in part upon new and complex
software and highly advanced computer systems. Complex software and computer
systems can contain defects, particularly when first introduced or when new
versions are released, and are possible targets for denial of service attacks
instigated by “hackers”. Although we conduct extensive testing and implement
Internet security processes, we may not discover defects to or vulnerabilities
in our software or systems that affect our new or current solutions or
enhancements until after they are delivered. Although we have not experienced
any material defects or vulnerabilities to date in our email defense and URL
filtering offerings, it is possible that, despite testing by us, defects or
vulnerabilities may exist in the solutions we provide. These defects or
vulnerabilities could cause or lead to interruptions for customers of our
solutions, resulting in damage to our reputation, legal risks, loss of revenue,
delays in market acceptance and diversion of our development resources, any of
which could cause our business to suffer.
Our
solutions may be adversely affected if we are not able to receive a sufficient
sampling of internet traffic or deliver our services to customers.
Our email
defense and URL filtering solutions are dependent, in part, on the ability of
our Detection Centers to analyze, in an automated fashion, live feeds of
internet and web related traffic received through our services to customers and
other contractual arrangements. If we were to suffer an
unanticipated, substantial decrease in such traffic or our Detection Centers
become unavailable for any significant period, the effectiveness of our
technologies would drop, and our product offerings would become less
attractive.
Investment
Risks
If
we will be in need of additional capital, we may not be able to secure
additional funds on acceptable terms, or at all, and the Company could
fail.
We have
invested heavily in technology development. We expect to continue to spend
financial and other resources on developing and introducing new offerings and
maintaining our corporate organizations and strategic relationships. We also
expect to invest resources in research and development projects to further
enhance our URL categorization and blocking, anti-spam and anti-virus
solutions.
Notwithstanding
the Company’s current, solid financial condition, should additional funding
become necessary we may be unable to secure capital on acceptable terms, or at
all, due to, among other things, difficulties in the capital and credit
markets. In such case, the Company could fail. There can be no
assurance that we will be able to raise necessary funds or that we will be able
to do so on terms acceptable to us. Even if available on acceptable terms, any
such additional funding may result in significant dilution to existing
shareholders.
If
we cannot continue to satisfy NASDAQ’s maintenance requirements, it may delist
our Ordinary Shares and we may not have an active public market for our Ordinary
Shares. The absence of an active trading market would likely make our Ordinary
Shares an illiquid investment.
Our
Ordinary Shares are quoted on The NASDAQ Capital Market. To continue to be
listed, among other requirements, we are required a) to maintain shareholders’
equity of at least $2,500,000, or market value of our outstanding shares
(excluding shares held by Company insiders and principal shareholders) of at
least $35,000,000, or we must have realized at least $500,000 in net income from
continuing operations in our last fiscal year or in two of our last three fiscal
years and b) we must maintain a minimum bid price per Ordinary Share of
$1.00. Up through 2006, the Company did not meet the applicable
listing requirements on several occasions. The Company believes it has
solidified its position on The NASDAQ Capital Market.
NASDAQ,
in response to the global economic downturn of 2008, suspended its minimum bid
requirement temporarily. If that suspension is lifted and/or the Company fails
to meet other listing standards due to the significant deterioration of the
Company’s business or stock price, we may be at risk for a delisting by NASDAQ
from the Capital Market.
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 individually beneficially own over five percent of
the voting power in the Company (together known as “affiliated entities”),
beneficially own, in the aggregate, approximately 33.5% of our outstanding
Ordinary Shares as of December 31, 2008. Included in the calculation of voting
power are warrants and options exercisable by the affiliated entities within 60
days thereof (some of which are underwater as of December 31, 2008). If they
vote together (especially if they were to convert all beneficial holdings into
shares entitled to voting rights in the Company), 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. In addition, conflicts of interest may
arise as a consequence of the significant shareholders control relationship with
us, including:
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Conflicts
between significant shareholders, and our other shareholders whose
interests may differ with respect to, among other things, our strategic
direction or significant corporate
transactions;
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Conflicts
related to corporate opportunities that could be pursued by us, on the one
hand, or by these shareholders, on the other hand;
or
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Conflicts
related to existing or new contractual relationships between us, on the
one hand, and these shareholders, on the other
hand.
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Substantial
sales of our Ordinary Shares could adversely affect our share price and dilute
the interests of our existing shareholders.
Although
the company is currently engaged in a stock buyback plan, any future sale, or
availability for sale, of large quantities of our Ordinary Shares may have the
effect of depressing our stock’s market price. We continue to maintain various
registration statements which cover the resale of shares issued and shares to be
issued on the exercise of warrants issued under certain private placements. In
particular, the additional Ordinary Shares to be issued if and when outstanding
warrants to purchase 791,113 Ordinary Shares (as of December 31, 2008) are
exercised will dilute existing shareholders of Ordinary Shares.
If
we fail to honor registration rights for past private placements, we will be
subject to payment of liquidated damages.
According
to registration rights agreements with the selling security holders listed under
registration statements on Form F-3 filed by us with the SEC between 2004 and
2006, should we fail to maintain the effectiveness of those registration
statements for the periods stated in the respective agreements, we risk having
imposed on us liquidated damages as defined in those agreements. For example,
one of the agreements provides for liquidated damages of up to one million
additional unregistered Series A Preferred Shares (which, given a conversion
ratio of one for two and the reverse split effective January 2, 2008, now equals
666,667 unregistered Ordinary Shares). These liquidated damages
would dilute the value of Ordinary Shares held by other
shareholders.
Intellectual
Property Risks
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 patented and patent pending technology, copyrights, service marks,
trademarks, trade secrets and similar intellectual property as critical to our
success, and rely on patent, trademark and copyright law, trade secret
protection and confidentiality or license agreements with our employees and
customers to protect our proprietary rights.
During
2004, we purchased a United States patent, U.S. Patent No. 6,330,590. During
2005, we filed in the United States two anti-spam related patent applications,
claiming priority for prior periods based on filings of U.S. Provisional Patent
Applications, and one virus outbreak detection related patent
application. [In early 2009, we abandoned one of the two anti-spam
patent applications filed during 2005, as well as the virus outbreak detection
patent application]. During 2006, we filed in the United States a patent
application relating to the prevention of spam in streaming systems or, in other
words, unwanted conversational media sessions (i.e. voice and video
related). During 2008, we filed a U.S. Provisional Patent Application
for anti-malware data center aggregate, the subject of which remains unpublished
and thus confidential. We may seek to patent certain additional software or
other technology in the future. Any such patent applications might not result in
patents issued within the scope of the claims we seek, or at all.
Despite
our precautions, unauthorized third parties may copy certain portions of our
technology, reverse engineer or obtain and use information that we regard as
proprietary or otherwise infringe or misappropriate our patent or our patent
pending technology, trade secrets, copyrights, trademarks and similar
proprietary rights. We may not have the proper resources in order to
adequately protect our intellectual property. In addition, the laws of some
foreign countries do not protect proprietary rights to the same extent as do the
laws of the United States. Our means of protecting our proprietary rights in the
United States or abroad may not be adequate and competitors may independently
develop similar technology.
We cannot
be certain that our email defense and URL filtering solutions’ software does not
infringe issued patents. In addition, because patent applications in the United
States are not publicly disclosed until eighteen months after the application is
filed, applications previously may have been filed which relate to our
solutions. Therefore, other parties, whether in the United States or
elsewhere, may assert infringement claims against us. We may also be subject to
legal proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of copyrights, trademarks and
other intellectual property rights of third parties by ourselves and our
licensees. Such claims, even if not meritorious, could result in the expenditure
of significant financial and managerial resources. We may not have
the proper resources in order to adequately defend against such
claims.
Risks
Relating to Operations in Israel
We
have important facilities and resources located in Israel, which has
historically experienced 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 the majority of our past
sales were made to customers outside Israel, we are nonetheless directly
influenced by the political, economic and military conditions affecting Israel.
Any major hostilities involving Israel, or the interruption or curtailment of
trade between Israel and its present trading partners, could significantly harm
our business, operating results and financial condition.
Since the
State of Israel was established in 1948, a number of armed conflicts have
occurred between Israel and its Arab neighbors. Since
October 2000, terrorist violence in Israel has increased
significantly. Recently, there has been an escalation in violence
among Israel, Hamas, the Palestinian Authority and other groups, as well as
extensive hostilities in December 2008 and January 2009 along Israel's border
with the Gaza Strip, which resulted in missiles being fired from the Gaza Strip
into Southern Israel. There were also extensive hostilities along
Israel's northern border with Lebanon in the summer of 2006. Ongoing and revived
hostilities or other Israeli political or economic factors could harm our
operations and cause our revenues to decrease.
In
addition, Israel and some companies doing business with Israel have been the
subject of an economic boycott by Arab countries and their close allies since
Israel’s establishment. These restrictive laws and policies may have an adverse
impact on our operating results, financial condition and expansion of our
business.
Our
results of operations may be negatively affected by the obligation of key
personnel to perform military service.
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 in the event of a national emergency, such as in
connection with recent hostilities along Israel's border with the Gaza Strip.
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.
Any disruption in our operations would harm our business.
Because
a substantial portion of our revenues historically have been generated in U.S.
dollars the EURO, and a portion of our expenses have been incurred in New
Israeli Shekels, our results of operations may be adversely affected by currency
fluctuations.
We have
generated a substantial portion of our revenues in U.S. dollars and Euro, and
incurred a portion of our expenses, principally salaries and related personnel
expenses in Israel, in New Israeli Shekels, or NIS. We anticipate that a
significant portion of our expenses will continue to be denominated in Israeli
shekels. As a result, we are exposed to risk to the extent that the
value of the U.S. dollar decreases against the NIS and the Euro. In
that event, the U.S. dollar cost of our operations will increase and our U.S.
dollar-measured results of operations will be adversely affected, as occurred
during portions of 2006 - 2008, when the NIS and the Euro appreciated against
the U.S. dollar, which resulted in a significant increase in the U.S. dollar
cost of our operational expenses and revenues. We cannot predict the trend for
future years. Our operations also could be adversely affected if we are unable
to guard against currency fluctuations in the future. To date, we have not
engaged in hedging transactions. In the future, 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 if
inflation in Israel accelerates.
The government
programs and benefits which we previously received require us to meet several
conditions and may be terminated or reduced in the future.
Prior to 1998, we received grants from the Government of Israel, through the OCS, for the financing of a significant portion of our research and development expenditures in Israel. These grants totaled $0.6 million. In 2001, we received $0.6 million and in 2002 we received $0.2 million. We did not submit an application for funding during the period 2004 - 2008. We have not received OCS funding in recent years, but we may apply for additional grants in the future. The OCS budget has been subject to reductions which may affect the availability of funds for possible future grants. Therefore, we cannot be certain that we will be able to receive future grants in similar amounts, or at all. In addition, the terms of any future OCS grants may be less favorable than our past grants.
Prior to 1998, we received grants from the Government of Israel, through the OCS, for the financing of a significant portion of our research and development expenditures in Israel. These grants totaled $0.6 million. In 2001, we received $0.6 million and in 2002 we received $0.2 million. We did not submit an application for funding during the period 2004 - 2008. We have not received OCS funding in recent years, but we may apply for additional grants in the future. The OCS budget has been subject to reductions which may affect the availability of funds for possible future grants. Therefore, we cannot be certain that we will be able to receive future grants in similar amounts, or at all. In addition, the terms of any future OCS grants may be less favorable than our past grants.
In order
to meet specified conditions in connection with the grants and programs of the
OCS, we have made representations to the Israel government about our Israeli
operations. From time to time the conduct of our Israeli operations
has deviated from our forecasts. If we fail to meet the conditions of
the grants, including the maintenance of a material presence in Israel, or if
there is any material deviation from the representations made by us to the
Israeli government, we could be required to refund the grants previously
received (together with an adjustment based on the Israeli consumer price index
and an interest factor) and would likely be ineligible to receive OCS grants in
the future.
Under the
Law for the Encouragement of Industrial Research and Development, 5744-1984 and
the related regulations, the discretionary approval of an OCS
committee is required for any transfer of technology developed with OCS funding
or for the transfer of manufacturing rights outside of Israel. OCS
approval is not required for the export of any products resulting from the
research and development. There is no assurance that we will receive the
required approvals for any proposed future transfer. Such approvals,
if granted, may be subject to the following additional
restrictions:
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a
requirement to pay the OCS a portion of the consideration we receive upon
any sale of such technology to an entity that is not
Israeli. The scope of the support received, the royalties that
were paid by us, the amount of time that elapsed between the date on which
the know-how was transferred and the date on which the grants were
received, as well as the sale price, will be taken into account in order
to calculate the amount of the payment;
and
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the
transfer of manufacturing rights could be conditioned upon an increase in
the royalty rate and payment of increased aggregate royalties (up to 300%
of the amount of the grant plus interest, depending on the percentage of
the manufacturing that is foreign).
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These
restrictions may impair our ability to sell certain of our older technology
assets outside of Israel. The restrictions will continue to apply
even after we repay the full amount of royalties payable for the
grants.
You
may have difficulties enforcing a U.S. judgment against us and our executive
officers and directors or asserting U.S. securities laws claims in
Israel.
We are
organized under the laws of Israel, and we maintain significant operations in
Israel. In addition, the majority of our directors and executive officers are
not residents of the United States and most of their assets and our assets are
located outside the United States. Service of process upon our
non-U.S. resident directors or executive officers and enforcement of judgments
obtained in the United States against us and our directors and executive
officers may be difficult to obtain within the United States. It may
be difficult to assert U.S. securities law claims in original actions instituted
in Israel. Israeli courts may refuse to hear a claim based on a
violation of U.S. securities laws because Israel is not the most appropriate
forum in which to bring such a claim. In addition, even if an Israeli
court agrees to hear a claim, it may determine that Israeli law and not U.S. law
is applicable to the claim. If U.S. law is found to be applicable,
the substance of the applicable U.S. law must be proved as a fact, which can be
a time-consuming and costly process. Certain matters of procedure
will also be governed by Israeli law. Furthermore, there is little
binding case law in Israel addressing these matters.
Israeli
courts might not enforce judgments rendered outside Israel which may make it
difficult to collect on judgments rendered against us. Subject to certain time
limitations, an Israeli court may declare a foreign civil judgment enforceable
only if it finds that (a) the judgment was rendered by a court which was,
according to the laws of the state of the court, competent to render the
judgment; (b) the judgment may no longer be appealed; (c) 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 (d) the judgment is executory in the state in
which it was given.
Even if
these 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 is a finding
of lack of 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 that 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.
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
shares.
Israeli
corporate law regulates 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, Israeli tax law treats stock-for-stock acquisitions
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 or
to taxation before his investment in the foreign corporation becomes liquid.
These provisions may adversely affect the price of our shares.
As
a foreign private issuer whose shares are listed on the NASDAQ Capital Market,
we may follow certain home country corporate governance practices instead of
certain NASDAQ requirements.
As a
foreign private issuer whose shares are listed on the NASDAQ Capital Market, we
are permitted to follow certain home country corporate governance practices
instead of certain requirements of the NASDAQ Marketplace Rules.
Among
other things, we may follow home country practice with regard to composition of
the board of directors and quorum at shareholders' meetings. In
addition, we may follow our home country law, instead of the NASDAQ Marketplace
Rules, which require that we obtain shareholder approval for certain dilutive
events, such as for the establishment or amendment of certain equity based
compensation plans, an issuance that will result in a change of control of the
company, certain transactions other than a public offering involving issuances
of a 20% or more interest in the company and certain acquisitions of the stock
or assets of another company.
A foreign
private issuer that elects to follow a home country practice instead of NASDAQ
requirements, must submit to NASDAQ in advance a written statement from an
independent counsel in such issuer's home country certifying that the issuer's
practices are not prohibited by the home country's laws. In addition,
a foreign private issuer must disclose in its annual reports filed with the
Securities and Exchange Commission or on its website each such requirement that
it does not follow and describe the home country practice followed by the issuer
instead of any such requirement. Accordingly, our shareholders may
not be afforded the same protection as provided under NASDAQ's corporate
governance rules.
Item
4. Information on the Company.
Overview
The legal
name of the Company is Commtouch Software Ltd., and its principal executive
offices are located at 4A Hazoran Street, Poleg Industrial Park, P.O.Box 8511,
Netanya 42504, Israel, where our telephone number is 011–972–9–863–6888. The
Company was incorporated under the laws of the State of Israel on February 5,
1991 and its legal form is a company limited by shares. Its Articles of
Association are on file in Israel with the office of the Israeli Registrar of
Companies and available for public inspection at that office. The Company’s
wholly owned subsidiary, Commtouch Inc., is located at 292 Gibraltar Drive,
Suite 107, Sunnyvale, California 94089, where our telephone number is (650)
864–2000.
We are a
provider of email defense and URL filtering solutions to enterprise customers
and OEM distribution partners, including real-time anti-spam, Zero-Hour virus
outbreak detection and Global View Mail Reputation services, as well as a URL
Filtering service and Zero-Hour Web Security Engine solution. The Company offers
its solutions to small, medium and large enterprises through a variety of third
party distribution channels. The solutions are also available for integration
with security, content filtering, anti-virus and other filtering solutions
through alliances and strategic technology partnerships. At the core
of Commtouch’s email defense offerings is Commtouch’s proprietary Recurrent
Pattern Detection (RPD)™ technology which, in general terms, analyzes messages
associated with mass email outbreaks and directs the blocking of such emails,
without the need to analyze individual messages. At the core of
Commtouch’s URL filtering solutions is its “in the cloud” infrastructure, which
analyzes various feeds from worldwide sources pertaining to URLs, and provides a
ranking of the URLs tailored to the needs of each customer.
Additional
Detail on Commtouch Offerings
We offer
a Software Development Kit or "SDK" comprised of multiple components, which is
built on our proprietary Recurrent Pattern Detection™ technology; each different
component enables third-party vendors to integrate a Company offering. Two
components, known as ctasd and ctengine, represent alternative methods of
enabling third-party vendors to integrate the Commtouch anti-spam solution into
their existing offerings. Both ctengine and ctasd provide these manufacturers or
service providers with full spam identification and spam classification services
from the Commtouch Detection Centers (described below). The SDK communicates
fully with a remote Detection Center, receiving results to queries about
suspicious messages and acting according to set policies on the customer side.
These same two components also enable integration of the Company’s Zero-Hour™
virus outbreak protection. This solution provides customers with the ability to
block malevolent software (or as known in the industry "malware"), including
email borne viruses, in real time, at the moment the initial attack occurs.
During the initial attack phase, traditional anti-virus vendors are typically
analyzing messages to determine whether they are indeed infected with a virus.
It is this critical lag in response time by traditional anti-virus vendors that
the Zero-Hour solution has been developed to remedy.
A third
component of the SDK, known as ctipd, enables integration of the Company’s Mail
Reputation Service. The Reputation Service is typically integrated into a device
that sits at the perimeter of the organization, deciding which email traffic to
allow to enter the organization, and which to block. It accomplishes this by
receiving classification data from a Commtouch Detection Center about the sender
of each email message. During 2007, the Company launched an
advanced version of this Reputation Service known as “GlobalView”.
Products
that may benefit from integration of the SDK solution include:
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Anti-virus
applications;
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Content
filtering solutions;
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Firewall
systems;
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Security
servers; and
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Other
network appliances
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We also
offer an enterprise anti-spam and Zero-Hour virus outbreak detection solution,
consisting of both a software element, or the “Enterprise Gateway”, and a
service component, or a Commtouch “Detection Center”. At the Enterprise Gateway,
messages are filtered at the customer organization’s entry point, before being
distributed to recipients, with added user-level controls and a top level of
secure spam and virus detection services from the Detection Center, all allowing
for real-time reaction to worldwide attacks. At the heart of the solution,
however, is the Detection Center, which detects new spam and virus attacks as
soon as they are launched and distributed over the Internet. The Detection
Center provides real-time spam and virus detection services to enterprise
customers by maintaining constant communication with Enterprise Gateways that
are locally installed at customer premises in different locations worldwide. The
Detection Center collects information from multiple sources about new attacks,
analyzes the input using Commtouch patented technology, identifies and detects
spam/viruses, classifies the data, matches its stored information against
outstanding queries for spam/virus detection from Enterprise Gateways and
replies in real-time back to the Enterprise Gateways with a prioritized
resolution.
Lastly,
during late 2008, the Company released its URL filtering services. These
services analyze and categorize for customers of our OEM partners the
source of URLs being accessed by such customers, mainly in order to prevent
a) the possibility of malware attacks being propogated by malicious URLs, b)
access to non-business related websites by employees and c) access by children
to inappropriate websites.
Competitive
Landscape
The
markets in which Commtouch competes are intensely competitive and rapidly
changing. However, we believe there is no single competitor that offers the
complete package of anti–spam, anti-virus, IP reputation and web defense
protections that Commtouch provides.
The
principal competitive factors in our industry include price, product
functionality, product integration, platform coverage and ability to scale,
worldwide sales infrastructure and global technical support. Some of our
competitors have greater financial, technical, sales, marketing and other
resources than we do, as well as greater name recognition and a larger installed
customer base. Additionally, some of these competitors have research and
development capabilities that may allow them to develop new or improved products
that may compete with product lines we market and distribute, possibly at a
lower cost. Our success will depend on our ability to adapt to these
competing forces, to develop more advanced products more rapidly and less
expensively than our competitors, and to educate potential customers as to the
benefits of using our products rather than developing their own
products.
Commtouch’s
GlobalView Mail Reputation Service competes in an evolving market. While the
space remains relatively immature, there are some established vendors, including
TrendMicro, that are offering reputation-based solutions. In some cases, while
the product positioning may be new, the underlying solutions may be mature – for
example, Spamhaus repositioning its RBL, or “Real-time Block List”, service as a
commercial reputation service. In addition, there are several startups competing
in this space, perhaps the most notable being Karmasphere.
In the
market for email defense solutions, there are fewer providers offering somewhat
ineffectual “content filtering” solutions (solutions focusing solely on the
content of potential spam email) than in the past, and more sophisticated
offerings that compete with our solutions. Email defense providers offering
forms of software (gateway), multi-functional appliances and managed service
solutions and which may be viewed as both competitors and potential customers to
Commtouch include Symantec (Brightmail), TrendMicro, McAfee (including the
recently acquired Secure Computing) and Cisco (IronPort). Email
defense providers offering solutions on an OEM basis similar to Commtouch’s
business model, and which may be viewed as direct competitors, include
Cloudmark, Mailshell and Mail-Filters.
The
market for real-time virus protection products is constantly evolving, as those
promoting the proliferation of viruses continually seek new distribution
techniques. Commtouch’s offering differs from traditional anti-virus solutions
in that we are offering an additional, complementary solution to signature and
heuristic-based anti-virus engines. For this reason, our Zero-Hour virus
outbreak protection engine has been licensed by several anti-virus companies,
including F-Secure and VirusBuster. If virus distribution methods
continue to migrate from email to other formats, there may be less of a demand
for our Zero-Hour solution and more of a demand for a web security product, such
as our URL filtering solutions.
In the
market for web security solutions, there are fewer providers offering somewhat
ineffectual “content filtering” solutions (solutions focusing solely on “Black
& White” lists) than in the past, and more advanced offerings that compete
with our URL filtering solutions. Web security defense providers offering forms
of software (gateway), multi-functional appliances and managed service solutions
and which may be viewed as both competitors and potential customers to Commtouch
include McAfee (Secure Computing), WebSense, IBM (ISS) and Cisco
(Fastdata). Web defense providers offering solutions on an OEM basis
similar to Commtouch’s business model, and which may be viewed as direct
competitors, include BrightCloud, RuleSpace and Puresight.
We expect
that the markets for email and web defense solutions will continue to become
more consolidated, with companies having greater resources than ours increasing
their presence in this market by acquiring or forming strategic alliances with
our competitors or business partners. Some examples of this in the email defense
field are the acquisitions of IronPort by Cisco, CipherTrust by Secure
Computing, Brightmail by Symantec Corp. and Microsoft of both Frontbridge and
Sybari Software. Some examples of this in the web defense field are
the acquisitions of Fastdata by Cisco, SurfControl by WebSense and Secure
Computing by McAfee.
See also
disclosure under “Item 3. Key Information– RISK FACTORS—Business Risks—We have
many established competitors who are offering a multitude of solutions to the
problems of spam/virus distribution and web-related security
threats.”
Sales
and Marketing
We
utilize third party distribution channels to sell our
products. Generally, our software is provided to OEM customers, who
in turn integrate the software into their product offerings for sale of our
services to their customers. We are paid service fees under a variety
of fee structures, including fixed fee and fee sharing
arrangements.
Our
enterprise anti-spam and Zero-Hour anti-virus solutions also are sold through
resellers, who pay us pre-negotiated fees from each sale closed with a
reseller’s customer.
All
Company sales are managed by the Company’s and its U.S. subsidiary’s business
development departments, each of which consists of a department head and a
relatively small number of business development professionals. The
Company’s marketing efforts are aimed mainly at potential OEM
customers. The marketing department is concentrated in the Company’s
Israel office, though our personnel travel internationally in furtherance of the
Company’s marketing goals.
Intellectual
Property
We regard
our patented and patent pending anti–spam and anti-virus technology, copyrights,
service marks, trademarks, trade secrets and similar intellectual property as
critical to our success, and rely on patent, 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.
During 2004, we purchased a United States patent, Patent No. 6,330,590, which we
believe to be an integral part of our patent strategy aimed at protecting our
proprietary anti-spam technology. During 2005, we filed in the United
States two anti-spam related patent applications, claiming priority for prior
periods based on filings of U.S. Provisional Patent Applications, and one virus
outbreak detection related patent application. [In early 2009, we
abandoned one of the two anti-spam patent applications filed during 2005, as
well as the virus outbreak detection patent application]. During
2006, we filed in the United States a patent application relating to the
prevention of spam in streaming systems (i.e. voice and video related
email). During 2008, we filed a U.S. Provisional Patent Application
for anti-malware data center aggregate, the subject of which remains unpublished
and thus confidential. We are only actively maintaining our registered trademark
for "COMMTOUCH", which is registered in the U.S., Canada, Israel, European
Union, China, Mexico, Norway, Taiwan, Russian Federation, South Korea and
Australia. A previous registration of "PRONTO" in Canada is still in force, but
we are not maintaining this registration and it will lapse. Since at least
September 2003, we are have claimed trademark rights in “RPD” and “Recurrent
Pattern Detection”, as applicable to our email defense solutions. We
have also been claiming trademark rights in Zero-Hour in relation to our virus
outbreak detection product (and more recently one of our web security products)
and GlobalView in relation to our IP reputation product.
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. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States. There
can be no assurance that our means of protecting our proprietary rights in the
United States or abroad will be adequate or that competing companies will not
independently develop similar technology.
Other
parties may assert infringement claims against us. We may also be subject to
legal proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement by us and/or our licensees of
the trademarks and other intellectual property rights of third parties. Such
claims, even if not meritorious, could result in the expenditure of significant
financial and managerial resources.
Government
Regulation
Laws
aimed at curtailing the spread of spam have been adopted by the United States
federal government, i.e. CAN-SPAM Act, and some individual U.S. states, with the
CAN-SPAM Act superseding some state laws or certain elements
thereof. See also disclosure under “Item 3. Key Information– RISK
FACTORS—Business Risks— “Tighter governmental enforcement of regulations could
decrease the distribution of unsolicited bulk (spam) email and malicious
software and decrease demand for our solutions, or increase our cost of doing
business
.
” Despite this
legislation, we have not seen abatement in the amount of spam traffic on the
Internet; rather, a continuing increase in large numbers that is being
distributed in more sophisticated ways. The continuing growth and
development of the spam market may prompt calls for even more stringent Internet
user protection laws that would limit the ability of companies and individuals
promoting or delivering spam online, and thus potentially negatively affect our
business.
The
propagation of email viruses, whether through email or web sites, which are
aimed at destroying or stealing third party data, is illegal under standard
state and federal law outlawing theft, misappropriation, conversion, etc.,
without the need for special legislation prohibiting such activities on the
Internet. Despite the existence of these laws, sources for Internet
viruses continue to spread multi-variant viruses seemingly without much fear of
recrimination. New laws providing for more stringent penalties could
be adopted in various jurisdictions, but it is unclear what, if any, affect
these would have on the anti-virus industry in general and our Zero-Hour Virus
Outbreak Detection and URL filtering solutions in particular.
Employees
As of
December 31, 2008, 2007 and 2006, we had 69, 60 and 46 employees, respectively.
None of our U.S. employees are covered by a collective bargaining agreement. As
of December 31, 2008, our employees were categorized as follows:
|
LOCATION
|
General &
Administrative
|
Sales &
Marketing
|
Research &
Development
|
Hosting
(Operations)
|
TOTAL:
|
|||||||||||||||
|
ISRAEL
OFFICE
|
9 | 13 | 31 | - | 53 | |||||||||||||||
|
U.S.
OFFICE
|
3 | 9 | - | 4 | 16 | |||||||||||||||
We
believe that our relations with our employees are good.
Israeli
law and certain provisions of the nationwide collective bargaining agreements
between the Histadrut (General Federation of Labor in Israel) and the
Coordinating Bureau of Economic Organizations (the Israeli federation of
employers’ organizations) apply to Commtouch’s Israeli employees. These
provisions principally concern the maximum length of the workday and workweek,
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 Israeli 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. Pursuant to an order issued in December 2007 by the Israeli
Minister of Industry, Trade and Labor, new provisions relating to pension
arrangements in the collective bargaining agreements will apply to all employees
in Israel, including our employees. According to these provisions,
all employees employed for at least nine months during 2008 and six months
commencing in 2009 will be entitled to pension benefits to be funded by preset
monthly contributions of the employee and the employer.
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. We currently fund our 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. We also provide
certain Israeli 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,
up to a certain maximum base salary set by law.
Description
of Property
All of
our facilities are leased. Our headquarters, in Netanya, Israel, is
approximately 1,007.4 square meters, and it houses senior management, research
and development, sales, marketing and administrative personnel. Our
subsidiary’s Sunnyvale, California office, which is approximately 3,600 square
feet in size, houses administrative, sales and hosting (operations)
personnel.
Geographic
Information
The
Company conducts its business on the basis of one reportable segment (see also
Note 1 of Notes to the Financial Statements for a brief description
of the Company’s business). The Company has adopted SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information".
Revenues
for Last Three Financial Years
See Item
5. Operating and Financial Review and Prospects - “Revenue Sources” and the F
pages to this Form 20-F below. Below is a breakdown of our revenues by location
(in thousands):
|
Year
December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Israel
|
$ | 344 | $ | 742 | $ | 1,080 | ||||||
|
North
America
|
4,525 | 6,424 | 8,018 | |||||||||
|
Europe
|
1,715 | 2,735 | 3,160 | |||||||||
|
Asia
|
493 | 1,038 | 1,497 | |||||||||
|
Other
|
157 | 311 | 337 | |||||||||
| $ | 7,234 | $ | 11,250 | 14,092 | ||||||||
We have
had only negligible capital expenditures and divestitures in the last three
financial years.
Item
4A. Unresolved Staff Comments.
None.
Item
5. Operating and Financial Review and Prospects.
The
following discussion should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto included elsewhere in this report.
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 set forth under “Item 3. Key
Information-Risk Factors” and in the Company’s other filings with the
SEC.
Overview
From 2003
through 2008, the focus of our business has been the development and selling,
through reseller and OEM distribution channels, anti-spam, Zero-Hour virus
outbreak detection and IP reputation solutions to enterprise class
customers. While no uniform definition of spam exists, the Company
generally defines “spam” as the sending of unsolicited bulk email for commercial
and non–commercial purposes. During late 2008, we released our first
URL filtering solutions for the web security market.
In
January 2008, the Company completed a 3:1 reverse stock split of the Company's
share capital following approval of the Board of Directors and shareholders. As
a result of this action, every three ordinary shares, par value NIS 0.05 each
(including all authorized, issued and outstanding ordinary shares and all
outstanding warrants and options to purchase ordinary shares) were combined into
one ordinary share bearing a par value of NIS 0.15 each. All of the Company's
authorized, issued and outstanding ordinary shares (including all outstanding
warrants and options to purchase ordinary shares) as of December 31, 2008 and
2007, have been restated to reflect the effect of the reverse stock
split.
Critical
Accounting Policies and Estimates
Operating
and Financial Review and Prospects are based upon the Company’s consolidated
financial statements, which have been prepared in accordance with United States
generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses and related
disclosure of contingent assets and liabilities. Management believes the
critical accounting policies and areas that require the most significant
judgments and estimates to be used in the preparation of the consolidated
financial statements are accounting for stock-based compensation, revenue
recognition, accounting for income taxes and commitments and
contingencies.
Accounting
for Stock–Based Compensation:
On
January 1, 2006, we adopted SFAS No. 123 (revised 2004), "Share-Based Payment"
("SFAS No. 123(R)") which requires the measurement and recognition of
compensation expense based on estimated fair values for all share-based payment
awards made to employees and directors. SFAS No. 123(R) supersedes Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), for periods beginning in fiscal year 2006. In March 2005, the
Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
("SAB 107") relating to SFAS No. 123(R). We have applied the provisions of SAB
107 in its adoption of SFAS No. 123(R). SFAS No. 123(R) requires companies to
estimate the fair value of equity-based payment awards on the date of grant
using an option-pricing model. The value of the portion of the award that is
ultimately expected to vest is recognized as an expense over the requisite
service periods in our consolidated statements of operations.
|
We
estimate the fair value of stock options granted using the Black-Scholes
option pricing model. The option-pricing model requires a number of
assumptions, of which the most significant are the expected stock price
volatility and the expected option term. Expected volatility was
calculated based upon actual historical stock price movements. The
expected term of options granted is based upon historical experience and
represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate is based on the yield from U.S.
treasury bonds with an equivalent term. We have historically not paid
dividends and has no foreseeable plans to pay dividends. We recognize the
related expenses over the vesting period using the straight line
method.
|
Revenue
recognition
Revenue
is recognized when the earnings process is complete, as evidenced by an
agreement between the customer and the Company, when delivery has occurred or
services have been rendered, when the fee is fixed or determinable and when
collection is probable. The service component of the Company’s solutions is
considered essential to the functionality of the software components.
Furthermore, the software components cannot be used on a standalone basis, or
with another party’s service. The customer has no ability to run the software or
the SDK on its own hardware. As the software portion of the product cannot stand
on its own, the Company considers each sale as a service arrangement. Therefore,
revenues deriving from our services are recognized ratably over the service
term, which generally includes a term period of one year to three
years. The Company’s revenue recognition policy is discussed in Note
2 of Notes to Consolidated Financial Statements.
Commitments
and Contingencies
Commtouch
periodically records the estimated impacts of various conditions, situations or
circumstances involving uncertain outcomes. These events are called
“contingencies”, and Commtouch’s accounting for such events is prescribed by
Statement of Financial Accounting Standards No. 5, “Accounting for
Contingencies” (“SFAS No. 5”). SFAS No. 5 defines a contingency as “an existing
condition, situation, or set of circumstances involving uncertainty as to
possible gain or loss to an enterprise that will ultimately be resolved when one
or more future events occur or fail to occur.”
SFAS No.
5 does not permit the accrual of gain contingencies under any circumstances. For
loss contingencies, the loss must be accrued if (1) information is available
that indicates it is probable that the loss has been incurred, given the
likelihood of the uncertain future events; and (2) that the amount of the loss
can be reasonably estimated.
The
accrual of a contingency involves considerable judgment on the part of
management. Commtouch uses its internal expertise, and outside experts (such as
lawyers, tax specialists and engineers), as necessary, to help estimate the
probability that a loss has been incurred and the amount (or range) of the loss.
The Company has recorded contingencies in situations where management determined
it was probable a loss had been incurred and the amount could be reasonably
estimated.
Valuation
of investments
Fair
values of marketable securities are estimated using quoted market prices where
available. Our marketable securities consist of highly-rated federal backed
student loan securities. Generally we classify our investments as available for
sale. Changes in fair value of investments classified as available for sale are
not recognized to income during the period, but rather are recognized as a
separate component of equity until realized.
Commencing
February 2008, all of the Company’s ARS (comprised of five securities) suffered
from failed auctions Subsequent to balance sheet date, .on January 5, 2009, all
of the Company’s ARS were purchased by the bank at full par value amounting to a
total of $ 2,000. By agreeing to the settlement with the bank, the
Company is essentially stating that it no longer has the intent of holding the
ARS until recovery, as it will now recover any unrealized loss
through the settlement offer, and accordingly, the ARS's were classified as
trading securities as of December 31, 2008.
Accounting
for income taxes
On
January 1, 2007, we adopted FASB Interpretation 48, “Accounting for Uncertainty
in Income Taxes,” or FIN 48, which contains a two-step approach to recognizing
and measuring uncertain tax positions accounted for in accordance with Statement
of Financial Accounting Standards 109, “Accounting for Income Taxes.”,” or SFAS
No. 109. The first step is to evaluate the tax position taken or expected to be
taken in a tax return by determining if the weight of available evidence
indicates that it is more likely than not that, on an evaluation of the
technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to
measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. . No provision was
recorded as a result of the adoption of FIN 48 or for the year ended December
31, 2008. . In addition, no provision was recorded as of December 31, 2008 and
2007.
The
Company and its subsidiary have provided a valuation allowance in respect to the
deferred tax assets resulting from operating loss carryforwards and other
temporary differences. Management currently believes that since the Company and
its subsidiary have a history of losses it is more likely than not that the
deferred tax regarding the loss carryforwards and other temporary differences
will not be realized in the foreseeable future.
Revenue
Sources
Service
Fees.
We
recognize revenues from anti-spam, Zero-Hour virus outbreak detection,
GlobalView Reputation and URL filtering/web security services. Revenues from
these services are recognized when persuasive evidence of an arrangement
exists, services are provided, the fee is fixed or determinable and
collectibility is probable. Revenues derived from these services are recognized
ratably over the life of the service period.
Patent
License Fees.
We also
recognize revenues from our patent licensing program. Revenues from patent
licenses are recognized when persuasive evidence of an arrangement exists,
delivery has occurred and the Company has no further obligations, the fee is
fixed or determinable and collectibility is probable.
Results
of Operations
The
following table sets forth financial data for the years ended December 31, 2006,
2007 and 2008 (in thousands):
|
2006
|
2007
|
2008
|
||||||||||
|
Revenues
|
$ | 7,234 | $ | 11,250 | $ | 14,092 | ||||||
|
Cost
of revenues
|
901 | 1,411 | 1,828 | |||||||||
|
Gross
profit
|
6,333 | 9,839 | 12,264 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
1,763 | 2,187 | 3,152 | |||||||||
|
Sales
and marketing
|
2,686 | 3,453 | 3,992 | |||||||||
|
General
and administrative
|
2,299 | 2,589 | 3,189 | |||||||||
|
Total
operating expenses
|
6,748 | 8,229 | 10,333 | |||||||||
|
Operating
income (loss)
|
(415 | ) | 1,610 | 1,931 | ||||||||
|
Financial
income (expenses), net
|
274 | 527 | 346 | |||||||||
|
Equity
in losses of affiliate
|
(49 | ) | - | - | ||||||||
|
Net
income (loss) before taxes
|
(190 | ) | 2,137 | 2,277 | ||||||||
|
Taxes
on income
|
- | 28 | 7 | |||||||||
|
Net
income (loss)
|
$ | (190 | ) | $ | 2,109 | $ | 2,270 | |||||
Comparison
of Years Ended December 31, 2008 and 2007
Revenues
. Revenues increased
by $2.8 million from $11.3 million in 2007 to $14.1 million in
2008. The increase is mainly due to a growth in market share,
especially in the international market. The number of OEMs increased by 32 in
2008 and amounted to 116 as of December 31, 2008.
Cost of Revenues.
Cost of
revenues increased by $0.4 million from $1.4 million in 2007 to $1.8 million in
2008. The increase in 2008 is mainly due to higher facility costs and hosting
expenses following the open of a fourth data center in Japan aiming to serve the
increasing number of customers. Cost of revenues did not increase in the same
proportion as sales in 2008 due to economies of scale. Most costs of revenues
are fixed and are not affected by increases or decreases in
revenues.
Research and Development
.
Research and development expenses increased by 44% and amounted to $3.2 million
in 2008 compared to $2.2 million in 2007. The increase is due to recruitment of
more employees as part of the Company’s decision to develop new products.
Research and development expenses include $319,000 of expenses in connection
with SFAS No. 123(R).
Sales and Marketing
. Sales
and marketing expenses increased by 16% and amounted to $4.0 million compared to
$3.5 million in 2007. The increase is mainly due to recruitment of employees and
increased selling and marketing activity. In 2008, sales and marketing expenses
included $298,000 expenses in connection with SFAS No. 123(R)
General and Administrative
.
General and administrative expenses increased by 23% from $2.6 million in 2007
to $3.2 million in 2008. The increase is mainly due to the recruitment of two
new employees. In 2008, general and administrative expenses included $833,000
expenses in connection with SFAS No. 123(R).
Financial Income (Expenses),
Net
. Financial income (expenses), net, decreased by 34% from net income
of $527,000 in 2007 to net income of $346,000 in 2008. The decrease
is primarily due to less interest income derived from declining interest rates
throughout 2008, earned on the company's cash deposits.
Comparison
of Years Ended December 31, 2007 and 2006
Revenues
. Revenues increased
by $4.1 million from $7.2 million in 2006 to $11.3 million in
2007. The increase is due to an increase in market share, especially
in the international market. The number of OEMs increased by 35 in 2007 and
amounted to 88 as of December 31, 2007.
Cost of Revenues.
Cost of
revenues increased by $0.5 million from $0.9 million in 2006 to $1.4 million in
2007. The increase in 2007 is mainly due to higher facility costs and hosting
expenses aiming to serve the increasing number of customers. Cost of revenues
did not increase in the same proportion as sales in 2007 due to economies of
scale. Most costs of revenues are fixed and are not affected by increases or
decreases in revenues.
Research and Development
.
Research and development expenses increased by 24% and amounted to $2.2 million
in 2007 compared to $1.8 million in 2006. The increase is due to recruitment of
more employees as part of the Company’s decision to develop new products.
Research and development expenses include $246,000 of expenses in connection
with SFAS No. 123(R).
Sales and Marketing
. Sales
and marketing expenses increased by 29% and amounted to $3.5 million compared to
$2.7 million in 2006. The increase is mainly due to recruitment of employees and
increased selling and marketing activity. In 2007, sales and marketing expenses
included $194,000 expenses in connection with SFAS No. 123(R)
General and Administrative
.
General and administrative expenses increased by 13% from $2.3 million in 2006
to $2.6 million in 2007. The increase is mainly due to the recruitment of two
new employees. In 2007, general and administrative expenses included $544,000
expenses in connection with SFAS No. 123(R).
Financial Income (Expenses),
Net
. Financial income (expenses), net, increased by 92% from net income
of $274,000 in 2006 to net income of $527,000 in 2007. The increase
is primarily due to interest income derived from the increase in cash levels in
2007 compared to 2006 and from higher interest rates.
Equity in Losses of
Affiliate
. In 2006, the Company recorded losses that occurred
in Imatrix, an affiliated entity, up to the carrying amount of its investment as
of December 31, 2006. In 2007, since Imatrix did not incur income in
excess of its cumulative losses, no equity loss was recorded with respect to
such affiliate. Due to our dilution in the equity ownership and lack of
significant in influence in Imatrix, the investment has been accounted for under
the cost method as of December 31, 2007.
Quarterly
Results of Operations (Unaudited)
The
following table sets forth certain unaudited quarterly statements of operations
data for the eight quarters ended December 31, 2008. 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 report. The operating results for any quarter
are not necessarily indicative of the operating results for any future
period.
|
Three
Months Ended
|
||||||||||||||||||||||||||||||||
|
Mar.
31,
|
Jun.
30,
|
Sept.
30,
|
Dec.
31,
|
Mar.
31,
|
Jun
30,
|
Sept.
30,
|
Dec.
31,
|
|||||||||||||||||||||||||
|
2007
|
2007
|
2007
|
2007
|
2008
|
2008
|
2008
|
2008
|
|||||||||||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||||||||||||||
|
(unaudited)
|
||||||||||||||||||||||||||||||||
|
Revenues
|
$ | 2,405 | $ | 2,617 | $ | 2,930 | $ | 3,298 | $ | 3,401 | $ | 3,568 | $ | 3,622 | $ | 3501 | ||||||||||||||||
|
Cost
of revenues
|
286 | 346 | 357 | 422 | 449 | 459 | 466 | 454 | ||||||||||||||||||||||||
|
Gross
profit
|
2,119 | 2,271 | 2,573 | 2,876 | 2,952 | 3,109 | 3,156 | 3,047 | ||||||||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||||||||||
|
Research
and
|
||||||||||||||||||||||||||||||||
|
development
|
456 | 539 | 559 | 633 | 781 | 792 | 780 | 799 | ||||||||||||||||||||||||
|
Sales
and marketing
|
826 | 810 | 874 | 943 | 1,015 | 967 | 1,043 | 967 | ||||||||||||||||||||||||
|
General
and administrative
|
661 | 627 | 620 | 681 | 869 | 839 | 797 | 684 | ||||||||||||||||||||||||
|
Total
operating expenses
|
1,943 | 1,976 | 2,053 | 2,257 | 2,665 | 2,598 | 2,620 | 2,450 | ||||||||||||||||||||||||
|
Operating
income
|
176 | 295 | 520 | 619 | 287 | 511 | 536 | 597 | ||||||||||||||||||||||||
|
Financial
income
|
||||||||||||||||||||||||||||||||
|
(expenses),
net
|
91 | 188 | 119 | 129 | 120 | 71 | 108 | 47 | ||||||||||||||||||||||||
|
Net
income
|
267 | 483 | 639 | 748 | 407 | 582 | 644 | 644 | ||||||||||||||||||||||||
|
Taxes
on income
|
— | — | — | 28 | 7 | — | — | — | ||||||||||||||||||||||||
|
Net
income
|
$ | 267 | $ | 483 | $ | 639 | $ | 720 | $ | 400 | $ | 582 | $ | 644 | $ | 644 | ||||||||||||||||
|
Basic
|
||||||||||||||||||||||||||||||||
|
Net
income per share
|
$ | 0.01 | $ | 0.02 | $ | 0.03 | $ | 0.03 | $ | 0.02 | $ | 0.02 | $ | 0.02 | $ | 0.03 | ||||||||||||||||
|
Diluted
net income per share
|
$ | 0.01 | $ | 0.02 | $ | 0.02 | $ | 0.03 | $ | 0.01 | $ | 0.02 | $ | 0.02 | $ | 0.02 | ||||||||||||||||
Up
through early 2006, we had a history of incurring operating losses, and we
cannot be certain that we will continue to achieve profitability on a quarterly
or annual basis in the future. 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:
|
|
•
|
Our
ability to successfully develop and market our email defense solutions to
new markets, both domestic and
international;
|
|
|
•
|
Our
ability to successfully develop and market new, modified or upgraded
solutions, as may be needed;
|
|
|
•
|
The
continued market acceptance of our new email defense
solutions;
|
|
|
•
|
Our
ability to expand our workforce with qualified personnel, as may be
needed;
|
|
|
•
|
Unanticipated
bugs or other problems affecting the providing of our email defense
solutions to customers;
|
|
|
•
|
The
success of our resellers’ and OEM partners’ sales efforts to potential
customers;
|
|
|
•
|
The
solvency of our resellers and OEM partners and their ability to allocate
sufficient resources towards the marketing of our email defense solutions
to their potential customers;
|
|
|
•
|
Our
OEM partners’ ability to effectively integrate our solutions into their
product offerings;
|
|
|
•
|
The
rate of adoption of email defense solutions by
customers;
|
|
|
•
|
The
substantial decrease in information technology
spending;
|
|
|
•
|
The
pricing of our solutions;
|
|
|
•
|
Our
ability to timely collect fees owed by resellers and OEM
partners;
|
|
|
•
|
Our
ability to add space and equipment to our current Detection Centers in a
timely and effective manner to match the rate of growth in our business,
plus our ability to build new Detection Centers as worldwide demand for
our products may require; and
|
|
|
•
|
The
effectiveness of our customer support, whether provided by our resellers
and OEM partners, or directly by
Commtouch.
|
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.
New
Accounting Pronouncements
In
February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2,
“Effective Date of FASB Statement No. 157” ("FSP 157-2"), to delay the effective
date of FASB Statement 157 for one year for certain non-financial assets and
non-financial liabilities, excluding those that are recognized or disclosed in
financial statements at fair value on a recurring basis (that is, at least
annually). For purposes of applying the FSP 157-2, non-financial
assets and non-financial liabilities include all assets and liabilities other
than those meeting the definition of a financial asset or a financial liability
in FASB Statement 159. FSP 157-2 defers the effective date of Statement No.
157 to fiscal years beginning after November 15, 2008, and interim periods
within those fiscal years for items within the scope of FSP 157-2. The Company
does not expect the adoption of FSP 157-2 to have a material impact on its
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS 160, ‘‘Noncontrolling Interests in
Consolidated Financial Statements’’ (‘‘SFAS 160’’). SFAS 160 amends ARB 51,
‘‘Consolidated Financial Statements’’, to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
160 also changes the way the consolidated income statement is presented by
requiring consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated and requires expanded
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent owners and the interests of the
noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods,
and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS
160 to have a material impact on its financial position, results of operations
or cash flows.
In March
2008, the FASB issued Statement 161 “Disclosures about Derivative Instruments
and Hedging Activities” ("SFAS 161") an amendment to FASB No.
133. This statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required
to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. Early application is
encouraged. The Company does not expect the adoption of SFAS 161 to
have a material impact on its financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired.
SFAS 141R also establishes disclosure requirements to enable the evaluation
of the nature and financial effects of the business combination. SFAS 141R
is effective for fiscal years beginning after December 15, 2008. Earlier
adoption is prohibited. The Company does not expect the adoption of SFAS 141R to
have a material impact on its financial position, results of operations or cash
flows.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of non-governmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles". The Company does not expect a material impact on its consolidated
financial statements from adoption of SFAS No. 162.
Liquidity
and Capital Resources
We have
financed our operations from
pos
itive operating cash flows,
the issuance of
equity securities and, to a lesser extent, from private loans and research and
development grants from the Israeli government.
On May 8,
2006, the Company entered into a small financing transaction with one private
investor, whereby the Company received $100,000 against the issuance of 31,153
Ordinary Shares and warrants to purchase an additional 23,364 Ordinary
Shares.
As of
December 31, 2007 and December 31, 2008, we had approximately $14.4 million and
$16.4 million of cash and cash equivalents and marketable securities,
respectively. The increase was due to positive operating cash flow and receipt
of proceeds from the exercise of warrants and options in the amount of $0.8
million, less $1.3 million expended in our Ordinary Share buyback plan (see
discussion under Item 16E. “Purchases of Equity Securities by the Issuer and
Affiliated Purchasers”).
In 2008,
net cash provided by operating activities was approximately $3.0 million. The
increase in operating cash flow was mainly due to our net income in 2008. Net
cash used in financing activities in 2008 was approximately $0.5 million, due to
option and warrant exercises and the buy beck activity. Net cash provided by
investing activities in 2008 was $0.3 million and consisted primarily of a
decrease in short term cash deposits of $0.9 million, and purchase of property
and equipment in the amount of $0.5 million. As of December 31, 2007 and
December 31, 2008, we had working capital of $11.8 million and $14.8 million,
respectively.
As of
December 31, 2008, marketable securities of the Company represent short-term
municipal ARS, which are purchased at par (100) and are valued at par (100) as
at December 31, 2008. They are all invested in triple A rated securities. Such
investments in the United States may be in excess of insured limits and are not
insured in other jurisdictions. Commencing February 2008, the ARS (comprised of
five securities) suffered from failed auctions. On January 5, 2009, the
Company’s entire ARS portfolio was purchased by the bank at full par value,
amounting to a total of $2 million. Therefore, there is no effect on the
statement of operations in 2008 from such securities as of December 31,
2008.
Based on
the cash balance at December 31, 2008, current projections of revenues and
related expenses, the Company believes it has sufficient cash to continue
operations at least through March 2010.
Contractual
obligations
The
following table summarizes our outstanding contractual obligations as of
December 31, 2008 (in thousands):
|
Contractual Obligation
|
Payments due by period
(USD in thousands)
|
|||||||||||||||||||
|
Total
|
Less than 1
year
|
1-3 years
|
3-5 years
|
More than 5
years
|
||||||||||||||||
|
Operating
lease obligation
|
$ | 736 | $ | 460 | $ | 276 | $ | - | $ | - | ||||||||||
|
Other
Long-term liabilities reflected on the Company’s Balance Sheet - Accrued
severance pay
|
857 | - | - | - | 857 | |||||||||||||||
|
Other
Long-term asset reflected on the Company’s Balance Sheet - severance pay
fund
|
(720 | ) | - | - | - | (720 | ) | |||||||||||||
|
Net
- severance pay liability
|
137 | - | - | - | 137 | |||||||||||||||
|
Total
|
$ | 873 | $ | 460 | $ | 276 | $ | - | $ | 137 | ||||||||||
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. Israeli companies are
generally subject to corporate tax on their taxable income. The applicable
corporate tax rate was 27% in 2008 and will be further progressively
reduced to the following tax rates: 2009 - 26%, 2010 and
thereafter - 25%.
|
As of
December 31, 2008, the Company's net operating loss carry forwards for tax
purposes amounted to approximately $78 million, which may be carried forward and
offset against taxable income in the future, for an indefinite
period.
As of
December 31, 2008, for federal income tax purposes, our U.S. subsidiary had net
operating loss carry-forwards of approximately $ 92 million. These losses
may offset any future U.S. taxable income of the U.S. subsidiary and will expire
in the years 2009 through 2025. In light of the subsidiary's history of
operating losses, the Company has recorded a valuation allowance for all of its
deferred tax assets.
Utilization
of U.S. net operating losses may be subject to substantial annual limitation due
to the "change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitations may result in the expiration of
net operating losses before utilization.
The
Company and its subsidiary have provided valuation allowances in respect to the
deferred tax assets resulting from operating loss carry forwards and other
temporary differences. Management currently believes that since the Company and
its subsidiary, until recently, has had a history of losses, it is more likely
than not that the deferred tax assets regarding the loss carry forwards and
other temporary differences will not be realized in the foreseeable
future.
Impact
of Inflation and Currency Fluctuations
Most of
our sales are in U.S. dollars, and the rest are mainly in Euros. However, a
portion of our costs relates to our operations in Israel. A substantial portion
of our operating expenses in Israel, primarily our research and development
expenses are denominated in NIS. Costs and revenues not denominated in U.S.
dollars are re-measured to U.S. dollars, when recorded, at prevailing rates of
exchange. This is done for the purposes of our financial statements and
reporting. As a result, we are exposed to risk to the extent that the value of
the U.S. dollar decreases against the NIS. In that event, the U.S.
dollar cost of our operations will increase and our U.S. dollar-measured results
of operations will be adversely affected, as occurred in 2007 and the first half
of 2008, when the NIS appreciated against the U.S. dollar, which resulted in a
significant increase in the U.S. dollar cost of our operations. Also,
in the event that the U.S. dollar appreciates against the Euro, our revenues
will decrease. Consequently, we are and will be affected by changes in the
prevailing NIS/U.S. dollar and Euro/ U.S. dollar exchange rates.
The
annual rate of inflation in Israel was 3.8% in 2008, 3.4% in 2007 and (0.1%) in
2006. The NIS appreciated against the U.S. dollar by approximately (1.6%) in
2008 and (8.9%) in 2007 and depreciated against the U.S. dollar by approximately
8.24% in 2006. The representative dollar exchange rate for converting the NIS to
U.S. dollars, as reported by the Bank of Israel, was NIS 3.802 for one U.S.
dollar on December 31, 2008. The representative dollar exchange rate was NIS
4.135 at March 16, 2009. Because exchange rates between the NIS and the dollar
fluctuate continuously, exchange rate fluctuations and especially larger
periodic devaluations will have an impact on our operating results and
period–to–period comparisons of our results. The effects of foreign currency
re–measurements are reported in the consolidated financial statements for
relevant periods in the statement of operations.
Item
6. Directors, Senior Management and Employees
The
following table presents information with respect to our directors’ beneficial
ownership of our Ordinary Shares as of December 31, 2008. Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting or 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 and rights to
receive economic benefits with respect to all shares beneficially owned. The
applicable percentage of ownership for each director is based on 25,206,659
Ordinary Shares outstanding as of December 31, 2008. Ordinary Shares issuable
upon exercise of options and other rights held and exercisable on or within
sixty days of December 31, 2008 are deemed outstanding for the purpose of
computing the percentage ownership of the director holding those options and
other rights.
|
Name and
Position
|
Age
|
Ordinary
Share
Beneficial
Ownership
>1%
|
Number of
Ordinary Shares
Beneficially Owned
|
Number of Options and Warrants included
in Beneficial Ownership
|
||||
|
Amir
Lev, Director, President and CTO
|
48
|
3%
|
761,131
|
599,980
options, at exercise prices ranging from $0.0375 to $6.60 per Ordinary
Share. Expiration dates range from 8/15/11 to
8/4/15
|
||||
|
Aviv
Raiz, Director (1)
|
50
|
21.6%
|
5,535,869
|
50,000
options, at exercise prices ranging from $3.12 to $6.60 per Ordinary
Share. Expiration dates range from 12/30/11 to 12/14/13. Also,
333,333 warrants, with an exercise price of $1.95, expiring in early
October 2010
|
||||
|
Gideon
Mantel, Director, Chairman of the Board and CEO
|
49
|
4.6%
|
1,207,175
|
804,149
options, at exercise prices ranging from $0.0375 to
$6.60. Expiration dates range from 8/15/11 to
8/4/15
|
|
Hila
Karah, Director(1)(3)
|
40
|
<1%
|
<1%
|
|||||
|
Lloyd
E. Shefsky, Director(2)(3)(4)
|
68
|
1.4%
|
345,383
|
115,103
options, at exercise prices ranging from $1.17 to $6.60. Expiration dates
range from 12.30.11 to 3.29.15.
|
||||
|
Yair
Shamir, Director (Outside Director) (2)(3)(5)
|
64
|
4.4%
|
1,099,158
|
9,375
options, at exercise prices ranging from $1.58 to
$4.10. Expiration dates range from 3.31.14 to
12.15.14
|
||||
|
Yair
Bar-Touv, Director (Outside Director) (1)(2)
|
48
|
<1%
|
<1%
|
|
(1)
|
Member
of the Compensation Committee
|
|
(2)
|
Member
of the Audit Committee
|
|
(3)
|
Member
of the Nominating Committee
|
|
(4)
|
Mr.
Shefsky’s ownership information includes his individual holdings and
holdings of LENE L.P. (134,265 Ordinary Shares), in which Mr. Shefsky
currently holds a relatively nominal, limited partnership
interest.
|
|
(5)
|
Mr.
Shamir’s ownership interest includes 1,099,158 Ordinary Shares purchased
by Catalyst Private Equity Partners II, for which Mr. Shamir acts as
Chairman and Managing Partner. Mr. Shamir’s options, as noted
in the table above, are also held on behalf of
Catalyst.
|
Other
Senior Management Employees:
The
following table sets forth the names and positions of our
senior management employees:
|
Name
|
Age
|
Ownership >1%
|
Position
|
|||
|
Gideon
Mantel
|
49
|
See
table above
|
CEO
and Chairman of the Board
|
|||
|
Amir
Lev
|
48
|
See
table above
|
President
and Chief Technical Officer
|
|||
|
Ron
Ela
|
38
|
(1)
|
Chief
Financial Officer
|
|||
|
Avner
Amram
|
47
|
(1)
|
Executive
Vice President, GM Americas, Commtouch Inc.
|
|||
|
Gary
Davis
|
47
|
(1)
|
Vice
President, General Counsel and Corporate Secretary
|
|||
|
Ronen
Rosenblatt
|
43
|
(1)(2)
|
Vice
President, Research and Development Commtouch Software
Ltd.
|
|||
|
Ido
Hadari
|
35
|
(1)
|
Vice
President, International Sales and Business Development, Commtouch
Software Ltd.
|
|||
|
Jay
Goldin
|
40
|
(1)
|
Vice
President, Business Development North America
|
|||
|
Yossi
Maslaton
|
42
|
(1)
|
Vice
President, Network Operations & Customer Services
|
|||
|
Asaf
Greiner
|
34
|
(1)
|
Vice
President, Web Security Products
|
|||
|
Rebecca
Herson
|
39
|
(1)
|
Vice
President,
Marketing
|
|
(1)
|
less
than 1%
|
|
(2)
|
During
early 2009, Ronen Rosenblatt joined the Company as Vice President of
Research and Development.
|
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 was also the General Manager
of Commtouch from January 1997 through April 2000, and in May 2000 became
President. Mr. Lev received a B.A. in Computer Science and Economics from Hebrew
University, Jerusalem.
Aviv
Raiz
has served as
a Director since December 2005. He is the founder and President of
Eurotrust Ltd. Mr. Raiz has been active in the foreign exchange
markets for the past twenty years, and has been a private equity investor in
several high-tech, bio-tech and Internet companies for the past ten years.
He holds an M.B.A. from
Tel Aviv University.
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, and in December 2006, he was confirmed as Chairman of
the Board. 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.
Hila
Karah joined the Board of Directors in March 2008. Ms. Karah has been the CIO of
Eurotrust Ltd. since 2006, and has been a private and public equity investor in
several high-tech, bio-tech and Internet companies since 2000. Prior to her
joining Eurotrust, she served as a partner financial analyst at Perceptive Life
Sciences Ltd., a New York-based hedge fund. Prior to her position at Perceptive,
Ms. Karah was a research analyst at Oracle Partners Ltd., a health care-focused
hedge fund based in Connecticut. Ms. Karah holds a BA in Molecular and Cell
Biology from the University of California, Berkeley, and has studied at the
UCB-UCSF JMP.
Lloyd E.
Shefsky
has served as
a Director of Commtouch since October 2003. He is a Clinical
Professor of Entrepreneurship and Co-Director of the Center for Family
Enterprises at the Kellogg School of Management and has taught in several
countries. In 1970, he founded the Chicago law firm, Shefsky & Froelich
Ltd., where has been Of Counsel since 1996. Since 1981 he has represented the
Government of Israel throughout the Midwestern U.S. For nearly forty years he
has represented hundreds of entrepreneurs and their companies, and during the
past twenty-five years, such representation has included numerous Israeli
companies with U.S. operations. Mr. Shefsky authored
Entrepreneurs Are Made Not
Born,
which was translated into five foreign languages. He received his
J.D. from the University of Chicago Law School, a B.S.C. from De Paul University
(accounting), is a member of the Illinois and Florida Bars, and has a CPA
certificate in Illinois.
Yair
Shamir joined the Board of Directors as an Outside Director under the Israel
Companies Law in March 2008. Mr. Shamir is the Chairman and Managing
Partner of Catalyst Investments and the Chairman of IAI, Israeli Aerospace
Industries. From 2004 to 2005, Mr. Shamir was Chairman of El Al,
Israeli Airlines and lead the privatization process of the firm. From
1997 to 2005, Mr. Shamir served as Chairman and CEO of VCON Telecommunications
Ltd. From 1995 to 1997, Mr. Shamir served as executive vice president
of the Challenge Fund-Etgar L.P. From 1994 to 1995, he served as
Chief Executive Officer of Elite Food Industries, Ltd. From 1988 to
1993, Mr. Shamir served as Executive Vice President and General Manager of
Scitex Corporation, Ltd. Mr. Shamir served in the Israeli Air Force as a pilot
and commander from 1963 to 1988. During his term in the Air Force, Mr. Shamir
attained the rank of colonel and served as head of the electronics department,
the highest professional electronics position within the Air
Force. He currently serves as a director of DSP Group Corporation and
also serves as director of other private hi-tech companies. Mr.
Shamir holds a B.Sc. Electronics Engineering from the Technion, Israel Institute
of Technology.
Yair
Bar-Touv joined the Board of Directors as an Outside Director under the Israel
Companies Law in March 2008. Mr. Bar-Touv is formerly the CIO of a
leading government enterprise specializing in analytic software solutions for
knowledge discovery (text and data mining) of large volumes of data, with a
focus on changing the ways enterprise organizations make decisions with regards
to primary business processes. Mr. Bar-Touv is also the former CEO of
Elron Telesoft and co-CEO of NCC, a leading Systems Integrator
operating in Israel and the USA, which was acquired in 1997 by Elron
Electronics. Mr. Bar-Touv holds an M.Sc in Computer Engineering from
the Technion Institute of Technology (1987) and a B.Sc in Electronic Engineering
from Ben-Gurion University (1981).
Ron Ela
joined Commtouch in July 2006 as its Chief Financial Officer. A Certified Public
Accountant, Mr. Ela formerly held management positions at two Israeli-based
Nasdaq listed companies, and most recently held the role of Controller at Verint
Systems Ltd., a wholly–owned subsidiary of Verint Systems Inc. During the five
years prior to that time, Mr. Ela served as Deputy Controller and subsequently
Controller for Partner Communication Ltd. Also, Mr. Ela spent 3 years in public
accounting with Kesselman & Kesselman, a member of PricewaterhouseCoopers in
Israel. Mr. Ela has a B.A. in business administration majoring in accounting
from the College of Management Academic Studies.
Avner
Amram joined Commtouch in 1996 and currently serves as Executive Vice President
and General Manager, Americas. Mr. Amram has over 17 years of experience in the
areas of technology, operational management and leadership, and is also a
founder of CVDO. Before 2002, Mr. Amram served as COO of Commtouch and was
responsible for worldwide operations. Mr. Amram also held a number of positions
at Commtouch prior to being appointed COO. From 1995 to 1996, Mr. Amram served
as project manager for Medatech, a leading provider of customer relationship
management (CRM) solutions, developing and managing complex installations at
large organizations. Prior to Medatech, Mr. Amram acted as General Manager of
Fuga Nursery in Israel, where he was responsible for operations, production,
marketing and distribution. Mr. Amram holds a Bachelors of Science (BSC), in
Computer Engineering and graduated Cum Laude from the Technion, Israel Institute
of Technology.
Gary
Davis joined Commtouch in September 1999 and serves as Vice President, General
Counsel and Corporate Secretary. Mr. Davis has over 20 years of legal experience
in both private law firm and corporate practices. Mr. Davis is certified to
practice law in both the State of Israel and California. Prior to September
1999, Mr. Davis was in–house counsel to Israel Military Industries and Elta
Electronics Industries. He received a B.A. in Political Economy of Industrial
Societies from U.C. Berkeley and a J.D. in law from Golden Gate
University.
Ronen
Rosenblatt rejoined Commtouch in January 2009 and serves as Vice President of
research and development. For the past 18 years, he has held executive positions
in the Israeli hi-tech industry ranging from start–ups to publically traded
companies. Mr. Rosenblatt served as VP of research and development at Commtouch
in its early stages until 2000 and most recently, he served as Vice President of
research and development at NiceVision, a division of Nice Systems. Previously,
Mr. Rosenblatt served in technology and business executive roles in several
startup companies, including Xacct, a provider of industry-leading mediation
software for telecom service providers that was acquired by Amdocs, Savantis,
and Gigaspaces. He earned a Bachelor of Science degree from Tel-Aviv University
and an Executive MBA from the Recanati School of Business.
Ido
Hadari joined Commtouch in 2008 and serves as Vice President, International
Sales and Business Development. Mr. Hadari has over a decade of business
management and sales experience, most recently at Interwise, an enterprise voice
and web conferencing provider that was acquired by AT&T. At Interwise, where
he worked for the past eight years, he held various senior business development
and channel management positions with responsibilities for regional sales in
Europe and Asia, and global strategic alliances. He holds a BA magna cum laude
in Business Administration and Economics from Hebrew University,
Jerusalem.
Jay
Goldin joined Commtouch in March 2006, as the Vice President Business
Development, North America. Prior to joining Commtouch, Mr. Goldin was a
consultant to networking and security companies, including Commtouch. Mr.
Goldin was a founder of Digital Fountain, a wireless and media networking
technology company, where he served as Vice President of Business
Development. He also co-founded Alyanza Infosystems, and was a
management consultant with Pacific Rim Consulting Group. Mr. Goldin
received his M.B.A and A.B. in Economics from Stanford University.
Yossi
Maslaton joined Commtouch in 1998 and has served as Vice President of Network
Operations and Customer Services since early 2005. Before 2005 he was
Director of Service Operations. With over 20 years of experience in the
fields of Information Technology and Networking, Mr. Maslaton
is responsible for the operations of Commtouch's data centers and
customer services, servicing tens of millions of users daily with the
highest standards of uptime. From 1991 to 1998 Mr. Maslaton was Manager of
Information Systems and labs for RND Networks, a group of hi-tech startups in
the network-routing field. Prior to that, Mr. Maslaton managed the
technical field-operations of a large project for the Israel Defense Forces in
the areas of distributed computing systems and radio
communications.
Asaf
Greiner joined Commtouch in 2008 and serves as Vice President of Web Security
Products. Mr. Greiner has over a decade of experience in executive and
entrepreneurial roles, previously serving as Director of Business Innovation at
Aladdin Knowledge Systems, a company specializing in software and Internet
security. Previously he co-founded and acted as general manager of beeFENCE, a
network security company, and Aduva, a Linux lifecycle management company that
was acquired by SUN Microsystems. He holds an MBA summa cum laude from The
Interdisciplinary Center, Herzliya and a BA in Business and Economics from
Hebrew University, Jerusalem.
Rebecca
Steinberg Herson joined Commtouch in April 2006 as Director of Marketing.
Currently, she serves as Vice President, Marketing, orchestrating the company's
global marketing strategy and activities. Prior to joining Commtouch, Ms. Herson
served as Vice President of Marketing at Redmatch, a software start-up.
Previously, she led marketing initiatives at Whale Communications (acquired in
2006 by Microsoft), Orckit Communications (Nasdaq: ORCT) and at various
not-for-profit organizations. As the head of marketing for six years at Whale,
an Internet security company, she was responsible for launching numerous
hardware/software products and held a key role in establishing the company as a
market leader in the secure remote access field. Ms. Herson holds a BA magna cum
laude from Yale University, and an MS in Management from Boston
University.
Election
of Directors
Directors
(other than outside directors, as explained below) are elected by shareholders
at the annual general meeting of the shareholders and hold office until the next
annual general meeting following the general meeting at which such director is
elected and until a successor is elected, or until the director is removed. An
annual general meeting must be held at least once in every calendar year, but
not more than fifteen months after the preceding annual general meeting.
Directors may be removed and other directors may be elected in their place or to
fill vacancies in the Board of Directors at any time by the holders of a
majority of the voting power at a general meeting of the shareholders. Until a
vacancy is filled by the shareholders, the Board of Directors may appoint new
directors temporarily to fill vacancies on the Board of Directors. The Amended
and Restated Articles of Association of Commtouch authorize the shareholders to
determine, from time to time, the number of directors. The maximum number of
directors is currently fixed at ten directors, though only seven directors are
currently serving on the Board of Directors. There are no family relationships
among any of the directors, officers or key employees of Commtouch.
Alternate
Directors
The
Amended and Restated 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, the alternate
may not in turn appoint an alternate for himself (unless the instrument
appointing him otherwise expressly provides) and the alternate is not entitled
to remuneration. A person who is not qualified to be appointed as a 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
Israel Companies Law 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:
|
|
•
|
an
employment relationship;
|
|
|
•
|
a
business or professional relationship maintained on a regular
basis;
|
|
|
•
|
control;
and
|
|
|
•
|
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. At least one of the outside directors is required to have
"financial and accounting expertise," unless another member of the audit
committee, who is an independent director under the NASDAQ Marketplace Rules,
has "financial and accounting expertise," and the other outside director or
directors are required to have "professional expertise," all as defined under
the Israel Companies Law.
Outside
directors are to be elected by a majority vote at a shareholders’ meeting,
provided that either:
|
|
•
|
such
majority includes at least one–third of the shares held by non–controlling
shareholders who are present and voting at the meeting;
or
|
|
|
•
|
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 period of 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 their appointment or if they violate their fiduciary duty to
the company. Each committee of a company’s Board of Directors must include at
least one outside director and the audit committee (the existence of which is
required under the Israel Companies Law) must include all outside directors. An
outside director is entitled to compensation as provided in the regulations
adopted under the Israel Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
service provided as an outside director.
Mr.
Shamir and Mr. Bar-Touv currently serve as the Company’s outside
directors.
In
addition, the NASDAQ Capital Market currently requires Commtouch to have at
least a majority of independent directors, as defined under Marketplace Rule
4200(a)(15), on the Board of Directors and to maintain an audit committee of at
least three members, each of whom must:
|
|
(i)
|
be
independent as defined under Marketplace Rule
4200(a)(15);
|
|
|
(ii)
|
meet
the criteria for independence set forth in Rule 10A-3(b)(1) under the
Securities Exchange Act of 1934, as amended, or “Exchange Act”, as set
forth below (subject to the exemptions provided in Exchange Act Rule
10A-3(c);
|
|
|
(iii)
|
not
have participated in the preparation of the financial statements of the
Company or any current subsidiary of the Company at any time during the
past three years; and
|
|
|
(iv)
|
be
able to read and understand fundamental financial statements, including a
company’s balance sheet, income statement and cash flow
statement.
|
Under
limited circumstances, the Company may have one audit committee member not
independent in accordance with the above, but such a member would only be able
to serve for a maximum of two years.
Exchange
Act Rule 10A-3(b)(1) requires that members of the audit committee meet that
rule’s definition of independence, which requires that an audit committee member
may not, except in his or her capacity as a director or committee member, (i)
accept directly or indirectly any consulting, advisory, or other compensatory
fee from the Company or any of its subsidiaries (except for fixed amounts of
compensation under a retirement plan for prior service with the Company,
provided that such compensation is not contingent in any way on continued
service), and (ii) be an “affiliated person” of the Company or any of its
subsidiaries.
NASDAQ
rules also require that the Company certify that it has, and will continue to
have, at least one member of the audit committee who has past employment
experience in finance or accounting, requisite professional certification in
accounting, or any other comparable experience or background which results in
the individual’s financial sophistication, including being or having been a
chief executive officer, chief financial officer or other senior officer with
financial oversight responsibilities. Also, under Item
401(h) of Regulation S-K, the Company is currently obligated to disclose whether
or not it has a “financial expert” on its audit committee, as defined under this
regulation (See Item 16A. Audit Committee Financial Expert).
The three
directors who serve on our audit committee, Mr. Shamir, Mr. Bar-Touv and Mr.
Shefsky, qualify as independent directors under NASDAQ Marketplace Rules
(including Exchange Act Rule 10A-3). Furthermore, Mr. Shamir and Mr. Bar-Touv
meet the qualification requirements for outside directors, as required under the
Israel Companies Law.
The
Company has identified the following Board members as “Independent directors”
pursuant to NASDAQ Marketplace Rule 4200(a)(15):
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|
a.
|
Yair
Bar-Touv
|
|
|
b.
|
Yair
Shamir
|
|
|
c.
|
Aviv
Raiz
|
|
|
d.
|
Hila
Karah
|
|
|
e.
|
Lloyd
Shefsky
|
Pursuant
to a recent amendment to the Israeli Companies Law, an Israeli company, whose
shares are publicly traded, may elect to adopt a provision in its articles of
association pursuant to which a majority of its board of directors will
constitute individuals complying with certain independence criteria prescribed
by the Israel Companies Law. We have not included such a provision in
our articles of association since our board of directors complies with the
independence requirements of the NASDAQ and Securities and Exchange Commission
regulations described above.
Audit
Committee
As noted
above in the discussion under “
Independent and Outside
Directors
”, the Israel 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,
approving management compensation and approving related party transactions as
required by law. An audit committee must consist of at least three directors
meeting the independence standards under the NASDAQ Marketplace Rules and must
include all outside directors under the Israel Companies Law, all as described
above. Furthermore, the Israel Companies Law specifically prohibits the chairman
of the Board of Directors, any director employed by or otherwise providing
services to a company and a controlling shareholder or any relative of a
controlling shareholder from being a member of the audit committee. Our Audit
Committee is in compliance with the noted requirements.
Compensation
Committee
The
Compensation Committee is responsible for determining salaries, incentives and
other forms of compensation for Commtouch’s directors and its executive
officers. The Compensation Committee is also responsible for
administering the various stock option plans, including the issuance of grants
of options to employees of the Company and its subsidiary.
Nominating
Committee
The
committee’s responsibilities include identifying individuals qualified to
become board members and recommending director nominees to the
board.
Internal
Auditor
Under the
Israel 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 a company’s actions comply with relevant
law and orderly business procedure. Under the Companies Law, the internal
auditor may be an employee of the company but not an interested party or office
holder, or a relative of an interested party or office holder, and he or she may
not be the company’s independent accountant or its representative. The Company
engaged a qualified internal auditor during 2008.
Approval
of Certain Transactions; Obligations of Directors, Officers and
Shareholders
The
Israel Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office holder’s
fiduciary duties consist of a duty of care and a duty of loyalty. Each person
listed in the first table that appears above at the beginning of this Item 6 is
an office holder.
The duty
of loyalty requires an office holder to act in good faith and for the benefit of
the company, including to avoid 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. A company may approve any of the acts mentioned
above provided that all the following conditions apply: the office holder acted
in good faith and neither the act nor the approval of the act prejudices the
good of the company, and the office holder disclosed the essence of his personal
interest in the act, including any substantial fact or document, a reasonable
time before the date for discussion of the approval.
The duty
of care requires an office holder to act with a level of care that a reasonable
office holder in the same position would employ under the same
circumstances. This includes the duty to use reasonable means to
obtain information regarding the advisability of a given action submitted for
his or her approval or performed by virtue of his or her position and all other
relevant information material to these actions.
Under the
Israel 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
Israel 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. "Personal interest," as defined by the Companies Law, includes a
personal interest of any person in an act or transaction of the company,
including a personal interest of his relative or of a corporation in which that
person or a relative of that person is a 5% or greater shareholder, a holder of
5% or more of the voting rights, a director or general manager, or in which he
or she has the right to appoint at least one director or the general
manager. "Personal interest" does not apply to a personal interest
stemming merely from holding shares in the company.
The
office holder must make the disclosure of his personal interest no later than
the first meeting of the company's board of directors that discusses the
particular transaction. This duty does not apply to the personal
interest of a relative of the office holder in a transaction unless it is an
"extraordinary transaction." 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, and a "relative"
as a spouse, siblings, parents, grandparents, descendants, spouse’s descendants
and the spouses of any of the foregoing.
In the
case of a transaction that 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 provide
otherwise. Our Amended and Restated Articles of Association do not
provide 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
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 a
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. 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 unless a majority of the board of
directors or the audit committee has a personal interest in the
matter. If a majority of the board of directors or the audit
committee has a personal interest in the transaction, shareholder approval also
would be required.
The
Israel 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 than 50% of the
voting rights in the company. Extraordinary transactions, including a private
placement, 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.
Under the
Israel 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, in respect to his or her voting at the
general meeting of shareholders on the following matters:
|
|
•
|
any
amendment to the Articles of
Association;
|
|
|
•
|
an
increase of the company’s authorized share
capital;
|
|
|
•
|
a
merger; or
|
|
|
•
|
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 Israel
Companies Law provides that a breach of the duty of fairness will be governed by
the laws governing breach of contract. The Israel Companies Law does not
describe the substance of this duty.
Insurance,
Indemnification and Exculpation of Directors and Officers; Limitations on
Liability
The
Israel Companies 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
or her duty of loyalty to the company, to the extent that he or she 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 or she committed in connection with
his or her serving as an office holder. Moreover, a company can indemnify an
office holder for (a) any monetary liability imposed upon such a office holder
for the benefit of a third party pursuant to a court judgment, including a
settlement or an arbitrator’s decision, confirmed by a court, (b) reasonable
legal costs, including attorney’s fees, expended by a office holder as a result
of an investigation or proceeding instituted against the office holder by a
competent authority, provided that such investigation or proceeding concludes
without the filing of an indictment against the office holder and either i) no
financial liability was imposed on the office holder in lieu of criminal
proceedings or ii) financial liability was imposed on the office
holder in lieu of criminal proceedings but the alleged criminal offense does not
require proof of criminal intent, and (c) reasonable litigation expenses,
including legal fees, actually incurred by such a office holder or imposed upon
the office holder by a court order, in a proceeding brought against the office
holder by or on behalf of the company or by others, or in a criminal action in
which he was acquitted, or in a criminal action which does not require proof of
criminal intent in which he was convicted. The Companies Law further
provides that the indemnification provision in a company’s articles of
association (i) may be an obligation to indemnify in advance, provided that,
other than litigation expenses, it is limited to events the board of directors
can foresee in light of the company’s actual activities when providing the
obligation and that it is limited to a sum or standards the board of directors
determines is reasonable in the circumstances, and (ii) may permit the company
to indemnify an officer or a director after the fact.
Furthermore,
a company can, with one limited exception, exculpate an office holder in
advance, in whole or in part, from liability for damages sustained by a breach
of duty of care to the company.
All of
these provisions are specifically limited in their scope by the Companies Law,
which provides that a company may not indemnify or exculpate an officer or
director nor enter into an insurance contract that would provide coverage for
any monetary liability incurred as a result of (i) a breach by the officer or
director of the duty of loyalty, unless the officer or director acted in good
faith and had a reasonable basis to believe that the act would not prejudice the
company, in which case the company is permitted to indemnify and provide
insurance to but not to exculpate; (ii) an intentional or reckless breach by the
officer or director of the duty of care, other than if solely done in
negligence; (iii) any act or omission done with the intent to derive an illegal
personal benefit; or (iv) any fine levied or forfeit against the director or
officer.
Our
Amended and Restated Articles of Association allow us to insure, exculpate and
indemnify office holders to the fullest extent permitted by law provided such
insurance, exculpation or indemnification is approved in accordance with the
Israel Companies Law. We have acquired directors’ and officers’ liability
insurance covering the officers and directors of Commtouch and its subsidiary
for certain claims. At the annual meeting of shareholders held on November 18,
2002, the shareholders approved a form of indemnification, exculpation and
insurance agreement that is applicable to all our directors. The form
of this agreement, as well as related provisions in our Amended and Restated
Articles of Association, were amended at the annual meeting of shareholders held
on December 30, 2005.
Compensation
of Directors and Executive Officers
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. Through 2008, directors did not
receive cash compensation for their services. However, at the annual
meeting in December 2008, shareholders approved the payment of cash
compensation, in addition to equity compensation (options), according to the
following:
|
|
a.
|
NIS
31,700 base annually per director, as linked to the applicable Israeli
consumer price index, payable in four equal installments at the beginning
of each calendar quarter; and
|
|
|
b.
|
NIS
1,590 per director per face to face Board or committee meeting or NIS954
(60% of NIS 1590) in case of telephonic participation at such meeting,
payable at the beginning of each calendar quarter following the quarter
during which a Board member participated in a meeting. No separate per
meeting compensation will be paid for committee meetings that are held on
the same day immediately prior or subsequent to a Board
meeting. In that event, a Board and committee meeting will be
considered one meeting.
|
|
|
c.
|
For
non-Israeli based directors, the amounts set forth will be paid in United
States dollars, according to the representative rate of exchange published
by the Bank of Israel on the date of
payment.
|
Directors
also are reimbursed for their expenses for each Board of Directors meeting
attended. See Item 10 “Amended and Restated 1999 Non-employee Directors Stock
Option Plan” for a discussion of director compensation in the form of option
grants. During 2008, options to purchase 491,984 Ordinary Shares were granted to
directors and executive officers under the Company’s stock option plans at a
weighted average exercise price of $ 3.20 per share. The aggregate direct
remuneration paid by Commtouch to all directors and executive officers (11
persons) in 2008 was approximately $669 thousand. During the same period
Commtouch accrued or set aside approximately $42 thousand for the same group to
provide pension, retirement or similar benefits. As of December 31, 2008,
directors and executive officers of Commtouch (8 persons) held an aggregate of
2,655,541 stock options to purchase a like number of Ordinary Shares, with
1,622,543 of those options having vested.
Options
to Purchase Securities from Registrant or Subsidiaries
As of
December 31, 2008, options to purchase 4,039,228
Ordinary Shares had been
granted to then existing employees, consultants, executive officers and
non–employee directors under the Company’s stock option plans, net of forfeited
options, and there were 1,447,361 shares available for grant under all plans. Of
the number of options granted, had not been exercised and had exercise prices
ranging from $0.0375 to $6.60 per share and a weighted average per share
exercise price of approximately $2.77, and were held by 56
persons. These options have termination dates ranging from March 2009
to August 2015.
Employee
Stock Option Plans
Employees,
including executive officers and other management employees, participate in the
Company’s employee option plans. The Commtouch Software Ltd. 2006 U.S. Stock
Option Plan, primarily covering the granting of options to employees and
consultants based in the United States, was adopted on December 15, 2006 and has
a term of ten years. The Commtouch Software Ltd. Amended and Restated
Israeli Share Options Plan, primarily covering the granting of options to
employees, consultants and directors based in Israel, was adopted on June 22,
2003 and has a term of ten years. While Israeli based directors
receive their grants under the Israeli plan, the principal terms of their grants
are identical to those of non-Israeli based directors receiving their grants
under the non-employee director plan (discussed below).
Some
previous employee option plans have either terminated or were amended and
restated, though options remain outstanding and exercisable under those
plans. Such plans include the Amended and Restated 1996 CSI Stock
Option Plan which expired on January 1, 2006 and the
Amended and Restated 1999
3(i) Share Option Plan, which was replaced by the above described Israeli Share
Option Plan.
All
employee stock option plans are administered by the Compensation Committee.
Subject to the provisions of the employee stock plans and applicable law, the
Compensation Committee has the authority to determine, among other things, to
whom options may be granted; the number of Ordinary Shares to which an option
may relate; the exercise price for each share; the vesting period of the option
and the terms, conditions and restrictions thereof, including accelerated
vesting on change of control provisions; to amend provisions relating to such
plans; and to make all other determinations deemed necessary or advisable for
the administration of such plans.
Amended
and Restated 1999 Non–Employee Directors Stock Option Plan
New
non-employee directors are currently entitled to an initial grant of 50,000
options. Non-employee directors who are reelected at the annual meeting of
shareholders are entitled to additional grants of 16,667 options.
The
Company’s Non–Employee Directors Plan was extended by an additional ten years at
the annual meeting of shareholders held on December 15, 2008. Under this plan,
each option becomes exercisable at a rate of 1/16th of the option shares every
three months, and has an exercise price equal to the fair market value of the
Ordinary Shares on the grant date of such option. Up through 2004, each option
granted had a maximum term of ten years, but would terminate earlier if the
optionee ceased to be a member of the Board of Directors. Options granted to
directors during 2005 - 2007 have a maximum term of six years. At the
annual meeting of shareholders of December 30, 2005, shareholders approved an
amendment to the Non-Employee Directors Plan to allow for the acceleration of
unvested options for any director who has served the company for at least three
years, unless the director resigned voluntarily or was removed from the Board of
Directors due to a failure to perform any of his/her duties to the
Company.
Employees
See Item
4: Employees
Item
7. Major Shareholders and Related Party Transactions.
The
following table presents information with respect to beneficial ownership of our
Ordinary Shares as of December 31, 2008, including:
|
|
•
|
each
person or entity known to Commtouch to own beneficially more than five
percent of Commtouch’s Ordinary Shares,
and
|
|
|
•
|
all
executive officers and directors as a
group.
|
Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting or 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 and rights to
receive economic benefits with respect to all shares beneficially owned. The
applicable percentage of ownership for each shareholder is based on 25,206,659
Ordinary Shares outstanding as of December 31, 2008. Ordinary Shares issuable
upon exercise of options and other rights held and exercisable on or within
sixty days of December 31, 2008 are deemed outstanding for the purpose of
computing the percentage ownership of the person holding those options and other
rights and for all directors and officers as a group, but are not deemed
outstanding for computing the percentage ownership of any other
person. Major shareholders in the Company have the same voting rights
as all other shareholders.
|
MAJOR
SHAREHOLDERS OF ORDINARY SHARES
|
Amount
|
Percent of
|
||||||
|
Owned
|
Class
|
|||||||
|
Aviv
Raiz*
|
5,535,869 | ** | 21.6 | % | ||||
|
All
directors and executive officers as a group at 12.31.08 (8
persons)
|
9,127,567 | *** | 33.5 | % | ||||
*This
shareholder of record resides in Israel.
**Includes
50,000 options and 333,333 warrants, exercisable into a like number of Ordinary
Shares.
***Includes
1,670,793 options exercisable into a like number of Ordinary
Shares. Also, this number includes 134,265 shares held by LENE L.P.,
in which Mr. Lloyd Shefsky holds a relatively small limited partner interest,
without any control over partnership management, and b) 1,099,158 Ordinary
Shares purchased by Catalyst Private Equity Partners II, for which Mr. Yair
Shamir acts as Chairman and Managing Partner.
Based on
a review of the information provided to us by our transfer agent, as
of December 31, 2008, there were
86 holders of
record of our Ordinary Shares, including 54 holders of record residing in
the United States holding 21,539,386 Ordinary Shares, or approximately
86% of the aggregate 25,206,659 Ordinary Shares outstanding as of such
date. These numbers are not representative of the number of
beneficial holders of our shares nor is it representative of where such
beneficial holders reside since many of these ordinary shares were held of
record by brokers or other nominees (including one U.S. nominee company, CEDE
& Co., which held approximately 80% of our outstanding Ordinary Shares
as of such date).
Significant
Changes in Percentage Ownership During the Past Three Years
|
|
·
|
Aviv
Raiz participated in the private placements of October 31, 2004 (the
preferred share issuance) and October 2, 2005, acquiring 500,000
convertible Series A Preferred Shares, 4 million Ordinary Shares and 2
million warrants exercisable into a like number of Ordinary
Shares. Subsequent to the preferred share round of October
2004, Mr. Raiz has also purchased in private transactions 1.1 million
convertible Series A Preferred Shares from certain investors who
participated in that round. The shareholdings referenced in
this paragraph are in their original, pre-reverse split format. Together
with his holdings from purchases on the open market, which continued
during 2008, and director options vesting within 60 days of December 31,
2008, Mr. Raiz beneficially holds 21.6% in the Company. Mr.
Raiz is a director of the Company.
|
Interest
of Management and their Family Members in Certain Transactions
There
were no material related party transactions during 2008 or through the date of
filing of this Form 20-F.
Item
8. Financial Information.
See Item
18: Financial Statements. If the Company decides to distribute a cash
dividend out of income that has been tax exempt due to an “approved enterprise”
status under the Law for the Encouragement of Capital Investments, 5719-1959,
the amount of cash dividend will be subject to corporate tax at the rate then in
effect under Israeli law. The Company has never declared or paid cash dividends
on its Ordinary Shares and does not currently anticipate paying any cash
dividends during 2009. The Company intends to retain future earnings to finance
the development of its business and for other corporate purposes.
We are
not a party to any litigation, and we are not aware of any threatened litigation
which, in the aggregate, would be material to the business of the
Company.
Except as
otherwise disclosed in this Annual Report, there has been no material change in
our financial position since December 31, 2008.
Item
9. The Offer and Listing.
The
Company’s Ordinary Shares have been traded publicly on NASDAQ as
follows:
|
|
a.
|
From
July 13, 1999 through June 29, 2004, under the symbol “CTCH” (up to June
7, 2002 on the National Market, and subsequently on the Small Cap Market,
which during 2005 was renamed the “Capital
Market”);
|
|
|
b.
|
From
June 30, 2004 through June 26, 2005, under the symbol
“CTCHC”;
|
|
|
c.
|
From
June 27, 2005 through January 1, 2008, under the symbol
“CTCH”;
|
|
|
d.
|
From
January 2, 2008 through January 29, 2008, under the symbol “CTCHD”;
and
|
|
|
e.
|
From
January 30, 2008, under the symbol
CTCH.
|
The
following table lists the high and low closing sales prices for the Company’s
Ordinary Shares, for the periods indicated:
|
High
|
Low
|
|||||||
|
2004:
|
$ | 3.72 | $ | 0.81 | ||||
|
2005:
|
$ | 3.90 | $ | 1.35 | ||||
|
2006:
|
$ | 4.08 | $ | 2.10 | ||||
|
2007:
|
$ | 7.44 | $ | 3.69 | ||||
|
2008:
|
$ | 6.22 | $ | 1.50 | ||||
|
2007:
|
||||||||
|
First
Quarter
|
$ | 4.80 | $ | 3.69 | ||||
|
Second
Quarter
|
$ | 6.15 | $ | 4.41 | ||||
|
Third
Quarter
|
$ | 7.44 | $ | 4.89 | ||||
|
Fourth
Quarter
|
$ | 7.41 | $ | 5.73 | ||||
|
2008:
|
||||||||
|
First
Quarter
|
$ | 6.22 | $ | 3.68 | ||||
|
Second
Quarter
|
$ | 4.40 | $ | 2.77 | ||||
|
Third
Quarter
|
$ | 3.45 | $ | 2.15 | ||||
|
Fourth
Quarter
|
$ | 2.50 | $ | 1.50 | ||||
|
Most
Recent Six Months:
|
||||||||
|
September
2008
|
$ | 3.00 | $ | 2.15 | ||||
|
October
2008
|
$ | 2.50 | $ | 1.55 | ||||
|
November
2008
|
$ | 1.98 | $ | 1.65 | ||||
|
December
2008
|
$ | 1.75 | $ | 1.50 | ||||
|
January
2009
|
$ | 2.12 | $ | 1.77 | ||||
|
February
2009
|
$ | 2.06 | $ | 1.79 | ||||
Item
10. Additional Information.
We are
registered under the Israel Companies Law as a public company with registration
number 52-004418-1. The objective stated in our memorandum of
association is to engage in any lawful activity.
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 Amended and Restated Articles of Association, copies of which
are filed with this report or have been filed as exhibits to certain of our
prior filings with the SEC.
As of
December 31, 2008 , our authorized share capital consisted of 55,353,340
Ordinary Shares, NIS 0.15 par value. As of December 31, 2008, there were
25,206,659 Ordinary Shares issued and outstanding.
DESCRIPTION
OF ORDINARY SHARES
All
issued and outstanding Ordinary Shares of Commtouch are duly authorized and
validly issued, fully paid and nonassessable.
The
Ordinary Shares do not have preemptive rights. Our Memorandum of Association,
Amended and Restated Articles of Association and the laws of the State of Israel
do not 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 are entitled to their full proportion of any cash or share
dividend declared.
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. Declaration of a dividend requires Board of Directors
approval.
Under
current Israeli regulations, any dividends or other distributions paid in
respect of Ordinary Shares purchased by non–residents of Israel with certain
non–Israeli currencies (including U.S. dollars) will be freely repatriable in
such non–Israeli currencies at the rate of exchange prevailing at the time of
conversion, provided that Israeli income tax has been paid on, or withheld from,
such payments.
MODIFICATION
OF CLASS RIGHTS
If at any
time the share capital is divided into different classes of shares, then, unless
the conditions of allotment of such class provide otherwise, the rights,
additional rights, advantages, restrictions and conditions attached or not
attached to any class, at any given time, may be modified, enhanced, added or
abrogated by resolution at a meeting of the holders of the shares of such
class.
SPECIAL
PROVISIONS IN AMENDED AND RESTATED ARTICLES OF ASSOCIATION RELATING TO
DIRECTORS
The
discussion regarding approval of director compensation and transactions with the
Company under “Item 6. Directors, Senior Management and Employees - Approval of
Certain Transactions; Obligations of Directors, Officers and Shareholders” is
incorporated herein by reference.
VOTING,
SHAREHOLDER MEETINGS AND RESOLUTIONS
Holders
of Ordinary Shares have one vote for each share held on all matters submitted to
a vote of shareholders.
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
at least one–third of the voting rights of the issued share capital. A meeting
adjourned for lack of a quorum may be adjourned to the same day in the next week
at the same time and place, or to such time and place as the Board of Directors
may determine in a notice to shareholders. At such reconvened meeting any two
shareholders entitled to vote and present in person or by proxy will constitute
a quorum. Generally, shareholder resolutions 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. For certain matters as
described under the Israel Companies law, there is a requirement that the
majority include the affirmative vote of at least one-third of the votes
cast by shareholders who are not controlling shareholders of the Company or
interested parties in the matter to be voted upon (or their representatives) or,
alternatively, the total shareholdings of the votes cast against the proposal
(other than by the Company’s controlling shareholders or interested parties in
the matter to be voted upon) must not represent more than one percent of the
voting rights in the Company.
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. In addition, a
merger can be completed only after 30 days have passed from the shareholders’
approval of each of the merging companies, all approvals have been submitted to
the Israeli Registrar of Companies and at least fifty 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, unless 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 45% 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:
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|
•
|
there
is a limitation on acquisition of any level of control of the company;
or
|
|
|
•
|
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 taxation before it
would become taxable in the United States, even though the investment has not
become liquid.
TRANSFER
OF SHARES AND NOTICES
Fully
paid Ordinary Shares that are issued and not subject to any legal restrictions
on transference may be transferred freely. Each shareholder of record is
entitled to receive at least twenty-one days' prior notice (and for certain
matters, thirty-five days’ prior notice) before the date of a shareholder
meeting and at least five days notice before the record date for the meeting.
For purposes of determining the shareholders entitled to notice and to vote at
such meeting, the Board of Directors may fix a record date not exceeding 40 days
prior to the date of any shareholder meeting.
CHANGES
IN OUR CAPITAL
Changes
in our capital are subject to the approval of the shareholders by a majority of
the votes of shareholders present by person or by proxy and voting at the
shareholders meeting.
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 Amended and Restated Articles of Association
and any further amendments thereto. 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.
We are
subject to certain of the information reporting requirements of the Exchange
Act. As a “foreign private issuer,” we are exempt from the rules and
regulations under the Exchange Act prescribing the furnishing and content of
proxy statements, 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 purchase and sale of
the ordinary shares. In addition, we are not required to file reports
and financial statements with the SEC as frequently or as promptly as U.S.
companies whose securities are registered under the Exchange
Act. However, we file with the SEC an Annual Report on Form 20-F
containing financial statements audited by an independent accounting
firm. We also furnish quarterly reports on Form 6-K containing
unaudited financial information after the end of each calendar
quarter. We post our Annual Report on Form 20-F on our Website
(www.commtouch.com) promptly following the filing of our Annual Report with the
Securities and Exchange Commission. The information on our website is not
incorporated by reference into this Annual Report.
This
report and other information filed or to be filed by us can be inspected and
copied at the public reference facilities maintained by the SEC at:
100 F
Street, NE
Public
Reference Room
Washington,
D.C. 20549
The SEC
maintains a Web site at www.sec.gov that contains reports, proxy and information
statements, and other information regarding registrants that make electronic
filings with the SEC using its EDGAR system.
TRANSFER
AGENT AND REGISTRAR
The
transfer agent and registrar for our Ordinary Shares is Wells Fargo Bank, N.A.
Shareowner Services of St. Paul, Minnesota.
MATERIAL
CONTRACTS DURING PAST TWO YEARS
Equity Investment
. Commtouch
made a $750 thousand investment in Mirapoint, a secure messaging vendor and an
OEM licensee, as part of Mirapoint's larger financing round in the fourth
quarter of 2007. In connection therewith, Commtouch received a
minority ownership interest in Mirapoint of approximately 7%.
Amended
and Restated Articles of Association
See the
discussion under Item 4 “Information on the Company- Overview” for instructions
on how to locate the Company’s Amended and Restated Articles of Association. In
addition, the Articles are incorporated by reference to this Form 20-F under
Exhibit 1.2 below.
EXCHANGE
CONTROLS
Non-residents
of Israel who own our ordinary shares may freely convert all amounts received in
Israeli currency in respect of such ordinary shares, whether as a dividend,
liquidation distribution or as proceeds from the sale of the ordinary shares,
into freely-repatriable non-Israeli currencies at the rate of exchange
prevailing at the time of conversion (provided in each case that the applicable
Israeli income tax, if any, is paid or withheld).
Until May
1998, Israel imposed extensive restrictions on transactions in foreign
currency. These restrictions were largely lifted in May
1998. Since January 1, 2003, all exchange control restrictions have
been eliminated although there are still reporting requirements for foreign
currency transactions. Legislation remains in effect, however,
pursuant to which currency controls can be imposed by administrative action at
any time.
The State
of Israel does not restrict in any way the ownership or voting of our ordinary
shares by non-residents of Israel, except with respect to subjects of countries
that are in a state of war with Israel.
ISRAELI
TAXATION AND INVESTMENT PROGRAMS
The
following is a summary of the principal tax laws applicable to companies in
Israel, including special reference to their effect on us, and Israeli
government programs benefiting us. This section also contains a discussion of
the material Israeli tax consequences to you if you acquire Ordinary Shares of
our company. This summary does not discuss all the acts of Israeli tax law that
may be relevant to you in light of your personal investment circumstances or if
you are subject to special treatment under Israeli law. To the extent that the
discussion is based on new tax legislation which has not been subject to
judicial or administrative interpretation, we cannot assure you that the views
expressed in this discussion will be accepted by the tax authorities. The
discussion should not be understood as legal or professional tax advice and is
not exhaustive of all possible tax considerations.
General
Corporate Tax Structure
Generally,
Israeli companies are subject to “Corporate Tax” on their taxable income. On
July 25, 2005, the Knesset (Israeli Parliament) approved the Law of the
Amendment of the Income Tax Ordinance (No. 147), 2005, which prescribes, among
others, a gradual decrease in the corporate tax rate in Israel to the following
tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009 - 26% and in
2010 and thereafter - 25%.
Tax
Benefits under the Law for the Encouragement of Industry (Taxes),
1969
The Law
for the Encouragement of Industry (Taxes), 1969, generally referred to as the
Industry Encouragement Law, provides several tax benefits for industrial
companies. An industrial company is defined as a company resident in Israel, at
least 90% of the income of which in a given tax year exclusive of income from
specified government loans, capital gains, interest and dividends, is derived
from an industrial enterprise owned by it. An industrial enterprise is defined
as an enterprise whose major activity in a given tax year is industrial
production activity.
Under the
Industry Encouragement Law, industrial companies are entitled to a number of
corporate tax benefits, including:
|
|
·
|
deduction
of purchase of know-how and patents
and/or right to use
a patent
over an eight-year period
;
|
|
|
·
|
the
right to elect, under specified conditions, to file a consolidated tax
return with additional related Israeli industrial companies and an
industrial holding company;
|
|
|
·
|
accelerated
depreciation rates on equipment and
buildings.
|
|
|
·
|
Expenses
related to a public offering on TA stock exchange and as of 1.1.2003 on
recognized stock markets outside of Israel, are deductible in equal
amounts over three years.
|
Under
some tax laws and regulations, an industrial enterprise may be eligible for
special depreciation rates for machinery, equipment and buildings. These rates
differ based on various factors, including the date the operations begin and the
number of work shifts. An industrial company owning an approved enterprise may
choose between these special depreciation rates and the depreciation rates
available to the approved enterprise.
Eligibility
for benefits under the Industry Encouragement Law is not subject to receipt of
prior approval from any governmental authority.
We
believe that we currently qualify as an industrial company within the definition
of the Industry Encouragement Law. We cannot assure you that the Israeli tax
authorities will agree that we qualify, or, if we qualify, that we will continue
to qualify as an industrial company or that the benefits described above will be
available to us in the future.
Special
Provisions Relating to Measurement of Taxable Income
Our
compan
y
is
taxed until tax year 2007 (including) under the Income Tax Law (Inflationary
Adjustments), 1985, generally referred to as the Inflationary Adjustments Law.
The Inflationary Adjustments Law is highly complex and represents an attempt to
overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. Its features, which are material to us, are
summarized as follows:
|
|
·
|
Where
a company’s equity, as calculated under the Inflationary Adjustments Law,
exceeds the depreciated cost of its fixed assets (as defined in the
Inflationary Adjustments Law), a deduction from taxable income is
permitted equal to the excess multiplied by the applicable annual rate of
inflation. The maximum deduction permitted in any single tax year is 70%
of taxable income, with the unused portion permitted to be carried
forward, linked to the Israeli consumer price index. The unused portion
that was carried forward may be deductible in full in the following
year.
|
|
|
·
|
Where
a company’s depreciated cost of fixed assets exceeds its equity, then the
excess multiplied by the applicable annual rate of inflation is added to
taxable income. (hereinafter: “
i
nflation supplement
”).
Note, the inflation supplement will only be added to the corporate income
but not to other incomes such as capital
gains.
|
|
|
·
|
Subject
to specified limitations, depreciation deductions on fixed assets and
losses carried forward are adjusted for inflation based on the change in
the consumer price index.
|
In
February 2008, the Inflationary Adjustments Law was repealed.
Capital
Gains Tax on Sales of Our Ordinary Shares
Israeli
law generally imposes a capital gains tax on the sale of any capital assets by
residents of Israel, as defined for Israeli tax purposes, and on the sale of
assets located in Israel, including shares in Israeli companies, by both
residents and non-residents of Israel, unless a specific exemption is available
or unless a tax treaty between Israel and the shareholder’s country of residence
provides otherwise. The law distinguishes between real gain and inflationary
surplus. The inflationary surplus is a portion of the total capital gain which
is equivalent to the increase of the relevant asset’s purchase price which is
attributable to the increase in the Israeli consumer price index or, in certain
circumstances, a foreign currency exchange rate, between the date of purchase
and the date of sale. The real gain is the excess of the total capital gain over
the inflationary surplus.
As of
January 1, 2006, the tax rate applicable to capital gains derived from the sale
of shares, whether listed on a stock market or not, is 20% for Israeli
individuals, unless such shareholder claims a deduction for financing expenses
in connection with such shares, in which case the gain will generally be taxed
at a rate of 25%. Additionally, if such shareholder is considered a “material
shareholder” at any time during the 12-month period preceding such sale, i.e.,
such shareholder holds directly or indirectly, including with others, at least
10% of any means of control in the company, the tax rate shall be 25%. Israeli
companies are subject to the Corporate Tax rate on capital gains derived from
the sale of shares, unless such companies were not subject to the Adjustments
Law (or certain regulations) at the time of publication of the aforementioned
amendment to the Tax Ordinance that came into effect on January 1, 2006, in
which case the applicable tax rate is 25%. However, the foregoing tax rates do
not apply to: (i) dealers in securities; and (ii) shareholders who acquired
their shares prior to an initial public offering (that may be subject to a
different tax arrangement).
Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from
the sale of shares of Israeli companies publicly traded on a recognized stock
exchange or regulated market outside of Israel, provided however that such
capital gains are not derived from a permanent establishment in Israel, such
shareholders are not subject to the Adjustments Law, and such shareholders did
not acquire their shares prior to an initial public offering. However,
non-Israeli corporations will not be entitled to such exemption if an Israeli
resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary or is entitled to 25% or more of the
revenues or profits of such non-Israeli corporation, whether directly or
indirectly.
In some
instances where our shareholders may be liable to Israeli tax on the sale of
their ordinary shares, the payment of the consideration may be subject to the
withholding of Israeli tax at the source.
Pursuant
to the Convention Between the government of the United States of America and the
government of Israel with Respect to Taxes on Income, as amended (the
“U.S.-Israel Tax Treaty”), the sale, exchange or disposition of ordinary shares
by a person who (i) holds the ordinary shares as a capital asset, (ii) qualifies
as a resident of the United States within the meaning of the U.S.-Israel Tax
Treaty and (iii) is entitled to claim the benefits afforded to such person by
the U.S.-Israel Tax Treaty, generally, will not be subject to the Israeli
capital gains tax. Such exemption will not apply if (i) such Treaty U.S.
Resident holds, directly or indirectly, shares representing 10% or more of our
voting power during any part of the 12-month period preceding such sale,
exchange or disposition, subject to certain conditions, or (ii) the capital
gains from such sale, exchange or disposition can be allocated to a permanent
establishment in Israel. In such case, the sale, exchange or disposition of
ordinary shares would be subject to Israeli tax, to the extent applicable;
however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be
permitted to claim a credit for such taxes against the U.S. federal income tax
imposed with respect to such sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax
Treaty does not relate to U.S. state or local taxes.
Taxation
of Non-Resident Holders of Shares
Non-residents
of Israel are subject to income tax on income accrued or derived from sources in
Israel. Such sources of income include passive income such as dividends,
royalties and interest, as well as non-passive income from services rendered in
Israel. On distributions of dividends other than bonus shares, or stock
dividends, income tax is withheld at the source at the following rates: for
dividends distributed on or after January 1, 2006 - 20%, or 25% for a
shareholder that is considered a “material shareholder” at any time during the
12-month period preceding such distribution, unless a different rate is provided
in a treaty between Israel and the shareholder’s country of residence. Under the
U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of
ordinary shares who is a Treaty U.S. Resident is 25%. Furthermore, dividends not
generated by an Approved Enterprise (or Benefited Enterprise) paid to a U.S.
corporation holding at least 10% of our issued voting power during the part of
the tax year which precedes the date of payment of the dividend and during the
whole of its prior tax year, are generally taxed at a rate of
12.5%.
For
information with respect to the applicability of Israeli capital gains taxes on
the sale of ordinary shares by United States residents, see above “— Capital
Gains Tax on Sales of Our Ordinary Shares.”
U.S.
TAX CONSIDERATIONS REGARDING ORDINARY SHARES ACQUIRED BY U.S.
TAXPAYERS
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
Subject
to the limitations described in the next paragraph, the following discussion
summarizes the material U.S. federal income tax consequences to a “U.S. Holder”
arising from the purchase, ownership and sale of the Ordinary
Shares. For this purpose, a “U.S. Holder” is a holder of Ordinary
Shares that is: (1) an individual citizen or resident of the United
States, including an alien individual who is a lawful permanent resident of the
United States or meets the substantial presence residency test under U.S.
federal income tax laws; (2) a corporation (or entity treated as a corporation
for U.S. federal tax purposes) or a partnership (other than a partnership that
is not treated as a U.S. person under any applicable U.S. Treasury Regulations)
created or organized under the laws of the United States or the District of
Columbia or any political subdivision thereof; (3) an estate, the income of
which is includable in gross income for U.S. federal income tax purposes
regardless of source; (4) a trust if a court within the United States is able to
exercise primary supervision over the administration of the trust and one or
more U.S. persons have authority to control all substantial decisions of the
trust; (5) a trust that has a valid election in effect to be treated as a U.S.
person to the extent provided in U.S. Treasury regulations, or (6) any person
otherwise subject to U.S. federal income tax on a net income basis in respect of
the Ordinary Shares, if such status as a U.S. Holder is not overridden pursuant
to the provisions of an applicable tax treaty.
This
summary is for general information purposes only and does not purport to be a
comprehensive description of all of the U.S. federal income tax considerations
that may be relevant to a decision to purchase our Ordinary
Shares. This summary generally considers only U.S. Holders that will
own our ordinary shares as capital assets. Except to the limited
extent discussed below, this summary does not consider the U.S. federal tax
consequences to a person that is not a U.S. Holder, not does it describe the
rules applicable to determine a taxpayer’s status as a U.S.
Holder. 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, administrative and judicial
interpretations thereof, and the U.S./Israel Income Tax Treaty, all as in effect
as of the date hereof and all of which are subject to change, possibly on a
retroactive basis, and all of which are open to differing
interpretations. Commtouch will not seek a ruling from the U.S.
Internal Revenue Service (“IRS”) with regard to the U.S. federal income tax
treatment of an investment in our Ordinary Shares by U.S. Holders and,
therefore, can provide no assurances that the IRS will agree with the
conclusions set forth below.
This
discussion does not address all of the aspects of U.S. federal income taxation
that may be relevant to a particular shareholder based on such shareholder’s
particular circumstances and in particular does not discuss any estate, gift,
generation-skipping, transfer, state, local or foreign tax
considerations. In particular, this discussion does not address the
U.S. federal income tax treatment of a U.S. Holder who is: (1) a
bank, life insurance company, regulated investment company, or other financial
institution or “financial services entity”; (2) a broker or dealer in securities
or foreign currency; (3) a person who acquired our Ordinary Shares in connection
with employment or other performance of services; (4) a U.S. Holder that is
subject to the U.S. alternative minimum tax; (5) a U.S. Holder that holds our
Ordinary Shares as a hedge or as part of a hedging, straddle, conversion or
constructive sale transaction or other risk-reduction transaction for U.S.
federal income tax purposes; (6) a tax-exempt entity; (7) real estate investment
trusts; (8) a U.S. Holder that expatriates out of the United States or a former
long-term resident of the United States; or (9) a person having a functional
currency other then the U.S. dollar. This discussion does not address
the U.S. federal income tax treatment of a U.S. Holder that owns, directly or
constructively, at any time, Ordinary Shares representing 10% or more of our
voting power. Additionally, the U.S. federal income tax treatment of
persons who hold Ordinary Shares through a partnership or other pass-through
entity are not considered. Each prospective investor is advised to
consult his or her own U.S. tax advisor with respect to the specific U.S.
federal and state income tax consequences to such person of purchasing, holding
or disposing of Ordinary Shares.
Taxation
of Dividends Paid On Ordinary Shares
Subject
to the discussion under the heading “Passive Foreign Investment Companies”
below, a U.S. Holder will be required to include in gross income as ordinary
income the amount of any distribution paid on Ordinary Shares (including the
amount of any Israeli tax withheld on the date of the distribution), to the
extent that such distribution does not exceed our current and accumulated
earnings and profits, as determined for U.S. federal income tax
purposes. The amount of a distribution which exceeds our earnings and
profits will be treated first as a non-taxable return of capital, reducing the
U.S. Holder’s tax basis for the Ordinary Shares to the extent thereof, and then
capital gain. Corporate holders generally will not be allowed a
deduction for dividends received. In general, preferential tax rates
not exceeding 15% for “qualified dividend income” and long-term capital gains
are applicable for U.S. Holders that are individuals, estates or trusts (these
preferential rates are scheduled to expire for taxable years beginning after
December 31, 2010, after which time dividends are scheduled to be taxed at
ordinary income rates and long-term capital gains are scheduled to be taxed at
rates not exceeding 20%). For this purpose, “qualified dividend
income” means, inter alia, dividends received from a “qualified foreign
corporation.” A “qualified foreign corporation” is a corporation that
is entitled to the benefits of a comprehensive tax treaty with the United States
which includes an exchange of information program. The IRS has stated
that the Israel/U.S. Tax Treaty satisfies this requirement and we believe we are
eligible for the benefits of that treaty.
In
addition, our dividends will be qualified dividend income if our shares are
readily tradable on Nasdaq or another established securities market in the
United States. Dividends will not qualify for the preferential rate
if we are treated, in the year the dividend is paid or in the prior year, as a
passive foreign investment company (“PFIC”). If our beliefs
concerning our PFIC status are correct, dividend distributions with respect to
our shares should be treated as qualified dividend income, subject to the U.S.
Holder satisfying the holding period and other requirements. A U.S.
Holder will not be entitled to the preferential rate: (i) if the U.S.
Holder has not held our Ordinary Shares or ADRs for at leash 61 days of the 121
day period beginning on the date which is 60 days before the ex-dividend date,
or (ii) to the extent the U.S. Holder is under an obligation to make related
payments on substantially similar property. Any days during which the
U.S. Holder has diminished its risk of loss on our Ordinary Shares are not
counted towards meeting the 61-day holding period. Finally, U.S.
Holders who elect to treat the dividend income as “investment income” pursuant
to Code section 163(d)(4) will not be eligible for the preferential rate of
taxation.
The
amount of a distribution with respect to our Ordinary Shares will be measured by
the amount of the fair market value of any property distributed, and for U.S.
federal income tax purposes, the amount of any Israeli taxes withheld
therefrom. (See discussion above under “Taxation of Non-Resident
Holders of Shares.”) Cash distributions paid by us in NIS will be
included in the income of U.S. Holders at a U.S. dollar amount based upon the
spot rate of exchange in effect on the date the dividend is includible in the
income of the U.S. Holder, and U.S. Holders will have a tax basis in such NIS
for U.S. federal income tax purposes equal to such U.S. dollar
value. If the U.S. Holder subsequently converts the NIS, any
subsequent gain or loss in respect of such NIS arising from exchange rate
fluctuations will be U.S. source ordinary exchange gain or loss.
Distributions
paid by us will generally be foreign source income for U.S. foreign tax credit
purposes. Subject to the limitations set forth in the Code, U.S.
Holders may elect to claim a foreign tax credit against their U.S. income tax
liability for Israeli income tax withheld from distributions received in respect
of the Ordinary Shares. In general, these rules limit the amount
allowable as a foreign tax credit in any year to the amount of regular U.S. tax
for the year attributable to foreign source taxable income. This
limitation on the use of foreign tax credits generally will not apply to an
electing individual U.S. Holder whose creditable foreign taxes during the year
do not exceed $300, or $600 for joint filers, if such individual’s gross income
for the taxable year from non-U.S. sources consists solely of certain passive
income. A U.S. Holder will be denied a foreign tax credit with
respect to Israeli income tax withheld from dividends received with respect to
the Ordinary Shares if such U.S. Holder has not held the ordinary shares for at
leash 16 days out of the 31-day period beginning on the date that is 15 days
before the ex-dividend date or to the extent that such U.S. Holder is under an
obligation to make certain related payments with respect to substantially
similar or related property. Any day during which a U.S. Holder has
substantially diminished his or her risk of loss with respect to the Ordinary
Shares will not count toward meeting the 16-day holding period. A
U.S. Holder will also be denied a foreign tax credit if the U.S. Holder holds
the Ordinary Shares in an arrangement in which the U.S. Holder’s reasonably
expected economic profit is insubstantial compared to the foreign taxes expected
to be paid or accrued. The rules relating to the determination of the
U.S. foreign tax credit are complex, and U.S. Holders should consult with their
own tax advisors to determine whether, and to what extent, the are entitled to
such credit. U.S. Holders that do not elect to claim a foreign tax
credit may instead claim a deduction for Israeli income taxes withheld, provided
such U.S. Holders itemize their deductions.
Sale
or Exchange of Ordinary Shares
Except as
provided under the PFIC rules described below, upon the sale, exchange or other
disposition of our Ordinary Shares, a U.S. Holder will recognize capital gain or
loss in an amount equal to the difference between such U.S. Holder’s tax basis
for the Ordinary Shares and the amount realized on the disposition (or its U.S.
dollar equivalent determined by reference to the spot rate of exchange on the
date of disposition, if the amount realized is denominated in a foreign
currency). The gain or loss realized on the sale or exchange or other
disposition of Ordinary Shares will be long-term capital gain or loss if the
U.S. Holder has a holding period of more than one year at the time of the
disposition.
In
general, gain realized by a U.S. Holder on a sale, exchange or other disposition
of Ordinary Shares will generally be treated as U.S. source income for U.S.
foreign tax credit purposes. A loss realized by a U.S. Holder on the
sale, exchange or other disposition of Ordinary Shares is generally allocated to
U.S. source income. However, U.S. Treasury Regulations require such
loss to be allocated to foreign source income to the extent certain dividends
were received by the taxpayer within the 24-month period preceding the date on
which the taxpayer recognized the loss. The deductibility of a loss
realized on the sale, exchange or other disposition of ordinary shares is
subject to limitations.
Tax
Consequences If We Are a Passive Foreign Investment Company
We would
be a passive foreign investment company, or PFIC, if either:
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|
·
|
75%
or more of our gross income (including our pro rata share of gross income
for any company, U.S. or foreign, in which we are considered to own 25% or
more of the shares by value), in a taxable year is passive (the “Income
Test”); or
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|
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·
|
At
least 50% of our assets, averaged over the year and generally determined
based upon value (including our pro rata share of the assets of any
company in which we are considered to own 25% or more of the shares by
value), in a taxable year are held for the product of, or produce, passive
income (the “Asset Test”).
|
Passive
income generally consists of dividends, interest, rents, royalties, annuities
and income from certain commodities transactions and from notional principal
contracts. Cash is treated as generating passive income.
If we are
or become a PFIC, each U.S. Holder who has not elected to treat us as a
qualified electing fund by making a “QEF election”, or who has not elected to
mark the shares to market (as discussed below), would, upon receipt of certain
distributions by us and upon disposition of our Ordinary Shares at a gain, be
liable to pay U.S. federal income tax at the then prevailing highest tax rates
on ordinary income plus interest on such tax, as if the distribution or gain had
been recognized ratably over the taxpayer’s holding period for the Ordinary
Shares. In addition, when shares of a PFIC are acquired by reason of
death from a decedent that was a U.S. Holder, the tax basis of such shares would
not receive a step-up to fair market value as of the date of the decedent’s
death, but instead would be equal to the decedent’s basis if lower, unless all
gain were recognized by the decedent. Indirect investments in a PFIC
may also be subject to special U.S. federal income tax rules.
The PFIC
rules would not apply to a U.S. Holder who makes a QEF election for all taxable
years that such U.S. Holder has held the Ordinary Shares while were are a PFIC,
provided that we comply with certain reporting requirements. Instead,
each U.S. Holder who has made such a QEF election is required for each taxable
year that we are a PFIC to include in income such U.S. Holder’s pro rata share
of our ordinary earnings as ordinary income and such U.S. Holder’s pro rata
share of our net capital gains as long-term capital gain, regardless of whether
we make any distributions of such earnings or gain. In general, a QEF
election is effective only if we make available certain required
information. The QEF election is made on a shareholder-by-shareholder
basis and generally may be revoked only with the consent of the
IRS. Although we have no obligation to do so, we intend to comply
with the applicable information reporting requirements for U.S. Holders to make
a QEF election.
A U.S.
Holder of PFIC shares which are traded on certain public markets, including the
NASDAQ, can elect to mark the shares to market annually, recognizing as ordinary
income or loss each year an amount equal to the difference as of the close of
the taxable year between the fair market value of the PFIC shares and the U.S.
Holder’s adjusted basis in the PFIC shares. Loses are allowed only to
the extent of net mark-to-market gain previously included income by the U.S.
Holder under the election for prior taxable years.
In light
of the complexity of PFIC rules, we cannot assure you that we have not been or
are not a PFIC or will avoid becoming a PFIC in the future. U.S.
holders who hold Ordinary Shares during a period when we are a PFIC will be
subject to the foregoing rules, even if we cease to be a PFIC. U.S. Holders are
urged to consult their tax advisors about the PFIC rules, including QEF and
mark-to-market elections. For those U.S. Shareholders who determine
that we were a PFIC in any our taxable years and notify us in writing
of their request for the information required in order to effectuate the QEF
Election described above, we will promptly make such information available to
them.
Information
Reporting and Withholding
A U.S.
Holder may be subject to backup withholding (currently at a rate of 28%, but
scheduled to increase to 31% for taxable years beginning after December 31,
2010) with respect to cash dividends and proceed from a disposition of Ordinary
Shares. In general, back-up withholding will apply only if a U.S.
Holder fails to comply with certain identification procedures. Backup
withholding will not apply with respect to payments made to certain exempt
recipients, such as corporations and tax-exempt organizations. Backup
withholding is not an additional tax and may be claimed as a credit against the
U.S. federal income tax liability of a U.S. Holder, provided that the required
information is timely furnished to the IRS.
Non-U.S.
Holders of Ordinary Shares
Except as
provided below, an individual, corporation, estate or trust that is not a U.S.
Holder generally will not be subject to U.S. federal income or withholding tax
on the payment of dividends on, and the proceeds from the disposition of, our
Ordinary Shares.
A
non-U.S. Holder may be subject to U.S. federal income or withholding tax on a
dividend paid on our Ordinary Shares or the proceeds from the disposition of our
Ordinary Shares if: (i) if such item is effectively connected with
the conduct by the non-U.S. Holder of a trade or business in the United States
or, in the case of a non-U.S. Holder that is a resident of a country which has
an income tax treaty with the United States, such item is attributable to a
permanent establishment or, in the case of gain realized by an individual
non-U.S. Holder, a fixed place of business in the U.S.; (ii) in the case of a
disposition of our Ordinary Shares, the individual non-U.S. Holder is present in
the U.S. for 183 days or more in the taxable year of the sale and certain other
conditions are met; (iii) the non-U.S. Holder is subject to U.S. federal income
tax pursuant to the provisions of the U.S. tax law applicable to U.S.
expatriates.
In
general, non-U.S. holders will not be subject to the 28% backup withholding with
respect to the payment of dividends on our Ordinary Shares if payment is made
through a paying agent, or office of a foreign broker outside the United States.
However, if payment is made in the United States or by a U.S. related person,
non-U.S. Holders may be subject to backup withholding, unless the non-U.S.
Holder provides on an applicable Form W-8 (or a substantially similar form) a
taxpayer identification number, certifies to its foreign status, or otherwise
establishes an exemption. A U.S. related person for these purposes is a person
with one or more current relationships with the United States.
Non-U.S.
holders generally may be subject to backup withholding at a rate of 28% on the
payment of the proceeds from the disposition of our Ordinary Shares to or
through the U.S. office of a broker, whether domestic or foreign, or the office
of a U.S. related person, unless the non-U.S. Holder provides a taxpayer
identification number, certifies to its foreign status or otherwise establishes
an exemption. Non-U.S. Holders will not be subject to backup withholding with
respect to the payment of proceeds from the disposition of ordinary shares by a
foreign office of a broker.
The
amount of any backup withholding from a payment to a non-U.S. Holder will be
allowed as a credit against such holder’s U.S. federal income tax liability and
may entitle such holder to a refund, provided that the required information is
timely furnished to the IRS.
Item
11. Qualitative and Quantitative Disclosure about Market Risk.
We
develop our technology in Israel and seek to provide our services worldwide. As
a result, our foreign currency exposures give rise to market risk associated
with exchange rate movements of the U.S. dollar, our functional and reporting
currency, against the NIS and Euro. We are exposed to the risk of fluctuation in
the U.S. dollar/NIS and the U.S. dollar/Euro exchange rate. Our
shekel-denominated expenses consist principally of salaries and related
personnel expenses, as well as vehicle lease payments. Although the majority of
our revenues are in US dollars, a substantial portion of our sales are derived
from the Euro currency. Neither a ten percent increase nor decrease in current
exchange rates would have a material effect on our consolidated financial
statements in the next six months.
Due to
the fact that we do not have any material debt, we have concluded that there is
currently no material interest market risk exposure.
Therefore,
no quantitative tabular disclosures are provided.
Item
12. Description of Securities Other than Equity Securities.
Not
applicable.
PART
II
Item
13. Defaults, Dividend Arrearages and Delinquencies.
Not
applicable.
Item
14. Material Modifications to the Rights of Security Holders and Use of
Proceeds.
In early
January 2008, the Company performed a 3:1 reverse stock split of the Company's
share capital. As a result of this action, every three ordinary shares, par
value NIS 0.05 each (including all authorized, issued and outstanding ordinary
shares and all outstanding warrants and options to purchase ordinary shares)
were combined into one ordinary share bearing a par value of NIS 0.15 each.
Other than this reverse stock split, no material modifications to the rights of
security holders occurred since January 1, 2008 to date.
Item
15. Controls and Procedures.
(a) As of
December 31, 2008, we performed an evaluation under the supervision and with the
participation of our management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Exchange Act). Our management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives and our management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures are effective as of December 31, 2008, to provide reasonable
assurance that the information required to be disclosed in filings and
submissions under the Exchange Act, is recorded, processed, summarized, and
reported within the time periods specified by the SEC’s rules and forms, and
that such information related to us and our consolidated subsidiary is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
about required disclosure.
(b) and
(c) Our management is responsible for establishing and maintaining adequate
internal control over our financial reporting, as such term is defined in Rule
13a-15(f) under the Security Exchange Act. Our internal control over financial
reporting system was designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements and even when determined to be effective can
only provide reasonable assurance with respect to financial statements. Also
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
Our
management assessed our internal control over financial reporting as of December
31, 2008. Our management based its assessment on criteria established in
Internal Control- Integrated Framework issued by the Committee of Sponsoring
Organization of the Treadway Commission. Based on this assessment, our
management has concluded that, as of December 31, 2008, our internal control
over financial reporting is effective.
(d) Our
independent registered public accounting firm, Kost, Forer, Gabbay &
Kasierer, a member of Ernst & Young Global, independently assessed the
effectiveness of the Company's internal control over financial reporting. Kost,
Forer, Gabbay & Kasierer, a member of Ernst & Young Global, has issued
an attestation report in respect of our internal control over financial
reporting as of December 31, 2008, which is included under Item 18 on page F-3,
F-4 of this annual report.
(e)
During the period covered by this annual report on Form 20-F, there were
no changes to our internal control over financial reporting that
occurred during the year ended December 31, 2008 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
Item 16.
Reserved
Item
16A. Audit Committee Financial Expert.
The Board
of Directors of the Company has determined that Mr. Yair Shamir, a member of the
Audit Committee, is an audit committee financial expert as that term is defined
in Item 16A of Form 20-F and is independent as that term is defined in each of
NASDAQ Marketplace Rule 4200(a)(15) and SEC Rule 10A-3(b)(1).
Item
16B. Code of Ethics.
The
Company, by way of Board of Directors resolution, has adopted a Code of Ethics
applicable to its senior financial officers, including its principal executive,
financial and accounting officers. The Code of Ethics is posted on
the Company’s website at
www.commtouch.com
,
under the link to “investor relations”.
Item
16C. Principal Accountant Fees and Services.
Kost,
Forer, Gabbay & Kasierer, a member of Ernst & Young Global, has served
as our Independent Registered Public Accounting Firm for each of the fiscal
years in the three-year period ended December 31, 2008, for which audited
financial statements appear in this annual report on Form 20-F. The following
table presents the aggregate fees for professional and other services rendered
by Kost, Forer, Gabbay & Kasierer for 2008 and 2007:
(1) Audit
fees consist of fees billed for the annual audit services engagement and other
audit services, which are those services that only the Independent Registered
Public Accounting Firm can reasonably provide, and include the group audit
including checking our internal control over Financial reporting; statutory
audits; consents; attest services; and assistance in connection with documents
filed with the SEC. These
fees
also include the attestation of our internal control over financial
reporting.
(2) Tax
fees include fees billed for tax compliance services, including the preparation
of original and amended tax returns and claims for refund; tax consultations,
such as assistance and representation in connection with tax audits and appeals,
transfer pricing, and requests for rulings or technical advice from taxing
authority; and tax planning services.
Audit
Committee Pre-approval Policies and Procedures
Below is
a summary of our current Policies and Procedures:
The main
role of the Company’s audit committee is to assist the Board of Directors in
fulfilling its responsibility for oversight of the quality and integrity of the
accounting, auditing and reporting practices of the Company. The Audit Committee
oversees the appointment, compensation, and oversight of the Company’s
independent registered public accounting firm engaged to prepare or issue an
audit report on the financial statements of the Company. The audit committee’s
specific responsibilities in carrying out its oversight role include the
approval of all audit and non-audit services to be provided by the external
auditor and the quarterly review of the firm’s non-audit services and related
fees. These services may include audit services, audit-related services, tax
services and other services, as described above. It is the policy of the audit
committee to approve in advance the particular services or categories of
services to be provided to the Company periodically. Additional services may be
pre-approved by the audit committee on an individual basis during the
year. The audit committee did not avail itself of section
(c)(7)(i)(C) of Rule 2-01 of Regulation S-X during 2007, which allows for an
exemption from the pre-approval process under certain limited
circumstances.
Item 16D
.
Exemptions from the Listing Standards
for Audit Committees.
Not
applicable.
Item 16E
.
Purchases of Equity Securities by the
Issuer and Affiliated Purchasers.
In July
2008, the Company announced the commencement of an Ordinary Share buyback plan,
under which the Company contemplates purchasing up to $4 million worth of its
Ordinary Shares through the end of 2009. As of February 2, 2009, the
Company had expended $1,570 thousand to repurchase 824,578 Ordinary Shares at an
average price of $1.87 per share. Repurchases during 2008 are
summarized in the following table:
ISSUER
PURCHASES OF SECURITIES
|
Period
|
Total Number
of Shares
Purchased
|
Average Price
Paid per Share
|
Total Number
of Shares
Purchased as
Part of Publicly
Announced
plan
|
Maximum US
dollar Value that
May Yet Be
Purchased Under
the plan
|
|||||||||
|
September
1 – September 30
|
36,032 | 2.44 | 36,032 | ||||||||||
|
October
1 – October 31
|
303,563 | 1.98 | 303,563 | ||||||||||
|
November
1 – November 30
|
171,193 | 1.82 | 171,193 | ||||||||||
|
December
1 - December 31
|
195,290 | 1.67 | 195,290 | ||||||||||
|
Total
|
706,078 | 1.91 | 706,078 |
$2,666
thousand
|
|||||||||
Item
16F. Change in Registrant’s Certifying Accountant.
Not
applicable.
Item
16G. Corporate Governance.
Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as our
Company, are permitted to follow certain home country corporate governance
practices instead of certain provisions of Rule 4350. We do not
comply with the following requirements of Rule 4350, and instead follow Israeli
law and practice with respect to such corporate governance
practices:
Nasdaq
Marketplace Rule 4350(b)(1)(A) requires that an annual report be delivered to
shareholders in accordance with three alternative delivery methods set forth in
the rule. One of those delivery methods allows for the posting of the
annual report on the Company’s website. However, that method also
requires that i) a prominent undertaking be posted on the website indicating
that, upon request, shareholders may receive a hard copy of the annual report
free of charge, and ii)
simultaneous with this
posting, the Company issue a press release stating that its annual report has
been filed with the SEC (or other appropriate regulatory authority). This press
release must also state that the annual report is available on the Company's
website and include the website address and that shareholders may receive a hard
copy free of charge upon request.
While the
Company’s most current annual report on Form 20-F, inclusive of consolidated
financial statements, is available on its website at
www.commtouch.com
, and the Company has
indicated publicly that it will provide copies of that report free of charge,
upon shareholder request, nevertheless the Company is not in strict compliance
with the Nasdaq rule. The Company does not include a statement on its
website in the form noted above and does not issue a press release upon the
posting of the annual report to its website; rather, the Company is following
its home country practice (in Israel, which, in addition to the Company’s
activities noted above, also enables shareholders to inspect the Company’s
annual consolidated financial statements in person at its principal
offices).
Under the
Israel Companies Law, an Israeli public company whose shares are traded only on
a stock exchange outside of Israel – such as Commtouch – must, unless its
Articles of Association provide otherwise, mail a copy of its annual financial
statements to each shareholder entitled to receive notice of a general meeting
no later than 14 days prior to the date of the general meeting. At
the Company’s annual meeting of shareholders in December 2005, shareholders
approved an amendment to the Company’s Articles of Association enabling the
Company to deliver its annual report to shareholders in the manner currently
employed by the Company, as noted above.
As a
foreign private issuer listed on the NASDAQ Capital Market, we may also follow
home country practice with regard to, among other things, composition of the
board of directors, director nomination process and regularly scheduled meetings
at which only independent directors are present. In addition, we may
follow our home country practice, instead of the NASDAQ Marketplace Rules, which
require that we obtain shareholder approval for certain dilutive events, such as
for the establishment or amendment of certain equity based compensation plans,
an issuance that will result in a change of control of the company, certain
transactions other than a public offering involving issuances of a 20% or more
interest in the company and certain acquisitions of the stock or assets of
another company. A foreign private issuer that elects to follow a home country
practice instead of NASDAQ requirements, must submit to NASDAQ in advance a
written statement from an independent counsel in such issuer’s home country
certifying that the issuer’s practices are not prohibited by the home country’s
laws. In addition, a foreign private issuer must disclose in its annual reports
filed with the Securities and Exchange Commission or on its website each such
requirement that it does not follow and describe the home country practice
followed by the issuer instead of any such requirement. Accordingly, our
shareholders may not be afforded the same protection as provided under NASDAQ’s
corporate governance rules.
See Item
6 “Directors, Senior Management and Employees” and Item 10 “Additional
Information” for a detailed description of the significant ways in which the
registrant’s corporate governance practices differ from those followed by U.S.
companies under the listing standards of the NASDAQ Capital
Market.
PART
III
Item
17. Financial Statements.
The
Company has responded to Item 18
Item
18. Financial Statements.
See pages F-1 to F-26.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
CONSOLIDATED
FINANCIAL STATEMENTS
AS
OF DECEMBER 31, 2008
U.S.
DOLLARS IN THOUSANDS
INDEX
|
Page
|
||
|
Reports
of Independent Registered Public Accounting Firm
|
F-2
-F-3
|
|
|
Consolidated
Balance Sheets
|
F-4
- F-5
|
|
|
Consolidated
Statements of Operations
|
F-6
|
|
|
Statements
of Changes in Shareholders' Equity
|
F-7
- F-8
|
|
|
Consolidated
Statements of Cash Flows
|
F-9
- F-10
|
|
|
Notes
to Consolidated Financial Statements
|
F-11
- F-26
|
-
- - - - - - - - - - - - - - - - - - -
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
COMMTOUCH
SOFTWARE LTD.
We have
audited the accompanying consolidated balance sheets of Commtouch Software Ltd.
("the Company") and its subsidiary as of December 31, 2007 and 2008, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2008. 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 the standards of the Public Company
Accounting Oversight Board (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 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 the Company and
its subsidiary as of December 31, 2007 and 2008, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission and our report dated March 30, 2009 expressed an
unqualified opinion thereon.
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
|
March
30, 2009
|
A
Member of Ernst & Young
Global
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Shareholders of
COMMTOUCH
SOFTWARE LTD.
We have
audited Commtouch Software Ltd.'s ("Commtouch" or the "Company") internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the "COSO criteria").
Commtouch's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
the Company's internal control over financial reporting based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining
an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our
opinion, Commtouch maintained in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on the COSO
criteria.
We also have audited, in accordance
with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Commtouch and its subsidiary as of
December 31, 2007 and 2008, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 2008 and our report dated March 30,
2009 expressed an unqualified opinion thereon.
|
Tel-Aviv,
Israel
|
KOST
FORER GABBAY & KASIERER
|
|
March
30, 2009
|
A
Member of Ernst & Young
Global
|
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands
|
December 31
|
||||||||
|
2007
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT
ASSETS:
|
||||||||
|
Cash
and cash equivalents
|
$ | 10,807 | $ | 13,661 | ||||
|
Short-term
cash deposit
|
1,600 | 740 | ||||||
|
Marketable
securities
|
2,000 | 2,000 | ||||||
|
Trade
receivables
|
1,110 | 1,614 | ||||||
|
Prepaid
expenses
|
193 | 270 | ||||||
|
Other
accounts receivable
|
110 | 119 | ||||||
|
Total
current assets
|
15,820 | 18,404 | ||||||
|
LONG-TERM
ASSETS:
|
||||||||
|
Long-term
lease deposits
|
33 | 64 | ||||||
|
Investment
in affiliate
|
750 | 750 | ||||||
|
Severance
pay fund
|
821 | 720 | ||||||
|
Property
and equipment, net
|
786 | 771 | ||||||
|
Total
long-term assets
|
2,390 | 2,305 | ||||||
|
Total
assets
|
$ | 18,210 | $ | 20,709 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
CONSOLIDATED
BALANCE SHEETS
U.S.
dollars in thousands, except share and per share data
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
CONSOLIDATED
STATEMENTS OF OPERATIONS
U.S.
dollars in thousands, except share and per share data
|
Year ended December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Revenues
|
$ | 7,234 | $ | 11,250 | $ | 14,092 | ||||||
|
Cost
of revenues
|
901 | 1,411 | 1,828 | |||||||||
|
Gross
profit
|
6,333 | 9,839 | 12,264 | |||||||||
|
Operating
expenses:
|
||||||||||||
|
Research
and development
|
1,763 | 2,187 | 3,152 | |||||||||
|
Sales
and marketing
|
2,686 | 3,453 | 3,992 | |||||||||
|
General
and administrative
|
2,299 | 2,589 | 3,189 | |||||||||
|
Total
operating expenses
|
6,748 | 8,229 | 10,333 | |||||||||
|
Operating
income (loss)
|
(415 | ) | 1,610 | 1,931 | ||||||||
|
Financial
income, net
|
274 | 527 | 346 | |||||||||
|
Equity
in losses of affiliate
|
(49 | ) | - | - | ||||||||
|
Net
income (loss) before taxes on income
|
(190 | ) | 2,137 | 2,277 | ||||||||
|
Taxes
on income
|
- | 28 | 7 | |||||||||
|
Net
income (loss)
|
$ | (190 | ) | $ | 2,109 | $ | 2,270 | |||||
|
Basic
net earnings (loss) per share
|
$ | (0.01 | ) | $ | 0.08 | $ | 0.09 | |||||
|
Diluted
net earnings (loss) per share
|
$ | (0.01 | ) | $ | 0.08 | $ | 0.08 | |||||
|
Weighted
average number of shares used in computing basic net earnings (loss) per
share
|
22,112,944 | 24,846,690 | 25,618,933 | |||||||||
|
Weighted
average numbers of shares used in computing diluted net earnings (loss)
per share
|
22,112,994 | 27,591,498 | 26,929,407 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
U.S.
dollars in thousands, except share data
|
Series A
Preferred
shares
|
Series A
Preferred
shares
amount
|
Ordinary
shares
|
Ordinary
shares
amount
|
Additional
paid-in
capital
|
Accumulated
other
comprehensive
income
|
Accumulated
deficit
|
Total
comprehensive
loss
|
Total
|
||||||||||||||||||||||||||||
|
Balance
as of January 1, 2006
|
1,776,667 | $ | 61 | 18,628,664 | $ | 664 | $ | 173,733 | $ | 21 | $ | (170,280 | ) | $ | 4,199 | |||||||||||||||||||||
|
Issuance
of shares
|
- | - | 31,153 | 1 | 99 | - | - | 100 | ||||||||||||||||||||||||||||
|
Issuance
of shares upon exercise of options and warrants
|
- | - | 1,798,005 | 58 | 2,379 | - | - | 2,437 | ||||||||||||||||||||||||||||
|
Conversion
of Series A Preferred shares to Ordinary Shares
|
(1,776,667 | ) | (61 | ) | 3,553,333 | 122 | (61 | ) | - | - | - | |||||||||||||||||||||||||
|
Stock-based
compensation related to employees
|
- | - | - | - | 790 | - | - | 790 | ||||||||||||||||||||||||||||
|
Stock-based
compensation related to options granted to non-employees
|
- | - | - | - | 155 | - | - | 155 | ||||||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
- | - | - | - | - | 2 | - | $ | 2 | 2 | ||||||||||||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | (190 | ) | (190 | ) | (190 | ) | ||||||||||||||||||||||||
|
Total
comprehensive loss
|
$ | (188 | ) | |||||||||||||||||||||||||||||||||
|
Balance
as of December 31, 2006
|
- | - | 24,011,155 | 845 | 177,095 | 23 | (170,470 | ) | 7,493 | |||||||||||||||||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
STATEMENTS
OF CHANGES IN SHAREHOLDERS' EQUITY
U.S.
dollars in thousands, except share data
|
Ordinary
shares
|
Ordinary
shares
amount
|
Additional
paid-in
capital
|
Treasury
stock
|
Accumulated
other
comprehensive
income *)
|
Accumulated
deficit
|
Total
comprehensive
income
|
Total
|
|||||||||||||||||||||||||
|
Balance
as of January 1, 2007
|
24,011,155 | 845 | 177,095 | - | 23 | (170,470 | ) | 7,493 | ||||||||||||||||||||||||
|
Issuance
of shares upon exercise of options and warrants
|
1,334,887 | 48 | 1,615 | - | - | - | 1,663 | |||||||||||||||||||||||||
|
Stock-based
compensation related to employees
|
- | 1,015 | - | - | - | 1,015 | ||||||||||||||||||||||||||
|
Stock-based
compensation related to options granted to non-employees
|
- | - | 68 | - | - | - | 68 | |||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 2,109 | $ | 2,109 | 2,109 | |||||||||||||||||||||||
|
Total
comprehensive income
|
$ | 2,109 | ||||||||||||||||||||||||||||||
|
Balance
as of December 31, 2007
|
25,346,042 | 893 | 179,793 | - | 23 | (168,361 | ) | 12,348 | ||||||||||||||||||||||||
|
Purchase
of treasury shares
|
(706,078 | ) | (28 | ) | - | (1,306 | ) | - | - | (1,334 | ) | |||||||||||||||||||||
|
Issuance
of shares upon exercise of options and warrants
|
566,695 | 25 | 819 | - | - | - | 844 | |||||||||||||||||||||||||
|
Stock-based
compensation related to employees
|
- | - | 1,495 | - | - | - | 1,495 | |||||||||||||||||||||||||
|
Stock-based
compensation related to options granted to non-employees
|
- | - | 37 | - | - | - | 37 | |||||||||||||||||||||||||
|
Net
income
|
- | - | - | - | - | 2,270 | $ | 2,270 | 2,270 | |||||||||||||||||||||||
|
Total
comprehensive income
|
$ | 2,270 | ||||||||||||||||||||||||||||||
|
Balance
as of December 31, 2008
|
25,206,659 | $ | 890 | $ | 182,144 | $ | (1,306 | ) | $ | 23 | $ | (166,091 | ) | $ | 15,660 | |||||||||||||||||
|
*)
|
Relates
to foreign currency translation
adjustments
|
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
Year ended December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Cash
flows from operating activities:
|
||||||||||||
|
Net
income (loss)
|
$ | (190 | ) | $ | 2,109 | $ | 2,270 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Depreciation
|
209 | 397 | 466 | |||||||||
|
Compensation
related to options granted to employees and non-employees
|
945 | 1,083 | 1,532 | |||||||||
|
Equity
in losses of affiliate
|
49 | - | - | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Increase
in trade receivables
|
(215 | ) | (540 | ) | (504 | ) | ||||||
|
Increase
in prepaid expenses and other accounts receivable
|
(28 | ) | (107 | ) | (46 | ) | ||||||
|
(Decrease)
increase in accounts payable
|
(40 | ) | 24 | (69 | ) | |||||||
|
(Decrease)
increase in employees and payroll accruals, accrued expenses and other
liabilities and government authorities
|
(37 | ) | 279 | (198 | ) | |||||||
|
(Decrease)
increase in deferred revenues
|
655 | 861 | (459 | ) | ||||||||
|
Increase
in accrued severance pay, net
|
8 | 11 | 27 | |||||||||
|
Other
|
- | (2 | ) | - | ||||||||
|
Net
cash provided by operating activities
|
1,356 | 4,115 | 3,019 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Change
in short-term cash deposit
|
- | (1,600 | ) | 860 | ||||||||
|
(Increase)
decrease in long-term lease deposits
|
5 | (20 | ) | (31 | ) | |||||||
|
Sale
of marketable securities
|
500 | - | - | |||||||||
|
Investment
in affiliate
|
- | (750 | ) | - | ||||||||
|
Purchase
of property and equipment
|
(380 | ) | (605 | ) | (504 | ) | ||||||
|
Net
cash provided by (used in) investing activities
|
125 | (2,975 | ) | 325 | ||||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Purchase
of treasury shares at cost
|
- | - | (1,334 | ) | ||||||||
|
Proceeds
from issuance of shares and warrants, net
|
100 | - | - | |||||||||
|
Proceeds
from options and warrants exercised
|
2,437 | 1,663 | 844 | |||||||||
|
Net
cash (used in) provided by financing activities
|
2,537 | 1,663 | (490 | ) | ||||||||
|
Increase
in cash and cash equivalents
|
4,018 | 2,803 | 2,854 | |||||||||
|
Cash
and cash equivalents at the beginning of the year
|
3,986 | 8,004 | 10,807 | |||||||||
|
Cash
and cash equivalents at the end of the year
|
$ | 8,004 | $ | 10,807 | $ | 13,661 | ||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
U.S.
dollars in thousands
|
Year ended December 31,
|
|||||||||||||
|
2006
|
2007
|
2008
|
|||||||||||
|
(a)
|
Non-cash
transactions:
|
||||||||||||
|
Conversion
of Series A Preferred shares to Ordinary shares
|
$ | 122 | $ | - | $ | - | |||||||
|
Purchase
of property and equipment - trade payables
|
$ | 65 | $ | (33 | ) | $ | (13 | ) | |||||
Supplemental
cash flow activities:
Cash paid
during the year for:
|
|
Income
taxes
|
$ | - | $ | 20 | $ | - |
The
accompanying notes are an integral part of the consolidated financial
statements.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
1:
|
GENERAL
|
|
|
a.
|
Commtouch
Software Ltd. ("Commtouch" or the Company") was incorporated under the
laws of Israel in 1991. The Company and its subsidiary (Commtouch Inc.)
develop and provide email defense solutions to OEM licensees and
enterprises. During 2006, 2007 and 2008, the Company's business was to
develop and sell, through a variety of third party distribution channels,
email defense solutions to various customers. The Company's email defense
solutions are comprised of anti-spam, Zero-Hour anti-virus, GlobalView
Mail Reputation solutions and, starting with the fourth quarter of 2008, a
web defense solution, URL filtering
services.
|
|
|
b.
|
During
the second half of 2003, the Company launched its first anti-spam
solution, and began generating revenues therefrom. During 2004, the
Company launched its Zero Hour solution, and began recognizing revenues
from this product. During 2005, the Company also began to recognize
revenues from its patent licensing program. These revenues were not
significant in 2006, 2007 and 2008. In late 2006, the Company
launched its GlobalView Reputation Services. During late 2008, the Company
released its URL filtering services. These services analyze and categorize
for customers of the Company's OEM partners the source of URLs being
accessed by such customers, mainly in order to prevent: a) the possibility
of malware attacks being propagated by malicious URLs; b) access to
non-business related websites by employees, and c) access by children to
inappropriate websites.
|
|
|
c.
|
The
Company expects that it will continue to be dependent upon third-party
distribution channels for a significant portion of its revenues, which are
expected to be derived from sales of the Company's anti-spam, anti-virus
solutions, reputation services and URL filtering
services.
|
|
|
d.
|
In
January 2008, the Company consummated a 3:1 reverse stock split of the
Company's share capital, see Note
5a.
|
|
NOTE
2:
|
SIGNIFICANT
ACCOUNTING POLICIES
|
The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("U.S.
GAAP").
|
|
a.
|
Use
of estimates:
|
The
preparation of consolidated financial statements in conformity with U.S.
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 in U. S. dollars:
|
A
majority of the revenues of the Company and its subsidiary is generated in
United States dollars ("dollars"). In addition, a substantial portion of their
costs is incurred or determined in dollars. The Company's management believes
that the dollar is the currency of the primary economic environment in which the
Company and its subsidiary operate. Thus, the dollar is their functional and
reporting currency. Accordingly, monetary accounts maintained in currencies
other than the dollar are remeasured into U.S. dollars, in accordance with
Statement of Financial Accounting Standard ("SFAS") No. 52, "Foreign Currency
Translation" ("SFAS No. 52"). All transaction gains and losses of the remeasured
monetary balance sheet items are reflected in the statements of operations as
financial income or expenses, as appropriate.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
c.
|
Principles
of consolidation:
|
The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiary. All inter–company balances and transactions have been
eliminated upon consolidation.
|
|
d.
|
Cash
equivalents:
|
Cash
equivalents are short-term highly liquid investments that are readily
convertible to cash with original maturities of three months or less when
purchased.
|
|
e.
|
Short-term
bank deposits:
|
Bank
deposits with maturities of more than three months but less than one year are
included in short-term bank deposits. Such short-term bank deposits are stated
at cost.
|
|
f.
|
Marketable
securities:
|
In
2007 the Company classified its marketable securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115"), as available-for-sale. The marketable securities that are held
for the short-term and available for immediate sale are stated at quoted market
prices at balance sheet date. The Company's marketable securities consist of
highly-rated auction rate (AAA) securities ("ARS") which are federal backed
student loan securities. These ARS may be liquidated at par value on the reset
date, which is generally 30 days. Available-for-sale securities are carried at
fair value, with the unrealized gains and losses, reported in "accumulated other
comprehensive income (loss)" in shareholders' equity. The effective maturity may
differ from the contractual maturities, due to the periodical auction
mechanism.
Commencing
February 2008, all of the Company's ARSs (comprised of five securities) suffered
from failed auctions Subsequent to the balance sheet date, on January 5, 2009,
all of the Company's ARSs were purchased by the bank at full par value amounting
to a total of $ 2,000. By agreeing to the settlement with the bank, the Company
is essentially stating that it no longer has the intent of holding the ARSs
until recovery, as it will now recover any unrealized loss through the
settlement offer and, accordingly, the ARSs were classified as trading
securities as of December 31, 2008.
|
|
g.
|
Investment
in affiliate:
|
For the
purposes of these financial statements, an affiliated company is a company held
to the extent of 20% or more, or a company less than 20% held, in which the
Company can exercise significant influence over operating and financial policy
of the affiliate. For the years ended December 31, 2007 and 2006, the investment
in an affiliated company (Imatrix) is accounted for under the equity method in
accordance with APB 18, "The Equity Method of Accounting for Investments in
Common Stock". Profits on inter-company sales not realized outside the group
were eliminated.
As of
December 31, 2007, the Company lacks the ability to exercise significant
influence over operating and financial policies of Imatrix and, accordingly, the
investment is accounted for on a cost basis.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In
November 2007, the Company made a $ 750 cash investment in Mirapoint Inc.
("Mirapoint"), a secure messaging vendor and an OEM licensee. The investment
(7%) in an affiliated company is accounted for under the cost method since the
Company cannot exercise significant influence over the operating and financial
policies of Mirapoint.
The
Company's investments are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an investment may not be
recoverable. As of December 31, 2008, no impairment losses have been
identified.
|
|
h.
|
Property
and equipment:
|
Property
and equipment are stated at cost net of accumulated depreciation. Depreciation
is calculated using the straight line method over the estimated useful lives of
the assets at the following annual rates:
|
%
|
||
|
Computers
and peripheral equipment
|
33.33
|
|
|
Office
furniture and equipment
|
7 -
20
|
|
|
Motor
vehicles
|
15
|
|
|
Leasehold
improvements
|
Over
the shorter of the term of the lease or the life of the
assets
|
|
|
i.
|
Impairment
of long-lived assets:
|
The
Company and its subsidiary's long–lived assets are reviewed for impairment
in
accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets",
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. No impairment losses were recorded in 2006 through
2008.
|
|
j.
|
Revenue
recognition:
|
The
Company derives revenues from Anti-Spam, Zero-Hour™ Virus Outbreak Protection
and GlobalView Mail Reputation Services. The service component of the Company's
solutions is considered essential to the functionality of the software
components. Furthermore, the software components can not be effectively used on
a standalone basis, or with a third party's service. The customer has no ability
to effectively run the software or the Software Development Kit ("SDK") on its
own hardware. As the software portion of the product can not effectively stand
on its own, the Company considers each sale as a service
arrangement.
Therefore,
revenues from such services are recognized over the service term, which
generally includes a term period of one year to three years.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
Revenue
is recognized in accordance with Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition", when the earnings process is complete, as evidenced by an
agreement between the customer and the Company, when delivery has occurred or
services have been rendered, when the fee is fixed or determinable and when
collectibility is probable.
|
|
k.
|
Research
and development costs:
|
Statement
of Financial Accounting Standards ("SFAS") 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. Costs incurred by the Company
between completion of the working models and the point at which the products are
ready for general release, have been insignificant. Therefore, all research and
development costs have been expensed.
|
|
l.
|
Concentrations
of credit risk:
|
SFAS No.
105, "Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentration of Credit
Risk" requires disclosure of any significant off balance sheet and credit risk
concentrations. The Company and its subsidiary have no significant
off–balance–sheet concentration of credit risk such as foreign exchange
contracts, option contracts or other foreign hedging arrangements.
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of trade receivables, marketable securities, short-term
deposits, cash and cash equivalents. The majority of the Company's short-term
deposits and cash and cash equivalents are invested in dollars and dollar linked
investments and are deposited in major banks in the United States and Israel.
Such investments in the United States may be in excess of insured limits and are
not insured in other jurisdictions. 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.
Marketable
securities of the Company mainly represent ARSs (see f above). Subsequent
to the balance sheet date, the bank that held the Company's ARSs purchased them
from the Company in consideration of $ 2,000 and, accordingly, no credit risk
exists with respect to these investments.
The trade
receivables of the Company are derived from transactions with companies located
primarily in North America, Europe, Israel and Asia. An allowance for doubtful
accounts is determined with respect to those amounts that the Company and its
subsidiary have determined to be doubtful of collection. The allowance for
doubtful accounts was zero as at December 31, 2007 and 2008. Bad debt expense
(recovery) for the years ended December 31, 2006, 2007 and 2008 was $ (6),
$ 0 and $ 0, respectively.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
|
|
m.
|
Accounting
for stock–based compensation:
|
The
Company accounts for stock-based compensation in accordance with SFAS No. 123
(revised 2004), "Share-Based Payment" ("SFAS 123(R)") which requires the
measurement and recognition of compensation expense based on estimated fair
values for all share-based payment awards made to employees and directors. SFAS
123(R) requires companies to estimate the fair value of equity-based payment
awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods in the Company's consolidated income
statements.
The
Company recognizes compensation expense for the value of its awards on a
straight line basis over the requisite service period of each of the awards, net
of estimated forfeitures. Estimated forfeitures are based on actual historical
pre-vesting forfeitures.
The
Company estimates the fair value of stock options granted using the
Black-Scholes option-pricing model. The option-pricing model requires a number
of assumptions, of which the most significant are the expected stock price
volatility and the expected option term. Expected volatility was calculated
based upon actual historical stock price movements. The expected term of options
granted represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate is based on the yield from U.S. Federal
Reserve zero-coupon bonds with an equivalent term. The Company has historically
not paid dividends and has no foreseeable plans to pay dividends.
The fair value for options granted in
2006, 2007 and 2008 is estimated at the date of grant using a Black-Scholes
options pricing model with the following weighted average
assumptions:
|
Year ended December 31,
|
||||||
|
Employee stock options
|
2006
|
2007
|
2008
|
|||
|
Volatility
|
70%
|
70%
|
80%
|
|||
|
Risk-free
interest rate
|
4.35%-4.85%
|
3.76%-4.94%
|
1.79%-2.79%
|
|||
|
Dividend
yield
|
0%
|
0%
|
0%
|
|||
|
Expected
life (years)
|
4.08
|
4.08
|
3.03
|
|||
For
further discussion, please refer to Note 5.
|
|
n.
|
Basic
and diluted net earnings (loss) per
share:
|
Basic and
diluted net earnings (loss) per share are presented in accordance with SFAS No.
128, "Earnings per Share", for all periods presented.
Basic net
earnings (loss) per share have been computed using the weighted–average number
of Ordinary shares outstanding during the year. Diluted net earning (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.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In 2006
all outstanding stock options and warrants were excluded from the calculation of
the diluted loss per share because all such securities were
anti–dilutive. In 2007 and 2008 the difference between the denominator of
basic and diluted net earnings per share is due to the effect of dilutive
securities for stock option. In 2007 and 2008, 363,133 and 1,563,038,
respectively, weighted average number of shares related to options and warrants
outstanding were excluded from calculation of the diluted earnings per share
since they would have an anti-dilutive effect.
|
|
o.
|
Severance
pay:
|
The
Company's liability for severance pay in Israel is calculated pursuant to
Israel's 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 Israeli employees is
fully provided by monthly deposits with severance pay funds and insurance
policies, and by an accrual. The value of those funds and policies is recorded
as an asset in the Company's balance sheet.
The
deposited funds include profits and losses accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the
obligation pursuant to Israel's Severance Pay Law or labor agreements. The value
of the deposited funds is based on the cash surrendered value of these
policies.
Severance
expense for the years ended December 31, 2006, 2007 and 2008 was approximately
$ 8, $ 11 and $ 26, respectively.
|
|
p.
|
Fair
value of financial
instruments:
|
The
carrying amounts of cash and cash equivalents, marketable securities, trade
receivables, prepaid expenses, other accounts receivable and accounts payable,
approximate their fair values due to the short–term maturities of financial
instruments.
|
q.
|
Treasury
shares:
|
The
Company repurchases its Ordinary shares from time to time on the open market and
holds such shares as Treasury shares. The Company presents the cost to
repurchase Treasury shares as a reduction in shareholders' equity.
|
|
r.
|
Income
taxes:
|
The
Company accounts for income taxes in accordance with SFAS No. 109, "Accounting
for Income Taxes" ("SFAS No. 109"). SFAS No. 109 prescribes the use of the
liability method whereby deferred tax asset and liability account balances are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The Company
provides a valuation allowance, if necessary, to reduce deferred tax assets to
amounts more likely than not to be realized.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
On
January 1, 2007, the Company adopted FASB Interpretation No. 48,
"Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109" (FIN 48). FIN 48 contains a two-step approach to
recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position taken or
expected to be taken in a tax return by determining if the weight of available
evidence indicates that it is more likely than not that, on an evaluation of the
technical merits, the tax position will be sustained on audit, including
resolution of any related appeals or litigation processes. The second step is to
measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. No liability for unrecognized tax benefits
was recorded as a result of the implementation of FIN 48.
|
|
s.
|
Reclassifications:
|
Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation.
|
|
t.
|
Recently
issued accounting pronouncements:
|
In
February 2008, the FASB issued FASB Staff Position ("FSP") FAS No. 157-2,
"Effective Date of FASB Statement No. 157" ("FSP 157-2"), to delay the effective
date of FASB Statement 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, excluding those that are recognized or disclosed in
financial statements at fair value on a recurring basis (that is, at least
annually). For purposes of applying FSP 157-2, nonfinancial assets and
nonfinancial liabilities include all assets and liabilities other than those
meeting the definition of a financial asset or a financial liability in FASB
Statement 159. FSP 157-2 defers the effective date of Statement No. 157 to
fiscal years beginning after November 15, 2008, and interim periods within those
fiscal years for items within the scope of this FSP 157-2. The Company does not
expect the adoption of FSP 157-2 to have a material impact on its consolidated
financial position, results of operations or cash flows.
In
December 2007, the FASB issued SFAS 160, ''Noncontrolling Interests in
Consolidated Financial Statements'' (''SFAS 160''). SFAS 160 amends ARB 51,
''Consolidated Financial Statements'', to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. It also clarifies that a noncontrolling
interest in a subsidiary is an ownership interest in the consolidated entity
that should be reported as equity in the consolidated financial statements. SFAS
160 also changes the way the consolidated income statement is presented by
requiring consolidated net income to be reported at amounts that include the
amounts attributable to both the parent and the noncontrolling interest. It also
requires disclosure, on the face of the consolidated statement of income, of the
amounts of consolidated net income attributable to the parent and to the
noncontrolling interest. SFAS 160 requires that a parent recognize a gain or
loss in net income when a subsidiary is deconsolidated and requires expanded
disclosures in the consolidated financial statements that clearly identify and
distinguish between the interests of the parent owners and the interests of the
noncontrolling owners of a subsidiary. SFAS 160 is effective for fiscal periods,
and interim periods within those fiscal years, beginning on or after
December 15, 2008. The Company does not expect the adoption of SFAS
160 to have a material impact on its consolidated financial position, results of
operations or cash flows.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
2:-
|
SIGNIFICANT
ACCOUNTING POLICIES (Cont.)
|
In March
2008, the FASB issued Statement 161 "Disclosures about Derivative Instruments
and Hedging Activities" ("SFAS 161") an amendment to FASB No.
133. This statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required
to provide enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity's financial
position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008. Early application is encouraged. The Company
does not expect the adoption of SFAS 161 to have a material impact on its
consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" ("SFAS 141R"). SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. Earlier adoption is
prohibited. The Company does not expect the adoption of SFAS 141R to have a
material impact on its consolidated financial position, results of operations or
cash flows.
In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles". SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States. It is effective 60 days following the SEC's approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles". The Company does not expect a material impact on its consolidated
financial statements from adoption of SFAS No. 162.
|
NOTE
3:
|
PROPERTY
AND EQUIPMENT
|
|
December 31
|
||||||||
|
2007
|
2008
|
|||||||
|
Cost:
|
||||||||
|
Computers
and peripheral equipment
|
$ | 2,414 | $ | 2,846 | ||||
|
Office
furniture and equipment
|
598 | 605 | ||||||
|
Motor
vehicles
|
88 | 88 | ||||||
|
Leasehold
improvements
|
1,150 | 1,157 | ||||||
| 4,250 | 4,696 | |||||||
|
Less
accumulated depreciation
|
(3,464 | ) | (3,925 | ) | ||||
|
Depreciated
cost
|
$ | 786 | $ | 771 | ||||
Depreciation
expense amounted to approximately $ 209, $ 397 and $ 466 in 2006, 2007 and 2008,
respectively.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
4:
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
Operating
leases:
|
The
Company leases its facility in Israel under an operating lease agreement
expiring on December 31, 2010. The subsidiary leases its facility in the U.S.
under an operating lease agreement expiring on February 28,
2010.
Facilities
rent expense for 2006, 2007 and 2008 was approximately $ 131, $ 164
and $ 202, respectively.
Annual
minimum future lease payments due under the above agreements (and motor vehicle
leases), at the exchange rate in effect on December 31, 2008, are approximately
as follows:
|
2009
|
$ | 460 | ||
|
2010
|
273 | |||
|
2011
|
3 | |||
| $ | 736 |
|
NOTE
5:
|
SHAREHOLDERS'
EQUITY
|
|
|
a.
|
General:
|
The
Ordinary shares of the Company have been traded on the Nasdaq National Market
and Nasdaq Capital Market (formerly The Nasdaq SmallCap Market), since July 1999
and 2002, respectively.
The
Ordinary shares confer upon their holders the right to receive notice to
participate and vote in general shareholder meetings of the Company and to
receive dividends, if declared. In January 2008, the Board of Directors and
shareholders approved a 3:1 reverse stock split of the Company's share capital.
As a result of this action, every three shares (including all authorized, issued
and outstanding shares and all outstanding warrants and options to purchase
shares) were combined into one share of the same respective class of shares
bearing a par value of NIS 0.15 each. All of the Company's authorized,
issued and outstanding shares (including all outstanding warrants and options to
purchase shares) as of December 31, 2008 and 2007, have been restated to reflect
the effect of the reverse stock split.
|
|
b.
|
Warrants
to investors:
|
As of
December 31, 2008, the Company's outstanding warrants issued to various parties
were as follows:
|
Issuance date
|
Warrants
granted for
Ordinary
shares
|
Exercise
price per
share
|
warrants
exercisable
|
Exercisable through
|
|||||||||
|
May
2004
|
969,971 | $ | 2.21 | 309,416 |
June
2009
|
||||||||
|
October
2005 (i)
|
500,000 | $ | 1.95 | 458,333 |
October
2010
|
||||||||
|
May
2006 (ii)
|
23,364 | $ | 3.21 | 23,364 |
May
2011
|
||||||||
|
Total
|
1,493,335 | 791,113 | |||||||||||
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
5:
|
SHAREHOLDERS'
EQUITY (Cont.)
|
|
|
(i)
|
Under
the Securities Purchase Agreement dated October 2, 2005, the Company
issued 2,000,000 Ordinary shares at $ 1.50 per share for gross
proceeds of $ 3,000. The investors also received two sets of
warrants, each representing an option to purchase up to 500,000 Ordinary
shares, with one set exercisable within nine months at $ 1.50 per
share and the other set exercisable within five years at $ 1.95 per
share. The warrants exercisable at $ 1.50 per share were exercised by
the end of 2006, and 500,000 warrants exercisable at $ 1.95 per share
are exercisable through October
2010.
|
|
|
(ii)
|
In
May 2006, the Company issued warrants to purchase 23,364 of the Company's
Ordinary shares at a price of $ 3.21 per share to one investor as
part of a private placement, in which the Company issued 31,153 Ordinary
shares for a total consideration of $ 100. The warrants expire in May
2011.
|
|
c.
|
Preferred
share issuance:
|
On
October 31, 2004, the Company entered into a Securities Purchase Agreement
("SPA") for the sale of Series A Preferred shares to investors of the Company
identified in the schedule of buyers to the SPA. The transaction closed on
December 9, 2004. Under the transaction:
|
|
1.
|
The
Company issued 2,126,667 Series A Preferred shares to new and existing
investors, including three of its directors at that time, for an aggregate
purchase price of $ 3,190. The purchase price per share paid in the
transaction was $ 1.50.
|
|
|
2.
|
The
company issued 300,000 Series A Preferred Shares and warrants, for an
aggregate purchase price of $ 810. The purchase price per share paid in
the transaction was $ 2.7.
|
|
|
3.
|
The
Series A Preferred shares were convertible into the Company's Ordinary
shares, and enjoyed certain preferences and other rights relating to
liquidation and business combinations, as described in the Company's
Amended and Restated Articles of
Association.
|
During
2005, 650,000 Series A Preferred shares were converted into 1,133,333 Ordinary
shares.
During
the quarter ended March 31, 2006, 500,000 Series A Preferred shares were
converted into 1,000,000 Ordinary shares. By early May 2006, 100,000 Series A
Preferred Shares were converted into 200,000 Ordinary shares triggering a
provision in the Company's Amended and Restated Articles of Association causing
the conversion of the remaining outstanding 1,176,667 Series A Preferred shares
into 2,353,333 Ordinary shares. This provision required the automatic conversion
of all outstanding Preferred shares following conversions exceeding 50% of the
originally issued Preferred shares. As a result, the Company no longer has a
Preferred class of securities outstanding.
|
|
d.
|
Employee
stock options:
|
In 1996,
the Company adopted the 1996 CI Stock Option Plan for granting options to its
U.S. employees and consultants to purchase Ordinary shares of the Company. Until
1999, 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 and consultants,
(which was amended in 2003 and renamed the "Amended and Restated Israeli
Share Option Plan".
As of December 31, 2008,
an aggregate of 1,447,361 Ordinary shares of the Company are still available for
future grant to employees and directors.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
5:
|
SHAREHOLDERS'
EQUITY (Cont.)
|
Options
granted under such plans and agreements up to September 2005, expire generally
after 10 years from the date of grant, with grants from September 2005 having
six-year terms from the date of grant. Options cease vesting upon termination of
the optionee's employment or other relationship with the Company. The options
generally vest over a period of four years. The exercise price of the options
granted under the individual agreements may not be less than the nominal value
of the shares into which such options are exercisable. Any options that are
canceled or not exercised within the option term become available for future
grant.
A summary
of the Company's employees share option activity under the plans is as
follows:
|
Number of
shares
|
Weighted
average
exercise
price
|
Aggregate
intrinsic
value
|
||||||||||
|
2008
|
2008
|
2008
|
||||||||||
|
Outstanding
at the beginning of the year
|
3,283,167 | $ | 2.65 | |||||||||
|
Granted
|
563,876 | $ | 2.85 | |||||||||
|
Exercised
|
(153,212 | ) | $ | 1.65 | ||||||||
|
Forfeited
|
(181,274 | ) | $ | 2.86 | ||||||||
|
Outstanding
at the end of the year
|
3,512,557 | $ | 2.69 | $ | 1,009 | * | ||||||
|
Options
vested and expected to vest at the end of the year
|
3,412,932 | $ | 2.64 | $ | 1,009 | |||||||
|
Exercisable
options at the end of the year
|
2,139,358 | $ | 1.94 | $ | 1,009 | * | ||||||
|
Weighted
average fair value of options granted during the year
|
$ | 1.63 | ||||||||||
*2,460,730
options were out of the money as of December 31, 2008.
The
aggregate intrinsic value of the Company's options is the difference between the
Company's closing share price on the last trading day of the fiscal year 2008
and the exercise price, times the number of options.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
5:
|
SHAREHOLDERS'
EQUITY (Cont.)
|
The
options outstanding as of December 31, 2008, have been separated into ranges of
exercise price, as follows:
|
|
Weighted
|
Weighted
|
|
Weighted
average
exercise
|
||||||||||||||||
|
Exercise
|
|
average
remaining
|
average
exercise
|
|
price per
share of
|
|||||||||||||||
|
price per
|
Options
|
contractual
|
price per
|
Options
|
exercisable
|
|||||||||||||||
|
share
|
outstanding
|
life in years
|
share
|
exercisable |
options
|
|||||||||||||||
|
$0.04–$0.27
|
132,619 | 2.73 | $ | 0.05 | 132,619 | $ | 0.05 | |||||||||||||
|
$0.33–$0.60
|
500,000 | 3.77 | $ | 0.35 | 500,000 | $ | 0.35 | |||||||||||||
|
$0.81–$0.84
|
38,667 | 2.84 | $ | 0.82 | 38,667 | $ | 0.82 | |||||||||||||
|
$0.93–$1.89
|
819,688 | 5.09 | $ | 1.34 | 528,218 | $ | 1.20 | |||||||||||||
|
$2.31–$2.91
|
266,154 | 4.16 | $ | 2.62 | 218,889 | $ | 2.57 | |||||||||||||
|
$3.12–$4.35
|
1,184,289 | 3.94 | $ | 3.33 | 580,753 | $ | 3.24 | |||||||||||||
|
$4.35-$6.60
|
571,140 | 4.65 | $ | 6.10 | 140,212 | $ | 6.20 | |||||||||||||
|
$
0.03–$6.60
|
3,512,557 | 4.26 | $ | 2.69 | 2,139,358 | $ | 1.94 | |||||||||||||
|
|
e.
|
Non–employee
directors stock option plan:
|
In 1999,
the Company adopted the 1999 Non-Employee Directors Stock Option Plan. The
original allotment of shares to this plan is 1,263,333. On December 15, 2006,
the Company combined the remaining pool of options in the employee stock option
plans reserve with the amount of options remaining in the Non-Employee Directors
Stock Option Plan reserve.
Since the
annual meeting of shareholders in 2003, new directors joining the Board are
entitled
to an option grant of
50,000 Ordinary shares
.
Each
option granted under the Non-Employee Directors Stock Option Plan becomes
exercisable at a rate of 1/16th of the shares every three months. Each option
has an exercise price equal to the fair market value of the Ordinary shares on
the grant date of such option. Until September 2005, each option granted had a
maximum term of 10 years, but since September 2005, the term of granted options
is six years. Options will terminate earlier if the optionee ceases to be a
member of the Board of Directors.
During
2008 the Company granted 233,335 options to non–employee directors at a weighted
average exercise price of $ 3.20 per share. Weighted average fair value of
options granted during the year is 1.43. As of December 31, 2008, 193,228
options were vested and unexercised and 458,337 were outstanding under the
Non–Employee Directors Stock Option Plan.
|
|
f.
|
Options
to non-employees:
|
|
Issuance date
|
Options granted
for Ordinary
Shares
|
Exercise price
per share
|
Options
exercisable
|
Exercisable
through
|
|||||||||
|
May
2006-2008 (i)
|
83,334 | $ 3.21-$5.73 | 39,579 |
May
2013
|
|||||||||
|
Total
|
83,334 | 39,579 | |||||||||||
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
5:
|
SHAREHOLDERS'
EQUITY (Cont.)
|
|
|
(i)
|
As
a consideration for consulting services, on May 7, 2006 the Company issued
50,000 options to a service provider to purchase the Company's Ordinary
shares at a price of $ 3.21 per option. On May 5, 2007, the Company
issued an additional 16,667 options to the service provider to purchase
the Company's Ordinary shares at a price of $ 5.73 per option. On May
6, 2008, the Company issued an additional 16,667 options to purchase
Ordinary shares to the service provider at a price of $ 3.85 per option.
The options shall vest and become exercisable at a rate of 1/16 of the
options every three months. The Company has accounted for this grant under
the fair value method of EITF 96-18. The fair value for these options was
estimated using a Black-Scholes option-pricing model. Compensation expense
for 2006, 2007 and 2008 amounted to $ 24, $ 70 and $ 37,
respectively.
|
|
|
g.
|
As
of December 31, 2008, the total unrecognized estimated compensation cost
related to non-vested stock options granted prior to that date was
$ 3,139 which is expected to be recognized over a period of up to
four years.
|
|
h.
|
Total
stock-based compensation expenses recognized in 2006, 2007 and
2008:
|
The total
stock-based compensation expense related to all of the Company's equity-based
awards, recognized for the year ended December 31, 2006, 2007 and 2008, was
comprised as follows:
|
Year
ended
December
31,
|
||||||||||
|
2006
|
2007
|
2008
|
||||||||
|
Cost
of revenues
|
$ | 15 | $ | 31 | $ | 45 | ||||
|
Research
and development
|
196 | 246 | 319 | |||||||
|
Selling
and marketing
|
96 | 194 | 298 | |||||||
|
General
and administrative
|
638
|
612 | 870 | |||||||
| $ |
945
|
$ | 1,083 | $ | 1,532 | |||||
|
NOTE
6:
|
INCOME
TAXES
|
|
|
a.
|
Corporate
tax structure:
|
Taxable
income of Israeli companies is subject to tax at the rate of 31% in 2006, 29% in
2007, 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.
|
|
b.
|
Measurement
of taxable income under the Income Tax (Inflationary Adjustments) Law,
1985:
|
Results
for tax purposes are measured in terms of earnings in NIS after certain
adjustments for increases in the Israeli Consumer Price Index ("CPI"). As
explained in Note 2b, the financial statements are measured in U.S. dollars. The
difference between the annual change in the Israeli CPI and in the NIS/dollar
exchange rate causes a further difference between taxable income and the income
before taxes shown in the financial statements. In accordance with paragraph
9(f) of SFAS No. 109, the Company has not provided deferred income taxes on the
difference between the functional currency and the tax bases of assets and
liabilities. In February 2008, the inflation adjustment law was
cancelled.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
6:
|
INCOME
TAXES (Cont.)
|
|
|
c.
|
Tax
benefits under Israel's Law for the Encouragement of Industry (Taxation),
1969:
|
The
Company may currently qualify as an "industrial company" within the definition
of the Law for the Encouragement of Industry (Taxation), as such, it may be
eligible for certain tax benefits, including, inter alia, special depreciation
rates for machinery, equipment and buildings, amortization of patents, certain
other intangible property rights and deduction of share issuance
expenses.
|
|
d.
|
Net
operating loss carryforwards:
|
As of
December 31, 2008, the Company's net operating loss carryforwards for tax
purposes amounted to approximately $ 78,000 which may be carried forward
and offset against taxable income in the future, for an indefinite
period.
As of
December 31, 2008, for federal income tax purposes, the U.S. subsidiary had net
operating loss carry-forwards of approximately $ 92,000. These losses may
offset any future U.S. taxable income of the U.S. subsidiary and will expire in
the years 2010 through 2025.
Utilization
of U.S. net operating losses may be subject to substantial annual limitation due
to the "change in ownership" provisions of the Internal Revenue Code of 1986 and
similar state provisions. The annual limitations may result in the expiration of
net operating losses before utilization.
The
Company and its subsidiary have provided valuation allowances in respect to the
deferred tax assets resulting from operating loss carryforwards and other
temporary differences. Management currently believes that since the Company and
its subsidiary have a history of losses it is more likely than not that the
deferred tax regarding the loss carryforwards and other temporary differences
will not be realized in the foreseeable future.
|
|
e.
|
Deferred
income taxes:
|
The
Company's deferred tax assets resulting from tax loss carryforwards and
temporary differences are as follows:
|
December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Deferred
tax assets are as follows:
|
||||||||||||
|
Operating
loss carry–forwards
|
$ | 50,292 | $ | 53,573 | $ | 53,829 | ||||||
|
Temporary
differences
|
684 | 1,076 | 1,440 | |||||||||
|
Deferred
tax asset before valuation allowance
|
50,976 | 54,649 | 55,269 | |||||||||
|
Valuation
allowance
|
(50,976 | ) | (54,649 | ) | (55,269 | ) | ||||||
|
Net
deferred tax asset
|
$ | - | $ | - | $ | - | ||||||
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
6:
|
INCOME
TAXES (Cont.)
|
|
f.
|
The
Company adopted the provisions of FIN 48 on January 1, 2007. The
adoption of FIN 48 did not result in a change to the Company's accumulated
deficit.
|
Income
(loss) before taxes on income consists of the following:
|
Year December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Israel
|
$ | (393 | ) | $ | 1,080 | $ | 1,469 | |||||
|
U.S.
|
203 | 1,057 | 808 | |||||||||
| $ | (190 | ) | $ | 2,137 | $ | 2,277 | ||||||
The
Company is required to calculate and account for income taxes in each
jurisdiction in which the Company or its subsidiary operate. Significant
judgment is required in determining its worldwide provision for income taxes and
recording the related assets and liabilities.
|
|
g.
|
Taxes
on income are comprised of the
following:
|
|
Year December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Foreign
- Current
|
$ | - | $ | 28 | $ | 7 | ||||||
|
|
h.
|
The
main reconciling items between the statutory tax rate of the Company and
the effective tax rate are the non-recognition of the benefits from
accumulated net operating loss carry forward due to the uncertainty of the
realization of such tax benefits.
|
|
|
i.
|
Tax
assessments:
|
The
Company has final tax assessments in Israel until 2003.
COMMTOUCH
SOFTWARE LTD. AND ITS SUBSIDIARY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
U.S.
dollars in thousands, except share and per share data
|
NOTE
7:
|
GEOGRAPHIC
INFORMATION
|
The
Company conducts its business on the basis of one reportable segment. The
Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information".
|
|
a.
|
Revenues
from external customers:
|
|
Year ended December 31,
|
||||||||||||
|
2006
|
2007
|
2008
|
||||||||||
|
Israel
|
$ | 344 | $ | 742 | $ | 1,080 | ||||||
|
North
America
|
4,525 | 6,424 | 8,018 | |||||||||
|
Europe
|
1,715 | 2,735 | 3,160 | |||||||||
|
Asia
|
493 | 1,038 | 1,497 | |||||||||
|
Other
|
157 | 311 | 337 | |||||||||
| $ | 7,234 | $ | 11,250 | $ | 14,092 | |||||||
|
|
For
the years ended December 31, 2006, 2007 and 2008, there are no major
customers.
|
|
|
b.
|
The
Company's net amount of long–lived assets is as
follows:
|
|
December 31
|
||||||||
|
2007
|
2008
|
|||||||
|
Israel
|
$ | 179 | $ | 175 | ||||
|
U.S.A.
|
607 | 596 | ||||||
| $ | 786 | $ | 771 | |||||
-
- - - - - - - - - - - - - - - - - -
-
Item
19. Exhibits.
The list of exhibits required by this
Item is incorporated by reference to the Exhibit Index which precedes the
exhibits to this report.
SIGNATURES
The
registrant hereby certifies that it meets all of the requirements for filing on
Form 20–F and that it has duly caused and authorized the undersigned to sign
this annual report on its behalf.
|
COMMTOUCH
SOFTWARE LTD.
|
|
|
By:
|
/s/ Ron Ela
|
|
Ron
Ela
|
|
|
Chief
Financial Officer
|
|
|
March
30, 2009
|
|
Item
19. Exhibits
|
Exhibit Number
|
Description of Document
|
|
|
1.1
|
Memorandum
of Association of the Company.(1)
|
|
|
1.2
|
Amended
and Restated Articles of Association of the Company, as amended on
December 14, 2007.(2)
|
|
|
2.1
|
Amended
and Restated Registration Rights Agreement dated as of April 19,
1999.(1)
|
|
|
2.1.1
|
Amendment
No. 1 to Amended and Restated Registration Rights Agreement dated as of
December 29, 1999.(3)
|
|
|
2.1.2
|
Amendment
No. 2 to Amended and Restated Registration Rights Agreement dated as of
March 10, 2000.(4)
|
|
|
2.3
|
Exhibit
“D” to Securities Purchase Agreement dated May 18, 2004 between Commtouch
Software Ltd. and certain investors thereunder – Form of Registration
Rights Agreement.(10)
|
|
|
2.4
|
Exhibit
“A” to Securities Purchase Agreement dated May 18, 2004 between Commtouch
Software Ltd. and certain investors thereunder – Form of Initial
Warrants.(11)
|
|
|
2.5
|
Exhibit
“A” to Securities Purchase Agreement dated October 31, 2004 between
Commtouch Software Ltd. and certain investors thereunder – Form of
Registration Rights Agreement.(12)
|
|
|
2.6
|
Redemption,
Amendment and Exchange Agreement dated October 31, 2004 between Commtouch
Software Ltd. and certain investors thereunder.(13)
|
|
|
2.7
|
Exhibit
“B” to Securities Purchase Agreement dated October 2, 2005 between
Commtouch Software Ltd. and certain investors thereunder – Form of Series
2 Warrant.(14)
|
|
|
2.8
|
Exhibit
“C” to Securities Purchase Agreement dated October 2, 2005 between
Commtouch Software Ltd. and certain investors thereunder – Form of
Registration Rights Agreement.(15)
|
|
|
2.9
|
Addendum
1 to Registration Rights Agreement, dated October 6, 2005 between
Commtouch Software Ltd. and certain investors
thereunder.(16)
|
|
|
4.1
|
Commtouch
Software Ltd. Amended and Restated 1996 CSI Stock Option
Plan.(5)
|
|
|
4.2
|
Commtouch
Software Ltd. 2006 U.S. Stock Option Plan.(6)
|
|
|
4.3
|
Amended
and Restated 1999 Section 3(i) Share Option Plan.(9)
|
|
|
4.4
|
Amended
and Restated Commtouch Software Ltd. 1999 Non–Employee Directors Stock
Option Plan.(7)
|
|
|
4.5
|
Extension
of Amended and Restated Commtouch Software Ltd. 1999 Non-Employee
Directors Stock Option Plan.
|
|
|
4.6
|
Commtouch
Software Ltd. Amended and Restated Israeli Share Option Plan [successor
plan to 1999 Section 3(i) Share Option Plan].(8)
|
|
|
4.7
|
Summary
of Director Compensation.
|
|
|
8
|
List
of Subsidiaries of the Company.
|
|
|
12.1
|
Certification
of Company’s Principal Executive Officer Pursuant to Exchange Act Rule
13a-14(a) or
15d-14(a).
|
|
12.2
|
Certification
of Company’s Principal Financial Officer Pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a).
|
|
|
13
|
Certification
of Company’s Principal Executive Officer and Principal Financial Officer
Pursuant to 18 U.S.C. 1350.
|
|
|
15
|
Consent
of Kost, Forer, Gabbay & Kasierer, independent
auditors.
|
|
(1)
|
Incorporated
by reference to exhibits in Amendment No. 1 to Registration Statement on
Form F–1 of Commtouch Software Ltd., File No.
333–78531.
|
|
(2)
|
Incorporated
by reference to Exhibit 1.2 to Annual Report on Form 20–F for the year
ended December 31, 2007.
|
|
(3)
|
Incorporated
by reference to exhibit in Amendment No. 1 to Registration Statement on
Form F–1 of Commtouch Software Ltd., File No.
333–89773.
|
|
(4)
|
Incorporated
by reference to exhibits in Amendment No. 2 to Registration Statement on
Form F–1 of Commtouch Software Ltd., File No. 333–89773, filed
March 28, 2000.
|
|
(5)
|
Incorporated
by reference to Exhibit 99.2 to Registration Statement on Form S–8 No.
333–141177.
|
|
(6)
|
Incorporated
by reference to Exhibit 99.4 to Registration Statement on Form S–8 No.
333–141177.
|
|
(7)
|
Incorporated
by reference to Exhibit 99.1 to Registration Statement on Form S–8 No.
333–141177.
|
|
(8)
|
Incorporated
by reference to Exhibit 99.3 to Registration Statement on Form S–8 No.
333–141177.
|
|
(9)
|
Incorporated
by reference to Exhibit 5 to Schedule TO, filed July 20,
2001.
|
|
(10)
|
Incorporated
by reference to Exhibit 99.2 to Report on Form 6–K for the month of May
2004, filed May 19, 2004.
|
|
(11)
|
Incorporated
by reference to Exhibit 99.3 to Report on Form 6–K for the month of May
2004, filed May 19, 2004.
|
|
(12)
|
Incorporated
by reference to Exhibit 99.4 to Report on Form 6–K for the month of
November 2004, filed November 5,
2004.
|
|
(13)
|
Incorporated
by reference to Exhibit 99.5 to Report on Form 6–K for the month of
November 2004, filed November 5,
2004.
|
|
(14)
|
Incorporated
by reference to Exhibit 99.6 to Report on Form 6–K for the month of
October 2005, filed October 11,
2005.
|
|
(15)
|
Incorporated
by reference to Exhibit 99.3 to Report on Form 6–K for the month of
October 2005, filed October 11,
2005.
|
|
(16)
|
Incorporated
by reference to Exhibit 99.4 to Report on Form 6–K for the month of
October 2005, filed October 11,
2005.
|