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
Listing 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 Listing 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 issuers home
country certifying that the issuers practices are not prohibited by the home
countrys 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 (see
Item 16G. Corporate Governance for a list of those home country practices
followed by us). Accordingly, our shareholders may not be afforded the same
protection as provided under NASDAQs 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
01197298636888. The Company was incorporated as a private company under the
laws of the State of Israel on February 10, 1991 and its legal form is a
company limited by shares. Commtouch became a public company on July 15, 1999.
Its Amended and Restated 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 Companys wholly owned subsidiary, Commtouch
Inc., has its principal office located at 292 Gibraltar Drive, Suite 107,
Sunnyvale, California 94089, where our telephone number is (650) 8642000, as
well as another office located at 7121 Fairway Dr., St. 104, Palm Beach
Gardens, FL 33418, tel: 561 575-3200. Commtouch Inc. is also in the process of
opening a formal office in the Washington, D.C. area at 7927 Jones Branch Drive,
Suite 2250, Tysons Corner, VA, where certain members of management and related
personnel are to be located.
We are a provider of messaging, antivirus and Web security solutions to
a wide array of customers and OEM and service provider distribution partners,
including real-time Inbound Anti-Spam, Outbound Spam Protection for service
providers, Zero-Hour virus outbreak protection and GlobalView Mail Reputation
services, as well as Command Antivirus and GlobalView URL Filtering services.
The Company offers its solutions to network and security vendors offering
content security gateways, unified threat management, or UTM, solutions,
network routers and appliances, antivirus solutions and to service providers
such as Software-as-a-Service, or SaaS, vendors, Web hosting providers and
Internet service providers. Our multiple services are intended to provide
Internet security for various users of the Internet against the harmful effects
of spam, malevolent software or malware, unwelcome websites, etc.
Additional Detail on Our Offerings
Our above-described services are typically accessed by our OEM and
service provider customers through the integration of a Software Development
Kit, or SDK, which, upon integration, is then able to communicate with our
remote, worldwide Detection Centers in order to provide our customers and their
users with the most up to date protection against the latest Internet threats
that they are facing.
At the core of our messaging security offerings is our proprietary
Recurrent Pattern Detection (RPD) technology which, in general terms, analyzes
messages associated with mass email outbreaks and directs the blocking of such
10
emails, without the need to analyze individual messages. Outbound Spam
Protection is intended to enable service providers to block emails being sent
from their system that contain spam, phishing or malware, and identify the
source of the problem. Inbound Anti-Spam is intended to enable customers to
block their end users receipt of such unwanted emails. GlobalView Mail
Reputation fights unwanted email at a networks perimeter, i.e. fighting them
at the entry point, before these messages enter the network, based on
identifying characteristics of the source of the email.
At the core of our Web security solutions is its in the cloud
infrastructure, which analyzes various feeds from worldwide sources as well as
data from our RPD pertaining to URLs, and provides a classification of the URLs
based on a set of categories.
At the core of our Command Antivirus solutions is our proprietary
detection and remediation technology and unique engine design based on a
combination of heuristics, emulation and several types of signatures, as well
as an in the cloud infrastructure, which allows for a high degree of
flexibility for our OEM customers.
In
February 2011, we announced the availability of all three of our principal
service offerings messaging, antivirus and Web security in one unified SDK.
The unified SDK can be integrated into the products of security and networking
vendors on an OEM basis, as well as into service providers infrastructure.
Typical solutions that would benefit from the unified engine are software or
hardware solutions or services that combine multiple security technologies,
such as UTM, secure content filtering gateways and SaaS security solutions. The
three principal service offerings messaging, antivirus and Web security are
still available also in non-unified, individual SDKs for our OEM and service
provider customers.
We
also offer the following services typically through reseller channels:
|
|
|
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|
An
enterprise anti-spam and Zero-Hour virus outbreak detection solution, which
allows the resellers customers to download an Enterprise Gateway (a software
program) enabling the subject Commtouch services to be provided in real time
by our Detection Centers. Through the Enterprise Gateway, messages are
filtered at the customer organizations 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.
|
|
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Command
Anti-Malware service known as CSAM, which offer world-class anti-malware
protection for consumers and small businesses, as well as enterprises with
hundreds of managed endpoints.
|
Sales and Marketing
We utilize third party distribution channels to sell our products.
Generally, our software is provided to OEM and service provider customers, who
in turn integrate the software into their product or service offerings for sale
or provision 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 gateway services, as
well as CSAM service, are sold through resellers, who pay us pre-negotiated
fees after each sale is closed with a resellers customer.
All Company sales are managed by the Companys and its U.S.
subsidiarys business development/sales departments, each of which consists of
a department head and a relatively small number of business development/sales
professionals. The Companys marketing efforts are aimed mainly at potential
OEM and service provider customers. The marketing department is concentrated in
the Companys Israel office, though our personnel travel internationally in
furtherance of the Companys marketing goals.
Intellectual Property
We regard our patented and patent pending antispam 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, U.S. Patent No.
6,330,590. During 2005, we filed in the United States an anti-spam related
patent application, claiming priority for a prior period based on the filing of
U.S. Provisional Patent Application. This application remains outstanding.
During 2006, we filed in the United States a
11
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). This provisional application was converted to a formal
patent application and, effective December 7, 2010, the United States Patent
and Trademark Office split our application into three pending applications and
issued us a new patent under the original application United States Patent
No. 7,849,186. In 2011, a divisional patent was issued in connection with one
of those split applications United States Patent No. 7,991,919, which will
have a term concurrent with US Patent No. 7,849,186. During 2008, we filed a
U.S. Provisional Patent Application for anti-malware data center aggregate,
which was subsequently converted into a formal patent application and then
rejected by the United States Patent and Trademark Office in 2011. We may seek
to patent certain additional software or other technology in the future.
We are actively maintaining our registered trademark for COMMTOUCH,
which is registered in the U.S., Canada, Israel, European Union and China. With
the acquisition of certain assets of Authentium during 2010, we also acquired
registered trademarks in Command Antivirus, Command Anti-Malware, Command
On Demand, Command Interceptor and Galileo, as well as registered service
marks in Authentium and Authentium ESP. We are allowing the registration of
Command Interceptor to lapse. A previous registration of PRONTO in Canada is
still in force, but we are not maintaining this registration and it will lapse
in 2014. Since at least September 2003, we have claimed trademark rights in
RPD and Recurrent Pattern Detection, as applicable to our messaging
security 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 intellectual property,
or IP, reputation and Web security products, as well as our cloud computing
network infrastructure.
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 customers of the trademarks and other intellectual property rights of third
parties. Our customer agreements typically include indemnity provisions, so we
may be obligated to defend against third party intellectual property rights
infringement claims on behalf of our customers. Such claims, even if not
meritorious, could result in the expenditure of significant financial and
managerial resources. During 2011, one such indemnification demand was made by
a customer, and we continue to cooperate with that customer in seeking to
defeat the underlying patent infringement claims. While we believe that
adequate non-infringement and/or invalidity arguments exist, it is too early in
the proceedings to anticipate the outcome of this matter.
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
FactorsBusiness RisksTighter
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
.
Though not totally clear as to the
exact reason, in the past year we have begun to see a gradual decline in the
amount of spam traffic on the Internet. The continuation of this trend can have
a negative effect our business, as potential customers may not view the need to
acquire a robust anti-spam solution (i.e. in place of a legacy solution) with
as much urgency.
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 Command Antivirus, Zero-Hour
Virus Outbreak Detection and GlobalView URL filtering solutions in particular.
12
Employees
As
of December 31, 2011, 2010 and 2009, we had 86, 93 and 72 employees,
respectively, with all of them located in the United States and Israel. None of
our U.S. employees are covered by a collective bargaining agreement. As of
December 31, 2011, our employees were categorized as follows:
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LOCATION
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General &
Administrative
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Sales &
Marketing
|
Research &
Development
|
Hosting
(Operations)
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TOTAL:
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|
|
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|
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ISRAEL
OFFICE
|
8
|
13
|
31
|
-
|
52
|
U.S.
OFFICE:
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|
|
|
|
|
|
|
|
|
|
California
|
4
|
6
|
-
|
8
|
18
|
|
|
|
|
|
|
Florida
|
3
|
1
|
10
|
-
|
14
|
|
|
|
|
|
|
Virginia
|
2
|
-
|
-
|
-
|
2
|
|
|
|
|
|
|
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 Commtouchs Israeli employees. These
provisions principally concern the maximum length of the workday and workweek,
minimum wages, contributions to a pension fund, insurance for workrelated
accidents, procedures for dismissing employees, determination of severance pay
and other conditions of employment. Furthermore, pursuant to such provisions,
the wages of most of Commtouchs 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. Also,
all Israeli employees employed for at least a year commencing in 2009 are entitled
to the funding of pension benefits 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 employees
base salary, and the employer contributes between 13.3% and 15.8% of the
employees base salary. Fulltime 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 employees 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 employees
base salary, and the employer contributes an amount equal to 7.5% of the
employees 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 1,057 square meters, and it houses senior management, research
and development, sales, marketing and administrative personnel. Our
subsidiarys Sunnyvale, California office, which is approximately 4,527 square
feet in size, houses administrative, sales and hosting (operations) personnel;
its office in Florida (approximately 3,000 square feet), houses the Command
Antivirus operations and research and development personnel, plus a small
number of administrative and sales personnel; and its office in Virginia is
expected to house some management, administrative and sales related personnel
(approximately 3,000 square feet).
13
Geographic Information
The
Company conducts its business on the basis of one reportable segment in
accordance with Accounting Standards Codification, or ASC, 280, Segment
Reporting.
Revenues for Last Three Financial Years
See
Item 5. Operating and Financial Review and Prospects Revenue Sources and
the financial statements included elsewhere in this annual report. Below is a
breakdown of our revenues by location (in thousands):
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|
|
|
|
Year December 31,
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|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
1,544
|
|
$
|
2,047
|
|
$
|
2,044
|
|
North America
|
|
|
8,032
|
|
|
9,184
|
|
|
12,655
|
|
Europe
|
|
|
3,776
|
|
|
4,454
|
|
|
4,869
|
|
Asia
|
|
|
1,508
|
|
|
1,976
|
|
|
3,036
|
|
Other
|
|
|
329
|
|
|
500
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,189
|
|
$
|
18,161
|
|
$
|
23,016
|
|
We
have had only negligible capital expenditures and divestitures in the last
three financial years.
Competitive Landscape
The
markets in which Commtouch competes are intensely competitive and rapidly
changing. However, we believe there are very few competitors that offer the
complete package of anti-spam, anti-virus (both traditional and complementary
real-time offerings), IP reputation and Web security 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/or to purchase new products by way of
strategic acquisitions, and to educate potential customers as to the benefits
of using our products rather than developing their own products.
In
the market for messaging security solutions, there are 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, Intel (McAfee) and Cisco
(IronPort). Messaging security providers offering solutions on an OEM basis
similar to Commtouchs business model, and which may be viewed as direct
competitors, include Cloudmark, Mailshell and Vade Retro.
Commtouchs
GlobalView Mail Reputation Service competes in an evolving market. This market
includes 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.
The
market for real-time virus protection products is also constantly evolving, as
those promoting the proliferation of viruses continually seek new distribution
techniques. Commtouchs real-time offering differs from traditional anti-virus
solutions (such as our Command Antimalware solution) in that we offer an
additional, complementary solution to signature and heuristic-based anti-virus
engines. For this reason, our Zero-Hour virus outbreak protection engine has
been employed by several security companies.
14
In
the market for antimalware solutions, there are vendors offering fairly
effective solutions using various technologies based on signatures, emulation
and heuristics. The Commtouch solution is not unique, but has an exclusive
OEM/service provider focus, and an increasing focus on heuristics and zero day
effectiveness. Most companies in this space provide end-user products and in
some cases make software development kits available on an OEM basis.
Competitors to Commtouch include McAfee, Sophos, Kaspersky, and open source
software such as Clam-AV.
In
the market for Web security solutions, there are advanced offerings that
compete with our GlobalView URL filtering solution. Web security 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 Intel (McAfee), WebSense and BlueCoat. Web
security providers offering solutions on an OEM basis similar to Commtouchs
business model, and which may be viewed as direct competitors, include Webroot
(BrightCloud), Symantec (RuleSpace) and IBM (ISS/Cobion).
We
expect that the markets for Internet security solutions will continue to become
more consolidated, with companies increasing their presence in this market or
entering ancillary markets by acquiring or forming strategic alliances with our
competitors or business partners. Some examples of this in the messaging
security field are the acquisitions of IronPort by Cisco, McAfee by Intel, both
Frontbridge and Sybari Software by Microsoft, and Bizanga by Cloudmark. Some
examples of this in the Web security field are the acquisitions of Fastdata by
Cisco, SurfControl by WebSense, CipherTrust by Secure Computing, Secure Computing
by McAfee, McAfee by Intel, RuleSpace by Symantec and and BrightCloud by
Webroot.
See
also disclosure under Item 3. Key Information Risk FactorsBusiness RisksWe
have many established competitors who are offering a multitude of solutions to
the problems of spam/virus distribution and Web-related security threats.
Item 4A. Unresolved Staff Comments.
Not
applicable.
Item 5. Operating and Financial Review and Prospects.
Overview
From
2003 through 2008, the sole focus of our business had been the development and
selling, through reseller and OEM distribution channels, of anti-spam,
Zero-Hour virus outbreak detection and IP reputation solutions to a wide array
of customers. During late 2008, we expanded our focus by way of the release of
our first URL filtering solutions for the web security market. In 2010, we
acquired certain assets comprising the Command Antivirus business unit of
Authentium, Inc.
Critical Accounting Policies and Estimates
Operating
and Financial Review and Prospects are based upon the Companys consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States (U.S. GAAP). The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from
those estimates. On an ongoing basis, the Companys management evaluates
estimates. Such estimates are based on historical experience and on various
other assumptions that are believed to be reasonable, the results of which form
the basis for making judgments about the carrying values of assets and
liabilities.
Accounting for StockBased Compensation:
ASC
718 - Compensation-stock Compensation- (ASC 718) 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 Companys 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
15
pre-vesting
forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates.
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.
treasury bonds with an equivalent term. The Company has historically not paid
dividends and has no foreseeable plans to pay dividends.
The
Company applies ASC 718, and ASC 505-50, Equity Based Payments to Non
Employees (ASC 505-50), with respect to options issued to non-employees.
The
fair value for options granted in 2009, 2010 and 2011 is estimated at the date
of grant using a Black-Scholes options pricing model with the following
weighted average assumptions:
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|
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|
|
|
|
|
Year ended
December 31,
|
Employee
stock options
|
|
2009
|
|
2010
|
|
2011
|
|
Volatility
|
|
82%
|
|
71%-73%
|
|
68%-70%
|
Risk-free interest rate
|
|
1.3%-1.6%
|
|
1.1%-1.6%
|
|
0.6%-2.1%
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Expected life (years)
|
|
3.35
|
|
3.7-4.6
|
|
3.6-4.8
|
Revenue recognition
We
derive revenues from sale of Anti-Spam, Anti-virus, Zero-Hour Virus Outbreak
Protection, GlobalView Mail Reputation, GlobalView URL filtering and Command
Antivirus services to OEM partners and enterprises. Revenue is recognized in
accordance with ASC 605, Revenue Recognition, when the earnings process is
complete, as evidenced by an agreement between the customer and the Company,
when services have been rendered, when the fee is fixed or determinable and
when collectability is probable. Revenues from such services are recognized
over the service term, which generally includes a term period of one to three
years.
Deferred
revenues include unearned amounts received from customers, but not yet
recognized as revenues.
Accounting for Income Tax
We
account for income taxes in accordance with FASB ASC 740,
Income Taxes.
ASC 740 prescribes the use
of the liability method whereby deferred tax assets 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. We record a valuation allowance, if necessary, to reduce deferred tax
assets to the amount that we believe is more likely than not to be realized.
Deferred
tax assets are classified as current or non-current based on the classification
of the related asset or liability for financial reporting, or according to the
expected reversal dates of the specific temporary differences if not related to
an asset or liability for financial reporting.
ASC
740 contains a two-step approach to recognizing and measuring a liability for
uncertain tax positions. 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 ASC
740.
16
Goodwill and Intangible assets
Goodwill
and certain other purchased intangible assets have been recorded as a result of
an acquisition made in 2010. Goodwill represents the excess of the purchase
price in a business combination over the fair value of net tangible and
intangible assets acquired. Goodwill is not amortized, but rather is subject to
an impairment test. The Company performs an annual impairment test at December
31 of each fiscal year, or more frequently if impairment indicators are
present. We operate in one operating segment, and this segment comprises the
only reporting unit.
ASC
350 prescribes a two-phase process for impairment testing of goodwill. The
first phase screens for impairment, while the second phase (if necessary) measures
impairment. Goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value determined using market
capitalization. In such case, the second phase is then performed, and the
Company measures impairment by comparing the carrying amount of the reporting
units goodwill to the implied fair value of that goodwill. An impairment loss
is recognized in an amount equal to the excess. For each of the two years in
the period ended December 31, 2011, no impairment losses have been identified.
Intangible
assets that are not considered to have an indefinite useful life are amortized
over their estimated useful lives, which range from 6 to 10 years. Acquired
customer contracts and relationships are amortized over their estimated useful
lives in proportion to the economic benefits realized. This accounting policy
results in accelerated amortization of such customer contracts and
relationships arrangements as compared to the straight-line method. Other
intangible assets consist primarily of technology, and are amortized over their
estimated useful lives on a straight-line basis.
The
carrying amount of these assets to be held and used is reviewed whenever events
or changes in circumstances indicate that the carrying value of an asset may
not be recoverable. Recoverability of these assets is measured by comparison of
the carrying amount of each asset (or asset group) to the future undiscounted
cash flows the asset (or asset group) is expected to generate. If the asset is
considered to be impaired, the amount of any impairment is measured as the
difference between the carrying value and the fair value of the impaired asset.
In
conjunction with the sale of the remaining business of Authentium to a third
party and the discontinuation of Authentium, in 2011, the Company wrote off the
remaining asset related to covenants not-to-compete in the amount of $502,
which was recorded in sales and marketing expenses.
Results of Operations
The
following table sets forth financial data for the years ended December 31,
2009, 2010 and 2011 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
15,189
|
|
$
|
18,161
|
|
$
|
23,016
|
|
Cost of revenues
|
|
|
2,260
|
|
|
2,918
|
|
|
4,091
|
|
Gross profit
|
|
|
12,929
|
|
|
15,243
|
|
|
18,925
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
2,958
|
|
|
3,397
|
|
|
5,410
|
|
Sales and marketing
|
|
|
4,212
|
|
|
4,575
|
|
|
5,486
|
|
General and administrative
|
|
|
3,063
|
|
|
3,911
|
|
|
4,721
|
|
Total operating expenses
|
|
|
10,233
|
|
|
10,883
|
|
|
15,617
|
|
Operating income
|
|
|
2,696
|
|
|
3,360
|
|
|
3,308
|
|
Financial income (expenses), net
|
|
|
60
|
|
|
(55
|
)
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income before tax benefit
|
|
|
2,756
|
|
|
3,305
|
|
|
3,281
|
|
Tax benefit
|
|
|
(2,404
|
)
|
|
(1,098
|
)
|
|
(1,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to ordinary and equivalently
participating shareholders
|
|
$
|
5,160
|
|
$
|
4,403
|
|
$
|
4,598
|
|
17
Comparison of Years Ended December 31, 2011 and 2010
Revenues
. Revenues increased by $4.8 million from $18.2 million in 2010 to
$23.0 million in 2011 which represent 27% increase. The increase is mainly due
to a growth in market share, increase in sales derived from our Web security
product launched in the fourth quarter of 2008 and sales of the Antivirus
product following the purchase of Command Antivirus on September 2010.
Cost of Revenues.
Cost of revenues increased by $1.2 million from $2.9 million in 2010
to $4.1 million in 2011 which represent 40% increase. The increase in 2011 is mainly
due to higher facility costs and hosting expenses aimed to serve the increasing
number of customers and the Command Antivirus expenses fully consolidated into
Commtouch.
Research and Development, net
. Research and development expenses increased
by $2 million and amounted to $5.4 million in 2011 compared to $3.4 million in
2010. The increase is mainly due to the related Command Antivirus expenses
being fully consolidated into Commtouch from September 2010. The increase in
our research and development expenses is also due to an OCS grant in 2010,
which reduced our payroll cost by $0.8 million, compared to $0 million in 2011.
Research and development expenses include $0.3 million of expenses in
connection with ASC 718. in 2011, compared to $0.3 million of expenses in
connection with equity based compensation in 2010.
Sales and Marketing
. Sales and marketing expenses increased by $0.9 million and amounted
to $5.5 million compared to $4.6 million in 2010. The increase is mainly due to
the impairment of the covenant -non-compete asset in the amount of $0.5
million, increased sales and marketing activity and the related Command
Antivirus expenses fully being consolidated into Commtouch from September 2010.
Sales and marketing expenses included $0.4 million expenses in connection with
ASC 718
General and Administrative
. General and administrative expenses
increased by $0.8 million, from $3.9 million in 2010 to $4.7 million in 2011.
The increase is mainly due to the update of the earnout liability in the amount
of $0.4 million in connection with the acquisition of the assets of the
Antivirus business of Authentium Inc. (now known as SafeCentral Inc.) The
contingent consideration is subject to adjustments upward or downward based on
the revenue derived from the purchased customer contracts and the related
Command Antivirus expenses fully being consolidated into Commtouch from
September 2010. In 2011, general and administrative expenses included $0.7
million expenses in connection with ASC 718, compared to $0.7 million of
expenses in connection with equity based compensation in 2010.
Financial Income (Expenses), Net
. Financial income (expenses), net, resulted
in expenses of $0.03 million in 2011 compared to expenses of $0.1 million in
2010.
Tax benefit.
Tax benefit increased by $219 from $1,098 in 2010 to $1,317 in 2011.
In 2011, the deferred tax asset increased by $1.4 million due to an increase in
forecasted taxable income that is more likely than not to be realized in the
foreseeable future, based on our established pattern of profitability in the
last few years.
Comparison of Years Ended December 31, 2010 and 2009
Revenues
. Revenues increased by $3.0 million from $15.2 million in 2009 to
$18.2 million in 2010. The increase is mainly due to a growth in market share,
especially in the Asian market, increase in sales derived from our Web security
product launched in the fourth quarter of 2008 and sales of the Antivirus
product following the purchase of Command Antivirus on September 2010.
Cost of Revenues.
Cost of revenues increased by $0.6 million from $2.3 million in 2009
to $2.9 million in 2010. The increase in 2010 is mainly due to higher facility
costs and hosting expenses aimed to serve the increasing number of customers
and the Command Antivirus expenses fully consolidated into Commtouch.
Research and Development, net
. Research and development expenses increased
by 15% and amounted to $3.4 million in 2010 compared to $3.0 million in 2009.
The increase is mainly due to the related Command Antivirus expenses being
fully consolidated into Commtouch from September 2010 and an increase due to
recruitment of additional employees to support the companys efforts to develop
new products. However, this increase was offset by an OCS grant in 2010, which
reduced our payroll cost by $0.8 million compared to only $0.3 million in 2009.
Research and development expenses include $0.3 million of expenses in
connection with ASC 718
Sales and Marketing
.
Sales and marketing expenses increased by 9% and amounted to $4.6 million compared
to $4.2 million in 2009. The increase is mainly due to recruitment of
employees, increased sales and marketing activity and the related Command
Antivirus expenses fully being consolidated into Commtouch from September 2010.
Sales and marketing expenses included $0.4 million expenses in connection with
ASC 718.
18
General and Administrative
. General and administrative expenses
increased by 28%, from $3.1 million in 2009 to $3.9 million in 2010. The
increase is mainly due to expenses incurred in connection with the acquisition
of Command Antivirus. In 2010, general and administrative expenses included
$0.7 million expenses in connection with ASC 718.
Financial Income (Expenses), Net
. Financial income (expenses), net, resulted
in expenses of $0.1 million in 2010 compared to income of $0.1 million in 2009.
The decrease is primarily due to a decrease in interest income in the Companys
cash deposits and exchange differences derived from the devaluation of the US
dollar against the NIS.
Taxes on income (tax benefit).
In 2009, a deferred tax asset in the amount
of $2.4 million in respect of loss carry forwards and other temporary differences was created in respect of
forecasted taxable income that is more likely than not to be realized in the
foreseeable future, based on our established pattern of profitability in the
last few years. In 2010, the deferred tax asset increased by $1.1 million due
to an increase in forecasted taxable income more likely than not to be realized
in the foreseeable future.
Quarterly Results of Operations (Unaudited)
The
following table sets forth certain unaudited quarterly statements of operations
data for the eight quarters ended December 31, 2011. This information has been
derived from the Companys consolidated unaudited financial statements, which,
in managements 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
|
|
June 30
|
|
Sep. 30
|
|
Dec. 31
|
|
Mar 31
|
|
June 30
|
|
Sep. 30
|
|
Dec. 31
|
|
|
|
2010
|
|
2010
|
|
2010
|
|
2010
|
|
2011
|
|
2011
|
|
2011
|
|
2011
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
4,079
|
|
|
4,104
|
|
|
4,601
|
|
|
5,377
|
|
|
5,515
|
|
|
5,696
|
|
|
5,855
|
|
|
5,950
|
|
Cost of revenues
|
|
|
609
|
|
|
652
|
|
|
753
|
|
|
904
|
|
|
1,010
|
|
|
938
|
|
|
1,019
|
|
|
1,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
3,470
|
|
|
3,452
|
|
|
3,848
|
|
|
4,473
|
|
|
4,505
|
|
|
4,758
|
|
|
4,836
|
|
|
4,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
810
|
|
|
561
|
|
|
824
|
|
|
1,202
|
|
|
1,247
|
|
|
1,377
|
|
|
1,342
|
|
|
1,444
|
|
Sales and marketing
|
|
|
1,062
|
|
|
1,024
|
|
|
1,100
|
|
|
1,389
|
|
|
1,391
|
|
|
1,318
|
|
|
1,138
|
|
|
1,639
|
|
General and administrative
|
|
|
792
|
|
|
873
|
|
|
1,054
|
|
|
1,192
|
|
|
893
|
|
|
1,004
|
|
|
1,209
|
|
|
1,615
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
2,664
|
|
|
2,458
|
|
|
2,978
|
|
|
3,783
|
|
|
3,531
|
|
|
3,699
|
|
|
3,689
|
|
|
4,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
806
|
|
|
994
|
|
|
870
|
|
|
690
|
|
|
974
|
|
|
1,059
|
|
|
1,147
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial income(expenses), net
|
|
|
(50
|
)
|
|
(12
|
)
|
|
59
|
|
|
(52
|
)
|
|
(14
|
)
|
|
(45
|
)
|
|
15
|
|
|
(23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
756
|
|
|
982
|
|
|
929
|
|
|
638
|
|
|
960
|
|
|
1,014
|
|
|
1,162
|
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes on income (tax benefit)
|
|
|
(38
|
)
|
|
97
|
|
|
(128
|
)
|
|
(1,029
|
)
|
|
(61
|
)
|
|
(401
|
)
|
|
275
|
|
|
(1,170
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to
ordinary and equivalently participating shareholders
|
|
|
794
|
|
|
885
|
|
|
1,057
|
|
|
1,667
|
|
|
1,021
|
|
|
1,415
|
|
|
887
|
|
|
1,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share
|
|
$
|
0.03
|
|
$
|
0.04
|
|
$
|
0.05
|
|
$
|
0.07
|
|
$
|
0.04
|
|
$
|
0.06
|
|
$
|
0.04
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per share
|
|
$
|
0.03
|
|
$
|
0.04
|
|
$
|
0.05
|
|
$
|
0.07
|
|
$
|
0.04
|
|
$
|
0.06
|
|
$
|
0.04
|
|
$
|
0.05
|
|
19
New Accounting Pronouncements
In
June 2011, the FASB issued an amendment to an existing accounting standard
which requires companies to present net income and other comprehensive income
in one continuous statement or in two separate, but consecutive, statements. In
addition, in December 2011, the FASB issued an amendment to an existing
accounting standard which defers the requirement to present components of
reclassifications of other comprehensive income on the face of the income
statement. The Companys adoption of both standards is not expected to have an
impact on the Companys consolidated financial statements.
In
September 2011, the FASB issued an amendment to an existing accounting
standard, which provides entities an option to perform a qualitative assessment
to determine whether further impairment testing on goodwill is necessary.
Specifically, an entity has the option to first assess qualitative factors to
determine whether it is necessary to perform the current two-step test. If an
entity believes, as a result of its qualitative assessment, that it is
more-likely-than-not that the fair value of a reporting unit is less than its
carrying amount, the quantitative impairment test is required. Otherwise, no
further testing is required. This standard is effective for annual and interim
goodwill impairment tests performed for fiscal years beginning after December
15, 2011. The Companys adoption of this standard is not expected to have a
material impact on the Companys financial statements and disclosures.
In
May 2011, the FASB issued a new accounting standard update, which amends the
fair value measurement guidance and includes some enhanced disclosure
requirements. The most significant change in disclosures is an expansion of the
information required for Level 3 measurements based on unobservable inputs. The
standard is effective for fiscal years beginning after December 15, 2011. The
Companys adoption of this standard is not expected to have a material impact
on the Companys financial statements and disclosures.
Liquidity and Capital Resources
1
We
have financed our operations from positive operating cash flows, the issuance
of equity securities and, to a lesser extent, from research and development
grants from the Israeli government.
As
of December 31, 2010 and December 31, 2011, we had approximately $13.4 million
and $20.9 million of cash and cash equivalents, respectively. The increase was
mainly due to the positive operating cash flow of $6.7 million and cash flows
from financing activities primarily consisting of receipt of proceeds from the
exercise of options in the amount of $1.3 million.
In
2011, net cash provided by operating activities was approximately $6.7 million.
Net cash provided by financing activities in 2011 was approximately $1.3
million. Net cash used in investing activities in 2011 was $0.5 million and
consisted primarily of the purchase of property and equipment. As of December
31, 2010 and December 31, 2011, we had working capital of $13.6 million and
$17.3 million, respectively.
Based
on the cash balance at December 31, 2011, current projections of revenues and
related expenses, the Company believes it has sufficient cash to continue
operations at least through May 2013.
The
contingent consideration related to the acquisition of the assets of the antivirus
business of Authentium Inc. (now known as SafeCentral Inc.) is subject to
adjustments upward or downward based on the revenue derived from the purchased
customer contracts. In connection with this contingent earn-out consideration,
the Company recorded an estimated amount of $2,831 as of the acquisition date.
As of December 31, 2011, the fair value of the contingent consideration of
$3,372 is presented in short term liabilities.
Contractual obligations
The
following table summarizes our outstanding contractual obligations as of
December 31, 2011 (in thousands):
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
622
|
|
$
|
523
|
|
$
|
99
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Long-term liabilities reflected on the Companys Balance Sheet
- Accrued severance pay
|
|
|
1,192
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1,192
|
|
Other Long-term asset reflected on the Companys Balance Sheet -
severance pay fund
|
|
|
(1,031
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,031
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net - severance pay liability
|
|
|
161
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnout obligation
|
|
|
3,372
|
|
|
3,372
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,155
|
|
$
|
3,895
|
|
$
|
99
|
|
$
|
-
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective Corporate Tax Rates
Israeli
companies were subject to corporate tax at the rate of 24% of their taxable
income in 2011. On December 5, 2011, the Israeli Parliament (the Knesset)
passed the Law for Tax Burden Reform (Legislative Amendments), 2011 which,
among others, cancels effective from 2012, the scheduled progressive reduction
in the corporate tax rate, and increases the corporate tax rate to 25% in 2012
and subsequent years.
As of December 31, 2011, the
Companys net operating loss carry forwards for tax purposes amounted to
approximately $ 70 million (including capital loss carry forward of $ 15 million), which
may be carried forward and offset against taxable income in the future, for an
indefinite period.
As of December 31, 2011, for federal
income tax purposes, the U.S. subsidiary had net operating loss carry-forwards
of approximately $ 91 million. These losses may offset any future U.S.
taxable income of the U.S. subsidiary and will expire in the years 2012 through
2025.
Utilization of U.S. net operating losses may be subject to substantial
annual limitation due to a change in ownership under provisions of the
Internal Revenue Code of 1986 and similar state provisions. Such limitation might
result in the loss of some or all of our U.S. net operating losses.
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 relate 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,
21
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 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 deflation in Israel was 4% in 2011, and 2.7% in 2010
and 3.9% in 2009. The NIS appreciated against the U.S. dollar by approximately
8% in 2011, 6.0% in 2010 and 0.7% in 2009. The representative dollar exchange
rate for converting the NIS to U.S. dollars, as reported by the Bank of Israel,
was NIS 3.8210 for one U.S. dollar on December 31, 2011. The representative
dollar exchange rate was NIS 3.7490 on March 20, 2012. 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 periodtoperiod comparisons of our results. The effects
of foreign currency remeasurements 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, 2011. 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 24,093,617
Ordinary Shares outstanding as of December, 2011. Ordinary Shares issuable upon
the exercise of options and other rights, which are exercisable on or within
sixty days of December 31, 2011, 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lior Samuelson, Director and Chairman of the Board
|
|
|
62
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviv Raiz, Director (1)
|
|
|
53
|
|
|
23%
|
|
|
5,552,740
|
|
|
66,871
options, at exercise prices ranging from $1.58 to $6.60 per Ordinary Share.
Expiration dates range from 12/15/12 to 12/15/17.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hila Karah, Director(1)(3)
|
|
|
43
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lloyd E. Shefsky,
Director(2)(3)
|
|
|
71
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yair Shamir, Director
(Outside Director) (2)(3)(4)
|
|
|
67
|
|
|
5.6%
|
|
|
1,344,435
|
|
|
80,412 options, at exercise prices ranging
from $1.58 to $4.10. Expiration dates range from 3/31/14 to 12/15/17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Yair Bar-Touv, Director
(Outside Director) (1)(2)
|
|
|
51
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Todd Thomson
|
|
|
51
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James Hamilton(5)
|
|
|
48
|
|
|
<1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
(1)
|
Member of
the Compensation Committee
|
|
|
(2)
|
Member of
the Audit Committee
|
|
|
(3)
|
Member of
the Nominating Committee
|
|
|
(4)
|
Mr. Shamirs ownership interest includes 1,264,023 of the Companys
Ordinary Shares purchased by Catalyst Private Equity Partners II, for which
Mr. Shamir acts as Chairman and Managing Partner. Mr. Shamirs options, as
noted in the table above, are also held on behalf of Catalyst.
|
|
|
(5)
|
Mr. Hamilton
joined the Board of Directors in February 2012.
|
Other Senior Management Employees:
The following table sets forth the names and positions of our senior
management employees, with ownership data being as of December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
|
Age
|
|
Ownership
>1%
|
|
|
Position
|
|
Shlomi Yanai(3)
|
|
41
|
|
(1)
|
|
Chief Executive Officer
|
Amir Lev(3)
|
|
52
|
|
3.2%(2)
|
|
President and Chief Technology Officer
|
Ron Ela(3)
|
|
41
|
|
(1)
|
|
Chief Financial Officer
|
Gary Davis
|
|
50
|
|
(1)
|
|
Vice President, General Counsel and
Corporate Secretary
|
Amos Arev
|
|
45
|
|
(1)
|
|
Vice President, Research & Development
Commtouch Software Ltd.
|
|
|
|
|
|
|
|
Francois Depayras
|
|
38
|
|
(1)
|
|
Vice President, Americas Sales and Business
Development, Commtouch Inc.
|
Ofer Tal
|
|
40
|
|
(1)
|
|
Vice President, International Sales and
Business Development, Commtouch Software Ltd.
|
Yossi Maslaton
|
|
44
|
|
(1)
|
|
Vice President, Network Operations &
Customer Services, Commtouch Inc.
|
Asaf Greiner
|
|
37
|
|
(1)
|
|
Vice President, Products, Commtouch
Software Ltd.
|
Rebecca Herson
|
|
41
|
|
(1)
|
|
Vice President, Marketing, Commtouch
Software Ltd.
|
Gabriel Mizrahi
|
|
37
|
|
(1)
|
|
Vice President, Technologies, Commtouch
Software Ltd.
|
Helmuth Freericks
|
|
58
|
|
(1)
|
|
General Manager Anti-Malware Solutions,
Commtouch Inc.
|
Michael Myshrall
|
|
42
|
|
(1)
|
|
Vice President, Corporate Development,
Commtouch Inc.
|
23
|
|
|
|
(1)
|
less than 1%
|
|
|
|
|
(2)
|
includes 628,672 options, at exercise
prices ranging from $0.36 to $6.60 per Ordinary Share. Expiration dates range
from 11/18/12 to 8/4/15.
|
|
|
|
|
(3)
|
Executive Officer for purposes of
aggregating compensation and share ownership of major shareholders, directors
and executive officers
|
Lior Samuelson has been a member of the Board since August 2010 and
Chairman since December 2010. Mr. Samuelson is the founder and managing partner
of Mercator Capital, a merchant bank specializing in advising and investing in
the technology and telecom sectors. During his extensive career, Mr. Samuelson
served as chairman, CEO and board member of several companies in technology,
telecom, financial services and management consulting. In 2008, he was the
chairman of Deltathree (DDDC); from 1997 to 1999, he was the president and CEO
of PricewaterhouseCoopers Securities. Prior to that, he was the president and
CEO of The Barents Group, a merchant bank specializing in advising and
investing in companies in emerging markets. He previously was a managing
partner with KPMG and held a senior management position at Booz, Allen &
Hamilton. Mr. Samuelson earned B.S. and M.S. degrees in Economics from Virginia
Tech.
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.
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
B.A. 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 and a B.Sc. from De Paul
University (accounting). He 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
24
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).
Todd Thomson joined the Board of Directors in November 2011. Mr. Thomson is Chairman of Dynasty
Financial Partners, a firm dedicated to providing investment and technology
platforms to independent advisors. Mr. Thomson is also Founder & CEO of
Headwaters Capital, a proprietary investment business and strategic consulting
firm. From 1998 through 2007, Mr. Thomson served in top management positions at
Citigroup, including CFO of the company and CEO of the Global Wealth Management
division. Prior to joining Citigroup, Mr. Thomson held senior positions at GE
Capital, Barents Group and Bain & Co. Mr. Thomson is also a member of the
Board of Directors of Cordia Bancorp, Bank of Virginia and the World Resources
Institute. Mr. Thomson is Chairman of the Wharton Leadership Advisory Board and
is also a past member of the Board of Trustees of Davidson College. Mr. Thomson
received his M.B.A., with distinction, from the Wharton School of Business and
his B.A. in Economics from Davidson College.
James Hamilton joined the Board of Directors in February 2012. Mr.
Hamilton has been in the technology industry for 26 years and is currently CEO
of a professional services and consulting company based in Houston named CPSG
Partners. During the past eleven years, he has been providing services to
security-focused companies, including TippingPoint, Inc., where he served as
President and CEO. [TippingPoint was acquired by 3Com in January of 2005.] The
company was an industry-leading provider of network-based Intrusion Prevention
Systems. Mr. Hamilton also spent two years at SafeNet as EVP of Corporate
Development, leading M&A and Strategic Alliances. Additionally, he served
as President and CEO of Efficient Networks (acquired by Siemens, Inc. in 2001),
after running both global sales and product teams as COO, and also held
executive positions with Picazo Communications (acquired by Intel in 1998),
Compaq, Networth (acquired by Compaq in 1995), 3Com and Grid Systems. Mr.
Hamilton graduated with a Bachelor of Science from Lawrence Technical
University.
Shlomi Yanai became the CEO of Commtouch in October 2011, bringing over
two decades of experience in the information security industry. He was
previously the vice president of corporate development strategy at SafeNet, a
global leader in information security, where he led SafeNets strategic
decisions regarding product and solution partnerships, as well as mergers and
acquisitions. Mr. Yanai also served as the vice president for the
rapidly-growing authentication business unit and award-winning two-factor
authentication solutions at SafeNet, Inc. and Aladdin Knowledge Systems, which
merged with SafeNet. Prior to Aladdin, Mr. Yanai managed the product team of
BMC Softwares security division, specializing in identity and password
management systems. Mr. Yanai holds a B.Sc. in mathematics and computer science
and an M.B.A from Ben Gurion University in Israel.
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 he became President. Mr. Lev received a B.A. in Computer Science
and Economics from Hebrew University, Jerusalem. In December 2011, Amir Lev
completed his service to the board of directors, and during 2012, he will be
winding down his activities as CTO and President of Commtouch.
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 whollyowned 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.
Gary Davis joined Commtouch in September 1999 and he currently serves
as Vice President, General Counsel and Corporate Secretary. Mr. Davis has over
25 years of legal experience in both private law firm and corporate practices.
25
Mr. Davis is certified to practice law in both the State of Israel and
California. Prior to September 1999, Mr. Davis was inhouse 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.
Francois Depayras re-joined Commtouch in 2010 as Vice President,
Americas Sales and Business Development. Mr. Depayras has over a decade of
experience in the messaging market, from leadership roles at Critical Path and
Ensim as well as his prior affiliation with Commtouch. At Critical Path, Mr.
Depayras served as Senior Product Manager, responsible for the development of a
hosted email solution targeting large enterprises. He then served as Vice
President of Sales and Alliances at Ensim, where he was responsible for
managing worldwide sales of user provisioning software solutions targeting both
service providers and enterprises, and managed relationships with strategic
partners. Prior to these positions, Mr. Depayras worked at Commtouch for four
years in a variety of roles, his last post being Director of Business
Development. He holds an MBA from San Francisco State University.
Ofer Tal joined Commtouch in 2009 as Vice President, International
Sales & Business Development. Mr. Tal is an experienced business
development & sales executive with nearly a decade of global experience in
technology solutions across EMEA. Most recently prior to Commtouch, he served
as Senior Director of Channel Sales and then Director of Sales, SEMEA at
GigaSpaces Technologies. Prior to GigaSpaces, he held various senior business
development and sales positions at Interwise, an enterprise voice and web
conferencing provider that was acquired by AT&T. He holds an LL.B from the
University of Tel Aviv School of Law.
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 Commtouchs 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,
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. Mr. Greiner will be leaving Commtouch in
mid-2012.
Rebecca Steinberg Herson joined Commtouch in April 2006 as Director of
Marketing. Currently, she serves as Vice President, Marketing, orchestrating
the companys 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. Ms. Steinberg will be leaving Commtouch in
early 2012.
Gabriel Mizrahi joined Commtouch in 2008 and he serves as Vice
President, Technologies. Prior to Commtouch, Mr. Mizrahi co-founded and served
as CTO of PineApp, a global messaging and Web security company that utilizes
Commtouchs technology. Prior to PineApp, Mr. Mizrahi was a Project Manager in
a large integration company, where he led Unix and Linux projects in the field
of Internet Security & Networking. He has extensive technical knowledge and
experience in tailor-made solutions and complex technology integration, and
received a prestigious award from the Chief of Electronics and Computers of the
Israel Defense Force for designing, developing and implementing a logistics and
technical management system. Mr. Mizrahi holds a technical degree in
electronics from Ort College.
26
Helmuth Freericks joined Commtouch in September 2010 with the
acquisition of the Command division of Authentium, Inc., and serves as General
Manager Anti-Malware Solutions. Mr. Freericks is an industry pioneer in the
anti-malware field, having co-founded one of the earliest antivirus companies -
Command Software - in 1984, long before computers were ubiquitous, and before
computer viruses were a household concept. At Command, Mr. Freericks served in
various executive roles over the years, starting as Vice President of Research
and Development and Chief Technology Officer, and finally as CEO before the
company was acquired by Authentium in 2002. While at Authentium, he served as
CEO of Global Risc, an Authentium subsidiary, and later as CTO and then Chief
Science officer at Authentium.
Amos Arev joined Commtouch in April 2011 as Vice President of Research
& Development. Mr. Arev has over 20 years of software development
management experience and has spent over half of his career specializing in IT
security. Prior to joining Commtouch, Mr. Arev was VP R&D of Skybox
Security, a provider of automated security risk management solutions. Prior to
Skybox Security, Mr. Arev held several R&D management positions at Check
Point Software and at Comverse Network Systems. Mr. Arev holds a Master of
Science in Electrical Engineering from Tel-Aviv University and a Bachelor of
Science in Electrical Engineering from the Technion, Israel Institute of
Technology, both cum laude.
Michael Myshrall joined Commtouch in January 2011 as Vice President,
Corporate Development. He brings to Commtouch two decades of investment banking,
business development and technology experience. Prior to joining Commtouch, he
focused on technology strategy, financial advisory and mergers and
acquisitions, first with Mercator Capital and more recently with Trilos
Ventures. Mr. Myshrall previously held various roles in business development,
marketing, and engineering within companies such as Nortel, Newbridge Networks,
Corvis, and Civcom. Mr. Myshrall holds a degree in Electrical Engineering from
the University of New Brunswick and an MBA from Harvard Business School.
To the best of our knowledge, there no arrangements or understandings
with major shareholders, customers, suppliers or others pursuant to which any
person referred to above was selected as a director or member of senior
management.
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 eight 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, and a person who is
not qualified to be appointed as an outside or independent director may not be
appointed as an alternate director for an outside or independent director,
respectively. 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. No director has appointed, and, to our
knowledge, no director currently intends to appoint, any other person as an
alternate director.
27
Chairman of the Board
Under the Companies Law, the general manager of a company (or a
relative of the general manager) may not serve as the chairman of the board of
directors, and the chairman of the board of directors (or a relative of the
chairman of the board of directors) may not serve as the general manager,
unless approved by the shareholders by a special majority vote prescribed by
the Companies Law. In any event, the shareholder vote cannot authorize the
appointment for a period longer than three years, which period may be extended
from time to time by the shareholders with a similar special majority vote. The
chairman of the board of directors shall not hold any other position with the
company (except as general manager if approved in accordance with the above
procedure) or in any entity controlled by the company, other than as chairman
of the board of directors of a controlled entity, and the company shall not
delegate to the chairman duties that, directly or indirectly, make him or her
subordinate to the general manager.
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 persons relative, partner, employer or any entity under the
persons control has or had, on or within the two years preceding the date of the
persons 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:
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an
employment relationship;
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a business
or professional relationship maintained on a regular basis;
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control; and
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service as
an office holder.
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No person may serve as an outside director if the persons position or
other business activities create, or may create, a conflict of interest with
the persons responsibilities as an outside director or may otherwise interfere
with the persons 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 Listing 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:
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such majority includes a majority of the shares held by
noncontrolling shareholders and shareholders who have no personal interest
in the election of the outside directors (excluding a personal interest that
is not related to a relationship with the controlling shareholders) who are
present and voting at the meeting; or
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the total number of shares held by noncontrolling shareholders and
disinterested shareholders voting against the election of the director at the
meeting does not exceed two percent of the aggregate voting rights in the
company.
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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 companys 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 Companys outside
directors.
In addition, the NASDAQ Listing Rules currently require Commtouch to
have at least a majority of independent directors, as defined under Listing
Rule 5605(a)(2), on the Board of Directors and to maintain an audit committee
of at least three members, each of whom must:
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(i)
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be independent as defined under Listing Rule 5605(a)(2);
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(ii)
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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));
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(iii)
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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
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(iv)
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be able to read and understand fundamental financial statements,
including a companys balance sheet, income statement and cash flow
statement.
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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 rules 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 individuals financial sophistication, including being or having been a
chief executive officer, chief financial officer or other senior officer with
financial oversight responsibilities. Also, the Company is required to disclose
whether or not it has an audit committee financial expert on its audit
committee, as defined under Item 16A to Form 20-F.
The three directors who serve on our audit committee, Mr. Shamir, Mr.
Bar-Touv and Mr. Shefsky, qualify as independent directors under NASDAQ Listing
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 Listing Rule 5605(a)(2):
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a.
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Yair
Bar-Touv
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b.
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Yair Shamir
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c.
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Aviv Raiz
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d.
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Hila Karah
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e.
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Lloyd
Shefsky
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f.
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Todd Thomson
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g.
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James
Hamilton
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Pursuant 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 (or a third
of its Board of Directors in case the company has a controlling shareholder)
will constitute individuals complying with certain independence criteria
prescribed by the Israel Companies Law, as well as certain other recommended
corporate governance provisions. 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 audit committees
duties include providing assistance to the board of directors in fulfilling its
legal and fiduciary obligations in matters involving our accounting, auditing,
financial reporting, internal control and legal compliance functions. In this
respect the audit committee approves the services
29
performed by our independent registered public accounting firm and
reviews their reports regarding our accounting practices and systems of
internal accounting controls. The audit committee also oversees the audits
conducted by our independent registered public accounting firm and takes those
actions as it deems necessary to satisfy itself that the accountants are
independent of management. Under the Israeli Companies Law, the audit committee
also is required to monitor whether there are any deficiencies in the
administration of our company, including by consulting with the internal
auditor and independent registered public accounting firm, to review, classify
and approve related party transactions and extraordinary transactions, to
review the internal auditors audit plan and to establish and monitor
whistleblower procedures. An audit committee must consist of at least three
directors meeting the independence standards under NASDAQ Listing Rules and
must include all outside directors under the Israel Companies Law, all as
described above. One of the outside directors must serve as the chair of the
audit committee. Furthermore, under the Israel Companies Law, the audit
committee may not include the chairman of the board, or any director employed
by the Company, by a controlling shareholder or by any entity controlled by a controlling
shareholder, or any director providing services to us, to a controlling
shareholder or to any entity controlled by a controlling shareholder on a
regular basis, or any director whose income is primarily dependent on a
controlling shareholder, and may not include a controlling shareholder or any
relatives of a controlling shareholder. Under the Companies Law, a meeting of
the audit committee is properly convened if a majority of the committee members
attend the meeting, and in addition a majority of the attending committee
members are independent directors within the meaning of the Companies Law and
include at least one outside director. Individuals who are not permitted to be
audit committee members may not participate in the committees meetings other
than to make a presentation regarding a particular issue. However, an employee
who is not a controlling shareholder or relative may participate in the
committees discussions but not in any vote, and the companys legal counsel
and corporate secretary may participate in the committees discussions and
votes if requested by the committee.
Compensation Committee
The Compensation Committee is responsible for determining salaries,
incentives and other forms of compensation for Commtouchs 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 committees responsibilities include identifying individuals
qualified to become board members and recommending director nominees to the
board.
Investment Committee
The committees responsibilities include identifying appropriate
investment vehicles for the cash reserves of the Company and recommending to
the board appropriate investment policy from time to time. As of the date of
filing of this annual report, the committee had not yet been reconstituted.
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 companys 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 companys independent accountant or its representative
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 holders 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 holders position in the
company and such persons 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 companys affairs which
the office holder has received due to his or her position as an office holder.
A company
30
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. A director is required to exercise independent
discretion in fulfilling his or her duties and may not be party to a voting agreement
with respect to his or her vote as a director. A violation of these
requirements is deemed a breach of the directors duty of loyalty.
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 audit committee
and the Board of Directors. The approval of the compensation committee may be
substituted for the approval of the audit committee, provided the compensation
committee complies with all the requirements prescribed by the Companies Law
regarding composition of the audit committee. If the compensation arrangement
is an immaterial amendment to an existing compensation arrangement of an
officer who is not a director, the approval of the audit committee without
Board approval is sufficient. Arrangements regarding the compensation of
directors require audit committee, Board of Directors 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, and includes shares for which the person has the right to vote
pursuant to a power-of-attorney. 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 companys 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 companys profitability, assets or liabilities, and a relative as a
spouse, sibling, parent, grandparent or descendant, and the sibling, parent or
descendant of a spouse, as well as the spouse of any of the foregoing.
In the case of a transaction that is not an extraordinary transaction
and that does not relate to compensation or terms of employment, 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 companys 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 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, or if such person is
invited by the Chairman of the Board of Directors or audit committee, as
applicable, to present the matter being considered. 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 (including for the provision of services to
the company through a company controlled by a controlling shareholder), 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 a
majority of the non-controlling and disinterested shareholders who are present,
in person or by proxy, at the meeting or, alternatively, the total
31
shareholdings of the non-controlling and disinterested shareholders who
vote against the transaction must not represent more than two percent of the
voting rights in the company. Generally, the approval of such a transaction may not extend
for more than three years, except that in the case of an extraordinary
transaction with a controlling shareholder or in which a controlling
shareholder has a personal interest that does not concern terms of compensation
for service as an office holder, or as a service provider to the company, the
transaction may be approved for a longer period if the audit committee
determines that the approval of the transaction for a period longer than three
years is reasonable under the circumstances.
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:
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any
amendment to the Articles of Association;
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an increase
of the companys authorized share capital;
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a merger; or
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approval of
interested party transactions that require shareholder approval.
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In addition, any controlling shareholder, any shareholder who can
determine the outcome of a shareholder vote and any shareholder who, under the
companys Articles of Association, can appoint or prevent the appointment of an
office holder, are 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 arbitrators decision, confirmed by a court, (b)
reasonable legal costs, including attorneys 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, (c) legal expenses (including attorneys
fees) incurred by an office holder in an administrative enforcement proceeding
and any compensation payable to injured parties for damages suffered by them as
determined in the proceeding (up to a maximum of 20% of the fine imposed on the
violating party) and (d) reasonable litigation expenses, including legal fees,
actually incurred by such an 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 companys 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 companys 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
32
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 last amended at the annual meeting of
shareholders held on December 15, 2011.
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 Commtouchs 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:
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a.
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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
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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.
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c.
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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.
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Directors also are reimbursed for their expenses for each Board of
Directors meeting attended. See in this item 6, Amended and Restated 1999
Non-employee Directors Stock Option Plan for a discussion of director compensation
in the form of option grants. During 2011, options to purchase 150,000 Ordinary
Shares were granted to directors and executive officers under the Companys
stock option plans at a weighted average exercise price of $3.47 per share. The
aggregate direct remuneration paid by Commtouch to all directors and executive
officers (10 persons) in 2011 was approximately $1,021,000. During the same
period Commtouch accrued or set aside approximately $103,000 for the same group
to provide pension, retirement or similar benefits. As of December 31, 2011,
directors and executive officers of Commtouch (10 persons) held an aggregate of
2,527,752 stock options to purchase a like number of Ordinary Shares, with
1,326,767 of those options being vested and exercisable within sixty days of
said date.
At the meeting of shareholders in December 2010, shareholders approved
the payment to Hila Karah of up to $10,000 annually for the performance of any
additional services, as agreed upon by Ms. Karah and the Company on a case by
case basis. During 2011, Ms. Karah received a total of $2,500 for her
additional services as a director.
Options to Purchase Securities from
Registrant or Subsidiaries
As of December 31, 2011, options to purchase 5,141,065 Ordinary Shares
were outstanding and held by 83 persons made up of then existing employees,
consultants, executive officers and nonemployee directors under the Companys
stock option plans, and there were 2,366,082 shares available for grant under
all plans. Of the number of options outstanding, 3,037,131 were vested and
exercisable. Additionally, these outstanding options had exercise prices
ranging from $0.33 to $6.60 per share, a weighted average per share exercise
price of approximately $3.1 and termination dates ranging from January 2, 2012
to December 15, 2017.
Employee Stock Option Plans
Employees, including executive officers and other management employees,
participate in the Companys employee option plans. The Commtouch Software Ltd.
2006 U.S. Stock Option Plan, primarily covering option grants to
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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 option
grants 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 NonEmployee
Directors Stock Option Plan
New non-employee directors are currently entitled to an initial grant
of 50,000 options pursuant to the Amended and Restated 1999 Non-Employee
Directors Stock Option Plan, or the Non-Employee Directors Plan. Non-employee
directors who are re-elected at the annual meeting of shareholders are entitled
to additional grants of 16,667 options, though at the annual meeting held
October 26, 2009 shareholders approved a one-time increase in the grants to
re-elected directors to 30,000 options.
The NonEmployee 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
our Ordinary Shares on the grant date of such option. Options granted through
2004 had a maximum term of ten years, but would terminate earlier if the option
holder ceased to be a member of the Board of Directors. Options granted to
directors during 2005 - 2011 generally 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.
Information on the CompanyEmployees.
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, 2011, including:
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each person or entity known to Commtouch to own beneficially more
than five percent of Commtouchs Ordinary Shares, and
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all
executive officers and directors as a group.
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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 24,093,617 Ordinary Shares outstanding as of December 31, 2011.
Ordinary Shares issuable upon exercise of options, which are exercisable on or
within sixty days of December 31, 2011, are deemed outstanding for the purpose
of computing the percentage ownership of the person holding those options for
all directors and executive officers as a
34
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.
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MAJOR
SHAREHOLDERS OF ORDINARY SHARES
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Amount
Owned
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Percent of
Class
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Aviv Raiz*
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5,552,740
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**
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23
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%
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Catalyst
Private Equity Partners II LP
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1,344,435
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***
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5.6
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%
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All
directors and executive officers as a group at 12/31/11 (10 persons)
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8,341,142
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****
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32.8
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%
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*This
shareholder of record resides in Israel. With respect to Catalyst Private
Equity Partners II LP, the Chairman and Managing Partner of this limited
partnership, Mr. Yair Shamir a director in the Company - resides in Israel.
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**Includes 66,871 options, exercisable into a
like number of Ordinary Shares.
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***Includes
80,412 options exercisable into a like number of Ordinary Shares.
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****Includes
1,326,767 options exercisable into a like number of Ordinary Shares.
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Based on a review of the information provided to us by our transfer
agent, as of December 31, 2011, there were 62 holders of record of our Ordinary
Shares, including 41 holders of record residing in the United States holding
20,633,188 Ordinary Shares, or approximately 86% of the aggregate 24,093,617
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 85% of our
outstanding Ordinary Shares as of such date on behalf of approximately 85
brokers and banks).
Significant Changes in Percentage Ownership
of Major Shareholders During the Past Three Years
None
Interest of Management and their Family
Members in Certain Transactions
There were no
related party transactions, as such term if defined in Item 7.B to Form 20-F,
during 2011 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. However, the Company has not adopted a
policy not to pay cash dividends and therefore may declare a dividend in the
future. The Companys current plans are to retain future earnings primarily to
finance the development of its business and for other corporate purposes.
While we have brought a few relatively minor lawsuits for collection
actions, we are not a direct 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. As noted under Item 3. Key Information Risk Factors,
one customer has made an indemnification demand on us during the past year as a
result of patent infringement actions brought against that customer and other
defendants. We continue to cooperate with that customer in seeking to defeat
the underlying patent infringement claims. While we believe that adequate
non-infringement and/or invalidity arguments exist, it is too early in the
proceedings to anticipate the outcome of this matter.
Except as
otherwise disclosed in this Annual Report, there has been no material change in
our financial position since December 31, 2011.
35
Item 9. The Offer and Listing.
The Companys
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.
|
Since December 16, 2009, the Companys Ordinary Shares have also been
traded on the Tel Aviv Stock Exchange, or TASE, under the symbol CTCH.
The following table lists the high and low closing sales prices for the
Companys Ordinary Shares on the NASDAQ Capital Market for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
|
|
2007:
|
|
$
|
7.44
|
|
$
|
3.69
|
|
2008:
|
|
$
|
6.22
|
|
$
|
1.50
|
|
2009:
|
|
$
|
4.30
|
|
$
|
1.57
|
|
2010:
|
|
$
|
3.90
|
|
$
|
1.35
|
|
2011:
|
|
$
|
3.98
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
2010:
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
4.30
|
|
$
|
3.70
|
|
Second
Quarter
|
|
$
|
4.13
|
|
$
|
2.96
|
|
Third
Quarter
|
|
$
|
3.90
|
|
$
|
2.85
|
|
Fourth
Quarter
|
|
$
|
2.50
|
|
$
|
1.50
|
|
|
|
|
|
|
|
|
|
2011:
|
|
|
|
|
|
|
|
First
Quarter
|
|
$
|
3.98
|
|
$
|
3.23
|
|
Second
Quarter
|
|
$
|
3.59
|
|
$
|
3.20
|
|
Third
Quarter
|
|
$
|
3.66
|
|
$
|
2.95
|
|
Fourth
Quarter
|
|
$
|
3.60
|
|
$
|
2.93
|
|
|
|
|
|
|
|
|
|
Most Recent
Six Months:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
2011
|
|
$
|
3.37
|
|
$
|
2.95
|
|
October 2011
|
|
$
|
3.50
|
|
$
|
2.93
|
|
November
2011
|
|
$
|
3.55
|
|
$
|
3.36
|
|
December
2011
|
|
$
|
3.60
|
|
$
|
3.25
|
|
January 2012
|
|
$
|
3.40
|
|
$
|
3.30
|
|
February
2012
|
|
$
|
3.40
|
|
$
|
3.05
|
|
36
The following
table lists the high and low closing sales prices for the Companys Ordinary
Shares on the TASE for the periods indicated. Share prices on the TASE are quoted in NIS:
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
2010:
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
NIS 16.19
|
|
|
NIS 13.64
|
|
Second
Quarter
|
|
|
NIS 15.10
|
|
|
NIS 11.50
|
|
Third
Quarter
|
|
|
NIS 14.90
|
|
|
NIS 11.00
|
|
Fourth
Quarter
|
|
|
NIS 14.33
|
|
|
NIS 12.04
|
|
|
|
|
|
|
|
|
|
2011:
|
|
|
|
|
|
|
|
First
Quarter
|
|
|
NIS 14.47
|
|
|
NIS 11.87
|
|
Second
Quarter
|
|
|
NIS 12.50
|
|
|
NIS 10.97
|
|
Third
Quarter
|
|
|
NIS 12.81
|
|
|
NIS 10.75
|
|
Fourth
Quarter
|
|
|
NIS 13.82
|
|
|
NIS 11.48
|
|
|
|
|
|
|
|
|
|
Most Recent
Six Months
|
|
|
|
|
|
|
|
September
2011
|
|
|
NIS 11.88
|
|
|
NIS 10.75
|
|
October 2011
|
|
|
NIS 12.66
|
|
|
NIS 11.48
|
|
November
2011
|
|
|
NIS 13.65
|
|
|
NIS 12.49
|
|
December
2011
|
|
|
NIS 13.82
|
|
|
NIS 12.18
|
|
January 2012
|
|
|
NIS 13.55
|
|
|
NIS 12.38
|
|
February
2012
|
|
|
NIS 12.63
|
|
|
NIS 11.37
|
|
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, 2011, our authorized share capital consisted of
55,353,340 Ordinary Shares, NIS 0.15 par value. As of December 31, 2011, there
were 24,093,617 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 non-assessable.
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 nonresidents 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
37
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 nonIsraeli currencies (including U.S. dollars) will be freely
repatriated 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.
Pursuant to Israels securities laws, a company registering its shares
for trade on the Tel Aviv Stock Exchange may not have more than one class of
shares for a period of one year following registration, after which it is
permitted to issue preferred shares, if the preference of those shares is
limited to a preference in the distribution of dividends and these preferred
shares have no voting rights.
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. Rule 5620(c) to Nasdaq Listing Rules
requires that an issuer listed on Nasdaq should have a quorum requirement that
in no case be less than 33 1/3% of the outstanding shares of the companys
common voting stock. However, as mentioned above, our articles of association,
consistent with the Companies Law, provides for a lower quorum requirement at
an adjourned meeting.
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 a majority 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 Companys controlling
shareholders or interested parties in the matter to be voted upon) must not
represent more than two percent of the voting rights in the Company.
38
ANTITAKEOVER 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 hold 25% or more of the voting rights in 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 hold more than 45% of the voting rights in the company, unless
someone else already holds 45% of the voting power of the company.
Finally,
Israeli tax law treats specified acquisitions, including a stockforstock 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, although in the case of shares of a foreign corporation that are
traded on a stock exchange, the tax may be postponed subject to certain
conditions.
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 our 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 registered public accounting firm. We also furnish
quarterly reports on Form 6-K containing unaudited financial information after
the end of each quarter and other reports on Form 6-K from time to time. 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.
39
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.
In
addition, since we are also listed on the Tel Aviv Stock Exchange we submit
copies of all our filings with the Securities and Exchange Commission to the
Israeli Securities Authority and the Tel Aviv Stock Exchange. Such copies can
be retrieved electronically through the Tel Aviv Stock Exchanges internet
messaging system (www.maya.tase.co.il) and through the MAGNA distribution site
of the Israeli Securities Authority (www.magna.isa.gov.il).
MATERIAL CONTRACTS DURING PAST TWO YEARS
Asset Purchases.
On September 3, 2010, through our subsidiary company, Commtouch Inc.,
we acquired certain assets comprising the Command Antivirus business unit of
Authentium (now known as SafeCentral, Inc.), including:
|
|
|
|
i.
|
the antivirus services
known as AV SDK and CSAM, which are aimed at protecting customers against
viruses, spyware, Trojan downloaders and other such Internet related threats;
|
|
ii.
|
certain contracts with OEM
customers pursuant to which such OEM customers are authorized to integrate
the AV SDK into their solutions and to sell and support such integrated
solutions;
|
|
iii.
|
certain contracts with
resellers pursuant to which such resellers are authorized to sell the CSAM
solutions;
|
|
iv.
|
all such services
intellectual property (including all interests in the Authentium and Command
Software brand names and all associated trademarks, trade names and related
property); and
|
|
v.
|
certain furniture,
computers and office equipment.
|
At
the closing, Commtouch Inc. also employed 13 new employees, based in a Florida
office, and engaged 4 independent contractors providing remote services to the
operation.
In
consideration for the sale of this division, Commtouch paid Authentium the sum
of $4.6 million in cash, $920,000 of which was placed in escrow and
subsequently distributed to Authentium in two installments during 2011.
Additionally, following the conclusion of the 2011 year and based on
achievement of certain revenue milestones, Commtouch shall pay SafeCentral in
cash an earnout payment of approximately $3 million, subject to adjustment upward
or downward based on the performance level of the purchased OEM contracts. The
fair value of the earnout obligation as of December 31, 2011 was approximately
$ 3.4 million.
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 our Ordinary Shares,
into 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 certain foreign currency transactions.
Legislation remains in effect, however, pursuant to which currency controls can
be imposed by administrative action at any time.
40
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
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
Israeli
companies were generally subject to corporate tax at the rate of 24% of their
taxable income in 2011. Corporate tax rates applicable for 2008, 2009 and 2010
were 27%, 26% and 25%, respectively.
On
December 5, 2011, the Israeli Parliament (the Knesset) passed the Law for Tax
Burden Reform (Legislative Amendments), 2011 which, among others, effective
from 2012 cancels the scheduled progressive reduction in the corporate tax
rate, and increases the corporate tax rate to 25% in 2012 and subsequent years.
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.
In
December 2010, the Knesset (Israeli Parliament) passed the Law for Economic
Efficiency for 2011 and 2012 (Amended Legislation), 2011, which prescribes,
among others, amendments in the Investment Law. The amendment
41
became
effective as of January 1, 2011. According to the amendment, the benefit tracks
in the Investment Law were modified and a flat tax rate applies to the
Companys entire preferred income. The Company will be able to apply (the
waiver is non-recourse) the amendment and from then on it will be subject to
the amended tax rates that are: 2011 and 2012 - 15%, 2013 and 2014 - 12.5% and
in 2015 and thereafter - 12%.
The
Company is not in development area A. The Company is examining the possible
effect of the amendment on the financial statements, if at all, and has not yet
decided whether to apply the amendment.
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 shareholders 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 assets
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 our 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.
42
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 shareholders country of residence.
Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder
of our 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.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
THE
FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION AND IS NOT
INTENDED TO BE, AND SHOULD NOT BE CONSIDERED TO BE, LEGAL OR TAX ADVICE. EACH
U.S. HOLDER 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 OUR
ORDINARY SHARES, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL, FOREIGN OR
OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
U.S. Federal Income Taxation
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 our 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 income 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 our
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, nor does it describe the rules applicable to determine a
taxpayers status as a U.S. Holder. This summary is based on the provisions of
the Internal Revenue Code of 1986, as amended, or 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, or the
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.
43
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 shareholders
particular circumstances and in particular does not discuss any estate, gift,
generation-skipping, transfer, state, local or foreign tax considerations. In
addition, 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 than 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 such persons own tax advisor with
respect to the specific U.S. federal and state income tax consequences to such
person of purchasing, holding or disposing of our Ordinary Shares, including
the effects of applicable state, local, foreign or other tax laws and possible
changes in the tax laws.
Distributions 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. Holders tax basis for our
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, 2012, 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 Ordinary
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,
or PFIC. 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 least 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.
44
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 our
Ordinary Shares. In general, these rules limit the amount allowable as a
foreign tax credit in any year to the amount of ordinary U.S. federal income
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 individuals 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 our
Ordinary Shares if such U.S. Holder has not held our Ordinary Shares for at
least 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 our 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 our Ordinary
Shares in an arrangement in which the U.S. Holders 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, they 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.
Disposition of 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. Holders
tax basis for our 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 specified 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.
Medicare Contribution Tax
For
taxable years beginning after December 31, 2012, U.S. Holders who are
individuals, estates or trusts will generally be required to pay a new 3.8%
Medicare tax on their net investment income (including dividends on and gains
from the sale or other disposition of our Ordinary Shares), or, in the case of
estates and trusts, on their net investment income that is not distributed. In
each case, the 3.8% Medicare tax applies only to the extent that the U.S.
Holders total adjusted income exceeds applicable thresholds.
Passive Foreign Investment Companies
Special
U.S. federal income tax laws apply to a U.S. Holder who owns shares of a
corporation that was (at any time during the U.S. Holders holding period) a
PFIC. We would be treated as a PFIC for U.S. federal income tax purposes for
any tax year if, in such tax year, 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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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 production
of, or produce, passive income (the Asset Test).
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For
this purpose, 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 taxpayers holding period for our 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 decedents death,
but instead would be equal to the decedents 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 described above would not apply to a U.S. Holder who makes a QEF
election for all taxable years that such U.S. Holder has held our Ordinary
Shares while we are a PFIC, provided that we comply with specified 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. Holders
pro rata
share of
our ordinary earnings as ordinary income and such U.S. Holders
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 qualifying 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. Holders adjusted tax basis in the PFIC shares.
Losses 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, subject to
specified exceptions for U.S. Holders who made a QEF or mark-to-market
election. U.S. Holders are strongly urged to consult their tax advisors about
the PFIC rules, including tax return filing requirements and the eligibility,
manner, and consequences to them of making a QEF or mark-to-market election
with respect to our Ordinary Shares in the event we that qualify as a PFIC. For
those U.S. Holders who determine that we were a PFIC in any of 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
With
respect to cash dividends and proceeds from a disposition of Ordinary Shares, a
U.S. Holder may be subject to backup withholding (currently at a rate of 28%,
scheduled to increase to 31% for taxable years beginning after December 31,
2012). In general, back-up withholding will apply only if a U.S. Holder fails
to comply with specified identification procedures. Backup withholding will not
apply with respect to payments made to designated 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.
Under
the Hiring Incentives to Restore Employment Act of 2010 (the HIRE Act), some
payments to foreign financial institutions in respect of accounts of U.S.
stockholders at such financial institutions may be subject to
46
withholding
at a rate of 30%. IRS guidance indicates that final regulations will be issued
that will provide that such withholding will only apply to distributions paid
on or after January 1, 2014, and to other withholdable payments (including
payments of gross proceeds from a sale or other disposition of our Ordinary
Shares) made on or after January 1, 2015. U.S. Holders should consult their tax
advisors regarding the effect, if any, of the HIRE Act on their ownership and
disposition of our common stock. See Non-U.S. Holders of Ordinary Shares.
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: (1) 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 United States; (2) in the case of a
disposition of our Ordinary Shares, the individual non-U.S. Holder is present
in the United States for 183 days or more in the taxable year of the sale and
other specified conditions are met; (3) 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 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.
The
amount of any backup withholding from a payment to a non-U.S. Holder will be
allowed as a credit against such holders 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.
The
HIRE Act may impose withholding taxes on some types of payments made to
foreign financial institutions and some other non-U.S. entities. Under the
HIRE Act, the failure to comply with additional certification, information
reporting and other specified requirements could result in withholding tax
being imposed on payments of dividends and sales proceeds to U.S. Holders that
own Ordinary Shares through foreign accounts or foreign intermediaries and
specified non-U.S. Holders. The HIRE Act imposes a 30% withholding tax on
dividends on, and gross proceeds from the sale or other disposition of,
Ordinary Shares paid from the United States to a foreign financial institution
or to a foreign nonfinancial entity, unless (i) the foreign financial
institution undertakes specified diligence and reporting obligations or (ii)
the foreign nonfinancial entity either certifies it does not have any
substantial U.S. owners or furnishes identifying information regarding each
substantial U.S. owner. In addition, if the payee is a foreign financial
institution, it generally must enter into an agreement with the U.S. Treasury
that requires, among other things, that it undertake to identify accounts held
by specified U.S. persons or U.S.-owned foreign entities, annually report
certain information about such accounts, and withhold 30% on payments to other
specified account holders. IRS guidance indicates that final regulations will
be issued that will provide that such withholding will only apply to
distributions paid on or after January 1, 2014, and to other withholdable
payments (including payments of gross proceeds from a sale or other
disposition of our Ordinary Shares) made on or after January 1, 2015. You
should consult your tax advisor regarding the HIRE Act.
Item 11. Quantitative and Qualitative Disclosures 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
47
U.S.
dollar/Euro exchange rate. Our NIS-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.
The
Company does not have any outstanding American Depositary Shares or American
Depositary Receipts.
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies.
None.
Item 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds.
None.
Item 15. Controls and Procedures.
(a)
As of December 31, 2011, 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, 2011, 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 SECs 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) 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.
A companys internal control
over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the
company; (ii) 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
48
the
company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys
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 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, 2011. 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, 2011, our internal control
over financial reporting is effective.
This
Annual Report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by our
independent registered public accounting firm pursuant to a provision under the
Dodd-Frank Wall Street Reform and Consumer Protection Act which grants a
permanent exemption for non-accelerated filers from complying with Section
404(b) of the Sarbanes-Oxley Act of 2002.
(c)
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, 2011 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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 NASDAQ Listing Rule 5605(a)(2).
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
Companys website at www.commtouch.com, under the link Investor relations
documents on the investor relations page.
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, 2011, 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 2011 and 2010:
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2011
Fees
|
|
2010
Fees
|
|
|
Audit related fees (1)
|
|
$
|
132,000
|
|
$
|
189,000
|
|
Tax Fees (2)
|
|
$
|
28,000
|
|
$
|
81,000
|
|
Total
|
|
$
|
160,000
|
|
$
|
270,000
|
|
49
(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 statutory audits; consents; attest services; and assistance in
connection with documents filed with the SEC. These fees for 2010 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. Also included for 2010
are fees related to services provided in connection with the Command Antivirus
unit acquisition.
Audit Committee Pre-approval Policies and Procedures
Below
is a summary of our current Policies and Procedures:
The
main role of the Companys 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
Companys independent registered public accounting firm engaged to prepare or
issue an audit report on the financial statements of the Company. The audit
committees 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 firms 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 2011, 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.
None.
Item 16F. Change in Registrants Certifying Accountant.
Not
applicable.
Item 16G. Corporate Governance.
Under
NASDAQ Listing Rule 5615(a)(3), foreign private issuers, such as our Company,
are permitted to follow certain home country corporate governance practices
instead of certain provisions of certain NASDAQ Listing Rules. We do not comply
with the following requirements of the NASDAQ Listing Rules, and instead follow
Israeli law and practice with respect to such corporate governance practices:
50
NASDAQ
Listing Rule 5250(d) 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 Companys 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 Companys website and include
the website address and that shareholders may receive a hard copy free of
charge upon request.
While
the Companys 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 Companys activities noted above, also enables shareholders to inspect
the Companys annual consolidated financial statements in person at its
principal offices).
Rule
5620(c) to NASDAQ Listing Rules requires that an issuer listed on NASDAQ should
have a quorum requirement that in no case be less than 33 1/3% of the
outstanding shares of a companys common voting stock. However, the Companys
articles of association, consistent with the Companies Law, provide for a lower
quorum in the event of a meeting adjourned for lack of a quorum, in which case
any two shareholders entitled to vote and present in person or by proxy at such
adjourned meeting shall constitute a quorum. Our quorum requirements for an
adjourned meeting do not comply with the NASDAQ requirements and we instead
follow our home country practice.
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 Listing 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 issuers home
country certifying that the issuers practices are not prohibited by the home
countrys 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 NASDAQs corporate governance rules.
Item 16H. Mine Safety Disclosure.
Not
applicable.
PART III
Item 17. Financial Statements.
The
Company has responded to Item 18
Item 18. Financial Statements.
See pages F-1 to F-30.
51
COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2011
U.S. DOLLARS IN THOUSANDS
|
|
INDEX
|
|
|
|
Page
|
|
|
Reports of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated Balance Sheets
|
F-3 - F-4
|
|
|
Consolidated Statements of Operations
|
F-5
|
|
|
Statements of Changes in Shareholders Equity
|
F-6
|
|
|
Consolidated Statements of Cash Flows
|
F-7 - F-8
|
|
|
Notes to Consolidated Financial Statements
|
F-9 - F-30
|
|
- - - - - - - - - - - - - - - - - - - -
|
|
|
|
Kost Forer Gabbay & Kasierer
|
3
Aminadav St.
|
Tel-Aviv
67067, Israel
|
|
Tel:
972 (3)6232525
|
Fax:
972 (3)5622555
|
www.ey.com
|
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, 2010 and 2011, 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,
2011. These financial statements are the responsibility of the Companys
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. We were not engaged to
perform an audit of the Companys internal control over financial reporting.
Our audits included consideration of internal control over financial reporting
as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and 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, 2010 and 2011, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2011, in conformity with U.S.
generally accepted accounting principles.
|
|
Tel-Aviv,
Israel
|
KOST FORER GABBAY & KASIERER
|
March 29, 2012
|
A Member of Ernst & Young Global
|
F-2
|
|
|
COMMTOUCH SOFTWARE LTD.
|
|
AND ITS SUBSIDIARY
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
13,432
|
|
$
|
20,868
|
|
Trade receivables, net
|
|
|
2,968
|
|
|
2,838
|
|
Deferred income taxes
|
|
|
1,940
|
|
|
1,996
|
|
Prepaid expenses and other accounts
receivable
|
|
|
384
|
|
|
463
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
18,724
|
|
|
26,165
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS:
|
|
|
|
|
|
|
|
Investment in affiliates
|
|
|
1,227
|
|
|
1,227
|
|
Deferred income taxes
|
|
|
1,560
|
|
|
2,889
|
|
Intangible assets, net
|
|
|
4,510
|
|
|
3,505
|
|
Goodwill
|
|
|
3,792
|
|
|
3,792
|
|
Severance pay fund and Lease deposits
|
|
|
1,249
|
|
|
1,071
|
|
Property and equipment, net
|
|
|
920
|
|
|
885
|
|
|
|
|
|
|
|
|
|
Total long-term assets
|
|
|
13,258
|
|
|
13,369
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
31,982
|
|
$
|
39,534
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-3
|
|
|
COMMTOUCH SOFTWARE LTD.
|
|
AND ITS SUBSIDIARY
|
|
|
CONSOLIDATED BALANCE SHEETS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
550
|
|
$
|
551
|
|
Employees and payroll accruals
|
|
|
1,073
|
|
|
1,215
|
|
Accrued expenses and other liabilities
|
|
|
330
|
|
|
628
|
|
Earn-out consideration
|
|
|
-
|
|
|
3,372
|
|
Deferred revenues
|
|
|
3,178
|
|
|
3,058
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
5,131
|
|
|
8,824
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
Long-term deferred revenues
|
|
|
964
|
|
|
694
|
|
Earn-out consideration
|
|
|
2,831
|
|
|
-
|
|
Accrued severance pay
|
|
|
1,303
|
|
|
1,192
|
|
|
|
|
|
|
|
|
|
Total long-term liabilities
|
|
|
5,098
|
|
|
1,886
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY:
|
|
|
|
|
|
|
|
Ordinary shares nominal value NIS 0.15 par
value-
|
|
|
|
|
|
|
|
Authorized: 55,353,340 shares as of
December 31, 2010 and 2011; Issued: 26,700,005 and 27,287,909 shares as of
December 31, 2010 and 2011, respectively; Outstanding: 23,505,713 and
24,093,617 shares as of December 31, 2010 and 2011, respectively
|
|
|
812
|
|
|
834
|
|
Additional paid-in capital
|
|
|
186,012
|
|
|
188,463
|
|
Treasury shares 3,194,292 Ordinary shares
at December 31, 2010 and 2011.
|
|
|
(8,566
|
)
|
|
(8,566
|
)
|
Accumulated other comprehensive income
|
|
|
23
|
|
|
23
|
|
Accumulated deficit
|
|
|
(156,528
|
)
|
|
(151,930
|
)
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
21,753
|
|
|
28,824
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
31,982
|
|
$
|
39,534
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-4
|
|
|
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,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
Revenues
|
|
$
|
15,189
|
|
$
|
18,161
|
|
$
|
23,016
|
|
Cost of revenues
|
|
|
2,260
|
|
|
2,918
|
|
|
4,091
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
12,929
|
|
|
15,243
|
|
|
18,925
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development, net
|
|
|
2,958
|
|
|
3,397
|
|
|
5,410
|
|
Sales and marketing
|
|
|
4,212
|
|
|
4,575
|
|
|
5,486
|
|
General and administrative
|
|
|
3,063
|
|
|
3,911
|
|
|
4,721
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
10,233
|
|
|
11,883
|
|
|
15,617
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
2,696
|
|
|
3,360
|
|
|
3,308
|
|
Financial income (expenses), net
|
|
|
60
|
|
|
(55
|
)
|
|
(27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income before tax benefit
|
|
|
2,756
|
|
|
3,305
|
|
|
3,281
|
|
Tax benefit
|
|
|
(2,404
|
)
|
|
(1,098
|
)
|
|
(1,317
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,160
|
|
$
|
4,403
|
|
$
|
4,598
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings per share
|
|
$
|
0.21
|
|
$
|
0.19
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings per share
|
|
$
|
0.20
|
|
$
|
0.18
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares used in
computing basic net earnings per share
|
|
|
24,531,810
|
|
|
23,575,354
|
|
|
23,620,171
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average numbers of shares used in
computing diluted net earnings per share
|
|
|
25,291,517
|
|
|
24,873,778
|
|
|
24,654,458
|
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
|
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, 2009
|
|
|
25,206,659
|
|
$
|
890
|
|
$
|
182,144
|
|
$
|
(1,306
|
)
|
$
|
|
23
|
|
|
|
$
|
(166,091
|
)
|
|
|
|
|
|
$
|
15,660
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
treasury shares
|
|
|
(1,457,748
|
)
|
|
(56
|
)
|
|
-
|
|
|
(3,482
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(3,538
|
)
|
Issuance of
shares upon exercise of options
|
|
|
209,850
|
|
|
8
|
|
|
210
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
218
|
|
Stock-based
compensation related to employees
|
|
|
-
|
|
|
-
|
|
|
1,345
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
1,345
|
|
Stock-based
compensation related to options granted to non-employees
|
|
|
-
|
|
|
-
|
|
|
32
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
32
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,160
|
|
|
$
|
5,160
|
|
|
|
5,160
|
|
Total comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,160
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2009
|
|
|
23,958,761
|
|
|
842
|
|
|
183,731
|
|
|
(4,788
|
)
|
|
|
23
|
|
|
|
|
(160,931
|
)
|
|
|
|
|
|
|
18,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
treasury shares
|
|
|
(1,030,466
|
)
|
|
(42
|
)
|
|
-
|
|
|
(3,778
|
)
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
(3,820
|
)
|
Issuance of
shares upon exercise of options and warrants
|
|
|
577,418
|
|
|
12
|
|
|
785
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
797
|
|
Stock-based
compensation related to employees
|
|
|
-
|
|
|
-
|
|
|
1,465
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
1,465
|
|
Stock-based
compensation related to options granted to non-employees
|
|
|
-
|
|
|
-
|
|
|
31
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
31
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
4,403
|
|
|
$
|
4,403
|
|
|
|
4,403
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2010
|
|
|
23,505,713
|
|
|
812
|
|
|
186,012
|
|
|
(8,566
|
)
|
|
|
23
|
|
|
|
|
(156,528
|
)
|
|
|
|
|
|
|
21,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of
shares upon exercise of options and warrants
|
|
|
587,904
|
|
|
22
|
|
|
1,238
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
1,260
|
|
Stock-based
compensation related to employees
|
|
|
-
|
|
|
-
|
|
|
1,213
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
|
1,213
|
|
Net income
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
4,598
|
|
|
|
|
|
|
|
4,598
|
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
December 31, 2011
|
|
|
24,093,617
|
|
$
|
834
|
|
$
|
188,463
|
|
$
|
(8,566
|
)
|
|
$
|
23
|
|
|
|
$
|
(151,930
|
)
|
|
|
|
|
|
$
|
28,824
|
|
|
|
*)
|
Relates to foreign currency
translation adjustments
|
The accompanying notes are an
integral part of the consolidated financial statements.
F-6
|
COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,160
|
|
$
|
4,403
|
|
$
|
4,598
|
|
Adjustments to reconcile net income to net
cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
491
|
|
|
520
|
|
|
545
|
|
Compensation related to options granted to
employees and non-employees
|
|
|
1,377
|
|
|
1,496
|
|
|
1,213
|
|
Amortization and impairment of intangible
assets
|
|
|
-
|
|
|
158
|
|
|
1,005
|
|
Increase in deferred income taxes
|
|
|
(2,404
|
)
|
|
(1,096
|
)
|
|
(1,385
|
)
|
Capital gain from sale of equipment
|
|
|
-
|
|
|
(9
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in trade receivables
|
|
|
(318
|
)
|
|
(1,036
|
)
|
|
130
|
|
Decrease (increase) in prepaid expenses and
other accounts receivable
|
|
|
(271
|
)
|
|
287
|
|
|
(79
|
)
|
Increase in accounts payable
|
|
|
112
|
|
|
138
|
|
|
17
|
|
Increase in employees and payroll accruals,
accrued expenses and other liabilities
|
|
|
261
|
|
|
163
|
|
|
981
|
|
Increase (decrease) in deferred revenues
|
|
|
706
|
|
|
(697
|
)
|
|
(390
|
)
|
Increase (decrease) in accrued severance
pay, net
|
|
|
(32
|
)
|
|
(10
|
)
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,082
|
|
|
4,317
|
|
|
6,701
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in short-term cash deposit
|
|
|
740
|
|
|
-
|
|
|
-
|
|
Decrease in long-term lease deposits
|
|
|
1
|
|
|
22
|
|
|
1
|
|
Sale of marketable securities
|
|
|
2,000
|
|
|
-
|
|
|
-
|
|
Investment in affiliate
|
|
|
(477
|
)
|
|
-
|
|
|
-
|
|
Proceeds from sale of equipment
|
|
|
-
|
|
|
9
|
|
|
-
|
|
Acquisition of Antivirus business
|
|
|
-
|
|
|
(4,600
|
)
|
|
-
|
|
Purchase of property and equipment
|
|
|
(412
|
)
|
|
(568
|
)
|
|
(526
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities
|
|
|
1,852
|
|
|
(5,137
|
)
|
|
(525
|
)
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-7
|
COMMTOUCH SOFTWARE LTD. AND ITS SUBSIDIARY
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
U.S. dollars in thousands
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury shares at cost
|
|
|
(3,538
|
)
|
|
(3,820
|
)
|
|
-
|
|
Proceeds from options and warrants
exercised
|
|
|
218
|
|
|
797
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing
activities
|
|
|
(3,320
|
)
|
|
(3,023
|
)
|
|
1,260
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash
equivalents
|
|
|
3,614
|
|
|
(3,843
|
)
|
|
7,436
|
|
Cash and cash equivalents at the beginning
of the year
|
|
|
13,661
|
|
|
17,275
|
|
|
13,432
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the end of the
year
|
|
$
|
17,275
|
|
$
|
13,432
|
|
$
|
20,868
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of
property and equipment - trade payables
|
|
$
|
(9
|
)
|
$
|
(55
|
)
|
$
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Earn out
consideration
|
|
$
|
-
|
|
$
|
2,831
|
|
$
|
-
|
|
Taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
$
|
67
|
|
The
accompanying notes are an integral part of the consolidated financial
statements.
F-8
|
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 internet security solutions to OEM
partners and enterprises. The Companys business is to develop and sell,
through a variety of third party distribution channels, these solutions to
various customers. The Companys messaging solutions are comprised of
anti-spam, Zero-Hour Virus Outbreak Protection and GlobalView Mail Reputation
solutions, its Web security solution is known as GlobalView URL filtering,
and its antivirus solution is known as Command Antivirus. The Company
operates in one reportable segment.
|
|
|
|
|
b.
|
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 Companys anti-spam,
Zero-Hour, anti-virus, IP reputation, URL filtering solutions and Command
Antivirus.
|
|
|
|
|
c.
|
Acquisition of Antivirus business:
|
|
|
|
|
|
On September 3, 2010, the Company completed the acquisition of the
assets of the Antivirus business of Authentium Inc. (now known as SafeCentral
Inc.), a private Florida based company, which provides security software
products and services including licensing antivirus and anti malware
software, as well as sale of multi-function consumer security suites and
security software products and services. As a result of this transaction, the
Company will generate additional revenues and be able to sell the new
acquired Antivirus services as additional product offering to new and
existing customers. The consideration in respect of the acquisition is
payable as follows: $ 4,600 was paid in cash at the closing date (of which
$920 was placed in escrow until 2011) and an amount of $ 3,000 in cash is
contingent consideration payable to Authentium Inc. based on the Antivirus
businesss 2011 revenues, due in May 2012 as defined in the Asset Purchase
Agreement. The contingent consideration is subject to adjustments upward or
downward based on the revenue derived from the purchased customer contracts.
In connection with this contingent earn-out consideration, the Company
recorded an estimated amount of $ 2,831 as of the acquisition date. As of
December 31, 2011, the fair value of the contingent consideration of $ 3,372
is presented in short term liabilities. The expenses incurred with respect of
the acquisition were $ 300.
|
|
|
|
|
|
The acquisition was accounted for using the purchase method of
accounting in accordance with ASC 805.
|
F-9
|
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 (Cont.)
|
|
|
|
|
|
Under purchase accounting, the total purchase price was allocated to
the Antivirus businesss net tangible and identifiable intangible assets
based on their estimated fair values at the acquisition date as set forth
below. The excess of the purchase price over the net tangible and
identifiable intangible assets was assigned to goodwill. The fair value of
the contingent consideration and the intangible assets was made by management
with the assistance of a third party valuation.
|
|
|
|
|
|
|
|
Equipment
and other assets
|
|
$
|
128
|
|
|
Deferred
revenue
|
|
|
(1,157
|
)
|
|
Technology
|
|
|
1,546
|
|
|
Customer
contracts and relationships
|
|
|
2,476
|
|
|
Covenants
not-to-compete
|
|
|
646
|
|
|
Goodwill
|
|
|
3,792
|
|
|
|
|
|
|
|
|
Total
purchase price
|
|
$
|
7,431
|
|
|
|
|
|
|
Technology
includes a virus detection technology (AV SDK and CSAM products) developed by
Authentium, which is aimed at protecting customers against viruses, spyware,
Trojan downloaders and other such Internet related threats. The technology is
being amortized on a straight-line basis to cost of revenues over an
estimated useful life of eight years.
|
|
|
|
|
|
Customer contracts and relationships
is comprised of the Antivirus businesss main customers and respective
contracts. The customer contracts and relationships is being amortized on an
accelerated basis to sales and marketing expenses, over an estimated useful
life of ten years.
|
|
|
|
|
|
Covenants not-to-compete
state that Authentium Inc. cannot compete against the Company by soliciting
customers, employees etc. The covenants not to compete are being amortized on
a straight-line basis to sales and marketing expenses, over an estimated
useful life of six years.
|
|
|
|
|
|
In conjunction with the sale of the remaining business of Authentium
to a third party and the discontinuation of Authentium, in 2011, the Company
wrote off the remaining asset related to covenants not-to-compete in the
amount of $502 which was recorded in sales and marketing expenses.
|
|
|
|
|
|
Goodwill
represents the excess of the purchase price of the acquired business over the
fair value of the underlying net tangible and intangible assets.
|
F-10
|
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
|
|
|
|
|
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. On an ongoing basis, the Companys
management evaluates estimates. Such estimates are based on historical
experience and on various other assumptions that are believed to be
reasonable, the results of which form the basis for making judgments about
the carrying values of assets and liabilities.
|
|
|
|
|
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 denominated in dollars. The Companys
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 ASC Topic 830, Foreign Currency Matters. 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.
|
|
|
|
|
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-11
|
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.)
|
|
|
|
|
f.
|
Investment in affiliates:
|
|
|
|
|
|
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 the
affiliates operating and financial policies. If the Company lacks the
ability to exercise significant influence over the affiliates operating and
financial policies, the investment should be accounted for on a cost basis.
|
|
|
|
|
|
The Companys 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, 2011 and 2010, the
Companys investments are accounted for on a cost basis and no impairment
losses have been identified.
|
|
|
|
|
g.
|
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
|
|
|
|
|
|
h.
|
Impairment of long-lived assets:
|
|
|
|
|
|
The Company and its subsidiarys long-lived assets and certain
identifiable intangibles are reviewed for impairment in accordance with ASC
360 Property, Plant and Equipment, 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 2009 through 2011.
|
F-12
|
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.)
|
|
|
|
|
i.
|
Goodwill:
|
|
|
|
|
|
Goodwill and certain other purchased intangible assets have been
recorded as a result of an acquisition made in 2010. Goodwill represents the
excess of the purchase price in a business combination over the fair value of
net tangible and intangible assets acquired. Goodwill is not amortized, but
rather is subject to an impairment test. The Company performs an annual
impairment test at December 31, of each fiscal year, or more frequently if
impairment indicators are present. The Company operates in one operating
segment, and this segment comprises its only reporting unit.
|
|
|
|
|
|
ASC 350 prescribes a two-phase process for impairment testing of
goodwill. The first phase screens for impairment, while the second phase (if
necessary) measures impairment. Goodwill impairment is deemed to exist if the
net book value of a reporting unit exceeds its estimated fair value
determined using market capitalization. In such case, the second phase is
then performed, and the Company measures impairment by comparing the carrying
amount of the reporting units goodwill to the implied fair value of that
goodwill. An impairment loss is recognized in an amount equal to the excess.
For each of the two years in the period ended December 31, 2011, no
impairment losses have been identified.
|
|
|
|
|
j.
|
Intangible assets:
|
|
|
|
|
|
Intangible assets that are not considered to have an indefinite
useful life are amortized over their estimated useful lives, which range from
6 to 10 years. Acquired customer contracts and relationships are amortized
over their estimated useful lives in proportion to the economic benefits
realized. This accounting policy results in accelerated amortization of such
customer contracts and relationships arrangements as compared to the
straight-line method. Other intangible assets consist primarily of technology
are amortized over their estimated useful lives on a straight-line basis.
|
|
|
|
|
|
The carrying amount of these assets to be held and used is reviewed
whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. Recoverability of these assets is
measured by comparison of the carrying amount of each asset (or asset group) to
the future undiscounted cash flows the asset (or asset group) is expected to
generate. If the asset is considered to be impaired, the amount of any
impairment is measured as the difference between the carrying value and the
fair value of the impaired asset.
|
|
|
|
|
|
During 2009 and 2010, no impairment losses have been identified. In
2011, impairment losses of $520 were recorded in respect of covenants not to
compete. See Note 1.
|
F-13
|
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.)
|
|
|
|
|
k.
|
Fair value measurements:
|
|
|
|
|
|
Concurrently with the adoption of ASC 820, the Company adopted ASC Topic
825, Financial Instruments, (ASC 825) which permits entities to elect, at
specified election dates, to measure eligible financial instruments at fair
value. As of December 31, 2010 and 2011, the Company did not elect the fair
value option under ASC 825 for any financial assets and liabilities that were
not previously measured at fair value.
|
|
|
|
|
|
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.
|
|
|
|
|
l.
|
Revenue recognition:
|
|
|
|
|
|
The Company derives revenues from sale of Anti-Spam, Anti-virus,
Zero-Hour Virus Outbreak Protection, GlobalView Mail Reputation, GlobalView
URL filtering and Command Antivirus services to OEM partners and enterprises.
|
|
|
|
|
|
Revenue is recognized in accordance with ASC 605 - 25 Revenue
Recognition and Staff Accounting Bulletin Topic 13, when the earnings
process is complete, as evidenced by an agreement between the customer and
the Company, when services have been rendered, when the fee is fixed or
determinable and when collectability is probable.
|
|
|
|
|
|
Revenues from such services are recognized over the service term,
which generally includes a term period of one to three years.
|
|
|
|
|
|
Deferred revenues include unearned amounts received from customers,
but not yet recognized as revenues.
|
|
|
|
|
m.
|
Research and development costs:
|
|
|
|
|
|
ASC 985-20, Costs of Software to be Sold, Leased or Marketed,
requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility.
|
|
|
|
|
|
Based on the Companys 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.
|
F-14
|
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.)
|
|
|
|
|
n.
|
Government grants:
|
|
|
|
|
|
Royalty-bearing grants from the Government of Israel for funding
certain approved research and development projects are recognized at the time
the Company is entitled to such grants, on the basis of the related costs
incurred and recorded as a deduction of research and development costs.
Research and development grants from the Government of Israel amounted to
$131, $774 and $263 in 2011, 2010 and 2009, respectively. See note 5a.
|
|
|
|
|
o.
|
Concentrations of credit risk:
|
|
|
|
|
|
The Company and its subsidiary have no significant off-balance-sheet
concentration of credit risk.
|
|
|
|
|
|
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables and
cash and cash equivalents. The majority of the Companys 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 Companys investments are institutions with high credit standing,
and accordingly, minimal 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 $45 and $32 at December
31, 2010 and 2011 respectively. Bad debt expense for each of the years ended
December 31, 2009, 2010 and 2011 was $0, $77 and $7, respectively.
|
|
|
|
|
p.
|
Accounting for stock-based compensation:
|
|
|
|
|
|
ASC 718 - Compensation-stock Compensation- (ASC 718) 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 Companys 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. ASC 718 requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
|
F-15
|
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.)
|
|
|
|
|
|
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. treasury bonds with an equivalent term. The Company has
historically not paid dividends and has no foreseeable plans to pay
dividends.
|
|
|
|
|
|
The Company applies ASC 718, and ASC 505-50, Equity Based Payments
to Non Employees (ASC 505-50), with respect to options issued to
non-employees.
|
|
|
|
|
|
The fair value for options granted in 2009, 2010 and 2011 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
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
82%
|
|
|
71%-73%
|
|
|
68%-70%
|
|
|
Risk-free
interest rate
|
|
|
1.3%-1.6%
|
|
|
1.1%-1.6%
|
|
|
0.6%-2.1%
|
|
|
Dividend
yield
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
Expected
life (years)
|
|
|
3.35
|
|
|
3.7-4.6
|
|
|
3.6-4.8
|
|
|
|
|
|
q.
|
Basic and diluted net earnings per share:
|
|
|
|
|
|
Basic and diluted net earnings per share are presented in accordance
with ASC Topic 260, Earnings per Share, for all periods presented.
|
|
|
|
|
|
Basic net earnings per share have been computed using the
weighted-average number of Ordinary shares outstanding during the year.
Diluted net earnings 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.
|
|
|
|
|
|
In 2009, 2010 and 2011, the difference between the denominator of
basic and diluted net earnings per share is due to the effect of dilutive
securities for stock options and warrants. In 2009, 2010 and 2011 2,584,732,
1,211,247 and 1,034,288, 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.
|
F-16
|
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.)
|
|
|
|
|
r.
|
Severance pay:
|
|
|
|
|
|
The Companys liability for severance pay in Israel is calculated
pursuant to Israels 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 months salary for each year of
employment or a portion thereof. The Companys obligation 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 Companys 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 Israels Severance Pay Law or labor
agreements. The value of the deposited funds is based on the cash surrendered
value of these policies.
|
|
|
|
|
|
Severance expense (income) for the years ended December 31, 2009,
2010 and 2011 was approximately $ (31), $ (10) and $ 66, respectively.
|
|
|
|
|
s.
|
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.
|
|
|
|
|
t.
|
Income taxes:
|
|
|
|
|
|
The Company accounts for income taxes in accordance with ASC Topic
740, Income Taxes (ASC 740). ASC 740 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.
|
|
|
|
|
|
Deferred tax assets are classified as current or non-current based on
the classification of the related asset or liability for financial reporting,
or according to the expected reversal dates of the specific temporary
differences if not related to an asset or liability for financial reporting.
|
F-17
|
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.)
|
|
|
|
|
|
ASC 740 contains a two-step approach to recognizing and measuring a
liability for uncertain tax positions. 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 ASC 740.
|
|
|
|
|
u.
|
Recently issued accounting pronouncements:
|
|
|
|
|
|
In June 2011, the FASB issued an amendment to an existing accounting
standard which requires companies to present net income and other
comprehensive income in one continuous statement or in two separate, but
consecutive, statements. In addition, in December 2011, the FASB issued an
amendment to an existing accounting standard which defers the requirement to
present components of reclassifications of other comprehensive income on the
face of the income statement. The Companys adoption of both standards is not
expected to have an impact on the Companys consolidated financial
statements.
|
|
|
|
|
|
In September 2011, the FASB issued an amendment to an existing
accounting standard, which provides entities an option to perform a
qualitative assessment to determine whether further impairment testing on
goodwill is necessary. Specifically, an entity has the option to first assess
qualitative factors to determine whether it is necessary to perform the
current two-step test. If an entity believes, as a result of its qualitative
assessment, that it is more-likely-than-not that the fair value of a
reporting unit is less than its carrying amount, the quantitative impairment
test is required. Otherwise, no further testing is required. This standard is
effective for annual and interim goodwill impairment tests performed for
fiscal years beginning after December 15, 2011. The Companys adoption of
this standard is not expected to have a material impact on the Companys
financial statements and disclosures.
|
|
|
|
|
|
In May 2011, the FASB issued a new accounting standard update, which
amends the fair value measurement guidance and includes some enhanced
disclosure requirements. The most significant change in disclosures is an
expansion of the information required for Level 3 measurements based on
unobservable inputs. The standard is effective for fiscal years beginning
after December 15, 2011. The Companys adoption of this standard is not
expected to have a material impact on the Companys financial statements and
disclosures.
|
F-18
|
COMMTOUCH SOFTWARE LTD.
AND ITS SUBSIDIARY
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
|
|
NOTE 3:
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
|
2010
|
|
2011
|
|
|
Cost:
|
|
|
|
|
|
|
Computers and peripheral equipment
|
|
$
|
4,233
|
|
$
|
4,717
|
|
|
Office furniture and equipment
|
|
|
627
|
|
|
640
|
|
|
Motor vehicles
|
|
|
45
|
|
|
45
|
|
|
Leasehold improvements
|
|
|
1,182
|
|
|
1,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,087
|
|
|
6,597
|
|
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(5,167
|
)
|
|
(5,712
|
)
|
|
|
|
|
|
|
|
|
|
|
Property and
Equipment, net
|
|
$
|
920
|
|
$
|
885
|
|
|
|
|
Depreciation
expense amounted to approximately $ 491, $ 520 and $ 545 in 2009, 2010 and
2011, respectively.
|
|
|
NOTE 4:-
|
INTANGIBLE ASSETS
|
|
|
|
Intangible
assets, net, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Accumulated
amortization
|
|
Intangible assets, net
|
|
|
|
|
December 31,
|
|
|
|
|
2010
|
|
2011
|
|
2010
|
|
2011
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers contracts and relationships
|
|
$
|
2,476
|
|
$
|
2,476
|
|
$
|
57
|
|
$
|
260
|
|
$
|
2,419
|
|
$
|
2,216
|
|
|
Technology
|
|
|
1,546
|
|
|
1,546
|
|
|
65
|
|
|
257
|
|
|
1,481
|
|
|
1,289
|
|
|
Covenants not-to-compete
|
|
|
646
|
|
|
646
|
|
|
36
|
|
|
(*)646
|
|
|
610
|
|
|
-
|
|
|
|
|
$
|
4,668
|
|
$
|
4,668
|
|
$
|
158
|
|
$
|
1,163
|
|
$
|
4,510
|
|
$
|
3,505
|
|
|
|
|
|
(*)
|
Includes write-off of covenants not-to-compete of $502 for the year
ended December 31, 2011.See Note 1.
|
|
|
|
|
Amortization of intangible assets charged to expense was $ 0, $ 158
and $ 1,005 for 2009, 2010 and 2011, respectively.
|
F-19
|
COMMTOUCH SOFTWARE LTD.
AND ITS SUBSIDIARY
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
NOTE 5:
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
a.
|
Commtouch Software Ltd., which is incorporated in Israel, partially
financed its research and development expenditures under programs sponsored
by the Office of Chief Scientist (OCS) for the support of certain research
and development activities conducted in Israel.
|
|
|
|
|
|
|
|
In connection with its research and development, the Company received
$1,185 of participation payments from the OCS. In return for the OCSs
participation, the Company is committed to pay royalties at a rate of 3% of
sales of the developed product, up to 100% of the amount of grants received
(100% plus interest at LIBOR). The Companys total commitment for royalties
payable with respect to future sales, based on OCS participations received or
accrued, net of royalties paid or accrued, totaled approximately $1,098 as of
December 31, 2011. For the years ended December 31, 2011 ,2010 and 2009, the
amounts of $61, $17 and $8 , respectively, were recorded as cost of revenues
with respect to royalties due to the OCS.
|
|
|
|
|
|
|
b.
|
Operating
leases:
|
|
|
|
|
|
|
|
The Company leases its facility in Israel under an operating lease
agreement expiring on December 31, 2011. The subsidiary leases its facilities
in the U.S. under an operating lease agreement expiring on August 31, 2013.
|
|
|
|
|
|
|
|
Facilities
rent expense for 2009, 2010 and 2011 was approximately $259, $352 and $410,
respectively.
|
|
|
|
|
|
|
|
Annual minimum future lease payments due under the above agreements
(and motor vehicle leases, which expire in 2013), at the exchange rate in
effect on December 31, 2011, are approximately as follows:
|
|
|
|
|
|
2012
|
|
$
|
523
|
|
2013
|
|
|
98
|
|
2014
|
|
|
1
|
|
|
|
|
|
|
|
|
$
|
622
|
|
|
|
|
|
c.
|
During
late 2010, one of the Companys customers, among others, was named as a
defendant in a patent infringement claim in a United States District Court
involving four distinct patents. In September 2011, the Company received an
indemnification notification from the customer indicating that one or two of
those patents may relate to Commtouch technology, and the customer was
reserving its rights. Due to the preliminary stage of the legal proceedings,
the Company and its legal advisors cannot currently assess the outcome or
possible adverse effect on the Companys financial position or results of
operations.
|
F-20
|
COMMTOUCH SOFTWARE LTD.
AND ITS SUBSIDIARY
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
NOTE 6:
|
SHAREHOLDERS EQUITY
|
|
|
|
|
a.
|
General:
|
|
|
|
|
|
|
|
The Ordinary
shares of the Company have been traded on the Nasdaq National Market (now
known as the Nasdaq Global Market) and Nasdaq Capital Market (formerly: The
NASDAQ SmallCap Market), since July 1999 and 2002, respectively.
|
|
|
|
|
|
|
|
On December 16, 2009, the Companys Ordinary shares became listed for
trading publicly on the Tel Aviv Stock Exchange, or TASE, thus making the
company a dual listed company.
|
|
|
|
|
|
|
|
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.
|
|
|
|
|
|
|
b.
|
Employee
stock options:
|
|
|
|
|
|
|
|
In 1996, the Company adopted the 1996 CSI Stock Option Plan for
granting options to its U.S. employees and consultants to purchase Ordinary
shares of the Company, which was replaced in 2006 by the 2006 U.S. Stock
Option Plan. 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, 2011,
an aggregate of 2,366,082 Ordinary shares of the Company are still available
for future grant to employees and directors.
|
|
|
|
|
|
|
|
Options granted under such plans and agreements up to September 2005,
expire generally after ten years from the date of grant and grants from
September 2005 having six-year terms from the date of grant. Options cease
vesting upon termination of the optionees 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.
|
F-21
|
COMMTOUCH SOFTWARE LTD.
AND ITS SUBSIDIARY
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 6:
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
A summary of
the Companys employees share option activity under the plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
options
|
|
Weighted
average
exercise price
|
|
Aggregate
intrinsic
value
|
|
|
|
2011
|
|
2011
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the beginning of the year
|
|
|
3,590,257
|
|
|
2.79
|
|
|
|
|
Granted
|
|
|
1,224,000
|
|
|
3.32
|
|
|
|
|
Exercised
|
|
|
(559,057
|
)
|
|
2.12
|
|
|
|
|
Expired and forfeited
|
|
|
(222,519
|
)
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at the end of the year
|
|
|
4,032,681
|
|
|
3.06
|
|
$
|
2,554
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested and expected to vest at the
end of the year
|
|
|
3,913,142
|
|
|
2.96
|
|
$
|
2,539
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable options at the end of the year
|
|
|
2,421,699
|
|
|
2.88
|
|
$
|
2,386
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average fair value of options
granted during the year
|
|
|
|
|
|
3.91
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of the Companys options is the
difference between the Companys closing share price on the last trading day
of the fiscal year 2011 and the exercise price, times the number of options.
|
F-22
|
COMMTOUCH SOFTWARE LTD.
AND ITS SUBSIDIARY
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
NOTE 6:
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
The options
outstanding as of December 31, 2011, have been separated into ranges of
exercise prices, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise
price per
share
|
|
Options
outstanding
|
|
Weighted
average
remaining
contractual
life in years
|
|
Weighted
average
remaining
price per
share
|
|
Options
exercisable
|
|
Weighted
average
exercise
price per
share of
exercisable
options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.33-$0.60
|
|
|
398,057
|
|
|
0.81
|
|
$
|
0.35
|
|
|
398,057
|
|
|
0.35
|
|
$0.93-$1.89
|
|
|
479,872
|
|
|
2.81
|
|
$
|
1.39
|
|
|
449,236
|
|
|
1.37
|
|
$1.93-$2.91
|
|
|
451,328
|
|
|
2.39
|
|
$
|
2.32
|
|
|
380,657
|
|
|
2.38
|
|
$3.12-$3.14
|
|
|
453,665
|
|
|
1.63
|
|
$
|
3.12
|
|
|
389,665
|
|
|
3.12
|
|
$3.18-$3.28
|
|
|
671,466
|
|
|
4.88
|
|
$
|
3.21
|
|
|
112,578
|
|
|
3.20
|
|
$3.41-$3.69
|
|
|
611,333
|
|
|
5.25
|
|
$
|
3.44
|
|
|
8,333
|
|
|
3.50
|
|
$3.75-$4.35
|
|
|
526,834
|
|
|
4.11
|
|
$
|
3.89
|
|
|
243,693
|
|
|
3.906.27
|
|
$4.69-$6.60
|
|
|
440,126
|
|
|
1.65
|
|
$
|
6.27
|
|
|
439,480
|
|
|
3.906.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,032,681
|
|
|
3.19
|
|
$
|
3.06
|
|
|
2,421,699
|
|
|
2.88
|
|
|
|
|
|
d.
|
Directors
stock option plan:
|
|
|
|
|
|
In 1999, the Company adopted the 1999 Directors Stock Option Plan,
and in 2008 shareholders approved an extension of the term of this plan
through July 13, 2019. The original allotment of shares to this plan was
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 Directors Stock Option Plan reserve.
|
|
|
|
|
|
Since the annual meeting of shareholders in 2003, new directors
joining the Board were entitled to a grant of 50,000 options. Directors who are re-elected at the
annual meeting of shareholders are entitled to additional grants of 16,667
options, though at the annual meeting held October 26, 2009 shareholders
approved a one-time increase in the grants to re-elected directors to 30,000
options.
|
|
|
|
|
|
Each option granted under the 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 ten 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.
|
F-23
|
|
|
COMMTOUCH SOFTWARE LTD.
|
|
AND ITS SUBSIDIARY
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
NOTE 6:
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
|
On January 1, 2011, 926,672 options were outstanding under the
Directors Stock Option Plan.
During 2011, the Company granted 150,002 options
to Directors at a weighted average exercise price at $3.47 per share. The
weighted average fair value of options granted during the year is $1.90.
During the year, 28,847 options were exercised at a weighted average exercise
price at $2.54 per share. As of December 31, 2011, 556,959 options were
vested and unexercised and 1,047,827 were outstanding under the Directors
Stock Option Plan.
|
|
|
|
|
e.
|
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
|
|
|
81,250
|
|
|
May 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83,334
|
|
|
|
|
|
81,250
|
|
|
|
|
|
|
|
|
|
|
(i)
|
As a consideration for consulting services, on May 7, 2006 the
Company issued 50,000 options to a service provider to purchase the Companys
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
Companys 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 ASC
505-50. The fair value for these options were estimated using a Black-Scholes
option-pricing model. Compensation expense for 2009, 2010 and 2011 amounted
to $32, $31 and $0, respectively.
|
|
|
|
|
|
f.
|
The total unrecognized estimated compensation cost related to
non-vested stock options granted until December 31, 2011 was $3,533 which is
expected to be recognized over a period of up to four years.
|
F-24
|
|
|
COMMTOUCH SOFTWARE LTD.
|
|
AND ITS SUBSIDIARY
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
NOTE 6:
|
SHAREHOLDERS EQUITY (Cont.)
|
|
|
|
|
g.
|
Total stock-based compensation expenses recognized in 2009, 2010 and
2011:
|
|
|
|
|
|
The total stock-based compensation expense related to all of the
Companys equity-based awards, recognized for the years ended December 31,
2009, 2010 and 2011, was comprised as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenues
|
|
$
|
40
|
|
$
|
38
|
|
$
|
24
|
|
Research and
development
|
|
|
302
|
|
|
316
|
|
|
294
|
|
Selling and
marketing
|
|
|
300
|
|
|
373
|
|
|
355
|
|
General and
administrative
|
|
|
735
|
|
|
769
|
|
|
540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,377
|
|
$
|
1,496
|
|
$
|
1,213
|
|
|
|
|
NOTE 7:
|
INCOME TAXES
|
|
|
|
|
a.
|
Corporate tax structure:
|
|
|
|
|
|
The Israeli corporate tax rate was 26% in 2009, 25% in 2010 and 24%
in 2011.
|
|
|
|
|
|
On December 5, 2011, the Israeli Parliament (the Knesset) passed the
Law for Tax Burden Reform (Legislative Amendments), 2011 (the Law) which,
among others, cancels effective from 2012, the scheduled progressive
reduction in the corporate tax rate. The Law also increases the corporate tax
rate to 25% in 2012. In view of this increase in the corporate tax rate to
25% in 2012, the real capital gains tax rate and the real betterment tax rate
were also increased accordingly.
|
|
|
|
|
|
In December 2010, the Knesset (Israeli Parliament) passed the Law
for Economic Efficiency for 2011 and 2012 (Amended Legislation), 2011, which
prescribes, among others, amendments in the Investment Law. The amendment
became effective as of January 1, 2011. According to the amendment, the
benefit tracks in the Investment Law were modified and a flat tax rate
applies to the Companys entire preferred income. The Company will be able to
apply (the waiver is non-recourse) the amendment and from then on it will be
subject to the amended tax rates that are: 2011 and 2012 - 15%, 2013 and 2014
- 12.5% and in 2015 and thereafter - 12%.
|
|
|
|
|
|
The Company is not in development area A. The Company is examining
the possible effect of the amendment on the financial statements, if at all,
and has not yet decided whether to apply the amendment.
|
F-25
|
|
|
COMMTOUCH SOFTWARE LTD.
|
|
AND ITS SUBSIDIARY
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
NOTE 7:
|
INCOME TAXES (Cont.)
|
|
|
|
|
b.
|
Tax benefits under Israels 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.
|
|
|
|
|
c.
|
Net operating loss carryforwards:
|
|
|
|
|
|
As of December 31, 2011, the Companys net operating loss
carryforwards for tax purposes amounted to approximately $73,311 (including
capital loss carry forward of $15,000) which may be carried forward and
offset against taxable income in the future, for an indefinite period.
|
|
|
|
|
|
As of December 31, 2011, for federal income tax purposes, the U.S.
subsidiary had net operating loss carry-forwards of approximately $91,616.
These losses may offset any future U.S. taxable income of the U.S. subsidiary
and will expire in the years 2012 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.
|
|
|
|
|
|
Management currently believes that since the Company has a history of
losses, and uncertainty with respect to future taxable income, it is more
likely than not that some of the deferred tax assets regarding the loss carry
forwards will not be utilized in the foreseeable future. Thus, a valuation
allowance was provided to reduce deferred tax assets to their realizable
value.
|
F-26
|
|
|
COMMTOUCH SOFTWARE LTD.
|
|
AND ITS SUBSIDIARY
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and per share data
|
|
|
|
|
NOTE 7:
|
INCOME TAXES (Cont.)
|
|
|
|
|
d.
|
Deferred income taxes:
|
|
|
|
|
|
Deferred taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. As of
December 31, 2010 and 2011, the Companys deferred taxes were in respect of
the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
Net operating loss carry-forwards (*)
|
|
$
|
48,864
|
|
$
|
54,075
|
|
Reserves and allowances
|
|
|
492
|
|
|
274
|
|
Property and Equipment
|
|
|
52
|
|
|
52
|
|
Research and development costs
|
|
|
669
|
|
|
642
|
|
|
|
|
|
|
|
|
|
Deferred tax assets before valuation
allowance
|
|
|
50,077
|
|
|
55,043
|
|
Valuation allowance
|
|
|
(46,577
|
)
|
|
(50,158
|
)
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
$
|
3,500
|
|
$
|
4,885
|
|
|
|
|
|
|
|
|
|
Domestic:
|
|
|
|
|
|
|
|
Current deferred tax asset, net
|
|
$
|
1,559
|
|
$
|
1,572
|
|
Non-current deferred tax asset, net
|
|
|
1,535
|
|
|
2,485
|
|
|
|
|
|
|
|
|
|
|
|
|
3,094
|
|
|
4,057
|
|
Foreign:
|
|
|
|
|
|
|
|
Current deferred tax asset, net
|
|
|
381
|
|
|
424
|
|
Non-current deferred tax asset, net
|
|
|
25
|
|
|
404
|
|
|
|
|
|
|
|
|
|
|
|
|
406
|
|
|
828
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,500
|
|
$
|
4,885
|
|
|
|
|
|
|
|
(*)
|
Including capital loss carry forwards of $3,824 in Israel.
|
F-27
|
COMMTOUCH SOFTWARE LTD.
|
|
AND ITS SUBSIDIARY
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and
per share data
|
|
|
|
|
NOTE 7:
|
INCOME TAXES (Cont.)
|
|
|
|
|
e.
|
For the year ended
December 31, 2009, 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 carryforwards due to the
uncertainty of the realization of such tax benefits, as well as recognition
of a deferred tax asset of $2,404 in respect of net operating loss
carryforwards and temporary differences that are more likely than not to be
realized in the foreseeable future. For the year ended December 31, 20
10
, 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, as well as utilization
of deferred tax asset of approximately $500 during 2010, offset by a
recognition of a deferred tax asset of approximately $1,600 in respect of net
operating loss carry-forwards and temporary differences that are more likely
than not to be realized in the foreseeable future.
|
|
|
|
|
|
For the year ended
December 31, 2011, the main reconciling items between the Companys statutory
tax rate and the effective tax rate relates to changes in valuation allowance
due to utilization of net operating loss carry forwards, recognition
of net operating loss carry forward due to certainty of future realization of
taxable income, and an increase in the Israeli tax rate (which resulted in an
increase in the deferred tax asset) offset by increase in the exchange rate of
the US dollars compared to the New Israeli Shekel.
|
|
|
|
|
f.
|
Income before tax benefit consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
2,573
|
|
$
|
3,124
|
|
$
|
3,114
|
|
U.S.
|
|
|
183
|
|
|
181
|
|
|
167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,756
|
|
$
|
3,305
|
|
$
|
3,281
|
|
|
|
|
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.
|
F-28
|
|
|
COMMTOUCH SOFTWARE LTD.
|
|
AND ITS SUBSIDIARY
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
U.S. dollars in thousands, except share and
per share data
|
|
|
|
NOTE 7:
|
INCOME TAXES (Cont.)
|
|
|
|
|
|
|
|
Tax benefit
is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
Current
taxes:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
-
|
|
$
|
(2
|
)
|
$
|
(2
|
)
|
Domestic
|
|
|
-
|
|
|
-
|
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
$
|
(2
|
)
|
$
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
taxes:
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
$
|
(135
|
)
|
$
|
(270
|
)
|
$
|
(357
|
)
|
Domestic
|
|
|
(2,269
|
)
|
|
(826
|
)
|
|
(1,028
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(2404
|
)
|
$
|
(1096
|
)
|
$
|
(1,385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,404
|
)
|
$
|
(1,098
|
)
|
$
|
(1,317
|
)
|
|
|
|
|
|
|
h.
|
Tax assessments:
|
|
|
|
|
|
|
|
The Company has final tax
assessments in Israel through 2006.
|
|
|
|
|
|
|
NOTE 8:
|
GEOGRAPHIC INFORMATION
|
|
|
|
The Company
conducts its business on the basis of one reportable segment. The Company has
adopted ASC 280, Segment Reporting.
|
|
|
|
|
|
|
a.
|
Revenues
from external customers:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
Israel
|
|
$
|
1,544
|
|
$
|
2,047
|
|
$
|
2,044
|
|
North America
|
|
|
8,032
|
|
|
9,184
|
|
|
12,655
|
|
Europe
|
|
|
3,776
|
|
|
4,454
|
|
|
4,869
|
|
Asia
|
|
|
1,508
|
|
|
1976
|
|
|
3,036
|
|
Other
|
|
|
329
|
|
|
500
|
|
|
412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,189
|
|
$
|
18,161
|
|
$
|
23,016
|
|
|
|
|
|
|
|
|
For the
years ended December 31, 2009, 2010 and 2011, there are no major customers.
|
F-29
|
|
|
COMMTOUCH SOFTWARE LTD.
AND ITS SUBSIDIARY
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
U.S.
dollars in thousands, except share and per share data
|
|
|
NOTE 8:
|
GEOGRAPHIC INFORMATION (Cont.)
|
|
|
|
|
|
|
b.
|
The Companys
net amount of long-lived assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
Israel
|
|
$
|
261
|
|
$
|
246
|
|
U.S.A.
|
|
|
5,169
|
|
|
4,144
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,430
|
|
$
|
4,390
|
|
|
|
NOTE 9:-
|
FINANCIAL INCOME (EXPENSES), NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
|
|
|
|
|
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
Interest on cash and
cash equivalents and short term deposit
|
|
$
|
108
|
|
$
|
20
|
|
$
|
177
|
|
Capital gain on sale of
marketable securities
|
|
|
38
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
exchange differences and other
|
|
|
(86
|
)
|
|
(75
|
)
|
|
(204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
60
|
|
$
|
(55
|
)
|
$
|
(27
|
)
|
|
- - - - - - - - - - - - - - - - - - - -
|
F-30
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 20F
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 29,
2012
|
|
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 15,
2011.
|
|
|
4.1
|
Commtouch
Software Ltd. 2006 U.S. Stock Option Plan.(2)
|
|
|
4.2
|
Amended and
Restated Commtouch Software Ltd. 1999 NonEmployee Directors Stock Option
Plan.(3)
|
|
|
4.3
|
Extension of
Amended and Restated Commtouch Software Ltd. 1999 Non-Employee Directors
Stock Option Plan.(4)
|
|
|
4.4
|
Commtouch
Software Ltd. Amended and Restated Israeli Share Option Plan [successor plan
to 1999 Section 3(i) Share Option Plan].(5)
|
|
|
4.5
|
Commtouch
Software Ltd. Amended and Restated 1996 CSI Stock Option Plan.(6)
|
|
|
4.6
|
Amended and
Restated 1999 Section 3(i) Share Option Plan.(7)
|
|
|
4.7
|
Summary of
Director Compensation.
|
|
|
4.8
|
Asset
Purchase Agreement by and between Commtouch Inc. and Authentium, Inc. dated
July 26, 2010.(8)
|
|
|
8
|
List of
Subsidiaries of the Company.
|
|
|
12.1
|
Certification
of Companys Principal Executive Officer Pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a).
|
|
|
12.2
|
Certification
of Companys Principal Financial Officer Pursuant to Exchange Act Rule
13a-14(a) or 15d-14(a).
|
|
|
13
|
Certification
of Companys Principal Executive Officer and Principal Financial Officer
Pursuant to 18 U.S.C. 1350.
|
|
|
15
|
Consent of
Kost, Forer, Gabbay & Kasierer, independent registered public accounting
firm.
|
|
|
101
|
The following materials from our Annual Report on Form 20-F for the year ended
December 31, 2011 formatted in XBRL (eXtensible Business Reporting Language) is furnished herein: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements
of Operations, (iii) the Statements of Changes in Shareholders Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the
Notes to Consolidated Financial Statements, tagged as blocks of text.
|
|
|
|
|
|
|
(1)
|
Incorporated
by reference to exhibits in Amendment No. 1 to Registration Statement on Form
F1 of Commtouch Software Ltd., File No. 33378531. [filed June 3, 1999]
|
|
|
|
(2)
|
Incorporated
by reference to Exhibit 99.4 to Registration Statement on Form S8 No.
333141177. [filed March 9, 2007]
|
|
|
|
(3)
|
Incorporated
by reference to Exhibit 99.1 to Registration Statement on Form S8 No.
333141177. [filed March 9, 2007]
|
|
|
|
(4)
|
Incorporated
by reference to Exhibit 4.6 to Annual Report on form 20-F for the year ended
December 31, 2008.
|
|
|
|
(5)
|
Incorporated
by reference to Exhibit 99.3 to Registration Statement on Form S8 No.
333141177. [filed March 9, 2007]
|
|
|
|
(6)
|
Incorporated
by reference to Exhibit 99.2 to Registration Statement on Form S8 No.
333141177. [filed March 9, 2007]
|
|
|
|
(7)
|
Incorporated
by reference to Exhibit 5 to Schedule TO, filed July 20, 2001.
|
|
|
|
(8)
|
Incorporated
by reference to Exhibit 4.8 to Annual Report on Form 20F/A for the year
ended December 31, 2010. [filed June 7, 2011]
|
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