SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F/A
Amendment No. 1
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: No. 0-20892
ATTUNITY LTD
(Exact name of Registrant as specified in its charter
and translation of Registrant's Name into English)
Israel
(Jurisdiction of
incorporation or organization)
Einstein Building, Tirat Carmel, Haifa, 39101, Israel
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act: None
Securities registered or to be registered pursuant to Section
12(g) of the Act:
Ordinary Shares, NIS 0.1 Par Value
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: None
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report:
Ordinary Shares, par value NIS 0.1 per share
as of December 31, 2003.........................14,767,432
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
Indicate by check mark which financial statement item the
registrant has elected to follow:
Item 17__ Item 18 X
This Report on Form 20-F/A is incorporated by reference into our
Form F-3 Registration Statements File Nos. 333-11972, 333-12450
and 333-14140.
Explanatory Note
----------------
This Amendment No. 1 on Form 20-F/A hereby amends Items 3, 5
and 18 of Attunity Ltd's Annual Report on Form 20-F for the fiscal year
ended December 31, 2003, which was filed on June 30, 2004.
This Amendment is not intended to revise other information
presented in our Annual Report on Form 20-F for the fiscal year ended
December 31, 2003 as originally filed and all such other information in
the original filing, which remains unchanged.
This Amendment does not reflect events occurring after the
filing of the original Form 20-F and does not modify or update the
disclosure therein in any way other than as required to reflect the
amendments discussed above. As a result, this Amendment continues to
speak as of June 30, 2004.
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INTRODUCTION
------------
Attunity Ltd designs, develops, markets and supports
standards-based integration middleware for accessing mainframe,
enterprise data sources and legacy applications. Since our initial
public offering on December 17, 1992, our ordinary shares have been
listed on the NASDAQ National Market. On October 27, 2000, our name was
changed to Attunity Ltd. and our NASDAQ symbol changed to ATTU. As used
in this annual report, the terms "we," "us" and "our" mean Attunity Ltd
and its subsidiaries, unless otherwise indicated.
Except for the historical information contained in this annual
report, the statements contained in this annual report are
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and the Private Securities Litigation
Reform Act of 1995, as amended, with respect to our business, financial
condition and results of operations. Such forward-looking statements
reflect our current view with respect to future events and financial
results. We urge you to consider that statements which use the terms
"anticipate," "believe," "do not believe," "expect," "plan," "intend,"
"estimate," "anticipate" and similar expressions are intended to
identify forward-looking statements. We remind readers that
forward-looking statements are merely predictions and therefore
inherently subject to uncertainties and other factors and involve known
and unknown risks that could cause the actual results, performance,
levels of activity, or our achievements, or industry results, to be
materially different from any future results, performance, levels of
activity, or our achievements expressed or implied by such
forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of
the date hereof. Except as required by applicable law, including the
securities laws of the United States, we undertake no obligation to
publicly release any update or revision to any forward-looking
statements to reflect new information, future events or circumstances,
or otherwise after the date hereof. We have attempted to identify
significant uncertainties and other factors affecting forward-looking
statements in the Risk Factors section that appears in Item 3.D. "Key
Information- Risk Factors"
We have obtained federal trademark registrations for
Attunity(R), Attunity B2B(R) and Attunity Connect(R) in the United
States. Any other trademarks and trade names appearing in this annual
report are owned by their respective holders.
Our consolidated financial statements appearing in this annual
report are prepared in U.S. dollars and in accordance with generally
accepted accounting principles in the United States, or U.S. GAAP, and
audited in accordance with the standards of the Public Company
Accounting Oversight Board (United States) generally accepted in the
United States. All references in this annual report to "dollars" or "$"
are to U.S. dollars and all references in this annual report to "NIS"
are to New Israeli Shekels.
Statements made in this annual report concerning the contents
of any contract, agreement or other document are summaries of such
contracts, agreements or documents and are not complete descriptions of
all of their terms. If we filed any of these documents
ii
as an exhibit to this annual report or to any registration statement or
annual report that we previously filed, you may read the document
itself for a complete description of its terms.
iii
TABLE OF CONTENTS
PART I.........................................................................1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS........1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE......................1
ITEM 3. KEY INFORMATION..............................................1
A. Selected Financial Data..................................1
B. Capitalization and Indebtedness..........................2
C. Reasons for the Offer and Use of Proceeds................3
D. Risk Factors.............................................3
ITEM 4. INFORMATION ON THE COMPANY..................................12
A. History and Development of the Company..................12
B. Business Overview.......................................13
C. Organizational Structure................................17
D. Property, Plants and Equipment..........................17
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................18
A. Operating Results.......................................18
B. Liquidity and Capital Resources.........................31
C. Research and Development, Patents and Licenses..........32
D. Trend Information.......................................33
E. Off-Balance Sheet Arrangements..........................34
F. Tabular Disclosure of Contractual Obligations...........34
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES..................34
A. Directors and Senior Management.........................34
B. Compensation............................................37
C. Board Practices.........................................38
D. Employees...............................................44
E. Share Ownership.........................................45
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...........49
A. Major Shareholders......................................49
B. Related Party Transactions..............................51
C. Interests of Experts and Counsel........................52
ITEM 8. FINANCIAL INFORMATION.......................................52
A. Consolidated Statements and Other Financial Information.52
B. Significant Changes.....................................53
ITEM 9. THE OFFER AND LISTING.......................................53
A. Offer and Listing Details...............................53
B. Plan of Distribution....................................54
C. Markets.................................................54
D. Selling Shareholders....................................54
E. Dilution................................................54
F. Expense of the Issue....................................55
ITEM 10. ADDITIONAL INFORMATION......................................55
A. Share Capital...........................................55
B. Memorandum and Articles of Association..................55
C. Material Contracts......................................58
D. Exchange Controls.......................................59
E. Taxation................................................59
F. Dividend and Paying Agents..............................71
G. Statement by Experts....................................71
H. Documents on Display....................................71
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I. Subsidiary Information..................................72
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS..72
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES......72
PART II.......................................................................72
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.............72
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS.........................................73
ITEM 15. CONTROLS AND PROCEDURES.....................................73
ITEM 16. [RESERVED]..................................................73
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT............................73
ITEM 16B. CODE OF ETHICS..............................................73
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES......................74
ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR
AUDIT COMMITTEE.............................................74
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES
AND PURCHASERS..............................................75
PART III......................................................................75
ITEM 17. FINANCIAL STATEMENTS........................................75
ITEM 18. FINANCIAL STATEMENTS........................................75
ITEM 19. EXHIBITS....................................................75
S I G N A T U R E S........................................................77
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The statements contained in this annual report that are not purely
historical are forward-looking statements. Such forward-looking statements also
include statements in Item 4 - "Information on the Company" and Item 5 -
"Operating and Financial Review and Prospects." These statements involve risks
and uncertainties and actual results could differ materially from such results
discussed in these statements as a result of the risk factors set forth in this
annual report. All forward-looking statements included in this annual report are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements.
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
-----------------------------------------------------
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
---------------------------------------
Not applicable.
ITEM 3. KEY INFORMATION
---------------
A. SELECTED FINANCIAL DATA
The following selected consolidated financial data for and as of the
five years ended December 31, 2003 are derived from our audited consolidated
financial statements, which have been prepared in accordance with U.S. GAAP. The
selected consolidated financial data as of December 31, 2001, 2000 and 1999 and
for the years ended December 31, 2000 and 1999 have been derived from audited
consolidated financial statements not included in this Annual Report. The
selected consolidated financial data set forth below should be read in
conjunction with and are qualified by reference to Item 5, "Operating and
Financial Review and Prospects" and our consolidated financial statements and
notes thereto included elsewhere in this Annual Report.
1
Income Statement Data:
Year ended December 31,
-------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(U.S. dollars in thousands, except per share data)
Revenues .......................................... $ 16,617 $ 17,455 $ 16,869 $ 18,671 $ 20,507
Cost of revenues .................................. 8,622 6,375 10,837 8,345 7,322
-------- -------- -------- -------- --------
Gross profit ...................................... 7,995 11,080 6,032 10,326 13,185
Research and development costs, net (1) ........... 1,491 1,438 3,593 3,559 2,476
Selling and marketing expenses .................... 5,938 5,369 12,120 11,992 8,544
General and administrative expenses ............... 2,749 1,938 4,218 5,463 2,533
Costs in respect of lawsuits ...................... 925 1,100 -- -- --
Restructuring and termination costs ............... -- 608 1,326 -- --
Impairment of investment and other assets ......... -- -- 272 6,090 --
In-process research and development write-off ..... -- -- -- 12,997 --
-------- -------- -------- -------- --------
Operating income (loss) ........................... (3,108) 627 (15,497) (29,775) (368)
Financial income, net ............................. 236 141 48 416 160
-------- -------- -------- -------- --------
Taxes on income (tax benefit) ..................... 84 264 402 (200) 188
-------- -------- -------- -------- --------
Gain (loss) from continued operations ............. (2,956) 504 (15,851) (29,159) (396)
Earnings from discontinued operations of a
segment, net of taxes ......................... -- -- -- 82 --
Gain (loss) on disposal of segment ................ -- -- 220 (2,224) --
-------- -------- -------- -------- --------
Gain (loss) from discontinued operations .......... -- -- 220 (2,142) --
Net income (loss) ................................. $ (2,956) $ 504 $(15,631) $(31,301) $ (396)
======== ======== ======== ======== ========
Basic and diluted net earnings (loss) per share
from continuing operations .................... $ (0.20) $ 0.03 $ (1.36) $ (2.96) $ (0.05)
======== ======== ======== ======== ========
Basic and diluted net earnings (loss) per share
from discontinued operations .................. $ -- $ -- $ 0.02 $ (0.22) $ --
======== ======== ======== ======== ========
Basic and diluted net earnings (loss) per share ... $ (0.20) $ 0.03 $ (1.34) $ (3.18) $ (0.05)
======== ======== ======== ======== ========
Number of shares used to compute diluted earnings
(loss) per share ............................... 14,767 14,725 11,668 9,844 8,365
======== ======== ======== ======== ========
-----------------
(1) Total research and development costs are offset in part by royalty-bearing
grants and the capitalization of certain computer software development costs.
Balance Sheet Data:
December 31,
------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(U.S. dollars in thousands)
Working capital (deficiency) ................ $ (553) $ 667 $ (142) $ 6,983 $ 7,636
Total assets ................................ 20,212 21,484 21,294 33,506 27,209
Short-term debt, including current maturities
of long-term debt ...................... 308 380 405 260 140
Long-term debt, less current maturities ..... 99 55 211 268 93
Shareholders' equity ........................ 10,473 13,080 12,325 23,977 19,516
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
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C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
Investing in our ordinary shares involves a high degree of risk and
uncertainty. You should carefully consider the risks and uncertainties described
below before investing in our ordinary shares. If any of the following risks
actually occurs, our business, prospects, financial condition and results of
operations could be harmed. In that case, the value of our ordinary shares could
decline, and you could lose all or part of your investment.
Risk Factors Relating to Our Company
We have a history of operating losses and may not achieve or sustain
profitability in the future.
We incurred an operating loss in the fiscal year ended December 31,
2003 and in three of the four preceding years, although we recorded an operating
profit in the fiscal year ended December 31, 2002. We can not assure you that we
will be able to achieve or sustain profitable operations in the future.
Our operating results fluctuate significantly.
Our quarterly results have fluctuated significantly in the past and are
likely to fluctuate significantly in the future. Our future operating results
will depend on many factors, including, but not limited to, the following:
o the size and timing of significant orders and their fulfillment;
o demand for our products;
o changes in our pricing policies or those of our competitors;
o the number, timing and significance of product enhancements;
o new product announcements by us and our competitors;
o our ability to successfully market newly acquired products and
technologies;
o our ability to develop, introduce and market new and enhanced
products on a timely basis;
o changes in the level of our operating expenses;
o budgeting cycles of our customers;
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o customer order deferrals in anticipation of enhancements or new
products that we or our competitors offer;
o product life cycles;
o software bugs and other product quality problems;
o personnel changes;
o changes in our strategy;
o seasonal trends and general domestic and international economic
and political conditions, among others;
o currency exchange rate fluctuations and economic conditions in
the geographic areas where we operate; and
o the assurance of success in marketing new products or
technologies.
Due to the foregoing factors, quarterly revenues and operating results
are difficult to forecast, and it is likely that our future operating results
will be adversely affected by these or other factors.
Revenues are also difficult to forecast because our sales cycle, from
initial evaluation to purchase, is lengthy and varies substantially from
customer to customer. We typically ship product orders shortly after receipt
and, consequently, order backlog at the beginning of any quarter has in the past
represented only a small portion of that quarter's revenues. As a result,
license revenues in any quarter depend substantially on orders booked and
shipped in that quarter.
Due to all of the foregoing, we cannot predict revenues for any future
quarter with any significant degree of accuracy. Accordingly, we believe that
period-to-period comparisons of our operating results are not necessarily
meaningful and you should not rely upon them as indications of future
performance. Although we have experienced revenue growth in the past, we may not
be able to sustain this growth rate, and you should not consider such past
growth indicative of future revenue growth, or of future operating results.
We may need to raise additional capital in the future, which may not be
available to us.
Our working capital requirements and the cash flow provided by our
operating activities are likely to vary greatly from quarter to quarter,
depending on the timing of orders and deliveries, and the payment terms offered
to our customers. We anticipate that our existing capital resources will be
adequate to satisfy our working capital and capital expenditure requirements
until at least June 30, 2005, but we may need to raise additional funds in the
future for a number of uses, including:
o implementing marketing and sales activities for our products and
services;
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o expanding research and development programs;
o expanding investment in fixed assets; and
o hiring additional qualified personnel.
We may not be able to obtain additional funds on acceptable terms or at
all. If we cannot raise needed funds on acceptable terms, we may be required to
delay, scale back or eliminate some aspects of our operations and we may not be
able to:
o develop new products;
o enhance our existing products;
o remain current with evolving industry standards;
o take advantage of future opportunities; or
o respond to competitive pressures or unanticipated requirements.
Any equity or debt financings, if available at all, may cause dilution
to our then-existing shareholders. If additional funds are raised through the
issuance of equity securities, the net tangible book value per share of our
ordinary shares would decrease and the percentage ownership of then current
shareholders would be diluted.
Our operating results vary quarterly and seasonally.
We have often recognized a substantial portion of our revenues in the
last quarter of the year and in the last month, or even weeks or days, of a
quarter. Our expense levels are substantially based on our expectations for
future revenues and are therefore relatively fixed in the short term. If revenue
levels fall below expectations, our quarterly results are likely to be
disproportionately adversely affected because a proportionately smaller amount
of our expenses varies with our revenues.
Our operating results reflect seasonal trends and we expect to continue
to be affected by such trends in the future. We expect to continue to experience
relatively higher sales in the first and second quarters of the year and
relatively lower sales in the third quarter ending September 30, as a result of
reduced sales activity in Europe during the summer months. Due to the foregoing
factors, in some future quarter our operating results may be below the
expectations of public market analysts and investors. In such event, it is
likely that the price of our ordinary shares would be materially adversely
affected.
We are subject to risks associated with international operations.
We are based in Israel and generate a large percentage of our sales
outside the United States. Our sales in the United States accounted for 45.0%,
40.2 % and 39.3% of our total revenues for the years ended December 31, 2001,
2002 and 2003, respectively. Although we continue to expand our international
operations and commit significant management time and
5
financial resources to developing direct and indirect international sales and
support channels, we cannot be certain that we will be able to maintain or
increase international market demand for our products. To the extent that we
cannot do so in a timely manner, our business, operating results and financial
condition will be adversely affected.
International operations are subject to inherent risks, including the
following:
o the impact of possible recessionary environments in multiple
foreign markets;
o longer receivables collection periods and greater difficulty in
accounts receivable collection;
o unexpected changes in regulatory requirements;
o difficulties and costs of staffing and managing foreign
operations;
o reduced protection for intellectual property rights in some
countries;
o potentially adverse tax consequences; and
o political and economic instability.
We cannot be certain that we, our distributors or our resellers will be
able to sustain or increase revenues from international operations or that the
foregoing factors will not have a material adverse effect on our future revenues
and, as a result, our business, operating results and financial condition.
We may be adversely affected by fluctuations in currency exchange
rates. While our revenues are generally denominated in United States dollars,
the Euro and British Pound, a significant portion of our expenses are incurred
in NIS. If we were to determine that it was in our best interests to enter into
any hedging transactions in the future, there can be no assurance that we will
be able to so do or that such transactions, if entered into, will materially
reduce the effect of fluctuations in foreign currency exchange rates on our
results of operations. In addition, if for any reason exchange or price controls
or other restrictions on the conversion of foreign currencies into NIS were
imposed, our business could be adversely affected. Although exposure to currency
fluctuations to date has not had a material adverse effect on our business there
can be no assurance such fluctuations in the future will not have a material
adverse effect on revenues from international sales and, consequently our
business, operating results and financial condition.
We are subject to risks relating to proprietary rights and risks of
infringement.
We are dependent upon our proprietary software technology and we rely
primarily on a combination of copyright and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our proprietary
rights. Except for our federal trademark registrations for Attunity(R), Attunity
B2B(R) and Attunity Connect(R) in the United States, we do not have any
trademark, patent or copyright registrations. To protect our software,
documentation and other written materials, we rely on trade secret and copyright
laws, which
6
afford only limited protection. It is possible that others will develop
technologies that are similar or superior to our technology. Despite our efforts
to protect our proprietary rights, unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary. It is difficult to police the unauthorized use of products in our
field, and we expect software piracy to be a persistent problem, although we are
unable to determine the extent to which piracy of our software products exists.
In addition, the laws of some foreign countries do not protect our proprietary
rights as fully as do the laws of the United States. We cannot be certain that
our means of protecting our proprietary rights in the United States or abroad
will be adequate or that our competition will not independently develop similar
technology.
We are not aware that we have infringed any proprietary rights of third
parties. It is possible, however, that third parties will claim that we have
infringed upon their intellectual property rights. We believe that software
product developers will increasingly be subject to infringement claims as the
number of products and competitors in our industry segment grows and the
functionality of products in different industry segments overlaps. It would be
time consuming for us to defend any such claims, with or without merit, and any
such claims could:
o result in costly litigation;
o divert management's attention and resources;
o cause product shipment delays; or
o require us to enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, may not be
available on terms acceptable to us, if at all.
If there is a successful claim of infringement against us and we are
not able to license the infringed or similar technology or other intellectual
property, our business, operating results and financial condition would be
materially adversely affected.
A significant portion of our revenues are dependent on maintenance payments from
customers using legacy CorVision, Mancal 2000 and APTuser software.
Approximately 17% of our revenues are derived from annual maintenance
payments made by customers who use CorVision, Mancal 2000 and APTuser, which are
legacy software products. In 2001, 2002 and 2003, these revenues on a
consolidated basis totaled $3.0 million, $3.0 million and $2.8 million,
respectively. Some of these customers may replace these legacy products with
more state-of-the-art products from other vendors and, as a result, discontinue
use of these products. This would result in a reduction in our maintenance
revenues and adversely affect our operating results.
Our products have a lengthy sales cycle.
Our customers typically use our products to deploy applications that
are critical to their business. As a result, the licensing and implementation of
our products generally involves a significant commitment of attention and
resources by prospective customers. Because of the
7
long approval process that typically accompanies strategic initiatives or
capital expenditures by companies, our sales process is often delayed, with
little or no control over any delays encountered by us. Our sales cycle can be
further extended for sales made through third party distributors. Delay in the
sales cycle of our products could result in significant fluctuations in our
quarterly operating results.
Rapid technological change may adversely affect the market acceptance of our
products and services.
We compete in a market that is characterized by rapid technological
change. The introduction of new technologies could render existing products and
services obsolete and unmarketable and could exert price pressures on our
products and services. Any future success will depend upon our ability to
address the increasingly sophisticated needs of our customers by:
o supporting existing and emerging hardware, software, databases
and networking platforms; and
o developing and introducing new and enhanced applications that
keep pace with such technological developments, emerging new
markets and changing customer requirements.
Our products may contain defects that may be costly to correct, delay market
acceptance of our products and expose us to litigation.
Despite testing by us, errors may be found in our software products. If
defects are discovered, we may not be able to successfully correct them in a
timely manner or at all. Defects and failures in our products could result in a
loss of, or delay in, market acceptance of our products and could damage our
reputation. Although our standard license agreement with our customers contains
provisions designed to limit our exposure to potential product liability claims,
it is possible that these provisions may not be effective or enforceable under
the laws of some jurisdictions, and we could fail to realize revenues and suffer
damage to our reputation as a result of, or in defense of, a substantial claim.
We currently do not carry product liability insurance.
We are dependent on our senior management. Any loss of the services of our
senior management would negatively affect our business.
Our future success depends to a large extent on the continued services
of our senior management and key personnel. Any loss of the services of members
of our senior management or other key personnel would negatively affect our
business.
Our results may be adversely affected by competition.
The market for our software products is fragmented and is intensely
competitive. Competition in the industry is generally based on product
performance, depth of product line, technical support and price. We compete both
with international and local software providers, many of whom have significantly
greater financial, technical and marketing resources than us. We anticipate
continued growth and competition in the software products market and,
8
consequently, the entrance of new competitors into the market. Our existing and
potential competitors may be able to develop software products and services that
are as effective as, or more effective or easier to use than those offered by
us. Such existing and potential competitors may also enjoy substantial
advantages over us in terms of research and development expertise, manufacturing
efficiency, name recognition, sales and marketing expertise and distribution
channels. There can be no assurance that we will be able to compete successfully
against current or future competitors or that competition will not have a
material adverse effect on our future revenues and, consequently, on our
business, operating results and financial condition.
We do not intend to pay cash dividends.
Our policy is to retain earnings for use in our business and, for this
reason, we do not intend to pay cash dividends on the ordinary shares in the
foreseeable future.
Risk Factors Relating to Our Ordinary Shares
Our share price has been volatile in the past and may decline in the future.
Our ordinary shares have experienced significant market price and
volume fluctuations in the past and may experience significant market price and
volume fluctuations in the future in response to factors such as the following,
some of which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of
securities analysts and investors;
o changes in expectations as to our future financial
performance, including financial estimates by securities
analysts and investors;
o announcements of technological innovations or new products
by us or our competitors;
o announcements by us or our competitors of significant
contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
o changes in the status of our intellectual property rights;
o announcements by third parties of significant claims or
proceedings against us;
o additions or departures of key personnel;
o future sales of our ordinary shares; and
o stock market price and volume fluctuations.
9
Domestic and international stock markets often experience extreme price
and volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations or political events or hostilities in or surrounding Israel, could
adversely affect the market price of our ordinary shares.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
Risk Factors Relating to Our Operations in Israel
Conducting business in Israel entails special risks.
We are incorporated under the laws of, and our executive offices and
research and development facilities are located in, the State of Israel.
Although most of our sales are made to customers outside Israel, we are directly
influenced by the political, economic and military conditions affecting Israel.
Specifically, we could be adversely affected by any major hostilities involving
Israel, a full or partial mobilization of the reserve forces of the Israeli
army, the interruption or curtailment of trade between Israel and its present
trading partners, or a significant downturn in the economic or financial
condition of Israel.
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, and a
state of hostility, varying from time to time in intensity and degree, has led
to security and economic problems for Israel. Since September 2000, there has
been a marked increase in violence, civil unrest and hostility, including armed
clashes, between the State of Israel and the Palestinians, and acts of terror
have been committed inside Israel and against Israeli targets in the West Bank
and Gaza. There is no indication as to how long the current hostilities will
last or whether there will be any further escalation. Any further escalation in
these hostilities or any future armed conflict, political instability or
violence in the region may have a negative effect on our business condition,
harm our results of operations and adversely affect our share price.
Furthermore, there are a number of countries that restrict business with Israel
or Israeli companies. Restrictive laws or policies of those countries directed
towards Israel or Israeli businesses may have an adverse impact on our
operations, our financial results or the expansion of our business.
Our results of operations may be negatively affected by the obligation of our
personnel to perform military service.
Many of our executive officers and employees in Israel are obligated to
perform up to 36 days, depending on rank and position, of military reserve duty
annually and are subject to being called for active duty under emergency
circumstances. If a military conflict or war arises, these individuals could be
required to serve in the military for extended periods of time. Our operations
could be disrupted by the absence for a significant period of one or more of our
executive officers or key employees or a significant number of other employees
due to military service. Any disruption in our operations could adversely affect
our business.
10
Economic conditions in Israel.
In recent years Israel has been going through a period of recession in
economic activity, resulting in low growth rates and growing unemployment. Our
operations could be adversely affected if the economic conditions in Israel
continue to deteriorate. In addition, due to significant economic measures
proposed by the Israeli Government, there have been strikes and work stoppages
in 2003 and 2004, affecting banks, airports and ports. These strikes have had an
adverse effect on the Israeli economy and on business, including our ability to
deliver products to our customers. Following the passage by the Israeli
Parliament of laws to implement the economic measures, the Israeli trade unions
have threatened further strikes or work-stoppages, and these may have a material
adverse effect on the Israeli economy and on us.
Our financial results may be adversely affected by inflation and currency
fluctuations.
Since we report our financial results in dollars, fluctuations in rates
of exchange between the dollar and non-dollar currencies may have a material
adverse affect on our results of operations. A significant portion of our
expenses are paid in NIS (primarily salaries) and are influenced by the timing
of, and the extent to which, any increase in the rate of inflation in Israel
over the rate of inflation in the United States is not offset by the devaluation
of the NIS in relation to the dollar. We believe that the rate of inflation in
Israel has not had a material adverse effect on our business to date However,
our dollar costs in Israel will increase if inflation in Israel exceeds the
devaluation of the NIS against the dollar or if the timing of such devaluation
lags behind inflation in Israel. Over time, the NIS has been devalued against
the dollar, generally reflecting inflation rate differentials. Likewise, our
operations could be adversely affected if we are unable to guard against
currency fluctuations in the future. We do not currently engage in any currency
hedging transactions intended to reduce the effect of fluctuations in foreign
currency exchange rates on our results of operations. We cannot guarantee that
we will enter into such transactions in the future or that such measures will
adequately protect us from serious harm due to the impact of inflation in
Israel.
We cannot guarantee continuation of government programs and tax benefits.
We have in the past received certain Israeli government grants and
currently enjoy certain tax benefits in Israel. To remain eligible for these
grants and tax benefits, we must continue to meet certain conditions, including
making some specified investments in fixed assets. If we fail to comply with
these conditions in the future, the benefits we receive could be canceled and we
may have to refund payments previously received under these programs (with
interest and linkage differentials) or pay certain taxes. We cannot guarantee
that these programs and tax benefits will be continued in the future, at their
current levels or at all. If these programs and tax benefits are ended, our
business, financial condition and results of operations could be negatively
affected.
Service and enforcement of legal process on us and our directors and officers
may be difficult to obtain.
Service of process upon our directors and officers and the Israeli
experts named herein, many of whom reside outside the United States, may be
difficult to obtain within the United
11
States. Furthermore, since a substantial portion of our assets, almost all of
our directors, some of the officers and the Israeli experts named in this annual
report are located outside the United States, any judgment obtained in the
United States against us or these individuals or entities may not be collectible
within the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act in original actions instituted in
Israel. However, subject to certain time limitations and other conditions,
Israeli courts may enforce final judgments of U.S. courts for liquidated amounts
in civil matters, including judgments based upon the civil liability provisions
of those Acts.
Provisions of Israeli law may delay, prevent or make difficult an acquisition of
us, which could prevent a change of control and therefore depress the price of
our shares.
Provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger with, or other
acquisition of, us. This could cause our ordinary shares to trade at prices
below the price for which third parties might be willing to pay to gain control
of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because
of these provisions of Israeli law.
Your rights and responsibilities as a shareholder will be governed by Israeli
law and differ in some respects from the rights and responsibilities of
shareholders under U.S. law.
We are incorporated under Israeli law. The rights and responsibilities
of holders of our ordinary shares are governed by our memorandum of association,
our articles of association and by Israeli law. These rights and
responsibilities differ in some respects from the rights and responsibilities of
shareholders in typical U.S. corporations. In particular, a shareholder of an
Israeli company has a duty to act in good faith toward the company and other
shareholders and to refrain from abusing his power in the company, including,
among other things, in voting at the general meeting of shareholders on certain
matters.
ITEM 4. INFORMATION ON THE COMPANY
--------------------------
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated under the laws of the State of Israel in 1988 as
I.S.G. Software Industries Ltd. We changed our name to ISG International
Software Group Ltd. in 1992 and we changed our name to Attunity Ltd. in October
2000.
We have subsidiaries in Israel, the United States, the United Kingdom,
France, Australia, Singapore and Hong Kong (PRC). Our executive headquarters are
located at Einstein Building, Tirat Carmel, Haifa 39101, Israel, telephone
number (972) 4-855-9666. Our United States-based subsidiary, Attunity Inc.,
maintains its principal offices at 40 Audubon Road, Wakefield, Massachusetts
01880, telephone number (781) 213-5200. Our address on the internet is
http://www.attunity.com. The information on our website is not incorporated by
reference into this annual report.
12
We develop, market and support standards-based integration middleware
for accessing mainframe, data sources and legacy applications. We began
operations in 1989. When we went public in December 1992, our principal products
were the APT product family of software productivity tools, comprised of the
APTuser - a production report generator and APTools - a comprehensive software
development system. In 1993 we acquired Mancal 2000 - a financial and logistic
application software package, in 1994 we acquired CorVision - an application
generator for enterprise applications, and in 1996 we released Attunity
Connect(R) (formerly known as ISG Navigator) - a universal data and application
access product. In 2000 we acquired Attunity BPI - a product for
service-oriented process creation and management across the extended enterprise.
B. BUSINESS OVERVIEW
We market software products for integrating disparate data sources,
legacy and mainframe applications enabling real-time access to data. Our
principal product is Attunity Connect. We also provide consulting, maintenance
and other related services for our products including maintenance services to
our legacy products: CorVision - an application generator, APTuser - a database
retrieval and production report generator, and Mancal 2000 - a logistics and
financial application software package.
Products and Services
o Attunity Connect - for universal data and application access.
o CorVision - an application generator for enterprise applications.
o APTuser - a production report generator.
o Mancal 2000 - a financial and logistic application software.
Attunity Connect
Attunity Connect enables information technology, or IT, departments,
software developers, systems integrators, OEMs and others to transparently
access a wide array of data sources and applications on many major computing
platforms and is optimized for distributed enterprise-wide deployment. Support
of TCP/IP and its distributed architecture add the capability for transparent
networking. Attunity Connect offers both relational (SQL) and object-based (J2EE
CA) data views. Users may employ the models separately, or in combination,
without regard to the underlying data source or computing platform on which they
reside. This is achieved through standard programming interfaces including ODBC,
OLE DB, MS ADO, JDBC, XML and J2EE CA.
Attunity Connect Features:
o Attunity Connect accesses different data sources transparently
using standard interfaces;
13
o Attunity Connect promotes an expanded data model extending SQL to
address heterogeneous databases that span pre-relational,
relational, and post-relational models; and
o Attunity Connect provides the ability to integrate object-based
data using the Attunity Application Framework, or AAF, through
Sun Microsystems's J2EE Connector Architecture (JCA).
Market requirements addressed:
Attunity Connect addresses today's most demanding enterprise data
access requirements for:
o seamless, native data access to heterogeneous databases:
pre-relational, relational, and post-relational;
o integration of a vast array of data sources through either
relational (SQL) or object-based access (J2EE CA) or a
combination of both;
o a total, integrated, industrial-strength solution for handling
and optimizing both data access and connectivity; and
o allowing businesses to integrate their existing legacy systems
into web-based and e-Business applications.
CorVision
CorVision is an application generator tool that runs on Digital VAX
computers under the Open VMS operating system and allows developers to use
either terminals or a Client/Server Windows application connected to VAX
computers. We are no longer selling new licenses for CorVision.
APTuser
APTuser is a production report generator able to access data residing
in different databases and file managers such as Oracle, Ingres, Informix,
Sybase, Rdb, Adabas, RMS and C-ISAM. APTuser is able to generate combined
reports, which access all of these files and databases concurrently. APTuser is
available for OpenVMS, HP/UNIX, IBM AIX, Data General Aviion and SUN Solaris
operating systems.
14
Mancal 2000
Mancal 2000 is a comprehensive financial and logistics software
application package developed to address the accounting and material management
requirements of large organizations. We are no longer selling new licenses for
Mancal 2000.
Customer Support Services
We provide the following direct support services to our customers:
o Hot-line support;
o Training; and
o Professional services.
Hot-line Support. We provide technical advice and information on the
use of our products. Our hot-line support is also responsible for publishing
technical bulletins and distributing new versions of software and program
"patches." We have hot-line operations in the United States, Israel, France, the
United Kingdom, Hong Kong and Australia.
Training. We provide classroom and on-site training in the use of our
products. The course curriculum includes product use education, software
development methodologies and system management. Our customers receive
documentation that includes user manuals, reference manuals, tutorials,
installation guides and release notes.
Professional Services. We provide consulting services to enable
customers to use our products efficiently and effectively.
Sales and Marketing
Distribution Channels. Our products and services are sold through both
direct and indirect channels, including distributors, value-added resellers, and
OEM partners. We maintain direct sales operations through wholly owned
subsidiaries in Israel, the United States, France, the United Kingdom, Australia
and Hong Kong. We distribute our products in Japan, South Korea, Taiwan ,
Singapore, South Africa, Italy, Germany, Spain and South and Central America
through independent distributors. Our field force is comprised of 13 persons in
North America, 16 persons in Europe, the Middle East and Africa, and 10 persons
in Asia Pacific.
Over the course of the past two years, we have focused on developing
long-term strategic partnerships with platform vendors, business intelligence
vendors and system integrators. We have entered into a number of partnerships,
including partnerships with:
o Oracle - OEM arrangement for Attunity Connect
o Hewlett Packard - OEM arrangement and as reseller of Attunity
Connect
o Attachmate - OEM arrangement for Attunity Connect
15
o Microsoft - certified vendor for Attunity Connect for BizTalk
Server
o IBM - co-markets Attunity Connect for DB2-II and Web Sphere
o Cognos - co-markets Attunity Connect
Customers
Our products are sold to large corporations and governmental and public
institutions with in-house IT staff. The following table provides a breakdown by
geographical area of our revenues, including maintenance revenues, during the
last three fiscal years:
2003 2002 2001
---- ---- ----
Israel................ $2,952 $2,576 $ 2,761
United States......... 6,528 7,025 7,589
Europe................ 5,411 4,950 4,012
Asia.................. 908 1,064 1,212
South America......... 369 1,500 1,066
Other................. 449 340 229
------- ------- -------
Total................. $16,617 $17,455 $16,869
======= ======= =======
Competition and Pricing
The markets in which we compete are intensely competitive. Competition
is generally based on product performance, depth of product line, technical
support and price. We compete both with international and local software product
providers, many of whom have significantly greater financial, technical and
marketing resources than us. We anticipate continued growth and competition and,
consequently, the entrance of new competitors into the market. Our existing and
potential competitors may be able to develop software products and services that
are as effective as, or more effective or easier to use, than those offered by
us. Such existing and potential competitors may also enjoy substantial
advantages over us in terms of research and development expertise, manufacturing
efficiency, name recognition, sales and marketing expertise and distribution
channels. We believe that the prices for our products compare favorably with
those of competing products
Intellectual Property Rights and Software Protection
We do not hold any patents and rely upon a combination of security
devices, copyrights, trademarks, trade secret laws and contractual restrictions
to protect our rights in our products. Our policy has been to pursue copyright
protection for our software and related documentation and trademark registration
of our product names. In addition, our employees and independent contractors are
generally required to sign non-disclosure agreements.
We have obtained federal trademark registrations for Attunity(R),
Attunity B2B(R) and Attunity Connect(R) in the United States. We believe that
copyright protection, which generally applies whether or not a license agreement
exists, is sufficient to protect our rights in our
16
products. Our policy is for our customers to sign non-transferable software
licenses providing contractual protection against unauthorized use of the
software.
Preventing the unauthorized use of software is difficult, and
unauthorized software use is a persistent problem in the software industry.
However, we believe that, because of the rapid pace of technological change in
the software industry, the legal protections for our products are less
significant factors in our success than the knowledge, ability and experience of
our employees, the frequency of product enhancements and the timeliness and
quality of support services provided by us.
C. ORGANIZATIONAL STRUCTURE
Our wholly owned subsidiaries act as marketing and customer service
organizations in the countries where they are incorporated and in most instances
for neighboring countries. The following table sets forth the legal name,
location and country of incorporation and percentage ownership of each of our
active subsidiaries:
Country of Ownership
Subsidiary Name Incorporation Percentage
----------------------------------------- --------------- ----------
Attunity Inc............................. United States 100%
Attunity (UK) Limited.................... United Kingdom 100%
Attunity France.......................... France 100%
Attunity Australia....................... Australia 100%
Attunity Hong Kong Limited............... Hong-Kong (PRC) 100%
Attunity Singapore PTE Ltd............... Singapore 100%
Attunity Israel (1992) Ltd............... Israel 100%
Attunity Software Services (1991) Ltd.... Israel 98.8%
D. PROPERTY, PLANTS AND EQUIPMENT
Our executive offices and research and development facilities are
located at Einstein Building, Tirat Carmel, Haifa, Israel 39101, where we occupy
9,800 square feet. The premises are occupied under a lease which terminates on
December 31, 2007. Our Herzliya marketing and sales offices constituting
approximately 5,700 square feet, is occupied under a lease which expires on
October 30, 2005. Our subsidiary Attunity Software Services (1991) Ltd.,
operates out of a 5,200 square-feet facility in Moshav Ya'ad (Galilee). The
lease for this facility expires on December 31, 2004 and Attunity Services has
an option to extend the lease period for an additional period of two years. Our
annual rental cost for all of our facilities in Israel was approximately
$257,000 in 2003.
In April 2002 we leased approximately 6,137 square feet of office space
at 40 Audubon Road, Wakefield, MA at an annual rental fee of $97,885. The lease
expires in June 2005.
The aggregate annual rent for our sales and service offices in Hong
Kong; Shanghai, the People's Republic of China; Sydney, Australia; Reading,
England and Paris, France was approximately $228,000 in 2003.
17
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
--------------------------------------------
A. OPERATING RESULTS
The following discussion and analysis should be read in conjunction
with our financial statements and notes thereto included elsewhere in this
Report.
Overview
We are a leading provider of standards-based integration middleware for
accessing mainframe, data sources and legacy applications. Founded in 1988 and
traded on the NASDAQ Stock Market, our worldwide operations support over 1,000
end-users including many of the Fortune 1000. Through distribution and OEM
agreements with global-class partners such as Oracle and HP, Attunity-based
solutions are deployed on thousands of systems worldwide. Our products are sold
through direct sales and support offices in the United States, the United
Kingdom, France, Israel, the People's Republic of China and Australia, as well
as distributors in Japan, S.E. Asia, Europe and Latin America.
In the last quarter of 2001, we implemented a restructuring plan. In
accordance with such plan, we reduced the number of our employees by 30 persons
(a 16% reduction from our September 2001 level of 190 employees), the majority
of which were in research and development and sales and marketing, and we also
reduced salaries of most of our remaining employees by 20% on average. As a
result of the foregoing, our research and development and selling and marketing
expenses decreased in 2002. In addition, we substantially reduced our marketing
investments in 2002. We believe that this reduction in the number of our
employees and our marketing investments did not have a material adverse effect
on our ability to develop and market our products.
General
We maintain our books and records in Israeli currency in compliance
with statutory requirements and in U.S. dollars. Approximately 83% (47% in
dollars) of our revenues in 2003 and approximately 85% (49% in dollars) of our
revenues in 2002 were derived outside of Israel and received in currencies other
than the NIS. In addition, a substantial portion of Attunity Ltd. and certain of
our subsidiaries' costs is denominated in dollars. Our management believes that
the dollar is the primary currency in the economic environment in which those
companies operate. Thus, the functional and reporting currency of those
companies is the dollar. Accordingly, monetary accounts maintained in currencies
other than the dollar are remeasured into dollars in accordance with Statement
of Financial Accounting Standard No. 52 "Foreign Currency Translation", or SFAS
No. 52. All transactions gains and losses of the remeasurement of monetary
balance sheet items are reflected in the statement of operations as financial
income or expenses, as appropriate.
The financial statements of the Israeli and other foreign subsidiaries,
whose functional currency is determined to be their local currency, have been
translated into dollars. All balance sheet accounts have been translated using
the exchange rates in effect at the balance sheet date. Statements of operations
amounts have been translated using the average exchange rate for the
18
year. The resulting translation adjustments are reported as a component of
shareholders' equity, accumulated other comprehensive loss.
Critical Accounting Policies
The preparation of financial statements requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including, but
not limited to those related to revenue recognition, bad debts and intangible
assets. We base our estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Under different assumptions or conditions, actual results may
differ from these estimates.
The following critical accounting policies, among others described in
note 2 to our financial statements, are the basis for our more significant
judgments and estimates used in the preparation of our consolidated financial
statements.
Revenue Recognition. We generate revenues mainly from license fees and
sub-license fees for the right to use its software products, maintenance,
support, consulting and training services. We sell our products primarily
through our direct sales force to customers and indirectly through distributors
and Value Added Resellers, or VARs. Both the customers and the distributors or
resellers are considered end users. We are also entitled to royalties from some
distributors and VARs upon the sublicensing of the software to end users.
We account for software sales in accordance with Statement of Position
No. 97-2, "Software Revenue Recognition", as amended, or SOP No. 97-2.
We and our subsidiaries have also adopted Staff Accounting Bulletin, or
SAB, No. 104, "Revenue Recognition", or SAB No. 104.
Revenue from license and services fees are recognized when persuasive
evidence of an arrangement exists, delivery of the product has occurred or the
services have been rendered, the fee is fixed or determinable and collectibility
is probable. We do not grant a right of return to our customers.
We determine that persuasive evidence of an arrangement exists with
respect to a customer when we have a purchase order from the customer or a
written contract, which is signed by both us and customer (documentation is
dependent on the business practice for each type of customer).
Our software may be either physically or electronically delivered to
the customer. We determine that delivery has occurred upon shipment of the
software or when the software is made available to the customer through
electronic delivery, when the customer has been provided with access codes that
allow the customer to take immediate possession of the software on its hardware.
19
We consider all arrangements with payment terms extending beyond five
months not to be fixed or determinable. If the fee is not fixed or determinable,
revenue is recognized as payments become due from the customer, provided that
all other revenue recognition criteria have been met.
We determine whether collectibility is probable on a case-by-case
basis. When assessing probability of collection, we consider the number of years
in business and history of collection. If we determine from the outset that
collectibility is not probable based upon our review process, revenue is
recognized as payments are received.
With regard to software arrangements involving multiple elements, we
have adopted Statement of Position No. 98-9, "Modification of SOP No. 97-2,
Software Revenue Recognition with Respect to Certain Transactions", or SOP No.
98-9. According to SOP No. 98-9, revenues should be allocated to the different
elements in the arrangement under the "residual method" when Vendor Specific
Objective Evidence, or VSOE, of fair value exists for all undelivered elements
and no VSOE exists for the delivered elements. Under the residual method, at the
outset of the arrangement with the customer, we defer revenue for the fair value
of our undelivered elements (maintenance and support, consulting and training)
and recognize revenue for the remainder of the arrangement fee attributable to
the elements initially delivered in the arrangement (software product) when the
basic criteria in SOP No. 97-2 have been met. Any discount in the arrangement is
allocated to the delivered element.
Our determination of fair value of each element in multiple-element
arrangements is based on VSOE. We align our assessment of VSOE for each element
to the price charged when the same element is sold separately. We have analyzed
all of the elements included in our multiple-element arrangements and determined
that we have sufficient VSOE to allocate revenue to the maintenance and support,
installation and training ("professional") services components of our license
arrangements. We sell our professional services separately, and accordingly we
have established VSOE for professional services based on our hourly or daily
rates. VSOE for maintenance and support is determined based upon the customer's
annual renewal rates for these elements. Accordingly, assuming all other revenue
recognition criteria are met, we recognize revenue from licenses upon delivery
using the residual method in accordance with SOP No. 98-9.
Arrangements for the sale of software products that include
installation and training services are evaluated to determine whether those
services are essential to the functionality of other elements of the
arrangement. We determined that these services are not considered essential to
the functionality of other elements of the arrangement, therefore, these
revenues are recognized as a separate element of the arrangement.
Revenues from royalties are recognized according to quarterly royalties
reports, as such reports are received from customers. Royalties are received
from customers who embedded our products in their own products and we are
entitled to a percentage of the customer revenue from the combined product.
Maintenance and support revenue included in multiple element
arrangement is deferred and recognized on a straight-line basis over the term of
the maintenance and support agreement.
20
Services revenues are recognized as the services are performed.
Deferred revenues include unearned amounts received under maintenance
and support contracts and amounts received from customers but not recognized as
revenues.
In transactions, where a customer's contractual terms include a
provision for customer acceptance, revenues are recognized either when such
acceptance has been obtained or as the acceptance provision has lapsed.
Bad Debt Allowance. An allowance for doubtful accounts is determined
with respect to those specific amounts that our management has determined to be
doubtful accounts. We perform ongoing credit evaluations of our customers. An
allowance for a doubtful account is determined with respect to those amounts
that we have determined to be doubtful of collection. Any changes in our
assumptions relating to the collectability of our accounts receivable, may
affect our financial position and results of operations.
Goodwill. Goodwill that resulted from transactions before July 1, 2001
was amortized using the straight-line method over the estimated useful life,
which is 7 to 10 years until December 31, 2001. SFAS No.142, "Goodwill and Other
Intangible Assets", requires goodwill to be tested for impairment on adoption
and at least annually thereafter or between annual tests in certain
circumstances, and written down when impaired, rather than being amortized as
previous accounting standards required. Goodwill is tested for impairment by
comparing the fair value of our company reporting unit with its carrying value.
Fair value was determined using discounted cash flows, market multiples and
comparative analysis. Significant estimates used in the methodologies include
estimates of future cash flows and estimates of market multiples for the
reportable unit. The use of different assumptions with respect to the expected
cash flows from our assets and other economic variables, primarily the discount
rate, may lead to different conclusions regarding the recoverability of our
assets' carrying values and to the potential need to record an impairment loss
for our intangible assets.
Research and Development Expenses, Net. Research and development costs
incurred in the process of software development before establishment of
technological feasibility are charged to expenses as incurred. Costs of the
production of a detailed program design incurred subsequent to the establishment
of technological feasibility are capitalized according to the principles set
forth in Statement of Financial Accounting Standards No.86 "Accounting for the
Costs of Computer Software to be Sold, Leased, or Otherwise Marketed", or SFAS
No.86.
Based on our product development process, technological feasibility is
established upon completion of a detail program design.
Capitalized software costs are amortized by the greater of the amount
computed using the: (1) ratio that current gross revenues from sales of the
software to the total of current and anticipated future gross revenues from
sales of the software, or (2) the straight-line method over the estimated useful
life of the product (five years), commencing with general product release and
included in cost of revenues.
At each balance sheet date, we assess the recoverability of this
intangible asset by comparing the unamortized capitalized software costs to the
net realizable value on a product by
21
product basis. Should the amount of the unamortized capitalized costs of a
computer software product exceed the net realizable value, these products will
be written down by the excess amount. In the years ended December 31, 2003, 2002
and 2001, we recorded $1.5 million, $0 and $ 2.4 million, respectively, as
impairment of capitalized software costs, which were included in "Cost of
revenues."
Under different assumptions with respect to the recoverability of our
intangible assets, our determination may be different, which may negatively
affect our financial position and results of operations.
Contingencies. We are, from time to time, subject to proceedings and
other claims related to employees, an alleged lease agreement and other matters.
We are required to assess the likelihood of any outcomes to these matters as
well as potential ranges of probable losses. A determination of the amount of
reserves required, if any, for these contingencies is made after careful
analysis of each individual issue. The required reserves may change in the
future due to new developments in each matter or changes in approach such as a
change in settlement strategy in dealing with these matters.
Deferred Taxes. We record a valuation allowance to reduce our deferred
tax assets to an amount that is more likely than not to be realized. While we
have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the
event we were to determine that we would be able to realize our deferred tax
assets in the future in excess of our net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should we determine that we would not be able to realize all or
part of our net deferred tax asset in the future, an adjustment to the deferred
tax asset would be charged to income in the period such determination was made.
Recent Accounting Pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", or "FIN 46." The objective of FIN 46 is to
improve financial reporting by companies involved with variable interest
entities. A variable interest entity is a corporation, partnership, trust, or
any other legal structure used for business purposes that either (a) does not
have equity investors with voting rights or (b) has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN 46 requires a variable interest entity to be consolidated by a company if
that company is subject to a majority of the risk of loss from the variable
interest entity's activities or entitled to receive a majority of the entity's
residual returns or both. FIN 46 also requires disclosures about variable
interest entities that the company is not required to consolidate but in which
it has a significant variable interest. The consolidation requirements of FIN 46
apply immediately to variable interest entities created after January 31, 2003.
The consolidation requirements apply to older entities in the first fiscal year
or interim period end after December 31, 2003. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. As of December
31, 2003, the Company does not expect the adoption of FIN 46 to have a material
impact on its consolidated financial statements.
22
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities", or SFAS 149. SFAS 149
amends and clarifies (1) the accounting guidance on derivative instruments
(including certain derivative instruments embedded in other contracts) and (2)
hedging activities that fall within the scope of FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", or "SFAS 133."
SFAS 149 amends SFAS 133 to reflect decisions made (1) as part of the
Derivatives Implementation Group, or DIG, process that effectively required
amendments to SFAS 133, (2) in connection with other projects dealing with
financial instruments, and (3) regarding implementation issues related to the
application of the definition of a derivative. SFAS 149 is effective (1) for
contracts entered into or modified after June 30, 2003, with certain exceptions,
and (2) for hedging relationships designated after June 30, 2003. The guidance
is to be applied prospectively.
Generally, SFAS 149 improves financial reporting by (1) requiring that
contracts with comparable characteristics be accounted for similarly and (2)
clarifying when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS 149 is not expected to
have a material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity", or
SFAS No. 150, which establishes standards for how an issuer of financial
instruments classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances) if, at inception, the monetary value of the
obligation is based solely or predominantly on a fixed monetary amount known at
inception, variations in something other than the fair value of the issuer's
equity shares or variations inversely related to changes in the fair value of
the issuer's equity shares. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 is not expected to have a material impact on
our financial position or results of operations.
Results of Operations
The following discussion of our results of operations for the years
ended December 31, 2001, 2002 and 2003, including the following table, which
presents selected financial information as a percentage of total revenues, is
based upon our statements of operations contained in our financial statements
for those periods, and the related notes, included in this annual report.
23
Year Ended December 31,
-------------------------------------
2003 2002 2001
---- ---- ----
Revenues:
Software licenses............................. 36% 40% 38%
Maintenance and support....................... 35 34 29
Services...................................... 29 26 33
Total revenues.......................... 100 100 100
Cost of revenues:
Software licenses............................. 13 11 15
Maintenance and support....................... 5 4 6
Services...................................... 25 22 29
Impairment of software development costs 9 - 14
Total cost of revenues............... 52 37 64
Gross profit..................................... 48 63 36
Research and development, net................. 9 8 21
Selling and marketing......................... 36 31 72
General and administrative.................... 16 11 25
Costs in respect of lawsuits 6 6 -
Restructuring and termination costs.......... - 4 8
Impairment of other assets.................... - - 2
Total operating expenses........................ 67 60 128
Operating income (loss)......................... (19) 3 (92)
Financial income, net........................... 1 0 0
Income taxes.................................... 0 1 2
Gain (loss) from continued operations (18) 2 (94)
Gain on disposal of segment..................... - - 1
------- ------- ----
Net income (loss)............................... (18)% 2% (93)%
======== ======= ======
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Revenues. Our revenues are derived primarily from software licenses,
maintenance and support and professional services. Total revenues decreased 4.8%
to $16.6 million in 2003 from $17.5 million in 2002. This decrease is mainly
attributable to a 12.8% decrease in license revenues, which decreased to $6
million in 2003 from $6.9 million in 2002 mainly due to a $0.5 million decrease
in sales of our legacy products. Maintenance and support revenues decreased 3.7%
from $6.1 million to $5.8 million as a result of a decrease in our legacy
products maintenance revenues. Services increased by 6% from $4.5 million to
$4.7 million, all of which increase was attributable to our European operations.
We expect that our license revenue will increase in 2004 and that our revenues
from maintenance, support and professional services will remain at the same
level in 2004.
24
Cost of Revenues. Cost of license revenues consists primarily of
production costs including media, packaging, freight and documentation,
amortization and write off of capitalized software development costs and certain
royalties and licenses payable to third parties and to the Office of the Chief
Scientist of the Ministry of Industry and Trade, or the Chief Scientist. Cost of
maintenance, support and services consists primarily of salaries of employees
performing the services and related overhead. Our cost of revenues increased
35.2% to $8.6 million in 2003 from $6.4 million in 2002 primarily due to a $1.5
million write-off of capitalized software development costs relating to the BPI
product which we no longer develop, a $0.2 million increase in royalties to the
Chief Scientist and an increase in cost of services in our European operations
resulting from local currency changes against the dollar of $0.3 million. We
anticipate that our cost of revenues as a percentage of sales excluding any
write-offs will remain the same in 2004.
Gross Profit. Our gross profit decreased 27.8% to $8 million in 2003
from $11.1 million in 2002, as a direct result of decreased revenues and
increased cost of revenues in 2003.
Research and Development, Net. Research and development expenses
consist primarily of salaries of employees engaged in on-going research and
development activities and other related costs. Total research and development
costs, before capitalized software costs, increased by 1.7% to $3.1 million in
2003 from $3 million in 2002. The increase is principally attributable to an
increase in salaries. We capitalized approximately $1.6 million of software
developments costs in 2003 and 2002. As a result of the foregoing, net research
and development costs increased by 3.7% to $1.5 million in 2003 from $1.4
million in 2002. We do not plan to significantly increase our expenditures for
research and development in 2004.
Selling and Marketing. Selling and marketing expenses consist primarily
of costs relating to compensation and overhead to sales, marketing and business
development personnel, travel and related expenses, advertising expenses and
sales offices maintenance and administrative costs. Selling and marketing
expenses increased by 10.6% to $5.9 million in 2003 from $5.4 million in 2002
mainly due to an increase in marketing and business development investments of
$0.4 million. We expect that our selling and marketing expenses will increase in
2004 as a result of our decision to add sales personnel and to increase our
marketing expenses as part of our plan to increase our license revenues.
General and Administrative. General and administrative expenses consist
primarily of compensation costs for administration, finance and general
management personnel, legal, audit, other administrative costs and bad debts.
General and administrative expenses increased by 41.8% to $2.7 million in 2003
from $1.9 million in 2002. The increase is principally attributable to the
increase of $0.4 million in bad debts in our Asia and Israeli operations, higher
legal fees of $0.1 million, hiring a new Chief Financial Officer and an increase
in the compensation of our Chairman and Chief Executive Officer of $0.5 million.
We do not believe that our general and administrative expenses will increase
significantly in 2004.
Costs in Respect of Lawsuits. We recorded charges of $0.4 million and
$0.8 million, in 2003 and 2002 respectively, relating to a legal dispute with
the Special Situations Funds and $0.6 million and $0.3 million, in 2003 and 2002
respectively, relating to legal dispute with the
25
landlord of our former offices in Massachusetts. Both disputes were resolved in
early 2004 without additional costs.
Restructuring and Termination Costs. In 2002 we had $0.6 million of
charges relating to termination of our
Chief Executive Officer and other expenses.
Operating Income (Loss). Based on the foregoing, we recorded an
operating loss of $(3.1) million in 2003 compared to an operating profit of
$0.6 million in 2002.
Financial Income, Net. Our financial income was offset in part by (i)
interest expense and (ii) currency translation adjustments between the dollar
and Europeans and Israeli currency. In 2003, we had net financial income of
$236,000 as compared to $141,000 in 2002. This increase in financial income is
attributable mainly to foreign currency translation adjustments.
Taxes on Income. Income taxes for 2003 were $84,000 compared with
$264,000 in 2002. In 2002, we incurred higher taxes due to a required increase
in withholding of taxes on export sales.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Revenues. Total revenues increased 3.5% to $17.5 million in 2002 from
$16.8 million in 2001. This increase is mainly attributable to a 9% increase in
license revenues, which increased to $6.9 million in 2002 from $6.4 million in
2001, mainly due to an increase in sales of Attunity Connect. Maintenance and
support revenues increased 21.6% from $5 million to $6.1 million as a result of
increase in Attunity Connect maintenance revenues. Services decreased by 19.3%
from $5.5 million to $4.5 million, as a result of our decision to significantly
reduce our professional services in the U.S.
Cost of Revenues. Cost of revenues decreased 41% to $6.4 million in
2002 from $10.8 million in 2001 primarily due to the decrease in write-offs and
amortization of capitalized software development costs of $3.2 million and
decrease in salary expenses of approximately $1.2 million.
Gross Profit. Gross profit increased 83.6% to $11.1 million in 2002
from $6 million in 2001, as a direct result of increased revenues and decreased
cost of revenues in 2002.
Research and Development, Net. Total research and development costs
decreased by 43.6% to $3 million in 2002 from $5.4 million in 2001. The decrease
is principally attributable to a decrease in headcount and in salaries. We
capitalized approximately $1.6 million of software developments costs in 2002
and $1.8 million in 2001. As a result of the foregoing, net research and
development costs decreased by 60.0% to $1.4 million in 2002 from $3.6 million
in 2001.
Selling and Marketing, Net. Selling and marketing expenses decreased by
55.7% to $5.4 million in 2002 from $12.1 million in 2001 due to a substantial
decrease in marketing investments and a reduction in headcount.
26
General and Administrative. General and administrative expenses
decreased by 54.1% to $1.9 million in 2002 from $4.2 million in 2001. The
decrease is principally attributable to the decrease in headcount and decreased
lease and salary expenses.
Costs in Respect of Lawsuits. In 2002 we recorded charges of $0.8
million and $0.3 million relating to legal disputes with the Special Situations
Funds and with the landlord of our former offices in Massachusetts respectively.
In 2002 we recorded $0.6 million relating to severance payments and other
expenses, compared with restructuring charges of $1.3 million relating to
severance payments, write-off of leasehold improvements and other related
expenses in 2001.
Restructuring and Termination Costs. In 2002 we recorded $0.6 million
of charges relating to the termination of our Chief Executive Officer and other
expenses. In 2001, we recorded restructuring charges of $1.3 million relating to
severance payments, write-off of leasehold improvements and other related
expenses.
Impairment of Other Assets. We recorded an impairment charge of $0.3
million relating to assembled workforce in 2001.
Operating Income (Loss). Based on the foregoing, we recorded an
operating income of $0.6 million in 2002 compared to an operating loss of $15.5
million in 2001.
Financial Income, Net. In 2002, we had net financial income of $141,000
as compared to $48,000 in 2001. This increase in financial income is
attributable to foreign currency translation adjustments.
Taxes on Income. The income taxes for 2002 were $264,000 compared
with an income tax provision of $402,000 in 2001.
Gain on Disposal of Segment. We recorded a $220,000 gain in 2001 with
respect to provisions related to the disposal of Medatech in our financial
statements for 2000.
Net Income (Loss). As a result of the foregoing, we had net income of
$0.5 million in 2002 compared to a net loss of $(15.6) million in 2001.
Conditions in Israel
We are incorporated under the laws of, and our principal executive
offices and manufacturing and research and development facilities are located
in, the State of Israel. Accordingly, our operations in Israel are directly
affected by political, economic and military conditions in Israel. Specifically,
we could be adversely affected by any major hostilities involving Israel, a full
or partial mobilization of the reserve forces of the Israeli army, the
interruption or curtailment of trade between Israel and its present trading
partners, and a significant downturn in the economic or financial condition of
Israel.
27
Political Conditions
Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, and a
state of hostility, varying from time to time in intensity, has led to security
and economic problems for Israel. Since September 2000, there has been a marked
increase in violence, civil unrest and hostility, including armed clashes,
between the State of Israel and the Palestinians, and acts of terror have been
committed inside Israel and against Israeli targets in the West Bank and Gaza.
There is no indication as to how long the current hostilities will last or
whether there will be any further escalation. Any further escalation in these
hostilities or any future armed conflict, political instability or violence in
the region may have a negative effect on our business condition, harm our
results of operations and adversely affect our share price. Furthermore, there
are a number of countries that restrict business with Israel and with Israeli
companies. Restrictive laws or policies of those countries directed towards
Israel or Israeli businesses may have an adverse impact on our operations, our
financial results or the expansion of our business.
In addition, some of our executive officers and employees in Israel are
obligated to perform up to 36 days, depending on rank and position, of military
reserve duty annually and are subject to being called for active duty under
emergency circumstances. If a military conflict or war arises, these individuals
could be required to serve in the military for extended periods of time. Our
operations could be disrupted by the absence for a significant period of one or
more of our executive officers or key employees or a significant number of other
employees due to military service. Any disruption in our operations could
adversely affect our business.
To date, no executive officer or key employee was recruited for
military service for any significant time period. Any further deterioration of
the hostilities between Israel and the Palestinian Authority into a full-scale
conflict might require more significant military reserve service by some of our
employees, which may have a material adverse effect on our business.
Economic Conditions
In recent years Israel has been going through a period of recession in
economic activity, resulting in low growth rates and growing unemployment. Our
operations could be adversely affected if the economic conditions in Israel
continue to deteriorate. In addition, due to significant economic measures
proposed by the Israeli Government, there have been strikes and work stoppages
in 2003 and 2004, affecting all banks, airports and ports. These strikes have
had an adverse effect on the Israeli economy and on business, including our
ability to deliver products to our customers. Following the passing by the
Israeli Parliament of laws to implement the economic measures, the Israeli trade
unions have threatened further strikes or work-stoppages, and these may have a
material adverse effect on the Israeli economy and on us.
Trade Relations
Israel is a member of the United Nations, the International Monetary
Fund, the International Bank for Reconstruction and Development and the
International Finance Corporation. Israel is a member of the World Trade
Organization and is a signatory to the General Agreement on Tariffs and Trade,
which provides for reciprocal lowering of trade
28
barriers among its members. In addition, Israel has been granted preferences
under the Generalized System of Preferences from the United States, Australia,
Canada and Japan. These preferences allow Israel to export products covered by
such programs either duty-free or at reduced tariffs.
Israel and the European Union Community concluded a Free Trade
Agreement in July 1975, which confers certain advantages with respect to Israeli
exports to most European countries and obligates Israel to lower its tariffs
with respect to imports from these countries over a number of years. In 1985,
Israel and the United States entered into an agreement to establish a Free Trade
Area. The Free Trade Area has eliminated all tariff and specified non-tariff
barriers on most trade between the two countries. On January 1, 1993, an
agreement between Israel and the European Free Trade Association, known as EFTA,
established a free-trade zone between Israel and the EFTA nations. In November
1995, Israel entered into a new agreement with the European Union, which
includes redefinement of rules of origin and other improvements, including
providing for Israel to become a member of the research and technology programs
of the European Union. In recent years, Israel has established commercial and
trade relations with a number of other nations, including China, India, Russia,
Turkey and other nations in Eastern Europe and Asia.
Effective Corporate Tax Rate
Israeli companies are generally subject to income tax at the corporate
rate of 36% of taxable income. We have been granted the status of an "Approved
Enterprise" under the Law for the Encouragement of Capital Investments, 1959, or
the Investment Law, with respect to our production facilities. An enlargement
project of ours was granted "Approved Enterprise" status in December 1998. In
accordance with the provisions of the Investment Law, we have elected to enjoy
"alternative benefits," wherein a company waives the receipt of grants in return
for a tax exemption. Income derived from an "Approved Enterprise" is tax-exempt
for a period of two years, commencing with the year it first earns taxable
income, and is subject to corporate tax at the rate of 10% to 25% for additional
periods of five to eight years based on the percentage of foreign investments in
our company. Our subsidiary, Attunity Software Services Ltd., or Attunity
Services, was granted "Approved Enterprise" status for two separate investment
programs from 1991 and 1993 whereby it has elected to receive Government grants
and to enjoy the benefit of a reduced tax rate of 25% during a period of seven
years commencing with the year it first earns taxable income. The period of tax
benefits, detailed above, is subject to limits of the earlier of twelve years
from the commencement of production, or fourteen years from the date of
approval. In 1993, Attunity Services received approval for an expansion of the
aforementioned programs whereby it elected to enjoy "alternative benefits" -
waiver of grants in return for tax exemption - and, accordingly, its income from
the "Approved Enterprise" will be tax-exempt for a period of ten years
commencing with the year it first earns taxable income. As of December 31, 2003,
Attunity Services has not received final approvals for such programs.
Since we currently have no taxable income, the benefits have not yet
commenced for all programs. Should we or Attunity Services derive income from
sources other than the "Approved Enterprise" during the periods of benefits,
such income shall be taxable at the regular corporate tax rate of 36%. Our taxes
outside Israel are dependent on our operations in each jurisdiction as well as
relevant laws and treaties. Under Israeli tax law, the results of our foreign
consolidated
29
subsidiaries, which have generally been unprofitable, cannot be consolidated for
tax purposes with the results of operations of the parent company.
Impact of Currency Fluctuations and of Inflation
Our financial results may be negatively impacted by foreign currency
fluctuations. Our foreign operations are generally transacted through our
international sales subsidiaries in Europe, the Middle East and Africa, and Asia
Pacific. As a result, these sales and related expenses are denominated in
currencies other than the U.S. dollar. Because our financial results are
reported in U.S. dollars, our results of operations may be adversely impacted by
fluctuations in the rates of exchange between the U.S. dollar and other
currencies, including:
o a decrease in the value of currencies in certain of the EMEA or
APAC relative to the U.S. dollar, which would decrease our
reported U.S. dollar revenue, as we generate revenue in these
local currencies and report the related revenue in U.S. dollars;
and
o an increase in the value of currencies in certain of the EMEA or
APAC, or Israel relative to the U.S. dollar, which would increase
our sales and marketing costs in these countries and would
increase research and development costs in Israel.
The dollar cost of our operations in Israel is influenced by the extent
to which any increase in the rate of inflation in Israel is (or is not) offset,
or is offset on a lagging basis, by the devaluation of the NIS in relation to
the dollar. Unless offset by a devaluation of the NIS, inflation in Israel will
have a negative effect on our profitability as we incur expenses, principally
salaries and related personnel expenses, in NIS. For several years prior to
1997, the rate of inflation in Israel exceeded the rate of devaluation of the
NIS against the dollar and companies experienced increases in the dollar cost of
their operations in Israel. This trend was reversed during 1997 and 1998. In
1999 and 2000, the rate of inflation exceeded the rate of devaluation of the NIS
against the U.S. dollar. In 2001 and 2002, the devaluation rate again exceeded
the inflation rate in Israel. In 2003 the rate of inflation was negative and the
NIS was revaluated vis-a-vis the dollar. We cannot assure you that we will not
be materially and adversely affected in the future if inflation in Israel
exceeds the devaluation of the NIS against the dollar or if the timing of such
devaluation lags behind inflation in Israel.
The following table sets forth, for the periods indicated, information
with respect to the rate of inflation in Israel, the rate of devaluation of the
NIS against the dollar, and the rate of inflation in Israel adjusted for such
devaluation:
Israeli inflation
Israeli Israeli Israeli devaluation adjusted for
Year ended December 31, price index inflation rate % rate % devaluation %
----------------------- ----------- ---------------- ------ -------------
1999 408.0 1.3 (0.2) 1.5
2000 408.0 0 (2.7) 2.8
2001 413.8 1.4 9.3 (7.8)
2002 440.65 6.4 7.3 (0.7)
2003 432.34 (1.9) (7.6) 6.1
30
A devaluation of the NIS in relation to the dollar has the effect of
reducing the dollar amount of any of our expenses or liabilities which are
payable in NIS (unless such expenses or payables are linked to the dollar). Such
devaluation also has the effect of decreasing the dollar value of any asset,
which consists of NIS or receivables payable in NIS (unless such receivables are
linked to the dollar). Conversely, any increase in the value of the NIS in
relation to the dollar has the effect of increasing the dollar value of any
unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and
expenses.
B. LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations through cash generated by
operations, funds generated by our public offering in 1992 (approximately $12
million), private equity investments (approximately $24.8 million), exercise of
stock options and warrants (approximately $9.5 million) as well as from research
and development and marketing grants, primarily from the Government of Israel.
In March 2000, we raised net proceeds of approximately $13 million in a private
placement of our securities. In October 2001, we raised additional proceeds of
approximately $5 million in a private placement of our securities. On a limited
basis we have also financed our operations through short-term loans and
borrowings under available credit facilities.
In May 2004, we concluded a transaction with a group of investors that
then owned 2,043,146 of our shares and warrants to purchase 2,944,651 shares at
exercise prices of $1.75 and $2.25, according to which the group invested an
additional $2 million in our company in the form of a five-year convertible
debenture, convertible at $1.75 per share and warrants to purchase 480,000
ordinary shares at an exercise price of $1.75 per share, subject to anti
dilution adjustments. See Item 7B. "Major Shareholders and Related Party
Transactions - Major Shareholders - Related Party Transactions."
In June 2004, we entered into an agreement with Plenus Technologies
Ltd., or Plenus, a venture capital lender, under which we secured a two-year $3
million credit line from Plenus at a fixed interest rate of 6.5% per annum. The
interest is payable quarterly on all amounts drawn under the credit line. We can
prepay or cancel the credit line at any time. We pay a commitment fee of 1% per
annum on the unutilized amount of the credit line. As collateral for the credit
line we registered a first ranking floating charge on all our assets and a first
ranking fixed charge on all our intellectual property. We undertook to issue to
Plenus five-year warrants to purchase our ordinary shares in an amount equal to
a percentage of the credit line divided by $3.00 per share, the exercise price
of the warrants (subject to anti-dilution adjustments), as follows: 20% of the
credit line if we terminate the credit line within the first year of its
initiation; 23% of the credit line if we terminate the credit line within the
second year of its initiation and we had not drawn any money from the credit
line prior to termination; and 30% of the credit line if we terminate the credit
line within the second year of its initiation and we had drawn money from the
credit line prior to termination.
As of December 31, 2003, we had $3.3 million in cash, cash equivalents,
restricted cash, short term deposits and marketable securities as compared to
$2.8 million in cash and cash equivalents at December 31, 2002. As of December
31, 2003, we had a bank line of credit of approximately $0.2 million, which is
unused.
31
As of December 31, 2003 we had $52,000 in long-term loans from United
Mizrachi Bank Ltd. These loans bear interest ranging between 5% to 7.8%.
Principal and interest are linked to the Israeli Consumer Price Index.
Net cash provided by operating activities was $2.4 million in 2003 and
$1.7 million in 2002. Net cash used in investing activities was $2.8 million in
2003 and $1.8 million in 2002, which funds were used primarily for software
development costs. Net cash used in financing activities was $0.1 million in
2003 and $0.2 million in 2002.
Our principal commitments consist of obligations outstanding under
operating leases. Our capital expenditures were approximately $238,000 in 2003
and $199,000 in 2002. The majority of our capital expenditures were for
computers and software. We currently do not have significant capital spending or
purchase commitments.
We anticipate that our existing capital resources and the additional
funds provided by the convertible debenture, once approved by the shareholders
meeting, will be adequate to satisfy our working capital and capital expenditure
requirements until June 30, 2005, but we may need to raise additional funds in
the next twelve months in order to provide the capital necessary for our working
capital and capital expenditure requirements.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
The software industry is characterized by rapid product change
resulting from new technological developments, performance improvements and
lower hardware costs and is highly competitive with respect to timely product
innovation. We, through our research and development and support personnel, work
closely with our customers and prospective customers to determine their
requirements, to design enhancements and new releases to meet their needs and to
adapt our products to new platforms, operating systems and databases. Research
and development activities for all products principally take place in our
research and development facilities in Israel. As of December 31, 2003, we
employed 37 persons in research and development.
We seek external resources for co-financing our development projects,
mainly from the Office of the Chief Scientist of the Israeli Ministry of
Industry and Trade. The Office of the Chief Scientist participated in financing
Attunity Connect, APTuser and the Hungarian version of Mancal 2000. Under the
Israeli Law for the Encouragement of Industrial Research and Development, or the
Research Law, research and development programs which meet specified criteria
and are approved by the research committee of the Office of the Chief Scientist
are eligible for grants of up to 50% of certain of the project's expenditures,
as determined by the research committee. In exchange, the recipient of such
grants is required to pay the Office of the Chief Scientist royalties from
revenues derived from products (and ancillary services) incorporating technology
developed within the framework of each such program or derived therefrom, up to
an aggregate of 100% of the dollar-linked value of the total grants received in
respect of such program, and with respect to grants received as of 1999, plus
interest. The royalty rates applicable to our programs range from 3% to 5%. Our
royalties expenses during the years 2001, 2002 and 2003 were $156,000, $232,000
and $479,000 respectively.
32
The terms of the Israeli government participation generally requires
that the manufacture of products developed under a program be performed in
Israel. However, upon the approval of the Chief Scientist, some of the
manufacturing volume may be performed outside Israel, provided that the grant
recipient pays royalties at an increased rate and the aggregate repayment amount
is increased to 120%, 150% or 300% of the grant, depending on the portion of the
total manufacturing volume that is performed outside Israel. As of April 1,
2003, the Research Law also allows for the approval of grants in cases in which
the applicant declares that part of the manufacturing will be performed outside
of Israel or by non-Israeli residents and the research committee is convinced
that the same is essential for the execution of the program. In such cases, the
increased royalty and repayment amount will be required.
The Research Law also provides that know-how developed under an
approved research and development program may not be transferred to third
parties in Israel without the approval of the research committee of the Office
of the Chief Scientist. We cannot assure you that such consent, if requested,
will be granted. The Research Law further provides that the know-how developed
under an approved research and development program may not be transferred to any
third parties outside Israel. No approval is required for the export of any
products resulting from such research or development.
The Research Law imposes reporting requirements with respect to certain
changes in the ownership of a grant recipient. The Research Law requires the
grant recipient and its controlling shareholders and interested parties to
notify the Office of the Chief Scientist of any change in control of the
recipient or a change in the holdings of the means of control of the recipient
that results in a non-Israeli becoming an interested party directly in the
recipient and requires the new interested party to undertake to the Office of
the Chief Scientist to comply with the Research Law. Accordingly, any
non-Israeli who acquires 5% or more of our ordinary shares will be required to
notify the Office of the Chief Scientist that it has become an interested party
and to sign an undertaking to comply with the Research Law.
We have committed substantial financial resources to our research and
development efforts. During 2001, 2002 and 2003, our research and development
expenditures were $5.4 million, $3.0 million and $3.1 million, respectively. We
did not receive any reimbursement from the Office of the Chief Scientist during
the last three years. We capitalized computer software development costs of $1.8
million, $1.6 million and $1.6 million in 2001, 2002 and 2003, respectively. We
believe that our investment in product development activities in 2004 will be
consistent with our expenditures in 2003.
D. TREND INFORMATION
We expect that our results will continue to be impacted by the
continued decline in revenues from our legacy products and by increased sales
and marketing expenditures while we attempt to gain market acceptance for our
data integration products. As a result of an unpredictable business environment
and long sales cycles we are unable to provide any guidance as to sales and
profitability trends.
As a result of unfavorable decision against us in our litigation with
the various Special Situation Funds and a settlement we reached with the
landlord of our former offices in
33
Massachusetts, we incurred liabilities of $1.9 million in the years ended
December 31, 2003 and 2002 with respect to these matters. In March 2004, we paid
the Special Situation Funds $684,000 and in April 2004, we paid $825,000 to the
landlord of our former offices in Massachusetts in full satisfaction of our
lease commitment.
E. OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our minimum contractual obligations and
commercial commitments, as of December 31, 2003 and the effect we expect them to
have on our liquidity and cash flow in future periods.
Contractual Obligations Payments due by Period
----------------------------------- -------------------------------------------
less than
Total 1 year 1-3 Years 3-5 Years
------ ------ --------- ---------
Long-term debt obligations....... $ 93 $ 41 $ 52 $--
Capital (finance) lease obligations 108 61 67 --
Operating lease obligations (*).. 1,549 590 889 70
- ------ ---- ------ ---
Total............................ $1,750 $692 $1,008 $70
-------------------
(*) Does not include an operating lease obligation of $2,005 which was satisfied
by the payment of $825 in early April 2004.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
------------------------------------------
A. DIRECTORS AND SENIOR MANAGEMENT
The following table lists the name, age, principal position and a
biographical description of each of our executive officers and directors.
Name Age Position with the Company
---- --- -------------------------
Shimon Alon ................... 53 Chairman of the Board of Directors
Arie Gonen..................... 58 Chief Executive Officer
Ofer Segev..................... 45 Chief Financial Officer
Shlomo Baumgarten.............. 55 Vice President-Finance and Secretary
Dov Biran ..................... 51 Director
Dan Falk....................... 59 Director*
Roni Ferber.................... 61 Outside Director*
Anat Segal..................... 37 Outside Director*
Ron Zuckerman.................. 47 Director
34
--------------------------
*Member of Audit Committee
Messrs. Gonen, Biran and Falk will serve as directors until our 2004
annual general meeting of shareholders and until their successors are elected.
Messrs. Alon and Zuckerman were appointed to our Board of Directors in May 2004
and will serve as directors until our 2004 annual general meeting of
shareholders and until their successors are elected. Mr. Roni Ferber was
designated an outside director by our board of directors in May 2001. According
to regulations promulgated under the Israeli Companies Law, the board of
directors of public companies like us, whose shares are traded outside Israel,
is permitted to designate a director who was appointed prior to February 1, 2000
and who would otherwise qualify as an outside director, as an outside director.
Mr. Roni Ferber will serve in such office pursuant to the provisions of the
Israeli Companies Law for a three-year term until our 2004 annual general
meeting of shareholders. Thereafter, his office may be renewed for only one
additional three-year term. Ms. Anat Segal was elected as an outside director in
December 2002. Ms. Anat Segal will serve in such office pursuant to the
provisions of the Israeli Companies Law for a three-year term until our 2005
annual general meeting of shareholders. Thereafter, her office may be renewed
for only one additional three-year term.
Our articles of association provide for a Board of Directors of not
fewer than three nor more than eleven members. The Board is currently composed
of six directors. Officers serve at the pleasure of the Board of Directors,
subject to the terms of any agreement between an officer and our company.
Shimon Alon was appointed Chairman of our Board of Directors in May
2004. From September 1997 until June 2003, Mr. Alon served as Chief Executive
Officer of Precise Software Solutions Ltd., or Precise, a leading provider of
application performance management. Since the acquisition of Precise by VERITAS
Software Corp., or VERITAS, in June 2003, Mr. Alon serves as an executive
advisor to VERITAS. Prior to Precise, Mr. Alon held a number of positions at
Scitex Corporation Ltd. and its subsidiaries, including President and Chief
Executive Officer of Scitex America and Managing Director of Scitex Europe. Mr.
Alon holds a degree from the Executive Management Program at the Harvard
Business School.
Arie Gonen has served as a director since December 1988. Mr. Gonen
served as the Chairman of our Board of Directors from October 31, 1988 until May
10, 2004. Mr. Gonen served as our Chief Executive Officer from October 31, 1988
until November 22, 2000. From September 1, 2002 through October 28, 2003, Mr.
Gonen served as our Interim Chief Executive Officer. Since October 28, 2003, Mr.
Gonen has served as our Chief Executive Officer. Prior to joining our company
and from 1976, Mr. Gonen served as President of Milan Software Industries (1976)
Ltd., an Israeli software company. Mr. Gonen received a B.Sc. in Electrical
Engineering and a M.Sc. in Computer Sciences from the Technion Israel Institute
of Technology.
Ofer Segev has been our Chief Financial Officer since June 2003.
From January 2002 until June 2003 he served as the Chief Executive Officer of
Teleknowledge Group Ltd., a private company in the billing and customer care
field. From May 2001, he was the Chief Financial Officer of Teleknowledge Group
Ltd. Prior to that, from May 2000 until April 2001, Mr. Segev
35
was the Chief Financial Officer of Tundo Corp., a company in the VoIP field.
Prior to that Mr. Segev was a partner at Kost Forer & Gabay, a predecessor to
Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global, where he led the
high technology service group. Mr. Segev holds a B.A. degree in Economics and
Accounting from Bar Ilan niversity in Israel and has studied at the Kellogg
Graduate School of Management at Northwestern University.
Shlomo Baumgarten has been our Vice President-Finance since October
1992. From October 1992 until June 2003, Mr. Baumgarten served as our Chief
Financial Officer, and previously he served as our Comptroller since our
incorporation in October 1988. Mr. Baumgarten served as a director of our
company from our inception until November 2000. Prior thereto and from 1983, he
was the Comptroller of Milan. Mr. Baumgarten holds a B.A. degree in Economics
and Auditing from Haifa University.
Dr. Dov Biran was appointed as a director in December 2003. Dr. Biran
has been a professor of computers and information systems at Northeastern
University in Boston since September 2001. Prior thereto, Dr. Biran served as
acting Chief Executive Officer, Chief Technology Officer and a director of our
company from March 2000 through October 2001. Dr. Biran was the founder and
president of Bridges for Islands, which was acquired by us in February 2000. For
over thirty years he has held various positions in the Information Technology,
or IT, area, including founder and Chief Executive Officer of Optimal
Technologies, a consulting IT firm, Chief Information Officer of Dubek Ltd.,
officer in the computer unit of the Israeli Defense Forces and as an adjunct
professor at Tel Aviv University.
Dan Falk was appointed as a director in April 2002, and was designated
as an outside director by our board of directors in May 2002. From 1999 until
2000, he served as the President and Chief Operating Officer and then Chief
Executive Officer of Sapiens International Corporation N.V., a publicly traded
company that provides cost-effective business software solutions. From 1995
until 1999, Mr. Falk was Executive Vice President and Chief Financial Officer of
Orbotech, a maker of automated optical inspection and computer aided
manufacturing systems. From 200 until 2003, Mr. Falk served as the chairman of
the board of directors of Atara Technology Ventures and is a member of the
boards of directors of Orbotech, Nice System Ltd, Orad Hi-Tec Systems Ltd.,
Netafim Ltd, Visionix Ltd., Ramdor Ltd., Medcon Ltd., Dor Chemicals Ltd, Poalim
Ventures 1 Ltd, Clicksoftware Ltd., Rontech Ltd, Ormat Industries Ltd and
Plastopil Ltd. He has an M.B.A. degree from the Hebrew University School of
Business.
Roni Ferber was appointed to the Board of Directors in October 1995
and was designated as an outside director by our Board of Directors in May 2001.
Since 1992, Mr. Ferber has been self-employed as a business consultant. From
1967 until December 1992, Mr. Ferber was General Manager and President of Nikuv
Computers Ltd., a publicly-traded software company located in Israel. Mr. Ferber
serves as a director of Comtech Ltd., a computer software company, traded on the
Tel Aviv Stock Exchange, and Dmatek Ltd, a manufacturer and distributor of
electronic tagging systems, traded on the London Stock Exchange. He has a B.A in
Economics from the Hebrew University in Jerusalem, and an M.A. in Semitic
Languages from the Tel Aviv University.
36
Anat Segal was appointed as an outside director in December 2002. Since
January 2000 Ms. Segal has acted as an independent advisor providing investment
banking services and financial and strategic consulting to high-tech companies.
Ms. Segal is also Managing Partner of Xenia Ventures, a high tech incubator
based in Kiryat Gat, Israel. Prior to that and since 1998, she has served as the
Managing Director and Head of Corporate Finance of Tamir Fishman & Co., which
was then an Israeli strategic affiliate of Hambrecht and Quist. From 1996 until
1998 she served as a Vice President of Investment Banking, Robertson Stephens &
Co/Evergreen. From 1990 until 1996 Ms. Segal held senior positions with Bank
Hapoalim Group and Poalim Capital Markets. Ms. Segal also serves as a board
member of Orad Ltd, a public company traded on London Stock Exchange, Prior-Tech
Ltd traded on the Tel Aviv Stock Exchange and Marathon Ventures Ltd, traded on
the Tel Aviv Stock Exchange. Ms. Segal holds a B.A. degree in Economics and
Management, an M.B.A. degree and an L.L.B. degree from Tel Aviv University.
Ron Zuckerman was appointed a director in May 2004. Mr. Zuckerman
founded Sapiens International Corporation and served as its Chief Executive
Officer from 1995 until March 2000 and currently serves as the Chairman of its
board of directors. Mr. Zuckerman served as Chairman of Precise Software
Solutions Ltd. until it was acquired by VERITAS Software Corp. in June 2003.
Robert J. Majteles, who served as a director from June 2002, resigned
in October 2003.
Pursuant to a certain Note and Warrant Purchase Agreement dated March
22, 2004 that we entered into with Messrs. Shimon Alon, Aki Ratner, Ron
Zuckerman and other investors represented by them, we agreed to provide the
investors with the right to designate Messrs. Shimon Alon, Ron Zuckerman and Aki
Ratner for election to our Board of Directors in 2004, thereafter to designate
two members for election to our Board of Directors so long as they continue to
beneficially own at least 15% of our issued and outstanding ordinary shares, on
an as converted basis (excluding unexercised warrants), and to designate one
member for election to our Board of Directors so long as they continue to
beneficially own at least 5% of our issued and outstanding ordinary shares, on
an as converted basis (excluding unexercised warrants). Messrs. Shimon Alon and
Ron Zuckerman began serving as directors in May 2004 and Mr. Aki Ratner will
begin his term as a director in July, 2004. See Item 7B. "Major Shareholders and
Related Party Transactions - Major Shareholders - Related Party Transactions."
B. COMPENSATION
The following table sets forth all compensation we paid with respect to
all of our directors and executive officers as a group for the year ended
December 31, 2003:
Salaries, fees,
commissions and Pension, retirement
bonuses and similar benefits
--------------- --------------------
All directors and executive officers
as a group, consisting of 7 persons ............. $807,032 $95,596
37
Non-employee directors received an annual fee of $33,000 and an
attendance fee of $300 per meeting attended.
As of December 31, 2003, our directors and executive officers as a
group, then consisting of 7 persons, held options to purchase an aggregate of
1,531,499 ordinary shares, at an exercise price of $0.82-$7.875 per share, with
vesting over three-year terms. Of such options, options to purchase 641,499
ordinary shares expire between 2005 and 2008. Such options were granted under
our 1998 and 2001 Employee Stock Option Plans and our 2003 Israeli Stock Option
Plan. See Item 6E. "Directors, Senior Management and Employee - Share Ownership
- Stock Option Plans."
C. BOARD PRACTICES
Election of Directors
Pursuant to our articles of association, all of our directors (except
the outside directors as detailed below) are elected at our annual general
meeting of shareholders by a vote of the holders of a majority of the voting
power represented and voting at such meeting. All the members of our Board of
Directors (except the outside directors) may be reelected upon completion of
their term of office. All our directors currently in office, except our outside
directors, were elected by our shareholders at our annual meeting of
shareholders of December 2003.
Independent and Outside Directors
The Israeli Companies Law requires Israeli companies with shares that
have been offered to the public in or outside of Israel to appoint at least two
outside directors. No person may be appointed as an outside director if the
person or the person's relative, partner, employer or any entity under the
person's control has or had, on or within the two years preceding the date of
the person's appointment to serve as outside director, any affiliation with the
company or any entity controlling, controlled by or under common control with
the company. The term affiliation includes:
o an employment relationship;
o a business or professional relationship maintained on a regular
basis;
o control; and
o service as an officer holder.
No person may serve as an outside director if the person's position or
other activities create, or may create, a conflict of interest with the person's
responsibilities as an outside director or may otherwise interfere with the
person's ability to serve as an outside director. If, at the time an outside
director is to be appointed, all current members of the Board of Directors are
of the same gender, then the outside director must be of the other gender.
Outside directors are elected by shareholders. The shareholders voting
in favor of their election must include at least one-third of the shares of the
non-controlling shareholders of the
38
company who are present at the meeting and voting on the matter. This minority
approval requirement need not be met if the total shareholdings of those
non-controlling shareholders who vote against their election represent 1% or
less of all of the voting rights in the company. Outside directors serve for a
three-year term, which may be renewed for only one additional three-year term.
Outside directors can be removed from office only by the same special percentage
of shareholders as can elect them, or by a court, and then only if the outside
directors cease to meet the statutory qualifications with respect to their
appointment or if they violate their duty of loyalty to the company.
Any committee of the board of directors must include at least one
outside director and the audit committee must include all of the outside
directors. An outside director is entitled to compensation as provided in
regulations adopted under the Israeli Companies Law and is otherwise prohibited
from receiving any other compensation, directly or indirectly, in connection
with such service.
In addition, the NASDAQ National Market requires us to have at least
two independent directors on our board of directors and to establish an audit
committee. Under NASDAQ rules promulgated pursuant to the Sarbanes-Oxley Act of
2002, we will be required in the future to have three independent directors on
our audit committee. Messrs. Dan Falk and Roni Ferber and Ms. Segal qualify as
independent directors under the NASDAQ Market requirements. Mr. Dan Falk and Ms.
Segal qualify as outside directors under the Israeli Companies Law requirements.
Approval of Related Party Transactions Under Israeli Law
The Israeli Companies Law codifies the fiduciary duties that "office
holders," including directors and executive officers, owe to a company. An
office holder's fiduciary duties consist of a duty of care and a duty of
loyalty. The duty of care requires an office holder to act at a level of care
that a reasonable office holder in the same position would employ under the same
circumstances. The duty of loyalty includes avoiding any conflict of interest
between the office holder's position in the company and his personal affairs,
avoiding any competition with the company, avoiding exploiting any business
opportunity of the company in order to receive personal gain for the office
holder or others, and disclosing to the company any information or documents
relating to the company's affairs which the office holder has received due to
his position as an office holder. Each person listed as a director or executive
officer in the table under Item6A. "Directors, Senior Management and Employees
-- Directors and Senior Management" above is an office holder. Under the Israeli
Companies Law, all arrangements as to compensation of office holders who are not
directors require approval of our board of directors, and, in certain cases,
also our audit committee, and the compensation of office holders who are
directors must be approved by our audit committee, board of directors and
shareholders.
The Israeli 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 us. In addition, if the transaction is an extraordinary
transaction, that is, a transaction other than in the ordinary course of
business, other than on market terms, or likely to have a material impact on the
company's profitability, assets or liabilities, the office holder must also
disclose any personal interest held by the office holder's spouse, siblings,
parents, grandparents, descendants, spouse's descendants and the
39
spouses of any of the foregoing, or by any corporation in which the office
holder or a relative is a 5% or greater shareholder, director or general manager
or in which he or she has the right to appoint at least one director or the
general manager. Some transactions, actions and arrangements involving an office
holder (or a third party in which an office holder has an interest) must be
approved by the board of directors or as otherwise provided for in a company's
articles of association, as not being adverse to the company's interest. In some
cases, such a transaction must be approved by the audit committee and by the
board of directors itself (with further shareholder approval required in the
case of extraordinary transactions). An office holder who has a personal
interest in a matter, which is considered at a meeting of the board of directors
or the audit committee, may not be present during the board of directors or
audit committee discussions and may not vote on this matter, unless the majority
of the members of the board or the audit committee have a personal interest, as
the case may be.
The Israeli Companies Law also provides that an extraordinary
transaction between a public company and a controlling shareholder, or
transactions in which a controlling shareholder of the company has a personal
interest but which are between a public company and another entity or the terms
of compensation of a controlling shareholder, require the approval of the board
of directors and of the shareholders. The shareholder approval for any such
extraordinary transaction must include at least one-third of the shareholders
who have no personal interest in the transaction and are present at the meeting.
The transaction can be approved by shareholders without this one-third approval,
if the total shareholdings of those shareholders who have no personal interest
and voted against the transaction do not represent more than one percent of the
voting rights in the company.
However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Israeli Companies Law and
amended in January 2002, certain transactions between a company and its
controlling shareholder(s) do not require shareholder approval.
In addition, pursuant to the recent amendment to these regulations,
directors' compensation and employment arrangements do not require the approval
of the shareholders if both the audit committee and the board of directors agree
that such arrangements are for the benefit of the company. If the director or
the office holder is a controlling shareholder of the company, then the
employment and compensation arrangements of such director or office holder do
not require the approval of the shareholders provided that certain criteria are
met.
The above exemptions will not apply if one or more shareholders,
holding at least 1% of the issued and outstanding share capital of the company
or of the company's voting rights, objects to the grant of such relief, provided
that such objection is submitted to the company in writing not later than seven
(7) days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.
40
Exculpation, Indemnification and Insurance of Directors and Officers
The Israeli Companies Law provides that an Israeli company cannot
exculpate an office holder from liability with respect to a breach of his duty
of loyalty, but may, if permitted by its articles of association, exculpate in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care. Our articles of association permit
us to exculpate an officer to the maximum extent permitted by the Israeli
Companies Law.
The Israeli Companies Law provides that a company may, if permitted by
its articles of association, enter into a contract for the insurance of the
liability of any of its office holders with respect to an act performed by him
in his capacity as an office holder, for:
o a breach of his duty of care to us or to another person;
o breach of his duty of loyalty to us, provided that the office
holder acted in good faith and had reasonable cause to assume
that his act would not prejudice our interests; or
o a financial liability imposed upon him in favor of another
person.
Our articles of association provide that we may enter into a contract
for the insurance of the liability, in whole in part, of any of its office
holders, to the maximum extent permitted by the Israeli Companies Law.
In addition, our articles of association provide that we may, with
respect to an act performed in the capacity of an office holder, (i) undertake
in advance to indemnify an office holder, provided that the undertaking shall be
restricted to foreseeable events and up to a feasible amount, as determined by
our board of directors; and (ii) indemnify an office holder retroactively;
against:
o a financial liability imposed on him in favor of another person
by any judgment, including a settlement or an arbitrator's award
approved by a court; and
o reasonable litigation expenses, including attorneys' fees,
expended by such office holder or charged to him by a court, in a
proceeding we instituted against him or instituted on our behalf
or by another person, or in a criminal charge from which he was
acquitted or in which he was convicted of an offense that does
not require proof of criminal intent.
These provisions are specifically limited in their scope by the Israeli
Companies Law, which provides that a company may not indemnify an office holder,
nor exculpate an office holder, nor enter into an insurance contract which would
provide coverage for any monetary liability incurred as a result of certain
improper actions.
Pursuant to the Israeli Companies Law, exculpation of, procurement of
insurance coverage for, and an undertaking to indemnify or indemnification of,
our office holders must be
41
approved by our audit committee and our board of directors and, if such office
holder is a director, also by our shareholders.
We have undertaken to indemnify our office holders to the fullest
extent permitted by law. We currently maintain directors and officers liability
insurance with a per claim and aggregate coverage limit of $10 million including
legal costs incurred.
Directors' Service Contracts
Mr. Gonen has served as a director since December 1988 and served as
the Chairman of our Board of Directors from October 31, 1988 until May 10, 2004.
Mr. Gonen served as our Chief Executive Officer from October 31, 1988 until
October 1, 2000. From August 22, 2002 through October 28, 2003, Mr. Gonen
assumed the position of Interim Chief Executive Officer. On October 28, 2003,
our Board of Directors appointed Mr. Gonen as our Chief Executive Officer, in
addition to his position at such time as Chairman of our Board of Directors, for
a term not to exceed three years, such appointment was approved by our annual
general meeting of shareholders in December 2003. In March 2003, we entered into
a new Employment and Services Agreement with Mr. Gonen, effective as of
September 1, 2002, under which Mr. Gonen agreed to serve as the Chairman of our
Board of Directors and our Interim Chief Executive Officer and to act as a
consultant for a period of three years after termination of his employment.
During the term of his employment with our company, Mr. Gonen is entitled to a
monthly gross salary of NIS 90,000, linked to the Israeli Consumer Price Index
(approximately $20,500) and is entitled to a monthly consulting fee of $13,500
plus V.A.T. during the three-year, post-termination consulting period. Mr.
Gonen's monthly gross salary during his employment term will be reduced by 20%
as long as the 20% pay reduction for all our employees remains in force.
Currently, Gonen's monthly salary (as well as all of our employees salaries) is
subject to a 14.4%. reduction. During his employment term, Mr. Gonen is entitled
to the use of a company car, full reimbursement for his home telephone expenses,
reimbursement for all-reasonable entertainment and living expenses both in
Israel and abroad, managers insurance, and education fund and we granted Mr.
Gonen options to purchase 400,000 of our ordinary shares at a price of $1.75 per
share. In addition, we agreed to pay Mr. Gonen the following bonuses: (i) 9% of
all license and maintenance revenues received by us between January 1, 2003 and
December 31, 2007 from international distributors that our Board of Directors
assigned Mr. Gonen to appoint, provided that this yearly bonus would not exceed
the lower of (a) 5% of our yearly net profit, excluding any impairment of
intangible assets, and (b) $100,000 per year; (ii) 16% of revenues received from
Oracle in 2003 and 6% of revenues received from Oracle in 2004; (iii) three-year
warrants to purchase up to 7% of the amount of shares issued in any fund-raising
transaction to investors introduced by Mr. Gonen; (iv) up to 7% of the proceeds
of an acquisition transaction that our Board of Directors assigned Mr. Gonen to
manage; and (v) additional yearly bonuses at the discretion of our Board of
Directors of up to $100,000. The agreement also contains non-competition and
confidentiality provisions. Following termination of his employment by us,
except for cause, Mr. Gonen will be entitled to a severance payment that is
calculated at two times his last gross salary multiplied by the number of years
since October 1, 1987, less the amount accumulated in the severance component of
his manager's insurance maintained by us for him which will be transferred to
his name.
42
In connection with the appointment of Mr. Gonen as our Chief Executive
Officer as well as Chairman of our Board of Directors in October 2003, Mr.
Gonen's Employment and Service Agreement was amended, as approved by the annual
general meeting of shareholders in December 2003, pursuant to which we granted
Mr. Gonen an additional 600,000 options to purchase our ordinary shares at an
exercise price of $1.92 per share, with vesting conditioned on his spending at
least two-thirds of his time in the United States during 2004.
In April 2004, in connection with a private placement of our securities
(see Item 7B. "Major Shareholders and Related Party Transactions - Related Party
Transactions"), our shareholders approved a new Employment and Services
Agreement with Mr. Gonen, which amended and restated the then existing
Employment and Services Agreement (as amended), effective as of January 1, 2004.
The new Employment and Services Agreement reflects the terms of the previous
agreement, and in addition we have the right under the new agreement to change
Mr. Gonen's position as Chief Executive Officer while continuing his employment
with us, and such change of position will not constitute termination of his
employment. In the event that Mr. Gonen's employment with us is terminated due
to the failure of our company to achieve the financial milestones agreed upon
from time to time by him and our Board of Directors, we will have the right to
terminate his employment and pay Mr. Gonen a one-time, lump-sum payment of
$250,000 instead of the monthly consulting fee to which he is entitled during
the three-year consulting period. It was further agreed that Mr. Gonen's options
to purchase 600,000 of our ordinary shares will vest only in the event of a
change of control transaction. The grant of the option to purchase 600,000
ordinary shares is conditioned on his spending at least two-thirds of his time
in the United States from January 24, 2004 and until January 23, 2005. Mr. Gonen
will retain the 600,000 options, subject to vesting upon a change in control
transaction, in the event that: (i) his employment is terminated by us, except
for justifiable cause; (ii) he stops serving as our Chief Executive Officer at
our Board of Director's request; or (iii) is requested by our Board of Directors
not to spend 66% of his time in the United States during the period mentioned
above. Additionally, we agreed that in the event our company is acquired in a
merger or acquisition transaction, Mr. Gonen will be entitled to a fee of up to
7% of the total value of the consideration paid to our company in such a
transaction, the exact percentage to be determined by our Board of Directors;
however, the percentage will be no less than 3% in the event that the closing of
the transaction occurs on or before December 31, 2004; 2% if the closing of the
transaction occurs at any time between January 1, 2005 and December 31, 2005 and
1% if the closing of the transaction occurs at any time between January 1, 2006
and December 31, 2007. Thereafter, Mr. Gonen will not be entitled to any fee in
connection with or relating to an acquisition transaction.
In April 2004, one of our shareholders wrote a letter to our Audit
Committee asking that it investigate whether certain compensation provisions of
the employment agreement entered into by our company and Mr. Gonen in March 2003
were validly and duly authorized. At our Meeting of Shareholders held on April
22, 2004, the same shareholder reiterated his request. Our Board of Directors
resolved, pursuant to the recommendation of our Audit Committee, to establish a
special fact finding committee to investigate the allegations and other matters
relating to Mr. Gonen's compensation. Our Board of Directors is currently
assessing the matter.
43
Audit Committee
Our audit committee, which was established in accordance with Section
114 of the Israeli Companies Law and Section 3(a)(58)(A) of the Securities
Exchange Act of 1934, assists our board of directors in overseeing the
accounting and financial reporting processes of our company and audits of our
financial statements, including the integrity of our financial statements,
compliance with legal and regulatory requirements, our independent public
accountants' qualifications and independence, the performance of our internal
audit function and independent public accountants, finding any defects in the
business management of our company for which purpose the audit committee may
consult with our independent auditors and internal auditor, proposing to the
board of directors ways to correct such defects, approving related-party
transactions as required by Israeli law, and such other duties as may be
directed by our board of directors.
Our audit committee consists of three board members who satisfy the
respective "independence" requirements of the Securities and Exchange
Commission, NASDAQ and Israeli Law for audit committee members. Our audit
committee is currently composed of Ms. Anat Segal and Messrs. Dan Falk and Roni
Ferber. The audit committee meets at least once each quarter.
The responsibilities of the audit committee also include approving
related-party transactions as required by law. Under Israeli law an audit
committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two
outside directors are serving as members of the audit committee and at least one
of the outside directors was present at the meeting in which an approval was
granted.
Internal Audit
The Israeli Companies Law requires the board of directors of a public
company to appoint an internal auditor nominated by the audit committee. A
person who does not satisfy the Israeli Companies Law's independence
requirements may not be appointed as an internal auditor. The role of the
internal auditor is to examine, among other things, the compliance of a
company's conduct with applicable law and orderly business practice. Yossi
Genossar serves as our internal auditor.
D. EMPLOYEES
On December 31, 2003, we employed 153 persons, comprised of 44 persons
in research and development, 9 persons in product and customer support, 53
persons in software services, 30 persons in marketing and sales and 17 persons
in general administration and management. As of December 31, 2003, we had 117
employees in Europe, the Middle East and Africa, 22 employees in the United
States and 14 employees located in other countries.
On December 31, 2002, we employed 158 persons, comprised of 34 persons
in research and development, 11 persons in product and customer support, 54
persons in software services, 38 persons in marketing and sales and 21 persons
in general administration and management. As of December 31, 2002, we had 118
employees in Europe, the Middle East and Africa, 26 employees in the United
States and 14 employees located in other countries.
44
On December 31, 2001, we employed 225 persons, comprised of 63 persons
in research and development, 17 persons in product and customer support, 61
persons in software services, 51 persons in marketing and sales and 33 persons
in general administration and management. As of December 31, 2001, we had 160
employees in Europe, the Middle East and Africa, 50 employees in the United
States and 15 employees located in other countries.
Certain provisions of the collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations (including the Industrialists' Association) are
applicable to our employees by order of the Israeli Ministry of Labor. These
provisions concern mainly the length of the workday, minimum daily wages for
professional workers, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. We generally provide our
employees with benefits and working conditions beyond the required minimums.
Pursuant to Israeli law, we are legally required to pay severance
benefits upon certain circumstances, including the retirement or death of an
employee or the termination of employment of an employee without due cause.
Israeli employers and employees are required to pay predetermined amounts to the
National Insurance Institute, which is similar to the United States Social
Security Administration. In 2003, payments to the National Insurance Institute
amounted to approximately 16.3% of wages (up to a maximum amount), of which
approximately two-thirds was contributed by employees with the balance
contributed by the employer.
E. SHARE OWNERSHIP
Beneficial Ownership of Executive Officers and Directors
The following table sets forth certain information as of May 18, 2004
regarding the beneficial ownership of our ordinary shares by each of our
directors and executive officers:
Number of Ordinary Percentage of
Shares Outstanding Ordinary
Beneficially Owned (1) Shares (2)
---------------------- --------------------
Shimon Alon ................. 1,367,845 (3,4,5,6) 8.5%
Arie Gonen .................. 1,383,333 9.0%
Ofer Segev................... 95,000 (7) *
Shlomo Baumgarten............ 156,500 (7,8) 1%
Dov Biran.................... 863,720 5.7%
Dan Falk..................... 3,333 (7) *
Roni Ferber.................. 31,666 (7,9) *
Anat Segal................... 3,333 (7) *
Ron Zuckerman................ 1,367,845 (3,4,5,6) 8.5%
----------------
45
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting
or investment power with respect to securities. Ordinary shares
relating to options currently exercisable or exercisable within 60
days of the date of the above table are deemed outstanding for
computing the percentage of the person holding such securities but
are not deemed outstanding for computing the percentage of any other
person. Except as indicated by footnote, and subject to community
property laws where applicable, the persons named in the table above
have sole voting and investment power with respect to all shares
shown as beneficially owned by them.
(2) The percentages shown are based on 15,221,538 ordinary shares
issued and outstanding as of May 18, 2004.
(3) Includes 441,698 ordinary shares issuable upon exercise of Series A
Warrants, exercisable at an exercise price of $1.75 per ordinary
share.
(4) Includes 147,232 ordinary shares issuable upon exercise of Series B
Warrants, exercisable at an exercise price of $2.00 per ordinary
share.
(5) Includes 160,000 ordinary shares issuable upon exercise of May 2004
Warrants, exercisable at an exercise price of $1.75 per ordinary
share.
(6) Includes 210,286 ordinary shares issuable upon the conversion of five
years convertible debentures, at a conversion price of $1.75 per
ordinary share.
(7) These ordinary shares are subject to currently exercisable options.
(8) Includes 156,500 ordinary shares subject to currently exercisable
options granted under our stock option plan, at exercise prices
between $1.05 - $7.875 per share. Such options expire between
December 2006 and December 2008.
(9) Includes 28,332 ordinary shares subject to currently exercisable
options granted under our stock option plan, at exercise prices
between $1.05-$7.875 per share. Such options expire between December
2005 and December 2007.
Stock Option Plans
1994 Stock Option Plan and 1998 Stock Option Plan
Under our 1994 Stock Option Plan, or the 1994 Plan, and our 1998 Stock
Option Plan, or the 1998 Plan, incentive stock options, or ISOs, as defined in
Section 422 of the United States Internal Revenue Code of 1986, as amended, may
be granted to our officers and employees or to employee of any of our
subsidiaries, and options which do not qualify as ISOs or non-qualified options,
may be granted to our employees, officers and directors or to employees of any
of our subsidiaries. An aggregate of 2,500,000 ordinary shares are reserved for
issuance under the 1994 Plan and 1998 Plan. Ordinary shares underlying any
options which are cancelled or not exercised become available for future grants.
The 1994 Plan and 1998 Plan will terminate in 2004 and 2008, respectively,
unless previously terminated by the Board of Directors.
The 1994 Plan and 1998 Plan are currently administered by our Board of
Directors, which in the future may delegate such administration to a committee
of directors. The Board or such committee, if appointed, has the authority to
determine the persons to whom options will be granted, the number of ordinary
shares to be covered by each option, the time or times at which
46
options will be granted or exercised, and the other terms and provisions of the
options. The exercise price of an ISO granted under such plans may not be less
than 100% (110% in the case of a 10% shareholder) and the exercise price of a
non-qualified option may not be less than 75% of the fair market value (as
defined in the plan) of our ordinary shares on the date of the grant.
It is intended that each option granted under the 1994 Plan and 1998
Plan will be exercisable in installments during the option term and shall not be
transferable by the optionee other than by will or by the laws of descent and
distribution. Options granted under such plans will terminate at such time (not
to exceed ten years from the date of grant) and under such circumstances as the
Board or Option Committee determines, generally not later than three months
after a termination of employment, or one year in the event of termination by
reason of the optionee's death or disability.
No options were granted under the 1994 Plan in 2003, and 400,916
ordinary shares remained available for future grant under the 1994 Plan at
December 31, 2003.
Options for the purchase of 55,000 ordinary shares, having exercise
prices ranging between $2.25 to $7.75 per share, were granted under the 1998
Plan in 2003 and at December 31, 2003 options for the purchase of 216,770
ordinary shares were available for future grants under such plan.
Of the outstanding options to purchase a total 1,545,454 ordinary
shares under the 1994 Plan and the 1998 Plan, options for the purchase of 45,800
ordinary shares will expire in 2004, options for the purchase of 49,000 ordinary
shares will expire in 2005 and the remaining options to purchase 1,450,654
ordinary shares will expire thereafter.
No ordinary shares were issued in 2003 upon exercise of options
previously granted under the 1994 Plan and 1998 Plan, and no options were
exercised by our officers and directors in 2003 under such plans.
2001 Stock Option Plan
In 2001 we adopted our 2001 Employee Stock Option Plan, or the 2001
Plan, which authorized the grant of options to purchase up to 1,000,000 ordinary
shares. In 2003, the 2001 Plan was amended such that the number of ordinary
shares issuable under the 2001 Plan was increased by 1,000,000 ordinary shares,
subsequent to which up to 2,000,000 ordinary shares are issuable under the 2001
Plan. Employees, officers, directors and consultants of our company and its
subsidiaries are eligible to participate in the 2001 Plan. Awards under the 2001
Plan may be granted in the forms of incentive stock options as provided in
Section 422 of the U.S. Internal Revenue Code of 1986, as amended, non-qualified
stock options, options granted pursuant to Section 102 of the Israeli Tax
Ordinance and options granted pursuant to Section 3.9 of the Israeli Tax
Ordinance. The 2001 Plan has a term of ten (10) years and will terminate in
2011. No award of options may be made after such date.
The 2001 Plan is currently administered by our Board of Directors,
which in the future may delegate such administration to a committee of
directors. Subject to the provisions of the 2001 Plan and applicable law, the
Board of Directors or the committee (if appointed) has the authority, to
determine, among other things to whom options may be granted; the number of
47
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; to construe and interpret the 2001 Plan; to prescribe,
amend and rescind rules and regulations relating to such plan; and to make all
other determinations deemed necessary or advisable for the administration of
such plan.
The exercise price of an ISO granted under the plans may not be less
than 100% (110% in the case of a 10% shareholder) and the exercise price of a
non-qualified option may not be less than 100% of the fair market value (as
defined in the plan) of our ordinary shares on the date of the grant.
As of December 31, 2003, options to purchase 1,907,500 ordinary shares
had been granted under the 2001 Plan, having exercise prices ranging between
$0.82 - $1.92 per share. Such outstanding options will expire after 2005.
In 2003, options to purchase 890,000 ordinary shares were granted under
the 2001 Plan to our officers and directors.
As of December 31, 2003, our executive officers and directors as a
group, consisting of 7 persons, held options to purchase 1,320,000 ordinary
shares under the 2001 Plan, exercisable at an average exercise price of $1.67
per share.
2003 Israeli Stock Option Plan
As of January 1, 2003, Section 102 of the Israeli Income Tax Ordinance
[New Version] - 1961, or Section 102, which applies to stock option plans, was
amended, pursuant to which certain new tax advantages are afforded with respect
to option grants to employees and directors. In order to enable employees and
directors to benefit from such tax advantages with respect to future grants of
options and issuance of shares upon exercise thereof, such grants have to be
performed under a share option plan that is adjusted to the amended Section 102.
Since our then existing stock option plans do not comply with the amended
Section 102, we adopted the 2003 Israeli Stock Option Plan, or the 2003 Plan,
under which options may be granted to employees employed by us or by our
affiliates. Under the 2003 Plan options to purchase up to 1,500,000 ordinary
shares may be granted; however, this will not increase the total number of
shares available for option grants, but will allow us to roll over shares
available for grant under our 1994 Plan, 1998 Plan and 2001 Plan into the 2003
Plan according to a resolution of our Board of Directors from time to time.
Options to Israeli employees, directors and officers, other than
controlling shareholders (as such term is defined in the Israeli Income Tax
Ordinance), under the 2003 Plan may only be granted under Section 102. Under the
amended Section 102, we may designate options granted pursuant to Section 102 as
"Approved 102 Options" or "Unapproved 102 Options." An Approved 102 Option may
be classified as either a capital gains option or an ordinary income option. We
elected to initially grant options pursuant to Section 102 as Approved 102
Options, under the capital gains tax route. Such election is effective as of the
first date of grant of such capital gain options under the 2003 Plan and shall
remain in effect at least until the lapse of one year following the end of the
tax year during which we first granted capital gain options. All Approved 102
Options (or the ordinary shares issued upon exercise thereof) must be held in
trust
48
by a trustee for the requisite holding period under the amended Section 102 in
order to benefit from the certain tax advantages. We may also grant Unapproved
102 Options, which do not have any tax benefit and are not held by a trustee.
Options granted under Section 102 are taxed on the date of sale of the exercised
ordinary shares and/or the date of the release of the options or such exercised
ordinary shares from the trust.
The 2003 Plan is currently administered by our Board of Directors,
which may delegate such administration to a committee of directors. Subject to
the 2003 Plan and applicable law, the Board of Directors or the committee (if
appointed) has the authority to determine, among other things to whom options
may be granted; the time and the extent to which the options may be exercised,
the fair market value of the shares and the exercise price of shares covered by
each option (based on the fair market value); to designate the type of options;
to make an election as to the type of Approved 102 option; interpret the 2003
Plan; to prescribe, amend and rescind rules and regulations relating to such
plan; and to make all other determinations deemed necessary or advisable for the
administration of such plan.
Options granted under the 2003 Plan are not assignable or transferable
by the optionee, except as specifically allowed under the 2003 Plan, and during
the lifetime may only be exercised by the optionee. Such options may be
exercised as long as the optionee is employed by, or providing services to, us
or any of our affiliates, to the extent the options have vested.
As of December 31, 2003, options to purchase 1,481,500 ordinary shares
had been granted under the 2003 Plan, having an exercise price of $1.42 per
share. Such outstanding options will expire in December 2009.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
-------------------------------------------------
A. MAJOR SHAREHOLDERS
The following table sets forth certain information as of May 18, 2004
regarding the beneficial ownership by all shareholders known to us to own
beneficially more than 5% of our ordinary shares:
Number of Ordinary Percentage of
Shares Outstanding
Beneficially Owned (1) Ordinary Shares (2)
---------------------- -------------------
Arie Gonen..................................... 1,383,333 (3) 9.0%
Dov Biran...................................... 863,720 5.7%
Messrs. Shimon Alon, Aki Ratner, Ron Zuckerman
and other investors represented by them ..... 6,130,654 (4,5,6,7) 31.8%
Total.......................................... 8,377,707 (8) 43.1%
-------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares relating
to options currently exercisable or exercisable within
49
60 days of the date of this table are deemed outstanding for computing
the percentage of the person holding such securities but are not deemed
outstanding for computing the percentage of any other person. Except as
indicated by footnote, and subject to community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares shown as beneficially owned
by them.
(2) The percentages shown are based on 15,221,538 shares issued and
outstanding as of May 18,, 2004.
(3) Includes 133,333 ordinary shares subject to currently exercisable
options granted under our stock option plan, exercisable at an exercise
price of $1.75 per share. Such options will expire on September 30,
2009.
(4) Includes 2,208,489 ordinary shares currently issuable upon exercise of
Series A Warrants, exercisable at an exercise price of $1.75 per share.
(5) Includes 736,162 ordinary shares currently issuable upon exercise of
Series B Warrants, exercisable at an exercise price of $2.00 per share.
(6) Includes 1,142,857 ordinary shares issuable upon the conversion of five
years convertible debentures, convertible at a conversion price of
$1.75 per share.
(7) Under a certain Stockholders Agreement dated December 23, 2003, as
amended in February 2004, by and among Messrs. Shimon Alon, Ron
Zuckerman, Aki Ratner, and other investors represented by them, among
other things, Messrs. Alon, Zuckerman and Ratner (i) were granted, in
any combination of two signatures of such persons, joint sole
discretionary authority over the disposition of the ordinary shares,
the exercise of the warrants and the conversion of the convertible
promissory notes, which were purchased by or issued to such group of
investors pursuant to or in connection with a certain Purchase
Agreement dated December 23, 2003, and the disposition of the shares
underlying such warrants and convertible promissory notes; and (ii)
were appointed, in any combination of two signatures of such persons,
as the group's powers of attorney, acting jointly, with sole
discretionary power to exercise the voting rights of each of the
securities acquired pursuant to the Purchase Agreement. See Item 7B.
"Major Shareholders and Related Party Transactions - Major Shareholders
- Related Party Transactions."
(8) See Footnotes (3) - (7).
Significant Changes in the Ownership of Major Shareholders.
On December 30, 2003, Messrs. Shimon Alon, Aki Ratner, Ron Zuckerman
and other investors represented by them purchased from the Special Situations
Funds their entire holding of 2,043,146 of our ordinary shares, Series A
Warrants to purchase 2,208,489 of our ordinary shares and Series B Warrants to
purchase 736,162 of our ordinary shares. On April 24, 2004, at an extraordinary
general meeting of shareholders, the shareholders resolved to reduce the
exercise price of the Series B Warrants from $2.25 to $2.00. See Item 7B. "Major
Shareholders and Related Party Transactions - Major Shareholders - Related Party
Transactions."
50
Major Shareholders Voting Rights
Our major shareholders do not have different voting rights.
Record Holders
At June 23, 2004, there were 55 holders of record of our ordinary
shares, of which 38 record holders holding approximately 85.38% of our ordinary
shares had registered addresses in the United States, including banks, brokers
and nominees. Because these holders of record include banks, brokers and
nominees, the beneficial owners of these ordinary shares may include persons who
reside outside the United States. On April 22, 2004, we had approximately 1,405
beneficial holders of our ordinary shares, we do not believe this number has
materially changed.
B. RELATED PARTY TRANSACTIONS
On December 30, 2003, Messrs. Shimon Alon, Aki Ratner, Ron Zuckerman
and other investors represented by them purchased from the Special Situations
Funds their entire holding of 2,043,146 of our ordinary shares, Series A
Warrants to purchase 2,208,489 of our ordinary shares and Series B Warrants to
purchase 736,162 of our ordinary shares. On the same date of their transaction
with the Special Situations Funds, we granted such group a 30-day option to
invest $2 million in our company in the form of five-year convertible promissory
notes, convertible at $1.75 per share, and warrants to purchase 450,000 of our
ordinary shares at an exercise price of $1.75 per share. On January 29, 2004 we
granted the group a seven-day extension to exercise such option and on February
5, 2004 the group elected to exercise such option. Accordingly, on March 22,
2004 we entered into a Note and Warrant Purchase Agreement with such group,
pursuant to which we issued the group convertible promissory notes in the
aggregate principal amount of $2 million, bearing interest at the rate of 5% per
annum, payable semi-annually, convertible at any time after issuance, in whole
or in part, into our ordinary shares, at a conversion price of $1.75 per share.
In April 2004, all such transactions were approved by our shareholders. The
notes and unpaid accrued interest thereon will be due and payable five years
after issuance, subject to early repayment in the event of default by us of our
obligations under the notes. In addition, we agreed to issue to certain members
of the group warrants to purchase an aggregate of 480,000 of our ordinary shares
at an exercise price of $1.75 per share, expiring three years after their
issuance. The convertible promissory notes and the warrants contain
anti-dilution provisions. In addition, the exercise price of the Series B
Warrants purchased by the group was reduced to $2.00 per share, and the term of
the Series A and Series B Warrants held by them was extended for one additional
year, to October 24, 2006. Under the agreement the group have the right to
designate Messrs. Shimon Alon, Ron Zuckerman and Aki Ratner for election to our
Board of Directors in 2004, thereafter to designate two members for election to
our Board of Directors so long as they continue to beneficially own at least 15%
of our issued and outstanding ordinary shares, on an as converted basis
(excluding unexercised warrants), and to designate one member for election to
our Board of Directors so long as they continue to beneficially own at least 5%
of our issued and outstanding ordinary shares, on an as converted basis
(excluding unexercised warrants). Under the agreement the group have a
pre-emptive right, so long as they hold at least 2% of our issued and
outstanding shares, to participate in certain future financings. The consent of
a majority of the promissory notes is required for any action that authorizes,
creates, reclassifies or issues any debt or equity security
51
having preference senior to or on parity with the promissory notes. We also
undertook to register the shares issuable upon conversion of the notes and
exercise of the warrants under the Securities Act of 1933 and to maintain a
registration statement in effect in order to allow the purchasers to freely sell
these shares.
In connection with the transactions contemplated by our March 22, 2004
note and warrant purchase agreement, our shareholders approved a new employment
and services agreement with Mr. Gonen, which, effective as of January 1, 2004,
amended and restated his existing employment and services agreement. See Item
6C. "Directors, Senior Management and Employees - Board Practices - Directors'
Service Contracts."
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
---------------------
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the consolidated financial statements, including the notes thereto,
and the exhibits listed in Item 19 hereof and incorporated herein by this
reference.
Legal Proceedings
In November 2002, four Special Situations Funds, or SSF, that invested
in our company in our October 2001 private placement, filed a complaint against
us alleging that we had breached the Registration Rights Agreement relating to
their investment in our company. SSF sought to collect liquidation damages of
approximately $603,000, plus unspecified actual damages allegedly due as a
result of a delay in the declaration of the effective date of the registration
statement covering the shares purchased by SSF, as provided for under the
Registration Rights Agreement. On March 28, 2003, the court ruled in favor of
SSF and awarded SSF liquidation damages in the amount of $ 603,000, plus
interest from the date on which the complaint was filed. We appealed the courts
decision and in January 2004, an appellate court affirmed the lower courts
decision and rejected our appeal. In 2002, we recorded a one-time charge in the
amount of $ 810,000 and an additional $365,000 in 2003 relating to the outcome
of the lawsuit and its related expenses. The charge was included in
restructuring and other non-recurring charges in our statement of operations.
During 2002, our U.S. subsidiary ceased to use its former leased
facilities prior to the end of the term of the lease, which was to expire in
September 2005. In 2003, the owner of the premises filed an action against us
for non-payment of the lease fees for 2003. In April 2004, we paid $825,000 to
settle the dispute with the owner.
Dividend Distribution Policy
We have never paid and do not intend to pay cash dividends on our
ordinary shares in the foreseeable future. Our earnings and other cash resources
will be used to continue the development and expansion of our business. Any
future dividend policy will be determined by
52
our Board of Directors and will be based upon conditions then existing,
including our results of operations, financial condition, current and
anticipated cash needs, contractual restrictions and other conditions.
According to the Israeli Companies Law, a company may distribute
dividends out of its profits, so long as the company reasonably believes that
such dividend distribution will not prevent the company from paying all its
current and future debts. Profits, for purposes of the Israeli Companies Law,
means the greater of retained earnings or earnings accumulated during the
preceding two years, as evidenced by financial statements prepared no more than
six months prior to the date of distribution. In the event cash dividends are
declared, such dividends will be paid in NIS.
B. SIGNIFICANT CHANGES
In May 2004, we announced that Mr. Shimon Alon was appointed Chairman
of our Board of Directors and that Messrs. Aki Ratner and Ron Zuckerman were
appointed directors of our company. Mr. Aki Ratner will begin his term as a
director in July 2004.
In June 2004, we entered into an agreement with Plenus Technologies
Ltd., or Plenus, under which we secured a two-year $3 million credit line from
Plenus at a fixed interest rate of 6.5% per annum. We undertook to issue to
Plenus five-year warrants to purchase our ordinary shares in an amount equal to
a percentage of the credit line divided by $3.00 per share, the exercise price
of the warrants (subject to anti-dilution adjustments), as follows: 20% of the
credit line if we terminate the credit line within the first year of its
initiation; 23% of the credit line if we terminate the credit line within the
second year of its initiation and we had not drawn any money from the credit
line prior to termination; and 30% of the credit line if we terminate the credit
line within the second year of its initiation and we had drawn money from the
credit line prior to termination. See Item 5B. "Operating and Financial Review
and Prospects - Liquidity and Capital Resources."
ITEM 9. THE OFFER AND LISTING
---------------------
A. OFFER AND LISTING DETAILS
Annual Stock Information
The following table sets forth, for each of the years indicated, the
range of high ask and low bid prices of our ordinary shares on the NASDAQ
National Market:
Year High Low
---- ---- ---
1999............................... $16.375 $6.75
2000............................... $37.50 $3.3125
2001............................... $5.50 $0.75
2002............................... $2.12 $0.50
2003............................... $2.22 $0.80
53
Quarterly Stock Information
The following table sets forth, for each of the full financial quarters
in the years indicated, the range of high ask and low bid prices of our ordinary
shares on the NASDAQ National Market:
High Low
---- ---
2002
----
First Quarter.......................... $1.55 $0.72
Second Quarter......................... $1.94 $0.90
Third Quarter.......................... $2.12 $0.90
Fourth Quarter......................... $1.34 $0.50
2003
----
First Quarter.......................... $1.05 $0.80
Second Quarter......................... $1.59 $0.90
Third Quarter.......................... $1.48 $1.00
Fourth Quarter......................... $2.22 $1.05
Monthly Stock Information
The following table sets forth, for each of the most recent last six
months, the range of high ask and low bid prices of our ordinary shares on the
NASDAQ National Market:
Month High Low
------ ---- ---
December 2003.......................... $2.22 $1.21
January 2004........................... $3.62 $2.08
February 2004.......................... $3.34 $2.53
March 2004............................. $3.44 $2.60
April 2004............................. $3.36 $2.62
May 2004............................... $2.88 $2.33
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ordinary shares have traded on the NASDAQ National Market since our
initial public offering on December 17, 1992. On October 27, 2000, our name was
changed to Attunity Ltd and our NASDAQ symbol changed to ATTU.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
54
Not applicable.
F. EXPENSE OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
----------------------
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
Purposes and Objects of the Company
We are a public company registered under the Israel Companies Law,
1999-5759, or the Israeli Companies Law, as Attunity Ltd., registration number
52-003801-9. Our objects and purposes, as provided by our articles of
association, are to carry on any lawful activity.
The Powers of the Directors
Under the provisions of the Israeli Companies Law and our articles of
association, a director cannot participate in a meeting nor vote on a proposal,
arrangement or contract in which he or she is personally interested. In
addition, our directors cannot vote compensation to themselves or any members of
their body without the approval of our audit committee and our shareholders at a
general meeting. See Item 6C. "Directors, Senior Management and Employees -
Board Practices - Approval of Related Party Transactions Under Israeli Law."
The authority of our directors to enter into borrowing arrangements on
our behalf is not limited, except in the same manner as any other transaction by
us.
Under our articles of association, retirement of directors from office
is not subject to any age limitation and our directors are not required to own
shares in our company in order to qualify to serve as directors.
Rights Attached to Shares
Our authorized share capital consists of 30,000,000 ordinary shares of
a nominal value of NIS 0.1 each. All outstanding ordinary shares are validly
issued, fully paid and non-assessable.
The rights attached to our ordinary shares are as follows:
Dividend rights. Subject to any preferential, deferred, qualified or
other rights, privileges or conditions attached to any special class of shares
with regard to dividends, the profits of the company available for dividend and
resolved to be distributed shall be applied in payment of dividends upon the
shares of the company in proportion to the amount paid up or credited as paid up
per the nominal value thereon respectively. Unless not otherwise specified in
the conditions of issuance of the shares, all dividends with respect to shares
which were not fully
55
paid up within a certain period, for which dividends were paid, shall be paid
proportionally to the amounts paid or credited as paid on the nominal value of
the shares during any portion of the abovementioned period. The board of
directors may declare interim dividends and propose the final dividend with
respect to any fiscal year only out of profits legally available for
distribution, in accordance with the provisions of the Israeli Companies Law.
See Item 8A. "Financial Information - Consolidated and Other Financial
Information - Dividend Distribution." If after one year a dividend has been
declared and it is still unclaimed, the board of directors is entitled to invest
or utilize the unclaimed amount of dividend in any manner to our benefit until
it is claimed. We are not obligated to pay interest or linkage differentials on
an unclaimed dividend.
Voting rights. Holders of ordinary shares have one vote for each
ordinary share held on all matters submitted to a vote of shareholders. Such
voting rights may be affected by the grant of any special voting rights to the
holders of a class of shares with preferential rights that may be authorized in
the future.
The quorum required at any meeting of shareholders consists of at least
two shareholders present in person or represented by proxy who hold or
represent, in the aggregate, at least one-third (33%) of the voting rights in
the company. A meeting adjourned for lack of a quorum generally is adjourned to
the same day in the following week at the same time and place or any time and
place as the directors designate in a notice to the shareholders. At the
reconvened meeting, the required quorum consists of any two members present in
person or by proxy.
Under our articles of association, all resolutions require approval of
no less than a majority of the voting rights represented at the meeting in
person or by proxy and voting thereon.
Pursuant to our articles of association, our directors (except outside
directors) are elected at our annual general meeting of shareholders by a vote
of the holders of a majority of the voting power represented and voting at such
meeting. See Item 6C. "Directors, Senior Management and Employees - Board
Practices - Election of Directors."
Rights to share in profits. Our shareholders have the right to share in
our profits distributed as a dividend and any other permitted distribution. See
this Item 10B. "Additional Information - Memorandum and Articles of Association
- Rights Attached to Shares - Dividend Rights."
Rights to share in surplus in the event of liquidation. In the event of
our liquidation, after satisfaction of liabilities to creditors, our assets will
be distributed to the holders of ordinary shares in proportion to the nominal
value of their holdings. This right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future.
Liability to capital calls by the company. Under our memorandum of
association and the Israeli Companies Law, the liability of our shareholders is
limited to the unpaid amount of the par value of the shares held by them.
Limitations on any existing or prospective major shareholder. See "Item
6C. Directors and Senior Management - Board Practices - Approval of Related
Party Transactions Under Israeli Law."
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Changing Rights Attached to Shares
The rights attached to any class of shares (unless otherwise provided
by the terms of issuance of the shares of that class) may be varied with the
consent in writing of the holders of all the issued shares of that class, or
with the sanction of a vote at a meeting of the shareholders passed at a
separate meeting of the holders of the shares of the class by a majority of the
voting rights of such class represented at the meeting in person or by proxy and
voting thereon.
Under our articles of association, unless otherwise provided by the
conditions of issuance, the enlargement of an existing class of shares, or the
issuance of additional shares thereof, shall not be deemed to modify or abrogate
the rights attached to the previously issued shares of such class or of any
other class.
Annual and Extraordinary Meetings
The Board of Directors must convene an annual meeting of shareholders
at least once every calendar year, within fifteen months of the last annual
meeting. In accordance with our articles of association, unless a longer period
for notice is prescribed by the Israeli Companies Law, at least ten (10) days
and not more than sixty (60) days notice of any general meeting of shareholders
shall be given. An extraordinary meeting may be convened by the board of
directors, as it decides, or upon a demand of any two directors or 25% of the
directors, whichever is lower, or of one or more shareholders holding in the
aggregate at least 5% of the shares and 1% of the voting rights, or one or more
shareholders holding in the aggregate at least 5% of the voting rights in the
company. See Item 10B. "Additional Information -- Memorandum and Articles of
Association -- Rights Attached to Shares-Voting Rights."
Limitations on the Rights to Own Securities in Our Company
Neither our memorandum of association or our articles of association
nor the laws of the State of Israel restrict in any way the ownership or voting
of shares by non-residents, except with respect to subjects of countries which
are in a state of war with Israel.
Provisions Restricting Change in Control of Our Company
The Israeli Companies Law requires that mergers between Israeli
companies be approved by the board of directors and general meeting of
shareholders of both parties to the transaction. The approval of the board of
directors of both companies is subject to such boards' confirmations that there
is no reasonable doubt that after the merger the surviving company will be able
to fulfill its obligations towards its creditors. Each company must notify its
creditors about the contemplated merger. The approval of a merger by the general
meetings of shareholders of the companies is also subject to additional approval
requirements as specified in the Israeli Companies Law and regulations
promulgated thereunder.
The Israeli Companies Law also provides that an acquisition of shares
in a public company must be made by means of a tender offer if as a result of
the acquisition the purchaser would become a 25% shareholder of the company.
This rule does not apply if there is already another 25% shareholder of the
company. Similarly, the Companies Law provides that an acquisition of shares in
a public company must be made by means of a tender offer if as a result
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of the acquisition the purchaser would become a 45% shareholder of the company,
unless there is a 50% shareholder of the company. Regulations under the Israeli
Companies Law provide that the Israeli Companies Law's tender offer rules do not
apply to a company whose shares are publicly traded outside of Israel, if
pursuant to the applicable foreign securities laws and stock exchange rules
there is a restriction on the acquisition of any level of control of the
company, or if the acquisition of any level of control of the company requires
the purchaser to make a tender offer to the public shareholders.
Under the Israeli Companies Law, a person may not purchase shares of a
public company if, following the acquisition, the purchaser would hold more than
90% of such company's shares or of any class of shares unless the purchaser
makes a tender offer to purchase all of the company's shares or all the shares
of the particular class, as applicable. If, as a result of the tender offer, the
purchaser would hold more than 95% of the company's shares or a particular class
of shares, the ownership of the remaining shares will be transferred to such
purchaser, However, if the entire tender offer has not been accepted, the
purchaser may not purchase, from those offerees who accepted the offer, shares
that will grant the purchaser ownership of more than 90% of the shares or class
of shares of the company, as applicable.
Disclosure of Shareholders Ownership
The Israeli Securities Law and regulations promulgated thereunder do
not require a company whose shares are publicly traded solely on a stock
exchange outside of Israel, as in the case of our company, to disclose its share
ownership. The Companies Law requires us to notify the identity and shareholding
of all registered shareholders to the Israeli Registrar of Companies.
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 in the shareholders meeting.
C. MATERIAL CONTRACTS
On March 22, 2004, we entered into a Note and Warrant Purchase
Agreement with Messrs. Shimon Alon, Aki Ratner, Ron Zuckerman and other
investors represented by them, pursuant to which we issued the group convertible
promissory notes in the aggregate principal amount of $2 million, bearing
interest at the rate of 5% per annum, payable semi-annually, convertible at any
time after issuance, in whole or in part, into our ordinary shares, at a
conversion price of $1.75 per share. The notes and unpaid accrued interest
thereon will be due and payable five years after issuance, subject to early
repayment in the event of default by us of our obligations under the notes. In
addition, we agreed to issue to certain members of the group warrants to
purchase an aggregate of 480,000 of our ordinary shares at an exercise price of
$1.75 per share, expiring three years after their issuance. The conversion price
of the notes and the exercise price of the warrants are subject to anti-dilution
adjustments. See Item 7B. "Major Shareholders and Related Party Transactions -
Major Shareholders - Related Party Transactions."
On June 3, 2004, we entered into an agreement with Plenus Technologies
Ltd., or Plenus, a venture capital lender, under which we secured a two-year $3
million credit line from Plenus,
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at a fixed interest rate of 6.5% per annum. See Item 5B. "Operating and
Financial Review and Prospects - Liquidity and Capital Resources."
D. EXCHANGE CONTROLS
Israeli law and regulations do not impose any material foreign exchange
restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new
"general permit" was issued under the Israeli Currency Control Law, 1978, which
removed most of the restrictions that previously existed under such law, and
enabled Israeli citizens to freely invest outside of Israel and freely convert
Israeli currency into non-Israeli currencies.
Non-residents of Israel who purchase our ordinary shares will be able
to convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in
Israel of our ordinary shares to an Israeli resident, into freely repatriable
dollars, at the exchange rate prevailing at the time of conversion, provided
that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.
E. TAXATION
Israeli Tax Consequences
The following is a summary of the current tax structure applicable to
companies in Israel, with special reference to its effect on us and our
shareholders. This summary does not discuss all the aspects of Israeli tax law
that may be relevant to a particular investor in light of his or her personal
investment circumstances or to some types of investors subject to special
treatment under Israeli law. Examples of this kind of investor include residents
of Israel, traders in securities or persons than own, directly or indirectly,
10% or more of our outstanding voting capital, all of whom are subject to
special tax regimes not covered in this discussion. To the extent that the
discussion is based on new tax legislation that has not been subject to judicial
or administrative interpretation, we cannot assure you that the tax authorities
will accept the views expressed in the discussion in question. The discussion is
not intended, and should not be taken, as legal or professional tax advice and
is not exhaustive of all possible tax considerations.
Recent Tax Reform
On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No.132), 5762-2002, known as the Tax Reform, came into effect,
following its enactment by the Israeli Parliament on July 24, 2002. On December
17, 2002, the Israeli Parliament approved a number of amendments to the tax
reform, which came into effect on January 1, 2003.
The tax reform, aimed at broadening the categories of taxable income
and reducing the tax rates imposed on employment income, introduced the
following, among other things:
Reduction of the tax rate levied on capital gains (other than gains
deriving from the sale of listed securities) derived after January 1, 2003, to a
general rate of 25% for both individuals and corporations. Regarding assets
acquired prior to January 1, 2003, the reduced tax rate will
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apply to a proportionate part of the gain, in accordance with the holding
periods of the asset, before or after January 1, 2003, on a linear basis;
Imposition of Israeli tax on all income of Israeli residents,
individuals and corporations, regardless of the territorial source of income,
including income derived from passive sources such as interest, dividends and
royalties;
Introduction of controlled foreign corporation, or CFC, rules into the
Israeli tax structure. Generally, under such rules, an Israeli resident who
holds, directly of indirectly, 10% or more of the rights in a foreign
corporation whose shares are not publicly traded, in which more than 50% of the
rights are held directly or indirectly by Israeli residents, and a majority of
whose income in a tax year is considered passive income, will be liable for tax
on the portion of such income attributed to his holdings in such corporation, as
if such income were distributed to him as a dividend; and
Imposition of capital gains tax on capital gains realized by
individuals as of January 1, 2003, from the sale of shares of publicly traded
companies (such gain was previously exempt from capital gains tax in Israel).
For information with respect to the applicability of Israeli capital gains taxes
on the sale of ordinary shares. See, "Capital Gains Tax " below.
o Introduction of a new regime for the taxation of shares and
options issued to employees and officers (including directors).
See, "Stock Option Plans" in Item 6E. above.
General Corporate Tax Structure
Israeli companies are subject to "Company Tax" at the rate of 36% of
taxable income. However, the effective tax rate payable by a company that
derives income from an approved enterprise (as further discussed below) may be
considerably less. Subject to relevant tax treaties, dividends or interest
received by an Israeli corporation from foreign subsidiaries are generally
subject to tax regardless of its status as an Approved Enterprise.
Tax Benefits Under the Law for the Encouragement of Capital
Investments, 1959
The Law for the Encouragement of Capital Investments, 1959, as amended,
commonly referred to as the Investment Law, provides that a proposed capital
investment in eligible facilities may, upon application to the Investment Center
of the Ministry of Industry and Trade of the State of Israel, be designated as
an approved enterprise. Each certificate of approval for an approved enterprise
relates to a specific investment program delineated both by its financial scope,
including its capital sources, and by its physical characteristics, e.g., the
equipment to be purchased and utilized pursuant to the program. An approved
enterprise is entitled to benefits including Israeli Government cash grants and
tax benefits in specified development areas. The tax benefits derived from any
such certificate of approval relate only to taxable income attributable to the
specific approved enterprise. If a company has more than one approval or only a
portion of its capital investments is approved, its effective tax rate is the
result of a weighted average of the applicable rates.
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Taxable income of a company derived from an approved enterprise is
subject to Company Tax at the maximum rate of 25% (rather than 36%) for the
benefit period. This period is ordinarily seven years (or ten years if the
company qualifies as a foreign investors' company as described below) commencing
with the year in which the approved enterprise first generates taxable income,
and is limited to twelve years from commencement of production or fourteen years
from the date of approval, whichever is earlier. The Investment Law also
provides that a company that has an approved enterprise within Israel will be
eligible for a reduced tax rate for the remainder of the benefit period and is
entitled to claim accelerated depreciation on buildings, machinery and equipment
used by the approved enterprise.
A company owning an approved enterprise may elect to forego entitlement
to the grants otherwise available under the Investment Law and in lieu thereof
participate in an alternative package of benefits. Under the alternative package
of benefits, a company's undistributed income derived from an approved
enterprise will be exempt from company tax for a period of between two and ten
years from the first year of taxable income, depending on the geographic
location of the approved enterprise within Israel, and such company will be
eligible for a reduced tax rate for the remainder, if any, of the otherwise
applicable benefits period.
A company that has an approved enterprise program is eligible for
further tax benefits if it qualifies as a foreign investors' company. A foreign
investors' company is essentially a company more than 25% of whose share capital
and combined share and loan capital is owned by non-Israeli residents. A company
which qualifies as a foreign investors' company and has an approved enterprise
program is eligible for tax benefits for a ten year benefit period. Income
derived from the approved enterprise program will be exempt from tax for a
period of two years and will be subject to a reduced tax rate for an additional
eight years, provided that the company qualifies as a foreign investors' company
as follows:
For a company with foreign investment of.... The Company Tax rate is
-------------------------------------------- -----------------------
over 25% but less than 49%.................. 25%
49% or more but less than 74%............... 20%
74% or more but less than 90%............... 15%
90% or more................................. 10%
In addition, the dividend recipient is taxed at the reduced rate
applicable to dividends from approved enterprises (15%), if the dividend is
distributed during the tax benefit period or within twelve years thereafter. The
company must withhold this tax at source, regardless of whether the dividend is
converted into foreign currency.
Subject to applicable provisions concerning income under the
alternative package of benefits, all dividends are considered to be attributable
to the entire enterprise and their effective tax rate is the result of a
weighted average of the various applicable tax rates. We currently intend to
reinvest any income derived from our approved enterprise programs and not to
distribute such income as a dividend.
The Investment Center bases its decision as to whether or not to
approve an application on the criteria set forth in the Investment Law and
regulations, the then prevailing policy of the
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Investment Center and the specific objectives and financial criteria of the
applicant. Accordingly, we cannot assure you that any of our applications, if
made, will be approved in the future.
Our production facilities and those of our subsidiary Attunity Services
have been granted "Approved Enterprise" status under the Investment Law.
In June 2000, we filed an application for a fourth investment program
which has not been approved, and the other three investment programs, which were
approved in February 1993, November 1993 and February 1998, will expire in
February 2005, October 2009 and February 2010, respectively. As of December 31,
2003, the investments under the June 2000 investment program remain in progress
and have not been completed.
According to the provisions of the Investment Law, we have elected to
enjoy "alternative benefits" - waiver of grants in return for tax exemption -
and, accordingly, income derived from the "Approved Enterprise" will be
tax-exempt for a period of two years commencing with the year we first earn
taxable income, and will be taxed at 10% to 25%, based upon the percentage of
our foreign investment in, for an additional period of five-eight years. The
period of tax benefits, detailed above, is subject to limits of the earlier of
twelve years from the commencement of production, or fourteen years from the
date of approval.
Attunity Services has been granted status as an "Approved Enterprise"
for two separate investment programs from 1991 and 1993 whereby it has elected
to receive government grants and to enjoy the benefit of a reduced tax rate of
25% during a period of seven years commencing with the year it first earns
taxable income. The period of tax benefits, detailed above, is subject to limits
of the earlier of twelve years from the commencement of production, or fourteen
years from the date of approval. In 1993, Attunity Services received approval
for an expansion of the aforementioned programs whereby it has elected to enjoy
"alternative benefits" - and, accordingly, its income from the "Approved
Enterprise" will be tax-exempt for a period of ten years commencing with the
year it first earns taxable income. As of December 31, 2002, Attunity Services
has not received final approvals for such programs.
If these retained tax-exempt profits are distributed in a manner other
than in our complete liquidation they would be taxed at the corporate tax rate
applicable to such profits as if the Company had not elected the alternative
system of benefits, currently between 15%-20% for an "Approved Enterprise." As
of December 31, 2003, our accumulated deficit does not include tax-exempt
profits earned by our and Attunity Services's "Approved Enterprises."
Since we currently have no taxable income, the benefits have not yet
commenced for all programs. Should we or Attunity Services derive income from
sources other than the "Approved Enterprise" during the periods of benefits,
such income shall be taxable at the regular corporate tax rate of 36%.
The tax benefits discussed above are conditioned upon fulfillment of
the requirements stipulated by the aforementioned law and the regulations
promulgated thereunder, as well as the criteria set forth in the certificates of
approval. In the event that we fail to comply with these conditions, the tax
benefits could be canceled, in whole or in part, and we would be required to
refund the amount of the canceled benefits, plus interest and certain inflation
adjustments. We
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believe that we have been in full compliance with the aforementioned conditions
through December 31, 2003.
The Investment Law has been extended until December 31, 2003 and there
is no assurance that it will be further extended. Failure to extend the law will
result in a significant increase in our effective corporate tax rate.
Tax Benefits Under the Law for the Encouragement of Industry
(Taxes), 1969
According to the Law for the Encouragement of Industry (Taxes), 1969,
or the Industry Encouragement Law, an Industrial Company is a company resident
in Israel, at least 90% of the income of which, in a given tax year, determined
in Israeli currency (exclusive of income from some 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 the following preferred corporate tax benefits:
o amortization of purchases of know-how and patents over an
eight-year period for tax purposes;
o the right to elect, under specified conditions, to file a
consolidated tax return with additional related Israeli
Industrial Companies; and
o accelerated depreciation rates on equipment and buildings.
Eligibility for benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority.
We cannot assure you that we will continue to qualify as an Industrial
Company or that the benefits described above will be available to us in the
future.
Taxation Under Inflationary Conditions
The Income Tax Law (Inflationary Adjustments), 1985, generally referred
to as the Inflationary Adjustments Law, represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing rapid
inflation. The Inflationary Adjustments Law is highly complex. Its features
which may be material to us can be summarized as follows:
There is a special tax adjustment for the preservation of equity
whereby some corporate assets are classified broadly into fixed assets and
non-fixed assets. Where a company's equity, as defined in such law, exceeds the
depreciated cost of fixed assets, a deduction from taxable income that takes
into account the effect of the applicable annual rate of inflation on such
excess is allowed up to a ceiling of 70% of taxable income in any single tax
year, with the unused portion permitted to be carried forward on a linked basis.
If the depreciated cost of fixed assets exceeds a company's equity, then such
excess multiplied by the applicable annual rate of inflation is added to taxable
income.
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o Subject to specific limitations, depreciation deductions on fixed
assets and losses carried forward are adjusted for inflation
based on the increase in the consumer price index.
o Capital gains on specific traded securities are normally exempt
from tax for individuals and are taxable for companies. However,
dealers in securities are subject to the regular tax rules
applicable to business income in Israel.
Capital Gains Tax
Israeli law imposes a capital gains tax on the sale of capital assets
located in Israel, including shares of Israeli companies by both residents and
non-residents of Israel unless a specific exemption is available or unless a tax
treaty between Israel and the shareholder's country of residence provides
otherwise. The law distinguishes between real gain and inflationary surplus. The
inflationary surplus is a portion of the total capital gain that is equivalent
to the increase of the relevant asset's purchase price which is attributable to
the increase in the Israeli consumer price index 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.
Prior to the tax reform, sales of our ordinary shares by individuals
were generally exempt from Israeli capital gains tax for so long as they were
quoted on NASDAQ or listed on a stock exchange in a country appearing in a list
approved by the Controller of Foreign Currency and we qualified as an Industrial
Company or an Industrial Holding Company.
Pursuant to the tax reform, generally, capital gains tax is imposed at
a rate of 15% on real gains derived on or after January 1, 2003, from the sale
of shares in companies (i) publicly traded on the Tel Aviv Stock Exchange, or
TASE, or; (ii) Israeli companies publicly traded on a recognized stock exchange
outside of Israel (such as NASDAQ).
This tax rate does not apply to: (i) dealers in securities; (ii)
shareholders that report in accordance with certain provisions of the
Inflationary Adjustment Law; or (iii) shareholders who acquired their shares
prior to an initial public offering (that are subject to a different tax
arrangement).
The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. However, a request may be made to the
tax authorities to consider the actual adjusted cost of the shares as the tax
basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares publicly traded on the TASE, and 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
outside of Israel (including NASDAQ), provided however that such capital gains
are not derived from a permanent establishment of such shareholders in Israel
and provided that such shareholders did not acquire their shares prior to an
initial public offering.
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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 any event, the provisions of the tax reform shall not effect the
exemption from capital gains tax for gains accrued before January 1, 2003, as
described above.
In certain 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 sale, exchange or disposition of ordinary shares by a person who
qualifies as a resident of the United States within the meaning of the U.S.-
Israel Tax Treaty and who 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 unless 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
particular conditions. A sale, exchange or disposition of ordinary shares by a
Treaty U.S. Resident who holds, directly or indirectly, shares representing 10%
or more of our voting power at any time during such preceding 12-month period
would be subject to such Israeli tax, to the extent applicable; however, under
the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be permitted to
claim a credit for such taxes against the U.S. federal income tax imposed with
respect to such sale, exchange or disposition, subject to the limitations in
U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax Treaty does not
relate to U.S. state or local taxes.
Taxation of Non-Residents
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 at the rate of 25% (12.5% for dividends
not generated by an approved enterprise if the non-resident is a U.S.
corporation and holds over 10% of our voting power, and 15% for dividends
generated by an approved enterprise) is withheld at source, unless a different
rate is provided in a treaty between Israel and the shareholder's country of
residence. Under the U.S.-Israel Tax Treaty, the maximum tax on dividends paid
to a holder of ordinary shares who is a Treaty U.S. Resident will be 25%.
However, under the Investment Law, dividends generated by an approved enterprise
are taxed at the rate of 15%, however this reduced rate will not apply if more
than 25% of the Israeli company's gross income consists of interest or
dividends, other than dividends or interest received from subsidiary
corporations or 50% or more of the outstanding shares of the voting stock of
which is owned by the Israeli company.
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Under an amendment to the Inflationary Adjustments Law, non-Israeli
entities might be subject to Israeli taxes on the sale of traded securities in
an Israeli company, subject to the provisions of any applicable double taxation
treaty.
Tax Benefits and Government Support for Research and Development
Israeli tax law allows, under specific conditions, a tax deduction in
the year incurred for expenditures, including capital expenditures, relating to
scientific research and development projects, if the expenditures are approved
by the relevant Israeli Government ministry, determined by the field of
research, and the research and development is for the promotion of the company
and is carried out by or on behalf of the company seeking such deduction.
Expenditures not so approved are deductible over a three-year period. However,
expenditures from proceeds made available to us through government grants are
not deductible according to Israeli law.
United States Federal Income Tax Consequences
The following is a summary of certain material U.S. federal income tax
consequences that apply to U.S. Holders who hold ordinary shares as capital
assets. This summary is based on the United States Internal Revenue Code of
1986, as amended, or the Code, Treasury regulations promulgated thereunder,
judicial and administrative interpretations thereof, and the U.S.-Israel Tax
Treaty, all as in effect on the date hereof and all of which are subject to
change either prospectively or retroactively. This summary does not address all
tax considerations that may be relevant with respect to an investment in
ordinary shares. This summary does not account for the specific circumstances of
any particular investor, such as:
o broker-dealers;
o financial institutions;
o certain insurance companies;
o regulated investment companies;
o investors liable for alternative minimum tax;
o tax-exempt organizations;
o non-resident aliens of the U.S. or taxpayers whose functional
currency is not the U.S. dollar;
o persons who hold the ordinary shares through partnerships or
other pass-through entities;
o persons who acquired their ordinary shares through the exercise
or cancellation of employee stock options or otherwise as
compensation for services;
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o investors that actually or constructively own 10 percent or more
of our voting shares; and
o investors holding ordinary shares as part of a straddle or a
hedging or conversion transaction.
This summary does not address the effect of any U.S. federal taxation
other than U.S. federal income taxation. In addition, this summary does not
include any discussion of state, local or foreign taxation.
You are urged to consult your tax advisors regarding the foreign and
United States federal, state and local tax considerations of an investment in
ordinary shares.
For purposes of this summary, a U.S. Holder is:
o an individual who is a citizen or, for U.S. federal income tax
purposes, a resident of the United States;
o a partnership, corporation or other entity created or organized
in or under the laws of the United States or any political
subdivision thereof;
o an estate whose income is subject to U.S. federal income tax
regardless of its source; or
o a trust that (a) is subject to the primary supervision of a court
within the United States and the control of one or more U.S.
persons or (b) has a valid election in effect under applicable
U.S. Treasury regulations to be treated as a U.S. person.
Taxation of Dividends
The gross amount of any distributions received with respect to ordinary
shares, including the amount of any Israeli taxes withheld therefrom, will
constitute dividends for U.S. federal income tax purposes, to the extent of our
current and accumulated earnings and profits as determined for U.S. federal
income tax principles. You will be required to include this amount of dividends
in gross income as ordinary income (see below in this Item 10E. "Additional
Information - Taxation - New Tax Law Applicable to Dividends and Long-Term
Capital Gain"). Distributions in excess of our earnings and profits will be
treated as a non-taxable return of capital to the extent of your tax basis in
the ordinary shares and any amount in excess of your tax basis, will be treated
as gain from the sale of ordinary shares. See below in this Item 10E.
"Additional Information - Taxation - Disposition of Ordinary Shares" for the
discussion on the taxation of capital gains. Dividends will not qualify for the
dividends-received deduction generally available to corporations under Section
243 of the Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld therefrom, will be included in your income in a U.S. dollar amount
calculated by reference to the exchange rate in effect on the day such dividends
are received. A U.S. Holder who receives payment in NIS and converts NIS into
U.S. dollars at an exchange rate other than the rate in effect on such day may
have a foreign currency exchange gain or loss that would be treated as
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ordinary income or loss. U.S. Holders should consult their own tax advisors
concerning the U.S. tax consequences of acquiring, holding and disposing
of NIS.
Any Israeli withholding tax imposed on such dividends will be a foreign
income tax eligible for credit against a U.S. Holder's U.S. federal income tax
liability, subject to certain limitations set out in the Code (or,
alternatively, for deduction against income in determining such tax liability).
The limitations set out in the Code include computational rules under which
foreign tax credits allowable with respect to specific classes of income cannot
exceed the U.S. federal income taxes otherwise payable with respect to each such
class of income. Dividends generally will be treated as foreign-source passive
income or financial services income for United States foreign tax credit
purposes. Foreign income taxes exceeding the credit limitation for the year of
payment or accrual may be carried back for two taxable years and forward for
five taxable years in order to reduce U.S. federal income taxes, subject to the
credit limitation applicable in each of such years. Other restrictions on the
foreign tax credit include a prohibition on the use of the credit to reduce
liability for the U.S. individual and corporation alternative minimum taxes by
more than 90%. A U.S. Holder will be denied a foreign tax credit with respect to
Israeli income tax withheld from dividends received on the ordinary shares to
the extent such U.S. Holder has not held the ordinary shares for at least 16
days of the 30-day period beginning on the date which is 15 days before the
ex-dividend date or to the extent such U.S. Holder is under an obligation to
make related payments with respect to substantially similar or related property.
Any days during which a U.S. Holder has substantially diminished its risk of
loss on the ordinary shares are not counted toward meeting the 16-day holding
period required by the statute. Further, there are special rules for computing
the foreign tax credit limitation of a taxpayer who receives dividends subject
to a reduced tax rate under the recently enacted amendments to the Code, see
discussion below. The rules relating to the determination of the foreign tax
credit are complex, and you should consult with your personal tax advisors to
determine whether and to what extent you would be entitled to this credit.
Disposition of Ordinary Shares
If you sell or otherwise dispose of ordinary shares, you will recognize
gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and the
adjusted tax basis in ordinary shares. Subject to the discussion below under the
heading "Passive Foreign Investment Companies," such gain or loss generally will
be capital gain or loss and will be long-term capital gain or loss if you have
held the ordinary shares for more than one year at the time of the sale or other
disposition. In general, any gain that you recognize on the sale or other
disposition of ordinary shares will be U.S. source for purposes of the foreign
tax credit limitation; losses will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the
Code.
In the case of a cash basis U.S. Holder who receives NIS in connection
with the sale or disposition of ordinary shares, the amount realized will be
based on the U.S. dollar value of the NIS received with respect to the ordinary
shares as determined on the settlement date of such exchange. A U.S. Holder who
receives payment in NIS and converts NIS into U.S. dollars at a conversion rate
other than the rate in effect on the settlement date may have a foreign currency
exchange gain or loss that would be treated as ordinary income or loss.
68
An accrual basis U.S. Holder may elect the same treatment required of
cash basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service,
or the IRS. In the event that an accrual basis U.S. Holder does not elect to be
treated as a cash basis taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder may have a
foreign currency gain or loss for U.S. federal income tax purposes because of
differences between the U.S. dollar value of the currency received prevailing on
the trade date and the settlement date. Any such currency gain or loss would be
treated as ordinary income or loss and would be in addition to gain or loss, if
any, recognized by such U.S. Holder on the sale or disposition of such ordinary
shares.
New Tax Law Applicable to Dividends and Long-Term Capital Gain
Under recently enacted amendments to the Code, dividends received by
non-corporate tax payers from certain foreign corporations, and long-term
capital gain realized by non-corporate tax payers, generally are subject to a
reduced maximum tax rate of 15% through December 31, 2008. Dividends received
with respect to ordinary shares should qualify for the 15% rate. The rate
reduction does not apply to dividends received from passive foreign investment
companies (see discussion below), or in respect of certain short-term or hedged
positions in the common stock or in certain other situations. The legislation
contains special rules for computing the foreign tax credit limitation of a
taxpayer who receives dividends subject to the rate reduction. U.S. Holders
should consult their own tax advisors regarding the implications of these rules
in light of their particular circumstances.
Passive Foreign Investment Companies
For U.S. federal income tax purposes, we will be considered a passive
foreign investment company, or PFIC, for any taxable year in which either (i)
75% or more of our gross income is passive income, or (ii) at least 50% of the
average value of all of our assets for the taxable year produce or are held for
the production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. federal income tax purposes, highly complex
rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are
urged to consult your tax advisors regarding the application of such rules.
Based on our current and projected income, assets and activities, we
believe that we are not currently a PFIC nor do we expect to become a PFIC in
the foreseeable future. However, because the determination of whether we are a
PFIC is based upon the composition of our income and assets from time to time,
there can be no assurances that we will not become a PFIC for any future taxable
year.
If we are treated as a PFIC for any taxable year, then, unless you
elect either to treat your investment in ordinary shares as an investment in a
"qualified electing fund", or a QEF election, or to "mark-to-market" your
ordinary shares, as described below, dividends would not qualify for the reduced
maximum tax rate, discussed above, and:
69
o you would be required to allocate income recognized upon receiving certain
dividends or gain recognized upon the disposition of ordinary shares
ratably over the holding period for such ordinary shares;
o the amount allocated to each year during which we are considered a PFIC
other than the year of the dividend payment or disposition would be
subject to tax at the highest individual or corporate tax rate, as the
case may be, and an interest charge would be imposed with respect to the
resulting tax liability allocated to each such year;
o gain recognized upon the disposition of ordinary shares would be taxable
as ordinary income; and
o you would be required to make an annual return on IRS Form 8621 regarding
distributions received with respect to ordinary shares and any gain
realized on your ordinary shares.
If you make either a timely QEF election or a timely mark-to-market
election in respect of your ordinary shares, you would not be subject to the
rules described above. If you make a timely QEF election, you would be required
to include in your income for each taxable year your pro rata share of our
ordinary earnings as ordinary income and your pro rata share of our net capital
gain as long-term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we
comply with certain applicable information reporting requirements.
Alternatively, if the ordinary shares are considered "marketable stock"
and if you elect to "mark-to-market" your ordinary shares, you will generally
include in income any excess of the fair market value of the ordinary shares at
the close of each tax year over your adjusted basis in the ordinary shares. If
the fair market value of the ordinary shares had depreciated below your adjusted
basis at the close of the tax year, you may generally deduct the excess of the
adjusted basis of the ordinary shares over its fair market value at that time.
However, such deductions generally would be limited to the net mark-to-market
gains, if any, that you included in income with respect to such ordinary shares
in prior years. Income recognized and deductions allowed under the
mark-to-market provisions, as well as any gain or loss on the disposition of
ordinary shares with respect to which the mark-to-market election is made, is
treated as ordinary income or loss.
Backup Withholding and Information Reporting
Payments in respect of ordinary shares may be subject to information
reporting to the U.S. Internal Revenue Service and to U.S. backup withholding
tax at a rate equal to the fourth lowest income tax rate applicable to
individuals (which, under current law, is 28%). Backup withholding will not
apply, however, if you (i) are a corporation or come within certain exempt
categories, and demonstrate the fact when so required, or (ii) furnish a correct
taxpayer identification number and make any other required certification.
Backup withholding is not an additional tax. Amounts withheld
under the backup withholding rules may be credited against a U.S. Holder's
U.S. tax liability, and a U.S. Holder
70
may obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the IRS.
Any U.S. holder who holds 10% or more in vote or value of our ordinary
shares will be subject to certain additional United States information reporting
requirements.
U.S. Gift and Estate Tax
An individual U.S. Holder of ordinary shares will be subject to U.S.
gift and estate taxes with respect to ordinary shares in the same manner and to
the same extent as with respect to other types of personal property.
F. DIVIDEND AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the reporting requirements of the United States
Securities Exchange Act of 1934, as amended, as applicable to "foreign private
issuers" as defined in Rule 3b-4 under the Exchange Act, and in accordance
therewith, we file annual and interim reports and other information with the
Securities and Exchange Commission.
As a foreign private issuer, we are exempt from certain provisions of
the Exchange Act. Accordingly, our proxy solicitations are not subject to the
disclosure and procedural requirements of Regulation 14A under the Exchange Act,
transactions in our equity securities by our officers and directors are exempt
from reporting and the "short-swing" profit recovery provisions contained in
Section 16 of the Exchange Act. In addition, we are not required under the
Exchange Act to file periodic reports and financial statements as frequently or
as promptly as U.S. companies whose securities are registered under the Exchange
Act. However, we distribute annually to our shareholders an annual report
containing financial statements that have been examined and reported on, with an
opinion expressed by, an independent public accounting firm, and we file reports
with the Securities and Exchange Commission on Form 6-K containing unaudited
financial information for the first three quarters of each fiscal year.
This annual report and the exhibits thereto and any other document we
file pursuant to the Exchange Act may be inspected without charge and copied at
prescribed rates at the following Securities and Exchange Commission public
reference rooms: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington,
D.C. 20549; and on the Securities and Exchange Commission Internet site
(http://www.sec.gov) and on our website www.attunity.com. You may obtain
information on the operation of the Securities and Exchange Commission's public
reference room in Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330 or by visiting the Securities and Exchange
Commission's website at
71
http://www.sec.gov. The Exchange Act file number for our Securities and Exchange
Commission filings is 0-20892.
The documents concerning our company which are referred to in this
annual report may also be inspected at our offices located at Einstein Building,
Tirat Carmel, Haifa 39101, Israel.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
----------------------------------------------------------
We are exposed to a variety of risks, including changes in interest
rates affecting primarily the interest received on short term deposits, and
foreign currency fluctuations. We do not use derivative financial instruments
Interest Rate Risk
Our exposure to market risk for changes in interest rates relates
primarily to our cash and cash equivalents. Our cash and cash equivalents are
held in U.S. dollars and bear annual interest of 0.85% which is based upon the
London Inter Bank Offered Rate (LIBOR). We place our cash and cash equivalents
with major financial banks. For purposes of specific risk analysis, we use
sensitivity analysis to determine the impact that market risk exposure may have
on the financial income derived from our cash and cash equivalents. The
potential loss to us over one year that would result from a hypothetical change
of 10% in the LIBOR rate would not be substantial.
Foreign Currency Exchange Risk
Our financial results may be negatively impacted by foreign currency
fluctuations. Our foreign operations are generally transacted through our
international sales subsidiaries in Europe, the Middle East and Africa, and Asia
Pacific. As a result, these sales and related expenses are denominated in
currencies other than the U.S. dollar. Because our financial results are
reported in U.S. dollars, our results of operations may be adversely impacted by
fluctuations in the rates of exchange between the U.S. dollar and other
currencies.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
------------------------------------------------------
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
-----------------------------------------------
None.
72
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
----------------------------------------------------------------------
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
-----------------------
During 2003, we carried out an evaluation, under the supervision and
with the participation of our senior management, including our chief executive
officer and chief financial officer, of the effectiveness of the design and
operation of our disclosure controls and procedures pursuant to Rule 13(a)-14 of
the Securities Exchange Act of 1934. Based upon that evaluation, our management,
including our chief executive officer and chief financial officer, concluded
that our company's disclosure controls and procedures are effective in timely
alerting them to material information relating to us required to be included in
the our periodic SEC filings.
There have been no significant changes in our internal controls or
other factors which could significantly affect internal controls subsequent to
the date of the evaluation.
It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
--------------------------------
Our board of directors has determined that Dan Falk meets the
definition of an audit committee financial expert, as defined in Item 401 of
Regulation S-K.
ITEM 16B. CODE OF ETHICS
--------------
We have adopted a code of ethics that applies to our chief executive
officer and all senior financial officers of our company, including the chief
financial officer, chief accounting officer or controller, or persons performing
similar functions. The code of ethics is publicly available on our website at
www.attunity.com. Written copies are available upon request. If we make any
substantive amendment to the code of ethics or grant any waivers, including any
implicit waiver, from a provision of the codes of ethics, we will disclose the
nature of such amendment or waiver on our website.
73
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES
--------------------------------------
Fees Paid to Independent Public Accountants
The following table sets forth, for each of the years indicated, the
fees paid to our independent public accountants and the percentage of each of
the fees out of the total amount paid to the accountants.
Year Ended December 31,
-------------------------------------------------------
2002 2003
-------------------------- ---------------------------
Services Rendered Fees Percentages Fees Percentages
--------------------- --------- ----------- --------- -----------
Audit (1)............ $ 110,248 86% $ 158,281 83%
Audit-related (2).... 10,950 8% 14,560 9%
Tax (3).............. 7,369 6% 18,580 8%
Other ............... -- -- -- --
Total ............... $ 128,567 100% $ 191,421 100%
--------------
(1) Audit fees consist of services that would normally be provided in
connection with statutory and regulatory filings or engagements,
including services that generally only the independent accountant can
reasonably provide.
(2) Audit-related fees relate to assurance and associated services that
traditionally are performed by the independent accountant, including:
attest services that are not required by statute or regulation;
accounting consultation and audits in connection with mergers,
acquisitions and divestitures; employee benefit plans audits; and
consultation concerning financial accounting and reporting standards.
(3) Tax fees relate to services performed by the tax division for tax
compliance, planning, and advice.
Pre-Approval Policies and Procedures
Our audit committee has adopted a policy and procedures for the
pre-approval of audit and non-audit services rendered by our independent public
accountants, Kost, Forer, Gabbay & Kasierer, a Member firm of Ernst & Young
Global. Pre-approval of an audit or non-audit service may be given as a general
pre-approval, as part of the audit committee's approval of the scope of the
engagement of our independent auditor, or on an individual basis. Any proposed
services exceeding general pre-approved levels also require specific
pre-approval by our audit committee. The policy prohibits retention of the
independent public accountants to perform the prohibited non-audit functions
defined in Section 201 of the Sarbanes-Oxley Act or the rules of the SEC, and
also requires the audit committee to consider whether proposed services are
compatible with the independence of the public accountants.
ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
COMMITTEE
---------------------------------------------------------------------
Not applicable.
74
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
PURCHASERS
---------------------------------------------------------------------
Issuer Purchase of Equity Securities
Neither we, nor any affiliated purchaser of our company, have purchased
any of our securities during 2003.
PART III
ITEM 17. FINANCIAL STATEMENTS
--------------------
The Company has elected to furnish financial statements and related
information specified in Item 18.
ITEM 18. FINANCIAL STATEMENTS
--------------------
Consolidated Financial Statements.
Index to Financial Statements...............................................F-1
Report of Independent Auditors.....................................F-2
Consolidated Balance Sheets........................................F-3
Consolidated Statements of Operations..............................F-5
Statements of Changes in Shareholders' Equity......................F-6
Consolidated Statements of Cash Flows..............................F-7
Notes to Consolidated Financial Statements.........................F-9
ITEM 19. EXHIBITS
--------
Index to Exhibits
Exhibit Description
------- -----------
1.1 Memorandum of Association of the Registrant (1)
1.2 Articles of Association of the Registrant, as amended (2)
2.1 Specimen of Ordinary Share Certificate (3)
4.7 1992 Employee Stock Option Plan (4)
4.8 1994 Employee Stock Option Plan (5)
4.9 1998 Employee Stock Option Plan (6)
4.10 2003 Israeli Stock Option Plan (7)
4.11 Note and Warrant Purchase Agreement dated March 22,
2004 among the
75
Registrant and the purchasers listed on Exhibit A
thereto, Form of Warrant and Form of Convertible
Promissory Note (8)
4.12 Employment and Services Agreement among the Registrant
and Mr. Gonen, effective as of January 1, 2004 (9)
4.13 Loan Agreement dated June 3, 2004 among the
Registrant and Plenus Technologies Ltd., or Plenus;
Warrant to purchase Ordinary Shares issued by the
Registrant to Plenus; Floating Charge Agreement dated
June 3, 2004 among the Registrant, Plenus, Golden
Gate Bridge Fund (Israel), or Golden Gate, and United
Mizrachi Bank, Ltd., or Mizrachi Bank; and Fixed
Charge Agreement dated June 3, 2004 among the
Registrant and Plenus, Golden Gate and Mizrachi Bank
(10)
4.14 Form of Warrant issued to Gaus Investments Ltd. and
R.4.B Ltd. (11)
8 List of Subsidiaries of the Registrant (12)
23.1 Consent of Kost Forer Gabbay & Kasierer, a Member of
Ernst & Young Global
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a)
of the Securities Exchange Act, as amended
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
----------------
(1) Filed as Exhibit 3.1 to the Registrant's Registration Statement on Form
F-1, registration number 33-54020, and incorporated herein by
reference.
(2) Filed as Exhibit 3.2 to the Registrant's Annual Report on Form 20-F for
the year ended December 31, 2000, and incorporated herein by reference.
(3) Filed as Exhibit 4 to the Amendment No. 2 to the Registrant's
Registration Statement on Form F-1, registration number 33-54020, filed
on December 9, 1992, and incorporated herein by reference.
(4) Filed as Exhibit 10.2 to the Registrant's Registration Statement on
Form F-1, registration number 33-54020, and incorporated herein by
reference.
(5) Filed Exhibit 4.8 to the Registrant's Annual Report on Form 20-F for
the year ended December 31, 2003, and incorporated herein by reference.
(6) Filed Exhibit 4.9 to the Registrant's Annual Report on Form 20-F for
the year ended December 31, 2003, and incorporated herein by reference.
(7) Filed Exhibit 4.10 to the Registrant's Annual Report on Form 20-F for
the year ended December 31, 2003, and incorporated herein by reference.
(8) Filed as Items 3, 4 and 5, respectively, to the Registrant's Report of
Foreign Private Issuer on Form 6-K submitted to the Securities and
Exchange Commission on March 25, 2004, and incorporated herein by
reference.
(9) Filed as Exhibit 4.12 to the Registrant's annual report on Form 20-F
for the year ended December 31, 2003, and incorporated herein by
reference.
(10) Filed as Exhibit 4.13 to the Registrant's Annual Report on Form 20-F
for the year ended December 31, 2003, and incorporated herein by
reference.
(11) Filed as Exhibit 4.14 to the Registrant's Annual Report on Form 20-F
for the year ended December 31, 2003, and incorporated herein by
reference.
(12) Filed as Exhibit 8 to the Registrant's Annual Report on Form 20-F for
the year ended December 31, 2003, and incorporated herein by reference.
76
ATTUNITY LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
IN U.S. DOLLARS
INDEX
Page
----
Report of Independent Auditors 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-34
- - - - - - - -
F-1
ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
ATTUNITY LTD.
We have audited the accompanying consolidated balance sheets of Attunity
Ltd. ("the Company") and its subsidiaries as of December 31, 2003 and 2002, 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, 2003. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2003 and 2002, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in United States.
As discussed in Note 2j to the consolidated financial statements, the
Company adopted Statement of Financial Accounting Standard No. 142 in 2002.
/s/Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 11, 2004 A Member of Ernst & Young Global
F-2
ATTUNITY LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands
December 31,
-----------------------------
2003 2002
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,073 $ 2,693
Restricted cash 902 -
Short-term bank deposits 120 88
Marketable securities 200 -
Trade receivables (net of allowance for doubtful
accounts of $ 312 and
$ 33 at December 31, 2003 and 2002, respectively) 2,845 3,377
Other accounts receivable and prepaid expenses (Note 3) 1,006 1,233
------------- -------------
Total current assets 7,146 7,391
----- ------------- -------------
SEVERANCE PAY FUND 1,592 1,189
------------- -------------
PROPERTY AND EQUIPMENT, NET (Note 4) 926 1,145
------------- -------------
SOFTWARE DEVELOPMENT COSTS, NET (Note 5) 4,512 6,075
------------- -------------
GOODWILL (Note 6) 6,036 5,684
------------- -------------
Total assets $ 20,212 $ 21,484
----- ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
ATTUNITY LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except for share data
December 31,
-----------------------------
2003 2002
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit (Note 7) $ 206 $ 175
Current maturities of long-term debt (Note 9) 102 205
Trade payables 583 645
Deferred revenues 2,090 1,986
Employees and payroll accruals 1,239 1,055
Accrued expenses and other liabilities (Note 8) 3,479 2,658
------------- -------------
Total current liabilities 7,699 6,724
----- ------------- -------------
LONG-TERM LIABILITIES:
Long-term debts (Note 9) 99 55
Accrued severance pay 1,941 1,625
------------- -------------
Total long-term liabilities 2,040 1,680
----- ------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
SHAREHOLDERS' EQUITY (Note 12):
Share capital - Authorized: 30,000,000
Ordinary shares of NIS 0.1 par value
at December 31, 2003 and 2002; Issued and outstanding:
14,767,432 shares at December 31, 2003 and 2002 525 525
Additional paid-in capital 86,504 86,504
Accumulated other comprehensive loss (259) (608)
Accumulated deficit (76,297) (73,341)
------------- -------------
Total shareholders' equity 10,473 13,080
----- ------------- -------------
Total liabilities and shareholders' equity $ 20,212 $ 21,484
----- ============= =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
ATTUNITY LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Revenues (Note 15):
Software licenses $ 6,045 $ 6,931 $ 6,355
Maintenance and support 5,832 6,057 4,978
Services 4,740 4,467 5,536
------------ ------------ -----------
16,617 17,455 16,869
------------ ------------ -----------
Cost of revenues:
Software licenses 2,094 1,878 2,547
Maintenance and support 801 715 1,042
Services 4,184 3,782 4,862
Impairment of software development costs 1,543 - 2,386
------------ ------------ -----------
8,622 6,375 10,837
------------ ------------ -----------
Gross profit 7,995 11,080 6,032
------------ ------------ -----------
Operating expenses:
Research and development, net (Note 16a) 1,491 1,438 3,593
Selling and marketing 5,938 5,369 12,120
General and administrative 2,749 1,938 4,218
Costs in respect of lawsuits (Note 16b) 925 1,100 -
Restructuring and termination costs (Note 16c) - 608 1,326
Impairment of other assets - - 272
------------ ------------ -----------
Total operating expenses 11,103 10,453 21,529
----- ------------ ------------ -----------
Operating income (loss) (3,108) 627 (15,497)
Financial income, net (Note 16d) 236 141 48
Income taxes (Note 13) 84 264 402
------------ ------------ -----------
Gain (loss) from continued operations (2,956) 504 (15,851)
------------ ------------ -----------
Discontinued operations:
Gain on disposal of segment, net of income taxes - - 220
------------ ------------ -----------
Net income (loss) $ (2,956) $ 504 $ (15,631)
============ ============ ===========
Basic and diluted net earnings (loss) per share from
continued operations $ (0.20) $ 0.03 $ (1.36)
============ ============ ===========
Basic and diluted net earnings (loss) per share from
discontinued operations, net of income taxes $ - $ - $ 0.02
============ ============ ===========
Basic and diluted net earnings (loss) per share $ (0.20) $ 0.03 $ (1.34)
============ ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ATTUNITY LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Accumulated
Additional Treasury other Total Total
Share paid-in shares at comprehensive Accumulated comprehensive shareholders'
capital capital cost loss deficit income(loss) equity
------- ---------- --------- ------------- ----------- ------------- -------------
Balance as of January 1, 2001 $ 431 $ 82,472 $ - $ (712) $(58,214) $ 23,977
Issuance of shares and options, net 89 4,577 - - - 4,666
Purchase of treasury shares as result of
Medatech and VisOpt annulment agreement (7) - (485) - - (492)
Issuance of shares and options related
to the acquisition of BFI 7 (492) 485 - - -
Treasury shares - (31) - - (31)
Other comprehensive loss:
Foreign currency translation adjustment - - - (164) - $ (164) (164)
Net loss - - - - (15,631) (15,631) (15,631)
------- ---------- --------- ------------- ----------- ------------- -------------
Total comprehensive loss $ (15,795)
===========
Balance as of December 31, 2001 520 86,557 (31) (876) (73,845) 12,325
Exercise of employees stock options 5 - - - - 5
Issuance expenses related to issuance
of shares in 2001 - (103) - - - (103)
Compensation in respect of warrants
granted to a consultant - 50 - - - 50
Treasury shares in respect of a senior
employee - - 31 - - 31
Other comprehensive income:
Foreign currency translation
adjustments - - - 268 - $ 268 268
Net income - - - - 504 504 504
------- ---------- --------- ------------- ----------- ------------- -------------
Total comprehensive income $ 772
==========
Balance as of December 31, 2002 525 86,504 - (608) (73,341) 13,080
Other comprehensive income:
Foreign currency translation
adjustments - - - 349 - $ 349 349
Net loss - - - - (2,956) (2,956) (2,956)
------- ---------- --------- ------------- ----------- ------------- -------------
Total comprehensive loss $ (2,607)
============
Balance as of December 31, 2003 525 $ 86,504 $ - $ (259) $(76,297) $ 10,473
======= ========== ========= ============= =========== -------------
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ATTUNITY LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Cash flows from operating activities:
-------------------------------------
Net income (loss) $ (2,956) $ 504 $ (15,631)
Adjustments required to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 543 679 1,782
Impairment of property and equipment - - 389
Amortization of capitalized software development
costs 1,613 1,590 2,378
Gain from discontinued operations - - (220)
Impairment of investment and other assets 1,543 - 2,658
Decrease (increase) in marketable securities, net (214) 24 866
Decrease (increase) in trade receivables 311 (552) 3,115
Decrease (increase) in other accounts receivable and
prepaid expenses 149 (101) 321
Increase (decrease) in trade payables 99 (691) (864)
Increase (decrease) in deferred revenues 178 (291) (331)
Increase in accrued expenses, employees and other
liabilities 1,199 479 358
Increase (decrease) in accrued severance pay, net (74) (18) 117
Write-off of loan granted to employee - - 90
Compensation in respect of warrants granted to a
consultant - 50 -
Others - (9) (3)
------------ ------------ -----------
Net cash provided by (used in) operating activities 2,391 1,664 (4,975)
------------ ------------ -----------
Cash flows from investing activities:
-------------------------------------
Proceeds from restricted marketable securities - - 205
Investment in restricted marketable securities - - (205)
Capitalization of software development costs (1,593) (1,595) (2,000)
Purchase of property and equipment (238) (199) (400)
Proceeds from sale of property and equipment 6 46 63
Investment in short-term bank deposits, net (32) (88) -
Investment in restricted cash (902) - -
------------ ------------ -----------
Net cash used in investing activities (2,759) (1,836) (2,337)
------------ ------------ -----------
Cash flows from financing activities:
-------------------------------------
Proceeds from exercise of options - 5 -
Proceeds from issuance of shares and options, net - - 4,666
Issuance expenses related to issuance of shares in
2001 - (103) -
Short-term bank credit, net 32 2 108
Proceeds from long-term debt 69 86 33
Principal payment of long-term debt (180) (259) (292)
Proceeds from treasury shares in respect of a senior
employee - 31 -
------------ ------------ -----------
Net cash provided by (used in) financing activities (79) (238) 4,515
------------ ------------ -----------
Effect of exchange rate changes on cash and cash
equivalents (173) 58 (46)
------------ ------------ -----------
Decrease in cash and cash equivalents (620) (352) (2,843)
Cash and cash equivalents at the beginning of the year 2,693 3,045 5,888
------------ ------------ -----------
Cash and cash equivalents at the end of the year $ 2,073 $ 2,693 $ 3,045
============ ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
ATTUNITY LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Supplemental disclosure of cash flow activities:
------------------------------------------------
Cash paid during the year for:
Interest $ 90 $ 60 $ 209
============ ============ ===========
Income taxes $ 25 $ 12 $ 402
============ ============ ===========
Supplemental disclosure of non-cash investing and
financing activities:
---------------------
Capital lease obligation incurred upon the
acquisition of property and equipment $ 50 $ - $ 259
============ ============ ===========
Purchase of treasury shares as result of Medatech and
VisOpt annulment agreement $ - $ - $ 492
============ ============ ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL
Attunity Ltd. ("Attunity") and its subsidiaries ("the Company")
develop, market and provide support for computer software integration
tools and application development tools.
The Company's main product is the Attunity Connect. Attunity Connect
is an enterprise information infrastructure product, which is
available on multiple platforms and provides database-independent
access to many databases and file systems. Attunity Connect
standardizes the interaction between data sources and application
programs utilizing various universally accepted standards.
The Company's principal application development tools are CorVision,
an application generator, and APTuser, a database retrieval and
production report generator. The Company also supports through its
Israeli subsidiary, Attunity Software Services Ltd. ("ASS"), "Mancal
2000", a logistics application software package.
As for geographic markets and major customers, see Note 15.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States
("U.S. GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
b. Financial statements in U.S. dollars ("dollars"):
A majority of the revenues of Attunity and certain of its
subsidiaries is generated in dollars. In addition, a substantial
portion of Attunity and certain subsidiaries' costs is
denominated in dollars. The Company's management believes that
the dollar is the primary currency in the economic environment in
which those companies operate. Thus, the functional and reporting
currency of those companies is the dollar.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into dollars in accordance with
Statement of Financial Accounting Standard No. 52 "Foreign
Currency Translation" ("SFAS No. 52"). All transactions gains and
losses of the remeasurement of monetary balance sheet items are
reflected in the statement of operations as financial income or
expenses, as appropriate.
F-9
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The financial statements of the Israeli and other foreign
subsidiaries whose functional currency is determined to be their
local currency, have been translated into dollars. All balance
sheet accounts have been translated using the exchange rates in
effect at the balance sheet date. Statement of operations amounts
have been translated using the average exchange rate for the
year. The resulting translation adjustments are reported as a
component of shareholders' equity, accumulated other
comprehensive loss.
c. Principles of consolidation:
The consolidated financial statements include the accounts of
Attunity and its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated in consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash, with maturities of three months
or less at the date acquired.
e. Restricted cash:
Restricted cash is primarily invested in highly liquid deposits,
which are used mainly as a security for the outcome of a lawsuit.
f. Short-term bank deposits:
Short-term bank deposits are deposits with maturities of more
than three months but less than one year. The deposits are in New
Israeli Shekels ("NIS") and bear interest at an average rate of
4.9%. The short-term deposits are presented at their cost,
including accrued interest.
g. Marketable securities:
The Company accounts for its investments in marketable securities
using Statement of Financial Accounting Standard No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115").
Management determines the appropriate classification of its
investments in debt and marketable equity securities at the time
of purchase and reevaluates such determinations at each balance
sheet date. The securities are classified as trading securities
when the Company holds the securities for resale in anticipation
of short-term market movements. The Company's trading securities
carried at their fair value based upon the quoted market price of
those investments. Net realized and unrealized gains and losses
on these securities are included in financial expenses or income,
as appropriate.
F-10
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
h. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated using the straight-line
method, over the estimated useful lives of the assets, at the
following annual rates:
%
------------------
Computers and peripheral equipment 20 - 33
Office furniture and equipment 10 - 20
Motor vehicles 15
Over the related lease
Leasehold improvements period
i. Impairment of long-lived assets:
The Company's long-lived assets are reviewed for impairment in
accordance with Statement of Financial Accounting Standard No.
144, "Accounting for the Impairment or Disposal of Long-lived
Assets" ("SFAS No. 144"), 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.
During 2001, the Company recorded impairment expenses amounting
to $ 272 attributed to assembled workforce, according to
Statement of Financial Accounting Standard No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of", which were included in "Impairment of other
assets". In 2003 and 2002, no impairment losses were identified.
j. Goodwill:
Goodwill arose from acquisitions prior to July 1, 2001, was
amortized until December 31, 2001, on a straight-line basis over
the estimated useful life, which is 7-10 years.
Statement of financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS No.142") requires goodwill to
be tested for impairment on adoption and at least annually
thereafter or between annual tests in certain circumstances, and
written down when impaired, rather than being amortized as
previous accounting standards required. Goodwill is tested for
impairment by comparing the fair value of the Company's reporting
unit with its carrying value. Fair value was determined using
discounted cash flows, market multiples and comparative analyze.
Significant estimates used in the methodologies included
estimates of future cash flows and estimates of market multiples
for the reportable unit.
The Company performs the annual impairment test during the third
fiscal quarter. As of December 31, 2003, no impairment losses
have been identified.
F-11
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
k. Research and development costs:
Research and development costs incurred in the process of
software development before establishment of technological
feasibility are charged to expenses as incurred. Costs of the
production of a detailed program design incurred subsequent to
the establishment of technological feasibility are capitalized
according to the principles set forth in Statement of Financial
Accounting Standards No.86 "Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed" ("SFAS
No.86").
Based on the Company product development process, technological
feasibility is established upon completion of a detail program
design.
Capitalized software costs are amortized by the greater of the
amount computed using the: (1) ratio that current gross revenues
from sales of the software to the total of current and
anticipated future gross revenues from sales of the software, or
(2) the straight-line method over the estimated useful life of
the product (five years), commencing with general product release
and included in cost of revenues.
At each balance sheet date, the Company assesses the
recoverability of this intangible asset by comparing the
unamortized capitalized software costs to the net realizable
value on a product by product basis. Should the amount of the
unamortized capitalized costs of a computer software product
exceed the net realizable value, these products will be written
down by the excess amount. In the years ended December 31, 2003,
2002 and 2001 the Company recorded $ 1,543, $ 0 and $ 2,386,
respectively, as impairment losses of capitalized software costs,
which were included in cost of revenues.
l. Income taxes:
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards No. 109 "Accounting
for Income Taxes", ("SFAS No. 109"). This statement 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 their estimated
realizable value.
m. Advertising expenses:
Advertising expenses are carried to the statement of operations,
as incurred. Advertising expenses for the years ended December
31, 2003, 2002 and 2001 amounted to $ 208, $ 55 and $ 648,
respectively.
F-12
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
n. Revenue recognition:
The Company generates revenues mainly from license fees and
sub-license fees for the right to use its software products,
maintenance, support, consulting and training services. The
Company sells its products primarily through its direct sales
force to customers and indirectly through distributors and Value
Added Resellers ("VARs"). Both the customers and the distributors
or resellers are considered end users. The Company is also
entitled to royalties from some distributors and VARs upon the
sublicensing of the software to end users.
The Company accounts for software sales in accordance with
Statement of Position No. 97-2, "Software Revenue Recognition",
as amended ("SOP No. 97-2"). The Company and its subsidiaries
have also adopted Staff Accounting Bulletin ("SAB") No. 104,
"Revenue Recognition" ("SAB No. 104").
Revenue from license fees and services are recognized when
persuasive evidence of an arrangement exists, delivery of the
product has occurred or the services have been rendered, the fee
is fixed or determinable and collectibility is probable. The
Company does not grant a right of return to its customers.
Persuasive evidence of an arrangement exists - The Company
determines that persuasive evidence of an arrangement exists with
respect to a customer when it has a purchase order from the
customer or a written contract, which is signed by both the
Company and customer (documentation is dependent on the business
practice for each type of customer).
Delivery has occurred - The Company's software may be either
physically or electronically delivered to the customer. The
Company determines that delivery has occurred upon shipment of
the software or when the software is made available to the
customer through electronic delivery, when the customer has been
provided with access codes that allow the customer to take
immediate possession of the software on its hardware.
The fee is fixed or determinable - The Company considers all
arrangements with payment terms extending beyond 5 months not to
be fixed or determinable. If the fee is not fixed or
determinable, revenue is recognized as payments become due from
the customer, provided that all other revenue recognition
criteria have been met.
Collectibility is probable - The Company determines whether
collectibility is probable on a case-by-case basis. When
assessing probability of collection, the Company considers the
number of years in business and history of collection. If the
Company determines from the outset that collectibility is not
probable based upon its review process, revenue is recognized as
payments are received.
With regard to software arrangements involving multiple elements,
the Company has adopted Statement of Position No. 98-9,
"Modification of SOP No. 97-2, Software Revenue Recognition with
Respect to Certain Transactions" ("SOP No. 98-9"). According to
SOP No. 98-9, revenues should be allocated to the different
elements in the arrangement under the "residual method" when
Vendor Specific Objective Evidence ("VSOE") of fair value exists
F-13
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
for all undelivered elements and no VSOE exists for the delivered
elements. Under the residual method, at the outset of the
arrangement with the customer, the Company defers revenue for the
fair value of its undelivered elements (maintenance and support,
consulting and training) and recognizes revenue for the remainder
of the arrangement fee attributable to the elements initially
delivered in the arrangement (software product) when the basic
criteria in SOP No. 97-2 have been met. Any discount in the
arrangement is allocated to the delivered element.
The Company's determination of fair value of each element in
multiple-element arrangements is based on VSOE. The Company
aligns its assessment of VSOE for each element to the price
charged when the same element is sold separately. The Company has
analyzed all of the elements included in its multiple-element
arrangements and determined that it has sufficient VSOE to
allocate revenue to the maintenance and support, installation and
training ("professional") services components of its license
arrangements. The Company sells its professional services
separately, and accordingly it has established VSOE for
professional services based on its hourly or daily rates. VSOE
for maintenance and support is determined based upon the
customer's annual renewal rates for these elements. Accordingly,
assuming all other revenue recognition criteria are met, the
Company recognizes revenue from licenses upon delivery using the
residual method in accordance with SOP No. 98-9.
Arrangements for the sale of software products that include
installation and training services are evaluated to determine
whether those services are essential to the functionality of
other elements of the arrangement. The Company had determined
that these services are not considered essential to the
functionality of other elements of the arrangement, therefore,
these revenues are recognized as a separate element of the
arrangement.
Revenues from royalties are recognized according to quarterly
royalties reports, as such reports are received from customers.
Royalties are received from customers who embedded the Company's
products in their own products and the Company is entitled to a
percentage of the customer revenue from the combined product.
Maintenance and support revenue included in multiple element
arrangement is deferred and recognized on a straight-line basis
over the term of the maintenance and support agreement.
Services revenues are recognized as the services are performed.
Deferred revenues include unearned amounts received under
maintenance and support contracts and amounts received from
customers but not recognized as revenues.
F-14
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
In transactions, where a customer's contractual terms include a
provision for customer acceptance, revenues are recognized either
when such acceptance has been obtained or as the acceptance
provision has lapsed.
o. Concentrations of credit risks:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, restricted cash, short-term bank deposits,
marketable securities and trade receivables.
Cash and cash equivalents, restricted cash and short-term bank
deposits are invested in major banks in Israel, Europe and the
United States. Such deposits in the United States may be in
excess of insured limits and are not insured in other
jurisdictions. Management believes that the financial
institutions that hold the Company's investments are financially
sound and, accordingly, minimal credit risk exists.
The Company's trade receivables are mainly derived from sales to
customers located primarily in the United States, Israel, Europe,
Far East and South America. The Company performs ongoing credit
evaluations of its customers and, through December 31, 2002, has
not experienced any material losses. An allowance for doubtful
accounts is determined with respect to those amounts that the
Company has determined to be doubtful of collection.
In 2003, the Company increased its allowance for doubtful
accounts to provide for doubtful receivables, mainly in the Far
East and in Israel.
Adjustments to allowance for doubtful accounts for the years
ended December 31, 2003, 2002 and 2001, were $ 279, $ (30) and $
(151), respectively.
The Company has no significant off-balance-sheet concentration of
credit risk such as foreign exchange contracts, option contracts
or other foreign hedging arrangements.
p. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board
Statement No. 25, "Accounting for Stock Issued to Employees"
("APB No. 25"), and FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" ("FIN No.
44"), in accounting for its employee stock option plans. Under
APB No. 25, when the exercise price of an employee stock option
is equivalent to or above the market price of the underlying
shares on the date of grant, compensation expense is recognized.
F-15
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The Company adopted the disclosure provisions of Financial
Accounting Standards Board Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure" ("SFAS No.
148"), which amended certain provisions of SFAS 123 to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for
stock-based employee compensation. The Company continues to apply
the provisions of APB No. 25, in accounting for stock-based
compensation.
ProF forma information regarding the Company's net income (loss)
and net earnings (loss) per share is required by Statement of
Financial Accounting Standard No. 123 "Accounting for Stock-Based
Compensation" and has been determined as if the Company had
accounted for its employee stock options under the fair value
method prescribed by SFAS No. 123.
The fair value for options granted in 2003, 2002 and 2001 is
amortized over their vesting period and estimated at the date of
grant using a Black-Scholes options pricing model with the
following weighted average assumptions:
2003 2002 2001
----------- ------------ -----------
Dividend yield 0% 0% 0%
Expected volatility 43.8% 79.5% 130%
Risk-free interest 3.5% 3% 3%
Expected life of up to 6 years 6 years 6 years
F-16
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Pro forma information under SFAS No. 123, is as follows:
Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Net income (loss) from continued
operations $ (2,956) $ 504 $ (15,851)
Net income (loss) from discontinued
operations, net of income tax - - 220
------------ ------------ -----------
Net income (loss) $ (2,956) $ 504 $ (15,631)
============ ============ ===========
Deduct stock-based employee
compensation fair value $ (586) $ (994) $ (1,508)
============ ============ ===========
Pro forma:
Net loss from continued operations $ (3,542) $ (490) $ (17,359)
Net income from discontinued
operations, net of income tax - - 220
------------ ------------ -----------
Net loss $ (3,542) $ (490) $ (17,139)
============ ============ ===========
Net earnings (loss) per share:
Basic and diluted net earnings (loss)
per share from continued operations
as reported $ (0.20) $ 0.03 $ (1.36)
============ ============ ===========
Basic and diluted net earnings per
share from discontinued operations,
net of income tax $ - $ - $ 0.02
============ ============ ===========
Basic and diluted net earnings (loss)
per share $ (0.20) $ 0.03 $ (1.34)
============ ============ ===========
Pro forma basic and diluted net loss
per share from continued operations
as reported $ (0.23) $ (0.03) $ (1.49)
============ ============ ===========
Pro forma basic and diluted net
earnings per share from discontinued
operations, net of income taxes $ - $ - $ 0.02
============ ============ ===========
Pro forma basic and diluted net loss
per share $ (0.23) $ (0.03) $ (1.47)
============ ============ ===========
The Company applies SFAS No. 123 and Emerging Issues Task Force
No. 96-18, "Accounting for Equity Instruments that are Issued to
Other than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), with respect to
options and warrants issued to non-employees. SFAS No. 123
requires the use of option valuation model to measure the fair
value of the warrants at the date of grant.
F-17
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
q. Basic and diluted net earnings (loss) per share:
Basicnet earnings (loss) per share are computed based on the
weighted average number of Ordinary shares outstanding during
each year. Diluted net earnings per share are computed based on
the weighted average number of Ordinary shares outstanding during
each year, plus dilutive potential Ordinary shares considered
outstanding during the year, in accordance with Statement of
Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS No. 128").
Certain outstanding stock options and warrants have been excluded
from the calculation of the diluted net earnings (loss) per
Ordinary share because the securities are antidilutive for all
periods presented. The total weighted average number of shares
related to the outstanding stock options and warrants excluded
from the calculations of diluted net earnings (loss) per share
were 6,963,321, 6,367,656 and 6,950,161 for the years ended
December 31, 2003, 2002 and 2001, respectively.
r. Severance pay:
The Company's liability for severance pay is calculated pursuant
to Israeli severance pay law based on the most recent salary of
the employees multiplied by the number of years of employment, as
of the balance sheet date for all employees in Israel. Employees
are entitled to one month's salary for each year of employment or
a portion thereof. The Company's liability for all of its
employees is fully provided by monthly deposits with severance
pay fund, insurance policies and by an accrual. The value of
these policies is recorded as an asset in the Company's balance
sheet.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israeli severance pay
law or labor agreements. The value of these policies is recorded
as an asset in the Company's balance sheet.
Severance pay expenses for the years ended December 31, 2003,
2002 and 2001 were $ 498, $ 576 and $ 1,375, respectively.
s. Fair value of financial instruments:
The estimated fair value of financial instruments has been
determined by the Company using available market information and
valuation methodologies. Considerable judgment is required in
estimating fair values. Accordingly, the estimates may not be
indicative of the amounts the Company could realize in a current
market exchange.
The carrying amounts of cash and cash equivalents, restricted
cash, short-term bank deposits, trade receivables, short-term
bank credits trade payables deferred revenues, employees and
payroll accruals accrued expenses and other liabilities
approximate their fair values due to the short-term maturity of
these instruments.
The fair value for marketable securities is based on quoted
market prices and does not significantly differ from the carrying
amount.
F-18
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
The fair value of long-term liabilities was estimated by
discounting the future cash flow using rate currently available
for long-term liabilities of similar terms and maturity. The
carrying amount of the Company's long-term liabilities
approximates their fair value.
t. Impact of recently issued accounting standards:
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). The
objective of FIN 46 is to improve financial reporting by
companies involved with variable interest entities. A variable
interest entity is a corporation, partnership, trust, or any
other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has
equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a
company if that company is subject to a majority of the risk of
loss from the variable interest entity's activities or entitled
to receive a majority of the entity's residual returns or both.
FIN 46 also requires disclosures about variable interest entities
that the company is not required to consolidate but in which it
has a significant variable interest. The consolidation
requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or
interim period end after December 31, 2003. Certain of the
disclosure requirements apply in all financial statements issued
after January 31, 2003, regardless of when the variable interest
entity was established. As of December 31, 2003, the Company does
not expect the adoption of FIN 46 to have a material impact on
its consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149 ("SFAS 149"),
"Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS 149 amends and clarifies (1) the accounting
guidance on derivative instruments (including certain derivative
instruments embedded in other contracts) and (2) hedging
activities that fall within the scope of FASB Statement No. 133
("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS 149 amends SFAS 133 to reflect decisions made
(1) as part of the Derivatives Implementation Group ("DIG")
process that effectively required amendments to SFAS 133, (2) in
connection with other projects dealing with financial
instruments, and (3) regarding implementation issues related to
the application of the definition of a derivative. SFAS 149 is
effective (1) for contracts entered into or modified after June
30, 2003, with certain exceptions, and (2) for hedging
relationships designated after June 30, 2003. The guidance is to
be applied prospectively.
Generally, SFAS 149 improves financial reporting by (1) requiring
that contracts with comparable characteristics be accounted for
similarly and (2) clarifying when a derivative contains a
financing component that warrants special reporting in the
statement of cash flows. SFAS 149 is not expected to have a
material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"), which establishes
standards for how an issuer of financial instruments classifies
and measures certain financial instruments with characteristics
of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a
liability (or an asset in
F-19
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
some circumstances) if, at inception, the monetary value of the
obligation is based solely or predominantly on a fixed monetary
amount known at inception, variations in something other than the
fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity
shares. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 is not expected
to have a material impact on the Company's financial position or
results of operations.
u. Reclassification:
Certain amounts from prior years referring to expenses and
property and equipment have been reclassified to conform with
current year presentation. The reclassification had no effect on
previously reported operating income (loss), shareholders' equity
or cash flows.
NOTE 3:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
December 31,
------------------------------
2003 2002
------------- -------------
Prepaid expenses $ 338 $ 460
Government authorities 485 370
Employees 64 166
Other 119 237
------------- -------------
$1,006 $1,233
============= =============
NOTE 4:- PROPERTY AND EQUIPMENT, NET
Cost:
Computers and peripheral equipment $3,559 $3,184
Office furniture and equipment 622 827
Motor vehicles 629 572
Leasehold improvements 1,182 1,110
------------- -------------
5,992 5,693
------------- -------------
Accumulated depreciation:
Computers and peripheral equipment 3,247 2,760
Office furniture and equipment 412 581
Motor vehicles 377 316
Leasehold improvements 1,030 891
------------- -------------
5,066 4,548
------------- -------------
Depreciated cost $ 926 $1,145
============= =============
Depreciation expenses for the years ended December 31, 2003, 2002
and 2001 are $ 543, $ 679 and $ 808, respectively.
As for charges on the Company's property and equipment, see Note
10.
F-20
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
NOTE 5:- SOFTWARE DEVELOPMENT COSTS, NET
December 31,
------------------------------
2003 2002
------------- -------------
Software development costs $ 15,347 $ 15,297
Less - accumulated amortization 10,835 9,222
------------- -------------
Amortized cost $ 4,512 $ 6,075
============= =============
Amortization expenses for the years ended December 31, 2003, 2002 and
2001 are $ 1,613, $ 1,590 and $ 2,378, respectively.
The Company recorded impairment expenses amounting to $ 1,543, $ 0 and
$ 2,386, attributed to capitalized software costs in 2003, 2002 and
2001, respectively.
Estimated amortization expenses for the years ended:
December 31,
-------------
2004 $1,874
2005 1,077
2006 756
2007 494
2008 311
-------------
$4,512
=============
NOTE 6:- GOODWILL
a. The results of operations presented below for the three years
ended December 31, 2003, 2002 and 2001, reflect the operations
had the Company adopted the non-amortization provisions of SFAS
No. 142 effective January 1, 2001:
Year ended December 31,
---------------------------------------
2003 2002 2001
------------ ----------- ------------
Reported net income (loss) $ (2,956) $ 504 $ (15,631)
Goodwill amortization - - 974
------------ ----------- ------------
Adjusted net income (loss) $ (2,956) $ 504 $ (14,657)
============ =========== ============
Basic and diluted net earnings
(loss) per share:
Reported net income (loss) $ (0.20) $ 0.03 $ (1.34)
Goodwill amortization - - 0.08
------------ ----------- ------------
Adjusted net income (loss) $ (0.20) $ 0.03 $ (1.26)
============ =========== ============
b. The change in the carrying amount of goodwill for the year ended
December 31, 2003, is due to translation adjustments.
F-21
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- SHORT-TERM BANK CREDIT
Interest rate December 31,
--------------------- ------------------------------
2003 2002 2003 2002
--------- --------- ------------- -------------
%
---------------------
Short-term bank loans:
In NIS 8.0 11.7 $ 206 $ 149
Short-term bank credit:
In NIS 8.9 13.4 - 26
------------- -------------
$ 206 $ 175
============= =============
(1) Total authorized credit lines approximate $ 250
=============
(2) Unutilized credit lines approximate $ 250
=============
(3) Weighted average interest rates at the end of
the year 3.5% 12.2%
============= =============
NOTE 8:- ACCRUED EXPENSES AND OTHER LIABILITIES
Government authorities $ 498 $ 599
SSF Lawsuit (see also Note 16b) 1,000 810
Accrued expenses 425 687
Burlington lease lawsuit (see also Note 16b) 850 290
Royalties to Government authorities 642 270
Others 64 2
------------- -------------
$ 3,479 $ 2,658
============= =============
NOTE 9:- LONG-TERM DEBTS
Capital lease obligations, linked to the U.S. dollar
and bears interest of 9.1% $ 108 $ 174
Other loans, linked to the Israeli Consumer Price
Index and bears interest of 5% to 6.7% 93 86
------------- -------------
201 260
Less - current maturities:
Capital lease obligations 61 135
Other loans 41 70
------------- -------------
$ 99 $ 55
============= =============
F-22
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- LONG-TERM DEBTS (Cont.)
As of December 31, 2003, the aggregate annual maturities of long-term
debts are as follows:
December 31,
------------------------------
2003 2002
------------- -------------
First year (current maturities) $ 102 $ 205
Second year 49 41
Third year 42 14
Fourth year 8 -
------------- -------------
$ 201 $ 260
============= =============
See also Note 10.
NOTE 10:- CHARGES (ASSETS PLEDGED)
As collateral for certain liabilities of the Company to banks and
others, fixed charges have been recorded on certain property and
equipment of the Company.
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease commitments:
The Company leases its operating facilities under non-cancelable
operating lease agreements, which expire in various dates. Future
minimum commitments under these leases as of December 31, 2003, are as
follows:
Operating
Year ended December 31, leases
----------------------- ---------
2004 $ 590
2005 442
2006 and thereafter 517
---------
$1,549
=========
Operating lease obligation does not include $ 2,005 for which the
Company has entered into a settlement agreement in March 2004 (see
also Note 16b).
Rent expenses under operating leases for the years ended December 31,
2003, 2002 and 2001 were $ 580, $ 704 and $ 1,298, respectively.
F-23
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
b. Royalties:
The Company participates in programs sponsored by the Israeli
Government for the support of research and development
activities. As of December 31, 2003, the Company had obtained
grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry and Trade ("the OCS") in the aggregate
amount of $ 2,418 for certain of the Company's research and
development projects. The Company is obligated to pay royalties
to the OCS, amounting to 2%-5% of the sales of the products and
other related revenues generated from such projects, up to
100%-150% of the grants received, linked to the U.S. dollar.
The obligation to pay these royalties is contingent on actual
sales of the products and in the absence of such sales no payment
is required.
Through December 31, 2003, the Company has paid or accrued
royalties to the OCS in the amount of $ 1,547. As of December 31,
2003, the aggregate contingent liability to the OCS amounted to $
871.
c. Litigation:
1. In November 2002, the four Special Situations Funds ("SSF")
that invested in the Company's October 2001 private
placement filed a complaint against the Company alleging
that the Company had breached the Registration Rights
Agreement related to their investment in the Company.
As such, SSF sought to collect liquidation damages of
approximately $ 603 plus unspecified actual damages
allegedly due as a result of delay in having Registration
Statement covering the shares purchased by SSF declared
effective at a later date. On March 28, 2003, the court
ruled against the Company, in favor of SSF. The judge
awarded SSF liquidation damages in the amount of $ 603, plus
interest from the date on which the complaint was filed.
The Company has appealed on the decision and, in January
2004, the upper court affirmed the decision against the
Company. In 2002, the Company recorded a one-time charge in
the amount of $ 810, and an addition $ 365 in 2003 related
to the outcome of the lawsuit and its related expenses. The
charge was included at costs in respect of lawsuits in the
statement of operations.
2. During 2002, the company's subsidiary in the United States
ceased the use of its former leased facilities before the
end of the agreement term, which will expire in September
2005.
In 2003, the landlord sued the company for non-payment of
the lease fees for 2003. Subsequent to the balance sheet
date, the company and the landlord settled the dispute where
the Company has agreed to pay $ 825 and will be released
from the lease agreement.
F-24
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY
a. The Ordinary shares of the Company are quoted on NASDAQ stock
market. The Ordinary shares confer upon the holders the right to
receive notice to participate and vote in general meetings of the
Company, and the right to receive dividends, if declared.
b. In October 2001, the Company issued 3,846,156 Ordinary shares to
private investors in net consideration of approximately $ 4,666.
In addition, the Company granted the investors and agents
warrants to purchase 4,150,387 of the Company's Ordinary shares
at an exercise price of $ 1.56 -$ 2.25. The agreement provides
that if the Company's stock price reaches $3 and $4 for certain
period of time, the warrants must be exercised or otherwise
forfeited. These warrants will expire in October 2005 (see also
Note 17).
c. Stock Option Plans:
Under the Company's 1992, 1994, 1998 and 2001 Stock Option Plans
(the "Plans"), the Company has granted options to purchase
Ordinary Shares to key employees, directors and officers as an
incentive to attract and retain qualified personnel. The exercise
price of options granted under the Plans may not be less than
100% (110% in the case of a 10% shareholder) of the fair market
value of the Company's Ordinary shares on the date of grant for
ISO options and 75% of the fair market for non-qualified options.
Under the terms of these four plans, options generally become
exercisable ratably over three to five years of employment,
commencing with the date of grant. The options generally expire
no later than 10 years from the date of the grant, and are
non-transferable, except under the laws of succession.
Under the Plans, 4,500,000 Ordinary shares of the Company were
reserved for issuance. Any options, which are canceled or
forfeited before expiration become available for future grants.
As of December 31, 2003, under the plans there are 639,186
options available for future grants.
The following is a summary of the Company's stock options granted
among the various plans:
Year ended December 31,
---------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
options price options price options price
---------- --------- ----------- --------- ---------- ---------
Outstanding at
beginning of year 1,604 $ 3.71 2,238 $ 3.87 1,226 $ 8.61
Granted 2,137 $ 1.57 143 $ 1.09 1,710 $ 1.26
Exercised - $ - (187) $ 0.02 (20) $ 0.02
Canceled or
forfeited (197) $ 7.83 (590) $ 4.85 (678) $ 5.57
---------- ----------- ----------
Outstanding at end
of year 3,544 $ 1.78 1,604 $ 3.71 2,238 $ 3.87
========== ========= =========== ========= ========== =========
Exercisable at end
of year 1,072 $ 3.78 990 $ 5.18 1,218 $ 5.74
========== ========= =========== ========= ========== =========
F-25
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
The options outstanding as of December 31, 2003, have been
separated into ranges of exercise price as follows:
Weighted
Options Weighted Options average
outstanding average Weighted exercisable exercise
Range of as of remaining average as of price of
exercise December 31, contractual exercise December 31, options
price 2003 life price 2003 exercisable
----------------- ------------- ------------ ----------- -------------- -----------
$ In thousands Years $ In thousands $
----------------- ------------- ------------ ----------- -------------- -----------
$ 0.02 6 2 $ 0.02 6 $ 0.02
$ 0.8 - 0.91 230 6.75 $ 0.82 10 $ 0.82
$ 1.05 - 1.42 1,712 3.98 $ 1.20 560 $ 1.21
$ 1.5 - 2.25 1,146 5.31 $ 1.89 87 $ 1.89
$ 2.88 - 3.0 26 2.21 $ 2.94 20 $ 2.94
$ 4.5 - 6.5 49 2.91 $ 5.41 50 $ 5.41
$ 6.88 - 9.75 327 2.42 $ 7.86 291 $ 7.87
$ 10 - 13.25 35 2.35 $ 10.78 35 $ 10.78
$ 16 13 2 $ 16 13 $ 16
------------- -----------
3,544 $ 2.23 1,072 $ 3.78
============= =========== =========== ===========
Weighted average fair values and weighted average exercise prices
of options whose exercise prices is equal to, lower than or
exceeds market price of the shares at date of grant are as
follows:
Year ended December 31,
--------------------------------------------------------------------
2003 2002 2001
--------------------- ------------------- ----------------------
Weighted Weighted Weighted Weighted Weighted Weighted
average average average average average average
fair exercise fair exercise fair exercise
value price value price value price
--------- --------- --------- --------- --------- ----------
Equals market
price at
date of grant $ 0.70 $ 1.55 $ 0.84 $ 1.22 $ 0.98 $ 1.32
========= ========== ========= ========= ========= ==========
Exceeds market
price at
date of grant $ 0.24 $ 2.17 $ - $ - $ 1.30 $ 1.83
========= ========== ========= ========= ========= ==========
Lower than
market price
at date of
grant $ - $ - $ 1.29 $ 0.02 $ 1.77 $ 0.02
========= ========== ========= ========= ========= ==========
F-26
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 12:- SHAREHOLDERS' EQUITY (Cont.)
d. Stock warrants:
The Company has issued warrants, as follows:
Outstanding Exercisable
as of as of
December 31, Exercise December 31, Exercisable
Issuance date 2003 price 2003 through
------------------- -------------- -------------- --------------- ------------------
June 2000 (1) 425,000 $12.3 - $15.50 425,000 March 31, 2005
October 2000 (2) 72,000 $7.65 72,000 October 31, 2005
June 2001 (3) 180,000 $2.5 180,000 December 31, 2004
October 2001 (4) 4,115,387 $1.56 - $2.25 4,115,387 October 16, 2005
--------- ---------
4,792,387 4,792,387
========= ==========
(1) Issued to investors and placement agents of 2000 private
placement.
(2) Issued to consultants and placement agents of 2000 private
placement.
(3) Issued to a consultant for public relations services.
(4) Issued to investors and placement agents of the October 2001
private placement.
The Company had accounted for its warrants to consultants under
the fair value method of SFAS No. 123 and EITF No. 96-18. The
fair value for these warrants was estimated using Black-Scholes
option-pricing model with the following weighted-average
assumptions for 2003, 2002 and 2001: risk-free interest rates of
2.5% for 2003, 2.5% for 2002 and 3% for 2001, dividend yields of
0% for each year, volatility factors of the expected market price
of the Company's Ordinary shares of 0.438, 0.795 and 1.3,
respectively and a weighted-average contractual life of
approximately 2 years for each year.
e. Dividends:
In the event that cash dividends are declared in the future, such
dividends will be paid in New Israeli Shekels ("NIS"). The
Company does not intend to pay cash dividends in the foreseeable
future.
NOTE 13:- INCOME TAXES
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the Law"):
The production facilities of Attunity and its subsidiary Attunity
Software Services Ltd. ("ASS") have been granted "Approved
Enterprise" status under the Investment Law.
In June 2000, Attunity Ltd. filed an application for a fourth
investment program which has not yet been approved, the other
three investment programs, which were approved in February 1998,
April 1998 and November 2001, will expire in April 2006, November
2008 and December 2011, respectively.
F-27
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13:- INCOME TAXES (Cont.)
As of December 31, 2003, the investments under June 2000
investment program remain in progress and has not been completed.
According to the provisions of the Law, Attunity Ltd. has elected
to enjoy "alternative benefits" - waiver of grants in return for
tax exemption - and, accordingly, income derived from the
"Approved Enterprise" will be tax-exempt for a period of two
years commencing with the year it first earns taxable income, and
will be taxed at 10% to 25%, based upon the percentage of foreign
investment in Attunity for an additional period of five-eight
years. The period of tax benefits, detailed above, is subject to
limits of the earlier of 12 years from the commencement of
production, or 14 years from the date of approval.
ASS has been granted status as an "Approved Enterprise" for two
separate investment programs from 1991 and 1993 whereby it has
elected to receive Government grants and to enjoy the benefit of
a reduced tax rate of 25% during a period of seven years
commencing with the year it first earns taxable income. The
period of tax benefits, detailed above, is subject to limits of
the earlier of 12 years from the commencement of production, or
14 years from the date of approval. In 1993, ASS received
approval for an expansion of the aforementioned programs whereby
it has elected to enjoy "alternative benefits" - waiver of grants
in return for tax exemption - and, accordingly, its income from
the "Approved Enterprise" will be tax-exempt for a period of ten
years commencing with the year it first earns taxable income.
As of December 2003, ASS has not yet received final approvals for
such programs.
If these retained tax-exempt profits are distributed in a manner
other than in the complete liquidation of the Company they would
be taxed at the corporate tax rate applicable to such profits as
if the Company had not elected the alternative system of
benefits, currently between 15%-20% for an "Approved Enterprise".
As of December 31, 2003, the accumulated deficit of the Company
does not include tax-exempt profits earned by the Company's
"Approved Enterprise".
The Company's decision is not to distribute dividends, other than
upon the liquidation of the Company.
As Attunity currently has no taxable income, the benefits have
not yet commenced for all programs.
The entitlement to the above benefits is conditional upon the
Company's fulfilling the conditions stipulated by the above law,
regulations published hereunder and the instruments of approval
for the specific investments in "Approved Enterprises". In the
event of failure to comply with these conditions, the benefits
may be canceled and the Company may be required to refund the
amount of the benefits, in whole or in part, including interest.
Should Attunity or ASS derive income from sources other than the
"Approved Enterprise" during the periods of benefits, such income
shall be taxable at the regular corporate tax rate of 36%.
F-28
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13:- INCOME TAXES (Cont.)
b. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results of Attunity and its Israeli subsidiaries for tax purposes
are measured and reflected in real terms of earnings in NIS after
certain adjustments for increases in the Consumer Price Index. As
explained in Note 2b, the financial statements are presented in
U.S. dollars. The difference between the annual change in the
Israeli Consumer Price Index and in the NIS/dollar exchange rate
causes a difference between taxable income or loss and the income
or loss before taxes shown in the financial statements. In
accordance with paragraph 9(f) of SFAS No. 109, the Company has
not provided deferred income taxes on this difference between the
reporting currency and the tax bases of assets and liabilities.
c. Tax benefits under the Law for the Encouragement of Industry
(Taxation),1969:
Attunity and ASS are "industrial companies" under the above law
and as such are entitled to certain tax benefits, mainly
accelerated depreciation of machinery and equipment. It may also
be entitled to deduct over three year period expenses incurred in
connection with a public share offering and to amortize know-how
acquired from third party.
d. On July 24, 2002, Amendment 132 to the Israeli Income Tax
Ordinance ("the Amendment") was approved by the Israeli
parliament and came into effect on January 1, 2003. The principal
objectives of the Amendment were to broaden the categories of
taxable income and to reduce the tax rates imposed on employees
income.
The material consequences of the Amendment applicable to the
Company include, among others, imposing tax upon all income of
Israel residents, individuals and corporations, regardless of the
territorial source of income and certain modifications in the
qualified taxation tracks of employee stock options.
e. Tax loss carryforward:
Net operating loss carryforward as of December 31, 2003 are as
follows:
Israel $ 34,633
United States *) 5,541
UK 2,589
Hong Kong 1,612
France 783
------------
$ 45,158
============
Net operating losses in Israel, UK and Hong Kong may be carried
forward indefinitely. Net operating losses in the U.S. are
available through 2023 and in France through 2006.
*) 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 limitation may
result in the expiration of net operating losses before
utilization.
F-29
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13:- INCOME TAXES (Cont.)
f. Deferred taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
December 31,
----------------------------
2003 2002
------------ ------------
Net operating loss carryforward $ 11,428 $ 10,255
Other 890 1,211
------------ ------------
Total deferred tax asset before
valuation allowance 12,318 11,466
Less - valuation allowance (12,318) (11,466)
------------ ------------
Net deferred tax assets $ - $ -
============ ============
The Company has provided valuation allowances in respect of
deferred tax assets resulting from tax loss carryforward and
other temporary differences. Management currently believes that
since the Company has a history of losses it is more likely than
not that the deferred tax regarding the loss carryforward and
other temporary differences will not be realized in the
foreseeable future.
During fiscal year 2003, the Company increased the valuation
allowance by $ 852 to $ 12,318.
F-30
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 13:- INCOME TAXES (Cont.)
g. Reconciliation:
A reconciliation of the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to the income of
the Company and the actual tax expense, is as follows:
Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Income (loss) from continued operations
before income taxes, as reported in
the consolidated statements of
operations $ (2,872) $ 768 $(15,449)
============ ============ ===========
Theoretical tax expense (income tax
benefit) computed at the rate
applicable to the Company (1) $ (1,034) $ 276 $ (5,562)
Tax adjustments in respect of inflation
in Israel and effect of different tax
rates for foreign subsidiaries - (471) (13)
Losses for which valuation allowance
was provided - - 3,965
Utilization of operating carryforward
tax losses (1,462) (227) -
Nondeductible expenses including
goodwill amortization, investment
impairment and others 2,496 422 1,626
Tax withholding 84 264 386
------------ ------------ -----------
Income taxes $ 84 $ 264 $ 402
============ ============ ===========
(1) Statutory rate applicable to the
Company 36% 36% 36%
============ ============ ===========
h. Pre-tax income (loss):
Domestic $ (2,489) $ (1,753) $(13,548)
Foreign (383) 2,521 (1,901)
------------ ------------ -----------
$ (2,872) $ 768 $(15,449)
============ ============ ===========
F-31
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 14:- EARNINGS (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
net earnings (loss) per share:
a. Numerator:
Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Net income (loss) from continued
operations $ (2,956) $ 504 $(15,851)
Net income from discontinued
operations, net of income tax - - 220
------------ ------------ -----------
Net income (loss) $ (2,956) $ 504 $(15,631)
============ ============ ===========
Numerator for basic and diluted net
earnings (loss) per share
from continued operations -
income available to shareholders
of Ordinary shares $ (2,956) $ 504 $(15,851)
============ ============ ===========
Numerator for basic and diluted net
earnings per share from discontinued
operations - income available to
shareholders of Ordinary shares $ - $ - $ 220
============ ============ ===========
Numerator for basic and diluted net
earnings (loss) per share - income
available to shareholders of Ordinary
shares $ (2,956) $ 504 $(15,631)
============ ============ ===========
b. Denominator:
Denominator for basic net earnings
per share - weighted average
number of Ordinary shares 14,767 14,697 11,666
Effect of dilutive securities:
Employee stock options *) - 28 *) -
------------ ----------- -----------
Denominator for diluted net
earnings (loss) per share -
adjusted weighted average number
of Ordinary shares,
assumed exercise of options 14,767 14,725 11,666
============ =========== ===========
*) The effect of the inclusion of the options and warrants in
2001 and 2003 would have been antidilutive
F-32
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION
The Company manages its business on a basis of one reportable segment:
computer software integration tools and application development tools.
Total revenues are attributed to geographic areas based on the
location of the end customers. This data is presented in accordance
with Statement of Financial Accounting Standard No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS No.
131").
Revenues from sales to unaffiliated customers:
Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Israel $ 2,952 $ 2,576 $ 2,761
United States 6,528 7,025 7,589
Europe 5,411 4,950 4,012
Far East 908 1,064 1,212
South America 369 1,500 1,066
Other 449 340 229
------------ ------------ -----------
$ 16,617 $ 17,455 $ 16,869
============ ============ ===========
The Company's long-lived assets are as follows:
December 31,
------------------------------
2003 2002
------------- -------------
Israel $ 11,144 $ 12,467
United States 180 274
Other 150 163
------------- -------------
$ 11,474 $ 12,904
============= =============
In 2003, 2002 and 2001 over 90% of the license revenues were derived
from the Connect product.
The Company's maintenance and support revenues are derived from annual
maintenance and support payments made by customers who use the Connect
product or the Corvision, Mancal 2000 and Aptuser products, which are
legacy products. In 2003, 2002 and 2001 maintenance and support
revenues derived from the legacy products represented 48%, 50% and
59%, respectively out of the total consolidated maintenance and
support revenues. Maintenance and support revenues in 2003, 2002 and
2001 related to the Connect product represented 52%, 50% and 41%,
respectively out of the total consolidated maintenance and support
revenues.
In 2003, the Company had a customer that accounted for 10.3% of
revenues; in 2002, a different customer accounted for 10.3%; and in
2001, no customer accounted for more than 10% of revenues.
F-33
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 16:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Research and development costs, net:
Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Total costs $ 3,084 $ 3,033 $ 5,382
Capitalized software development costs (1,593) (1,595) (1,789)
------------ ------------ -----------
$ 1,491 $ 1,438 $ 3,593
============ ============ ===========
b. Costs in respect of lawsuits:
SSF lawsuit (1) $ 365 $ 810 $ -
Burlington lease lawsuit (2) 560 290 -
------------ ------------ -----------
$ 925 $ 1,100 $ -
============ ============ ===========
c. Restructuring and termination costs:
Restructuring charges (3) $ - $ - $ 1,326
Employment termination benefits (4) - 467 -
Others - 141 -
------------ ------------ -----------
$ - $ 608 $ 1,326
============ ============ ===========
(1) See Note 11c.
(2) In 2002, the Company's subsidiary in the United States
ceased the use of its former lease facilities before the end
of the agreement term, which will expire in September 2005.
The Company early adopted Statement of Financial Accounting
Standard No. 146, "Accounting for Costs Associated with Exit
Disposal Activities" ("SFAS No. 146"), which addresses the
recognition, measurement, and reporting of costs associated
with exit and disposal activities, including restructuring
activities.
According to SFAS No. 146, the Company recognized a one-time
charge, in a total amount of $290, related to the costs that
will continue to be incurred under the agreement for its
remaining time, without economic benefit to the Company.
The one-time charge was measured at its fair value at the
cease-of-use date, based on the future remaining lease
payments, reduced by estimated sublease rentals that could
be reasonably obtained for those facilities.
In 2003 the landlord sued the Company for non-payment of the
lease fees for 2003. In March 2004, the Company and the
landlord settled the dispute where the Company has agreed to
pay $ 825 and be released from the lease agreement.
(3) In September 2001, after sustaining substantial losses, the
Company implemented a restructuring plan. The plan consisted
of the involuntary termination of 30 employees and write-off
of leasehold improvements that have no useful use as a
result of the dismissal of employees. The Company recorded
restructuring changes in accordance with Emerging Issues
Task Force No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain costs in a restructuring) " and
Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Changes".
F-34
ATTUNITY LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 16:- SELECTED STATEMENTS OF OPERATIONS DATA (Cont.)
(4) One time charge related to employment termination of the
then chief executive officer of the Company and other
employees during 2002.
d. Financial income, net:
Financial income:
Gain on trading marketable securities $ 3 $ - $ -
Interest and other income 90 69 142
Foreign currency translation
differences 588 141 515
------------ ----------- -----------
681 210 657
------------ ----------- -----------
Financial expenses:
Interest (100) (69) (304)
Foreign currency translation
differences (345) - (305)
------------ ----------- -----------
(445) (69) (609)
------------ ----------- -----------
$ 236 $ 141 $ 48
============ =========== ===========
NOTE 17:- SUBSEQUENT EVENTS
In March 2004, the Company signed an agreement with a group of
investors ("the Group") that owns 2,043,146 shares and warrants to
purchase 2,208,489 shares at an exercise price of $ 1.75 and 736,162
shares at an exercise price of $ 2.25. According to the agreement, the
Group will invest, subject to a shareholders approval, an additional $
2 million in the Company as a five-year convertible debenture at $
1.75 per share, and warrants to purchase 480,000 Ordinary shares at an
exercise price of $ 1.75 per share.
- - - - - - - - - - - -
F-35
S I G N A T U R E S
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
ATTUNITY LTD.
By: /s/Ofer Segev
-------------
Ofer Segev
Chief Financial Officer
Dated: November 22, 2004
77