-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JgbezgQTI5cGI06UQREgbvgoQEUfnPbWsRxfg1pISTLpxKO1loszqeURRV8hqlR0 P+oU5uuqw9SAIkHtdsAC0w== 0000910662-04-000340.txt : 20040630 0000910662-04-000340.hdr.sgml : 20040630 20040630135927 ACCESSION NUMBER: 0000910662-04-000340 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATTUNITY LTD CENTRAL INDEX KEY: 0000893821 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-20892 FILM NUMBER: 04890913 BUSINESS ADDRESS: STREET 1: INDUSTRIAL PARK STREET 2: TECHNION CITY CITY: HAIFA ISRAEL STATE: L3 ZIP: 32000 BUSINESS PHONE: 5086513888 FORMER COMPANY: FORMER CONFORMED NAME: ISG INTERNATIONAL SOFTWARE GROUP LTD DATE OF NAME CHANGE: 19950725 20-F 1 attufrm20f.txt FISCAL YEAR ENEDED 12/31/03 SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 20-F [ ] 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...........14,767,395 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 is incorporated by reference into our Form F-3 Registration Statements File Nos. 333-11972, 333-12450 and 333-14140. 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 i 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. ii 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............................29 C. Research and Development, Patents and Licenses.............30 D. Trend Information..........................................31 E. Off-Balance Sheet Arrangements.............................32 F. Tabular Disclosure of Contractual Obligations..............32 ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....................32 A. Directors and Senior Management............................32 B. Compensation...............................................36 C. Board Practices............................................36 D. Employees..................................................42 E. Share Ownership............................................43 ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............47 A. Major Shareholders.........................................47 B. Related Party Transactions.................................49 C. Interests of Experts and Counsel...........................50 ITEM 8. FINANCIAL INFORMATION.........................................50 A. Consolidated Statements and Other Financial Information....50 B. Significant Changes........................................51 ITEM 9. THE OFFER AND LISTING........................................51 A. Offer and Listing Details..................................51 B. Plan of Distribution.......................................52 C. Markets....................................................52 D. Selling Shareholders.......................................52 E. Dilution...................................................53 F. Expense of the Issue.......................................53 ITEM 10. ADDITIONAL INFORMATION........................................53 A. Share Capital..............................................53 B. Memorandum and Articles of Association.....................53 C. Material Contracts.........................................56 D. Exchange Controls..........................................57 E. Taxation...................................................57 F. Dividend and Paying Agents.................................69 G. Statement by Experts.......................................69 H. Documents on Display.......................................69 iii I. Subsidiary Information.....................................70 ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS....70 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........70 PART II......................................................................70 ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...............70 ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS...........................................71 ITEM 15. CONTROLS AND PROCEDURES.......................................71 ITEM 16. [RESERVED]....................................................71 ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT..............................71 ITEM 16B. CODE OF ETHICS................................................71 ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES........................72 ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE...........................................72 ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND PURCHASERS................................................73 PART III.....................................................................73 ITEM 17. FINANCIAL STATEMENTS..........................................73 ITEM 18. FINANCIAL STATEMENTS..........................................73 ITEM 19. EXHIBITS......................................................73 S I G N A T U R E S.......................................................75 iv 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 .................................. 7,079 6,375 8,451 8,345 7,322 -------- ------- -------- -------- -------- Gross profit ...................................... 9,538 11,080 8,418 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 Restructuring and other non-recurring charges ..... 925 1,708 1,326 -- -- Impairment of investment and other assets ......... 1,543 -- 2,658 6,090 -- In-process research and development write-off ..... -- -- -- 12,997 -- -------- ------- -------- -------- -------- Operating profit (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 -------- ------- -------- -------- -------- Profit (loss) from continuing 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 profit (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. 2 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; 3 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; 4 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 and Mancal 2000 software. A significant portion of our revenues are derived from annual maintenance payments made by customers who use CorVision and Mancal 2000, which are both legacy software products. In 2001, 2002 and 2003, these revenues on a consolidated basis totaled $3.0 million, $2.6 million and $2.5 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. 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 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 18 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. SOP No. 97-2, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. We have also 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. SOP No. 98-9 requires that revenue be recognized 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 and all other four criteria of SOP No. 97-2 are met. Under the residual method any discount in the arrangement is allocated to the delivered element. We and our subsidiaries have also adopted Staff Accounting Bulletin, or SAB, No. 104, "Revenue Recognition" or SAB No. 104. Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. We generally do not grant a right of return to our customers. We consider all arrangements with payment terms extending beyond one year 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. Revenues from royalties are recognized according to quarterly royalties reports, as received from customers which 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. Arrangements that include consulting and training services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. To date, we have had determined that the services are not considered essential to the functionality of other elements of the arrangement, therefore, these revenues are recognized as the services are performed. Deferred revenues includes unearned amounts received under maintenance and support contracts and amounts received from customers but not recognized as revenues. Professional services are recognized when rendered. 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. 19 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, are charged to income as incurred before technological feasibility is established. Based on our product development process, technological feasibility is established upon completion of a detailed program design. Costs that are incurred between completion of a detailed program design and the point at which the product is ready for general release are capitalized according to the principles set forth in SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed." 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-product basis. 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. In 2003, we recorded an impairment charge of $1.5 million with respect to a product that is no longer being sold. 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 20 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. 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 21 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. 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 Total cost of revenues.......... 43 37 50 Gross profit............................ 57 63 50 Research and development, net........ 9 8 21 Selling and marketing................ 36 31 72 General and administrative........... 16 11 25 Restructuring and other non-recurring charges.............. 6 10 8 Impairment of software development costs.............................. 9 - 16 Total operating expenses............... 76 60 142 Operating profit (loss)................ (19) 3 (92) Financial income, net.................. 1 0 0 22 Taxes on income........................ 0 1 2 Profit (loss) from continuing operations, net of taxes.......... (18) 2 (94) Earnings from discontinued operations of a segment, net of taxes............................. - - 1 Gain (loss) on disposal of segment..... - - 1 ------- ------- ---- Net profit (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. We expect that our license revenue will increase in 2004 based on our current license pipeline and that our revenues from maintenance, support and professional services will remain at the same level in 2004. Cost of Revenues. Cost of license revenues consists primarily of production costs including media, packaging, freight and documentation, amortization 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 11% to $7.1 million in 2003 from $6.4 million in 2002 primarily due to the increase in royalties to the Chief Scientist and increase in cost of services in our European operations resulting from local currency changes against the dollar. We anticipate that our cost of revenues as a percentage of sales will remain the same in 2004. Gross Profit. Our gross profit decreased 13.9% to $9.5 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 due to an increase in marketing and business development investments. We expect that our selling and marketing expenses will increase in 2004 as a result 23 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, hiring a new CFO and to an increase in the compensation of our Chairman and CEO. We do not believe that our general and administrative expenses will increase significantly in 2004. Restructuring and Other Non-Recurring Charges. We recorded non-recurring charges of $0.4 million and $0.8 million relating to legal dispute with the Special Situations Funds in 2003 and 2002 respectively and $0.6 million and $0.3 million relating to legal dispute with the landlord of our former offices in Massachusetts in 2003 and 2002 respectively. Both disputes were resolved in early 2004 without additional costs. In 2002 we had $0.6 million of charges relating to severance payments and other expenses. Impairment of Software Development Costs. In 2003, we recorded $1.5 million asset impairment charge with respect to our capitalized software costs of a product we no longer sell. 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 revenues from software licenses, which increased to $6.9 million in 2002 from $6.3 million in 2001. Cost of Revenues. Cost of revenues decreased 24.6% to $6.3 million in 2002 from $8.5 million in 2001 primarily due to the decrease in amortization of capitalized software development costs and salary expenses. Gross Profit. Gross profit increased 31.6% to $11.1 million in 2002 from $8.4 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 24 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. 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. Restructuring and Other Non-Recurring Charges. We recorded non-recurring 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 and $0.6 million relating to severance payments and other expenses in 2002, compared with restructuring charges of $1.3 million relating to severance payments, write-off of leasehold improvements and other related expenses in 2001. Impairment of Software Development Costs and Other. We recorded a $2.4 million asset impairment charge with respect to our capitalized software development costs and $0.3 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 $201,000 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 25 interruption or curtailment of trade between Israel and its present trading partners, and a significant downturn in the economic or financial condition of Israel. 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 26 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 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 27 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 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 Israeli inflation Year ended Israeli Israeli devaluation adjusted for 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)
28
Israeli Israeli inflation Year ended Israeli Israeli devaluation adjusted for December 31, price index inflation rate % rate % devaluation % ------------ ----------- ---------------- ------ ------------- 2003 432.34 (1.9) (7.6) 6.1
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. 29 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. 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 30 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. 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 FINFORMATION 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 31 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 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 32 Name Age Position with the Company - ---- --- ------------------------- Dov Biran ................... 51 Director Dan Falk..................... 59 Director* Roni Ferber.................. 61 Outside Director* Anat Segal................... 37 Outside Director* Ron Zuckerman................ 47 Director - -------------------------- *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 33 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 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 University 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. FromOctober 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 34 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. 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." 35 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
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 36 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 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 37 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 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. 38 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. 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. 39 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 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- 40 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. 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. 41 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. 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. 42 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. 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 Beneficially Owned Ordinary Shares (1) (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) * 43 Roni Ferber...................... 31,666 (7,9) * Anat Segal....................... 3,333 (7) * Ron Zuckerman.................... 1,367,845 (3,4,5,6) 8.5% - ---------------- * 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. 44 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 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. 45 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 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, 46 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 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% - -------------
47 (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 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 48 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." 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- 49 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 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. 50 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 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 51 2001.................................. $5.50 $0.75 2002.................................. $2.12 $0.50 2003.................................. $2.22 $0.80 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. 52 D. SELLING SHAREHOLDERS Not applicable. E. DILUTION 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: 53 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 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. 54 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." 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 55 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 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 56 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, 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 57 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: o 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 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; o 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; o 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 o 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 58 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. 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: The Company Tax For a company with foreign investment of.... 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. 59 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 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 60 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 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: 61 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. 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, 62 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. 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 63 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. 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; 64 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; 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. 65 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 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. 66 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. 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 67 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: 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. 68 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 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, 69 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 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. 70 ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES ------------------------------------------------------ Not applicable. PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES ----------------------------------------------- None. 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 71 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. 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. 72 ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE --------------------------------------------------------------------- Not applicable. 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 (1) 73 4.7 1992 Employee Stock Option Plan (1) 4.8 1994 Employee Stock Option Plan 4.9 1998 Employee Stock Option Plan 4.10 2003 Israeli Stock Option Plan 4.11 Note and Warrant Purchase Agreement dated March 22, 2004 among the Registrant and the purchasers listed on Exhibit A thereto, and ancillary documents (3) 4.12 Employment and Services Agreement among the Registrant and Mr. Gonen, effective as of January 1, 2004 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 4.14 Form of Warrant issued to Gaus Investments Ltd. and R.4.B Ltd. 8 List of Subsidiaries of the Registrant 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 an exhibit to the Registrant's Registration Statement on Form F-1, registration number 33-54020, and incorporated herein by reference. (2) Filed as an exhibit 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 an exhibit to the Registrant's Report of Foreign Private Issuer on Form 6-K submitted to the Securities and Exchange Commission on March 25, 204, and incorporated herein by reference. 74 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 ------------ ------------ ----------- 7,079 6,375 8,451 ------------ ------------ ----------- Gross profit 9,538 11,080 8,418 ------------ ------------ ----------- 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 Restructuring and other non-recurring charges (Note 16b) 925 1,708 1,326 Impairment of investment and other assets (Note 16c) 1,543 - 2,658 ------------ ------------ ----------- Total operating expenses 12,646 10,453 23,915 ----- ------------ ------------ ----------- 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) ============ ============ ===========
*) Reclassified. 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 investment and 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 exceeds 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 of capitalized software costs, which were included in "Impairment of investment and other assets". 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"). SOP No. 97-2, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair value of the elements. The Company has also 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"). SOP No. 98-9 requires that revenue be recognized under the "residual method" when Vendor Specific Objective Evidence ("VSOE") of fair value exists for all undelivered elements and no VSOE exists for the delivered elements and all other four criteria of SOP No. 97-2 are met. Under the residual method any discount in the arrangement is allocated to the delivered element. The Company and its subsidiaries have also adopted Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition" ("SAB No. 104"). Revenue from license fees is recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, no significant obligations with regard to implementation remain, the fee is fixed or determinable and collectibility is probable. The Company generally does not grant a right of return to its customers. The Company considers all arrangements with payment terms extending beyond one year 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. 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. Arrangements that include consulting and training services are evaluated to determine whether those services are essential to the functionality of other elements of the arrangement. To date, the Company had determined that the services are not considered essential to the functionality of other elements of the arrangement, therefore, these 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-13 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-14 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. Pro 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-15 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-16 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: Basic net 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-17 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-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.) 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-19 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-20 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-21 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-22 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 in restructuring and other non-recurring charges 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-23 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-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 (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-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.) 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-26 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-27 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-28 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-29 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-30 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-31 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, 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-32 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. Restructuring and other non-recurring charges: Restructuring charges (1) $ - $ - $ 1,326 SSF lawsuit (2) 365 810 - Burlington lease lawsuit (3) 560 290 - Employment termination benefits (4) - 467 - Others - 141 - ------------ ------------ ----------- $ 925 $ 1,708 $ 1,326 ============ ============ ===========
(1) 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". (2) See Note 11c. (3) 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 and be released from the lease agreement. F-33 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.
c. Impairment of investment and other assets: Year ended December 31, ----------------------------------------- 2003 2002 2001 ------------ ------------ ----------- Impairment of capitalized software costs $ 1,543 $ - $ 2,386 Impairment of assembled workforce - - 272 ------------ ------------ ----------- $ 1,543 $ - $ 2,658 ============ ============ =========== 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 (UNAUDITED) 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:\W2000\2235\M\03\E$12.DOC F-34 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 and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. ATTUNITY LTD. By: /s/Arie Gonen ------------- Arie Gonen Chief Executive Officer Dated: June 30, 2004 75 EX-4.8 2 ex4_8.txt 1994 STOCK OPTION PLAN Exhibit 4.8 ISG INTERNATIONAL SOFTWARE GROUP LTD. 1994 STOCK OPTION PLAN 1. Purpose of Plan. The 1994 Stock Option Plan (the "Plan") is intended as an incentive to retain, on the Board of Directors and in the employ of ISG International Software Group Ltd. (the "Company") and its subsidiaries, persons of training, experience, and ability, to attract new directors, consultants and employees whose services are considered unusually valuable, to encourage the sense of proprietorship of such persons, and to stimulate the active interest of such persons in the development and financial success of the Company. Stock options ("Options") granted under the Plan may contain such terms as will qualify the options as incentive stock options ("ISOs") within the meaning of Section 422(b) of the United States Internal Revenue Code of 1986, as amended (the "Code"). 2. Administration of Plan. The Board of Directors (the "Board") or a Stock Option Committee (the "Committee") appointed and maintained by the Board shall have the power to administer the Plan. The Committee shall consist of at least two members who shall serve at the pleasure of the Board, and any member of such Committee shall be eligible to receive Options under the Plan while serving on the Committee, unless otherwise specified herein. The Board or the Committee shall have full power and authority: (i) to designate participants; (ii) to designate Options or any portion thereof as ISOs; (iii) to determine the terms and provisions of respective option agreements (which need not be identical) including, but not limited to, provisions concerning the time or times when and the extent to which the Options may be exercised and the nature and duration of restrictions as to transferability or restrictions constituting substantial risk of forfeiture; (iv) to accelerate the right of an optionee to exercise in whole or in part any previously granted ISO; and (v) to interpret the provisions and supervise the administration of the Plan. The Board or the Committee shall have the authority to grant in its discretion to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price lower than provided in the Option so surrendered and canceled and containing such other terms and conditions as the Board or the Committee may prescribe in accordance with the provisions of the Plan. All decisions and selections made by the Board or the Committee pursuant to the provisions of the Plan shall be made by a majority of its members except that no member of the Board or Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or Committee relating to any Option to be granted to that member. Any decision reduced to writing and signed by a majority of the members who are authorized to make such decision shall be fully effective as if it had been made by a majority at a meeting duly held. Each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him or liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the Plan unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the members may have as directors or otherwise under the memorandum of association of the Company, any agreement, any vote of stockholders or disinterested 2 directors, or otherwise. 3. Designation of Participants. The persons eligible for participation in the Plan as recipients of Options shall include only employees of, or consultants to, the Company or of any subsidiary of the Company. Directors of the Company who are not employees of the Company shall also be eligible for participation in the Plan as recipients of Options (but not ISOs). A person who has been granted an Option hereunder may be granted additional Options, if the Board or the Committee shall so determine. 4. Stock Reserved for Plan. Subject to adjustment as provided in paragraph 6 hereof, a total of 500,000 Ordinary Shares, NIS 0.1 par value, of the Company ("Stock") shall be subject to the Plan. The shares subject to the Plan shall consist of unissued shares, and such number of shares shall be, and hereby is, reserved for sale for such purpose. Any of such shares which may remain unsold and which are not subject to outstanding options at the termination of the Plan shall cease to be reserved for the purpose of the Plan, but until termination of the Plan the Company shall at all times reserve a sufficient number of shares to meet the requirements of the Plan. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the shares theretofore subject to such Option may again be subjected to an Option under the Plan. 5. Option Price. (a) The purchase price of each share subject to an ISO shall not be less than 100% (or 110%, if at the time of grant the optionee owns more than 10% of the voting stock of the Company) of the Fair Market Value of such share (as defined in paragraph (b)) on the date the ISO is granted. The purchase price of each share subject to an Option or any portion thereof which is not designated as an ISO shall not be less than 75% of the Fair Market Value of such share on the date the Option is granted and in no 3 event shall the purchase price be less than the par value of the Stock. (b) The Fair Market Value of a share on a particular date shall be the mean between the highest and lowest quoted selling prices on such date (the valuation date) on the securities market where the Stock is principally traded. If there were no sales on the valuation date, but there were sales within a reasonable period both before or after that date, the Fair Market Value shall be determined by taking a weighted average of the mean between the highest and lowest selling prices on the nearest date before and the nearest date after the valuation date. This average must be weighted inversely by the respective numbers of trading days between the selling dates and the valuation date. If the fair market value cannot be determined under the preceding three sentences, it shall be determined in good faith by the Board or the Committee. (c) The option price shall be payable upon the exercise of the Option in cash, by check, or other form satisfactory to the Board or the Committee. (d) The proceeds of the sale of the Stock subject to an Option are to be added to the general funds of the Company and used for its corporate purposes. 6. Adjustments. (a) If the Company is separated or reorganized, or merged, consolidated or amalgamated with or into another corporation while unexercised Options remain outstanding under the Plan, there shall be substituted for the shares subject to the unexercised portions of such outstanding Options an appropriate number of shares of each class of stock or other securities of the separated or reorganized, or merged, consolidated or amalgamated corporation which were distributed to the shareholders of the Company in respect of such shares; provided, however, that all such Options may be exercised in full by the optionees as of the effective date of any such separation, reorganization, merger, 4 consolidation or amalgamation, by the optionees' giving notice in writing to the Company of their intention to so exercise. (b) If the Company is liquidated or dissolved while unexercised Options remain outstanding under the Plan, then all such outstanding Options may be exercised in full by the optionees as of the effective date of any such liquidation or dissolution of the Company, without regard to any vesting requirement imposed pursuant to the provisions of paragraph 7(a), by the optionees' giving notice in writing to the Company of their intention to so exercise. (c) If the outstanding shares of Stock shall at any time be changed or exchanged by declaration of a stock dividend, stock split, combination or exchange of shares, recapitalization, extraordinary dividend payable in stock of a corporation other than the Company, or otherwise in cash, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of shares subject to this Plan or subject to any Options theretofore granted, and the option prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of shares without changing the aggregate option price; provided, however, that no adjustment shall be made by reason of the distribution of subscription rights on outstanding stock. 7. Term and Exercise of Options. (a) Each Option granted under this Plan shall be exercisable on the date and for the number of shares as shall be provided in the option agreement evidencing the Option and setting forth the terms thereof. Such option agreement may provide that the optionee must complete a minimum number of years of service with the Company prior to exercising in whole or in part any previously granted Option. However, (i) no Option shall be exercisable after the expiration of ten years from 5 the date of grant, and (ii) no ISO granted to a person who at the time of grant owns more than 10% of the voting stock of the Company may be exercisable after the expiration of five years from the date of grant. (b) Options granted under the Plan shall not be transferable by optionees other than by will or the laws of descent and distribution, and during an optionee's lifetime shall be exercisable only by that optionee. (c) Options may not be exercised after the termination of employment and/or service as a director unless (i) prior to the date of such termination, the Board or the Committee shall authorize, in the relevant option agreement or otherwise, an extension of the term of all or part of the Option beyond the date of such termination for a period not to exceed the period during which the Option by its terms would otherwise have been exercisable, (ii) termination is without cause, in which event any Options still in force and unexpired may be exercised within a period of 90 days from the date of such termination, but only with respect to the number of shares purchasable at the time of such termination, (iii) termination is the result of death or disability, in which event any Options still in force and unexpired may be exercised within a period of six (6) months from the date of termination, but only with respect to the number of shares purchasable at the time of such termination, or (iv) termination of employment is the result of retirement under any deferred compensation agreement or retirement plan of the Company or of any subsidiary of the Company, while Options granted hereunder are still in force and unexpired, in which case the Board or Committee shall have the discretion to permit any unmatured installments of the Options to be accelerated as of the later of the date of retirement or a date one year following the date of grant, and the Options shall thereupon be exercisable 6 in full. (d) The holders of Options shall not be or have any of the rights or privileges of shareholders of the Company in respect of any shares purchasable upon the exercise of any part of an Option unless and until, following exercise, certificates representing such shares shall have been issued by the Company to such holders. (e) Any form of option agreement authorized by the Plan may contain such other provisions as the Board or the Committee may, from time to time, deem advisable. Without limiting the foregoing, the Board or the Committee may, with the consent of the optionee, from time to time cancel all or any portion of any Option then subject to exercise, and the Company's obligation in respect of such Option may be discharged by (i) payment to the optionee of an amount in cash equal to the excess, if any, of the Fair Market Value of the shares at the date of such cancellation subject to the portion of the Option so canceled over the aggregate purchase price of such shares, (ii) the issuance or transfer to the optionee of shares of Stock with a Fair Market Value at the date of such transfer equal to any such excess, or (iii) a combination of cash and shares with a combined value equal to any such excess, all as determined by the Board or the Committee in its sole discretion. (f) Options shall be exercised by the optionee by giving written notice to the Company, which exercise shall be effective upon receipt of such notice by the Secretary of the Company at its principal office. The notice shall specify the number of shares with respect to which the Option is being exercised. 8. Maximum ISO Award. The aggregate Fair Market Value of Stock (determined as of the date of the grant of options) with respect to which ISOs are 7 exercisable for the first time by any optionee during any calendar year shall not exceed the limitation provided under Section 422(d) of the Code. 9. Purchase for Investment. Unless shares of Stock covered by the Plan have been registered under the United States Securities Act of 1933, as amended, or the Company has determined that such registration is unnecessary, each person exercising an Option under the Plan may be required by the Company to give a representation in writing that he is acquiring such shares for his own account, for investment and not with a view to, or for sale in connection with, the distribution of any part thereof. 10. Term Date of Plan. The Plan shall be effective as of October 31, 1994, and shall terminate on November 1, 2004. 11. Approval of Stockholders. The Plan shall be subject to approval by the vote of stockholders holding at least a majority of the voting stock of the Company voting in person or by proxy at a duly held stockholders' meeting, or by written consent of a majority of all the stockholders, within twelve (12) months after the adoption of the Plan by the Board and shall take effect as of the date of adoption by the Board upon such approval. The Board or the Committee may grant options under the Plan prior to such approval, but any such option shall become effective as of the date of grant only upon such approval and, accordingly, no such option may be exercisable prior to such approval. 12. Amendments or Termination. The Board may amend, alter, or discontinue the Plan, except that no amendment or alteration shall be made which would impair the rights of the holder of any Option theretofore granted without his consent, and except that no amendment or alteration shall be made which, without the approval of the shareholders, would: 8 (a) Change the class of persons eligible to participate in the Plan as provided in Section 3; (b) Decrease the option price provided in Section 5; (c) Increase the total number of shares reserved for the purposes of the Plan, except as is provided in Section 6; or (d) Extend the option period provided for in Section 7. 13. No Special Employment Rights. Nothing contained in the Plan or in any Option shall confer upon any optionee any right with respect to the continuation of his or her employment by the Company (or any subsidiary) or interfere in any way with the right of the Company (or any subsidiary), subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the optionee from the rate in existence at the time of the grant of an Option. 14. Withholding. The Company's obligation to deliver shares upon the exercise of any Option granted under the Plan shall be subject to the optionee's satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. The Company and optionee may agree to withhold shares of Stock purchased upon exercise of an Option to satisfy the above-mentioned withholding requirements. With the approval of the Board or the Committee, which shall have sole discretion to grant, and on such terms and conditions as the Board or the Committee may impose, the optionee may satisfy the foregoing condition by electing to have the Company withhold from delivery shares having a value equal to the amount of tax to be withheld. The Board or the Committee shall also have the right to require that shares be withheld from delivery to 9 satisfy such condition. 15. Government Regulations The Plan, and the granting and exercise of Options hereunder, and the obligation of the Company to sell and deliver shares or cash under such Options, shall be subject to all applicable laws, rules, and regulations, including the Code and the registration of the shares under the United States Securities Act of 1933, and to such approvals by any governmental agencies or national securities exchanges as may be required. 16. Governing Law. This Plan shall be deemed made in Israel and shall be governed by and construed and enforced in accordance with the laws of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. 10 EX-4.9 3 ex4_9.txt 1998 EMPLOYEE STOCK OPTION PLAN Exhibit 4.9 ISG INTERNATIONAL SOFTWARE GROUP LTD. 1998 STOCK OPTION PLAN 1. Purpose of the Plan. ISG International Software Group Ltd. 1998 Stock Option Plan (the "Plan") is intended to advance the interests of ISG International Software Group Ltd. (the "Company") by inducing individuals or entities of outstanding ability and potential to join and remain with, or provide consulting or advisory services to, the Company, by encouraging and enabling employees, Directors, consultants and advisors to acquire proprietary interests in the Company, and by providing those employees, Directors, consultants and advisors with an additional incentive to promote the success of the Company. This is accomplished by providing for the granting of "Options," which term, as used herein, includes both "Incentive Stock Options" and "Nonstatutory Stock Options," as later defined, to employees and "Nonstatutory Stock Options" to non-employee Directors, consultants and advisors. 2. Administration. The Plan shall be administered by the Board of Directors of the Company (the "Board"). Except as herein specifically provided, the interpretation and construction by the Board of any provision of the Plan or of any Option granted under it, shall be final and conclusive. The receipt of Options by Directors shall not preclude their vote on any matters in connection with the administration or interpretation of the Plan. 3. Shares Subject to the Plan. The stock subject to Options granted under the Plan shall be ordinary shares of the Company, par value NIS 0.1 per share (the "Ordinary Shares") authorized but unissued. The maximum number of Ordinary Shares which may be issued pursuant to Options granted under the Plan shall not exceed five hundred thousand (500,000) shares, subject to adjustment in accordance with the provisions of Section 12 hereof The Company shall at all times while the Plan is in force reserve such number of Ordinary Shares as will be sufficient to satisfy the requirements of all outstanding Options granted under the Plan. In the event any Option granted under the Plan shall expire or terminate for any reason without having been exercised in full or shall cease for any reason to be exercisable in whole or in part, the unpurchased Ordinary Shares subject thereto shall again be available for Options under the Plan. 4. Participation. The class of persons which shall be eligible to receive Options under the Plan shall be (a) with respect to Incentive Stock Options described in Section 6 hereof, all employees of either the Company or any subsidiary corporation of the Company; and (b) with respect to Nonstatutory Stock Options described in Section 7 hereof, all employees and non-employee Directors of, or consultants and advisors to, either the Company or any subsidiary corporation of the Company; provided, however, that Nonstatutory Stock Options shall not be granted to any such consultants and advisors unless (i) bona fide services have been or are to be rendered by such consultant or advisor; and (ii) such services are not in connection with the offer or sale of securities in a capital raising transaction. The Board, in its sole discretion, but subject to the provisions of the Plan, shall determine the employees and non-employee Directors of, and the consultants and advisors to, the Company and its subsidiary corporations to whom Options shall be granted (the "Optionees"), the time or times when they shall be granted, the type of Option to be granted and the number of shares to be covered by each Option, taking into account the nature of the employment or services rendered by the individuals being considered, their annual compensation, their present and potential contributions to the 2 success of the Company and such other factors as the Board may deem relevant. 5 Stock Option Agreement. Each Option granted under the Plan shall be authorized by the Board and shall be evidenced by a Stock Option Agreement which shall be executed by the Company and by the Optionee to whom such Option is granted. The Stock Option Agreement shall specify the number of Ordinary Shares as to which any Option is granted, the period during which the Option is exercisable and the option price per share thereof. All Options shall comply with and be subject to the provisions of Section 6 or 7, whichever is applicable as determined by the type of Option to be granted, as well as all other provisions of this Plan and such other terms and conditions not inconsistent with the Plan as the Board may deem desirable. 6 Incentive Stock Options. The Board may grant Options under the Plan which are intended to meet the requirements of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code") (referred to herein as an "Incentive Stock Option"), and which are subject to the following terms and conditions and any other terms and conditions as may at any time be required by Code Section 422: a. An Incentive Stock Option may be granted to any individual eligible to receive an Option under the Plan pursuant to Section 4(a) hereof. b. Each Incentive Stock Option under the Plan must be granted prior to [ , 2008]. c. The option price of the shares subject to any Incentive Stock Option shall not be less than the fair market value of the Ordinary Shares at the time such Incentive Stock Option is granted; provided, however, if an Incentive Stock Option is granted to an Optionee who owns, at the time the Incentive Stock Option is granted, more than ten 3 percent (10%) of the total combined voting power of all classes of stock of the Company or of a parent corporation or subsidiary corporation of the Company, the option price of the shares subject to the Incentive Stock Option shall be at least one hundred ten percent (110%) of the fair market value of the Ordinary Share at the time the Incentive Stock Option is granted. d. No Incentive Stock Option granted under the Plan shall be exercisable after the expiration of ten (10) years from the date of its grant. However, if an Incentive Stock Option is granted to an Optionee who owns, at the time the Incentive Stock Option is granted, more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of a parent corporation or subsidiary corporation of the Company, such Incentive Stock Option shall not be exercisable after the expiration of five (5) years from the date of its grant. Every Incentive Stock Option granted under the Plan shall be subject to earlier termination as expressly provided in Section 10 hereof. e. For purposes of determining share ownership under this Section 6, the attribution rules of Code Section 424(d) shall apply. f. For purposes of the Plan, fair market value shall be determined by the Board. If the Ordinary Shares are listed on a national securities exchange or traded on the Over-the-Counter market, fair market value shall be the closing selling price or, if not available, the mean of the closing bid and asked prices of the Ordinary Share, or, if not available, of the high bid and low asked prices of the Ordinary Share quoted on such exchange, or on the Over-the-Counter market as reported by the National Association of Securities Dealers Automated Quotation (NASDAQ) system, or if the Ordinary Shares are not listed on NASDAQ, then by the National Quotation Bureau, Incorporated, as the case 4 may be, on the day on which the Option is granted, or, if there is no trading or bid or asked price on that day, the closing selling price or the mean of the closing bid and asked prices or of the high bid and low asked prices on the nearest trading date before that day and for which such prices are available, and if the Ordinary Shares are not listed on such an exchange or traded in such a market, then the fair market value shall be determined by taking into consideration all relevant factors, including but not limited to the Company's net worth, prospective earning power and dividend paying capacity. 7. Nonstatutory Stock Options. The Board may grant Options under the Plan which are not intended to meet the requirements of Code Section 422, as well as Options which are intended to meet the requirements of Code Section 422 but the terms of which provide that they will not be treated as Incentive Stock Options (referred to herein as a "Nonstatutory Stock Option"). Nonstatutory Stock Options shall be subject to the following terms and conditions: a. A Nonstatutory Stock Option may be granted to any individual or entity eligible to receive an Option under the Plan pursuant to Section 4(b) hereof. b. The option price of the shares subject to a Nonstatutory Stock Option shall be determined by the Board, in its sole discretion, at the time of the grant of the Nonstatutory Stock Option; provided, however, that the option price of the shares subject to a Nonstatutory Stock Option granted to a person subject to Section 16(b) of the Securities Exchange Act of 1934, as amended (an "Insider"), shall not be less than the fair market value of the Ordinary Share at the time such Nonstatutory Stock Option is granted. c. A Nonstatutory Stock Option granted under the Plan may be of such duration as shall be determined by the Board (subject to earlier termination as expressly 5 provided in Section 10 hereof); provided, however, that no Nonstatutory Stock Option granted under the Plan to an Insider shall be exercisable after the expiration of ten (10) years from the date of its grant. 8. Transferability. No Incentive Stock Option granted under the Plan shall be transferable by the Optionee otherwise than by will or the laws of descent and distribution, and, during the lifetime of the Optionee shall not be exercisable by any other person. [A Nonstatutory Stock Option may be transferred (i) to one or more members of the Optionee's Immediate Family, (ii) to a trust solely for the benefit of the Optionee and/or one or more members of his or her Immediate Family, or (iii) to a partnership or limited liability company whose only partners or members are the Optionee and/or persons referred to in clauses (i) and (ii). For this purpose, members of an Optionee's "Immediate Family" shall include his or her spouse, children or grandchildren (including adopted children and grandchildren and step-children and step-grandchildren). Any such transfer shall not be effective unless and until the Optionee has furnished the Company with a written notice of the transfer and copies of all documents evidencing the transfer. Any Option or portion thereof so transferred may be exercised by the transferee to the same extent as the Optionee would have been entitled to exercise it, and shall remain subject to all of the terms and conditions that would have applied to such Option under the provisions thereof and this Plan, if the Optionee had not transferred the Option or portion thereof.] 9. Rights of Option Holders. An Option Holder shall have none of the rights of a shareholder with respect to the Ordinary Shares covered by his Option until such Ordinary Shares shall be transferred to him upon the exercise of his Option. For purposes 6 of this Plan, "Option Holder" shall mean (i) an Optionee; or (ii) with respect to any Option held by an Optionee at the date of his death, the Optionee's Beneficiary, as determined pursuant to Section 19. 10. Termination of Employment or Death. a. If the employment of an employee by, or the services of a non-employee Director for, or consultant or advisor to, the Company or a subsidiary corporation of the Company shall be terminated for cause or, subject to the terms of the Stock Option Agreement, voluntarily by the employee, non-employee Director, consultant or advisor, then his or its Option shall expire forthwith. Subject to the terms of the Stock Option Agreement, and except as provided in subsections (b) and (c) of this Section 10, if such employment or services shall terminate for any other reason, then such Option may be exercised at any time within three (3) months after such termination, subject to the provisions of subsection (d) of this Section 10. For purposes of the Plan, the retirement of an individual either pursuant to a pension or retirement plan adopted by the Company or at the normal retirement date prescribed from time to time by the Company shall be deemed to be termination of such individual's employment other than voluntarily or for cause. For purposes of this subsection (a), an employee, non-employee Director, consultant or advisor who leaves the employ or services of the Company to become an employee or a non-employee Director of, or a consultant or advisor to, a subsidiary corporation of the Company or a corporation (or subsidiary corporation or parent corporation of the corporation) which has assumed the Options of the Company as a result of a corporate reorganization, etc., shall not be considered to have terminated his employment or services. 7 b. Subject to the terms of the Stock Option Agreement, if an Optionee dies (i) while employed by, or while serving as a non-employee Director for or consultant or advisor to, the Company or a subsidiary corporation of the Company or (ii) within three (3) months after the termination of his employment or services other than voluntarily by the employee or non-employee Director, or for cause, then such Option may, subject to the provisions of subsection (d) of this Section 10, be exercised by the Optionee's Beneficiary at any time within one (1) year after such death. c. Subject to the terms of the Stock Option Agreement, if an Optionee ceases employment or services because of permanent and total disability (within the meaning of Code Section 22(e)(3)) while employed by, or while serving as a non-employee Director for or consultant or advisor to, the Company or a subsidiary corporation of the Company, then such Option may, subject to the provisions of subsection (d) of this Section 10, be exercised at any time within one (1) year after his termination of employment, termination of Directorship or termination of consulting or advisory services, as the case may be, due to the disability. d. An Option may not be exercised pursuant to this Section 10 except to the extent that the Option Holder was entitled to exercise the Option at the time of termination of employment, termination of Directorship, termination of consulting or advisory services, or death, and in any event may not be exercised after the expiration of the Option. e. For purposes of this Section 10, the employment relationship of an employee of the Company or of a subsidiary corporation of the Company will be treated as continuing intact while he is on military or sick leave or other bona fide leave of 8 absence (such as temporary employment by the Government) if such leave does not exceed ninety (90) days, or, if longer, so long as his right to reemployment is guaranteed either by statute or by contract. 11. Exercise of Options. a. Unless otherwise provided in the Stock Option Agreement, any Option granted under the Plan shall be exercisable in whole at any time, or in part from time to time, prior to expiration. The Board, in its absolute discretion, may provide in any Stock Option Agreement that the exercise of any Option granted under the Plan shall be subject: (i) to such condition or conditions as it may impose, including, but not limited to, a condition that the Optionee remain in the employ or service of, or continue to provide consulting or advisory services to, the Company or a subsidiary corporation of the Company for such period or periods from the date of grant of the Option as the Board, in its absolute discretion, shall determine; and (ii) to such limitations as it may impose, including, but not limited to, a limitation that the aggregate fair market value of the Ordinary Shares with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company and its parent corporation and subsidiary corporations) shall not exceed one hundred thousand dollars ($100,000). In addition, in the event that under any Stock Option Agreement the aggregate fair market value of the Ordinary Shares with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year (under all plans of the Company and its parent corporation and subsidiary corporations) exceeds one hundred thousand dollars ($100,000), the Board may, when shares are transferred upon exercise of such Options, designate those shares which shall be treated as transferred 9 upon exercise of an Incentive Stock Option and those shares which shall be treated as transferred upon exercise of a Nonstatutory Stock Option. b. An Option granted under the Plan shall be exercised by the delivery by the Option Holder to the Company at its principal office (attention of the Secretary) of written notice of the number of Ordinary Shares with respect to which the Option is being exercised. Such notice shall be accompanied by payment of the full option price of such shares, and payment of such option price shall be made by the Option Holder's delivery of his check payable to the order of the Company in such amount. 12. Adjustment Upon Change in Capitalization. a. In the event that the outstanding Ordinary Shares is hereafter changed by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, combination of shares, reverse split, stock dividend or the like, an appropriate adjustment shall be made by the Board in the aggregate number of shares available under the Plan, in the number of shares and option price per share subject to outstanding Options, and in any limitation on exercisability referred to in Section 11(a) (ii) hereof which is set forth in outstanding Incentive Stock Options. If the Company shall be reorganized, consolidated or merged with another corporation, an Option Holder shall be entitled to receive upon the exercise of his Option the same number and kind of shares of stock or the same amount of property, cash or securities as he would have been entitled to receive upon the happening of any such corporate event as if he had been, immediately prior to such event, the holder of the number of shares covered by his Option; provided, however, that in such event the Board shall have the discretionary power to take any action necessary or appropriate to prevent any Incentive Stock Option granted hereunder 10 from being disqualified as such under the then existing provisions of the Code or any law amendatory thereof or supplemental thereto. b. Any adjustment in the number of shares shall apply proportionately to only the unexercised portion of the Option granted hereunder. If fractions of a share would result from any such adjustment, the adjustment shall be revised to the next lower whole number of shares. 13. Further Conditions of Exercise. a. Unless prior to the exercise of the Option the shares issuable upon such exercise have been registered with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended, the notice of exercise shall be accompanied by a representation or agreement of the Option Holder to the Company to the effect that such shares are being acquired for investment and not with a view to the resale or distribution thereof, or such other documentation as may be required by the Company, unless in the opinion of counsel to the Company such representation, agreement or documentation is not necessary to comply with such Act. b. The Company shall not be obligated to deliver any Ordinary Shares until it has been listed on each securities exchange on which the Ordinary Shares may then be listed or until there has been qualification under or compliance with such federal or state laws, rules or regulations as the Company may deem applicable. The Company shall use reasonable efforts to obtain such listing, qualification and compliance. 14. Effectiveness of the Plan. The plan was adopted by the Board on [ , 1998] and approved by the shareholders of the Company on [ , 1998]. 15. Termination, Modification and Amendment. 11 a. The Plan shall terminate on [ , 2008], which is ten (10) years from the date of the earlier of its adoption by the Board or its approval by the Company's shareholders, or sooner as hereinafter provided, and no Option shall be granted after termination of the Plan. b. The Plan may from time to time be terminated, modified or amended by the affirmative vote of the holders of a majority of the outstanding Ordinary Shares of the Company present in person or by proxy at a meeting of shareholders of the Company convened for such purpose. c. The Board may at any time, on or before the termination date referred to in Section 15 (a) hereof, terminate the Plan, or from time to time make such modifications or amendments to the Plan as it may deem advisable; provided, however, that the Board shall not, without approval by the affirmative vote of the holders of a majority of the outstanding Ordinary Shares of the Company present in person or by proxy at a meeting of shareholders of the Company convened for such purpose, increase (except as provided by Section 12 hereof) the maximum number of shares as to which Options may be granted hereunder, change the designation of the employees or class of employees to receive Options, or make any other change which would prevent any Incentive Stock Option granted hereunder which is intended to be an "incentive stock option" from qualifying as such under the then existing provisions of the Code or any law amendatory thereof or supplemental thereto. d. No termination, modification or amendment of the Plan may, without the consent of the Option Holder, adversely affect the rights conferred by such Option. 16. Not a Contract of Employment. Nothing contained in the Plan or in any 12 Stock Option Agreement executed pursuant hereto shall be deemed to confer upon any Option Holder any right to remain in the employ or service of the Company or a subsidiary corporation of the Company or any entitlement to any remuneration or other benefit pursuant to any consulting or advisory arrangement. 17. Use of Proceeds. The proceeds from the sale of shares pursuant to Options granted under the Plan shall constitute general funds of the Company. 18. Taxes. The Company may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of all taxes required by law to be withheld with respect to Options granted under the Plan and the exercise thereof including, but not limited to (i) deducting the amount so required to be withheld from any other amount then or thereafter payable to an Option Holder; or (ii) requiring an Option Holder to pay to the Company the amount so required to be withheld as a condition of the issuance, delivery, distribution or release of any Ordinary Shares. 19. Designation and Change of Beneficiary. Each Optionee shall file with the Board a written designation of one or more persons (the "Beneficiary") as the individual who shall be entitled to exercise any Options, or to receive any amount payable, under the Plan upon his death. An Optionee may, from time to time, revoke or change his Beneficiary designation without the consent of any previously designated Beneficiary by filing a new designation with the Board. The last such designation received by the Board shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Board prior to the Optionee's death, and in no event shall it be effective as of a date prior to such receipt. If at the date of an Optionee's death, there is no designation of a Beneficiary in effect for the Optionee 13 pursuant to the provisions of this Section 19, or if no Beneficiary designated by the Optionee in accordance with the provisions hereof survives to exercise any Options that become exercisable, or to receive any amount that becomes payable, under the Plan by reason of the Optionee's death, the Optionee's estate shall be treated as the Optionee's Beneficiary for all purposes. 20. Payments to Persons Other Than Optionee. If the Board shall find that any Option Holder to whom any amount, or any Ordinary Shares, is payable under the Plan is unable to care for his affairs because of illness, accident or legal incapacity, then if the Board so directs, such amount, or such Ordinary Shares, may be paid to such Option Holder's spouse, child or other relative, an institution maintaining or having custody of such person, or any other person deemed by the Board to be a proper recipient on behalf of such Option Holder, unless a prior claim therefor has been made by a duly appointed legal representative of the Option Holder. Any payment made under this Section 20 shall be a complete discharge of the liability of the Company with respect to such payment. 21. Indemnification of the Board. In addition to such other rights of indemnification as they may have, the members of the Board shall be indemnified by the Company to the extent permitted under applicable law against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any rights granted hereunder and against all amounts paid by them in settlement thereof or paid by them in satisfaction of a judgment of any such action, suit or proceeding, except a judgment based upon a finding of bad faith. Upon the institution of any such action, suit or proceeding, the member or members of the Board 14 shall notify the Company in writing, giving the Company an opportunity at its own cost to defend the same before such member or members undertake to defend the same on their own behalf. 22. Definitions. For purposes of the Plan, the terms "parent corporation" and "subsidiary corporation" shall have the meaning set forth in Code Sections 424(e) and 424(f), respectively, and the masculine shall include the feminine and the neuter as the context requires. 23. Governing Law. The Plan shall be governed by, and all questions arising hereunder shall be determined in accordance with, the laws of the State of Israel. 15 EX-4.10 4 ex4_10.txt 2003 ISRAELI STOCK OPTION PLAN Exhibit 4.10 ATTUNITY LTD. THE 2003 ISRAELI SHARE OPTION PLAN (*In compliance with Amendment No. 132 of the Israeli Tax Ordinance, 2002) 1 2 TABLE OF CONTENTS 1. PURPOSE OF THE ISOP.........................................................3 2. DEFINITIONS.................................................................3 3. ADMINISTRATION OF THE ISOP..................................................6 4. DESIGNATION OF PARTICIPANTS.................................................7 5. DESIGNATION OF OPTIONS PURSUANT TO SECTION 102 .............................7 6. TRUSTEE.....................................................................8 7. SHARES RESERVED FOR THE ISOP................................................9 8. PURCHASE PRICE..............................................................9 9. ADJUSTMENTS................................................................10 10. TERM AND EXERCISE OF OPTIONS..............................................11 11. VESTING OF OPTIONS........................................................12 12. PURCHASE FOR INVESTMENT...................................................13 13. DIVIDENDS.................................................................13 14. RESTRICTIONS ON ASSIGNABILITY AND SALE OF OPTIONS.........................13 15. EFFECTIVE DATE AND DURATION OF THE ISOP...................................14 16. AMENDMENTS OR TERMINATION.................................................14 17. GOVERNMENT REGULATIONS....................................................14 18. CONTINUANCE OF EMPLOYMENT.................................................14 19. GOVERNING LAW & JURISDICTION..............................................14 20. TAX CONSEQUENCES..........................................................14 21. NON-EXCLUSIVITY OF THE ISOP...............................................15 22. MULTIPLE AGREEMENTS.......................................................15 2 3 This plan, as amended from time to time, shall be known as Attunity Ltd. 2003 Israeli Share Option Plan (the "ISOP"). 1. PURPOSE OF THE ISOP The ISOP is intended to provide an incentive to retain, in the employ of the Company and its Affiliates (as defined below), persons of training, experience, and ability, to attract new employees, directors, consultants, service providers and any other entity which the Board shall decide their services are considered valuable to the Company, to encourage the sense of proprietorship of such persons, and to stimulate the active interest of such persons in the development and financial success of the Company by providing them with opportunities to purchase shares in the Company, pursuant to the ISOP. 2. DEFINITIONS For purposes of the ISOP and related documents, including the Option Agreement, the following definitions shall apply: 2.1 "Affiliate" means any "employing company" within the meaning of Section 102(a) of the Ordinance. 2.2 "Approved 102 Option" means an Option granted pursuant to Section 102(b) of the Ordinance and held in trust by a Trustee for the benefit of the Optionee. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Capital Gain Option (CGO)" as defined in Section 5.4 below. 2.5 "Cause" means, (i) conviction of any felony involving moral turpitude or affecting the Company; (ii) any refusal to carry out a reasonable directive of the chief executive officer, the Board or the Optionee's direct supervisor, which involves the business of the Company or its Affiliates and was capable of being lawfully performed time to cure; (iii) embezzlement of funds of the Company or its Affiliates; (iv) any breach of the Optionee's fiduciary duties or duties of care of the Company; including without limitation disclosure of confidential information of the Company; and (v) any conduct (other than conduct in good faith) reasonably determined by the Board to be materially detrimental to the Company. In order to remove doubt, it is hereby clarified that in any event of conflict between the definition of the term "Cause" in this ISOP and the definition of the term "Cause" in certain employment agreement, the definition in this ISOP shall prevail in connection with the Option, with the Option Agreement and with this ISOP. 2.6 "Chairman" means the chairman of the Committee. 2.7 "Code" means the United States Internal Revenue Code of 1986, as now in effect or as hereafter amended. 3 4 2.8 "Committee" means a share option compensation committee of the Board, designated from time to time by the resolution of the Board, which shall consist of no fewer than two members of the Board. The Committee shall consist of directors who are "outside directors" as defined in Section 162(m) of the Code and "Non-Employee Directors" as defined in Rule 16b-3 promulgated by the Securities and Exchange Commission under the United States Securities Exchange Act of 1934. 2.9 "Company" means Attunity Ltd., an Israeli company. 2.10 "Companies Law" means the Israeli Companies Law 5759-1999, as now in effect or as hereafter amended. 2.11 "Controlling Shareholder" shall have the meaning ascribed to it in Section 32(9) of the Ordinance. 2.12 "Date of Grant" means, the date of grant of an Option, as determined by the Board or authorized Committee and set forth in the Optionee's Option Agreement. 2.13 Employee" means a person who is employed by the Company or its Affiliates, including an individual who is serving as a director or an office holder, but excluding Controlling Shareholder. 2.14 "Expiration date" means the date upon which an Option shall expire, as set forth in Section 10.2 of the ISOP. 2.15 "Fair Market Value" means as of any date, the value of a Share determined as follows: (i) If the Shares are listed on any established stock exchange or a national market system , including without limitation the NASDAQ National Market system, or the NASDAQ SmallCap Market of the NASDAQ Stock Market, the Fair Market Value shall be the closing sales price for such Shares (or the closing bid, if no sales were reported), as quoted on such exchange or system for the last market trading day prior to time of determination, as reported in the Wall Street Journal, or such other source as the Board deems reliable. Without derogating from the above, solely for the purpose of determining the tax liability pursuant to Section 102(b)(3) of the Ordinance, if at the Date of Grant the Company's shares are listed on any established stock exchange or a national market system or if the Company's shares will be registered for trading within ninety (90) days following the Date of Grant, the Fair Market Value of a Share at the Date of Grant shall be determined in accordance with the average value of the Company's shares on the thirty (30) trading days preceding the Date of Grant or on the thirty (30) trading days following the date of registration for trading, as the case may be; (ii) If the Shares are regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value shall be the mean between the high bid and low asked prices for the Shares on the last market trading day prior to the day of determination, or; 4 5 (iii) In the absence of an established market for the Shares, the Fair Market Value thereof shall be determined in good faith by the Board. 2.16 "ISOP" means this 2003 Israeli Share Option Plan, as may be amended from time to time. 2.17 "ITA" means the Israeli Tax Authorities. 2.18 "Non-Employee" means a consultant, adviser, service provider, Controlling Shareholder or any other person who is not an Employee. 2.19 "Ordinary Income Option (OIO)" as defined in Section 5.5 below. 2.20 "Option" means an option to purchase one or more Shares of the Company pursuant to the ISOP. 2.21 "102 Option" means any Option granted to Employees pursuant to Section 102 of the Ordinance. 2.22 "3(i) Option" means an Option granted pursuant to Section 3(i) of the Ordinance to any person who is Non- Employee. 2.23 "Optionee" means a person who receives or holds an Option under the ISOP. 2.24 "Option Agreement" means the share option agreement between the Company and an Optionee that sets out the terms and conditions of an Option. 2.25 "Ordinance" means the 1961 Israeli Income Tax Ordinance [New Version] 1961 as now in effect or as hereafter amended and regulations promulgated thereunder. 2.26 "Purchase Price" means the price for each Share subject to an Option. 2.27 "Section 102" means section 102 of the Ordinance as now in effect or as hereafter amended. 2.28 "Share" means the ordinary shares, NIS 0.1 par value each, of the Company. 2.29 "Successor Company" means any entity the Company is merged to or is acquired by, in which the Company is not the surviving entity. 2.30 "Transaction" means (i) merger, acquisition or reorganization of the Company with one or more other entities in which the Company is not the surviving entity, (ii) a sale of all or substantially all of the assets or shares of the Company not covered by paragraph (1) above. 2.31 "Trustee" means any individual appointed by the Company to serve as a trustee and approved by the ITA, all in accordance with the provisions of Section 102(a) of the Ordinance. 2.32 "Unapproved 102 Option" means an Option granted pursuant to Section 102(c) of the Ordinance and not held in trust by a Trustee for the benefit of the Optionee. 5 6 2.33 "Vested Option" means any Option, which has already been vested according to the Vesting Dates. 2.34 "Vesting Dates" means, as determined by the Board or by the Committee, the date as of which the Optionee shall be entitled to exercise the Options or part of the Options, as set forth in section 11 of the ISOP. 3. ADMINISTRATION OF THE ISOP 3.1 The Board shall have the power to administer the ISOP either directly or upon the recommendation of the Committee, all as provided by applicable law and in the Company's Articles of Association. Notwithstanding the above, the Board shall automatically have residual authority: (i) if no Committee shall be constituted or; (ii) if such Committee shall cease to operate for any reason or; (iii) with respect to the rights not delegated by the Board to the Committee. 3.2 The Committee shall select one of its members as its Chairman and shall hold its meetings at such times and places as the Chairman shall determine. The Committee shall keep records of its meetings and shall make such rules and regulations for the conduct of its business as it shall deem advisable. 3.3 The Committee shall have the power to recommend to the Board and the Board shall have the full power and authority to: (i) designate participants; (ii) determine the terms and provisions of the respective Option Agreements, including, but not limited to, the number of Options to be granted to each Optionee, the number of Shares to be covered by each Option, provisions concerning the time and the extent to which the Options may be exercised and the nature and duration of restrictions as to the transferability or restrictions constituting substantial risk of forfeiture and to cancel or suspend awards, as necessary; (iii) determine the Fair Market Value of the Shares covered by each Option; (iv) make an election as to the type of Approved 102 Option; and (v) designate the type of Options. The Committee shall have full power and authority to :(i) alter any restrictions and conditions of any Options or Shares subject to any Options (ii) interpret the provisions and supervise the administration of the ISOP; (iii) accelerate the right of an Optionee to exercise in whole or in part, any previously granted Option; (iv) determine the Purchase Price of the Option; (v) prescribe, amend and rescind rules and regulations relating to the ISOP; and (vi) make all other determinations deemed necessary or advisable for the administration of the ISOP. 3.4 Notwithstanding the above, the Committee shall not be entitled to grant Options to the Optionees, however, it will be authorized to issue Shares underlying Options which have been granted by the Board and duly exercised pursuant to the provisions herein in accordance with section 112(a)(5) of the Companies Law. 6 7 3.5 The Board shall have the authority to grant, at its discretion, to the holder of an outstanding Option, in exchange for the surrender and cancellation of such Option, a new Option having a purchase price equal to, lower than or higher than the Purchase Price of the original Option so surrendered and canceled and containing such other terms and conditions as the Committee may prescribe in accordance with the provisions of the ISOP. 3.6 Subject to the Company's Articles of Association, all decisions and selections made by the Board or the Committee pursuant to the provisions of the ISOP shall be made by a majority of its members except that, subject to the provisions of the Companies Law, no member of the Board or the Committee shall vote on, or be counted for quorum purposes, with respect to any proposed action of the Board or the Committee relating to any Option to be granted to that member. Any decision reduced to writing shall be executed in accordance with the provisions of the Company's Articles of Association, as the same may be in effect from time to time. 3.7 The interpretation and construction by the Board or the Committee of any provision of the ISOP or of any Option Agreement thereunder shall be final and conclusive unless otherwise determined by the Board. 3.8 Subject to the Company's Articles of Association and the Company's decision, and to all approvals legally required, including, but not limited to the provisions of the Companies Law, each member of the Board or the Committee shall be indemnified and held harmless by the Company against any cost or expense (including counsel fees) reasonably incurred by him, or any liability (including any sum paid in settlement of a claim with the approval of the Company) arising out of any act or omission to act in connection with the ISOP unless arising out of such member's own fraud or bad faith, to the extent permitted by applicable law. Such indemnification shall be in addition to any rights of indemnification the member may have as a director or otherwise under the Company's Articles of Association, any agreement, any vote of shareholders or disinterested directors, insurance policy or otherwise. 4. DESIGNATION OF PARTICIPANTS 4.1 The persons eligible for participation in the ISOP as Optionees shall include any Employees and/or Non-Employees of the Company or of any Affiliate; provided, however, that (i) Employees may only be granted 102 Options; (ii) Non-Employees may only be granted 3(i) Options; and (iii) Controlling Shareholders may only be granted 3(i) Options. 4.2 The grant of an Option hereunder shall neither entitle the Optionee to participate nor disqualify the Optionee from participating in, any other grant of Options pursuant to the ISOP or any other option or share plan of the Company or any of its Affiliates. 4.3 Anything in the ISOP to the contrary notwithstanding, all grants of Options to directors and office holders shall be authorized and implemented in accordance with the provisions of the Companies Law or any successor act or regulation, as in effect from time to time. 5. DESIGNATION OF OPTIONS PURSUANT TO SECTION 102 5.1 The Company may designate Options granted to Employees pursuant to Section 102 as Unapproved 102 Options or Approved 102 Options. 7 8 5.2 The grant of Approved 102 Options shall be made under this ISOP adopted by the Board as described in Section 15 below, and shall be conditioned upon the approval of this ISOP by the ITA as required by Section 102. 5.3 Subject to the provisions of Section 5.6 below, Approved 102 Option may either be classified as Capital Gain Option ("CGO") or Ordinary Income Option ("OIO"). 5.4 Approved 102 Option elected and designated by the Company to qualify under the capital gain tax treatment in accordance with the provisions of Section 102(b)(2) shall be referred to herein as CGO. 5.5 Approved 102 Option elected and designated by the Company to qualify under the ordinary income tax treatment in accordance with the provisions of Section 102(b)(1) shall be referred to herein as OIO. 5.6 The Company's election of the type of Approved 102 Options as CGO or OIO granted to Employees (the "Election"), shall be appropriately filed with the ITA before the Date of Grant of an Approved 102 Option. Such Election shall become effective beginning the first Date of Grant of an Approved 102 Option under this ISOP and shall remain in effect until the end of the year following the year during which the Company first granted Approved 102 Options. The Election shall obligate the Company to grant only the type of Approved 102 Option it has elected, and shall apply to all Optionees who were granted Approved 102 Options during the period indicated herein, all in accordance with the provisions of Section 102(g) of the Ordinance. For the avoidance of doubt, such Election shall not prevent the Company from granting Unapproved 102 Options simultaneously. 5.7 All Approved 102 Options must be held in trust by a Trustee, as described in Section 6 below. 5.8 For the avoidance of doubt, the designation of Unapproved 102 Options and Approved 102 Options shall be subject to the terms and conditions set forth in Section 102 of the Ordinance and the regulations promulgated thereunder. 5.9 With regards to Approved 102 Options, the provisions of the ISOP and/or the Option Agreement shall be subject to the provisions of Section 102 and the Tax Assessing Officer's permit, and the said provisions and permit shall be deemed an integral part of the ISOP and of the Option Agreement. Any provision of Section 102 and/or the said permit which is necessary in order to receive and/or to keep any tax benefit pursuant to Section 102, which is not expressly specified in the ISOP or the Option Agreement, shall be considered binding upon the Company and the Optionees. 8 9 6. TRUSTEE 6.1 Approved 102 Options which shall be granted under the ISOP and/or any Shares allocated or issued upon exercise of such Approved 102 Options and/or other shares received subsequently following any realization of rights, including without limitation bonus shares, shall be allocated or issued to the Trustee and held for the benefit of the Optionees for such period of time as required by Section 102 or any regulations, rules or orders or procedures promulgated thereunder (the "Holding Period"). In the case the requirements for Approved 102 Options are not met, then the Approved 102 Options may be treated as Unapproved 102 Options, all in accordance with the provisions of Section 102 and regulations promulgated thereunder. 6.2 Notwithstanding anything to the contrary, the Trustee shall not release any Shares allocated or issued upon exercise of Approved 102 Options prior to the full payment of the Optionee's tax liabilities arising from Approved 102 Options which were granted to him and/or any Shares allocated or issued upon exercise of such Options. 6.3 With respect to any Approved 102 Option, subject to the provisions of Section 102 and any rules or regulation or orders or procedures promulgated thereunder, an Optionee shall not sell or release from trust any Share received upon the exercise of an Approved 102 Option and/or any share received subsequently following any realization of rights, including without limitation, bonus shares, until the lapse of the Holding Period required under Section 102 of the Ordinance. Notwithstanding the above, if any such sale or release occurs during the Holding Period, the sanctions under Section 102 of the Ordinance and under any rules or regulation or orders or procedures promulgated thereunder shall apply to and shall be borne by such Optionee. 6.4 Upon receipt of Approved 102 Option, the Optionee will sign an undertaking to release the Trustee from any liability in respect of any action or decision duly taken and bona fide executed in relation with the ISOP, or any Approved 102 Option or Share granted to him thereunder. 7. SHARES RESERVED FOR THE ISOP; RESTRICTION THEREON 7.1 The Company has reserved 1,500,000 (one million five hundred) authorized but unissued Shares, for the purposes of the ISOP, the 2001 Employee Stock Option Plan, and for the purposes of any other share option plans which may be adopted by the Company in the future, subject to adjustment as set forth in Section 9 below. Any Shares which remain unissued and which are not subject to the outstanding Options at the termination of the ISOP shall cease to be reserved for the purpose of the ISOP, but until termination of the ISOP the Company shall at all times reserve sufficient number of Shares to meet the requirements of the ISOP. Should any Option for any reason expire or be canceled prior to its exercise or relinquishment in full, the Shares subject to such Option may again be subjected to an Option under the ISOP or under the Company's other share option plans. 9 10 7.2 Each Option granted pursuant to the ISOP, shall be evidenced by a written Option Agreement between the Company and the Optionee, in such form as the Board or the Committee shall from time to time approve. Each Option Agreement shall state, among other matters, the number of Shares to which the Option relates, the type of Option granted thereunder (whether a CGO, OIO, Unapproved 102 Option or a 3(i) Option), the Vesting Dates, the Purchase Price per share, the Expiration Date and such other terms and conditions as the Committee or the Board in its discretion may prescribe, provided that they are consistent with this ISOP. Unless otherwise explicitly expressed in the Option Agreement or in this Plan, in any event of conflict between the provisions of this ISOP and the provisions of the Option Agreement, the provisions of this Option Agreement shall prevail. 8. PURCHASE PRICE 8.1 The Purchase Price of each Share subject to an Option shall be determined by the Committee in its sole and absolute discretion in accordance with applicable law, subject to any guidelines as may be determined by the Board from time to time. Each Option Agreement will contain the Purchase Price determined for each Optionee. 8.2 The Purchase Price shall be payable upon the exercise of the Option in a form satisfactory to the Committee, including without limitation, by cash or check. The Committee shall have the authority to postpone the date of payment on such terms as it may determine. 8.3 The Purchase Price shall be denominated in the currency of the primary economic environment of, either the Company or the Optionee (that is the functional currency of the Company or the currency in which the Optionee is paid) as determined by the Company. 9. ADJUSTMENTS Upon the occurrence of any of the following described events, Optionee's rights to purchase Shares under the ISOP shall be adjusted as hereafter provided: 9.1 In the event of Transaction, the unexercised Options then outstanding under the ISOP shall be assumed or substituted for an appropriate number of shares of each class of shares or other securities of the Successor Company (or a parent or subsidiary of the Successor Company) as were distributed to the shareholders of Ordinary Shares of the Company in connection and with respect to the Transaction. In the case of such assumption and/or substitution of Options, appropriate adjustments shall be made to the Purchase Price so as to reflect such action and all other terms and conditions of the Option Agreements shall remain unchanged, including but not limited to the vesting schedule, all subject to the determination of the Committee or the Board, which determination shall be in their sole discretion and final. The Company shall notify the Optionee of the Transaction in such form and method as it deems applicable at least ten (10) days prior to the effective date of such Transaction. 9.2 Notwithstanding the above and subject to any applicable law, the Board or the Committee shall have full power and authority to determine that in certain Option Agreements there shall be a clause instructing that, if in any such Transaction as described in section 9.1 above, the Successor Company (or parent or subsidiary of the Successor Company) does not agree to 10 11 assume or substitute for the Options, the Vesting Dates shall be accelerated so that any unvested Option or any portion thereof shall be immediately vested as of the date which is ten (10) days prior to the effective date of the Transaction and any Options not exercised by ten (10) days prior to the effective date of the Transaction shall be null and void and no consideration whatsoever shall be paid to the Optionees in connection with such Options. 9.3 For the purposes of section 9.1 above, an Option shall be considered assumed or substituted if, following the Transaction, the Option confers the right to purchase or receive, for each Share underlying an Option immediately prior to the Transaction, the consideration (whether shares, options, cash, or other securities or property) received in the Transaction by holders of Ordinary Shares held on the effective date of the Transaction (and if such holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares); provided, however, that if such consideration received in the Transaction is not solely ordinary shares (or their equivalent) of the Successor Company or its parent or subsidiary, the Committee may, with the consent of the Successor Company, provide for the consideration to be received upon the exercise of the Option to be solely ordinary shares (or their equivalent) of the Successor Company or its parent or subsidiary equal in Fair Market Value to the per Share consideration received by holders of a majority of the outstanding shares in the Transaction; and provided further that the Committee may determine, in its discretion, that in lieu of such assumption or substitution of Options for options of the Successor Company or its parent or subsidiary, such Options will be substituted for any other type of asset or property including cash which is fair under the circumstances. 9.4 If the Company is voluntarily liquidated or dissolved while unexercised Options remain outstanding under the ISOP, the Company shall immediately notify all unexercised Option holders of such liquidation, and the Option holders shall then have ten (10) days to exercise any unexercised Vested Option held by them at that time, in accordance with the exercise procedure set forth herein. Upon the expiration of such ten-days period, all remaining outstanding Options will terminate immediately. 9.5 If the outstanding shares of the Company shall at any time be changed or exchanged by declaration of a share dividend (bonus shares), share split, combination or exchange of shares, recapitalization, or any other like event by or of the Company, and as often as the same shall occur, then the number, class and kind of the Shares subject to the ISOP or subject to any Options therefore granted, and the Purchase Prices, shall be appropriately and equitably adjusted so as to maintain the proportionate number of Shares without changing the aggregate Purchase Price, provided, however, that no adjustment shall be made by reason of the distribution of subscription rights (rights offering) on outstanding shares. Upon happening of any of the foregoing, the class and aggregate number of Shares issuable pursuant to the ISOP (as set forth in Section 7 hereof), in respect of which Options have not yet been exercised, shall be appropriately adjusted, all as will be determined by the Board whose determination shall be final. 10. TERM AND EXERCISE OF OPTIONS 10.1 Options shall be exercised by the Optionee by giving written notice to the Company and/or to any third party designated by the Company (the "Representative"), in such form and method as 11 12 may be determined by the Company and when applicable, by the Trustee in accordance with the requirements of Section 102, which exercise shall be effective upon receipt of such notice by the Company and/or the Representative and the payment of the Purchase Price at the Company's or the Representative's principal office. The notice shall specify the number of Shares with respect to which the Option is being exercised. 10.2 Options, to the extent not previously exercised, shall terminate forthwith upon the earlier of: (i) the date set forth in the Option Agreement; and (ii) the expiration of any extended period in any of the events set forth in section 10.5 below. 10.3 The Options may be exercised by the Optionee in whole at any time or in part from time to time, to the extent that the Options become vested and exercisable, prior to the Expiration Date, and provided that, subject to the provisions of section 10.5 below, the Optionee is employed by or providing services to the Company or any of its Affiliates, at all times during the period beginning with the granting of the Option and ending upon the date of exercise. 10.4 Subject to the provisions of section 10.5 below, in the event of termination of Optionee's employment or services, with the Company or any of its Affiliates, all Options granted to such Optionee will immediately expire. A notice of termination of employment or service shall be deemed to constitute termination of employment or service. For the avoidance of doubt, in case of such termination of employment or service, the unvested portion of the Optionee's Option shall not vest and shall not become exercisable. 10.5 Notwithstanding anything to the contrary hereinabove and unless otherwise determined in the Optionee's Option Agreement, an Option may be exercised after the date of termination of Optionee's employment or service with the Company or any Affiliates during an additional period of time beyond the date of such termination, but only with respect to the number of Vested Options at the time of such termination according to the Vesting Dates, if: (i) termination is without Cause, in which event any Vested Option still in force and unexpired may be exercised within a period of ninety (90) days after the date of such termination; or- (ii) termination is the result of death or disability of the Optionee, in which event any Vested Option still in force and unexpired may be exercised within a period of twelve (12) months after the date of such termination; or - (iii)prior to the date of such termination, the Committee shall authorize an extension of the terms of all or part of the Vested Options beyond the date of such termination for a period not to exceed the period during which the Options by their terms would otherwise have been exercisable. For avoidance of any doubt, if termination of employment or service is for Cause, any outstanding unexercised Option (whether vested or non-vested), will immediately expire and terminate, and the Optionee shall not have any right in connection to such outstanding Options. 10.6 To avoid doubt, the Optionees shall not have any of the rights or privileges of shareholders of 12 13 the Company in respect of any Shares purchasable upon the exercise of any Option, nor shall they be deemed to be a class of shareholders or creditors of the Company for purpose of the operation of sections 350 and 351 of the Companies Law or any successor to such section, until registration of the Optionee as holder of such Shares in the Company's register of shareholders upon exercise of the Option in accordance with the provisions of the ISOP, but in case of Options and Shares held by the Trustee, subject to the provisions of Section 6 of the ISOP. 10.7 Any form of Option Agreement authorized by the ISOP may contain such other provisions as the Committee may, from time to time, deem advisable. 10.8 With respect to Unapproved 102 Option, if the Optionee ceases to be employed by the Company or any Affiliate, the Optionee shall extend to the Company and/or its Affiliate a security or guarantee for the payment of tax due at the time of sale of Shares, all in accordance with the provisions of Section 102 and the rules, regulation or orders promulgated thereunder. 11. VESTING OF OPTIONS 11.1 Subject to the provisions of the ISOP, each Option shall vest following the Vesting Dates and for the number of Shares as shall be provided in the Option Agreement. However, subject to the provisions of Section 10.5 above, no Option shall be exercisable after the Expiration Date. 11.2 An Option may be subject to such other terms and conditions on the time or times when it may be exercised, as the Committee may deem appropriate. The vesting provisions of individual Options may vary. 12. PURCHASE FOR INVESTMENT The Company's obligation to issue or allocate Shares upon exercise of an Option granted under the ISOP is expressly conditioned upon: (a) the Company's completion of any registration or other qualifications of such Shares under all applicable laws, rules and regulations or (b) representations and undertakings by the Optionee (or his legal representative, heir or legatee, in the event of the Optionee's death) to assure that the sale of the Shares complies with any registration exemption requirements which the Company in its sole discretion shall deem necessary or advisable. Such required representations and undertakings may include representations and agreements that such Optionee (or his legal representative, heir, or legatee): (a) is purchasing such Shares for investment and not with any present intention of selling or otherwise disposing thereof; and (b) agrees to have placed upon the face and reverse of any certificates evidencing such Shares a legend setting forth (i) any representations and undertakings which such Optionee has given to the Company or a reference thereto and (ii) that, prior to effecting any sale or other disposition of any such Shares, the Optionee must furnish to the Company an opinion of counsel, satisfactory to the Company, that such sale or disposition will not violate the applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the Optionee. 13 14 13. DIVIDENDS With respect to all Shares (but excluding, for avoidance of any doubt, any unexercised Options) allocated or issued upon the exercise of Options purchased by the Optionee and held by the Optionee or by the Trustee, as the case may be, the Optionee shall be entitled to receive dividends in accordance with the quantity of such Shares, subject to the provisions of the Company's Articles of Association (and all amendments thereto) and subject to any applicable taxation on distribution of dividends, and when applicable subject to the provisions of Section 102 and the rules, regulations or orders promulgated thereunder. 14. RESTRICTIONS ON ASSIGNABILITY AND SALE OF OPTIONS 14.1 No Option or any right with respect thereto, purchasable hereunder, whether fully paid or not, shall be assignable, transferable or given as collateral or any right with respect to it given to any third party whatsoever, except as specifically allowed under the ISOP, and during the lifetime of the Optionee each and all of such Optionee's rights to purchase Shares hereunder shall be exercisable only by the Optionee. Any such action made directly or indirectly, for an immediate validation or for a future one, shall be void. 14.2 As long as Options and/or Shares are held by the Trustee on behalf of the Optionee, all rights of the Optionee over the Shares are personal, can not be transferred, assigned, pledged or mortgaged, other than by will or pursuant to the laws of descent and distribution. 15. EFFECTIVE DATE AND DURATION OF THE ISOP The ISOP shall be effective as of the day it was adopted by the Board and shall terminate at the end of ten (10) years from such day of adoption. 16. AMENDMENTS OR TERMINATION The Board may at any time, but when applicable, after consultation with the Trustee, amend, alter, suspend or terminate the ISOP. No amendment, alteration, suspension or termination of the ISOP shall impair the rights of any Optionee, unless mutually agreed otherwise between the Optionee and the Company, which agreement must be in writing and signed by the Optionee and the Company. Termination of the ISOP shall not affect the Committee's ability to exercise the powers granted to it hereunder with respect to Options granted under the ISOP prior to the date of such termination. 14 15 17. GOVERNMENT REGULATIONS The ISOP, and the granting and exercise of Options hereunder, and the obligation of the Company to sell and deliver Shares under such Options, shall be subject to all applicable laws, rules, and regulations, whether of the State of Israel or of the United States or any other State having jurisdiction over the Company and the Optionee, including the registration of the Shares under the United States Securities Act of 1933, and the Ordinance and to such approvals by any governmental agencies or national securities exchanges as may be required. Nothing herein shall be deemed to require the Company to register the Shares under the securities laws of any jurisdiction. 18. CONTINUANCE OF EMPLOYMENT OR HIRED SERVICES Neither the ISOP nor the Option Agreement with the Optionee shall impose any obligation on the Company or an Affiliate thereof, to continue any Optionee in its employ or service, and nothing in the ISOP or in any Option granted pursuant thereto shall confer upon any Optionee any right to continue in the employ or service of the Company or an Affiliate thereof or restrict the right of the Company or an Affiliate thereof to terminate such employment or service at any time. 19. GOVERNING LAW & JURISDICTION The ISOP shall be governed by and construed and enforced in accordance with the laws of the State of Israel applicable to contracts made and to be performed therein, without giving effect to the principles of conflict of laws. The competent courts of Tel-Aviv, Israel shall have sole jurisdiction in any matters pertaining to the ISOP. 20. TAX CONSEQUENCES 20.1 Any tax consequences arising from the grant or exercise of any Option, from the payment for Shares covered thereby or from any other event or act (of the Company and/or its Affiliates, the Trustee or the Optionee), hereunder, shall be borne solely by the Optionee. The Company and/or its Affiliates and/or the Trustee shall withhold taxes according to the requirements under the applicable laws, rules, and regulations, including withholding taxes at source. Furthermore, the Optionee shall agree to indemnify the Company and/or its Affiliates and/or the Trustee and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Optionee. 20.2 The Company and/or, when applicable, the Trustee shall not be required to release any Share certificate to an Optionee until all required payments have been fully made. 21. NON-EXCLUSIVITY OF THE ISOP The adoption of the ISOP by the Board shall not be construed as amending, modifying or rescinding any previously approved incentive arrangements or as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including, without limitation, the granting of Options otherwise than under the ISOP, and such arrangements may be either applicable generally or only in specific cases. 15 16 For the avoidance of doubt, prior grant of options to Optionees of the Company under their employment agreements, and not in the framework of any previous option plan, shall not be deemed an approved incentive arrangement for the purpose of this Section. 22. MULTIPLE AGREEMENTS The terms of each Option may differ from other Options granted under the ISOP at the same time, or at any other time. The Board may also grant more than one Option to a given Optionee during the term of the ISOP, either in addition to, or in substitution for, one or more Options previously granted to that Optionee. * * * 16 EX-4.12 5 ex4_12.txt A. GONEN EMPLOYMENT AGREEMENT Exhibit 4.12 Employment and Services Agreement --------------------------------- Duly made and executed in Haifa, Israel as of the ___ of March 2004 by and between Attunity Ltd. Company no. 520038019 of Einstein Building, Tirat Carmel 39101, Israel (Hereinafter "ATTUNITY") OF THE FIRST PART ----------------- And Arie Gonen I.D. NO. 00168950/4 2 Pinhas Lavon St. Haifa, Israel (Hereinafter "GONEN") OF THE SECOND PART ------------------ WHEREAS GONEN has acted as CEO and Chairman of the Board of ATTUNITY from October 1, 1987 until November 22, 2000 and has acted as Active Chairman since November 22, 2000 until September 1, 2002 and since September 1, 2002 has acted as Chairman and Interim CEO until the date hereof; and WHEREAS ATTUNITY wishes to appoint GONEN as Chairman and CEO and GONEN agrees to serve as Chairman and CEO Attunity on the terms and conditions set forth herein; NOW, THEREFORE, in condition of the mutual promises and undertaking of the parties, it is hereby agreed as follows: 1. DUTIES AND RESPONSIBILITIES --------------------------- 1.1. Subject to the terms and conditions of this Agreement (i) GONEN shall serve as Chairman of the Board of ATTUNITY, and (ii) GONEN shall also serve as CEO of ATTUNITY. 1.2. During the term of GONEN's employment, GONEN shall: 1.2.1. Devote his full working time and best efforts to the business and affairs of ATTUNITY and the performance of his duties hereunder (this Section 1.2.1 is not applicable to the Services Period as described in section 7 herein); and 1.2.2. Not engage in or be associated with, directly or indirectly, any competitive business, duties or pursuits; and 1.2.3. Not undertake or accept any other paid or unpaid employment or occupation or engage in or be associated with, directly or indirectly, any other businesses, duties or pursuits to the extent such activities will materially interfere with his duties hereunder (this Section 1.2.1 is not applicable to the Services Period as described in section 7 herein). 1.3. GONEN agrees that during a one year period ("One Year Period") starting January 25, 2004 and ending January 24, 2005, GONEN will spend at least sixty six percent (66%) of his time in the United States. However, GONEN will be entitled to spend less than sixty six percent (66%) of his time in the United States upon the occurrence of any of the following events: 1.3.1. GONEN's employment is terminated by Attunity (except for Justifiable Cause). 1.3.2. GONEN stop serving as CEO at the Company's request. 1.3.3. GONEN's is requested by the Board of Directors of ATTUNITY not to spend sixty six percent (66%) of his time in the United States during the One Year Period. 1.3.4. Change of Control. 1.4. For the purposes of this agreement, "Change of Control" shall mean: 1.4.1. The approval by the stockholders of ATTUNITY of a merger or consolidation of ATTUNITY with any other corporation, other than a merger or consolidation which would result in the voting securities of ATTUNITY outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into securities of the surviving entity) sixty percent (60%) or more of the total voting power represented by the voting securities of ATTUNITY or such surviving entity outstanding immediately after such merger consolidation; or 1.4.2. Any "person" (as that term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) becoming the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended), directly or indirectly, of securities of ATTUNITY representing 60% or more of the total voting power represented by ATTUNITY's then outstanding voting securities; 2. TERM AND TERMINATION 2.1. This Agreement shall commence as of January 1, 2004 and will remain in effect until the end of the term of the Services Period (as defined in Section 7.2 below), unless earlier terminated in accordance with the terms and provisions of this Section 2. 2.2. ATTUNITY shall have the right to terminate this Agreement at any time for Justifiable Cause (as hereunder defined) as determined by the board of directors of ATTUNITY, by giving GONEN written notice of termination for cause. In such event, this Agreement and the employment relationship shall be deemed effectively terminated upon the time of delivery of such notice. The term "Justifiable Cause" shall mean (a) a serious breach of trust including but not limited to theft, embezzlement, breach of fiduciary duty, prohibited disclosure to unauthorized person or entities of confidential or proprietary information of or relating to ATTUNITY and the engaging by GONEN in any prohibited businesses competitive to the business of ATTUNITY and its subsidiaries, affiliates or associated companies, or (b) any willful failure to perform competently any of GONEN's fundamental functions or duties hereunder or other cause justifying termination or dismissal under applicable law. 2.3. During the period following the Termination of Employment Date (as defined in Section 7.1 below), GONEN shall cooperate with ATTUNITY and use his best efforts to assist the integration into ATTUNITY's organization of the person or persons who will assume GONEN's responsibilities. 3. COMPENSATION 3.1. Commencing January 1, 2004 and until the Termination of Employment Date (as defined in Section 7 below), ATTUNITY shall pay GONEN as compensation a monthly gross salary of ninety thousand (90,000) New Israel Shekels ("NIS") payable until the 9th of the following month (the "Gross Salary"). The Gross Salary payable each month shall be linked to the Israeli Consumer Price Index published by the Israeli Central Statistic Bureau. The base index will be the index of December 2003. The Gross Salary can be only increased as a result of changes in the Israeli Consumer Price Index. Such compensation shall be comprehensive and all - inclusive in that it shall be deemed to include all overtime payments according to the terms of the Working Hours and Rest Law 5711 - 1951 or any other similar law or provision which may apply. 3.2. GONEN shall be entitled to the use of an automobile owned by ATTUNITY ("Company Car"), the price of which will not exceed seventy five thousand ($75,000) US Dollars. ATTUNITY shall reimburse GONEN for all expenses relating to the use and upkeep of such automobile. ATTUNITY will replace such Company Car at least every forty-eight (48) months. Upon termination of this Agreement for any reason, GONEN will have the option to purchase such automobile at its book value at the time of such termination. GONEN will keep his Company Car for six (6) months commencing from the Termination of Employment Date as set for in Section 7 herein. 3.3. GONEN shall be entitled to full reimbursement for his home telephone expenses, including calls made abroad. 3.4. GONEN shall be entitled to a refund for all-reasonable entertainment and living expenses both in Israel and abroad, upon the furnishing of receipts, relating to his employment with ATTUNITY. 3.5. ATTUNITY and GONEN shall obtain and maintain Managers Insurance (Bituach Menahalim) in the customary form for the exclusive benefit of GONEN. ATTUNITY shall pay an amount equal to 13.33% of each monthly Gross Salary payment towards the premiums payable in respect of such insurance. GONEN shall pay, by deduction from salary, 5% of each monthly Gross Salary and ATTUNITY shall pay an additional amount equal to 2.5% of each monthly Gross Salary for insurance against disability. It is hereby agreed that GONEN's benefits under the foregoing insurance shall come in lieu of, and as full and final substitution for severance pay to which GONEN may otherwise be entitled under applicable law. When GONEN's employment is terminated for whatsoever reason (except for Justifiable Cause) GONEN will be entitled to a severance payment that is calculated at two times his last Gross Salary (as described in Section 3.1) multiplied by the number of years since October 1, 1987, less the amount accumulated in the severance component of the Manager Insurance specified above and GONEN's Managers Insurance will transferred to GONEN. 3.6. GONEN shall be entitled to "Keren Hishtalmut" as customary for all ATTUNITY employees. 3.7. GONEN shall be entitled to paid annual vacation of twenty five (25) working days, based on five (5) working days week, with respect to and during each twelve (12) month period of his employment hereunder. Such vacation, in respect to any year, may be carried forward. GONEN will be entitled to be paid for unutilized accrued vacation on a yearly basis. However, Gonen has waived his accrued vacation until December 31, 2002. 3.8. In the event that GONEN shall be required by ATTUNITY to spend time abroad, he shall be entitled to a special grant equal to the amount of days he has spent outside Israel multiplied by a daily rate of one hundred and thirty four US Dollars ($134), in addition to the reimbursement of his expenses as specified in 3.4 above. 3.9. GONEN shall be entitled to a bonus according to the Bonus Plan attached hereto as Schedule 1. In addition, commencing 2002, the Board of Directors will be entitled to award GONEN with additional bonuses, which shall not exceed One Hundred Thousand US Dollars ($100,000) per calendar year. 3.10.Subject to GONEN's fulfillment of his obligations under Section 1.3 herein, GONEN has been granted six hundred thousand (600,000) stock options to purchase Ordinary Shares of ATTUNITY pursuant to ATTUNITY's 2003 Employee Stock Option Plan at a price of $1.92 per share to be vested only upon a Change of Control. Those options are exercisable upon a Change of Control as defined above. 3.11.GONEN agrees and accepts that in January 2002 ATTUNITY implemented a 20% temporary salary reduction plan for all its employees and as long as this reduction plan for all employees is not changed Gonen's Gross Salary will be reduced by 20%. This reduction will not apply to section 3.5 regarding which the salary mentioned in section 3.1 shall prevail. 4. PROPRIETARY INFORMATION 4.1. GONEN acknowledges and agrees that ATTUNITY possesses and will continue to possess and acquire information, trade secrets and technology that has been created, discovered or developed, or has otherwise become known to ATTUNITY in the field of computer software and services, including without limitation, information and technology that has been assigned or otherwise conveyed to ATTUNITY, which information has commercial value in the business in which ATTUNITY is engaged. Such information, whether documentary, written oral or computer generated, shall be deemed to be and referred to as "Proprietary Information", which includes but is not limited to trade marks, trade secrets, copyrights, processes, formulas, data and know-how, improvements, inventions, techniques, products, forecasts, third party products and know-how and customer lists. 4.2. Proprietary Information shall be deemed to include any and all proprietary information disclosed by or on behalf of ATTUNITY and irrespective of form but excluding information that (a) was known to GONEN prior to his association with ATTUNITY and can be so proven by GONEN; (b) shall have become a part of the public knowledge except as a result of breach of this Agreement by GONEN; (c) shall have been received by GONEN from a third party having no obligation towards ATTUNITY; (d) reflects general skills and experience gained during GONEN's employment by ATTUNITY; or (e) reflects information and data generally known within the industries or trades in which ATTUNITY competes. 4.3. GONEN agrees and declares that all Proprietary Information, patents and other rights in connection therewith shall be the sole property of ATTUNITY and it's assigns. At all times, both during his employment by ATTUNITY and after its termination, GONEN will not use or disclose any Proprietary Information or anything relating thereto without the written consent of ATTUNITY except as may be necessary in the ordinary course of performing his duties hereunder. 4.4. Should, for any reason, any one or more of the terms contained in Sub-Paragraphs 4.1. 4.2. And 4.3 of this Section 4 be held to be excessively broad with regard to time, geographic scope or activity, that term shall be construed in a manner to enable it to be enforced to the extant compatible with applicable law. 4.5. GONEN's undertakings in this Paragraph 4 shall remain in full force and effect for two (2) years after termination of this Agreement. 5. NON-COMPETITION GONEN agrees and undertakes that he will not, during the term of this Agreement (including the Service Period) and for a period of one year thereafter: 5.1. Directly or indirectly, as owner, partner, joint venturer, stock holder, employee, broker, agent, principal, trustee, corporate officer, director, licensor, licensee or any capacity whatsoever engage in, become financially interested in, be employed by, or have any connection with in Israel or any other country any business or venture worldwide that is engaged in any activities involving either (a) products or services similar to the actual products then produced by ATTUNITY or its subsidiaries or affiliates, or (b) information processes, technology or equipment in which ATTUNITY or its subsidiaries or affiliates then has a proprietary interest; provided, however that GONEN may own any securities of any corporation which is engaged in such business and is and is publicly-owned and trade but in any amount not to exceed at any one time ten percent (10%) of any class of stock or securities of such company, so long as he has no active role in the publicly-owned and traded company as traded company as director, employee, consultant or otherwise. 5.2. Employ (other that through ATTUNITY or its subsidiaries) any person employed by ATTUNITY during the previous twelve (12) months for any purpose or in any place in any business in which he is deemed to be a control person as defined under any Israeli or U.S. securities or banking laws or regulations. 5.3. Should, for any reason, any one or more of the terms contained in Sub-Paragraphs 5.1 and 5.2 of this Section 5 be held to be excessively broad with regard to time, geographic scope or activity, that term shall be construed in a manner to enable it to be enforced to the extent compatible with applicable law. 6. NO RESTRICTION ON EMPLOYMENT GONENrepresents and warrants that on the date hereof he is free to be employed by ATTUNITY upon the terms contained in this Agreement and that there are no employment contracts, consulting contracts or restrictive covenants preventing full performance of his duties hereunder. 7. TERMINATION OF GONEN's EMPLOYMENT AND THE SERVICES PERIOD 7.1. ATTUNITY has the right to change GONEN's position as CEO while continuing GONEN's employment with ATTUNITY, and such change of position shall not constitute termination of employment for purposes of this Section 7 of this Agreement or for any other purpose. ATTUNITY shall give GONEN at least thirty (30) days notice of the termination of his employment with ATTUNITY. If GONEN wishes to terminate his employment with Attunity, he shall give ATTUNITY at least thirty (30) days written notice. (collectively the "Termination of Employment Date") 7.2. After the Termination of Employment Date, GONEN shall not be entitled to the Gross Salary and the other benefits specified in Section 3 above (except as expressly specified in Section 3.2 and according to Sections 3.9 and 3.10) and the following provisions will instead apply: 7.2.1. For a period of thirty six (36) months commencing on the Termination of Employment Date (the "Services Period"), GONEN undertakes to provide up to fifty four (54) hours of consulting services per month to ATTUNITY and not more than One thousand nine hundred forty four (1,944) hours on an accumulative basis. The Board of ATTUNITY will exclusively determine GONEN's duties and title during the Services Period. GONEN will be entitled to all the payments under this Section 7.2 herein regardless of whether ATTUNITY utilizes GONEN's services. GONEN recognizes that from time to time the Board might require from GONEN to provide more than fifty four (54) hours per month. In such events GONEN will make his best effort to comply with such requests, however, GONEN's accumulative commitment will not exceed one thousand nine hundred forty four (1,944) hours for the Services Period. 7.2.2. In the event that GONEN will be required by ATTUNITY to travel abroad, a full day will be calculated at eight (8) hours and will include GONEN's flying time. In such an event, GONEN shall be entitled to a payment that is equal to the amount of days he has spent outside Israel multiplied by a daily rate of one hundred thirty four US Dollars ($134), in addition to the reimbursement of his reasonable expenses, in accordance with ATTUNITY'S expense reimbursement policy. 7.2.3. In consideration for GONEN's availability to provide the Consulting Services during the Services Period, ATTUNITY shall pay GONEN thirty six (36) monthly payments of thirteen thousand five hundred US Dollars ($13,500) plus VAT (the "Payments"), to be paid by the 25th of each month. GONEN will furnish ATTUNITY with an invoice for each month by the 30th of the month. Payments will be made in NIS in accordance with a last known representative exchange rate published by the Bank of Israel. These monthly payments will not be changed as long as the cumulative commitment specified in section 7.2.1 will not exceed one thousand nine hundred forty four (1,944) hours for the Services Period. 7.3. In the event that ATTUNITY wishes to terminate GONEN's employment agreement with ATTUNITY due to the failure of ATTUNITY to achieve its financial milestones agreed to from time to time by GONEN and the Board of Directors of ATTUNITY, in writing, ATTUNITY shall have the right to pay GONEN a one-time, upfront lump-sum payment of two hundred and fifty thousand US Dollars ($250,000) instead of the payments that GONEN is entitled to receive during the Services Period described in sections 7.2.1, 7.2.2, and 7.21.3 and GONEN will not be required to provide the related services. 7.4. The parties acknowledge that during the Services Period, there will not be any employer - employee relationship between ATTUNITY and GONEN and GONEN will be acting as an independent contractor. 8. GENERAL PROVISIONS 8.1. This Agreement shall not be amended, modified or varied by any oral agreement or representation or otherwise than by a written instrument executed by both parties or by their duly authorized representative. 8.2. No failure, delay or forbearance of either party in exercising any power or right hereunder shall in any way restrict or diminish such party's rights and powers under this Agreement, or operate as a waiver of any of the terms or conditions hereof. 8.3. If any term or provision of this Agreement shall be declared invalid, illegal, or unenforceable, to the extent that a court shall deem it reasonable to enforce such term or provision and if such term or provision shall be unreasonable to enforce to any extent, such term or provision shall be severed and all remaining terms and provisions shall be unaffected and shall continue in full force and effect. 8.4. The terms and conditions of this Agreement supersede those of all previous agreements and arrangements, either written or oral, relating to the subject hereof, including the Employment Agreement between ATTUNITY and GONEN dated January 1, 1996 and including the Agreement dated September 1, 2002. 8.5. This Agreement is personal to GONEN and GONEN shall not assign or delegate his rights or duties to a third party, whether by contract, will or operation of law, without ATTUNITY's prior written consent, except moneys and compensation rights that may be passed to his heirs. 8.6. This Agreement shall inure to the benefit of ATTUNITY's successors and assigns. 8.7. Each notice and/or demand given by one party pursuant to this Agreement shall be given in writing and shall be sent by registered mail to the other party at the address appearing in the caption of this Agreement or by facsimile and such notice and/or demand shall be deemed given at the expiration of twelve (12) hours after dispatch by facsimile, three (3) days from the date of mailing by registered mail or immediately if delivered by hand. Such address shall be effective unless notice of change in address is provided by registered mail to the other party. 8.8. Any dispute arising out of or in connection with this Agreement will, in the failure of the parties to reach an amicable agreement, be finally settled by a single arbitrator appointed in accordance with the agreement of the parties. In the absence of agreement within twenty one (21) days from the written request of one party for the appointment of an arbitrator, the chairman of the Israeli Bar Association shall appoint an arbitrator. The arbitrator shall be a lawyer knowledgeable in the laws appertaining to computers and software. The arbitrator shall be bound in his deliberations by the substantive laws of the State of Israel and shall provide the parties with written reasons for his decision. 8.9 This Agreement is subject to the required corporate approvals of Attunity. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. Attunity Ltd. Arie Gonen - ------------------------------------ ------------- SCHEDULE 1 - BONUS PLAN GONEN will receive a bonus according to the following: 1. Commencing January 1, 2004 and until December 31, 2007, ATTUNITY will pay GONEN nine percent (9%) of all licenses and maintenance revenues received by ATTUNITY from International Distributors, which the Board assigned GONEN to appoint (including the International Distributors were appointed during 2002). This bonus will be paid within sixty (60) days of the receipt of payments from the Internal Distributors. However, this yearly bonus will not exceed the lower of (i) five percent (5%) of the yearly net profit excluding impairment of intangible Assets of ATTUNITY and (ii) one hundred thousand US Dollars ($100,000) per year. 2. GONEN will also receive an additional bonus that is equal to six percent (6%) of revenues received from Oracle (Transparent Gateway) in 2004. These bonuses will be paid within fourteen (14) days of the receipt of payments from Oracle. 3. In the event that GONEN will be assigned by the Board to raise funds for ATTUNITY in any form including equity and convertible debentures and exercise of Warrants. GONEN will be entitled to three-year warrants at the closing price of fund raising deal of up to seven percent (7%) of the amount of shares that were issued in the fund raising deal, the exact percentage to be determined by the Board of ATTUNITY. To remove doubt, this provision will only apply to investors introduced to ATTUNITY by GONEN. 4. In the event that ATTUNITY will be acquired in a merger or an acquisition transaction, GONEN will be entitled to a fee that is up to seven percent (7%) of the total value of the consideration paid for ATTUNITY in such a transaction, the exact percentage to be determined by the Board of ATTUNITY. However, the percentage will be no less than three percent (3%) in the event that the closing of the acquisition occurs on or before December 31, 2004; two percent (2%) if the closing of the acquisition transaction occurs at any time between January 1, 2005 and December 31, 2005 and one percent (1%) if the closing of the acquisition transaction occurs at any time between January 1, 2006 and December 31, 2007. Thereafter, GONEN shall not be entitled to any fee in connection with or relating to an acquisition transaction. EX-4.13 6 ex4_13.txt LOAN AGREEMENT & ANCILLARY DOCUMENTS OF 06/03/04 Exhibit 4.13 LOAN AGREEMENT -------------- THIS LOAN AGREEMENT (this "Agreement") made as of the 3rd day of June 2004, by and between Attunity Ltd., an Israeli company number 520038019, of Einstein Building, Tirat Hacarmel, Israel 39101 (the "Company"), Plenus Technologies, Ltd. ("Plenus" or the "Lender"). W I T N E S S E T H: WHEREAS, the Company wishes to obtain a lending facility from the Lender on the terms and conditions set forth in this Agreement; and WHEREAS, the Lender is willing to make available a lending facility to the Company on the terms and conditions set forth in this Agreement. NOW THEREFORE, the parties hereto hereby agree as follows: 1. Loan, Warrant and Security. 1.1 Credit Line Amount. The Lender hereby undertakes to make available to the Company a revolving credit facility in the aggregate amount of three million dollars ($3,000,000) (the "Credit Line Amount"). 1.2 Disbursement. The Credit Line Amount shall be provided in installments of not less than two hundred and fifty thousand dollars ($250,000) each ("Installment(s)"), upon the later of: (i) seven (7) business days following the date on which Plenus receives a written disbursement request from the Company stating the exact amount the Company wishes to receive from the Lenders (the "Disbursement Request"), or (ii) the disbursement date specified in the Disbursement Request; provided, however, that such later disbursement date must always be within the Term (as defined in Section 1.6 hereof). Each Installment shall be transferred by the Lender to the Company by means of wire transfer in accordance with wire instructions to be provided in writing to Plenus by the Company from time to time, or, if no other instructions are given, to: Attunity Ltd. United Mizrahi Bank 26, Haneviim Street Haifa, ISRAEL Hadar Branch Haifa, # 441 Account # 578600 Swift code: MIZBILITA 1.3 Delivery of Documents. Concurrently with the execution and delivery of this Agreement the Company shall deliver to Plenus the document referred to in clauses (i) and (ii) below, and within thirty (30) days thereafter all of the other documents referred to in clauses (iii) through (vi) below: (i) a warrant, in the form attached hereto as Exhibit A (the "Warrant"), in the name of Plenus, for the purchase of Warrant Shares (as defined in the 2 Warrant) in accordance with the terms of the Warrant, duly executed by the Company; (ii) a Floating Charge Agreement (the "Floating Charge Agreement") and a Fixed Charge Agreement (the "Fixed Charge Agreement") by and between the Lender, Co-lenders and the Company, in the forms attached hereto as Exhibit B1 and Exhibit B2, respectively, duly executed by the Company; (iii) copies of forms for creating a floating charge (as per Exhibit C1) and fixed charge (as per Exhibit C2), both duly signed by the Company and stamped to indicate filing with the Israeli Registrar of Companies, and certificates of registration of such floating charge and fixed charge ; (iv) true and correct copies of resolutions of the Company's Board of Directors (a) authorizing the Company to enter into this Agreement, the Floating Charge Agreement and the Fixed Charge Agreement, (b) authorizing the issuance of the Warrant to Plenus and reserving a sufficient number of Ordinary Shares to be issued upon exercise of the Warrant, in the event that Plenus elects to exercise the Warrant into such shares, and (c) authorizing an officer of the Company to execute and deliver all of such documents and their respective exhibits and schedules; (v) waivers, consents and approvals in respect of the transactions contemplated herein, including, but not limited to, regarding pre-emptive rights, registration rights and other rights of third parties, including, without limitation, creditors and governmental entities, if applicable; and (vi) a legal opinion by counsel to the Company, a copy of which is attached hereto as Exhibit D. The date on which all of the above documentation shall be delivered to Plenus to its satisfaction shall be referred to herein as the "Closing Date". For the purposes of this Agreement, including all of its schedules and exhibits, the "Effective Date" shall be deemed the date hereof. Without detracting from the Company's obligation to timely furnish Plenus with all of the documents set forth above, the obligations of the Lender pursuant hereto shall be subject to receipt of all of such documents, and the Lender shall have the right to terminate this Agreement by written notice to the Company should the Company breach its obligation to furnish the said documents within the specified period. 1.4 Security. In accordance with the terms and the conditions of the Floating Charge Agreement and the Fixed Charge Agreement, the Company agrees to secure the repayment of any amount borrowed hereunder (the "Principal Amount"), any accrued and unpaid Interest (as defined below) and the Credit Line Fee (as defined below), by creating a first priority floating charge on the Company's present and future tangible and intangible assets and rights of any kind, whether contingent or absolute, as more fully set forth in the Floating Charge Agreement, and a first priority fixed charge on the Company's technology, as more fully set forth in the Fixed Charge Agreement for the benefit of the Lender and for the benefit of the entities specified as Co-lenders in Schedule 1 hereto (the "Co-lenders"). 1.5 Seniority. The indebtedness evidenced by this Agreement is hereby expressly stated to be senior in right of payment to any current or future indebtedness of the Company (whether reflected in the balance sheet or not), except for the indebtedness incurred in the Company's ordinary course of business. 1.6 Term. The term during which the Credit Line Amount according to this Agreement shall be made available by the Lender to the Company (the "Term") will commence on the Closing Date and terminate twenty four (24) months following the Effective 3 Date, unless this Agreement is earlier terminated or repayment is accelerated in accordance with this Agreement. 2. Payments. 2.1 Principal Amount. The outstanding and unpaid Principal Amount shall be due and payable, in one payment, twenty-four (24) months after the Effective Date (the "Repayment Date"). 2.2 Interest on Principal. The Company shall pay to the Lender interest on the Principal Amount outstanding from time to time (denominated in dollars) at an annual rate of six and one-half percent (6.5%), calculated from the disbursement date of each Installment until the date of repayment of such Installment, plus value added tax ("VAT"), if applicable (such interest together with the VAT - the "Interest"). The Interest accrued in each calendar quarter during the Term shall become due and payable on the first day of the next ensuing calendar quarter, except for the Interest accrued during the last quarter or partial quarter within the Term which shall become due and payable on the last business day of the Term. In the event the Company is legally obliged to deduct tax at source ("withholding tax") from any Interest payment, it shall do so and provide the Lender with sufficient confirmation evidencing such deduction. Alternatively, Lender may provide the Company with a tax deduction exemption from the Income tax authorities. 2.3 Interest on Late Payment. Any amount owing by the Company to the Lender hereunder which is not paid by the Company on its due date shall bear an additional 5% interest per annum, plus VAT if applicable; which additional interest shall be compounded daily. 2.4 Non-utilized Credit Line Fee. The Company shall pay to the Lender, on each of the first and second anniversary of the Effective Date, a fee equal to 1% of the Credit Line Amount which was not utilized in the contract year ending on such anniversary date, plus VAT if applicable. For the purpose of such fee, any Principal Amount borrowed and repaid during such year shall be taken into account as partially utilized, based on the number of days it was outstanding. 2.5 Division of Payments. All payments to be made by the Company to the Lender shall be made to the following account: Plenus - account number 133021 at United Mizrachi Bank Ltd., Branch No. 522, located in Herzliya, Swift Code: MIZBILIT. 2.6 Prepayment. Notwithstanding anything to the contrary herein contained, the Company may prepay any amounts owed to the Lender, at any time, subject to the Company providing the Lender with thirty (30) days or more prior written notice of such intention to prepay, and further provided that each such prepayment is in an amount of not less than the lesser of (a) two hundred and fifty thousand dollars ($250,000), or (b) the sum of the then outstanding Principal Amount plus Interest accrued thereon. 4 2.7 Early Termination. The Company may terminate this Agreement, prospectively, at any time before the Repayment Date, by providing Plenus with a notice in writing indicating its intention to terminate this Agreement, in the form attached hereto as Exhibit E, provided that upon delivery of such notice to the Lender, (i) the Company shall have satisfied all of its obligations under this Agreement (including all exhibits and schedules hereto), and (ii) all amounts due from the Company pursuant to this Agreement, on account of the Principal Amount, the Interest, late payment interest, the Credit Line Fee or otherwise, shall have been paid in full and the Company shall not have any outstanding debts to the Lender pursuant to or in connection with this Agreement. 2.8 Set-off. The Lender may set-off any obligation owed to them by the Company under this Agreement, the Floating Charge Agreement, the Fixed Charge Agreement or the Warrant (together, the "Transaction Documents") against any obligation owed by the Lender to the Company, regardless of the place of payment, booking branch or currency of either obligation, upon giving the Company seven (7) days' prior written notice. If an obligation is not liquidated or unascertained, the Lender may set-off in an amount estimated by them in good faith to be the amount of that obligation. If obligations are in different currencies, the Lender may convert either obligation at a market rate of exchange in its usual course of business for the purpose of the set-off. The Lender shall not be obliged to exercise any right given to them under this Section 2.8. In the event that the foregoing set-off is made by the Lender, any amounts set-off will be deemed to be payment as described in Section 2 above. The Company may not set-off any obligation owed to it by the Lender against any obligation it owes to the Lender under the Transaction Documents. 3. Acceleration. Notwithstanding anything herein to the contrary, the entire unpaid Principal Amount, together with accrued and unpaid Interest to date, shall be due and payable at any time without any further demand, immediately upon the occurrence of any of the events described below ("Event of Acceleration"), unless otherwise provided herein: (i) the Company fails to pay any sum due from it under any of the Transaction Documents at the time, in the currency and in the manner specified therein, or otherwise is in material breach of any of the Transaction Documents and the same is not remedied within seven (7) days, in case of non-payment, or fourteen (14) days in case of any other breach; or (ii) the Company performs a general readjustment or rescheduling or another arrangement regarding its indebtedness pursuant to Section 350 to the Israeli Companies Law, 1999 (the "Companies Law") or otherwise; or makes a general assignment for the benefit of, or a composition with, its creditors pursuant to Section 350 to the Companies Law or otherwise; or (iii) any indebtedness of the Company to a third party for borrowed money in the amount of more than $100,000 is not paid when due; or any indebtedness of the Company to a third party for borrowed money in the amount of more than $100,000 becomes capable of being declared by such third party to be, or is declared, due and payable prior to its specified maturity; or 5 (iv) the filing against the Company of any petition in liquidation or any petition for relief under the provisions of applicable law for the relief of debtors, or the appointment of a special manager, temporary liquidator, temporary receiver or trustee to take possession of any material property or assets of the Company; or an attachment is placed on any of the material assets of the Company; or the Company resolves to voluntarily liquidate; or the appointment of a liquidator or receiver to take possession of material property or assets of the Company; or (v) any representation or statement made by the Company in any of the Transaction Documents or in any notice or other document, certificate or written statement delivered by it pursuant thereto or in connection therewith is, or proves to have been, incorrect or misleading in any material respect; or (vi) any event or series of events occur(s) which, in the reasonable opinion of Plenus, may have a material adverse effect on the business, condition (financial or otherwise), or results of operations of the Company or on the ability of the Company to comply with any of its material obligations under any of the Transaction Documents; or (vii) the Company consummates (a) an issuance of the Company's securities or a consolidation or merger of the Company with or into another entity, pursuant to which or as a result thereof the Company's then current shareholders will own less than fifty (50%) percent of the voting securities of the Company, the new entity or the surviving entity (as the case may be) or they will no longer have the power or the right to appoint more than fifty (50%) percent of the members of the board of directors of such entity; (b) an issuance or sale of shares of the Company constituting immediately thereafter more than fifty (50%) percent of the Company's outstanding shares (on a fully diluted and as-converted basis) to third parties other than the Company's current shareholders, (c) a sale of a material part of the Company's assets; or (d) an equity investment, or series equity of investments, in the Company resulting in proceeds to the Company following the Effective Date in an aggregate amount of at least fifteen million dollars ($15,000,000). The Company shall promptly inform Plenus of the occurrence of any Event of Acceleration and, upon receipt of a written request to that effect from Plenus, shall confirm to Plenus that, except as previously notified to Plenus or as notified in such confirmation, no Event of Acceleration has occurred. 4. Representations and Warranties. The Company hereby represents and warrants to each of the Lenders, as of the date hereof and the Closing Date and as of each date on which a Disbursement Request is made by the Company (via a bring-down certificate as further described below), each of the following representations and warranties. The Company agrees to provide to Plenus a bring-certificate signed by the chief executive officer of the Company and certifying that since the date hereof and until each date on which a Disbursement Request was executed by the Company no event or a series of events occurred which are reasonably likely to have a material adverse effect on the business, condition (financial or otherwise), or results of operations of the Company or on the ability of the Company to comply with any of its material obligations under any of the 6 Transaction Documents. The Lenders shall not be obligated to comply with such Disbursement Request pursuant to the terms of Section 1.2 hereof until Plenus received such signed bring-down certificate from the Company. (i) The Company is a company duly formed and validly existing under the laws of the State of Israel. The Company's current Articles are attached hereto as Schedule 4(i). The Company has full corporate power and authority to enter into and perform its obligations under the Transaction Documents, and all of such documents constitute legally binding obligations of the Company and are enforceable against the Company in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium, liquidation, conservatorship, receivership or similar laws relating to, or affecting generally the enforcement of, creditor's rights and remedies or by other equitable principles of general application. (ii) The Company has furnished Plenus with (i) its audited, consolidated, financial statements as at, and for the year ended, December 31, 2003 [and (ii) its unaudited financial statements for the first quarter ended March 31, 2004] ((i) and (ii) are collectively referred to herein as the "Financial Statements"). The Financial Statements are true and correct in all material respects, are in accordance with the books and records of the Company and have been prepared in accordance with generally accepted accounting principles consistently applied, and fairly and accurately present in all material respects the financial position of the Company as of such dates and the results of its operations for the periods then ended. Except as disclosed in documents filed by the Company with the Securities and Exchange Commission pursuant to the reporting requirements of the Securities Exchange Act of 1934, including material filed pursuant to Section 13(a) of the Exchange Act (all of the foregoing including filings incorporated by reference therein being referred to herein as the "Commission Documents" ), the Financial Statements or listed in Schedule 4(ii), since December 31, 2003, there has not been any material adverse change in the assets, liabilities, condition (financial or otherwise) or business of the Company, including, without limitation: (a) any damage, destruction or loss, whether or not covered by insurance, materially and adversely affecting the assets, properties, conditions (financial or otherwise), operating results or business of the Company; (b) any waiver by the Company of a valuable right or of a material debt owed to it; (c) any satisfaction or discharge of any material lien, material claim or material encumbrance or payment of any material obligation by the Company, except in the ordinary course of business; (d) any material change or amendment to a material contract or material arrangement by which the Company or any of its assets or properties is bound or subject; (e) any loans made by the Company to its employees, officers, or directors other than travel advances made in the ordinary course of business; (f) any sale, transfer or lease of, except in the ordinary course of business, or mortgage or pledge of imposition of lien on, any of the Company's material assets; or 7 (g) any change in the accounting methods or accounting principles or practices employed by the Company. (iii) The execution and delivery of this Agreement (including all exhibits and schedules) by the Company, and performance of the Company's obligations hereunder, have been duly and validly authorized by all necessary corporate action. (iv) The Company has taken all corporate actions, and has procured all consents and approvals, necessary for the issuance of the Warrant; and the Warrant, and the Warrant Shares when issued, and with respect to the Warrant Shares when the Exercise Price (as defined in the Warrant) is paid, shall be duly authorized, validly issued, fully paid andnonassessable. (v) Neither the execution nor the delivery of this Agreement, nor the transactions contemplated hereby, will contravene any agreement or negative pledge, or, to the Company's best knowledge, any law, rule, restriction or decree to which the Company is subject, and will not result in any such violation or be in conflict with or constitute, with or without the passage of time and giving of notice, either a default under any such provision, instrument, judgment, order, writ, decree or contract or an event that results in the creation of any lien, charge or encumbrance upon any assets of the Company or, to the knowledge of the Company, the suspension, revocation, impairment, forfeiture, or non-renewal of any material permit, license, authorization, or approval applicable to the Company, its business or operations or any of its assets or properties. (vi) There is no order, writ, injunction or decree of any court, government or governmental agency affecting, or, to the best knowledge of Company, which may affect, the Company or any of its businesses, assets or interests, in a material adverse manner; nor is there any action, suit, proceeding or investigation pending or, to the Company's knowledge, currently threatened, against the Company, that questions the validity of any of the Transaction Documents, or the right of the Company to execute and deliver any such document or to consummate the transactions contemplated thereby, or that might result, either individually or in the aggregate, in any material adverse changes in the assets, condition, affairs or prospects of the Company, financially or otherwise, nor is the Company aware that there is any basis for the foregoing. (vii) Other than as set forth in the Commission Documents and in Schedule 4(vii) hereto and the Company's Financial Statements, there are no material claims, guarantees, royalty payments, payments to government entities or regulatory bodies, security interests, options or other rights outstanding with respect to any of the Company's assets or securities, and the Company has no outstanding loans or financial obligations to any third parties, including, but not limited to, any banking obligations, and any liens on the Company's bank accounts or other assets of the Company whether registered or not. (viii) The Company, to the best of its knowledge, owns and has developed, or has obtained the right to use, free and clear of all liens (other than the liens created hereunder or by operation of law) and claims, all patents, trademarks, domain names and copyrights, and applications, licenses and rights with respect to the foregoing, and all trade secrets, including know-how, inventions, designs, processes, works of authorship, computer programs and 8 technical data and information (collectively herein "Intellectual Property") used and sufficient for use in the conduct of its business as now conducted, and as same may be in effect from time to time, and, to the best of the Company's knowledge, without infringing upon or violating any right, lien, or claim of others, and the Company has taken security measures customary in the industry to protect the secrecy, confidentiality and value of all the Intellectual Property, except that the Company has not registered any patent, trademark or copyright with respect to its Intellectual Property. A complete list of all patents, trademarks and key domain names registered by the Company in any jurisdiction as of the date hereof is set forth in Schedule 4(viii) attached hereto. (ix) The Company's capitalization on a fully diluted basis, as of the Effective Date, is as set forth in Schedule 4(ix) attached hereto. All of the issued shares of the Company, of all classes are all duly and validly authorized and issued, fully paid and nonassessable, and were issued in accordance with every relevant securities laws, or pursuant to valid exemptions therefrom. Except as provided in the Commission Documents and in Schedule 4(ix), there are no outstanding options, warrants, rights (including conversion or pre-emptive rights with respect to the Warrant Shares) or agreements for the purchase or acquisition from the Company of any shares of its share capital. Except as set forth in the Commission Documents and in Schedule 4(1x), the Company is not a party or subject to any agreement or understanding which affects or relates to the voting rights or which requires written consents with respect to (1) any of the Company's securities (excluding options granted under the employee stock option plan of the Company, if any), or (2) a director of the Company. (x) To the best of the Company's knowledge, there are no investigations or actions or administrative proceedings of or before any court or agency which (a) could have a material adverse effect on the business, financial condition or results of operations of the Company or the ability of the Company to perform its obligations hereunder, or (b) purports to affect the legality, validity or enforceability of any of the Transaction Documents. (xi) Neither this Agreement (including any schedule or exhibit to this Agreement) nor any documents, certificates or other items supplied by the Company with respect to the transactions contemplated hereby, contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements herein or therein, in light of the circumstances in which they were made, not misleading. (xii) Other than the subsidiaries listed on Schedule 4(xii), the Company has no subsidiaries ("Subsidiaries"). For the purposes of this section 4, reference to the Company other than in this clause (xii), shall mean both the Company and all of its Subsidiaries. (xiii) No consent, approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any governmental authority on the part of the Company is required in connection with the consummation of the transactions contemplated by the Transaction Documents, except for the registration of the charges under the Floating Charge Agreement and the Fixed Charge Agreement and compliance with the applicable securities laws and the consent of the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Employment. (xiv) Each Material Agreement (as defined below) is in full force and effect, none is subject to recession and to the best knowledge of the Company, there are no existing 9 circumstances which would reasonably be expected to materially modify the terms of any Material Agreement. To the Company's best knowledge, no third party is in default under any Material Agreement. The Material Agreements which are not referred to in the Commission Documents are set forth in Schedule 4(xiv) attached hereto. Plenus or its counsel has received true and correct copies of each Material Agreement. The Company is not in breach of any obligation under any Material Agreement. For the purposes of this Agreement, the term "Material Agreement" shall mean any agreements, understandings, instruments, contracts, proposed transactions, judgments, orders, writs or decrees to which the Company is a party or by which it is bound that may involve (i) obligations (contingent or otherwise) of, or payments to the Company, exceeding $100,000 each, or (ii) intellectual property rights of the Company and/or the intellectual property rights of any third party (other than the license of the Company's software and products, or those of Company's suppliers, in the ordinary course of its business which do not fall within any other category herein), or (iii) distribution rights, or (iv) provisions restricting the development, manufacture or distribution of the Company's products or services, or (v) restrictions or limitations on the Company's right to do business or compete in any area or any field with any person, firm or company, or (vi) indemnification by the Company with respect to infringements of proprietary rights (other than those entered into in the Company's ordinary course of business and which do not fall within any other category herein). Notwithstanding the foregoing, "Material Agreement" shall not include non-disclosure agreements executed in the Company's ordinary course of business. 5. Reporting and Notice Rights. 5.1 Reporting and Notices. Until the termination of this Agreement, the Company shall provide Plenus with the following: (i) consolidated audited financial statements within ninety (90) days after the end of each fiscal year (including an audited annual balance sheet of the Company as at the end of the fiscal year and the statement of income and cash flow of the Company for the fiscal year then ended), (ii) consolidated, un-audited, quarterly financial statements within sixty (60) days after the end of each quarter, (iii) such other data and information as Plenus may reasonably request, provided such data is reasonably available, (iv) at least five (5) business days advanced written notice of any equity investment in the Company occurring after the date hereof, (v) at least five (5) business days advanced written notice of a merger or consolidation of the Company, a sale of any substantial portion of the assets or shares of the Company or any reorganization or restructuring of the Company having similar effects, or a distribution of dividends, and (vi) at least five (5) business days advanced written notice of a firmly underwritten initial public offering of the Company's shares pursuant to a registration statement filed with the Securities and Exchange Commission under the Securities Act of 1933 or pursuant to a registration statement filed with a similar law under any other jurisdiction. Furthermore, the Lenders shall have, subject to customary non-disclosure obligations, at reasonable times and upon reasonable notice, full access to all books and records of the Company and shall be entitled to inspect the properties of the Company and consult with management of the Company regarding the same, to the extent necessary or advisable for the purpose of monitoring observance by the Company of its obligations under the Transaction Documents. 10 Following the termination of this Agreement, and for as long as the Warrant is outstanding, the Lenders shall have the same reporting and information rights, as granted to the holders of shares of the Company of any class. 5.2 [Reserved] 5.3 Information. The Company acknowledges that the Lenders will likely have, from time to time, information that may be of interest to the Company ("Information") regarding a wide variety of matters. The Company, as a material part of the consideration for this Agreement, agrees that the Lenders shall have no duty to disclose any Information to the Company or permit the Company to participate in any projects or investments based on any Information, or to otherwise take advantage of any opportunity that may be of interest to the Company if it were aware of such Information, and hereby waives, to the extent permitted by law, any claim based on the corporate opportunity doctrine or otherwise that could limit the Lenders' ability to pursue opportunities based on such Information or that would require the Lenders to disclose any such Information to the Company or offer any opportunity relating thereto to the Company. 5.4 Confidentiality. (a) Lender acknowledges that the data and the information obtained by it from the Company or anyone on its behalf prior to or during the term of this Agreement which relate to the Company, including, without limitation the existence and terms of the Transaction Documents, are confidential, and agrees that such data and information will not be disclosed by it to any third party nor exploited for other projects, investments or the like, without the prior written consent of the Company; provided, however, that in connection with reports to their shareholders, investors and/or co-lenders, the Lender may, without first obtaining such written consent, make general statements regarding the nature and progress of the Company's business and provide non-confidential data and information, provided that such shareholders, investors and/or co-lenders shall maintain such information in confidence. Furthermore, the Lender may disclose any data and information to their directors, officers and employees on a need to know basis, provided that such directors, officers and employees shall undertake the same obligations as the Lender undertakes hereunder with respect to such data and information or that the Lender shall be responsible for any disclosure or use thereby without the Company's consent. (b) Except as required under applicable law or the NASDAQ rules, neither party shall be entitled to issue a press release or any public statement relating to the existence or terms of the Transaction Documents without obtaining the prior written consent of the other party. The foregoing shall similarly apply to any other form of public communication, including, but not limited to, announcements, conferences, advertisements, professional or trade publications, mass marketing materials etc. 6. Authority. Notwithstanding any of the provisions set forth herein, the Company acknowledges and agrees that Plenus has syndicated the loan granted hereunder to the Co-lender and to the participants specified as such in Schedule 1 (the "Participants") and that Plenus shall act as the lead manager of such syndication on behalf of the Co-lender and on behalf of the 11 Participants. Plenus hereby represents and warrants to the Company that (a) the Co-lenders and the Participants have agreed that Plenus at its sole discretion shall determine (i) whether or not to realize any charges and/or pledges over the assets of the Company created for the benefit of the Lenders, the Co-lender or the Participants; (ii) whether or not repayment of any amounts hereunder owed to the Lenders, the Co-lender or the Participants are to be accelerated and whether or not an event of a default pursuant to the Floating Charge Agreement or the Fixed Charge Agreement has occurred, (iii) any other decisions that needs to be made with respect to any issue relating to the Transaction Documents, (b) Plenus has been appointed the attorney-in-fact on behalf of the Co-lender and the Participants in connection with all of the foregoing, (c) the Co-lender and the Participants have agreed not to take any action to the contrary, (d) the Co-lender and the Participants have agreed that in the event that Plenus should give its consent under this Agreement, Plenus' consent shall bind them as well. 7. Holding the Warrant and the Warrant Shares. Plenus shall be entitled to receive, upon the exercise of the Warrant by Plenus, the Warrant Shares issuable upon such exercise, and Plenus shall be entitled to transfer all or any part of the Warrant or the Warrant Shares so issued to a Co-lender, Participant or Permitted Transferees (as defined in Section 9.4 hereof), provided that such transferees are not direct competitors of the Company, and provided further that Plenus shall have an irrevocable proxy from all of such transferees with respect to all of the Warrant Shares held by them. 8. Covenant. The Company shall comply with the terms of, and do all that is reasonably necessary to maintain in full force and effect all authorizations, approvals, licenses and consents required by or under the laws and regulations of the State of Israel and any other applicable jurisdiction to enable it lawfully to enter into and perform its obligations under the Transaction Documents, and to ensure the legality, validity, enforceability or admissibility in evidence of all such documents. 9. Miscellaneous. 9.1 Further Action. The Company shall perform such further acts and execute such further documents as, in Plenus's opinion, may be reasonably necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected hereby. 9.2 Governing Law. This Agreement shall be governed by, and construed according to, the laws of the State of Israel, without regard to the conflict of laws provisions thereof. 9.3 Successors and Assigns. Except as otherwise expressly limited herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. 9.4 Non-assignability. None of the rights or obligations set forth in, arising under, or created by this Agreement may be assigned or transferred by the Company or Lender 12 without the prior consent in writing of the other party, which consent shall not be unreasonably withheld. Anything herein to the contrary notwithstanding, subject to applicable law and the second proviso to Section 7 above, Lender shall have the right to assign or transfer its rights and obligations under this Agreement, as long as such assignment or transfer is not to a competitor of the Company, to any of the following (each a "Permitted Transferee"): (i) any other entity which controls, is controlled by, or is under common control with Lender, (ii) if the Lender is a trustee or is appointed to act on behalf of others - to its beneficiaries, or (iii) if the Lender is a general or limited partnership - to its partners and to affiliated partnerships managed by the same management company or managing general partner or to an entity which controls, is controlled by, or is under common control with, such management company or managing general partner. The foregoing in clauses (i)-(iii) above is subject to the assignee or transferee assuming in writing the obligations of the assignor or transferor under this Agreement. The limited right of Lender to assign and transfer pursuant to this Section 9.4 shall also apply, mutatis mutandis, to each Permitted Transferee. 9.5 Entire Agreement. The Transaction Documents constitute the full and entire understanding and agreement between the Company and the Lender with regard to the subject matters hereof and thereof. The preamble, exhibits and schedules hereto constitute an integral part hereof. 9.6 Fees and Taxes. The Company shall share in and contribute a total amount of twenty thousand dollars ($20,000), plus VAT, towards the legal fees and other expenses incurred by Plenus in connection with the transactions contemplated under the Transaction Documents, as follows: Twenty thousand dollars ($20,000), plus VAT, will be paid by the Company 10 business days after signing the Loan agreement. The Company shall also be responsible for all taxes and other compulsory payments to which the Lenders are or shall be subject under the transactions contemplated by the Transaction Documents (other than taxes on the income of the Lender imposed in the jurisdiction in which its principal or lending office under this Agreement is located). Without derogating from the foregoing, the Company will pay the stamp tax applicable to the Transaction Documents and any document in connection therewith, including, without limitation, the Warrant Shares. 9.7 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of the Company and Plenus. No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring. All remedies, under this Agreement, by law or otherwise, afforded to any of the parties, shall be cumulative and not alternative. 9.8 Survival. All covenants made in this Agreement shall continue to remain in full force and effect for as long as this Agreement is still in effect pursuant to its terms. The Company's representations and warranties shall survive the expiration or termination, for any reason, of this Agreement. 9.9 Notices. All notices and other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be telecopied (faxed) or mailed by registered or certified mail, postage prepaid, or by electronic mail, or otherwise delivered by hand or by messenger as follows: 13 if to the Company - to the Company's address set forth above, to the attention of Chief Executive Officer and Chief Financial Officer; if to the Lender - to Plenus's address, to the attention of the persons set forth in Schedule 1; or to such other address, or to the attention of such other person, with respect to a party as such party shall notify the other parties in writing as above provided. Any notice sent in accordance with this Section 9.9 shall be effective (i) if mailed, three (3) business days after mailing, (ii) if sent by messenger, upon delivery, and (iii) if sent via telecopier (fax) or electronic mail, upon transmission and electronic confirmation of receipt or - if transmitted and received on a non-business day - on the first business day following transmission and electronic confirmation of receipt. 9.10 Partial Invalidity. If any provision of this Agreement is held by a court of competent jurisdiction to be invalid or unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction. 9.11 Currency. The term "dollars" appearing in this Agreement shall mean the legal currency of the United States of America, and all payments hereunder shall be made in such currency, unless otherwise agreed in writing by Plenus and the Company. IN WITNESS WHEREOF the parties have signed this Loan Agreement in one or more counterparts as of the date first appearing above. ATTUNITY LTD. By: ________________________ Its: ________________________ PLENUS TECHNOLOGIES, LTD. By: ________________________ Its: ________________________ 14 SCHEDULE 1 ---------- THE LENDER Name and Address - ---------------- Plenus Technologies Ltd. with a copy to: Steve Kronengold, Esq. 16 Abba Eben Avenues Rabin Science Park Herzliya Pituach Rehovot Israel Israel Attn: Ruthi Simcha Facsimile: (972-9) 957-8770 (972-8) 938-2975 THE CO-LENDERS Name and Address - ---------------- I Golden Gate Bridge Fund Mizrahi United Bank Ltd. THE PARTICIPANTS 1. The Investment Corporation of United Mizrachi Bank Ltd. 2. Union Bank of Israel Ltd. 3. Industrial Development Bank of Israel Ltd. 4. D. Partners (BVI), L.P 5. CMA Technology Venture Partner Limited 6. D. Partners (Israel), Limited Partnership 7. Israel Continental Bank Ltd. 8. Nessuah Zannex Ltd. 9. Mercantile Discount Bank Ltd. 10. Benleumi Provident Funds 11. Bank Leumi Le-Israel B.M. 12. Kahal Ltd. * Includes the aggregate participation amount of the Co-lender and all of the Participants. THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. SUBJECT TO THE PROVISIONS OF SECTION 10 HEREOF, THIS WARRANT SHALL BE VOID AFTER 5:00 P.M. EASTERN TIME ON JUNE 2, 2009 (the "EXPIRATION DATE"). ATTUNITY LTD. WARRANT TO PURCHASE ORDINARY SHARES NOMINAL VALUE NIS 0.1 PER SHARE For VALUE RECEIVED, Plenus Technologies Ltd. ("Plenus"), or any other Holder (as defined in Section 2 hereof) (the "Warrantholder"), is entitled to purchase, subject to the provisions of this Warrant, from Attunity Ltd., a corporation organized under the laws of Israel ("Company"), at any time not later than 5:00 P.M., Eastern time, on the Expiration Date, at an exercise price per share equal to $3.00 (the exercise price in effect being herein called the "Warrant Price"), the number of shares determined in accordance with Section 3A herein ("Warrant Shares") of the Company's ordinary shares, nominal value NIS 0.1 per share ("Ordinary Shares"). The number of Warrant Shares purchasable upon exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time as described herein. Section 1. Registration. The Company shall maintain books for the transfer and registration of the Warrant. Upon the initial issuance of this Warrant, the Company shall issue and register the Warrant in the name of the Warrantholder. Section 2. Permitted Transfers. The Warrantholder shall be entitled to transfer the Warrants to (i) a Co-Lender and each Participant (ii) any entity which controls, is controlled by or is under common control with the Warrantholder, (iii) if the Warrantholder is a trustee for, or acts on behalf of other person - such other person, and (iv) if the Warrantholder is a general or limited partnership - each of its partners and each other partnership managed by the same management company or managing general partner or an entity which controls, is controlled by, or is under common control with, such management company or managing general partner. All transfers of this Warrant shall be accompanied by an executed warrant transfer deed, under which the transferee undertakes to be bound by all obligations of the Warrantholder under this Warrant. The form of the deed of transfer and is attached hereto as Appendix B. Section 3. Exercise of Warrant. (a) Cash Exercise. Subject to the provisions hereof, the Warrantholder may exercise this Warrant in whole or in part at any time upon surrender of the Warrant, together with delivery of the duly executed Warrant exercise form attached hereto as Appendix A (the "Exercise Agreement") and payment by cash, certified check or wire transfer of funds for the aggregate Warrant Price for that number of Warrant Shares then being purchased, to the Company during normal business hours on any business day at the Company's principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof). The Warrant Shares so purchased shall be deemed to be issued to the holder hereof or such holder's designee, as the record owner of such shares, as of the close of business on the next business day after the date on which this Warrant shall have been surrendered (or evidence of loss, theft or destruction thereof and security or indemnity satisfactory to the Company), the Warrant Price shall have been paid and the completed Exercise Agreement shall have been delivered. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding three (3) business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of such holder or such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such certificates, deliver to the holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. As used herein, "business day" means a day, other than a Saturday or Sunday, on which banks in New York City are open for the general transaction of business. (b) Cashless Exercise. In lieu of the payment method set forth in sub-section (a) above, the Warrantholder may elect to exchange the Warrant for a number of Warrant Shares computed using the following formula: X = Y(A-B)/A Where X = the number of Warrant Shares to be issued to the Warrantholder. Y = the number of Warrant Shares purchasable under the Warrant (adjusted to the date of such calculation, but excluding Warrant Shares already issued under this Warrant). A = the Fair Market Value (as defined below) of one Ordinary Share. B = Exercise Price (as adjusted to the date of such calculation). "Fair Market Value" of an Ordinary Share shall mean the most recent closing bid price of the Company's Ordinary Shares, as published by Nasdaq, prior to the Warrantholder's exercise of the Warrant. In the event of a cashless exercise under this Section 3(b), this Warrant must be exercised for all the Warrant Shares then purchasable under this Warrant, and must be surrendered to the Corporation along with the Notice of Exercise. After such exercise and receipt by the Warrantholder of the appropriate amount of Warrant Shares, this Warrant shall be null and void. 2 Section 3A. Number of Warrant Shares. The Company and Plenus have entered into a certain Loan Agreement dated June __, 2004, pursuant to which Plenus has made available to the Company a revolving credit facility in the amount of $3 million (the "Credit Line"). The number of Warrant Shares that the Warrantholder may purchase pursuant to this Warrant shall be determined as follows: (a) In the event the Credit Line is terminated within the first year of its initiation, the Warrantholder shall be entitled to purchase the number of Warrant Shares equal to twenty percent (20%) of the Credit Line divided by the Exercise Price, as adjusted. (b) In the event the Credit Line is terminated within the second year of its initiation and the Company had not drawn any money from the Credit Line prior to termination, the Warrantholder shall be entitled to purchase the number of Warrant Shares equal to twenty-three percent (23%) of the Credit Line divided by the Exercise Price, as adjusted.. (c) In the event the Credit Line is terminated within the second year of its initiation and the Company had drawn money from the Credit Line prior to termination, the Warrantholder shall be entitled to purchase the number of Warrant Shares equal to thirty percent (30%) of the Credit Line divided by the Exercise Price, as adjusted. Section 4. Compliance with the Securities Act of 1933. The Company may cause the legend set forth on the first page of this Warrant to be set forth on each Warrant or similar legend on any security issued or issuable upon exercise of this Warrant, unless counsel for the Company is of the opinion as to any such security that such legend is unnecessary. Section 5. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the initial issuance of Warrant Shares issuable upon the exercise of the Warrant; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificates for Warrant Shares in a name other than that of the registered holder of this Warrant in respect of which such shares are issued, and in such case, the Company shall not be required to issue or deliver any certificate for Warrant Shares or any Warrant until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's reasonable satisfaction that such tax has been paid. The holder shall be responsible for income and gift taxes due under federal, state or other law, if any such tax is due. 3 Section 6. Mutilated or Missing Warrants. In case this Warrant shall be mutilated, lost, stolen, or destroyed, the Company shall issue in exchange and substitution of and upon cancellation of the mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and for the purchase of a like number of Warrant Shares, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of the Warrant, and with respect to a lost, stolen or destroyed Warrant, reasonable indemnity or bond with respect thereto, if requested by the Company. Section 7. Reservation of Ordinary Shares. The Company hereby represents and warrants that there have been reserved, and the Company shall at all applicable times keep reserved until issued (if necessary) as contemplated by this Section 7, out of the authorized and unissued Ordinary Shares, sufficient shares to provide for the exercise of the rights of purchase represented by this Warrant. The Company agrees that all Warrant Shares issued upon exercise of the Warrant shall be, at the time of delivery of the certificates for such Warrant Shares upon the due exercise of this Warrant, duly authorized, validly issued, fully paid and non-assessable Ordinary Shares of the Company. Section 8. Adjustments. Subject and pursuant to the provisions of this Section 8, the Warrant Price and number of Warrant Shares subject to this Warrant shall be subject to adjustment from time to time as set forth hereinafter. (a) If the Company shall, at any time or from time to time while this Warrant is outstanding, pay a dividend or make a distribution on its Ordinary Shares in Ordinary Shares, subdivide its outstanding Ordinary Shares into a greater number of shares or combine its outstanding Ordinary Shares into a smaller number of shares or issue by reclassification of its outstanding Ordinary Shares any shares of its capital stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the number of Warrant Shares purchasable upon exercise of the Warrant and the Warrant Price in effect immediately prior to the date upon which such change shall become effective, shall be adjusted by the Company so that the Warrantholder thereafter exercising the Warrant shall be entitled to receive the number of Ordinary Shares or other capital stock which the Warrantholder would have received if the Warrant had been exercised immediately prior to such event upon payment of a Warrant Price that has been adjusted to reflect a fair allocation of the economics of such event to the Warrantholder. Such adjustments shall be made successively whenever any event listed above shall occur. (b) If any capital reorganization, reclassification of the capital stock of the Company, consolidation or merger of the Company with another corporation in which the Company is not the survivor, or sale, transfer or other disposition of all or substantially all of the Company's assets to another corporation shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby the Warrantholder shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the Warrant Shares immediately theretofore issuable upon exercise of the Warrant, such shares of stock, securities or assets as would have been issuable or payable with respect to or in 4 exchange for a number of Warrant Shares equal to the number of Warrant Shares immediately theretofore issuable upon exercise of the Warrant, had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of each Warrantholder to the end that the provisions hereof (including, without limitation, provision for adjustment of the Warrant Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or properties thereafter deliverable upon the exercise thereof. The Company shall not effect any such consolidation, merger, sale, transfer or other disposition unless prior to or simultaneously with the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger, or the corporation purchasing or otherwise acquiring such assets or other appropriate corporation or entity shall assume the obligation to deliver to the holder of the Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase, and the other obligations under this Warrant. The provisions of this paragraph (b) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. (c) In case the Company shall fix a payment date for the making of a distribution to all holders of Ordinary Shares (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing corporation) of evidences of indebtedness or assets (other than cash dividends or cash distributions payable out of consolidated earnings or earned surplus or dividends or distributions referred to in Section 8(a)), or subscription rights or warrants, the Warrant Price to be in effect after such payment date shall be determined by multiplying the Warrant Price in effect immediately prior to such payment date by a fraction, the numerator of which shall be the total number of Ordinary Shares outstanding multiplied by the Market Price (as defined below) per Ordinary Share immediately prior to such payment date, less the fair market value (as determined by the Company's Board of Directors in good faith) of said assets or evidences of indebtedness so distributed, or of such subscription rights or warrants, and the denominator of which shall be the total number of Ordinary Shares outstanding multiplied by such Market Price per Ordinary Share immediately prior to such payment date. "Market Price" as of a particular date (the "Valuation Date") shall mean the following: (a) if the Ordinary Shares are then listed on a national stock exchange, the closing sale price of one Ordinary Share on such exchange on the last trading day prior to the Valuation Date; (b) if the Ordinary Shares are then quoted on the Nasdaq Stock Market, Inc. ("Nasdaq"), the closing sale price of one Ordinary Share on Nasdaq on the last trading day prior to the Valuation Date or, if no such closing sale price is available, the average of the high bid and the low asked price quoted on Nasdaq on the last trading day prior to the Valuation Date; or (c) if the Ordinary Shares are not then listed on a national stock exchange or quoted on Nasdaq, the Fair Market Value of one Ordinary Share as of the Valuation Date, shall be determined in good faith by the Board of Directors of the Company and the Warrantholder. The Board of Directors of the Company shall respond promptly, in writing, to an inquiry by the Warrantholder prior to the exercise hereunder as to the Market Value of an Ordinary Share as determined by the Board of Directors of the Company. In the event that the Board of Directors of the Company and the Warrantholder are unable to agree upon the Market Value in respect of subpart (c) hereof, the Company and the Warrantholder shall jointly select an appraiser, who is experienced in such matters. The decision of such appraiser shall be final and conclusive, and the cost of such 5 appraiser shall be borne evenly by the Company and the Warrantholder. Such adjustment shall be made successively whenever such a payment date is fixed. (d) For the term of this Warrant, in addition to the provisions contained above, the Warrant Price shall be subject to adjustment as provided below. An adjustment to the Warrant Price shall become effective immediately after the payment date in the case of each dividend or distribution and immediately after the effective date of each other event which requires an adjustment. (e) In the event that, as a result of an adjustment made pursuant to this Section 8, the holder of this Warrant shall become entitled to receive any shares of capital stock of the Company other than Ordinary Shares, the number of such other shares so receivable upon exercise of this Warrant shall be subject thereafter to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in this Warrant. (f) Except as provided in subsection (g) hereof, if and whenever the Company shall issue or sell, or is, in accordance with any of subsections (f)(l) through (f)(6) hereof, deemed to have issued or sold, any Ordinary Shares for a consideration per share less than the Warrant Price in effect immediately prior to the time of such issue or sale, then and in each such case (a "Trigger Issuance") the then-existing Warrant Price shall automatically be reduced, as of the close of business on the effective date of the Trigger Issuance, to the lowest price per share at which any Ordinary Shares were issued or sold or deemed to be issued or sold in the Trigger Issuance; provided, however, that in no event shall the Warrant Price after giving effect to such Trigger Issuance be greater than the Warrant Price in effect prior to such Trigger Issuance. For purposes of this subsection (f), "Additional Ordinary Shares" shall mean all Ordinary Shares issued by the Company or deemed to be issued pursuant to this subsection (f), other than Excluded Issuances (as defined in subsection (g) hereof). For purposes of this subsection (f), the following subsections (f)(l) to (f)(6) shall also be applicable (subject, in each such case, to the provisions of subsection (g) hereof) and to each other subsection contained in this subsection (f): (f)(1) Issuance of Rights or Options. In case at any time the Company shall in any manner grant (directly and not by assumption in a merger or otherwise) any warrants or other rights to subscribe for or to purchase, or any options for the purchase of, Ordinary Shares or any stock or security convertible into or exchangeable for Ordinary Shares (such warrants, rights or options being called "Options" and such convertible or exchangeable stock or securities being called "Convertible Securities") whether or not such Options or the right to convert or exchange any such Convertible Securities are immediately exercisable, and the price per share for which Ordinary Shares are issuable upon the exercise 6 of such Options or upon the conversion or exchange of such Convertible Securities (determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of (x) the total amount, if any, received or receivable by the Company as consideration for the granting of such Options, plus (y) the aggregate amount of additional consideration payable to the Company upon the exercise of all such Options, plus (z), in the case of such Options which relate to Convertible Securities, the aggregate amount of additional consideration, if any, payable upon the issue or sale of such Convertible Securities and upon the conversion or exchange thereof, by (ii) the total maximum number of Ordinary Shares issuable upon the exercise of such Options or upon the conversion or exchange of all such Convertible Securities issuable upon the exercise of such Options) shall be less than the Warrant Price in effect immediately prior to the time of the granting of such Options, then the total number of Ordinary Shares issuable upon the exercise of such Options or upon conversion or exchange of the total amount of such Convertible Securities issuable upon the exercise of such Options shall be deemed to have been issued for such price per share as of the date of granting of such Options or the issuance of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Warrant Price. Except as otherwise provided in subsection 8(f)(3), no adjustment of the Warrant Price shall be made upon the actual issue of such Ordinary Shares or of such Convertible Securities upon exercise of such Options or upon the actual issue of such Ordinary Shares upon conversion or exchange of such Convertible Securities. (f)(2) Issuance of Convertible Securities. In case the Company shall in any manner issue (directly and not by assumption in a merger or otherwise) or sell any Convertible Securities, whether or not the rights to exchange or convert any such Convertible Securities are immediately exercisable, and the price per share for which Ordinary Shares are issuable upon such conversion or exchange (determined by dividing (i) the sum (which sum shall constitute the applicable consideration) of (x) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus (y) the aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the total number of shares of Ordinary Shares issuable upon the conversion or exchange of all such Convertible Securities) shall be less than the Warrant Price in effect immediately prior to the time of such issue or sale, then the total maximum number of shares of Ordinary Shares issuable upon conversion or exchange of all such Convertible Securities shall be deemed to have been issued for such price per share as of the date of the issue or sale of such Convertible Securities and thereafter shall be deemed to be outstanding for purposes of adjusting the Warrant Price, provided that (a) except as otherwise provided in subsection 8(f)(3), no adjustment of the Warrant Price shall be made upon the actual issuance of such Ordinary Shares upon conversion or exchange of such Convertible Securities and (b) no further adjustment of the Warrant Price shall be made by reason of the issue or sale of Convertible Securities upon exercise of any Options to purchase any such Convertible 7 Securities for which adjustments of the Warrant Price have been made pursuant to the other provisions of subsection 8(f). (f)(3) Change in Option Price or Conversion Rate. Upon the happening of any of the following events, namely, if the purchase price provided for in any Option referred to in subsection 8(f)(l) hereof, the additional consideration, if any, payable upon the conversion or exchange of any Convertible Securities referred to in subsections 8(f)(l) or 8(f)(2), or the rate at which Convertible Securities referred to in subsections 8(f)(l) or 8(f)(2) are convertible into or exchangeable for Ordinary Shares shall change at any time (including, but not limited to, changes under or by reason of provisions designed to protect against dilution), the Warrant Price in effect at the time of such event shall forthwith be readjusted to the Warrant Price which would have been in effect at such time had such Options or Convertible Securities still outstanding provided for such changed purchase price, additional consideration or conversion rate, as the case may be, at the time initially granted, issued or sold. On the termination of any Option for which any adjustment was made pursuant to this subsection 8(f) or any right to convert or exchange Convertible Securities for which any adjustment was made pursuant to this subsection 8(f) (including without limitation upon the redemption or purchase for consideration of Convertible Securities by the Company), the Warrant Price then in effect hereunder shall forthwith be changed to the Warrant Price which would have been in effect at the time of such termination had such Option or Convertible Securities, to the extent outstanding immediately prior to such termination, never been issued. (f)(4) Consideration for Stock. In case any Ordinary Shares, Options or Convertible Securities shall be issued or sold for cash, the consideration received therefor shall be deemed to be the net amount received by the Company therefor, after deduction therefrom of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case any Ordinary Shares, Options or Convertible Securities shall be issued or sold for a consideration other than cash, the amount of the consideration other than cash received by the Company shall be deemed to be the fair value of such consideration as determined in good faith by the Board of Directors of the Company, after deduction of any expenses incurred or any underwriting commissions or concessions paid or allowed by the Company in connection therewith. In case any Options shall be issued in connection with the issue and sale of other securities of the Company, together comprising one integral transaction in which no specific consideration is allocated to such Options by the parties thereto, such Options shall be deemed to have been issued for such consideration as determined in good faith by the Board of Directors of the Company. (f)(5) Record Date. In case the Company shall take a record of the holders of its Ordinary Shares for the purpose of entitling them (i) to receive a dividend or other distribution payable in Ordinary Shares, Options or Convertible Securities or (ii) to subscribe for or purchase Ordinary Shares, Options or Convertible 8 Securities, then such record date shall be deemed to be the date of the issue or sale of the Ordinary Shares deemed to have been issued or sold upon the declaration of such dividend or the making of such other distribution or the date of the granting of such right of subscription or purchase, as the case may be. (f)(6) Treasury Shares. The number of Ordinary Shares outstanding at any given time shall not include shares owned or held by or for the account of the Company or any of its wholly-owned subsidiaries, and the disposition of any such shares (other than the cancellation or retirement thereof) shall be considered an issue or sale of Ordinary Shares for the purpose of this subsection (f). (g) Anything herein to the contrary notwithstanding, the Company shall not be required to make any adjustment of the Warrant Price in the case of the issuance of (A) capital stock, Options or Convertible Securities issued to directors, officers, employees or consultants of the Company in connection with their service as directors of the Company, their employment by the Company or their retention as consultants or service providers by the Company pursuant to an equity compensation program approved by the Board of Directors of the Company or the compensation committee of the Board of Directors of the Company, (B) Ordinary Shares upon the conversion or exercise of Options or Convertible Securities issued prior to the date hereof, (C) Ordinary Shares issued or issuable by reason of a dividend, stock split or other distribution on Ordinary Shares (but only to the extent that such a dividend, split or distribution results in an adjustment in the Warrant Price pursuant to the other provisions of this Warrant) or (D) capital stock, Options or Convertible Securities issued in an acquisition by the Company of the assets or equity interests of another entity, in connection with a joint venture or other strategic alliance transaction or to lending institutions, licensors of tangible or intangible property or equipment leasing companies in connection with licensing, leasing or financing transactions, in either case approved by the Board of Directors, and (E) the issuance of Ordinary Shares upon the exercise or conversion of any securities described in clauses (A) through (D) above (collectively, "Excluded Issuances"). Section 9. Fractional Interest. The Company shall not be required to issue fractions of Warrant Shares upon the exercise of the Warrant. If any fractional Ordinary Shares would, except for the provisions of the first sentence of this Section 9, be delivered upon such exercise, the Company, in lieu of delivering such fractional share, shall pay to the exercising holder of this Warrant an amount in cash equal to the Fair Market Value of such fractional Ordinary Shares on the date of exercise. As used in this Warrant, "Fair Market Value" of a an Ordinary Share as of a particular date (the "Valuation Date") shall mean the following: (a) if the Ordinary Shares are then listed on a national stock exchange, the closing sale price of one Ordinary Share on such exchange on the last trading day prior to the Valuation Date; (b) if the Ordinary Shares are then quoted on Nasdaq, the closing sale price of one Ordinary Share on Nasdaq on the last trading day prior to the Valuation Date or, if no such closing sale price is available, the average of the high bid and the low sales price quoted on Nasdaq on the last trading day prior to the Valuation Date; or (c) if the Ordinary Shares are not then listed on a national stock exchange or quoted on Nasdaq, the Fair Market Value of one Ordinary Share as of the Valuation Date, shall be determined in good faith by the Board of Directors of the Company. 9 Section 10. Extension of Expiration Date. If the Company fails to cause any Registration Statement covering Registrable Securities (unless otherwise defined herein, capitalized terms are as defined in the Registration Rights Agreement referred to in Section 15 below) to be declared effective prior to the applicable dates set forth therein and the Blackout Period (whether alone, or in combination with any other Blackout Period) continues for more than 60 days in any 12 month period, or for more than a total of 90 days, then the Expiration Date of this Warrant shall be extended one day for each day beyond the 60-day or 90-day limits, as the case may be, that the Blackout Period continues. Section 11. Benefits. Nothing in this Warrant shall be construed to give any person, firm or corporation (other than the Company and the Warrantholder and permitted Tranferees) any legal or equitable right, remedy or claim, it being agreed that this Warrant shall be for the sole and exclusive benefit of the Company and the Warrantholder. Section 12. Notices to Warrantholder. Upon the happening of any event requiring an adjustment of the Warrant Price, the Company shall promptly give written notice thereof to the Warrantholder at the address appearing in the records of the Company, stating the adjusted Warrant Price and the adjusted number of Warrant Shares resulting from such event and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Failure to give such notice to the Warrantholder or any defect therein shall not affect the legality or validity of the subject adjustment. Section 13. Identity of Transfer Agent. The Transfer Agent for the Ordinary Shares is American Stock Transfer and Trust Company. Upon the appointment of any subsequent transfer agent for the Ordinary Shares or other shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrant, the Company will mail to the Warrantholder a statement setting forth the name and address of such transfer agent. Section 14. Notices. Unless otherwise provided, any notice required or permitted under this Warrant shall be given in writing and shall be deemed effectively given as hereinafter described (i) if given by personal delivery, then such notice shall be deemed given upon such delivery, (ii) if given by telex or telecopier, then such notice shall be deemed given upon receipt of confirmation of complete transmittal, (iii) if given by mail, then such notice shall be deemed given upon the earlier of (A) receipt of such notice by the recipient or (B) three days after such notice is deposited in first class mail, postage prepaid, and (iv) if given by an internationally recognized overnight air courier, then such notice shall be deemed given one day after delivery to such carrier. All notices shall be addressed as follows: (i) if to the Warrantholder, at its address as set forth in the Company's books and records and, if to the Company, at the address as follows, or at such other address as the Warrantholder or the Company may designate by ten days' advance written notice to the other: If to the Company: Attunity Ltd. Einstein Building Tirat Carmel, Israel Attention: Arie Gonen 10 Fax: 011-972-4-857-6745 With a copy (which shall not constitute notice) to: Carter, Ledyard & Milburn 2 Wall Street New York, NY 10005 Attention: Steven Glusband Fax: (212) 732-3232 If to Plenus: Plenus Technologies, Ltd. 16 Abba Eben Avenues Herzliya Pituach Israel Attentionn: Ruthi Simcha Facsimile: 972-9-957-8770 Section 15. Registration Rights. The Warrantholder is entitled with respect to the Warrant Shares to the identical registration rights and the additional terms and conditions (with the exception of the penalties and expense provisions) provided in the Registration Rights Agreement between the Company and certain Purchasers dated May 5, 2004, a copy of which is attached hereto. The rights and obligations of the Company and the Holder set forth in this Section 15 shall survive the exercise of this Warrant. Section 16. Successors. All the covenants and provisions hereof by or for the benefit of the Warrantholder shall bind and inure to the benefit of its respective successors and assigns hereunder. Section 17. Governing Law. This Warrant shall be governed by, and construed in accordance with, the internal laws of the State of Israel, without reference to the choice of law provisions thereof. This Warrant shall be governed by and construed in accordance with the internal laws of the State of Israel, without giving effect to its choice of law provisions. This Agreement shall not interpreted or construed with any presumption against the party causing this Agreement to be drafted. Section 18. No Rights as Stockholder. Prior to the exercise of this Warrant, the Warrantholder shall not have or exercise any rights as a stockholder of the Company by virtue of its ownership of this Warrant. Section 19. Amendment; Waiver Any term of this Warrant may be amended or waived (including the adjustment provisions included in Section 8 of this Warrant) upon the written consent of the Company and the Warrantholder. Section 20. Section Headings. The section heading in this Warrant are for the convenience of the Company and the Warrantholder and in no way alter, modify, amend, limit or restrict the provisions hereof. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed on the __ day of May 2004. ATTUNITY LTD. By:___________________________ Name: Title: 12 APPENDIX A ---------- WARRANT EXERCISE FORM --------------------- To: Attunity Ltd. Attn: ____________, 1. [ ] [____] (Check and initial here if the undersigned elects this alternative) The undersigned hereby elects to purchase [FILL IN NUMBER OF SHARES] ____________ Ordinary Shares of Attunity Ltd. pursuant to the terms of the attached Warrant (the "Warrant"), and tenders herewith payment in full for the Exercise Price of the shares being purchased. 1. [ ] [____] (Check and initial here if the undersigned elects this alternative In lieu of exercising the Warrant for cash or a check, the undersigned hereby elects to effect the net exercise provision of Section 3(b) of the Warrant and receive [FILL IN NUMBER OF SHARES] _________ Ordinary Shares of Attunity Ltd. pursuant to the terms of the Warrant according to the following calculation (Initial here if the undersigned elects this alternative ________): X = Y (A-B) ( ) = (____) [(_____) - (_____)] ------- -------------------------- A (_____) Where X = the number of shares of Warrant Shares to be issued to Warrantholder. Y = the number of shares of Warrant Shares purchasable under the amount of the Warrant being exchanged (as adjusted to the date of such calculation). A = the Fair Market Value of one share of the Corporation's Ordinary Shares. B = Exercise Price (as adjusted to the date of such calculation). 2. Please issue a certificate or certificates representing said Warrant Shares in the name of the below list of entities, and record same in the Corporation's internal share registry, as follows: Very truly yours, ______________ By: ___________ Title: __________ Date: __________ Appendix B ---------- FORM OF TRANSFER (To be signed only upon transfer of Warrant) FOR VALUE RECEIVED, the undersigned (the "Transferor") hereby assigns and transfers unto ______________________________________________ (the "Transferee") the right represented by the attached Warrant No. _ (the "Warrant") to purchase [fill in amount of Warrant Shares] Warrant Shares of Attunity Ltd. at an Exercise Price of $3.00, subject to adjustment, out of the total Warrant Shares to which the Warrant relates, and appoints ______________, Attorney, to transfer such right on the books of Attunity Ltd., with full power of substitution in the premises. The Transferor further represents that the transfer is made in accordance with the terms of the Warrant, including, without limitation, with respect to the Transferee being a Permitted Transferee or with respect to which consent to transfer has been given by Attunity Ltd. Dated: __________________ By: ------------------------- Name: ----------------------- Signed in the presence of: By: ------------------------- Name: ----------------------- And the undersigned Transferee hereby agrees to the transfer of said rights to which the Warrant relates, and agrees to be bound by the terms and conditions of the Warrant. The undersigned further represents that the transfer is made in accordance with the terms of the Warrant. Dated: __________________ By: ------------------------- Name: ----------------------- Signed in the presence of: By: ------------------------- Name: ----------------------- 14 FLOATING CHARGE AGREEMENT ------------------------- THIS FLOATING CHARGE AGREEMENT (this "Agreement") made as of the 3rd day of June 2004, by and among Attunity Ltd., an Israeli company number 520038019 of Einstein Building, Tirat Hacarmel Israel 39101(the "Pledgor"); Plenus Technologies Ltd. of Delta House, 16 Abba Eben Avenue, Herzeliya 46725, Israel) ("Plenus" or "Lender"); and United Mizrachi Bank Ltd. and Golden Gate Bridge Fund (Israel), Limited Partnership (collectively the "Co-Lenders"). WHEREAS, the Pledgor has agreed to enter into this Agreement in order to secure certain obligations of the Pledgor to the Lender and to the Co-Lenders (the "Secured Obligations", as such term is defined in the Loan Agreement referred to in Section 1); NOW, THEREFORE, IT IS AGREED AS FOLLOWS: 1. The Preamble to this Agreement constitutes an integral part hereof. All capitalized terms used herein and not defined herein shall have the meaning assigned to such terms in the Loan Agreement by and among the Pledgor, the Lender and the Co-Lenders, dated as of June ___, 2004 (the "Loan Agreement"). 2. To secure the performance of the Pledgor's obligations pursuant to this Agreement, the Loan Agreement and the Warrant (the "Secured Obligations"), the Pledgor hereby pledges and grants the Lender and the Co-Lender, a first priority floating charge on all of its right, title and interest (the "Floating Charge") in all its present and future tangible and intangible assets and rights of any kind, whether contingent or absolute, all as more fully described in Exhibit A attached hereto (the "Collateral"), for as long as the Floating Charge is in effect. 3. Subject to the provisions of Section 13.2 hereof, the Pledgor will not without prior written consent of Plenus which will not be unreasonably withheld or delayed and which consent may be obtained, inter alia, via e-mail communication: (a) materially change the general nature of its business and/or operate any transaction which may have a material adverse effect on the business, condition (financial or otherwise), or results of operations of the Pledgor or on the ability of the Pledgor to comply with any of its material obligations under any of the Transaction Documents ("Material Adverse Change"); (b) make any loan or other extension of credit to its distributors, customers or any subsidiary that is not wholly owned by Pledgor (with the exception of Attunity Software Services (1991) Ltd. in which the Company through its wholly owned subsidiary, Attunity Israel (1992) Ltd., holds a 95% interest), except for loans and other extensions of credit granted in the ordinary course of business and in the event such loan or other extension of credit is not in the ordinary course of business, for an aggregate amount of not more than US$50,000; (c) receive financial loans or similar extensions of credit from a bank or other financial institution or third party, exceeding (together with the amounts set forth in subsection (d) hereunder) an aggregate amount of US$100,000; (d) issue any guarantee or otherwise incur any contingent liability in connection with any financial loan or similar extension of credit from a bank or other financial institution or third party, exceeding in the aggregate (together with the amounts set forth in subsection (c) hereinabove) an amount of US$150,000; provided that, the restrictions contained in 2 clauses (c) and (d) of this Section 3 shall not apply to any commercial debts (e.g., payments due to suppliers or other entities within the framework of a commercial relationship or guarantees in respect thereof) incurred by the Pledgor in the ordinary course of its business, (e) sell, transfer, assign, grant a security interest in or pledge any of the Collateral other than: (i) with respect to sale or transfer of any of the Collateral in the ordinary course of business, or (ii) the creation of a fixed charge under Section 169(d) of the Companies Ordinance (New Version), 5743-1983, on assets of the Pledgor which are acquired by the Pledgor following the Effective Date, provided, however, that such fixed charge shall only be recorded in favor of the actual seller of such assets or a commercial bank, or other financial institution specifically financing such an acquisition of assets; (f) repay any existing or future loans, debts or other financial obligations, including, without limitation, with respect to shareholders' loans, excluding, however, operating expenses of the Pledgor which are incurred in the Pledgor's ordinary course of business and repayment of loans or debts the assumption of which is not forbidden pursuant to this Agreement; (g) transfer ownership of its assets to a third party other than in the ordinary course of business, (h) create or permit to exist any encumbrance over any of its present or future revenues or assets except for encumbrances existing at the date of this Agreement; and (i) distribute any dividends. For the purpose of this Agreement, "IP" shall mean, all intangible legal right, title and interest evidenced by or embodied in or connected or related to (i) copyrights; (ii) patents and any rights thereunder, and all applications, registrations, and renewals in connection therewith; (iii) trademarks, service marks, trade names, together with all translations, adaptations, derivations, and combinations thereof, and all applications, registrations, and renewals in connection therewith; (iv) all mask works, rights in original topographies and all applications, registrations, and renewals in connection therewith; (v) all trade secrets, rights to unpatented inventions, know-how and confidential information; and (vi) all computer software (including data and related documentation), in each case on a worldwide basis, and all copies and tangible embodiments thereof, or any part thereof, in whatever form or medium. The provisions of this Section 3 shall apply mutatis mutandis to any existing and/or future subsidiaries of the Pledgor. The Pledgor undertakes that each and every one of its existing and future subsidiaries shall undertake in writing to comply with this Section 3 as provided above. 4. The Pledgor shall use best efforts to preserve the Collateral, without interfering with the use of the Collateral in the ordinary course of business, and shall at all times maintain insurance coverage customary for a company of its size, at the stage of development and in the industry in which Pledgor operates. 5. The Pledgor hereby affirms the representations and warranties appearing in Section 4 of the Loan Agreement and such representations and warranties are incorporated by reference herein. 6. Plenus shall be entitled on its own behalf and on behalf of the Co-lenders to enforce the Floating Charge against the Pledgor, and the Collateral shall be subject to immediate foreclosure, at any time and without any further demand, immediately 3 upon the occurrence of an Event of Acceleration, unless otherwise provided for in this Agreement or the Loan Agreement. The Pledgor shall promptly inform the Lender of the occurrence of any Event of Acceleration and, upon receipt of a written request to that effect from Plenus, confirm to the Lender that, except as previously notified to the Lender or as notified in such confirmation, no Event of Acceleration has occurred. 7. (a) Upon the occurrence of any Event of Acceleration, Plenus shall be entitled to adopt all the measures it deems fit, allowed by applicable law, in order to recover the performance of the Secured Obligations and realize all of its rights hereunder, including the realization of the Collateral, in whole or in part, and to apply the proceeds thereof to the Secured Obligations without Plenus first being required to realize any other guarantees or collateral securities, if such be held by Plenus. (b) Upon the occurrence of an Event of Acceleration, Plenus may, as attorney-in-fact of the Pledgor (and, for the purpose hereof, the Pledgor does hereby irrevocably appoints Plenus to be its attorney-in-fact), subject to any applicable law, sell all or any part of the Collateral by public auction or otherwise, by itself or through others, for cash or installments thereof or otherwise, at a price and on such terms as Plenus in its reasonable discretion shall deem fit, and likewise, subject to applicable law, Plenus may of its own accord or through the court or an execution office, realize the value of the Collateral or any part thereof, including, inter alia, by appointing a receiver or receiver and manager on behalf of Plenus, who shall be empowered, inter alia: (1) to call in all or any part of the Collateral; (2) to sell, or agree to the sale of, the Collateral, in whole or in part, to dispose, or agree to dispose, of same in such other manner on such terms as he deems fit; (3) to make such other arrangement regarding the Collateral or any part thereof as he deems fit; (4) to take any and all action required which he, at his sole discretion, deems productive or otherwise helpful, for the realization of the Collateral, and/or for the fulfillment of his duty; and (5) to carry out any other authority empowered to him by the court or the execution office. The Lenders and the Co-Lenders acknowledge and agree that certain of the Collateral may have been developed with the assistance of funds received from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Employment and consequently the use, transfer and sale of such Collateral is subject to the Law for the Encouragement of Industrial Research and Development, 5744-1984, as amended or supplemented from time to time 4 and all rules and regulations issued thereunder (the "R&D Law") and they undertake to comply with the R&D Law. 8. The Pledgor shall cooperate with the Lender and Co-Lenders and execute all documents as may be reasonably necessary or advisable to register the Floating Charge with the Israeli Registrar of Companies and/or Registrar of Pledges, such document(s) substantially in the form annexed hereto as Exhibit B, and shall bear all stamp taxes with respect to such registrations. The Pledgor shall pay, upon demand, all reasonable expenses, including reasonable attorney's fees, incurred by the Lender and the Co-lender in enforcing their rights and remedies hereunder. 9. The amount being secured under the Floating Charge created by this Floating Charge Agreement is unlimited in amount and is created in accordance with the Loan Agreement. The payments to be made to the Lender and to the Co-lenders in the event of the foreclosure of the Floating Charge will be made in the following order: (i) costs (distributed pro rata among the Lender and the Co-lenders),, (ii) expenses and taxes, (iii) interest, (iv) any payment due under Section 9.6 of the Loan Agreement and (v) the Principal Amount. The Floating Charge shall be cancelled and be of no further force and effect and the Lender and Co-Lenders shall promptly execute and provide the Pledgor with all documents necessary to release the Floating Charge upon repayment in full of the Principal Amount together with any accrued Interest thereon, payment of the Credit Line Fee (if applicable) and any other amounts due according to this Agreement, unless terminated earlier by the Lender. 10. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Israel. The parties hereto hereby irrevocable submit to the exclusive jurisdiction of the appropriate court in Tel Aviv, Israel. 11. The Pledgor shall promptly notify Plenus in writing of any Material Adverse Change and of any other event that may materially adversely affect the condition or value of the Collateral. 12. The Pledgor will immediately notify Plenus of any change in its name or identity or corporate structure or in the location of its chief offices or where its books and records are kept, as well as any change to its incorporation documents.[It's just a notice requirement] 13. None of the rights, privileges or obligations set forth in, arising under, or created by, this Agreement may be assigned or transferred by any party hereto without the prior consent in writing of the Pledgor and Plenus. Notwithstanding the foregoing and without derogating from the requirement and limitations set forth immediately below: 13.1 the Lender and each of the Co-Lenders shall have the right to assign or transfer any of its rights, privileges and obligations under this Agreement to a Permitted Transferee, provided that such assignment or transfer is not to a competitor of the Pledgor, and further provided that the assignee or transferee undertakes, in writing, all of such Lender's or Co-Lender's obligations hereunder. The assigning or transferring Lender or Co-Lender shall notify the 5 Pledgor in writing of any such assignment or transfer no later than seven (7) days following its execution. 13.2 The Pledgor shall be entitled to assign or transfer its rights, privileges and obligations under this Agreement in the event of an M&A Transaction (as defined below) so long as the entity that results from such merger or consolidation, or purchase and sale of all, or substantially all, of Pledgor's assets or shares (as applicable, the "Surviving Entity"), shall have executed and delivered to the Lender an agreement containing an assumption by the Surviving Entity of the due and punctual performance of all obligations and performance and observance of each covenant and condition of the Pledgor set forth in the Loan Agreement and herein, including the registration and perfection of the Lender's and Co-Lenders' security interest in the Collateral. For purposes of this Agreement, the term M&A Transaction shall mean the consummation of (a) a transaction or a series of transactions for the sale or other disposition of all, or substantially all, of the assets or business of the Corporation, or (b) a transaction or a series of transactions, including, without limitation, a merger or consolidation, whereby, or as a result thereof, the Corporation's shareholders immediately prior thereto, hold 50% or less of the voting power of the Corporation, the surviving entity or the new entity (as the case may be) or they will no longer have the power or the right to appoint more than fifty (50%) percent of the members of the board of directors of such entity. 14. Notwithstanding anything herein to the contrary, (i) the Co-Lenders have agreed that Plenus at its sole discretion shall determine whether to realize any charges and/or pledges over the assets of the Pledgor created for the benefit of the Lender and the Co-Lenders, and make any other decisions that need to be made with respect to any other issue relating to this Agreement, (ii) the Co-Lenders have agreed that Plenus at its sole discretion shall determine whether an Event of Acceleration has occurred and (iii) the Co-Lenders have agreed not to take any action to the contrary. 15. The parties hereto intend and agree that the Co-Lenders shall be deemed a third party beneficiary hereunder and that, subject to Section 14 above, all rights and privileges conferred upon the Co-Lenders pursuant hereto shall inure to their benefit. 16. Any notices to be provided by one party to another shall be done in accordance with the notice provisions set forth in the Loan Agreement. 17. Any term of this Agreement may be amended and the observance of any term hereof may be waived (either prospectively or retroactively and either generally or in a particular instance) only with the written consent of the Pledgor and Plenus. No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of such party's rights or remedies with respect to such breach or any other breach or default theretofore or thereafter occurring. All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative. 6 18. This Agreement, the Fixed Charge Agreement, the Loan Agreement and their Exhibits and Schedules, constitute the full and entire understanding and agreement among the parties with regard to the subject matters hereof and thereof. The preamble, Exhibits and Schedules hereto constitute an integral part hereof. IN WITNESS WHEREOF, this Floating Charge Agreement has been executed by the parties hereto as of the date first above written. ATTUNITY LTD. PLENUS TECHNOLOGIES LTD. By: By: ---------------------- ---------------------- Title: Title: ---------------------- ---------------------- Date: Date: ---------------------- ---------------------- UNITED MIZRACHI BANK LTD. GOLDEN GATE BRIDGE FUND (ISRAEL), LIMITED PARTNERSHIP By: By: ---------------------- ---------------------- Title: Title: ---------------------- ---------------------- Date: Date: ---------------------- ---------------------- 7 EXHIBIT A --------- The collateral consists of all of Pledgor's rights, titles and interests in and to all assets of the Pledgor, including, but not limited to, the following (the "Collateral"): All goods and equipment now owned or hereafter acquired, including, without limitation, all machinery, fixtures, vehicles (including motor vehicles and trailers), and any interest in any of the foregoing, and all attachments, accessories, accessions, replacements, substitutions, additions, and improvements to any of the foregoing, wherever located; All inventory, now owned or hereafter acquired, including, without limitation, all merchandise, raw materials, parts, supplies, packing and shipping materials, work in process and finished products including such inventory as is temporarily out of Pledgor's custody or possession or in transit and including any returns upon any accounts or other proceeds, including insurance proceeds, resulting from the sale or disposition of any of the foregoing and any documents of title representing any of the above; All contract rights and general intangibles and all of Pledgor's IP, now owned or hereafter acquired, including, without limitation, the underlying source and object code of Pledgor's proprietary software products and technologies, goodwill, trademarks, servicemarks, Internet domain names, trade dress, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringement claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, income tax refunds, payments of insurance; all claims for damages by way of any past, present and future infringement of any of the foregoing and rights to payment of any kind, including trade receivables and accrued payments for services rendered and/or products and consulting services deliverables delivered; All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Pledgor arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Pledgor, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Pledgor; All documents, cash, deposit accounts, securities, securities entitlements, securities accounts, investment property, financial assets, letters of credit, certificates of deposit, instruments and chattel paper now owned or hereafter acquired and Pledgor's Books relating to the foregoing; All claims for damages by way of any past, present and future infringement of any of Pledgor's IP; 8 All Pledgor's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof; The term "Pledgor's Books" as used herein shall mean all Pledgor's books and records including ledgers, records regarding Pledgor's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information; and All insurance policies or the proceeds thereof in respect of the above described assets. Notwithstanding anything to the contrary in this Exchibit A, "Collateral" shall not include those assets on which a charge or encumberance has already been registered at the Israeli Registrar of Companies at the date of the Floating Charge Agreement to which this Exhibit A is attached. FIXED CHARGE AGREEMENT ---------------------- THIS FIXED CHARGE AGREEMENT (this "Agreement") made as of the 3rd day of June 2004, by and among Attunity Ltd., a company duly incorporated under the laws of the State of Israel, having its principal place of business at Einstein Building, Tirat Hacarmel, Israel (the "Pledgor"), Plenus Technologies Ltd. of Delta House, 16 Abba Eben Avenue, Herzeliya 46725, Israel ("Plenus" or the "Lender"), and Golden Gate Bridge Fund (Israel), Limited Partnership, and United Mizrachi Bank, Ltd. (collectively referred to as "Co-lenders"). WHEREAS, the Pledgor has agreed to enter into this Agreement in order to secure certain obligations of the Pledgor, to the Lender and to the Co-lenders, pursuant to the Loan Agreement; NOW, THEREFORE, IT IS AGREED AS FOLLOWS: 1. The Preamble to this Agreement constitutes an integral part hereof. All capitalized terms used herein and not defined herein shall have the meaning assigned to such terms in the Loan Agreement by and among the Pledgor, the Lender and the Co-lenders, dated as of June 3, 2004 (the "Loan Agreement"). 2. To secure the performance of the Pledgor's obligations pursuant to this Agreement, the Floating Charge Agreement, the Loan Agreement and the Warrant (the "Secured Obligations"), the Pledgor hereby pledges and grants the Lender, and to the Co-Lenders, a first priority fixed charge on all of the Pledgor rights in and to its intellectual property (the "Fixed Charge") as more fully described in Exhibit A attached hereto (the "Collateral"), for as long as the Fixed Charge is in effect. 3. The Pledgor will not without prior written consent of Plenus which will not be unreasonably withheld or delayed and which consent may be obtained, inter alia, via e-mail communication: (a) materially change the general nature of its business; (b) make any loan or other extension of credit to its distributors, customers or any subsidiary that is not wholly owned by Pledgor (with the exception of Attunity Software Services (1991) Ltd. in which the Company through its wholly owned subsidiary, Attunity Israel (1992) Ltd., holds a 95% interest), other than loans and advances granted in the ordinary course of business and for an aggregate amount of not more than $50,000; (c) receive any loan or advance from a third party or incur any debt, other than debt incurred in the ordinary course of business consistent with past business practices of the Pledgor and up to an aggregate amount of US$100,000; (d) issue any guarantee or otherwise incur any contingent liability, other than in the ordinary course of business and up to an aggregate amount of US$100,000; (e) sell, transfer, assign, grant a security interest in or pledge any of the Collateral or any of the Pledgor's other assets (f) repay any existing or future loans, debts or other financial obligations, including, without limitation, with respect to shareholders' loans, in the aggregate amount of more than US$50,000, excluding, however, operating expenses of the Pledgor which are incurred in the Pledgor's ordinary course of business and repayment of loans or debts the assumption of which is not forbidden pursuant to this Agreement; (g) transfer ownership of its assets (other than the Collateral) to a third party other than in the ordinary course of business, (h) create or 2 permit to exist any encumbrance over any of its present or future revenues or assets; and (i) distribute any dividends. The provisions of this Section 3 shall apply mutatis mutandis to any existing and/or future subsidiaries or affiliates of the Pledgor. The Pledgor undertakes that each and every of its existing and future subsidiaries, shall undertake in writing to comply with this Section 3 as provided above. 4. The Pledgor shall use best efforts to preserve the Collateral, without interfering with the use of the Collateral in the ordinary course of business, and shall at all time maintain insurance which is adequate for a company of the size, at the stage of development and in the industry which Pledgor operates and approved by Plenus. The Pledgor shall permit the Lender and the Co-lenders to inspect the Collateral and its records at all reasonable times and upon reasonable notice, subject to customary non-disclosure restrictions as reasonably determined by the Pledgor. 5. The Pledgor hereby makes those representations and warranties appearing in Section 4 of the Loan Agreement and such representations and warranties are incorporated by reference herein. 6. Plenus shall be entitled on behalf of the Lender and the Co-lenders to enforce the Fixed Charge against the Pledgor, and the Collateral shall be subject to immediate foreclosure, at any time without any further demand, immediately upon the occurrence of an Event of Acceleration, unless otherwise provided for below or in the Loan Agreement. The Pledgor shall promptly inform the Lender of the occurrence of any Event of Acceleration and, upon receipt of a written request to that effect from Plenus, confirm to the Lender that, except as previously notified to the Lender or as notified in such confirmation, no Event of Acceleration has occurred. 7. (a) Upon the occurrence of any Event of Acceleration, Plenus shall be entitled to adopt all the measures it deems fit, allowed by applicable law, in order to recover the performance of the Secured Obligations and realize all of its rights hereunder, including the realization of the Collateral, in whole or in part, and to apply the proceeds thereof to the Secured Obligations without Plenus first being required to realize any other guarantees or collateral securities, if such be held by Plenus. (b) Upon the occurrence of an Event of Acceleration, Plenus may, as attorney-in-fact of the Pledgor (and, for the purpose hereof, the Pledgor does hereby irrevocably appoints Plenus to be its attorney-in-fact), subject to any applicable law, sell all or any part of the Collateral by public auction or otherwise, by itself or through others, for cash or installments thereof or otherwise, at a price and on such terms as Plenus in its reasonable discretion shall deem fit, and likewise, subject to applicable law, Plenus may of its own accord or through the court or an execution office, realize the Collateral or any part thereof, including, inter alia, by appointing a receiver or receiver and manager on behalf of Plenus, who shall be empowered, inter alia: 3 (1) to call in all or any part of the Collateral; (2) to sell, or agree to the sale of, the Collateral, in whole or in part, to dispose, or agree to dispose, of same in such other manner on such terms as he deems fit; (3) to make such other arrangement regarding the Collateral or any part thereof as he deems fit; (4) to take any and all action required which he, at his sole discretion, deems productive or otherwise helpful, for the realization of the Collateral, and/or for the fulfillment of his duty; and (5) to carry out any other authority empowered to him by the court or the execution office. The Lenders and the Co-Lenders acknowledge and agree that certain of the Collateral may have been developed with the assistance of funds received from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Employment and consequently the use, transfer and sale of such Collateral is subject to the Law for the Encouragement of Industrial Research and Development, 5744-1984, as amended or supplemented from time to time and all rules and regulations issued thereunder (the "R&D Law") and they undertake to comply with the R&D Law. 8. The Pledgor shall cooperate with the Lender and Co-lenders and execute all documents as may be reasonably necessary or advisable to register the Fixed Charge with the Israeli Registrar of Companies and/or Registrar of Pledges, such document(s) substantially in the form annexed hereto as Exhibit B, and shall bear all stamp taxes with respect to such registrations. The Pledgor shall pay, upon demand, all reasonable expenses, including reasonable attorney's fees, incurred by the Lender and the Co-lenders in enforcing their rights and remedies hereunder. 9. The amount being secured under the Fixed Charge created by this Fixed Charge Agreement is unlimited in amount and is created in accordance with the Loan Agreement. The payments to be made to the Lender and the Co-lenders in the event of the foreclosure of the Fixed Charge will be made in the following order: costs (pro rata among the Lender and the Co-lenders), expenses and taxes, Interest, any payment under Section 9.6 of the Loan Agreement and then Principal Amount. The Fixed Charge shall be cancelled, and the Lender and Co-lenders shall promptly execute and provide the Pledgor with all documents necessary to release the Fixed Charge, upon repayment of all amounts owed to the Lender and the Co-lenders and the termination of the Loan Agreement pursuant to its terms. 10. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Israel. The parties hereto hereby irrevocable submit to the exclusive jurisdiction of the appropriate court in Tel Aviv, Israel. 4 11. The Pledgor shall promptly notify Plenus in writing of any Material Adverse Change and of any other event that may materially adversely affect the condition or value of the Collateral. 12. The Pledgor will immediately notify the Lender and Co-lenders of any material change in its name or identity or corporate structure or in the location of its chief offices or where its books and records are kept, as well as any change to its incorporation documents which might adversely affect the Lender's and the Co-lenders' rights hereunder. 13. None of the rights, privileges, or obligations set forth in, arising under, or created by this Agreement may be assigned or transferred by any party hereto without the prior consent in writing of the Pledgor and Plenus. Notwithstanding the foregoing and without derogating from the requirement and limitations set forth immediately below, the Lender and the Co-lenders shall have the right to assign or transfer any of its rights, privileges and obligations under this Agreement to a Permitted Transferee, provided that such assignment or transfer is not to a competitor of the Pledgor, and further provided that the assignee or transferee undertakes, in writing, all of such Lender's or Co-lender's obligations hereunder. The assigning or transferring Lender or Co-lender shall notify the Pledgor in writing of any such assignment or transfer no later than seven (7) days following its execution. 14. Notwithstanding anything herein to the contrary, (i) the Co-lenders have agreed that Plenus at its sole discretion shall determine whether to realize any charges and/or pledges over the assets of the Pledgor created for the benefit of the Lender and the Co-lenders, (ii) the Co-lenders have agreed that Plenus at its sole discretion shall determine whether a Default Event has occurred, and (iii) Plenus has been appointed the attorney-in-fact on behalf of the Co-lenders in connection with all of the foregoing and the Co-lenders have agreed not to take any action to the contrary. 15. Any notices to be provided by one party to another shall be done in accordance with the notice provisions set forth in the Loan Agreement. [signature page follows] 5 IN WITNESS WHEREOF, this Fixed Charge Agreement has been executed by the parties hereto as of the date first above written. ATTUNITY LTD. PLENUS TECHNOLOGIES LTD. By: By: --------------------- --------------------- Title: Title: --------------------- --------------------- Date: Date: --------------------- --------------------- UNITED MIZRACHI BANK, LTD. By: -------------------- Title: -------------------- Date: -------------------- GOLDEN GATE BRIDGE FUND (ISRAEL) LIMITED PARTNERSHIP By: _________________ Title: _________________ Date: _________________ 6 EXHIBIT A --------- The Collateral consists of all of Pledgor's right, title in and to its intellectual property rights, including, but not limited to, the following: All contract rights and general intangibles now owned or hereafter acquired, including, without limitation, goodwill, trademarks, servicemarks, Internet domain names, trade dress, trade styles, trade names, patents, patent applications, leases, license agreements, franchise agreements, blueprints, drawings, purchase orders, customer lists, route lists, infringements, claims, computer programs, computer discs, computer tapes, literature, reports, catalogs, design rights, all claims for damages by way of any past, present and future infringement of any of the foregoing and rights to payment of any kind; All now existing and hereafter arising accounts, contract rights, royalties, license rights and all other forms of obligations owing to Pledgor arising out of the sale or lease of goods, the licensing of technology or the rendering of services by Pledgor, whether or not earned by performance, and any and all credit insurance, guaranties, and other security therefor, as well as all merchandise returned to or reclaimed by Pledgor; All copyright rights, copyright applications, copyright registrations and like protections in each work of authorship and derivative work thereof, whether published or unpublished, now owned or hereafter acquired; all trade secret rights, including all rights to unpatented inventions, know-how, operating manuals, license rights and agreements and confidential information, now owned or hereafter acquired; all mask work or similar rights available for the protection of semiconductor chips, now owned or hereafter acquired; all claims for damages by way of any past, present and future infringement of any of the foregoing; and All Pledgor's Books relating to the foregoing and any and all claims, rights and interests in any of the above and all substitutions for, additions and accessions to and proceeds thereof; and The term "Pledgor's Books" as used herein shall mean all Pledgor's books and records including ledgers, records regarding Pledgor's assets or liabilities, the Collateral, business operations or financial condition and all computer programs or discs or any equipment containing the information. All insurance policies or the proceeds thereof in respect of the above described assets. EX-4.14 7 ex4_14.txt FORM OF WARRANT TO GAUS & R.4.B Exhibit 4.14 THIS WARRANT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT OR EXEMPTION FROM REGISTRATION UNDER THE FOREGOING LAWS. SUBJECT TO THE PROVISIONS OF SECTION 10 HEREOF, THIS WARRANT SHALL BE VOID AFTER 5:00 P.M. EASTERN TIME ON FEBRUARY 4, 2007 (the "EXPIRATION DATE"). No. _______ ATTUNITY LTD. WARRANT TO PURCHASE 20,000 ORDINARY SHARES NOMINAL VALUE NIS 0.1 PER SHARE For VALUE RECEIVED, [ ], an Israeli company (the "Warrantholder"), is entitled to purchase, subject to the provisions of this Warrant, from Attunity Ltd., an Israeli company (the "Company"), at any time not later than 5:00 P.M., Eastern time, on the Expiration Date, at an exercise price per share equal to $1.92 (the exercise price in effect being herein called the "Warrant Price"), 20,000 shares ("Warrant Shares") of the Company's ordinary shares, nominal value NIS 0.1 per share ("Ordinary Shares"). The number of Warrant Shares purchasable upon exercise of this Warrant and the Warrant Price shall be subject to adjustment from time to time as described herein. Section 1. Registration. The Company shall maintain books for the transfer and registration of the Warrant. Upon the initial issuance of this Warrant, the Company shall issue and register the Warrant in the name of the Warrantholder. Section 2. Transfers. As provided herein, this Warrant may be transferred only pursuant to a registration statement filed under the Securities Act of 1933, as amended ("Securities Act"), or an exemption from such registration. Subject to such restrictions, the Company shall transfer this Warrant from time to time upon the books to be maintained by the Company for that purpose, upon surrender thereof for transfer properly endorsed or accompanied by appropriate instructions for transfer and such other documents as may be reasonably required by the Company, including, if required by the Company, an opinion of its counsel to the effect that such transfer is exempt from the registration requirements of the Securities Act of 1933, to establish that such transfer is being made in accordance with the terms hereof, and a new Warrant shall be issued to the transferee and the surrendered Warrant shall be canceled by the Company. Section 3. Exercise of Warrant. Subject to the provisions hereof, the Warrantholder may exercise this Warrant in whole or in part at any time upon surrender of the Warrant, together with delivery of the duly executed Warrant exercise form attached hereto as Appendix A (the "Exercise Agreement") and payment by cash, certified check or wire transfer of funds for the aggregate Warrant Price for that number of Warrant Shares then being purchased, to the Company during normal business hours on any business day at the Company's principal executive offices (or such other office or agency of the Company as it may designate by notice to the holder hereof). The Warrant Shares so purchased shall be deemed to be issued to the holder hereof or such holder's designee, as the record owner of such shares, as of the close of business on the next business day after the date on which this Warrant shall have been surrendered (or evidence of loss, theft or destruction thereof and security or indemnity satisfactory to the Company), the Warrant Price shall have been paid and the completed Exercise Agreement shall have been delivered. Certificates for the Warrant Shares so purchased, representing the aggregate number of shares specified in the Exercise Agreement, shall be delivered to the holder hereof within a reasonable time, not exceeding three (3) business days, after this Warrant shall have been so exercised. The certificates so delivered shall be in such denominations as may be requested by the holder hereof and shall be registered in the name of such holder or such other name as shall be designated by such holder. If this Warrant shall have been exercised only in part, then, unless this Warrant has expired, the Company shall, at its expense, at the time of delivery of such certificates, deliver to the holder a new Warrant representing the number of shares with respect to which this Warrant shall not then have been exercised. As used herein, "business day" means a day, other than a Saturday or Sunday, on which banks in New York City are open for the general transaction of business. Section 4. Compliance with the Securities Act of 1933. The Company may cause the legend set forth on the first page of this Warrant to be set forth on each Warrant or similar legend on any security issued or issuable upon exercise of this Warrant, unless counsel for the Company is of the opinion as to any such security that such legend is unnecessary. Section 5. Payment of Taxes. The Company will pay any documentary stamp taxes attributable to the initial issuance of Warrant Shares issuable upon the exercise of the Warrant; provided, however, that the Company shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the issuance or delivery of any certificates for Warrant Shares in a name other than that of the registered holder of this Warrant in respect of which such shares are issued, and in such case, the Company shall not be required to issue or deliver any certificate for Warrant Shares or any Warrant until the person requesting the same has paid to the Company the amount of such tax or has established to the Company's reasonable satisfaction that such tax has been paid. The holder shall be responsible for income and gift taxes due under federal, state or other law, if any such tax is due. Section 6. Mutilated or Missing Warrants. In case this Warrant shall be mutilated, lost, stolen, or destroyed, the Company shall issue in exchange and substitution of and upon cancellation of the mutilated Warrant, or in lieu of and 2 substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and for the purchase of a like number of Warrant Shares, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction of the Warrant, and with respect to a lost, stolen or destroyed Warrant, reasonable indemnity or bond with respect thereto, if requested by the Company. Section 7. Reservation of Ordinary Shares. The Company hereby represents and warrants that there have been reserved, and the Company shall at all applicable times keep reserved until issued (if necessary) as contemplated by this Section 7, out of the authorized and unissued Ordinary Shares, sufficient shares to provide for the exercise of the rights of purchase represented by this Warrant. The Company agrees that all Warrant Shares issued upon exercise of the Warrant shall be, at the time of delivery of the certificates for such Warrant Shares upon the due exercise of this Warrant, duly authorized, validly issued, fully paid and non-assessable Ordinary Shares of the Company. Section 8. Adjustments. Subject and pursuant to the provisions of this Section 8, the Warrant Price and number of Warrant Shares subject to this Warrant shall be subject to adjustment from time to time as set forth hereinafter. (a) If the Company shall, at any time or from time to time while this Warrant is outstanding, pay a dividend or make a distribution on its Ordinary Shares in Ordinary Shares, subdivide its outstanding Ordinary Shares into a greater number of shares or combine its outstanding Ordinary Shares into a smaller number of shares or issue by reclassification of its outstanding Ordinary Shares any shares of its capital stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing corporation), then the number of Warrant Shares purchasable upon exercise of the Warrant and the Warrant Price in effect immediately prior to the date upon which such change shall become effective, shall be adjusted by the Company so that the Warrantholder thereafter exercising the Warrant shall be entitled to receive the number of Ordinary Shares or other capital stock which the Warrantholder would have received if the Warrant had been exercised immediately prior to such event upon payment of a Warrant Price that has been adjusted to reflect a fair allocation of the economics of such event to the Warrantholder. Such adjustments shall be made successively whenever any event listed above shall occur. (b) If any capital reorganization, reclassification of the capital stock of the Company, consolidation or merger of the Company with another corporation in which the Company is not the survivor, or sale, transfer or other disposition of all or substantially all of the Company's assets to another corporation shall be effected, then, as a condition of such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition, lawful and adequate provision shall be made whereby the Warrantholder shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions herein specified and in lieu of the Warrant Shares immediately theretofore issuable upon exercise of the Warrant, such shares of stock, 3 securities or assets as would have been issuable or payable with respect to or in exchange for a number of Warrant Shares equal to the number of Warrant Shares immediately theretofore issuable upon exercise of the Warrant, had such reorganization, reclassification, consolidation, merger, sale, transfer or other disposition not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of each Warrantholder to the end that the provisions hereof (including, without limitation, provision for adjustment of the Warrant Price) shall thereafter be applicable, as nearly equivalent as may be practicable in relation to any shares of stock, securities or properties thereafter deliverable upon the exercise thereof. The provisions of this paragraph (b) shall similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, transfers or other dispositions. (c) For the term of this Warrant, in addition to the provisions contained above, the Warrant Price shall be subject to adjustment as provided below. An adjustment to the Warrant Price shall become effective immediately after the payment date in the case of each dividend or distribution and immediately after the effective date of each other event which requires an adjustment. (d) In the event that, as a result of an adjustment made pursuant to this Section 8, the holder of this Warrant shall become entitled to receive any shares of capital stock of the Company other than Ordinary Shares, the number of such other shares so receivable upon exercise of this Warrant shall be subject thereafter to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Warrant Shares contained in this Warrant. (e) Record Date. In case the Company shall take a record of the holders of its Ordinary Shares for the purpose of entitling them to receive a dividend or other distribution payable in Ordinary Shares, Options or Convertible Securities, then such record date shall be deemed to be the date of the issue or sale of the Ordinary Shares deemed to have been issued or sold upon the declaration of such dividend. Section 9. Fractional Interest. The Company shall not be required to issue fractions of Warrant Shares upon the exercise of the Warrant. Section 10. Benefits. Nothing in this Warrant shall be construed to give any person, firm or corporation (other than the Company and the Warrantholder) any legal or equitable right, remedy or claim, it being agreed that this Warrant shall be for the sole and exclusive benefit of the Company and the Warrantholder. Section 11. Notices to Warrantholder. Upon the happening of any event requiring an adjustment of the Warrant Price, the Company shall promptly give written notice thereof to the Warrantholder at the address appearing in the records of the Company, stating the adjusted Warrant Price and the adjusted number of Warrant Shares resulting from such event and setting 4 forth in reasonable detail the method of calculation and the facts upon which such calculation is based. Failure to give such notice to the Warrantholder or any defect therein shall not affect the legality or validity of the subject adjustment. Section 12. Identity of Transfer Agent. The Transfer Agent for the Ordinary Shares is American Stock Transfer and Trust Company. Upon the appointment of any subsequent transfer agent for the Ordinary Shares or other shares of the Company's capital stock issuable upon the exercise of the rights of purchase represented by the Warrant, the Company will mail to the Warrantholder a statement setting forth the name and address of such transfer agent. Section 13. Notices. Unless otherwise provided, any notice required or permitted under this Warrant shall be given in writing and shall be deemed effectively given as hereinafter described (i) if given by personal delivery, then such notice shall be deemed given upon such delivery, (ii) if given by telex or telecopier, then such notice shall be deemed given upon receipt of confirmation of complete transmittal, (iii) if given by mail, then such notice shall be deemed given upon the earlier of (A) receipt of such notice by the recipient or (B) three days after such notice is deposited in first class mail, postage prepaid, and (iv) if given by an internationally recognized overnight air courier, then such notice shall be deemed given one day after delivery to such carrier. All notices shall be addressed as follows: (i) if to the Warrantholder, at its address as set forth in the Company's books and records and, if to the Company, at the address as follows, or at such other address as the Warrantholder or the Company may designate by ten days' advance written notice to the other: If to the Company: Attunity Ltd. Einstein Building Tirat Carmel, Israel Attention: Arie Gonen Fax: 011-972-4-857-6745 With a copy (which shall not constitute notice) to: Carter, Ledyard & Milburn 2 Wall Street New York, NY 10005 Attention: Steven Glusband Fax: (212) 732-3232 Section 14. Registration Rights. The initial holder of this Warrant is entitled to the benefit of certain registration rights in respect of the Warrant Shares as provided in Section 1 of that letter agreement between the Company and the Warrantholder dated February 5, 2004, and any subsequent holder hereof may be entitled to such rights. 5 Section 15. Successors. All the covenants and provisions hereof by or for the benefit of the Warrantholder shall bind and inure to the benefit of its respective successors and assigns hereunder. Section 16. Governing Law. This Warrant shall be governed by, and construed in accordance with, the internal laws of the State of Israel, without reference to the choice of law provisions thereof. The Company and, by accepting this Warrant, the Warrantholder, each irrevocably submits to the exclusive jurisdiction of the courts of Haifa, Israel to the exclusion of all other jurisdictions for the purpose of any suit, action, proceeding or judgment relating to or arising out of this Warrant and the transactions contemplated hereby. Service of process in connection with any such suit, action or proceeding may be served on each party hereto anywhere in the world by the same methods as are specified for the giving of notices under this Warrant. The Company and, by accepting this Warrant, the Warrantholder, each irrevocably consents to the jurisdiction of any such court in any such suit, action or proceeding and to the laying of venue in such court. The Company and, by accepting this Warrant, the Warrantholder, each irrevocably waives any objection to the laying of venue of any such suit, action or proceeding brought in such courts and irrevocably waives any claim that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Section 17. No Rights as Stockholder. Prior to the exercise of this Warrant, the Warrantholder shall not have or exercise any rights as a stockholder of the Company by virtue of its ownership of this Warrant. Section 18. Amendment; Waiver Any term of this Warrant may be amended or waived (including the adjustment provisions included in Section 8 of this Warrant) upon the written consent of the Company and the Warrantholder. Section 19. Section Headings. The section heading in this Warrant are for the convenience of the Company and the Warrantholder and in no way alter, modify, amend, limit or restrict the provisions hereof. 6 IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed on the __ day of February, 2004. ATTUNITY LTD. By:___________________________ Name: Title: 7 APPENDIX A Attunity Ltd. WARRANT EXERCISE FORM To: Attunity Ltd. The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant ("Warrant") for, and to purchase thereunder by the payment of the Warrant Price and surrender of the Warrant, _______________ Ordinary Shares ("Warrant Shares") provided for therein, and requests that certificates for the Warrant Shares be issued as follows: ------------------------------- Name -------------------------------- Address -------------------------------- -------------------------------- Federal Tax ID or Social Security No. and delivered by certified mail to the above address, or electronically (provide DWAC Instructions:___________________), or other (specify: __________________________________________). and, if the number of Warrant Shares shall not be all the Warrant Shares purchasable upon exercise of the Warrant, that a new Warrant for the balance of the Warrant Shares purchasable upon exercise of this Warrant be registered in the name of the undersigned Warrantholder or the undersigned's Assignee as below indicated and delivered to the address stated below. Dated: ___________________, ____ Note: The signature must correspond with Signature:______________________________ the name of the registered holder as written on the first page of the Warrant in every _____________________________ particular, without alteration or enlargement Name (please print) or any change whatever, unless the Warrant has been assigned. _____________________________ ----------------------------- Address ----------------------------- Federal Identification or Social Security No. 8 Assignee: ----------------------------- ----------------------------- ----------------------------- 9 EX-8 8 ex8.txt LIST OF SUBSIDIARIES Exhibit 8 LIST OF SUBSIDIARIES We have the following significant 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% EX-23.1 9 ex23_1.txt CONSENT OF INDEPENDENT AUDTITORS Exhibit 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Forms F-3 (File No. 333-14140, 333-11972 and 333-12450) and Registration Statements on Forms S-8 (File No. 333-84180, 333-932 and 333-11648) of Attunity Ltd. of our report dated March 11, 2004 with respect to the consolidated financial statements of Attunity Ltd. included in this Annual Report on Form 20-F for the year ended December 31, 2003. /s/Kost Forer Gabbay and Kasierer Tel-Aviv, Israel KOST, FORER GABBAY & KASIERER June 30, 2004 A member of Ernst & Young Global EX-31.1 10 ex31_1.txt SECTION 302 CERTIFICATION OF CEO Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Arie Gonen, certify that: 1. I have reviewed this annual report on Form 20-F of Attunity Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 30, 2004 /s/Arie Gonen* -------------- Arie Gonen Chief Executive Officer * The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. EX-31.2 11 ex31_2.txt SECTION 302 CERTIFICATION OF CFO Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Ofer Segev, certify that: 1. I have reviewed this annual report on Form 20-F of Attunity Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 30, 2004 /s/Ofer Segev* -------------- Ofer Segev Chief Financial Officer * The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. EX-32.1 12 ex32_1.txt SECTION 906 CERTIFICATION OF CEO Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Attunity Ltd. (the "Company") on Form 20-F for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Arie Gonen, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/Arie Gonen* - -------------- Arie Gonen Chief Executive Officer June 30, 2004 * The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. EX-32.2 13 ex32_2.txt SECTION 906 CERTIFICATION OF CFO Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Attunity Ltd. (the "Company") on Form 20-F for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ofer Segev, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/Ofer Segev* - ------------- Ofer Segev Chief Financial Officer June 30, 2004 * The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. -----END PRIVACY-ENHANCED MESSAGE-----