20-F 1 zk1414697.htm 20-F zk1414697.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C.  20549
 
FORM 20-F
 
o
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, 2013
 
 
OR
 
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from __________ to __________
 
OR
 
o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report _________
 
Commission file number:   001-20892
 
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)
 
16 Atir Yeda Street, Atir Yeda Industrial Park, Kfar Saba, 4464321, Israel
(Address of principal executive offices)
 
Dror Harel-Elkayam, CFO
Tel: +972-9-8993000; Fax: +972-9-8993001
Attunity Ltd, 16 Atir Yeda Street, Atir Yeda Industrial Park, Kfar Saba, 4464321, Israel
 
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Name of Each Exchange on which Registered
 
Ordinary Shares,
NIS 0.4 par value per share
 
The NASDAQ Stock Market LLC
 
Securities registered or to be registered pursuant to Section 12(g) of the Act: None
 
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None
 
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report (December 31, 2013): 14,527,292
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities act.
 
o Yes      x No
 
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.  
 
o Yes      x No
 
 
 

 
 
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.
 
x Yes      o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  
 
 x Yes      o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer o      Accelerated Filer o     Non-Accelerated Filer x
 
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
 
x
U.S. GAAP

o
International Financial Reporting Standards as issued by the International Accounting Standards Board

o
Other

        If "Other" has been checked in response to the previous question indicate by check mark which financial statements the registrant has elected to follow:
 
o Item 17   o Item 18
 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  
 
o Yes      x No
 
 
- ii -

 
 
INTRODUCTION
 
Unless indicated otherwise by the context, all references in this annual report to:
 
 
·
“we”, “us”, “our”, “Attunity”, the “Company” or the "Registrant" are to Attunity Ltd and its subsidiaries;
 
 
·
“dollars” or “$” are to United States dollars;
 
 
·
“NIS” or “shekel” are to New Israeli Shekels;
 
 
·
the “Companies Law” or the “Israeli Companies Law” are to the Israeli Companies Law, 5759-1999;
 
 
·
the “SEC” are to the United States Securities and Exchange Commission;
 
 
·
"Big Data" are to very large and complex quantities of datasets that are difficult to process using traditional data processing applications;
 
 
·
"CDC" are to change data capture, a process that captures and replicate only the changes made to enterprise data sources rather the entire data sources;
 
 
·
"Cloud computing" are to the use of computing resources, hardware and software, that are  generally delivered as a service over the Internet;
 
 
·
"Convertible Notes" or "Notes" are to the convertible promissory notes we issued to certain investors (including Mr. Shimon Alon, the Chairman of our Board of Directors and our Chief Executive Officer, and Mr. Ron Zuckerman, a member of our Board of Directors) pursuant to a Note and Warrant Purchase Agreement, dated March 22, 2004, as amended from time to time, by and between us and the investors, or the Note Agreement;
 
 
·
“Hayes” are to Hayes Technology Group, Inc., an Illinois corporation we acquired in December 2013; and
 
 
·
"RepliWeb" are to RepliWeb Inc., a Delaware corporation we acquired in September 2011.
 
We have obtained trademark registrations in the U.S. for, among others, AttunityÒ, Attunity ConnectÒ, Attunity FederateÒ, Attunity ReplicateÒ, RepliWebÒ, Better DataÒ, Smaller Databases®, Data Echo®, Data Recast® and Gold Client®. Unless indicated otherwise by the context, 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 dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, and are audited in accordance with the standards of the Public Company Accounting Oversight Board in the United States.

On April 1, 2014, the exchange rate between the NIS and the dollar, as quoted by the Bank of Israel, was NIS 3.476 to $1.00. Unless indicated otherwise by the context, statements in this annual report that provide the dollar equivalent of NIS amounts or provide the NIS equivalent of dollar amounts are based on such exchange rate.

On July 19, 2012, we effected a one-for-four reverse split of our ordinary shares, and accordingly the par value of our ordinary shares was changed from NIS 0.1 to NIS 0.4 per share. Unless indicated otherwise by the context, all ordinary share, option and per share amounts as well as stock prices in this annual report have been adjusted to give retroactive effect to the stock split for all periods presented.
 
 
- iii - 

 

 
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 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, and the summary included herein is qualified by reference to the full text of the document which is incorporated by reference into this annual report.
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
Except for the historical information contained in this annual report, the statements contained in this annual report are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, and other federal securities laws with respect to our business, financial condition and results of operations.  Such forward-looking statements reflect our current view with respect to future events and financial results.
 
We urge you to consider that statements which use the terms “anticipate,” “believe,” “expect,” “plan,” “intend,” “estimate,” and similar expressions are intended to identify forward-looking statements.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, including revenues from agreements we signed, expansion of our operations, development and release of new products, performance, levels of activity, our achievements, or industry results, to be materially different from any future results, plans to expand our operations, plans to develop and release new products, performance, levels of activity, or our achievements, or industry results, expressed or implied by such forward-looking statements. Such forward-looking statements appear in Item 3.D “Risk Factors”, Item 4 “Information on the Company” and Item 5 “Operating and Financial Review and Prospects” as well as elsewhere in this annual report. The forward-looking statements contained in this annual report are subject to risks and uncertainties, including those discussed under Item 3.D “Risk Factors” and in our other filings with the SEC.  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.

 
- iv - 

 
 
TABLE OF CONTENTS
 
 
1
 
1
 
1
 
1
 
A.
Selected Financial Data
1
 
B.
Capitalization and Indebtedness
2
 
C.
Reasons for the Offer and Use of Proceeds
2
 
D.
Risk Factors
2
 
15
 
A.
History and Development of the Company
15
 
B.
Business Overview
16
 
C.
Organizational Structure
27
 
D.
Property, Plants and Equipment
27
 
28
 
28
 
A.
Operating Results
28
 
B.
Liquidity and Capital Resources
39
 
C.
Research and Development, Patents and Licenses
42
 
D.
Trend Information
42
 
E.
Off-Balance Sheet Arrangements
42
 
F.
Tabular Disclosure of Contractual Obligations
42
 
43
 
A.
Directors and Senior Management
43
 
B.
Compensation
45
 
C.
Board Practices
49
 
D.
Employees
56
 
E.
Share Ownership
57
 
59
 
A.
Major Shareholders
59
 
B.
Related Party Transactions
60
 
61
 
A.
Consolidated Statements and Other Financial Information
61
 
B.
Significant Changes
62
 
62
 
A.
Offer and Listing Details
62
 
B.
Plan of Distribution
63
 
C.
Markets
63
 
D.
Selling Shareholders
64
 
E.
Dilution
64
 
F.
Expenses of the Issue
64
 
64
 
A.
Share Capital
64
 
B.
Memorandum and Articles of Association
64
 
C.
Material Contracts
68
 
 
- v -   

 
 
 
D.
Exchange Controls
70
 
E.
Taxation
70
 
F.
Dividends and Paying Agents
78
 
G.
Statement by Experts
78
 
H.
Documents on Display
78
 
I.
Subsidiary Information
79
 
79
 
81
 
81
 
81
 
81
  81
 
82
 
82
 
83
 
84
 
84
 
84
 
84
 
84
 
85
 
85
 
85
 
85
 
88
 
 
- vi -     

 
 
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 statements of operations data for the years ended December 31, 2013, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2013 and 2012, which have been prepared in accordance with U.S. GAAP, are derived from our audited consolidated financial statements set forth elsewhere in this annual report.  The selected consolidated statements of operations data for the years ended December 31, 2010 and 2009 and the selected consolidated balance sheet data as of December 31, 2011, 2010 and 2009, which have also been prepared in accordance with U.S. GAAP, 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 and the other financial information appearing elsewhere in this annual report.
 
Balance Sheet Data:
 
   
December 31,
 
   
2013
   
2012
   
2011
   
2010
   
2009
 
   
(U.S. dollars in thousands)
 
Working capital (deficiency)
  $ 12,292     $ (3,046 )   $ (6,891 )   $ (2,643 )   $ (2,710 )
Total assets
    49,980       26,132       22,993       10,705       11,895  
Current maturities of long term-debt, short-term convertible debt,
   including current maturities of long-term convertible debt
      --         1,934         950         1,259         1,250  
Long-term debt, less current maturities
    --       --       --       1,661       2,750  
Contingent purchase consideration
    3,280       --       1,669       --       --  
Warrants and bifurcated conversion feature, and other
   liabilities presented at fair value
    1,093       730       510       1,215       303  
Shareholders’ equity
    30,098       9,562       5,188       733       2,042  
Additional paid-in capital
    130,944       110,318       107,345       102,459       102,095  
 
 
1

 
 
Income Statement Data:
 
   
Year ended December 31,
 
   
2013
   
2012
   
2011
   
2010
   
2009
 
   
(U.S. dollars and share amounts in thousands, except per share data)
 
       
Software licenses
  $ 13,364     $ 14,437     $ 8,140     $ 4,645     $ 4,126  
Maintenance and services
    11,833       11,042       7,029       5,430       5,327  
Total revenues
    25,197       25,479       15,169       10,075       9,453  
                                         
Cost of software licenses
    748       831       563       1,119       2,347  
Cost of maintenance and services
    1,384       1,525       890       832       723  
Research and development expenses
    7,756       7,748       4,960       2,482       1,894  
Selling and marketing expenses
    11,793       9,833       5,851       3,831       3,469  
General and administrative expenses
    3,574       3,024       2,835       1,854       1,608  
                                         
Total operating expenses
    25,255       22,961       15,099       10,118       10,041  
Operating income (loss)
    (58 )     2,518       70       (43 )     (588 )
                                         
Financial expenses, net
    627       1,241       1,284       1,388       697  
Other income
    --       --       --       --       10  
Income (loss) before taxes on income
    (685 )     1,277       (1,214 )     (1,431 )     (1,275 )
Taxes on income (benefit)
    (56 )     (209 )     (399 )     74       28  
                                         
Net income (loss)
    (629 )     1,486       (815 )     (1,505 )     (1,303 )
Basic net income /(loss) per share
  $ (0.05 )   $ 0.14     $ (0.09 )   $ (0.20 )   $ (0.20 )
Weighted average number of shares used in computing basic net
    income / (loss) per share
    11,474       10,716       8,662       7,993       7,124  
                                         
Diluted net income /(loss) per share
  $ (0.05 )   $ 0.12     $ (0.09 )   $ (0.20 )   $ (0.20 )
Weighted average number of shares used in computing diluted net
    income / (loss) per share
    11,474       12,311       8,662       7,993       7,124  
 
B.
Capitalization and Indebtedness
 
Not applicable.
 
C.
Reasons for the Offer and Use of Proceeds
 
Not applicable.
 
D.
Risk Factors
 
The following risk factors, among others, could in the future affect our actual results of operations and could cause our actual results to differ materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and we assume no obligation to update this information.  Before you decide to buy, hold, or sell our ordinary shares, you should carefully consider the risks described below, in addition to the other information contained elsewhere in this annual report. The following risk factors are not the only risk factors facing our Company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. Our business, financial condition and results of operation could be seriously harmed if any of the events underlying any of these risks or uncertainties actually occurs. In that event, the price for our ordinary shares could decline, and you may lose all or part of your investment.
 
 
2

 
 
Risk Factors Relating to Our Business

We have a history of operating losses and may not achieve or sustain profitability in the future.
 
We incurred an operating loss of $58,000 in the fiscal year ended December 31, 2013 and, while we generated operating income in the prior two fiscal years, we incurred operating losses in the past. Our ability to achieve and sustain profitability in the future depends in part on the rate of growth of, and changes in technology trends in, our market; the global economy; our ability to develop new products and technologies in a timely manner; the competitive position of our products; our ability to manage expenses; and other risks, some of which are described in this annual report. We may also seek to increase our operating expenses and make additional expenditures in anticipation of generating higher revenues, which we may not realize, if at all, until sometime in the future. As such, there can be no assurance that we will be able to achieve or sustain profitable operations in the future. Even if we maintain profitability, we cannot assure that future net income will offset our cumulative losses, which, as of December 31, 2013, were approximately $102.0 million.
 
We depend on strategic relationships with our distributors, OEM, VAR and other business partners and our revenues may be reduced if such relationships are not successful or are terminated. In particular, a loss of one of our OEM partners may have a material adverse effect on our business, operating results and financial condition.
 
Our products and services are sold through both direct and indirect channels, including distributors, original equipment manufacturers, or OEM, value-added resellers, or VAR, and other business partners. Specifically, we rely on strategic relationships with OEM and other business partners and resellers to sell our products and services and these relationships are likely to account for a larger portion of our revenues in the future. Typically, where our fees depend on orders of products (and not fixed license fees), these parties are not obligated to sell any of our products. Any failure of these relationships to market our products effectively or generate significant revenues for us, a termination of any of these relationships, or if we are unable to form additional strategic alliances in the future that will prove beneficial to us, could have a material adverse effect on our business, operating results and financial condition.
 
In particular, we rely on our strategic relationship with Microsoft Corporation, or Microsoft. For example, in December 2010, we entered into two five–year OEM agreements with Microsoft for aggregate consideration of nearly $9 million. We expect Microsoft to continue to be strategic to our business and future growth. A termination or other disruption of our commercial relationship with Microsoft could have a material adverse effect on our business, operating results and financial condition.
 
Our ability to expand our business into the SAP market and the success of our Gold Client offering depend on our relationship with SAP, including our ability to maintain our status as a SAP Software Solution and Technology Partner.
 
On December 18, 2013, we acquired Hayes, a leading U.S.-based provider of data replication software for the market in which SAP AG, or SAP, operates, including Hayes' flagship product, Gold Client®, a globally-recognized software solution in the SAP data replication market. Through Hayes, we maintain a status of a "SAP Software Solution and Technology Partner" and our Gold Client solutions have achieved several certifications from SAP, including, most recently, as a certified integration with the SAP® ERP 6.0 application running on the SAP HANA® platform.  The success of our Gold Client offering is dependent to a large extent on our relationship with SAP and, in particular, our ability to maintain these certifications and, where appropriate, our ability to obtain additional certifications from SAP for our future SAP related offerings. This is primarily because an installation of SAP solutions is considered as a sizeable investment and current and prospective customers tend to view these certifications as valuable when making capital expenditure decisions related to their SAP solution-based environment. If we fail to maintain our status as a SAP Software Solution and Technology Partner or, where appropriate, obtain additional certifications from SAP for our future SAP related offerings, our business and operating results, especially our ability to expand our business into the SAP market and the sales of our Gold Client offering, could be adversely affected.
 
 
3

 
 
Our business and operating results depend in part on the successful and timely implementation of our third party partner solutions.
 
We rely on our strategic partners to extend the functionality and facilitate the wider adoption of our software solutions. Specifically, our software solutions, which are designed to enable access, sharing, replication, management, consolidation and distribution of data across heterogeneous enterprise platforms, organizations and the cloud, are often licensed or incorporated as part of a broader offering through our strategic partners. As a result, our revenue and financial results depend in part on the timely and successful implementation of our partners’ solutions. To the extent our partners’ deliverables are not met in a timely manner or at all, our business and operating results could be adversely affected.
 
The loss of one or more of our significant customers or a decline in demand from one or more of these customers could harm our business.
 
Historically, we have relied on a limited number of customers for a substantial portion of our total sales. For example, in 2012, Microsoft, our largest customer for that year, accounted for 10.9% of our revenues. There can be no assurance that such customers will continue to order our products in the same level or at all. A reduction or delay in orders from such customers, including reductions or delays due to market, economic or competitive conditions, could have a material adverse effect on our business, operating results and financial condition.
 
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 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 or with the involvement of third party distributors or partners. We cannot control such delays and cannot control the timing of sales cycles or our sales revenue. Delay in the sales cycle of our products could result in significant fluctuations in our quarterly operating results or difficulty in forecasting revenues for any given period.
 
We face risks associated with acquisition of businesses and technologies.
 
We completed the acquisition of Hayes and RepliWeb in December 2013 and September 2011, respectively. As part of our growth strategy, we may continue to evaluate and pursue additional acquisitions of, or significant investments in, other complementary companies or technologies to increase our technological capabilities and expand our product offerings. Future acquisitions and the successful integration of new technologies, products, assets or businesses into our own would require significant attention from our management and could result in a diversion of resources from our existing business, which in turn could have an adverse effect on our business operations. Other risks commonly encountered with acquisitions include disruption of our ongoing business; difficulties in integration of the acquired operations and personnel; inability of our management to maximize our financial and strategic position by the successful implementation of uniform product offerings and the incorporation of uniform technology into our product offerings and control system; being subject to known or unknown contingent liabilities, including taxes, expenses and litigation costs; and inability to realize expected synergies or other anticipated benefits. We cannot assure you that we will be successful in overcoming these risks or any other problems we may encounter in connection with the Hayes acquisition or other potential future acquisitions. Our inability to successfully integrate the operations of an acquired business and realize anticipated benefits associated with an acquisition could have a material adverse effect on our business, financial condition, results of operations and cash flows. Acquisitions or other strategic transactions may also result in dilution to our existing shareholders if we issue additional equity securities as consideration and may increase our debt. We may also be required to amortize significant amounts of intangible assets or record impairment of goodwill in connection with future acquisitions, which would adversely affect our operating results.
 
 
4

 
 
Severe global economic conditions may materially adversely affect our business.
 
Our business and financial condition is affected by global economic conditions and their impact on levels of spending by customers, which may be disproportionately affected by economic downturns. For example, starting in late 2008 and lasting through much of 2009, a steep downturn in the global economy sparked by uncertainty in credit markets and deteriorating consumer confidence, reduced technology spending by many organizations. More recently, credit and sovereign debt issues have destabilized certain European economies as well and thereby increased global macroeconomic uncertainties. Uncertainty about current global economic conditions continues to pose a risk as customers may postpone or reduce spending in response to restraints on credit. Should the economic slowdown resume and/or companies in our target markets reduce capital expenditures, it may cause our customers to reduce or postpone their technology spending significantly, which could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, if the market is flat and customers experience low visibility we may not be able to increase our sales (whether direct sales or indirect sales through our distributors). Each of the above scenarios would have a material adverse effect on our business, operating results and financial condition.

We are subject to risks associated with international operations.
 
We are based in Israel and generate a large portion of our sales outside the United States.  Our sales outside of the United States accounted for approximately 30%, 35% and 29% of our total revenues for the years ended December 31, 2013, 2012 and 2011, respectively. Although we commit significant management time and 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 may be adversely affected.
 
As we conduct business globally, our future results could also be adversely affected by a variety of uncontrollable and changing factors and inherent risks, including the following:
 
 
·
the impact of the recessionary environments in multiple foreign markets, such as in some European countries;
 
 
·
longer receivables collection periods and greater difficulty in accounts receivable collection;
 
 
·
unexpected changes in regulatory requirements;
 
 
·
difficulties and costs of staffing and managing foreign operations;
 
 
·
reduced protection for intellectual property rights in some countries;
 
 
·
potential tax consequences; and
 
 
·
political and economic instability.
 
 
5

 
 
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, on our business, operating results and financial condition.

Our business and operating results may be adversely affected by competition, including as a result of consolidation of our competitors.
 
The markets for our software products are intensely competitive and, particularly in the file replication and application release automation markets, also fragmented. 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. In the fields of application release automation, web deployment and enterprise file replication, we also compete with providers of open source and freeware solutions, which are substantially less expensive than our solutions. We anticipate continued growth and competition in the software products market. In the past few years, we have identified a trend of consolidation in the software industry in general, and in the real-time data integration market in particular. For example, in July 2011, Informatica Corporation acquired WisdomForce, which engages, among other things, in data replication and loading, and in December 2013, IBM acquired Aspera, which engages, among other things, in the sale of managed file transfer solutions. Consolidation and mergers in our market may result in stronger competition by larger companies that threaten our market positioning.
 
Our existing and potential competitors, such as IBM, Informatica, Oracle (following the acquisition of Golden Gate), SAP, EPI-USE and HP, who compete with different products or services we offer, may offer or 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, as well as financial resources.  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 must develop new products as well as enhancements and new features to existing products to remain competitive and our future growth will depend upon market acceptance of our products.
 
We compete in a market that is characterized by technological changes and improvements and frequent new product introductions and enhancements.  The introduction of new technologies and products could render existing products and services obsolete and unmarketable and could exert price pressures on our products and services.  Any future success and our future growth will depend upon our ability to address the increasingly sophisticated needs of our customers by, among others:
 
 
·
supporting existing and emerging hardware, software, databases and networking platforms;
 
 
·
developing and introducing new and enhanced applications that keep pace with such technological developments, emerging new markets and changing customer requirements; and
 
 
·
gaining and consecutively increasing market acceptance of our products.
 
We are currently developing new products as well as enhancements and new features to our existing products, and new solutions for cloud computing and other integrated management products. We may not be able to successfully complete the development and market introduction of new products or product enhancements or new features.  If we fail to develop and deploy new products and product enhancements or features on a timely basis or if we fail to gain market acceptance of our new products, our revenues will decline and we may lose market share to our competitors. For example, in late 2005, we launched Attunity InFocus, and, despite significant investments in developing and marketing of this product, demand was weak and we determined to end the sales of this product in the end of 2008.
 
 
6

 
 
Our products may contain defects that may be costly to correct, delay market acceptance of our products, harm our reputation 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 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 trademark registrations in the United States, and one registered patent which we do not view as material, we do not have any other registered trademarks, patents or copyrights. To protect our software, documentation and other written materials, we rely on trade secret and copyright laws, which 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.  It would be time consuming for us to defend any such claims, with or without merit, and any such claims could:
 
 
·
result in costly litigation;
 
 
·
divert management’s attention and resources;
 
 
·
cause product shipment delays; and
 
 
·
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.
 
 
7

 
 
We incorporate open source technology in our products which may expose us to liability and have a material impact on our product development and sales.
 
Some of our products utilize open source technologies. These technologies are licensed to us under varying license structures, including the General Public License. If we have improperly integrated, or in the future improperly integrate software that is subject to such licenses into our products, in such a way that our software becomes subject to the General Public License or similar licenses, we may be required to disclose our own source code to the public. This could enable our competitors to eliminate any technological advantage that our products may have over theirs. Any such requirement to disclose our source code or other confidential information related to our products could materially and adversely affect our competitive position and impact our business, results of operations and financial condition.
 
If our products are unable to interoperate with hardware and software technologies developed and maintained by third parties that are not within our control, our ability to develop and sell our products to our customers could be adversely affected, which would result in harm to our business and operating results.
 
Our products are designed to interoperate with and provide access to a wide range of third-party developed and maintained hardware and software technologies, which are used by our customers. The future design and development plans of the third parties that maintain these technologies are not within our control and may not be in line with our future product development plans. We may also rely on such third parties, particularly certain third-party developers of database and application software products, to provide us with access to these technologies so that we can properly test and develop our products to interoperate with the third-party technologies. These third parties may in the future refuse or otherwise be unable to provide us with the necessary access to their technologies. In addition, these third parties may decide to design or develop their technologies in a manner that would not be interoperable with our own. If any of the situations described above were to occur, we would not be able to continue to market our products as interoperable with such third-party hardware and software, which could adversely affect our ability to successfully sell our products to our customers.

We may need to raise additional capital in the future, which may not be available to us.
 
We had cash and cash equivalents of approximately $16.5 million as of December 31, 2013. Although we anticipate that our existing capital resources will be adequate to satisfy our working capital and capital expenditure requirements in the next 12 months, we may need to raise additional funds in the future in order to satisfy our future working capital and capital expenditure requirements. There is no assurance that we will be able to obtain additional funds on a timely basis, 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.  In addition, if additional funds are raised through the issuance of equity securities, the percentage ownership of then current shareholders would be diluted.
 
We may be required to pay additional taxes due to tax positions that we undertook.
 
We operate our business in various countries, and we attempt to utilize an efficient operating model to optimize our tax payments based on the laws in the countries in which we operate. This can cause disputes between us and various tax authorities in the countries in which we operate whether due to tax positions that we have taken regarding filing of various tax returns or in cases where we determined not to file tax returns. In particular, not all of the tax returns of our operations are final and may be subject to further audit and assessment by the applicable tax authorities. There can be no assurance that the applicable tax authorities will accept our tax positions. In such event, we may be required to pay additional taxes, as a result of which, our future results may be adversely affected.

 
8

 

Our operating results fluctuate significantly and are affected by seasonality.
 
Our quarterly results have fluctuated significantly in the past and may fluctuate significantly in the future.  Our future operating results will depend on many factors, including, but not limited to, the following:
 
 
·
the size and timing of significant orders and their timely fulfillment;
 
 
·
demand for our products;
 
 
·
seasonal trends and general domestic and international economic and political conditions, among others;
 
 
·
changes in our pricing policies or those of our competitors;
 
 
·
the number, timing and significance of product enhancements;
 
 
·
new product announcements by us and our competitors;
 
 
·
our ability to successfully market newly acquired products and technologies;
 
 
·
our ability to develop, introduce and market new and enhanced products on a timely basis;
 
 
·
changes in the level of our operating expenses;
 
 
·
budgeting cycles of our customers;
 
 
·
customer order deferrals in anticipation of enhancements or new products that we or our competitors offer;
 
 
·
product life cycles;
 
 
·
software bugs and other product quality problems;
 
 
·
personnel changes;
 
 
·
changes in our strategy;
 
 
·
currency exchange rate fluctuations and economic conditions in the geographic areas where we operate; and
 
 
·
the inherent uncertainty 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 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.  In light of the foregoing, we cannot predict revenues for any future quarter with any significant degree of accuracy and period-to-period comparisons of our operating results may not necessarily be meaningful.
 
 
9

 
 
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 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, primarily in the third quarter ending September 30, when we expect to continue to experience relatively lower sales mainly as a result of reduced sales activity 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.
 
The loss of the services of our key personnel would negatively affect our business.
 
Our future success depends to a large extent on the continued services of our senior management and key personnel, including, in particular, Shimon Alon, the Chairman of our Board of Directors and our Chief Executive Officer.  Any loss of the services of members of our senior management or other key personnel, and especially those of Mr. Alon, would adversely affect our business.
 
Although our internal control over financial reporting was considered effective as of December 31, 2013, there is no assurance that our internal control over financial reporting will continue to be effective in the future, which could result in our financial statements being unreliable, government investigation or loss of investor confidence in our financial reports.
 
            The Sarbanes-Oxley Act of 2002, or SOX, imposes certain duties on us. Our efforts to comply with the management assessment requirements of Section 404(a) of SOX have resulted in a devotion of management time and attention to compliance activities, and as we expect to be subject to the auditor attestation requirements of Section 404(b) of SOX starting with the year ending December 31, 2014, these efforts are expected to require the continued commitment of significant resources. If we fail to maintain the adequacy of our internal controls, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal control over financial reporting. We may also identify material weaknesses or significant deficiencies in our internal control over financial reporting. In addition, while we expect that our internal control over financial reporting would need to be audited by our independent registered public accounting firm starting the year ending December 31, 2014, such internal control has not and is not currently required to be audited. In the future, if we are unable to assert that our internal controls are effective, our investors could lose confidence in the accuracy and completeness of our financial reports, which in turn could cause our stock price to decline. Failure to maintain effective internal control over financial reporting could also result in investigation or sanctions by regulatory authorities.
 
Risk Factors Relating to Our Ordinary Shares
 
Provisions of the Plenus Loan may make an acquisition of us more costly or difficult, which could depress the price of our shares.
 
Pursuant to the loan agreement between Attunity and Plenus Technologies Ltd. (and certain of its affiliates, or Plenus), dated as of January 31, 2007, as amended, or the Plenus Loan, if on or before December 31, 2017, we enter into a “Fundamental Transaction”, which is defined to include a sale through a merger, selling all or substantially all of our assets, or a transaction in which a person or entity acquires more than 50% of our outstanding shares, then we will be required to pay Plenus an amount equal to, in general, the higher of $300,000 or 15% of the aggregate proceeds payable to our shareholders or us in connection with such Fundamental Transaction. Plenus' right to such payment, or the Plenus Right, remains outstanding despite us having repaid the Plenus Loan in full. As a result, an acquisition of our Company that triggers the Plenus Right will be more costly to a potential acquirer and these provisions, taken as a whole, may have the effect of making an acquisition of our Company more difficult. In addition, these provisions 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.
 
 
10

 
 
Provisions of our OEM agreements with Microsoft may make an acquisition of us more difficult, which could depress the price of our shares.
 
Pursuant to the OEM agreements we entered with Microsoft with respect to our CDC and open database connectivity, or ODBC, technologies, Microsoft is entitled to a right of first offer, whereby we are required to notify Microsoft in the event that we wish to sell our Company or sell or grant an exclusive license of the technology underlying the CDC or ODBC products, as the case may be, and, if the offer is accepted by Microsoft, negotiate such transaction with Microsoft, or, if rejected by Microsoft, we may enter into such transaction with a third party only on substantially the same or more favorable terms than the initial offer made by us to Microsoft. Microsoft is also entitled to terminate the OEM agreements under certain circumstances, including upon a change of control of our Company. These provisions, taken as a whole, may have the effect of making an acquisition of our Company more difficult. In addition, these provisions 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.
 
Our directors and executive officers own a substantial percentage of our ordinary shares.
 
As of April 1, 2014, our directors and executive officers beneficially own approximately 19.1% of our outstanding ordinary shares. As a result, if these shareholders acted together, they could exert significant influence on the election of our directors and on decisions by our shareholders on matters submitted to shareholder vote, including mergers, consolidations and the sale of all or substantially all of our assets. This concentration of ownership of our ordinary shares could delay or prevent proxy contests, mergers, tender offers, or other purchases of our ordinary shares that might otherwise give our shareholders the opportunity to realize a premium over the then-prevailing market price for our ordinary shares.  This concentration of ownership may also adversely affect our share price.
 
Issuance of a significant amount of additional ordinary shares upon exercise of outstanding options, warrants and rights and/or substantial future sales of our ordinary shares may depress our share price.
 
As of April 1, 2014, we had approximately 14.8 million ordinary shares issued and outstanding and approximately 2.0 million of additional ordinary shares which are issuable upon exercise of outstanding employee stock options and warrants. The issuance of a significant amount of additional ordinary shares on account of these outstanding securities will dilute our current shareholders’ holdings and may depress our share price.

If our existing shareholders or holders of our options or warrants sell substantial amounts of our ordinary shares, the market price of our ordinary shares may be adversely affected. Any substantial sales of our shares in the public market might also make it more difficult for us to sell equity or equity related securities in the future at a time and on terms we deem appropriate.  Even if a substantial number of sales do not occur, the mere existence of this “market overhang” could have a negative impact on the market for, and the market price of, our ordinary shares.

The market price of our ordinary shares may fluctuate and could be substantially affected by various factors.
 
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. Numerous factors, many of which are beyond our control, may cause our market price and trade volume to fluctuate and decrease, including the following factors:
 
 
·
quarterly variations in our operating results;
 
 
11

 
 
 
·
changes in expectations as to our future financial performance and cash position, including financial estimates by securities analysts and investors;
 
 
·
announcements of technological innovations or new products by us or our competitors;
 
 
·
announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;
 
 
·
changes in the status of our intellectual property rights;
 
 
·
announcements by third parties of significant claims or proceedings against us; and
 
 
·
future substantial sales of our ordinary shares.
 
Domestic and international stock markets and electronic trading platforms 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 also adversely affect the price of our ordinary shares.
 
If securities analysts do not publish research, or if securities analysts or other third parties publish inaccurate or unfavorable research, about us, the price of our ordinary shares could decline.
 
The trading market for our ordinary shares will rely in part on the research and reports that securities analysts and other third parties choose to publish about us. We do not control these analysts or other third parties. The price of our ordinary shares could decline if one or more securities analysts downgrade our ordinary shares or if one or more securities analysts or other third parties publish inaccurate or unfavorable research about us or cease publishing reports about us.
 
Provisions of our articles of association and of Israeli law as well as the terms of compensation of some of our senior management may delay, prevent or make difficult an acquisition of us, which could depress the price of our shares.
 
The provisions in our articles of association relating to the submission of shareholder proposals for shareholders meetings, and requiring a special majority voting in order to amend certain provisions of our articles of association relating to such proposals as well as to election and removal of directors, may have the effect of delaying or making an acquisition of our Company more difficult. In addition, provisions of Israeli corporate and tax law may have the effect of delaying, preventing or making an acquisition of our Company more difficult. For example, under the Israeli Companies Law, upon the request of a creditor of either party to a proposed merger, the court may delay or prevent the merger if it concludes that there exists a reasonable concern that as a result of the merger the surviving company will be unable to satisfy the obligations of any of the parties to the merger. In addition, our executive officers and certain other key employees are entitled to certain benefits in connection with a change of control of the Company. These provisions 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.
 
We do not intend to pay cash dividends.
 
Our policy is to retain earnings for use in our business.  We have never declared or paid cash dividends, and we do not anticipate paying cash dividends in the foreseeable future.
 
 
12

 
 
Risk Factors Relating to Our Operations in Israel
 
Security, political and economic instability in the Middle East may harm our business.
 
We are incorporated under the laws of the State of Israel, and our principal offices and research and development facilities are located in Israel. Accordingly, security, political and economic conditions in the Middle East in general, and in Israel in particular, directly affect our business.
 
Over the past several decades, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Since late 2000, there has also been a high level of violence between Israel and the Palestinians which has strained Israel’s relationship with its Arab citizens, Arab countries and, to some extent, with other countries around the world. Since the end of 2010 several countries in the region, including Egypt and Syria, have been experiencing increased political instability, which led to changes in government in some of these countries, the effects of which are currently difficult to assess. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in areas that neighbor Israel, such as Hamas in Gaza and Hezbollah in Lebanon. This situation may potentially escalate in the future to violent events which may adversely affect Israel and us. This instability may lead to deterioration of the political and trade relationships that exist between the State of Israel and these countries.  In addition, this instability may affect the global economy and marketplace. Any armed conflicts or political instability in the region, including acts of terrorism or any other hostilities involving or threatening Israel, would likely negatively affect business conditions and could make it more difficult for us to conduct our operations in Israel, which could increase our costs and adversely affect our financial results. Our commercial insurance does not cover losses that may occur as a result of events associated with the security situation in the Middle East, such as damages to our facilities resulting in disruption of our operations. Although the Israeli government currently covers the reinstatement value of direct damages that are caused by terrorist attacks or acts of war, we cannot assure you that this government coverage will be maintained or will be adequate in the event we submit a claim.
 
Furthermore, some neighboring countries, as well as certain companies and organizations, continue to participate in a boycott of Israeli firms and others doing business with Israel or with Israeli companies. Similarly, Israeli companies are limited in conducting business with entities from several countries. For example, in 2008, the Israeli legislature passed a law forbidding any investments in entities that transact business with Iran. Restrictive laws, policies or practices directed towards Israel or Israeli businesses could have an adverse impact on the expansion of our business.

In addition, we could be adversely affected by the interruption or curtailment of trade between Israel and its trading partners, a significant increase in the rate of inflation, or a significant downturn in the economic or financial condition of Israel.

Our financial results may be adversely affected by 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 effect on our results of operations.  We generate a majority of our revenues in dollars or in dollar-linked currencies, but some of our revenues are generated in other currencies such as the Euro, the British Pound Sterling, the Hong-Kong Dollar and the NIS. As a result, some of our financial assets are denominated in these currencies, and fluctuations in these currencies could adversely affect our financial results. In addition, a large portion of our expenses, principally salaries and related personnel expenses, are paid in NIS.  For instance, during 2013, we witnessed a strengthening of the average exchange rate of the NIS against the dollar, which increased the dollar value of Israeli expenses. If the NIS strengthens against the dollar, as it did in 2013, the value of our Israeli expenses will increase. While we engage, from time to time, in currency hedging transactions intended to reduce the effect of fluctuations in foreign currency exchange rates on our results of operations, we cannot guarantee that such measures will adequately protect us against currency fluctuations in the future.  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 our operating results and financial condition.
 
 
13

 
 
Because we received grants from the Israeli Office of the Chief Scientist, we are subject to ongoing restrictions.
 
We have in the past received royalty-bearing grants from the Office of the Chief Scientist of the Israeli Ministry of Economy (formerly, the Ministry of Industry, Trade and Labor), or the Chief Scientist, for research and development programs that meet specified criteria. Although we have no further obligation to pay royalties to the Chief Scientist in respect of sales of our products, the terms of the Chief Scientist’s grants limit our ability to transfer know-how developed under an approved research and development program outside of Israel. In addition, any non-Israeli citizen, resident or entity that, among other things, becomes a holder of 5% or more of our share capital or voting rights, is entitled to appoint one or more of our directors or our chief executive officer, serves as a director of our Company or as our chief executive officer, is generally required to notify the same to the Chief Scientist and to undertake to observe the law governing the grant programs of the Chief Scientist, the principal restrictions of which are the transferability limits described above.
 
It may be difficult to enforce a U.S. judgment against us or our officers and directors and to assert U.S. securities laws claims in Israel.
 
We are incorporated under the laws of the State of Israel. Service of process upon us, our Israeli subsidiaries, our directors and officers and the Israeli experts, if any, named in this annual report, substantially all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, because the majority of our assets and investments, and substantially all of our directors, officers and such Israeli experts are located outside the United States, any judgment obtained in the United States against us or any of them may be difficult to collect within the United States.
 
We have been informed by our legal counsel in Israel that it may also be difficult to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on an alleged violation of U.S. securities laws if they determine that Israel is not the most appropriate forum to bring such a claim. In addition, even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. There is little binding case law in Israel addressing these matters. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law.
 
Subject to specified time limitations and legal procedures, under the rules of private international law currently prevailing in Israel, Israeli courts may enforce a U.S. judgment in a civil matter, including a judgment based upon the civil liability provisions of the U.S. securities laws, as well as a monetary or compensatory judgment in a non-civil matter, provided that the following key conditions are met:
 
 
·
subject to limited exceptions, the judgment is final and non-appealable;
 
 
·
the judgment was given by a court competent under the laws of the state of the court and is otherwise enforceable in such state;
 
 
·
the judgment was rendered by a court competent under the rules of private international law applicable in Israel;
 
 
·
the laws of the state in which the judgment was given provides for the enforcement of judgments of Israeli courts;
 
 
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·
adequate service of process has been effected and the defendant has had a reasonable opportunity to present his arguments and evidence;
 
 
·
the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel;
 
 
·
the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties; and
 
 
·
an action between the same parties in the same matter was not pending in any Israeli court at the time the lawsuit was instituted in the U.S. court.
 
ITEM 4.
INFORMATION ON THE COMPANY
 
A.
History and Development of the Company
 
Corporate History and Details
 
Attunity Ltd was incorporated under the laws of the State of Israel in 1988 as a company limited by shares.
 
Our executive headquarters are located at 16 Atir Yeda Street, Atir Yeda Industrial Park, Kfar Saba 4464321, Israel, telephone number (972) 9-899-3000. Our authorized representative and agent in the U.S. is Attunity Inc., our wholly owned subsidiary, which maintains its principal offices at 70 Blanchard Road, Burlington, Massachusetts 01803, telephone number (781) 730-4070.  Our address on the Internet is http://www.attunity.com. The information on our website is not incorporated by reference into this annual report.
 
We are a leading provider of information availability software solutions that enable access, sharing, replication, management, consolidation and distribution of data, including Big Data, across heterogeneous enterprise platforms, organizations, and the cloud.
 
We began operations in 1989 and, when we went public on NASDAQ in December 1992, our principal products were the APT (Application Programming Tools) 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 Attunity Software Services (1991) Ltd. (formerly known as Meyad Computers Company (1991) Ltd.), which owned Mancal 2000 - a financial and logistic application software package. In 1994, we acquired Attunity Inc. (formerly known as Cortex Inc.), which owned CorVision - an application generator for enterprise applications. In 1996, we released Attunity ConnectÒ - a universal data and application access product. In 2004, we released Attunity Stream – a CDC software that captures only the changes made to enterprise data sources with minimal impact on the database systems. In 2005, we released Attunity InFocus – a software platform for workplace - focused composite applications which, since late 2008, we no longer offer. In 2009, we released Attunity Operational Data Replication – a set of solutions that allow the transfer and synchronization of data between heterogeneous databases. In 2011, we acquired RepliWeb, a leading provider of enterprise file replication and managed file transfer technologies, and released Attunity Replicate, a high performance data replication software that enables organizations to accelerate and improve the distribution and sharing of data for enhanced accessibility. In 2013, we raised net proceeds of approximately $18 million in a public offering and acquired Hayes, a leading provider of data replication software for the SAP market.
 
 
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Recent Major Business Developments
 
Below is a summary of the major business developments in Attunity since January 1, 2013:
 
 
·
On April 2, 2014, we announced the release of Attunity Maestro, a new Big Data management platform.
 
 
·
On December 18, 2013, we acquired Hayes, a leading U.S.-based provider of data replication software for the SAP market.
 
 
·
On November 26, 2013, we raised net proceeds of approximately $18 million in a public offering.
 
 
·
On October 16, 2013, we announced the extension of an OEM distribution agreement with one of the world’s largest business software and hardware systems companies.

 
·
On September 23, 2013, we announced that we enhanced Attunity Replicate, our data replication platform, to enable fast and easy disaster recovery for Oracle environments.

 
·
On May 8, 2013, we announced that we have extended our multi-year OEM strategic distribution agreement with one of our partners, a world-leading software and IT corporation, and that, as part of the extension, the new structure of the agreement improves for us the pricing terms for license, support and maintenance revenues.
 
For a discussion of our principal capital expenditures and divestitures, see Item 5.B " Operating and Financial Review and Prospects –Liquidity and Capital Resources –Principal Capital Expenditure and Divestitures.”
 
B.
Business Overview
 
Overview
 
We are a leading provider of information availability software solutions that enable access, sharing, replication, management, consolidation and distribution of data, including Big Data, across heterogeneous enterprise platforms, organizations, and the cloud. Our software solutions include data replication (Replicate and Gold Client), change data capture (CDC), data connectivity (Attunity Connect), enterprise file replication (EFR), managed-file-transfer (MFT) and cloud data transfer (CloudBeam).

Our software solutions benefit our customers’ businesses by enabling real-time access and availability of data and files where and when needed, across the maze of heterogeneous systems making up today’s information technology (IT) environment. Our software is commonly used for projects such as data warehousing, big data analytics, reporting, migration and modernization, application release automation (ARA), data distribution and cloud initiatives.

Our products form a comprehensive suite of software infrastructure that is designed to reduce the complexity of managing data to, from, and between today’s information systems and enable the use of enterprise information where and when needed. Our software includes products for real-time data integration (including data and file replication); test data management; ARA (a process that automates the deployment and upgrade of custom applications and web content across various stages of the application and content lifecycle); and managed file transfer, or MFT (a process that allows organizations to secure and automate business-to-business information exchanges over standard internet connections). In addition, we offer a software as a service, or SaaS, based platform with a portfolio of services to enable cloud data loading and replication.
 
 
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Our software solutions have been deployed at thousands of organizations worldwide across all industries, including government, financial services, healthcare, oil and gas, manufacturing, retail, pharmaceuticals, and the supply chain industry. Over the years, our company and products have also won a number of awards for ingenuity, performance and innovation, including the following recent awards:
 
 
·
In December 2013, our Attunity Replicate data replication software was named to the List of the Trendsetting Products in Data for 2014 by DBTA Magazine;
 
 
·
In September 2013, Info-Tech Research Group named Attunity as ‘Top Innovator’ and awarded us the ‘Trend Setter Award’ for Managed File Transfer (MFT);
 
 
·
In June 2013, DBTA Magazine named Attunity ‘One of the Most Important Companies in Data Today’; and
 
 
·
In April 2013, CRN Magazine selected Attunity as a ‘Big Data 100 Company’ in its annual list recognizing the most innovative technology vendors that offer products and services to help businesses manage Big Data.
 
We are not responsible for any of these awards or the entities that award them.
 
Through distribution, OEM agreements and strategic relationships with global-class partners such as Microsoft, Oracle, IBM, HP, EMC and Amazon Web Service (AWS), our solutions have been deployed at thousands of organizations worldwide in all areas of industry, including government, healthcare, financial services, insurance, oil & gas, manufacturing, retail, pharmaceuticals and the supply chain industry.
 
Our products and services are sold through direct sales and support offices in the United States, the United Kingdom, Hong Kong and Israel, as well as through distributors and local partners in several countries in Europe as well as in Japan, South Korea, Taiwan, Singapore, and South and Central America.
 
The Market Opportunity and Our Solutions
 
We believe that the world of IT data infrastructure is undergoing a significant change, one that enables very large information assets to be accessible in a timely manner, reaching more users through more applications and devices. This new paradigm in information access requires support for service-based standards, real-time detection of critical events, and the ability to manage very large quantities of datasets, to which we refer as Big Data. Consequently, our main focus and strategy is to strengthen our position as a leading provider of real-time data integration, replication and test data management, which are all enabling technologies.
 
In 2009, we expanded our product offering to target the data replication market, an important segment of the data integration market that enables the real-time availability and consistency of data across heterogeneous databases. Specifically, we focused on what we call Operational Data Replication, or ODR, software solutions, which are designed to make information available to support operational business intelligence. We have since expanded on our technology to support a variety of mission-critical data initiatives. Based, among other things, on market studies and inputs from our customers and prospects, we believe that the need for heterogeneous data integration and replication will continue to increase with the adoption of cloud computing and Hadoop (an open-source software framework for storage and large-scale processing of data-sets on clusters of commodity hardware), as organizations start to manage data both in on-premises data centers and in cloud-based systems. In this respect, we focus on high-speed bulk data transfer and CDC capabilities to support both environments. In September 2011, we acquired RepliWeb, which allows us to offer an extensive data and content replication platform for enterprise data centers and the cloud. In December 2013, we acquired Hayes, which allows us to offer SAP users, through our Gold Client® suite of solutions, a flexible and reliable solution for selecting and moving targeted volumes of data from and between SAP applications and data warehouses, including SAP HANA (SAP's in-memory Big Data platform designed to fulfill the increasing demand for real-time analytics).
 
 
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We believe that our suite of software solutions and services responds to the market need we identified by providing the following key benefits:
 
 
·
our solutions allow organizations to select, access, detect, notify and act upon changing data and critical business events in real-time, and realize the full benefits of being a ‘real-time enterprise’;
 
 
·
our solutions simplify the growing, complex maze of different database systems, platforms, versions and hardware, on-premises and in the cloud, reducing the costs of interconnectivity and opening up the opportunity for new and more valuable cross-system applications;
 
 
·
our solutions empower organizations to manage all types of data structure, across substantially  all network environments, and throughout commercially-relevant business applications and computing environments; and
 
 
·
our solutions enable real-time availability of data required to support business intelligence, analytics, and operations, a requirement that is now a common enabler for improved efficiencies and competitive advantage.
 
Our Strategy
 
The key elements of our strategy to achieve our objectives include:
 
 
·
Extend our Product Leadership. Our flexible, open and standards-based architecture extends integration opportunities into more business applications and enterprise computing environments, including cloud computing. Our goal is to provide the most comprehensive and reliable suite of data management and integration solutions for enterprise data centers and cloud environments that accelerate information access and movement, improve system uptime and reduce operational overhead and complexities.
 
 
·
Expand Our Selling Capabilities. We market and sell our products in the U.S, the U.K, Europe, Asia-Pacific regions, the Middle East and Latin America through direct sales, OEM, reseller and distributor channels. We intend to expand our sales channels in those territories and seek to enter into agreements with new OEMs and other indirect channels.
 
 
·
Enter New Markets. To date, our revenues have been derived predominantly from licensing our software to enterprises that use it in their data centers and cloud environments to enable Big Data analytics, data integration, business intelligence, release automation and file replication. We believe that our software is well positioned to meet the new and fast-growing markets of Big Data and cloud computing (including cloud data warehousing, analytics, the "Industrial Internet of Things”, Hadoop-based environments, cloud data archiving, and disaster recovery), adding value to customers with new solutions as these markets evolve. We intend to capitalize upon these opportunities by marketing our software and services to companies with real-time information needs.
 
 
·
Increased Penetration of Our Existing Customer Base. Over the years, our different software solutions were licensed to over 2,500 customers worldwide and that base continues to grow. This large installed base affords us a unique opportunity for cross-selling our expanded product offering and future software solutions. By way of example, through our acquisition of Hayes, we are now in a position to cross-sell and up-sell our solutions to existing customers who leverage SAP software. Since enterprises today are largely heterogeneous and SAP is one of the largest Enterprise Resource Planning (ERP) vendors in the world today, we believe there is significant opportunity to grow our business in this area.
 
 
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·
Expand and Leverage our Strategic Relationships. We believe that a significant market opportunity exists to sell our software with the complementary products and services provided by other organizations. We plan to extend our existing strategic relationships and develop new alliances with leading global software providers, equipment manufacturers, application service providers, systems integrators and value-added resellers, in order to extend the functionality of our software and increase sales. We have strategic relationships with global-class partners such as Microsoft, IBM, Oracle, HP, EMC, AWS, SAP and CenturyLink, Inc. (Savvis), where our software is sold as a complementary product to their product line, or embedded within their own products.  We intend to leverage the sales and marketing capabilities of our alliance partners and facilitate the wider adoption of our software.
 
 
·
Pursue Strategic Acquisitions and Investments. In order to achieve our business objectives, we may evaluate and pursue the acquisition of, or significant investments in, other complementary companies, technologies, products and/or businesses that enable us to enhance and increase our technological capabilities and expand our software products and service offerings.  For instance, in September 2011, we completed the acquisition of RepliWeb, a provider of enterprise file replication and managed file transfer technologies, and in December 2013 we acquired Hayes to expand our capability to select and replicate SAP and SAP HANA data.
 
Products
 
Our software offering currently consists of the following key products:
 
Attunity Maestro
 
Attunity Maestro, which we launched in April 2014, is an enterprise-class information flow management and automation platform, integrating mission-critical data. The solution accelerates and orchestrates data transmission and deployment processes of Big Data and other large-file assets throughout global data center and cloud environments.  Maestro is designed to meet the needs of a diverse portfolio of users like IT Operations, "lines of business" and risk management teams, and to provide controls for defining, executing, managing and auditing all transaction and automation initiatives. The key features of Attunity Maestro are:
 
 
·
Cascading, distrribution and consolidation;
 
 
·
Central monitoring and management for Attunity products; and
 
 
·
Process flow designer.
 
 
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Attunity ReplicateÒ
 
Attunity Replicate is a high-performance data replication software, which we believe enables organizations to accelerate and reduce the costs of distributing, sharing and ensuring the availability of data for meeting business operations and business intelligence needs. Using Attunity Replicate, organizations can load data efficiently and quickly to operational data stores/warehouses; create copies of production databases to enable operational reporting; offload queries from operational systems to reduce load and impact; facilitate zero-downtime migrations and upgrades; and distribute data across data sources/centers. Instead of relying on a complex, resource-intensive ETL (Extract, Transform and Load) process which moves data in batches, Attunity enables ELT with a simple yet powerful GUI (Graphic User Interface) expediting the traditionally-slow process of data provisioning. The key features of Attunity Replicate are:
 
 
·
Complete automation and optimized high-performance database replication, including database schema, data and changes;
 
 
·
Simplified user experience delivering a "Click-2-Replicate" solution, which means it allows the user to simplify and automate the implementation of end-to-end data replication; and
 
 
·
Heterogeneous replication supporting many types of source and target databases, including cloud.
 
Attunity CDC
 
Attunity CDC captures and delivers the changes made to enterprise data sources to a destination database. Given the exponential growth rates of transactional data year-on-year, and the increasing demands for businesses to work with ever more timely information, streaming changed-data to applications and messaging systems has become a critical component of the modern ‘real-time enterprise’. Using Attunity CDC, we believe organizations can significantly improve the movement of enterprise operational data in real-time to data warehouses and data marts; significantly improve the efficiency of ETL, processes, synchronize data sources; and enable event-driven business activity monitoring and processing. Attunity CDC provides agents that non-invasively monitor and capture changes to enterprise data sources. Changes are delivered in real-time or consumed as required using standard interfaces. The key features of Attunity CDC are:
 
 
·
Real-time capture of changes from most data sources, including Oracle and SQL Server, as well as legacy systems such as mainframe, HP NonStop, and HP OpenVMS;
 
 
·
Structured Query Language (SQL)-based change delivery for ETL and data-oriented applications;
 
 
·
Extensible Markup Language (XML)-based change delivery for Enterprise Application Integration, or EAI, and message-oriented applications;
 
 
·
Simple installation and fast configuration using wizard-based GUI; and
 
 
·
Auditing and recoverability.
 
Attunity ConnectÒ
 
Attunity Connect is a suite of pre-built adapters to mainframe and enterprise data sources. It is designed to provide seamless access to legacy data for business intelligence and enterprise portals, build .NET and J2EE (Java 2 Enterprise Edition) applications that interoperate with legacy systems, and EAI initiatives. Attunity Connect resides natively on the data server to provide standard, service-oriented integration (SQL, XML, and Web based services) to a broad list of data sources on platforms ranging from Windows and UNIX to HP NonStop and Mainframe. With robust support for metadata, bi-directional read/write access and transaction management, Attunity Connect simplifies and reduces the cost of legacy integration. The key features of Attunity Connect are:
 
 
·
Standard, service-oriented interfaces (SQL, XML, Web services);
 
 
·
Comprehensive pre-built adapter library on virtually any platform;
 
 
·
Transactional read/write integration;
 
 
·
Query governing;
 
 
·
Enterprise class scalability, reliability and performance;
 
 
·
Certified with leading Business intelligence (BI) and EAI products; and
 
 
·
Simple installation and fast configuration using wizard-based GUI.
 
 
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Attunity Managed File Transfer (MFT)
 
Attunity MFT is a file transfer management solution that allows organizations to secure and automate business-to-business information exchanges over standard internet connections. Attunity MFT delivers security policy enforcement, auditing, inspection policies, routing, and accelerated transfers of large-file payloads across each stage of the file transfer process. The key features of MFT are:
 
 
·
Secure two–tier demilitarized zone architecture (a physical or logical separation between internal and external network or computing environments, which helps organizations address regulatory, compliance and information security requirements);
 
 
·
Ability to address user, server and application-driven file transfer processes;
 
 
·
Support for most commercial encryption and security policies; and
 
 
·
Rich application programming interface, or API, that supports extensive inspection policies and file routing.  
 
Attunity for EFR
 
Attunity for EFR is a heterogeneous file system and storage replication solution, optimized for Wide Area Network (WAN) infrastructures. The solution provides organizations with widely distributed (global/regional/local) operations, a highly reliable and fast way to replicate, mirror, backup and/or migrate unstructured data. The key features of Attunity for EFR are:
 
 
·
Comparative snap-shot technology enabling delta only replication;
 
 
·
Accelerated WAN transfer engines;
 
 
·
Extensive file and content include/exclude definitions; and
 
 
·
Real-time replication engines for Windows server environments.
 
Attunity for ARA
 
Attunity for ARA is an ARA and Web deployment solution for Windows (.NET & SharePoint), UNIX and Linux applications and web infrastructures. The product is used by IT operations, application development and content/marketing teams to manage and automate the deployment of applications and digital content across on-premise and cloud-based servers. The key features of Attunity for ARA are:
 
 
·
Robust automation and scheduling engines;
 
 
·
End-to-end auditing and reporting of managed processes; and
 
 
·
One-click rollback of applications, content & configurations.
 
 
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Attunity Gold ClientÒ
 
Attunity Gold Client Solutions is our replication software for data management within SAP environments. Businesses around the world choose Gold Client Solutions to maximize the value of their investments in SAP, by reducing enterprise storage requirements, improving the quality and availability of test data, restoring development integrity, and ensuring data security. Using Gold Client Solutions, customers can quickly select and copy subsets of only relevant data from production or non-production sources to non-production targets, with options to simultaneously scramble sensitive data and keep data subsets in sync across systems. Gold Client Solutions reside natively in the SAP application layer and supports a broad list of SAP applications, including ERP, BW, HR, CRM, SRM, GTS and SAP HANA. The key features of Gold Client are:
 
 
·
Replicating data with all relevant data, exactly as it exists in the source;
 
 
·
Providing flexible selection methods allow any criteria to identify data for replication;
 
 
·
Creating smaller, fully functional clients;
 
 
·
Migrating select data to new or existing environments, on premise or in cloud;
 
 
·
Simultaneously copying relevant data on multiple SAP applications;
 
 
·
Protecting sensitive data at export with extensive, extendable transformation rules; and
 
 
·
Selectively deleting unwanted data in non-production systems.
 
Attunity CloudBeam
 
Attunity CloudBeam is our fully-managed data transfer SaaS-based platform that is designed to move data to, from, and between on-premises and cloud environments quickly, reliably and affordably. We believe Attunity CloudBeam helps users to realize the value of cloud computing by alleviating the challenges of uploading and managing the transmission of Big Data, also known as the "Big Data bottleneck," as well as address other infrastructure maintenance challenges. Supporting AWS cloud storage services, Attunity CloudBeam facilitates solutions such as loading data for analytics in the cloud, disaster recovery, content distribution, and cloud migrations. The key features of Attunity CloudBeam are:
 
 
·
Automation – provides robust scheduling of data transfer processes, including continuous synchronization. The command line interface also enables application level automation;
 
 
·
Acceleration – high-performance movement of very large files and large numbers of files to, from, and between on-premises and cloud environments;
 
 
·
Manageability – enables user to manage cloud data movement without the overhead of building and maintaining cloud infrastructure;
 
 
·
Reliability – provides comprehensive audited and recoverable file transfers;
 
 
·
Security – encrypts all transfers to ensure data is not tampered with or viewed inappropriately; and
 
 
·
Affordability – subscription-based services enable customers to pay based on usage.
 
Sales and Marketing
 
Our products and services are sold through both direct and indirect channels, including distributors, VARs and OEM partners.
 
We maintain direct sales operations through wholly owned subsidiaries in the United States, the United Kingdom, Hong Kong and Israel.  In several countries in Europe, as well as in Japan, South Korea, Taiwan, Singapore, and South and Central America, we distribute our products through independent distributors. Our field force (including marketing, sales, technical pre-sales and support personnel) as of December 31, 2013 was comprised of 40 persons in North America, 11 persons in Europe, the Middle East and Africa and 3 persons in the Asia Pacific region.
 
Over the course of the past several years, we have focused on developing long-term strategic partnerships with platform vendors, business intelligence vendors, resellers, VARs, OEMs, system integrators and managed service providers as well as with other business partners, such as EMC and HP Vertica. We entered into a number of OEM, VAR  and/or reseller agreements with Microsoft, IBM, Oracle, HP, Business Objects (owned by SAP), CenturyLink, Inc. (Savvis) and other enterprise software vendors and integrators. For example, in February 2011, we announced that we had entered into an OEM agreement with Microsoft to provide our ODBC connector in Microsoft's next version of SQL Server. This OEM agreement was in addition to a multi-million dollar OEM agreement with Microsoft to provide our CDC in Microsoft's enterprise edition of SQL Server 2012, which we announced in December 2010. The scope of these OEM agreements is global and it also covers resellers, developers and distributors of Microsoft's SQL Server.
 
 
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Customer Support Services
 
We provide the following direct support services to our customers:
 
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”. Such hot-line customer support is typically provided through toll-free telephonic support during business hours, which, for an additional fee, can be extended to 24 hours a day, seven days a week. We have hot-line operations in the United States, Israel and China. Support is provided via telephone, remote-access and e-mail and, in the case of our Gold Client solutions, also through dedicated website resources that include videos and other documentation. A substantial majority of our customers are covered by support contracts, with, in some cases, services being provided by local subcontractors or resellers.
 
Training.  We provide classroom and on-site training in the use and, where necessary, implementation, of our products. The courses, which, where appropriate, are also provided as online learning programs, typically include product use education, product troubleshooting and system management.  Our customers receive documentation that includes user manuals, reference manuals, tutorials, installation guides and release notes.
 
Professional Services.  We offer consulting services and system integration assistance to customers, although most of our products do not require material support in implementation. In respect of our Gold Client solutions, we offer customers professional services for the implementation of the product, including installation assistance of the software, software configuration specific to the SAP application version, custom table analysis, custom configuration when needed, and training.
 
Seasonality
 
Our business is subject to seasonal trends, primarily in the third quarter ending September 30, when we have typically experienced relatively low sales mainly as a result of reduced sales activity of our customers and prospects during the summer months. We have also often recognized a substantial portion of our revenues in the last quarters of the year and in the last month, or even weeks or days, of a quarter.
 
Customers
 
       Our products are sold directly and indirectly primarily to large and medium-size enterprises in the financial services, healthcare, manufacturing, retail, pharmaceuticals and the supply chain industry, as well as to governmental and public institutions. In addition, our products are sold indirectly through a number of regional resellers and world-class OEM partners, such as Microsoft, IBM, Oracle and HP, as well as other software vendors and integrators.
 
For the year ended December 31, 2013, no single customer accounted more than 10% of our total revenues. For the year ended December 31, 2012, Microsoft accounted for approximately 10.9% of our total revenues. For the year ended December 31, 2011, Microsoft and another OEM partner accounted for approximately 13.4% and 10.7%, respectively, of our total revenues.
 
 
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In the past three years, a substantial majority of our license revenues were derived from our connectivity and data replication products whereas the balance of license revenues were derived from our file replication products, which consist of our file replication, MFT and ARA solutions associated with the acquisition of RepliWeb in September 2011.
 
In 2012 and 2013, a substantial majority of our maintenance and support revenues were derived from both our connectivity and data replication products and file replication products, whereas the balance of our maintenance and support revenues were derived from the Corvision and APTuser products, which are our legacy products. In 2011, a substantial majority of our maintenance and support revenues were derived from our connectivity and data replication products, whereas the balance of our maintenance and support revenues were derived from the file replication products and, to a lesser extent, from our legacy products.
 
In 2013, 69.6% of our revenues were from the U.S., 13.0% were from Europe, 7.2% were from Israel, 7.0% were from the Far East and 3.2% were from other countries, compared to 65.0%, 14.3%, 8.8%, 5.8% and 6.1%, respectively, in 2012, and 70.7%, 14.4%, 6.2%, 5.7% and 2.8%, respectively, in 2011.
 
For additional details regarding the breakdown of our revenues by geographical distribution and by activity, see Item 5.A “Operating and Financial Review and Prospects – Operating Results – Results of Operations”.
 
Competition and Pricing
 
General: The IT marketplace is highly competitive and has very few barriers to entry. The primary competitive factors affecting sales of our products are product performance and features, depth of product line, technical support and price. We compete both with international and local software vendors, many of whom have significantly greater financial, technical and marketing resources than us.
 
We anticipate continued growth and competition in this market and, consequently, the entrance of new competitors into the market or intensified competition, including by way of consolidation. In the past few years, we have identified a trend of consolidation in the software industry in general, and in the real-time data integration market in particular, such as IBM’s acquisition of Aspera (December 2013), Informatica Corporation's acquisition of Wisdom Force (July 2011) and Oracle's acquisition of GoldenGate Software (July 2009). Consolidation and mergers in our market may result in stronger competition by larger companies that threatens our market positioning. New entrants may also include the IT departments of current and potential customers of ours that develop solutions that compete with our products.
 
 
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Connectivity and Data Replication: The competitors with our connectivity (including CDC) and data replication offering include Oracle (through GoldenGate), Informatica Corporation and IBM.  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 resources, manufacturing efficiency, name recognition, sales and marketing expertise, distribution channels, as well as financial resources. However, we believe that our connectivity and data replication products are generally competitive in price and features and have certain advantages as compared to competitors’ products.
 
Application Release Automation (ARA)/ Web Deployment: Our competitors in the ARA and Web Deployment market include major platform vendors, such as Microsoft, IBM and HP; server provisioning and configuration management vendors, such as BMC Software, Inc., CA Inc. and Serena Software, Inc.; and other providers of open source and freeware solutions. Our commercial competitors in this market enjoy significant advantages over us primarily in their abilities to manage both the operating systems and application stacks, stronger global brand recognition and deeper product development capabilities. The open source and freeware solutions offer significant cost benefits compared to our and other commercial solutions. However, we believe our offerings are competitive in that they address the needs of heterogeneous computing and application infrastructures, reduce the potential for vendor lock-in, are quicker and easier to install, and deliver a quicker total return on investment.

Managed File Transfer (MFT): Our competitors in the MFT market include the larger global software and middleware vendors, such as IBM (Sterling Commerce), Axway Software SA and Tibco Software Inc.; mid-tier software vendors, such as Globalscape Inc. and Ipswitch Inc.; and SaaS vendors such as Box.net and YouSendit. The MFT market is highly competitive with the larger global software vendors possessing significant advantages over us in terms of stronger global brand recognition, current feature sets, research and development resources, and sales infrastructure. Additionally, we face increased competition from SaaS vendors who offer low first-year product acquisition costs.  However, we believe our MFT solution provides a rich portfolio of features that addresses the mainstream market needs, has a lower total cost of ownership and delivers high enterprise value.

Enterprise File Replication (EFR): Our competitors in the EFR market include the major platform vendors such as Microsoft, IBM and HP; the large storage management vendors such as EMC, CA and Symantec; mid-tier replication vendors such as Vision Solutions, Inc. (Double-Take Software); as well as other providers of open source and freeware solutions. The larger commercial vendors have strong visibility and penetration with storage management processes such as de-duplication and archival processes. The open source and freeware solutions offer significant cost benefits compared to our and other commercial solutions. However, we believe our EFR solution is very competitive in its ability to reliably manage massive file/folder structures, its ability to address organizations with large numbers of server endpoint connected over WAN links, and our low total cost of ownership.

SAP Data Replication and Management: Our competitors in the SAP data replication and management market include major platform vendors, such IBM and SAP itself; global consulting services and software solutions vendors, such as Informatica, EPI-USE and BackOffice; and storage management providers, such as EMC and NetApp. Our competitors in this market enjoy advantages over us in terms of stronger global brand recognition, research and development resources, and sales infrastructure. However, we believe our solutions for SAP data are competitive in their ability to offer a rich portfolio of features and a quick implementation process, and deliver a quick total return on investment.
 
 
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Intellectual Property Rights and Software Protection
 
While we have one registered patent for a method for compressing and decompressing files in the field of file transfer software, we primarily 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 trademark registrations in the U.S. for, among others, AttunityÒ, Attunity ConnectÒ, Attunity FederateÒ, Attunity ReplicateÒ, RepliWebÒ, Better DataÒ, Smaller Databases®, Data Echo®, Data Recast® and Gold Client®. 
 
We believe that copyright protection, which generally applies whether or not a license agreement exists, is sufficient to protect our rights in our products. We do not currently own any registered copyrights. Our policy is for our customers to sign non-transferable software license agreements 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.
 
Government Regulations
 
General
 
Israel has the benefit of a free trade agreement with the United States which, generally, permits tariff-free access into the United States for products produced by us in Israel.  In addition, as a result of an agreement entered into by Israel with the European Union, or the EU, and countries remaining in the European Free Trade Association, or EFTA, the EU and EFTA have abolished customs duties on Israeli industrial products.
 
Grants from the Office of the Chief Scientist
 
The Government of Israel encourages research and development projects through the Office of Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Chief Scientist, pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, and the regulations promulgated thereunder, or the R&D Law.  Generally, grants from the Chief Scientist constitute up to 50% of qualifying research and development expenditures for particular approved projects. Under the terms of these Chief Scientist projects, a royalty of 3% to 5% is due on revenues from sales of products and related services that incorporate know-how developed, in whole or in part, within the framework of projects funded by the Chief Scientist. Royalty obligations are usually 100% of the dollar-linked amount of the grant, plus interest.
 
We have not received grants since 2000 and, since 2006, we have not had any liability to pay royalties to the Chief Scientist.  Nevertheless, the R&D Law provides that know-how developed under an approved research and development program or rights associated with such know-how may not be transferred to third parties in Israel without the approval of the Chief Scientist. Such approval is not required for the sale or export of any products resulting from such research or development. The R&D Law, as amended, further provides that the know-how developed under an approved research and development program or rights associated with such know-how may not be transferred to any third parties outside Israel, except in certain special circumstances and subject to the Chief Scientist’s prior approval. The Chief Scientist may approve the transfer of Chief Scientist-funded know-how outside Israel, generally, in the following cases: (a) the grant recipient pays to the Chief Scientist a portion of the sale price paid in consideration for such Chief Scientist-funded know-how (according to certain formulas), (b) the grant recipient receives know-how from a third party in exchange for its Chief Scientist-funded know-how, or (c) such transfer of Chief Scientist-funded know-how arises in connection with certain types of cooperation in research and development activities.
 
 
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The R&D Law also imposes reporting requirements with respect to certain changes in the ownership of a grant recipient.  The law requires the grant recipient and its controlling shareholders and non-Israeli interested parties to notify 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 Chief Scientist to comply with the R&D Law.  In addition, the rules of the Chief Scientist may require additional information or representations in respect of certain of such events. For this purpose, “control” is defined as the ability to direct the activities of a company other than any ability arising solely from serving as an officer or director of the company.  A person is presumed to have control if such person holds 50% or more of the means of control of a company.  “Means of control” refers to voting rights or the right to appoint directors or the chief executive officer.  An “interested party” of a company includes a holder of 5% or more of its outstanding share capital or voting rights, its chief executive officer and directors, someone who has the right to appoint its chief executive officer or at least one director, and a company with respect to which any of the foregoing interested parties owns 25% or more of the outstanding share capital or voting rights or has the right to appoint 25% or more of the directors.  Accordingly, any non-Israeli who acquires 5% or more of our ordinary shares will be required to notify the Chief Scientist that it has become an interested party and to sign an undertaking to comply with the R&D Law.
 
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 principal operating subsidiaries (direct and indirect):
 
 
Subsidiary Name
 
Country of
Incorporation
 
Ownership
Percentage
         
Attunity Inc.
 
United States
 
100%
Attunity (UK) Limited
 
United Kingdom
 
100%
Attunity (Hong Kong) Ltd.
 
Hong-Kong
 
100%
Attunity Israel (1992) Ltd.
 
Israel
 
100%
RepliWeb Inc.
 
United States
 
100%
Hayes Technology Group, Inc.
 
United States
 
100%
 
D.
Property, Plants and Equipment
 
General. Other than the leased properties described below, we do not own or lease any material tangible fixed assets. With respect to encumbrances on our assets, see Item 5.B "Operating and Financial Review and Prospects– Liquidity and Capital Resources – Principal Financing Activities – Credit Line.".
 
Israeli Leases. Our executive, marketing and sales offices as well as research and development facilities are located in the industrial park of Kfar Saba, Israel. In August 2012, in order to consolidate our two Israeli facilities into one location, we entered into a new lease agreement for the lease of approximately 18,400 square feet in said location. In accordance with the lease, we relocated to these new facilities in mid-March 2013. The lease expires in February 2018 and may be extended for two additional periods of three years each.  The aggregate annual rent for our Israeli facilities in 2013, which was comprised in 2013 of this facility and another facility that we left in mid-March 2013, was approximately $535,000 in 2013, compared with approximately $414,000 in 2012.
 
 
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North America Leases. We lease approximately 4,200 square feet of office space in Burlington, MA, approximately 2,500 square feet of office space in Coconut Creek, FL, and approximately 4,300 square feet of office space in Buffalo Grove, IL. The aggregate annual rent of these facilities was approximately $155,000 in 2013. In February 2014, we relocated to a new office space in Burlington of approximately 6,000 square feet, for annual rent of approximately $134,000 (which reflects an annual increase in our lease expenses of approximately $28,000).
 
Leases in Other Locations. We lease office space in Hong Kong and, commencing March 2013, in Chertsey, England. The aggregate annual rent for these premises was approximately $160,000 in 2013 (compared with $126,000 in 2012).
 
Facilities - Outlook. We believe that the aforesaid offices and facilities are suitable and adequate for our operations as currently conducted and as currently foreseen. In the event that additional or substitute offices and facilities are required, we believe that we could obtain such offices and facilities at commercially reasonable rates.
 
ITEM 4A.                   UNRESOLVED STAFF COMMENTS
 
Not applicable.
 
ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 
Our discussion and analysis of our financial condition and results of operation are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP.  Our operating and financial review and prospects should be read in conjunction with our financial statements, accompanying notes thereto and other financial information appearing elsewhere in this annual report.
 
A.
Operating Results
 
Overview
 
We were founded in 1988 and became a public company in the United States in 1992. We have been delivering software solutions to organizations around the world for over twenty years and we are now a leading provider of information availability software solutions that enable access, sharing, replication, management, consolidation and distribution of data, including Big Data, across heterogeneous enterprise platforms, organizations, and the cloud.

Our software solutions include data replication (Replicate and Gold Client), CDC, data connectivity (Attunity Connect), EFR, MFT and cloud data transfer (CloudBeam). These solutions benefit our customers’ businesses by enabling real-time access and availability of data and files where and when needed, across the maze of heterogeneous systems making up today’s IT environment. Our software is commonly used for projects such as data warehousing, big data analytics, reporting, migration and modernization, ARA, data distribution and cloud initiatives.
 
 
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Through distribution, OEM agreements and strategic relationships with global-class partners, our solutions have been deployed at thousands of organizations worldwide in all areas of industry, including government, healthcare, financial services, insurance, oil & gas, manufacturing, retail, pharmaceuticals and the supply chain industry.
 
Executive Summary
 
2013 Highlights
 
In 2013, our total revenues were approximately $25.2 million, compared to $25.5 million in 2012. Our total revenues were comprised of:

 
·
License revenues that decreased by 7.4% to $13.4 million in 2013, compared to $14.4 million in 2012. The decrease in license revenues mainly resulted from lower than expected sales of our solutions during the first half of 2013 with $5.0 million in license revenues, compared to $7.1 million in the first half of 2012. We attribute this decrease primarily to the generation of fewer marketing leads and a relatively weak execution of sales, both through our direct sales and our OEM partners. In the second half of 2013, we were able to improve our marketing and sales operations and our license revenues grew to $8.4 million, compared to $7.3 million in the second half of 2012. The growth in license revenues in the second half of 2013 was primarily due to an increase in the average size of our deals and in the number of transactions, which we attribute to our expanded sales and marketing initiatives during that period and an increase in license revenues from one of our OEM partners, which we attribute to the modification in the commercial terms of the OEM agreement with such partner; and
 
 
·
Maintenance and services revenues that increased by 7.2% to $11.8 million, compared to $11.0 million in 2012. The increase is primarily due to an increase in license revenues generated throughout 2012 that contributed to higher maintenance revenues in the 2013.
 
Our operating loss for 2013 was $58,000 compared to operating income of $2.5 million for 2012. This change is mainly a result of a $1.9 million increase in sales and marketing expenses, while the total revenues remained at the same level.
 
Our operating loss contributed to a net loss of $629,000 or ($0.05) per diluted share, compared to a net income of $1.5 million, or $0.12 per diluted share, in 2012.
 
        In November 2013, we raised net proceeds of approximately $18 million in a public offering of our ordinary shares. We currently intend to continue to use the net proceeds in connection with the execution of our strategic plan, including for expanding our sales, marketing and research and development activities, as well as acquisitions and investments, and for working capital and other general corporate purposes.
 
In December 2013, we acquired Hayes, a leading U.S.-based provider of data replication software for the SAP market, in consideration for (1) approximately $6.2 million in a combination of cash ($4.5 million) and ordinary shares (185,000 shares) and (2) contingent payments of up to $4.2 million (in a combination of cash and shares) over 2014 and 2015. With this acquisition, we plan to penetrate the SAP market, accessing a new, larger customer base and further establishing Attunity as a leading software vendor for Big Data replication, offering a broader line of solutions that enable data access, sharing and distribution across heterogeneous IT platforms in enterprise data centers and cloud environments. See also in Item 10.C "Material Contracts - Acquisition of Hayes."
 
We had cash and cash equivalents of approximately $16.5 million as of December 31, 2013 compared with $3.8 million as of December 31, 2012. This increase in our cash position is mainly attributable to approximately $18.0 million raised in the public offering and the exercise of stock options and warrants of approximately $1.1 million. This increase was partially offset by the payment, in April 2013, of $2.0 million to RepliWeb' s former shareholders, as a full and final payment of the contingent consideration payable to them in connection with the acquisition of RepliWeb.
 
 
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Our shareholders' equity increased to $30.1 million as of December 31, 2013 compared to $9.6 million as of December 31, 2012.
 
2014 Outlook
 
We identified the following trends that may influence our market and the demand for our software solutions:
 
 
·
Big Data, which is a relatively new target market for Attunity with our ability to enable information availability and to facilitate the replication and transfer of large amounts of structured and unstructured data to enable analytics and business intelligence, seems to continue growing rapidly, with numerous software vendors, developers and integrators looking to invest substantial resources in this market;
 
 
·
Continued growth of the already large open systems database, or DBMS, market, which is a target market for Attunity with our data replication software solutions. Continued and accelerated growth of the amounts of data stored and managed by organizations; Information immediacy, or the growing need and expectation by business users to have fresh and up-to-date information;
 
 
·
The "Industrial Internet of Things," which is a trend that refers to integrating complex physical machinery with networked sensors and software, together with Big Data, and machine-to-machine communication over wide distances, for the purpose of analyzing all of it together (often in real-time), to gain better insights. These insights enable organizations to adjust and optimize operations. This evolving trend may present new opportunities and markets for our solutions;
 
 
·
Ongoing extensive growth in unstructured data and a need to deploy, migrate and integrate this data across distributed computing environments and into competent Big Data systems, including Hadoop; and
 
 
·
Cloud computing, which is also a relatively new target market for Attunity with our data replication software solutions, and which seems to continue growing significantly, with numerous software vendors, developers and integrators looking to invest substantial resources in this market.
 
In 2014, we intend to continue to invest in expanding our sales and marketing, developing and marketing new solutions and products, such as our recently announced Attunity Maestro, and enhancing existing solutions and products, including for supporting new markets. We believe that this strategy will enable us to support continued sales growth and enhance market acceptance for our offerings. In particular, we intend to continue to introduce and market several of our new software solutions, such as our optimized data loading solution for Amazon Redshift as well as our SAP replication solution supporting SAP HANA.
 
Our ability to continue our growth and achieve profitability depends, in part, on the global economy and the growth rates and changes in technology trends in industries in which we operate, as well as the level of market acceptance of our solutions. As such, our results may be adversely affected if there is a further economic slowdown, a decrease in the overall market’s IT spending, a reduction in the capital expenditures by companies in our target markets or a failure of our new products to achieve market recognition.
 
 
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For additional details regarding our capital resources and contractual obligations, see Item 5.B "Operating and Financial Review and Prospects Liquidity and Capital Resources Principal Financing Activities," Item 5.B "Operating and Financial Review and Prospects Liquidity and Capital Resources Outlook" and Item 5.F "Operating and Financial Review and Prospects Tabular Disclosure of Contractual Obligations."
 
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 (1) revenue recognition; (2) stock-based compensation; (3) liabilities presented at fair value; (4) provisions for income taxes; (5) business combinations; and (6) goodwill and intangible assets. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Under different assumptions or conditions, actual results may differ from these estimates.
 
We believe that the following significant accounting policies are the basis for the most 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 our software products, maintenance, support, consulting and training services.  We sell our products primarily through our direct sales force to customers and indirectly through distributors, OEMs and VARs.  Both the customers and the distributors or resellers are considered end users.  We are also entitled to fees from some of our OEMs and VARs upon the sublicensing of our software to end users. We account for software sales in accordance with Accounting Standards Codification, or ASC, No. 985-605, "Software Revenue Recognition", or ASC No. 985-605.
 
Revenues from license and services fees are recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred or the services have been rendered, the fee is fixed or determinable and collectability is probable.  We usually do not grant a right of return to our customers.
 
We determine that persuasive evidence of an arrangement exists with respect to a customer when we have a purchase order from the customer, a written contract or an approved quote, which is signed by both us and customer (documentation is dependent on the business practice for each type of customer).
 
Our software may be either physically or electronically delivered to the customer.  We determine that delivery has occurred upon shipment of the software or when the software is made available to the customer through electronic delivery, when the customer has been provided with access codes that allow the customer to take immediate possession of the software on its hardware. We consider all arrangements with payment terms extending beyond five months not to be fixed or determinable.  If the fee is not fixed or determinable, revenue is recognized as payments become due from the customer, provided that all other revenue recognition criteria have been met.
 
We determine whether collectability is probable on a case-by-case basis.  When assessing probability of collection, we consider the number of years in business and history of collection.  If we determine from the outset that collectability is not probable based upon our review process, revenue is recognized as payments are received.
 
 
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With regard to software arrangements involving multiple elements, we allocate revenues to the different elements in the arrangement under the “residual method," in accordance with ASC No. 985-605, when Vendor Specific Objective Evidence, or VSOE, of fair value exists for all undelivered elements.  Under the residual method, at the outset of the arrangement with the customer, we defer revenue for the fair value of our undelivered elements (maintenance and support) and recognize revenue for the remainder of the arrangement fee attributable to the elements initially delivered in the arrangement (software product) when the basic criteria have been met. Any discount in the arrangement is allocated to the delivered element.
 
Our determination of fair value of each element in multiple-element arrangements is based on the price charged when the same element is sold separately. We have established VSOE for professional services based on the hourly or daily rates we charge when we sell such services separately.  VSOE for maintenance and support is determined based upon the price charged for renewals of such services.
 
Fees from OEMs or VARs are calculated either as a percentage of the revenue generated by the seller on sales of our products, or as a percentage of the OEM's or VAR's products in which our products are embedded, as specified in the applicable agreement. Those revenues are recognized on a quarterly basis in arrears based on reports received from the OEM or VAR.

Maintenance and support revenue included in multiple element arrangement is deferred and recognized on a straight-line basis over the term of the maintenance and support agreement.
 
Services revenues are recognized as the services are performed.
 
Deferred revenues include unearned amounts received under maintenance and support contracts and amounts charged to customers but not recognized as revenues.
 
    Stock-based Compensation. We account for equity-based compensation in accordance with ASC 718 “Compensation – Stock Compensation.” Under the fair value based measurement approach of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as an expense over the requisite service period. Determining the fair value of stock-based awards at the grant date requires the exercise of judgment, as well as the determination of the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ from our estimates, equity-based compensation expense and our results of operations would be impacted.
 
We estimate the fair value of employee stock options using a Black-Scholes-Merton valuation model. The fair value of an award is affected by our share price on the date of grant as well as other assumptions, including the estimated volatility of our share price over the expected term of the awards, and the estimated period of time that we expect employees to hold their stock options. The risk-free interest rate assumption is based upon U.S. Treasury interest rates appropriate for the expected life of the awards. We use the historical volatility of our ordinary shares in order to estimate future share price trends. In order to determine the estimated period of time that we expect employees to hold their stock options, we use the "simplified method" as adequate historical experience is not available to provide a reasonable estimate.  The simplified method will continue to apply until enough historical experience is available to provide a reasonable estimate of the expected term. Our expected dividend rate is zero since we do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future.
 
Liabilities Presented at Fair Value. The Plenus Right (see Note 8 to our consolidated financial statements) is considered as a derivative and classified as liability in accordance with ASC No. 815-40, "Contracts in Entity's Own Equity", or ASC No. 815-40, and is marked to market at each reporting date. As of December 31, 2013 and 2012 the liability associated with the Plenus Right amounted to $1,093,000 and $730,000, respectively.
 
 
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We determined the fair value of the Plenus Right taking into account data provided by a third-party valuation specialist who assisted us in estimating the probability of occurrence of events triggering the exercisability of such right and used the Cox, Ross and Rubinstein’s Binomial model for options valuation; however, we are ultimately responsible for determining the value. In the model: (1) the fair value is affected by our share price on the date of issuance as well as other assumptions, including the estimated volatility of our share price over the term of this instrument; and (2) the risk-free interest rate assumption is based upon U.S. Treasury interest rates appropriate for the term of this instrument. We use the historical volatility of our ordinary shares in order to estimate future share price trends and our expected dividend rate is zero since we do not currently pay cash dividends on our ordinary shares and do not anticipate doing so in the foreseeable future.
 
Provisions for Income Taxes. We are subject to income taxes in Israel, the United States and a number of other foreign jurisdictions. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. Based on the guidance in ASC No. 740 “Income Taxes”, we use a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax expense or benefit as the largest amount that is more than 50% likely of being realized upon settlement.
 
Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit, the refinement of an estimate or changes in tax laws. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related interest and penalty.
 
We also assess our ability to utilize tax attributes, including those in the form of carry forwards for which the benefits have already been reflected in the financial statements. We do not record valuation allowances for deferred tax assets that we believe are more likely than not to be realized in future periods. While we believe the resulting tax balances as of December 31, 2013 and 2012 are appropriately accounted for, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to our consolidated financial statements and such adjustments could be material. See Note 13 to our consolidated financial statements included elsewhere in this annual report for further information regarding income taxes.
 
Our income tax may be subject to audits by the tax authorities which may result in proposed assessments. We believe that we adequately provided for any reasonably foreseeable outcomes related to tax audits and settlement. However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, audits are closed or when statutes of limitation on potential assessments expire.
 
Business Combinations. We account for business combinations in accordance with ASC No. 805, “Business Combinations”, or ASC No. 805. ASC No. 805 requires recognition of assets acquired, liabilities assumed, and any non-controlling interest at the acquisition date, measured at their fair values as of that date. Any excess of the fair value of net assets acquired over purchase price and any subsequent changes in estimated contingencies are to be recorded in earnings. In accordance with business combination accounting, we allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. In addition, we expense acquisition-related expenses as they are incurred. We engage third-party appraisal firms to assist management in determining the fair values of certain assets acquired and liabilities assumed. Such valuations require our management to make significant estimates and assumptions, especially with respect to intangible assets.
 
 
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Our management makes estimates of fair value based upon assumptions it believes to be reasonable. These estimates are based on historical experience and information obtained from the management of the acquired companies and relevant market and industry data and are, inherently, uncertain. Critical estimates made in valuing certain of the intangible assets include, but are not limited to, the following: (1) future expected cash flows from license sales, maintenance agreements, customer contracts and acquired developed technologies and patents; and (2) discount rates. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Changes to these estimates, relating to circumstances that existed at the acquisition date, are recorded as an adjustment to goodwill during the purchase price allocation period (generally within one year of the acquisition date) and as operating expenses, if otherwise.
 
In connection with purchase price allocations, we estimate the fair value of the maintenance and support obligations assumed in connection with acquisitions. The estimated fair value of the maintenance and support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair value by estimating the costs related to fulfilling the obligations plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligation. See Note 3 to our consolidated financial statements for additional information on accounting for our recent acquisitions.
 
Goodwill and Intangible Assets. Goodwill is measured as the excess of the cost of acquisition over the sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed.

We review goodwill for impairment at least annually on December 31st or more frequently if events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. We test goodwill using the two-step goodwill impairment process in accordance with ASC 350, "Intangibles-Goodwill and Other". The first step, identifying a potential impairment, compares the fair value of the reporting unit with its carrying amount. If the carrying amount exceeds its fair value, the second step will be performed; otherwise, no further step is required. The second step, measuring the impairment loss, compares the implied fair value of the goodwill with the carrying amount of the goodwill. Any excess of the goodwill carrying amount over the applied fair value is recognized as an impairment loss, and the carrying value of goodwill is written down to fair value. As of December 31, 2013, no impairment of goodwill has been identified.

Results of Operations
 
The following discussion of our results of operations for the years ended December 31, 2013, 2012 and 2011, including the following table, which presents selected financial information data in dollars and 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.
 
On September 19, 2011, we completed the acquisition of RepliWeb, which is described elsewhere in this annual report. As a result of this transaction, the revenues and expenses of RepliWeb are consolidated with our results of operations starting September 19, 2011. The assets and liabilities of RepliWeb are consolidated with our balance sheet as of December 31, 2011.  See Note 3 to our consolidated financial statements included in this annual report.
 
On December 18, 2013, we completed the acquisition of Hayes, which is described elsewhere in this annual report, including in Item 10.C "Material Contracts - Acquisition of Hayes." As a result of this transaction, the revenues and expenses of Hayes are consolidated with our results of operations starting December 18, 2013. The assets and liabilities of Hayes are consolidated with our balance sheet as of December 31, 2013.  See Note 3 to our consolidated financial statements included in this annual report.
 
 
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Year Ended December 31,
(U.S. dollars in thousands)
 
   
2013
   
2012
   
2011
 
Software licenses
    53 %     13,364       57 %     14,437       54 %     8,140  
Maintenance and services
    47 %     11,833       43 %     11,042       46 %     7,029  
Total Revenues
    100 %   $ 25,197       100 %   $ 25,479       100 %   $ 15,169  
Operating expenses:
                                               
Cost of software licenses
    3 %   $ 748       3 %     831       4 %     563  
Cost of maintenance and services
    5 %     1,384       6 %     1,525       6 %     890  
Research and development
    31 %     7,756       30 %     7,748       33 %     4,960  
Selling and marketing
    47 %     11,793       39 %     9,833       39 %     5,851  
General and administrative
    14 %     3,574       12 %     3,024       19 %     2,835  
Total operating expenses
    100 %     25,255       90 %     22,961       100 %     15,099  
Operating income (loss)
    *       (58 )     10 %     2,518       *       70  
Financial expenses, net
    2 %     627       5 %     1,241       8 %     1,284  
Income / (loss) before tax on income
    (3 )%     (685 )     5 %     1,277       (8 )%     (1,214 )
Income tax benefit
    ( *)     (56 )     (1 )%     (209 )     (3 )%     (399 )
Net income (loss)
    (2 )%   $ (629 )     6 %   $ 1,486       (5 )%   $ (815 )
 
                * Less than 1%
 
Comparison of Years Ended December 31, 2013, 2012 and 2011
 
Revenues. Our revenues are derived primarily from software licenses, maintenance and services. For additional details regarding the manner in which we recognize revenues, see the discussion under the caption “Critical Accounting Policies - Revenue Recognition” above.
 
The following table provides a breakdown of our revenues by type of revenues, relative percentages out of total revenues during the last three fiscal years as well as the percentage change between such periods (dollars in thousands):
 
   
 
2013
   
 
2012
   
 
2011
   
Percent change
2013 vs. 2012
   
Percent change
2012 vs. 2011
 
Software licenses
  $ 13,364       53 %   $ 14,437       57 %   $ 8,140       54 %     (7 )%     77 %
Maintenance and services
    11,833       47 %     11,042       43 %     7,029       46 %     7 %     57 %
Total
  $ 25,197       100 %   $ 25,479       100 %   $ 15,169       100 %     0 %     68 %
 
 
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The following table provides a breakdown by geographical area of our revenues (including maintenance and services revenues),  relative percentages out of total revenues during the last three fiscal years as well as the percentage change between such periods (dollars in thousands(:
 
   
 
2013
   
 
2012
   
 
2011
   
Percent change
2013 vs. 2012
   
Percent change
2012 vs. 2011
 
United States
  $ 17,529       69.6 %   $ 16,568       65 %   $ 10,729       70.7 %     6 %     54 %
Europe
    3,265       13.0 %     3,646       14.3 %     2,191       14.4 %     (10 )%     66 %
Israel
    1,818       7.2 %     2,234       8.8 %     948       6.2 %     (19 )%     136 %
Far East
    1,774       7.0 %     1,478       5.8 %     869       5.7 %     20 %     70 %
Other
    811       3.2 %     1,553       6.1 %     432       2.8 %     (48 )%     259 %
Total
  $ 25,197       100 %   $ 25,479       100 %   $ 15,169       100 %     (1 )%     68 %
 
In 2013, our total revenues were approximately $25.2 million, compared to $25.5 million in 2012. Total revenues were comprised of:

 
·
License revenues that decreased by 7.4% to $13.4 million in 2013, compared to $14.4 million in 2012. The decrease in license revenues mainly resulted from lower than expected sales of our solutions during the first half of 2013 with $5.0 million in license revenues, compared to $7.1 million in the first half of 2012. We attribute this decrease primarily to the generation of fewer marketing leads and a relatively weak execution of sales, both through our direct sales and our OEM partners. In the second half of 2013, we were able to improve our marketing and sales operations and our license revenues grew to $8.4 million, compared to $7.3 million in the second half of 2012. The growth in license revenues in the second half of 2013 was primarily due to increase in the average size of our deals and in the number of transactions, which we attribute to our expanded sales and marketing initiatives during that period and an increase  in license revenues from one of our OEM partners, which we attribute to the modification in the commercial terms of the OEM agreement with such partner; and
 
 
·
Maintenance and services revenues that increased by 7.2% to $11.8 million, compared to $11.0 million in 2012. The increase is primarily due to an increase in license revenues generated throughout 2012 that contributed to higher maintenance revenues in the 2013.
 
In 2012, total revenues increased by approximately 68% to $25.5 million from $15.2 million in 2011. This increase was primarily attributable to the 77% increase in license revenues and a 57% increase in maintenance and services revenues.  The 77% growth in license revenues between 2011 and 2012 was primarily due to (1) the acquisition of RepliWeb in September 2011 and the full consolidation of its operating results with our results of operations in 2012; and (2) the launch in the fourth quarter of 2011 and market acceptance of Attunity Replicate with first sales starting in the second quarter of 2012, resulting also in an increase in the average size of our deals. The $4.0 million increase in maintenance and service revenues in 2012 compared to 2011, reflecting a 57% growth, was also primarily due to the acquisition of RepliWeb and the full consolidation of its operating results with ours.
 
While our revenues increased between 2011 and 2013 primarily in the United States, where revenues increased from approximately $10.7 million in 2011 to $16.6 million in 2012 and to $17.5 million in 2013, the change in our revenues is primarily related to the aforesaid factors, rather than a specific demand for our products in any region. We have, however, witnessed a growing demand for our products in the Far East, where revenues increased from approximately $0.9 million in 2011 to $1.5 million in 2012 and to $1.8 million in 2013.
 
 
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Cost of Revenues.  Cost of software license revenues consists of amortization of core technology acquired and royalties to a third party. Cost of maintenance and services consists primarily of salaries of employees performing the services and related overhead.
 
The following table sets forth a breakdown of our cost of revenues between license and maintenance and services for the last three fiscal years as well as the percentage change between such periods (dollars in thousands):
 
   
 
 
2013
   
 
 
2012
   
 
 
2011
   
Percent change
2013 vs. 2012
   
Percent change
2012 vs. 2011
 
Cost of software licenses
  $ 748     $ 831     $ 563       (10.0 )%     47.6 %
Cost of maintenance and services
    1,384       1,525       890       (9.2 )%     71.3 %
Total
  $ 2,132     $ 2,356     $ 1,453       (9.5 )%     62.1 %
 
Our cost of revenues decreased to approximately $2.1 million in 2013 from approximately $2.4 million in 2012. This decrease is mainly due to (1) a decrease in amortization of capitalized software development expenses from $160,000 in 2012 to zero in 2013 and (2) a decrease of approximately $113,000 in our employee related costs. This decrease was partially offset by an increase of approximately $88,000 in amortization of acquired intangible assets.
 
Our cost of revenues increased to approximately $2.4 million in 2012 from approximately $1.5 million in 2011. This increase is mainly due to (1) $0.4 million in additional support personnel related costs that were incurred in connection with the acquisition of RepliWeb, (2) an increase in amortization of intangible assets of approximately $0.2 million associated with the acquisition of RepliWeb, and (3) an increase in commissions and benefits as associated with the increase in license revenues of approximately $0.3 million.
 
Operating Expenses. The following table sets forth a breakdown of our operating expenses for the last three fiscal years as well as the percentage change between such periods (dollars in thousands):
 
   
 
2013
   
2012
   
2011
   
Percent change
2013 vs. 2012
   
Percent change
2012 vs. 2011
 
Research and development
  $ 7,756     $ 7,748     $ 4,960       0.1 %     56.2 %
Selling and marketing
    11,793       9,833       5,851       19.9 %     68.1 %
General and administrative
    3,574       3,024       2,835       18.2 %     6.7 %
Total
  $ 23,123     $ 20,605     $ 13,646       12.2 %     51 %
 
Research and Development.  Research and development, or R&D, expenses consist primarily of salaries of employees engaged in on-going research and development activities and other related costs.
 
Total R&D costs remained at the same level with $7.8 million in 2013, compared to $7.7 million in 2012. In 2013, our employee related costs, including stock-based compensation expenses, decreased by approximately $128,000 compared to 2012. This decrease was offset by an increase of $134,000 in rent expenses.
 
Total R&D costs increased by approximately 56% from $5.0 million in 2011 to $7.7 million in 2012. The increase is attributed mainly to additional costs of approximately $3.2 million associated with the consolidation of RepliWeb’s operating results, including as related to the increase in the number of our R&D employees as a result of the acquisition. This increase was partially offset by a reduction in the number of R&D employees and a strengthening of the average exchange rate of the dollar against the NIS, which decreased the dollar value of Israeli, including R&D, expenses.
 
 
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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, and sales offices maintenance and administrative costs.
 
Selling and marketing expenses increased by approximately 20% to $11.8 million in 2013 from $9.8 million in 2012. This increase is primarily due to (1) an increase of approximately $1.0 million in costs related to the expansion of our sales and marketing teams (from 33 employees as of December 31, 2012 to 54 employees as of December 31, 2013) during 2013, consistent with our strategy to increase our global footprint,  (2) additional investment in marketing activities of approximately $450,000 to support this expansion, and (3) related expenses that resulted in an increase of $410,000 in travel and rent expenses.
 
Selling and marketing expenses increased by approximately 68% to $9.8 million in 2012 from $5.9 million in 2011. This increase is primarily due to an increase in sales commissions of approximately $1.6 million as a result of the corresponding increase in revenues, approximately $1.5 million related to additional costs related to the acquisition of RepliWeb, and approximately $0.9 million associated with the expansion of our marketing activities, including recruitment of additional personnel and travel expenses.
 
General and Administrative.  General and administrative expenses consist primarily of compensation costs for finance, general management and administration personnel, and legal, audit, and other administrative costs.
 
General and administrative expenses increased by approximately 18% to $3.6 million in 2013 from $3.0 million in 2012. The increase is primarily attributable to expenses associated with the acquisition of Hayes that amounted to $0.5 million.
 
General and administrative expenses increased by approximately 7% to $3.0 million in 2012 from $2.8 million in 2011.  The increase was primarily attributable to the consolidation of RepliWeb’s operating results.
 
Operating Income.  Based on the foregoing, our operating income decreased from approximately $2.5 million in 2012 to an operating loss of $58,000 in 2013. In 2011, we had an operating income of $70,000.

 Financial Expenses, Net. In 2013, we had net financial expenses of $627,000 compared to approximately $1.2 million in 2012. This decrease is attributed mainly to an expense of $717,000 that we recorded in 2012 related to the conversion and repayment of the Convertible Notes and the loan to us from Plenus during 2012, resulting in no financial expense in 2013. In addition, the financial expenses associated with the $2.0 million contingent milestone payment due in connection with the RepliWeb acquisition were approximately $66,000 in 2013, compared to $265,000 in 2012. This decrease in financial expenses was partially offset by an increase in financial expense of (1) approximately $140,000 that was attributed to a revaluation of the Plenus Right presented at fair value, and (2) approximately $90,000 associated with increase of expenses associated with exchange rate differences (mainly due to the revaluation of the NIS in relation to the dollar in 2013).

In 2012, we had net financial expenses of $1.2 million compared to $1.3 million in 2011. This decrease is attributed mainly to the conversion and the repayment of the Convertible Notes and loan from Plenus during the first half of 2012, resulting in lower interest and inducement expenses. This decrease was offset by the financial expenses associated with the accretion of the $2.0 million contingent payment due in connection with the RepliWeb acquisition and with revaluation of the Plenus Right.
 
 
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In 2012, approximately $0.7 million of financial expenses was attributed to the increase in the valuation of certain outstanding warrants and the conversion features of the Convertible Notes, as well as an increase in the valuation of the Plenus Right, compared to approximately $0.6 million for the same items in 2011. In general, for as long as these securities contained anti-dilution and price protection features, any change in our share price would lead to recognition of financial income (in the event of decrease of our share price) or financial expense (in the event of increase of our share price) in accordance with ASC No. 815-40, which could have an impact on our results of operations. During 2011, we were able to secure waivers from the price protection provisions from the holders of most of the warrants and Convertible Notes, which waivers partially mitigated the aforesaid impact of fluctuations in our share price over our financial income or expense starting with the first quarter of 2011. During 2012, we were able to secure waivers from the price protection provisions from the remaining holders of these securities. See also note13 to our consolidated financial statements included elsewhere in this annual report.

Taxes on Income. The corporate tax rate in Israel was 25% for 2013, compared with 25% in 2012 and 24% in 2011.
 
Income tax benefit for 2013 was $56,000 compared to $209,000 in 2012 and $399,000 in 2011. The net change mainly relates to changes in deferred tax assets and liabilities with respect to acquired intangible assets and tax loss carryforwards.
 
For additional details regarding our income taxes, see also note 13 to our consolidated financial statements included elsewhere in this annual report and "Item 10E – Taxation – Israeli Tax Considerations.”
 
Impact of Currency Fluctuations and of Inflation
 
Our financial results may be negatively impacted by foreign currency fluctuations and inflation.
 
Except as set forth below, foreign currency fluctuations and the rate of inflation did not have a material impact on our financial results in the past three years.
 
In 2013, the revaluation of the dollar in relation to the NIS increased the dollar reporting value of our operating expenses by approximately $0.7 million for that year compared with 2012. Since the beginning of 2014, we have been engaged in several currency hedging transactions intended to reduce the effect of fluctuations in currency exchange rates on our financial statements. As of December 31, 2012 and 2013, we had outstanding currency options in the total amount of approximately $0.5 million and $0, respectively, because the options outstanding as of December 31, 2012 expired in various dates until June 2013.
 
For additional details, see Item 11 "Qualitative and Quantitative Disclosures about Market Risk" below.
 
B.
Liquidity and Capital Resources
 
In the past few years, we financed our operations through cash generated by operations, equity investments in private placements, short-term loans and, until mid 2012, borrowings under loans from Plenus and the Convertible Notes. Most recently, in November 2013, we also raised proceeds in a public offering, as described below.
 
Our funding and treasury activities are conducted within corporate practices to maximize investment returns while maintaining appropriate liquidity for both our short and long term needs. Cash and cash equivalents are held primarily in U.S. dollars and NIS.
 
 
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Principal Financing Activities
 
In the past two years, we have engaged in several financing activities designed to improve our cash position, including restructuring of our borrowings, as follows:
 
Public offering. On November 26, 2013, we closed a firm commitment underwritten public offering of 2,852,000 ordinary shares (including 372,000 ordinary shares issued to the underwriter upon full exercise of its over-allotment option), at a public offering price of $7.00 per share. The net proceeds for us were approximately $18.0 million.

Credit Line. In August 2012, we secured a short-term line of credit of approximately $1.0 million from an Israeli bank. Draws under the credit line bear interest, most of which at the bank’s cost of funds plus a margin of 3.0%. As of December 31, 2013, we have drawn approximately $0.5 million under the credit line to support the bank guarantees we granted in connection with our Israeli office lease. The credit line is scheduled to expire in April 2014 and we have determined not to renew such facility. In order to secure our obligations to the bank, we granted to the bank, among others, a first priority floating charge on all of our assets, which pledge will be removed as part of the termination of such facility.

Convertible Notes. Between December 31, 2011 and January 31, 2012, the holders, in the aggregate, of approximately $1.2 million of principal amount of the Convertible Notes, or approximately 76% of the then total outstanding principal amount of the Notes, including Shimon Alon, our Chairman and CEO, and Ron Zuckerman, a member of our Board of Directors, converted their Convertible Notes into a total of approximately 0.6 million ordinary shares pursuant to an offer we made to all holders of the Convertible Notes, or the Prepayment Offer, the key terms of which were as follows:

 
·
the conversion ratio of that portion of the Notes being converted was increased, reflecting a reduction of the conversion price of the Notes from $2.48 to a conversion price of $2.00 (or $2.13, depending on the share price at the time of the conversion) per share; and
 
 
·
each Note holder was entitled to payment, in cash or in additional ordinary shares (based on the new conversion ratio), of the interest payment due in 2012 (in a total amount of approximately $0.1 million for all Notes) plus accrued and unpaid interest for 2011 (in a total amount of approximately $0.2 million for all Notes).
 
The Prepayment Offer expired on January 31, 2012. On July 29, 2012, the holders, in the aggregate, of the remaining Convertible Notes in the principal amount of approximately $0.2 million, converted their Convertible Notes into a total of 92,743 ordinary shares at a conversion price per share of $2.48.  For additional details, see Item 7.B “Related Party Transactions –Convertible Notes.”
 
Working Capital and Cash Flows
 
As of December 31, 2013, we had $16.5 million in cash and cash equivalents, compared to $3.8 million in cash and cash equivalents as of December 31, 2012. The increase is mainly due to the proceeds raised in the public offering and proceeds we received from exercises of warrants and stock options.
 
During 2012, the entire principal amount then outstanding (including interest accrued thereon) under the Convertible Notes and the Plenus Loan was fully repaid. As such, as of December 31, 2012 and 2013, we did not have any third-party debt other than the short-term credit line described above. As of December 31, 2013, our working capital amounted to $12.3 million, compared to a deficit of $3.0 million as of December 31, 2012.
 
 
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The following table presents the major components of net cash flows used in and provided by operating, investing and financing activities for the periods presented (dollars in thousands(:

   
2013
   
2012
   
2011
 
Net cash provided by operating activities
  $ 262     $ 1,942     $ 4,249  
Net cash provided by (used in) investing activities
    (4,826 )     54       (2,685 )
Net cash provided by (used in) financing activities
    17,322       363       (947 )
 
Net cash provided by operating activities was $262,000 in 2013, compared to approximately $1.9 million in 2012 and $4.3 million in 2011. The decrease from 2012 to 2013 is mainly attributed to a decrease in net income as compared to 2012. The decrease from 2011 to 2012 is primarily due to the payment in the aggregate amount of $3.9 million we received from Microsoft during 2011.
 
Net cash used in investing activities in 2013 was approximately $4.8 million, compared to net cash provided by investing activities in 2012 of $54,000 and net cash used in investing activities of $2.7 million in 2011. The change between 2013 and 2012 is attributable mainly to cash paid, of $4.1 million in connection with the acquisition of Hayes in December 2013 and our relocation to new office space in Israel during the first quarter of 2013, which resulted in capital expenditures in the amount of approximately $0.7 million. The change between 2012 and 2011 is mainly attributable to $2.4 million of cash used in 2011 in connection with the acquisition of RepliWeb during that year.
 
Net cash provided by financing activities in 2013 was $17.3 million, compared to net cash provided by financing activities of $363,000 in 2012 and net cash used in financing activities of $1.0 million in 2011. The increase between 2012 and 2013 is mainly due to net proceeds of approximately $18.0 million raised in the public offering and proceeds of approximately $1.1 million we received from exercises of warrants and stock options during 2013 (compared to proceeds of approximately $0.6 million we received from exercises of warrants and stock options in 2012). This increase was partially offset by the payment, in April 2013, of $2.0 million to RepliWeb's former shareholders, as a full and final payment of the contingent consideration payable to them in connection with the acquisition of RepliWeb. The change between 2011 to 2012 is attributable mainly to repayments of loans of $0.3 million in 2012, compared to $1.3 million in 2011, and to proceeds we received from exercises of warrants and stock options in the aggregate amount of approximately $0.6 million in 2012, compared to $0.3 million in 2011.
 
Principal Capital Expenditure and Divestitures

During 2013, our capital expenditures totaled approximately $663,000 (compared to $308,000 during 2012 and $161,000 during 2011), most of which were used for leasehold improvements and the purchase of equipment and furniture in connection with our relocation to new offices in Israel and for the purchase of computer equipment.  Other than future capital expenditures in connection with the purchase of computers and licensee software and consistent with the amounts described in 2013, we have no significant capital expenditures in progress. We did not affect any principal divestitures in the past three years.
 
Outlook
 
Currently, our principal commitments consist of (1) liability for the contingent payments due to Hayes former shareholders in the amount of up to $4.2 million (presented in our consolidated financial statements at present value of approximately $3.2 million), which, if earned, is payable in March 2015 and 2016, and (2) a short-term credit line of up to $1.0 million. See also Item 5.F "Tabular Disclosure of Contractual Obligations."
 
In light of our cash balances and other factors, including our ability to generate cash from operations, we believe that our existing capital resources will be adequate to satisfy our working capital and capital expenditure requirements for a period of no less than the next twelve months.
 
 
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C.
Research and Development, Patents and Licenses, etc.
 
The software industry is characterized by rapid product changes 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 and in Illinois. As of December 31, 2013, we employed 58 persons in research and development.
 
We have committed substantial financial resources to our research and development efforts. During 2013, 2012 and 2011, our research and development expenditures were $7.8 million, $7.7 million and $5.0 million, respectively.
 
As described in Item 4.B “Information on the Company - Business Overview - Government Regulations,” we participated in the past in programs sponsored by the Office of the Chief Scientist.
 
D.
Trend Information
 
See Item 5.A “Operating Results – Executive Summary.”
 
E.
Off-Balance Sheet Arrangements
 
We do not have any off-balance sheet arrangements, as such term is defined under Item 5.E of the instructions to Form 20-F, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
 
F.
Tabular Disclosure of Contractual Obligations
 
The following table summarizes our contractual obligations and commercial commitments, as of December 31, 2013:
 
Contractual Obligations
 
Payments due by Period
(U.S. dollars in thousands)
 
   
Total
   
Less than 1 year*
   
1-3 Years
   
3-5 Years
   
More than 5 Years
 
Severance pay obligation (1)
    1,095       --       --       --       --  
Operating lease obligations (2)
    4,324       1,224       1,852       1,165       83  
Hayes payment obligation (3)
    3,280       --       3,280       --       --  
Total (4)
  $ 8,669     $ 1,224     $ 5,132     $ 1,165     $ 83  
 
* For 2014.
 
 
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(1) Severance payments of $4,328 are payable only upon termination, retirement or death of the respective employee. Of this amount, $1,095 is unfunded. Since we are unable to reasonably estimate the timing of settlement, the timing of such payments is not specified in the table. See also Note 2(r) to our Consolidated Financial Statements.
 
(2) Includes rent expenses of approximately $3,936 related to our leased facilities for the next six years.
 
(3) Represents the fair value of contingent payments of up to $4,200 in the aggregate payable in March 2015 and 2016 to former Hayes shareholders.
 
(4) As of December 31, 2013, these figures exclude (1) $82 for an accrual for uncertain income tax position under ASC No. 740 “Income Taxes,” which is paid upon settlement because we are unable to reasonably estimate the ultimate amount or timing of settlement (see Note 2(k) of our consolidated financial statements included elsewhere in this annual report), and (2) $1,093 for liabilities presented at fair value associated with the Plenus Right because we are unable to reasonably estimate the ultimate amount of, or timing of payment for, such Plenus Right (see Note 8 of our consolidated financial statements included elsewhere in this annual report).
 
ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 
A.
Directors and Senior Management
 
The following lists the name, age, principal position and a biographical description of each of our directors and senior management.
 
Name
 
Age
 
Director Since
 
Position with the Company
Shimon Alon
 
64
 
2004
 
Chairman of the Board of Directors and Chief Executive Officer
Dror Harel-Elkayam
 
46
 
- -
 
Chief Financial Officer and Secretary
Erez Zeevi
 
48
 
- -
 
Vice President, Research and Development and Worldwide Support
Dov Biran
 
61
 
2003
 
Director
Dan Falk (1) (2)
 
69
 
2002
 
Director
Tali Alush-Aben  (1) (2)
 
50
 
2008
 
Outside Director
Ron Zuckerman
 
56
 
2004
 
Director
Gil Weiser  (1) (2)
 
72
 
2010
 
Outside Director
 

 
(1)
Member of the Audit Committee.
 
 
(2)
Member of the Compensation Committee.
 
Shimon Alon was appointed Chairman of our Board of Directors in April 2004 and was appointed our Chief Executive Officer in June 2008.  From September 1997 until June 2003, Mr. Alon served as Chief Executive Officer of Precise Software Solutions Ltd., or Precise, a provider of application performance management. Since the acquisition of Precise by Veritas Software Corp., or Veritas, in June 2003, Mr. Alon has served 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.
 
 
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Dror Harel-Elkayam was appointed Chief Financial Officer in October 2010. Prior to that, he served as our Vice President - Finance and Secretary since October 2004.  From August 1997 until June 2003, he served as the Director of Finance and Corporate Secretary of Precise. Since the acquisition of Precise by Veritas in June 2003 and until September 2004, he served as a Director of Finance of Precise. Mr. Harel-Elkayam holds a B.A. degree in economics and accounting from the Hebrew University, Jerusalem. He is also a certificated public accountant in Israel.
 
Erez Zeevi was appointed as our Vice President, Research and Development and Worldwide Support in March 2009. From January 2006 until March 2009, he served as our Director of Research and Development. Mr. Zeevi joined Attunity in 1993 and has served in various positions associated with our Research and Development activities. He holds a B.Sc. degree in software engineering from the Technion, Israel Institute of Technology in Haifa.
 
Dr. Dov Biran has been a director since December 2003. From March 2000 through October 2001, he served as acting Chief Executive Officer, Chief Technology Officer and a Director of Attunity. Dr. Biran is the founder and the Chief Executive Officer of Fitango, Inc. Prior thereto, Dr. Biran was the founder and President of Bridges for Islands, which was acquired by us in February 2000. Dr. Biran was the Chief Executive Officer of Optimal Technologies, Chief Information Officer of Dubek Ltd. and an officer in the computer unit of the Israeli Defense Forces. He also served as a Professor of entrepreneurship and computers at Babson College, Northeastern University and Tel Aviv University. Dr. Biran holds a B.Sc., M.B.A., and a Ph.D. in computers from Tel Aviv University.
 
Dan Falk has been a director since April 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., or Sapiens, 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 Ltd., a maker of automated optical inspection and computer aided manufacturing systems.  Mr. Falk is a member of the boards of directors of Orbotech, Nice Systems Ltd., Ormat Technologies Inc., Nova Measuring Systems Ltd., and the Chairman of the Board of Directors of Orad Hi-Tech Systems Ltd. He holds a B.A degree in economics and political science and an M.B.A. degree, both from the Hebrew University, Jerusalem.
 
Tali Alush-Aben has been an outside director since December 2008. She is currently an independent consultant. Until January 2008, she was a General Partner at Gemini, an Israeli venture capital fund she joined in 1994. Her focus in Gemini was primarily on software companies. Prior to joining Gemini, she served as Marketing Director of RadView, then a start-up software company, and as Senior Product Marketing Manager at SunSoft Inc. From 1990 to 1992, she served as Marketing Director for Mercury Interactive Corporation. Ms. Alush-Aben is also a member of the board of directors of Vizrt Ltd. She holds a B.Sc. degree in mathematics and computer science and an M.B.A. degree, both from Tel-Aviv University.
 
Ron Zuckerman has been a director since May 2004. Mr. Zuckerman co-founded Precise and served as its Chairman until it was acquired by Veritas in June 2003. Mr. Zuckerman co-founded Sapiens and served as its Chairman and Chief Executive Officer until March 2000. Mr. Zuckerman was a co-founder and director of GVT Holdings SA, a Brazilian telephone operator, until it was acquired by the Vivendi Group in late 2009. Mr. Zuckerman was also an early investor and a director of Wintegra Inc. until it was acquired by PMC-Sierra Inc. in late 2010. He is also an investor and a director in several other privately held companies.  Mr. Zuckerman holds a B.Sc. degree in economics from Brandeis University.

Gil Weiser has been an outside director since December 2010. Mr. Weiser currently serves as a director of several companies, including ClickSoftware Technologies Ltd., and as the Chairman of BG Technologies Ltd. He has more than 25 years of experience in management and operations, with executive posts at corporate, academic and financial entities. He served as the Chief Executive Officer of Orsus Solutions Ltd. from August 2006 to June 2010, and as the Chief Executive Officer of Hewlett Packard (Israel) and CMS Corporation from 1995 to 2000. From 1993 until 1995, he served as President and Chief Executive Officer of Fibronics International Inc. and as Chief Executive Officer of Digital (DEC Israel) from 1978 to 1993. He also served as a director of the Tel Aviv Stock Exchange from 2002 to 2004 and as Chairman of the Multinational Companies Forum. Mr. Weiser holds a B.Sc. degree from Technion, Israel Institute of Technology in Haifa as well as a M.Sc. degree in science from the University of Minnesota.
 
 
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Additional Information
 
There are no family relationships between any of the directors or members of senior management named above.
 
Our articles of association provide for a Board of Directors of not fewer than two nor more than eleven members.  Our Board of Directors is currently composed of six directors (including the two outside directors).  Officers serve at the pleasure of the Board of Directors, subject to the terms of any agreement between the officer and us. In accordance with the Companies Law, the concurrent office of Mr. Alon as both our Chairman and Chief Executive Officer for a term of three years was approved by our shareholders in December 2011.
 
Messrs. Alon, Biran, Falk and Zuckerman will serve as directors until our annual general meeting of shareholders in 2014. Ms. Alush-Aben was elected as an outside director in December 2011 for a three-year term, until our 2014 annual general meeting of shareholders. Mr. Weiser was re-elected as an outside director in December 2013 for a three-year term, until our annual general meeting of shareholders in 2016.
 
  We are not aware of any arrangements or understandings with major shareholders, customers, suppliers or others, pursuant to which any person referred to above was selected as a director or member of senior management.

B.
Compensation
 
General
 
The following table sets forth all cash and cash-equivalent compensation we paid with respect to all of our directors and executive officers as a group for the periods indicated:
 
   
Salaries, fees,
commissions and bonuses
   
Pension, retirement
and similar benefits
 
2012 - All directors and executive officers as a group, consisting of 8 persons for the year ended December 31, 2012
  $ 948,000     $ 152,000  
2013 - All directors and executive officers as a group, consisting of 8 persons for the year ended December 31, 2013
  $ 1,023,000     $ 163,000  
 
We provide leased automobiles to our executive officers in Israel pursuant to standard policies and procedures.
 
In accordance with the approval of our shareholders in December 2012, our non-employee directors, including outside directors, received an annual fee of $9,000 and an attendance fee of NIS 1,650 (equivalent to approximately $475) per meeting attended, both linked to the Israeli Consumer Price Index, or CPI. Following the approval of our shareholders in December 2013, the annual fee of all non-employee directors, including outside directors, was increased to $15,000, starting in 2014.
 
 
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In November 2011, our Audit Committee and Board of Directors adopted a revised stock option policy for non-employee directors, which policy was subsequently approved by our shareholders. According to the stock option policy, each of our non-employee directors who may serve from time to time, including our outside directors, will be granted options, as follows:
 
 
·
a grant of options under our stock option plans to purchase 20,000 ordinary shares, which vest in three equal installments over three years;
 
 
·
the exercise price of all options will be equal to the fair market value of the ordinary shares on the date of the grant (i.e., the closing price of our shares on the date of the annual general meeting of shareholders in which such director is elected or reelected); and
 
 
·
the portion of outstanding options scheduled to vest during any year in which the director’s service with us is terminated or expires will accelerate and become fully vested and exercisable for a period of 180 days thereafter, unless termination was due to the director’s resignation or for one of the causes set forth in the Companies Law.

All of the options granted to the directors are made pursuant to one of our equity incentive plans and expire six years after the grant date.

In 2013, our directors and executive officers were granted options exercisable into 113,338 ordinary shares, at a weighted-average exercise price of $8.81 per share. Such options will expire in 2019.

Other than the foregoing fees, reimbursement for expenses and the award of stock options, we do not compensate our directors for serving on our Board of Directors.
 
Our Chief Executive Officer
 
Mr. Shimon Alon began serving as a director of our Company in April 2004. We entered into an employment agreement with Mr. Alon, under which he agreed to serve as our Chief Executive Officer effective June 1, 2008. Pursuant to the employment agreement, Mr. Alon has agreed to devote his full working time and best efforts to our business and affairs, and to the performance of his duties under the agreement as long as he is employed by us. Pursuant to his employment agreement, as amended, we provide Mr. Alon the following payments and benefits:
 
 
·
A gross monthly salary (denominated in NIS) of the NIS equivalent of approximately $28,770 during the term of his employment;
 
 
·
An annual bonus (denominated in NIS) that will not exceed the NIS equivalent of (1) for 2012,  $170,600 gross (for 100% achievement), and (2) starting 2013, $230,150 gross (for 100% achievement) or $322,200 (for overachievement of 120% or more). In general, the annual bonus is payable on a quarterly basis, subject to Mr. Alon achieving certain criteria and milestones set by our Compensation Committee and Board of Directors. The milestones and criteria for the annual bonus for the years 2013, 2014 and 2015, which are described in more detail below, were also approved by our shareholders and consist of several performance metrics (namely, an annual revenue metric and, for 2014 and 2015, also a profitability metric), which are tied to our annual budget for the applicable year and are subject to target thresholds within each metric and ranges of bonus payout. Based on the applicable criteria and milestones set for 2012 and 2013, Mr. Alon was granted the full amount of the annual bonus for 2012 and approximately 67% of the annual bonus for 2013;
 
 
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·
In June 2008, when Mr. Alon was appointed as our Chief Executive Officer, we granted him options to purchase 240,000 ordinary shares at an exercise price equal to $1.20 per share. In December 2009, December 2010, December 2011 and December 2013, we granted Mr. Alon additional options to purchase (1) 62,500 ordinary shares at an exercise price equal to $1.00 per share, (2) 25,000 ordinary shares at an exercise price equal to $2.80 per share, (3) 50,000 ordinary shares at an exercise price equal to $2.84 per share, and (4) 93,338 ordinary shares at an exercise price equal to $8.55 per share.
 
 
o
All exercise prices reflect the market price of our shares on the applicable date of grant (with respect to the grant in 2013, see below).
 
 
o
All options expire six years after the date of grant, are subject to the terms of our equity incentive plans and vest as follows: (1) the initial grant of 240,000 options - one third of the options vest at the end of each of the three years following the commencement of Mr. Alon’s employment (all of which are currently vested); and (2) with respect to the additional grants, one third of the options vest one year after the grant date, with the balance vesting in eight equal quarterly installments. Vesting of the options will accelerate upon certain change of control events, in accordance with Mr. Alon's employment agreement.
 
 
o
The grant of options in December 2013 was made pursuant to our agreement with Mr. Alon, as approved by our shareholders, to grant him, on the date of the annual meeting of shareholders for each of 2013, 2014 and 2015, options to purchase a number of ordinary shares equal to 0.7% of the total outstanding shares (on a fully diluted basis) of the Company as of November 1st of each year, at an exercise price equal to the average market price of the shares in the 30 trading days prior to the applicable grant date. Such stock options will vest within three years following the applicable grant date, with one third of the options vesting one year after the grant date and the balance vesting in eight equal quarterly installments. Vesting of the options will accelerate upon certain change of control events, in accordance with Mr. Alon's current employment agreement. Such options will expire six years after the applicable grant date. The fair market value of the proposed grant, as measured on the date of the grant, based on Black-Scholes model, shall not exceed the NIS equivalent of approximately $1,035,670, or the Cap, which is the equivalent of three times Mr. Alon's annual base salary per year of vesting, on a linear basis. By way of example, assuming the grant took place on April 1, 2014 and with an average price per share in the 30 trading days prior to the applicable grant date of $9.71, the fair market value of such grant (using the Black-Scholes model) is approximately $174,000 per each year of vesting, well below the Cap. For the sake of clarity, if the fair market value on the applicable grant date exceeds the Cap per year, the number of options will be reduced so that it does not exceed the Cap. All other terms and conditions in connection with such options shall be as set forth in the Company’s 2012 Stock Incentive Plan, as amended.
 
 
·
A company car and all related expenses, except for related taxes;
 
 
·
Company contributions for the benefit of Mr. Alon to (1) our Managers Insurance Policy in the amount of 18.33% of Mr. Alon’s gross salary (a portion of which is for severance pay, to which Mr. Alon would be entitled), and (2) our Education Fund (“Keren Hishtalmut”) in the amount of 7.5% of Mr. Alon’s gross salary;
 
 
·
Up to 22 days paid vacation per year and 10 days recreation payment per year in an amount normally paid by our Company; and
 
 
·
In the event of termination of Mr. Alon’s employment for any reason (other than (1) by the Company under circumstances that he is not entitled to severance pay under Israeli law, or (2) by resignation at any time without the required prior notice), Mr. Alon will be entitled to an adjustment period of 12 months following the end of the prior notice period under the agreement (or from the date that he actually ceased to provide services should we choose to waive the prior notice period). During the adjustment period, Mr. Alon will be entitled to all rights to which he is entitled under his employment agreement and he will be entitled to exercise any vested options; however, his options will cease to vest. The employee-employer relationship will not terminate until the end of the adjustment period. Mr. Alon will be entitled to reimbursement of all expenses in connection with his employment.
 
 
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Mr. Alon’s employment agreement contains customary confidentiality and non-solicitation provisions as well as an undertaking of Mr. Alon not to compete with us or our field of business for 12 months following termination of his employment.
 
Determination of Annual Bonus
 
For each of 2013, 2014 and 2015, the annual bonus granted to our Chief Executive Officer will be granted in accordance with the following milestones and criteria:

 
·
Annual Bonus: NIS equivalent of $230,150 gross (for 100% achievement of the applicable metric).

 
·
Cap: Not more than 140% of the Annual Bonus (for overachievement of 120% or more).
 
 
·
Annual weighting of metrics:
 
 
o
Revenues: Achievement of the revenues target set in the annual budget of the Company approved by the Board of Directors for the applicable fiscal year, or the "Annual Budget" will entitle our Chief Executive Officer to 80% (100% weight for 2013) of the annual bonus; and
 
 
o
Profitability: Achievement of the non-GAAP operating income target set in the Annual Budget will entitle our Chief Executive Officer to 20% (0% weight for 2013) of the annual bonus.
 
 
·
Target thresholds within each of the aforesaid revenues and profitability metrics and ranges of bonus payout (out of the applicable portion of the annual bonus assigned to such metric):
 

Achievement/Overachievement of the
Revenue/Profitability Targets
 
Bonus Payment/Payout Percentage
(straight line between steps)
0 < 80%
 
0%
80%
 
65%
90%
 
80%
100%
 
100%
110%
 
120%
120% or more
 
140%

 
·
Payments: Other than the annual bonus for 2013 and payments on account of overachievement (which are payable only following release of our financial results for the applicable full year), the annual bonus shall be paid on a quarterly basis, based on the achievement of the applicable targets, measured on an accumulated basis and allocated evenly for each quarter (i.e., for each quarter, up to 25% of the Annual Bonus will be payable upon on-target achievement of the quarterly target in the Annual Budget, on an accumulated basis, but, for the sake of clarity, if the target threshold for the applicable quarter is not achieved, no payment shall be made). In case of any overpayment of bonus, which may occur as a result of fluctuations in quarterly results compared to the Annual Budget, will be repaid promptly.
 
 
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·
Adjustments: Our Board of Directors, following recommendation and approval of our Compensation Committee, may adjust the annual targets set in the Annual Budget in case of one-time events (such as acquisitions) that may occur during the relevant fiscal year.
 
Change of Control Arrangements
 
All of our executive officers as well as certain additional key employees are entitled to (1) accelerated vesting of the ordinary shares subject to outstanding options granted to them in connection with a change in control of the Company and (2) an extended period of six months of termination notice in connection with a termination of employment within one year following a change in control of the Company.
 
C.
Board Practices
 
Introduction
 
According to the Israeli Companies Law and our articles of association, the management of our business is vested in our Board of Directors.  The Board of Directors may exercise all powers and may take all actions that are not specifically granted to our shareholders. As part of its powers, our Board of Directors may cause us to borrow or secure payment of any sum or sums of money for our purposes, at times and upon terms and conditions as it determines, including the grant of security interests in all or any part of our property.
 
Election of Directors; Board Meetings
 
Pursuant to our articles of association, all of our directors are elected at annual meetings of our shareholders. Except for our outside directors (as described below), our directors hold office until the next annual meeting of shareholders following the annual meeting at which they were appointed, which is required to be held at least once during every calendar year and not more than fifteen months after the last preceding meeting. Pursuant to applicable NASDAQ rules, director nominees are recommended for the Board of Directors' selection by a majority of our "independent directors" within the meaning of the NASDAQ Listing Rule 5605(a)(2).
 
Except for our outside directors (as described below), directors may be removed earlier from office by resolution passed at a general meeting of our shareholders and our Board of Directors may temporarily fill vacancies in the Board until the next annual meeting of shareholders.
 
Our articles of association provide for a Board of Directors of not fewer than two nor more than eleven members.  Our Board is currently composed of six directors (including two outside directors).  Under the Israeli Companies Law, our Board of Directors is required to determine the minimum number of directors who must have “accounting and financial expertise” (as such term is defined in regulations promulgated under the Companies Law). Our Board determined that the Board should consist of at least one director who has “accounting and financial expertise.” However, our Board has determined that both Mr. Dan Falk and Mr. Gil Weiser have the requisite “accounting and financial expertise.”
 
Meetings of the Board of Directors are generally held at least once each quarter, with additional special meetings scheduled when required.
 
Outside Directors
 
The Israeli Companies Law requires Israeli companies with shares that have been offered to the public in or outside of Israel, such as Attunity, to appoint at least two outside directors.
 
 
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To qualify as an outside director, an individual (or the individual’s relative, partner, employer or any entity under the individual's control) may not have, and may not have had at any time during the previous two years, any "affiliation" (i) with the company, the company's controlling shareholder or its relative, or another entity affiliated with the company or its controlling shareholder, or (ii) in a company without a controlling shareholder (or a shareholder that owns more than 25% of its voting power), such as Attunity, with any person who, at the time of appointment, is the chairman, the chief executive officer, the chief financial officer or a 5% shareholder of the company. The term affiliation includes:
 
 
·
an employment relationship;
 
 
·
a business or professional relationship;
 
 
·
control; and
 
 
·
service as an office holder, excluding service as a director that was appointed to serve as an outside director of a company that is about to make its initial public offering.
 
The Companies Law defines the term “office holder” of a company to include a director, the chief executive officer, the chief business manager, a vice president and any officer that reports directly to the chief executive officer.
 
In addition, pursuant to the Companies Law, (1) an outside director must have either “accounting and financial expertise” or “professional qualifications” (as such terms are defined in regulations promulgated under the Companies Law) and (2) at least one of the outside directors must have “accounting and financial expertise.” Our outside directors are Mr. Gil Weiser and Ms. Tali Alush-Aben. We have determined that Mr. Weiser has the requisite “accounting and financial expertise” and that Ms. Alush-Aben has the requisite “professional qualifications.”
 
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 who are not controlling shareholders or their relatives 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 a majority of the shares of the non-controlling shareholders of the company who voted 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 2% or less of all of the voting rights in the company.
 
The initial term of an outside director is three years and he or she may be reelected for up to two additional three-year terms. Thereafter, in a company whose shares are listed for trading on, among others, the NASDAQ Capital Market, such as Attunity, he or she may be reelected by our shareholders for additional periods of up to three years each, if our audit committee and the Board of Directors confirm that, in light of the outside director’s expertise and special contribution to the work of the Board of Directors and its committees, the reelection for such additional period is beneficial to the Company. Reelection of an outside director may be effected through one of the following mechanisms: (1) the Board of Directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority required to appoint outside directors for their initial term as described above; or (2) a shareholder holding 1% or more of the voting rights proposed the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company, excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations with the controlling shareholders; provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders constitute more than 2% of the voting rights in the company.
 
 
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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, except that 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.
 
Independent Directors
 
Under the NASDAQ rules, a majority of our Board of Directors must qualify as independent directors within the meaning of NASDAQ Listing Rule 5605(a)(2). Our Board of Directors has determined that all of our directors, except for Mr. Alon, our Chairman of the Board of Directors and Chief Executive Officer, would qualify as “independent directors” within the meaning of such rule.
 
Committees of the Board of Directors
 
Subject to the provisions of the Israeli Companies Law, our Board of Directors may delegate its powers to committees consisting of board members. Our Board of Directors currently operates an audit committee and a compensation committee.
 
Audit Committee
 
Pursuant to applicable SEC and NASDAQ rules, we are required to have an audit committee of at least three members, each of whom must satisfy the independence requirements of the SEC and NASDAQ.  In addition, pursuant to NASDAQ rules, all of the members of the audit committee must be financially literate and at least one member must possess accounting or related financial management expertise.  The audit committee must also have a written charter specifying the committee’s duties and responsibilities, which include, among other things, the selection and evaluation of our independent auditors.

Under the Companies Law, our Board of Directors is required to appoint an audit committee, which must be comprised of at least three directors, include all of the outside directors, a majority of its members must satisfy the independence standards under the Companies Law, and the chairman is required to be an outside director. The duties of the audit committee under the Companies Law include, among others, examining flaws in the business management of the company and suggesting remedial measures to the Board, assessing the Company's internal audit system and the performance of its internal auditor, and, as more fully described under Item 10.B. below, approval of certain interested party transactions.
 
 
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Our audit committee adopted a written charter specifying the committee's duties and responsibilities, which include, among other things, assisting 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’ appointment, 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 and proposing to the Board of Directors ways to correct such defects; approving related-party transactions; and such other duties as may be directed by our Board of Directors or required by applicable law. In addition, our audit committee functions as our Qualified Legal Compliance Committee, or the QLCC. In its capacity as the QLCC, the audit committee is also responsible for investigating reports made by attorneys appearing and practicing before the SEC in representing us of perceived material violations of U.S. federal or state securities laws, breaches of fiduciary duty or similar violations by us or any of our agents.
 
Our audit committee is currently composed of Mr. Weiser, the chairperson of our audit committee, Ms. Alush-Aben and Mr. Falk, all of whom satisfy the respective “independence” requirements of the Companies Law, SEC and NASDAQ rules for audit committee members.
 
Our audit committee meets at least once each quarter, with additional special meetings scheduled when required.
 
Compensation Committee
 
Pursuant to applicable NASDAQ rules that became effective on July 1, 2013, the compensation payable to a company’s chief executive officer and other executive officers must generally be approved by a compensation committee comprised solely of independent directors.
 
Under a recent amendment to the Companies Law, our Board of Directors is required to appoint a compensation committee, which must be comprised of at least three directors, include all of the outside directors, its other members must satisfy certain independence standards under the Companies Law, and the chairman is required to be an outside director. Under the Companies Law, the role of the compensation committee is to recommend to the Board of Directors, for ultimate shareholder approval by a special majority, a policy governing the compensation of office holders based on specified criteria; to review, from time to time, modifications to the compensation policy and examine its implementation; to approve the actual compensation terms of office holders prior to approval thereof by the Board of Directors; and to resolve whether to exempt the compensation terms of a candidate for chief executive officer from shareholder approval.
 
Our compensation committee, established in December 2012, adopted a written charter specifying the committee's duties and responsibilities, which include, among other things, the duties and roles assigned to it pursuant to the Companies Law and applicable NASDAQ rules described above; and oversight and administration of our equity based plans.
 
Our compensation committee is currently composed of Ms. Alush-Aben, the chairperson of our compensation committee, Mr. Weiser and Mr. Falk, all of whom satisfy the respective “independence” requirements of the Companies Law, SEC and NASDAQ rules for compensation committee members.
 
Our compensation committee meets at least once each quarter, with additional special meetings scheduled when required.
 
Internal Audit
 
Under the Companies Law, our Board of Directors is also required to appoint an internal auditor proposed by the audit committee.  The role of the internal auditor is to examine, among other things, whether our activities comply with the law and orderly business procedure. The internal auditor may not be an interested party or office holder, or a relative of any interested party or office holder, and may not be a member of our independent accounting firm.  The Companies Law defines the term “interested party” to include a person who holds 5% or more of a company’s outstanding share capital or voting rights, a person who has the right to appoint one or more directors or the general manager, or any person who serves as a director or as the general manager. Mr. Eyal Weitzman of EWC Audit Ltd., an Israeli accounting firm, serves as our internal auditor.
 
 
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Directors’ Service Contracts
 
Our Chief Executive Officer. We entered into an employment agreement with Mr. Alon, our Chief Executive Officer, who is also the Chairman of our Board of Directors. See Item 6.B “Directors, Senior Management and Employees – Compensation – Our Chief Executive Officer.”
 
Other. Except as set forth above and in Item 6.B “Directors, Senior Management and Employees – Compensation,” there are no arrangements or understandings between us and any of our current directors or Chief Executive Officer for benefits upon termination of service.
 
Fiduciary Duties of Office Holders
 
                The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
 
The duty of care requires an office holder to act with the level of skill with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care of an office holder includes a duty to use reasonable means to obtain:  
 
 
·
information on the advisability of a given action brought for his approval or performed by him by virtue of his position; and
 
 
·
all other important information pertaining to these actions.
 
The duty of loyalty of an office holder requires an office holder to act in good faith and for the benefit of the company, and includes a duty to:  
 
 
·
refrain from any conflict of interest between the performance of his duties in the company and his performance of his other duties or personal affairs;
 
 
·
refrain from any action that constitutes competition with the company’s business;  
 
 
·
refrain from exploiting any business opportunity of the company to receive a personal gain for himself or others; and
 
 
·
disclose 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 in the table under Item 6.A "Directors and Senior Management" above is considered an office holder under the Companies Law.
 
Approval of Related Party Transactions Under Israeli Law
 
General. Under the Companies Law, a company may approve an action by an office holder from which the office holder would otherwise have to refrain, as described above, if:
 
 
·
the office holder acts in good faith and the act or its approval does not cause harm to the company; and
 
 
·
the office holder disclosed the nature of his or her interest in the transaction (including any significant fact or document) to the company at a reasonable time before the company’s approval of such matter.
 
 
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Disclosure of Personal Interests of an Office Holder.  The Companies Law requires that an office holder disclose to the company, promptly, and, in any event, not later than the board meeting at which the transaction is first discussed, any direct or indirect personal interest that he or she may have and all related material information known to him or her relating to any existing or proposed transaction by the company.  If the transaction is an extraordinary transaction, the office holder must also disclose any personal interest held by:
 
 
·
the office holder’s relatives. Relatives are defined to include the spouse, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of any of these people; or
 
 
·
any corporation in which the office holder or his or her relatives holds 5% or more of the shares or voting rights, serves as a director or general manager or has the right to appoint at least one director or the general manager.
 
Under the Companies Law, an extraordinary transaction is a transaction:
 
 
·
not in the ordinary course of business;
 
 
·
not on market terms; or
 
 
·
that is likely to have a material impact on the company’s profitability, assets or liabilities.
 
The Companies Law does not specify to whom within the company nor the manner in which required disclosures are to be made.  We require our office holders to make such disclosures to our Board of Directors.
 
Under the Companies Law, once an office holder complies with the above disclosure requirement, the Board of Directors may approve a transaction between the company and an office holder, or a third party in which an office holder has a personal interest, unless the articles of association provide otherwise and provided that the transaction is not detrimental to the company’s interest. If the transaction is an extraordinary transaction, first the audit committee and then the board of directors, in that order, must approve the transaction.  Under specific circumstances, shareholder approval may also be required.  A director who has a personal interest in an extraordinary transaction, which is considered at a meeting of the board of directors or the audit committee, may not be present at this meeting or vote on this matter, unless a majority of the Board of Directors or the audit committee, as the case may be, has a personal interest.  If a majority of the Board of Directors has a personal interest, then shareholder approval is generally also required.
 
Approval of Office Holder Compensation. Pursuant to a recent amendment to the Companies Law,  every Israeli public company, such as Attunity, must adopt a compensation policy, recommended by the compensation committee, and approved by the Board of Directors and the shareholders, in that order. The shareholder approval requires a majority of the votes cast by shareholders, excluding any controlling shareholder and those who have a personal interest in the matter. In general, all office holders’ terms of compensation – including fixed remuneration, bonuses, equity compensation, retirement or termination payments, indemnification, liability insurance and the grant of an exemption from liability – must comply with the Company's compensation policy. In December 2013, our shareholders approved the compensation policy for our executive officers and directors.
 
In addition, the compensation terms of directors, the chief executive officer, and any employee or service provider who is considered a controlling shareholder, must be approved separately by the compensation committee, the Board of Directors and the shareholders of the company (by the same majority noted above), in that order. The compensation terms of other officers require the approval of the compensation committee and the board of directors.
 
 
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Exculpation, Indemnification and Insurance of Directors and Officers
 
Exculpation of Office Holders.  Under the Companies Law, an Israeli company may not exempt an office holder from his or her liability for a breach of the duty of loyalty to the company, but may exempt an office holder, in advance, from his or her liability, in whole or in part, for a breach of his or her duty of care to the company (except with regard to distributions), if the articles of association so provide.  Our articles of association permit us to exempt our office holders to the fullest extent permitted by law.
 
Office Holders’ Insurance. As permitted by the Companies Law, our articles of association provide that, subject to the provisions of the Companies Law, we may enter into a contract for the insurance of the liability of any of our office holders concerning an act performed by him or her in his or her capacity as an office holder for:
 
 
·
a breach of his or her duty of care to us or to another person;
 
 
·
a breach of his or her duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice our interests;
 
 
·
a financial liability imposed upon him or her in favor of another person;
 
 
·
expenses he or she incurs as a result of administrative proceedings that may be instituted against him or her under Israeli securities laws, if applicable, and payments made to injured persons under specific circumstances thereunder; and
 
 
·
any other matter in respect of which it is permitted or will be permitted under applicable law to insure the liability of an office holder in the Company.
 
Indemnification of Office Holders. As permitted by the Companies Law, our articles of association provide that we may indemnify any of our office holders for an act performed in his or her capacity as an office holder, retroactively (after the liability has been incurred) or in advance against the following:
 
 
·
a financial liability incurred by, or imposed on, him or her in favor of another person by any judgment, including a settlement or an arbitration award approved by a court; provided that our undertaking to indemnify with respect to such events on a prospective basis is limited to events that our Board of Directors believes are foreseeable in light of our actual operations at the time of providing the undertaking and to a sum or standard that our Board of Directors determines to be reasonable under the circumstances, and further provided that such events and amount or criteria are set forth in the undertaking to indemnify;
 
 
·
reasonable litigation expenses, including attorney’s fees, incurred by the office holder as a result of an investigation or proceeding instituted against him by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him and either (A) concluded without the imposition of any financial liability in lieu of criminal proceedings or (B) concluded with the imposition of a financial liability in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent or in connection with a financial sanction;
 
 
·
reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or charged to him or her by a court, resulting from the following: proceedings we institute against him or her or instituted on our behalf or by another person; a criminal indictment from which he or she was acquitted; or a criminal indictment in which he or she was convicted for a criminal offense that does not require proof of intent;
 
 
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·
expenses he or she incurs as a result of administrative proceedings that may be instituted against him or her under Israeli securities laws, if applicable, and payments made to injured persons under specific circumstances thereunder; and
 
 
·
any other matter in respect of which it is permitted or will be permitted under applicable law to indemnify an office holder in the Company.
 
Limitations on Exculpation, Insurance and Indemnification. The Companies Law 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 any of the following:
 
 
·
a breach by the office holder of his or her duty of loyalty, unless with respect to indemnification and insurance, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
 
·
a breach by the office holder of his or her duty of care if the breach was committed intentionally or recklessly, unless it was committed only negligently;
 
 
·
any act or omission committed with the intent to derive an illegal personal benefit; or
 
 
·
any fine levied against the office holder.
 
In addition, under the Companies Law, exculpation of, an undertaking to indemnify or indemnification of, and procurement of insurance coverage for, our office holders must be approved by our audit committee and our Board of Directors and, in specified circumstances, such as if the office holder is a director, by our shareholders.
 
We have undertaken to indemnify our office holders to the fullest extent permitted by law by providing them with a Letter of Indemnification, the form of which was approved by our shareholders. We also currently maintain directors and officers liability insurance with an aggregate coverage limit of $15 million, with a Side A coverage of an additional $5 million.
 
D.
Employees
 
The following table details certain data on the workforce of Attunity and its consolidated subsidiaries for the periods indicated:

   
As of December 31,
 
   
2013
   
2012
   
2011
 
Numbers of employees by geographic location
                 
United States
    53       26       27  
Israel
    70       76       79  
Europe
    8       6       5  
Other
    5