SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
F O R M 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR
15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of
November 2004
RADA ELECTRONIC INDUSTRIES LIMITED
(Name of Registrant)
7 Giborei Israel Street, Netanya 42504, Israel
(Address of Principal Executive Office)
Indicate by check mark whether the registrant files or will
file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F X Form 40-F __
Indicate by check mark if the registrant is submitting the
Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):__
Indicate by check mark if the registrant is submitting the
Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):__
Indicate by check mark whether by furnishing the information
contained in this Form, the registrant is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes __ No X
If "Yes" is marked, indicate below the file number assigned to
the registrant in connection with Rule 12g3-2(b): 82-___________
This Form 6-K is being incorporated by reference into the Company's
Form F-3 Registration Statements File Nos. 333-12074, 333-115598 and
333-117954.
RADA ELECTRONIC INDUSTRIES LTD.
6-K Items
1. Consolidated Financial Statements of RADA Electronic Industries Ltd.
as of September 30, 2004 and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the nine months
ended September 30, 2004.
ITEM 1
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2004
IN U.S. DOLLARS
UNAUDITED
INDEX
Page
-----------
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Statements of Changes in Shareholders' Equity 3
Condensed Consolidated Statements of Cash Flows 4-5
Notes to Condensed Consolidated Financial Statements 6-9
- - - - - - - - - - - - - - - -
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
September 30, December 31,
Note 2004 2003
------- ------------ ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,908 $ 467
Trade receivables (net of allowance for doubtful accounts
of $ 214 at September 30, 2004 and December 31, 2003) 4,678 3,496
Other receivables and prepaid expenses 352 250
Costs and estimated earnings in excess of billings on
uncompleted contracts 3 201 176
Inventories 4 1,560 873
------------ ------------
Total current assets 8,699 5,262
----- ------------ ------------
LONG-TERM RECEIVABLES AND DEPOSITS:
Long-term receivables 1,014 990
Long-term restricted cash 1,090 -
Leasing deposits 86 71
Severance pay fund 1,638 1,511
------------ ------------
Total long-term receivables and deposits 3,828 2,572
----- ------------ ------------
PROPERTY AND EQUIPMENT, NET 4,381 4,728
------------ ------------
OTHER ASSETS:
Intangible assets, net 1,780 1,987
Deferred charges, net 63 -
------------ ------------
Total other assets 1,843 1,987
----- ------------ ------------
Total assets $ 18,751 $ 14,549
----- ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit and loans $ 400 $ 1,123
Trade payables 582 640
Other payables and accrued expenses 3,795 3,317
Deferred revenues 814 1,062
Billings in excess of costs and estimated earnings on
uncompleted contracts 3 1,450 1,836
------------ ------------
Total current liabilities 7,041 7,978
----- ------------ ------------
LONG-TERM LIABILITIES:
Convertible note 2,562 -
Long-term loans - 1,220
Accrued severance pay 2,127 2,048
------------ ------------
Total long-term liabilities 4,689 3,268
----- ------------ ------------
CONTINGENCIES, COMMITMENTS AND CHARGES
MINORITY INTERESTS 407 425
------------ ------------
SHAREHOLDERS' EQUITY: 5
Share capital
Ordinary shares of NIS 0.005 par value - Authorized:
45,000,000 shares at September 30, 2004 and
December 31, 2003; Issued and outstanding: 20,417,446
and 18,510,716 shares at September 30, 2004 and
December 31, 2003, respectively 110 108
Additional paid-in capital 61,845 59,139
Warrants 1,957 1,405
Accumulated deficit (57,298) (57,774)
------------ ------------
Total shareholders' equity 6,614 2,878
----- ------------ ------------
Total liabilities and shareholders' equity $ 18,751 $ 14,549
----- ============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
Nine months ended Three months ended Year ended
September 30, September 30, December
------------------------ ------------------------ 31,
Note 2004 2003*) 2004 2003 2003
----------------- ------------ ----------- ------------ -------------
(unaudited)
-------------------------------------------------
Revenues: 6
Products $ 8,372 $ 4,806 $ 3,162 $ 1,921 $ 8,977
Services 2,286 2,515 578 853 3,338
----------- ------------ ----------- ------------ -------------
10,658 7,321 3,740 2,774 12,315
----------- ------------ ----------- ------------ -------------
Cost of revenues:
Products 6,579 4,323 2,219 1,639 6,933
Services 1,192 1,439 319 495 2,659
----------- ------------ ----------- ------------ -------------
7,771 5,762 2,538 2,134 9,592
----------- ------------ ----------- ------------ -------------
Gross profit 2,887 1,559 1,202 640 2,723
----------- ------------ ----------- ------------ -------------
Operating expenses:
Marketing, selling, general
and administrative expenses 2,125 1,981 747 674 2,698
----------- ------------ ----------- ------------ -------------
Operating income (loss) 762 (422) 455 (34) 25
Financial income (expenses),
net (321) 733 (149) 964 708
Other income (expenses), net 17 (79) 7 (141) (2)
----------- ------------ ----------- ------------ -------------
458 232 313 789 731
Minority interests in losses
of subsidiary 18 29 - 22 27
----------- ------------ ----------- ------------ -------------
Net income $ 476 $ 261 $ 313 $ 811 $ 758
=========== ============ =========== ============ =============
Earnings per share:
Basic net earnings per share $ 0.02 $ 0.01 $ 0.02 $ 0.04 $ 0.04
=========== ============ =========== ============ =============
Diluted net earnings per
share $ 0.02 $ 0.01 $ 0.01 $ 0.04 $ 0.04
=========== ============ =========== ============ =============
*) Reclassified
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
STATEMENTS OF CHANGES IN SHARHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Number of Additional Total
Ordinary Share paid-in Accumulated shareholders'
shares capital capital Warrants deficit equity
----------- ---------- ---------- --------- ----------- ------------
Balance at January 1, 2003 18,510,716 108 58,785 124 (58,532) 485
Adjustment of accrual
for issuance expenses - - 354 - - 354
Fair value of warrants
issued in connection
with settlement of
debt, net *) - - - 1,267 - 1,267
Fair value of warrants
issued to suppliers - - - 14 - 14
Net income - - - - 758 758
---------- ---------- ---------- ---------- ---------- ----------
Balance at
December 31, 18,510,716 108 59,139 1,405 (57,774) 2,878
Issuance of Ordinary
shares, net **) 1,864,313 2 2,624 - 2,626
Issuance of warrants - - - 552 - 552
Beneficial conversion
feature on
convertible note - - 53 - - 53
Exercise of options 42,417 29 - - 29
Net income - - - - 476 476
---------- ---------- ---------- ---------- ---------- ----------
Balance at September 30,
2004 (unaudited) 20,417,446 $ 110 $ 61,845 $ 1,957 $ (57,298) $ 6,614
========== ========== ========== ========== ========== ==========
*) Net of issuance expenses of approximately $ 38 ended December 31, 2003.
**) Net of issuance expenses of approximately $ 95 ended September 30, 2004.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Nine months ended
September 31
-----------------------------
2004 2003
-------------- --------------
(unaudited)
---------------------------
Cash flow from operating activities:
------------------------------------
Net income $ 476 $ 261
Adjustments required to reconcile net income to net cash
provided by operating activities:
Gain on extinguishment of debt - (1,013)
Depreciation and amortization 751 1,007
Minority interests in losses of subsidiary (18) (29)
Accrued interest and translation differences on long-term
receivables (24) (82)
Decrease (increase) in trade receivables, net (1,182) 58
Increase in other receivables and prepaid expenses (102) (405)
Increase in inventories (687) (17)
Decrease (increase)in costs and estimated earnings in
excess of billings, net (411) 1,933
Decrease in trade payables (73) (78)
Increase in other payables and accrued expenses 478 63
Decrease in deferred revenues (248) (181)
Accrued severance pay, net (48) (196)
------------ ------------
Net cash provided by operating activities (1,088) 1,321
------------ ------------
Cash flow from investing activities:
------------------------------------
Investment in long term restricted cash (1,090) -
Purchase of property and equipment (187) (47)
Payment of leasing deposits (15) -
------------ ------------
Net cash used in investing activities (1,292) (47)
------------ ------------
Cash flow from financing activities:
------------------------------------
Proceeds from issuance of shares, net 2,636 -
Proceeds from issuance of convertible note, net 2,494 -
Issuance of warrants 552 -
Decrease in short-term bank credits and loans, net (1,943) (1,155)
Beneficial conversion feature on convertible note 53 -
Exercise of options 29 -
------------ ------------
Net cash provided by (used in) financing activities 3,821 (1,155)
------------ ------------
Increase in cash and cash equivalents 1,441 119
Cash and cash equivalents at the beginning of the year 467 570
------------ ------------
Cash and cash equivalents at the end of the year $ 1,908 $ 689
============ ============
4
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
STATEMENTS OF CASH FLOWS (Cont.)
--------------------------------------------------------------------------------
U.S. dollars in thousands
Nine months ended
September 31
----------------------------
2004 2003
------------- -------------
(unaudited)
--------------------------
Non-cash transactions:
----------------------
Fair value of warrants issued in connection with
settlement of debt $ - $ 1,453
=========== ===========
Adjustment of accrual for issuance expenses $ - $ 355
=========== ===========
Supplemental disclosures of cash flow activities:
-------------------------------------------------
Net cash paid during the year for:
Income taxes $ 2 $ 2
=========== ===========
Interest $ 183 $ 206
=========== ===========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL
a. RADA Electronic Industries Ltd., an Israeli corporation (the
"Company") is engaged in the development, manufacturing and sale
of Automated Test Equipment ("ATE") products, avionics equipment
and aviation data acquisition and debriefing systems.
b. The Company operates a test and repair shop using its ATE
products in Beijing, China through its 80% owned Chinese
subsidiary, Beijing Huari Aircraft Components Maintenance and
Services Co. Ltd. ("CACS" or "subsidiary"). CACS was established
with a third party, which owns the remaining 20% equity interest.
c. The accompanying unaudited interim consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included.
Operating results for the nine months ended September 30, 2004,
are not necessarily indicative of the results of operations that
may be expected for the year ended December 31, 2004.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies applied in the annual financial
statements of the Company as of December 31, 2003 are applied
consistently in these financial statements.
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
b. For further information, refer to the consolidated financial
statements as of December 31, 2003.
c. Accounting for share based compensation:
The Company account for share based compensation for employees
using the intrinsic value method presented in Accounting
Principles Board (APB) Statement No. 25, Accounting for Stock
Issued to Employees, and related interpretations, and comply with
the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, and with the disclosure provisions of
SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosure Amendment of SFAS No. 123.
Pro forma information regarding the Company's net income and net
earnings per share is required by SFAS No. 123 and has been
determined as if the Company had accounted for its employee stock
options under the fair value method prescribed by SFAS No. 123.
6
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
If deferred compensation had been determined under the above
mentioned fair value method, the effect on the Company's share
based compensation cost, net income and net earnings per share
would have been immaterial for all the reported periods.
NOTE 3:- CONTRACTS IN PROGRESS
Amounts included in the financial statements, which relate to costs
and estimated earnings in excess of billings on uncompleted contracts
are classified as current assets. Billings in excess of costs and
estimated earnings on uncompleted contracts are classified as current
liabilities. Summarized below are the components of the amounts:
a. Costs and estimated earnings in excess of billings on uncompleted
contracts
September 30, December 31,
2004 2003
-------------- --------------
(unaudited)
--------------
Costs incurred on uncompleted contracts $ 5,295 $ 862
Estimated earnings 607 324
-------------- --------------
5,902 1,186
Less - billings and progress payments 5,701 1,010
-------------- --------------
$ 201 $ 176
============== ==============
b. Billings in excess of costs and estimated earnings on uncompleted
contracts:
September 30, December 31,
2004 2003
-------------- --------------
(unaudited)
Costs incurred on uncompleted contracts $ 2,468 $ 3,711
Estimated earnings 957 1,019
-------------- --------------
3,425 4,730
Less - billings and progress payments 4,875 6,566
-------------- --------------
$ 1,450 $ 1,836
============== ==============
7
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 4:- INVENTORIES
September 30, December 31,
2004 2003
------------- -------------
Raw materials and components $ 902 $ 668
Work in progress 451 112
Finished goods 207 93
------------- -------------
$ 1,560 $ 873
============= =============
NOTE 5:- PRIVATE PLACEMENT
On July 12, 2004, The Company concluded a private placement of 1.8
million of ordinary shares. The purchase price was $1.60 per share.
The Company also granted the investors a right to purchase up to an
aggregate of 1.1 million additional ordinary shares at $2.10 per share
issuable upon the exercise of additional investment rights which
expire 24 months following the effective date of the registration
statement. In addition, The Company issued an aggregate of $3.0
million principal amount of convertible notes. The convertible notes
will mature in three years, bear interest at a rate of six month LIBOR
plus 2.5% and are convertible at the investors' option at a conversion
price of $2.10 per share. The Company recorded the convertible notes
in its fair value and the remaining balance will be amortized over the
period of three years. In addition, the Company granted the purchasers
of the convertible notes a right to purchase up to an aggregate of
937,500 additional ordinary shares at $2.50 per share issuable upon
the exercise of warrants which expire on January 12, 2010.
8
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 6:- GEOGRAPHIC INFORMATION
a. In accordance with Statement of Financial Accounting Standards
No. 131 "Disclosures About Segments of an Enterprise and Related
Information", the Company is organized and operates as one
business segment, which develops, manufactures and sells ATE
products, avionics equipment and aviation data acquisition and
debriefing systems.
b. Revenues by geographic areas:
Revenues are attributed to geographic area based on the location
of the end customers as follows:
Nine months ended Year ended
-------------------------- --------------
September 30, December 31,
-------------------------- --------------
2004 2003 2003
----------- ----------- --------------
North America $ 2,656 $ 2,624 $ 5,115
Europe 2,810 604 3,436
Israel 2,931 2,049 3,224
Others 2,261 2,044 540
----------- ----------- --------------
Total $ 10,658 $ 7,321 $ 12,315
=========== =========== ==============
9
Management's Discussion and Analysis of Financial Condition and Results of
Operations
--------------------------------------------------------------------------------
This information should be read in conjunction with the condensed
consolidated financial statements and notes included in Item 1 of Part I of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2003 contained in our 2003 Annual
Report on Form 20-F. The discussion and analysis which follows may contain trend
analysis and other forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 which reflect our current views with
respect to future events and financial results. These include statements
regarding our earnings, projected growth and forecasts, and similar matters that
are not historical facts.
We remind shareholders that forward-looking statements are merely
predictions and therefore are inherently subject to uncertainties and other
factors that could cause the future results to differ materially from those
described in the forward-looking statements.
Overview
We develop, manufacture and sell automated test equipment and avionics
products for military and commercial use mainly in Israel, Europe and the United
States. Until December 31, 2001 we also sold aircraft spare parts through our
subsidiary, Jetborne International, but this business was discontinued following
the sale of our holdings in Jetborne. We also provide test and repair services
using our CATS(R) testers and test program sets through our Chinese subsidiary,
CACS. In addition, we provide manufacturing services to third parties engaged
mainly in the avionics market.
In March 2002, we sold, effective December 31, 2001, our 75% equity
interest in Jetborne to ILI Aviation Ltd., a private company registered under
the laws of the Marshall Islands. ILI undertook to cause Jetborne to repay us
all outstanding inter-company loan balances plus interest and additional
royalties whereby the repayment will be made in accordance with a schedule based
on a percentage of actual sales of Jetborne's inventory on hand on the effective
date of the agreement. All payments due to us under the agreement must be paid
no later than the tenth anniversary of the agreement. Based on our assessment of
the collectibility of this debt we recorded an allowance for the full balance
due to us under the agreement.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the notes to our consolidated financial
statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition. While the estimates
and judgments associated with the application of these policies may be affected
by different assumptions or conditions, we believe the estimates and judgments
associated with the reported amounts are appropriate in the circumstances.
The significant accounting policies listed in Note 2 of our consolidated
financial statements that we believe are the most critical to aid in fully
understanding and evaluating our
10
financial condition and results of our operations under generally accepted
accounting principles are discussed below.
Intangible Assets. Costs of producing our TPS software library, which is
integrated with our test station, incurred subsequent to achieving technological
feasibility, were capitalized according to FASB No. 86 "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" and are amortized
over the estimated useful life of the product. We assess the recoverability of
these intangible assets at each balance sheet date by determining whether
unamortized capitalized costs do not exceed the net realizable value of the
software. Net realizable value is the estimated future gross revenues from a
product reduced by the estimated future costs of disposing of that product,
including costs of performing maintenance and customer support required to
satisfy our obligations set forth at the time of sale. The use of different
assumptions with respect to the expected cash flows from our assets and other
economic variables, primarily the discount rate, may lead to different
conclusions regarding the recoverability of our assets' carrying values and to
the potential need to record an impairment loss for our intangible assets.
Impairment of Long-Lived Assets. We are required to assess the impairment
of long-lived assets on an annual basis, and potentially more frequently when
events or changes in circumstances indicate that the carrying value may not be
recoverable in accordance with Statement of Financial Accounting Standards,
("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." We assess the impairment of our assets based on a number of factors,
including any significant changes in the manner of our use of the respective
assets or the strategy of our overall business and significant negative industry
or economic trends. Upon determination that the carrying value of a long-lived
asset may not be recoverable, based upon a comparison of fair value to the
carrying amount of the asset, an impairment charge is recorded. We measure fair
value based on the projected future undiscounted cash flows expected to be
generated by the respective asset. Under different assumptions with respect to
the recoverability of our long-lived assets, our determination may be different,
which may negatively affect our financial position and results of operations.
Share-Based Compensation. We account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB") opinion
No. 25, "Accounting for Stock Issues to Employees," and related interpretations.
Under APB 25, compensation cost is measured as the excess, if any, of the
closing market price of our stock at the date of grant over the exercise price
of the option granted. We recognize compensation cost for stock options, if any,
ratably over the vesting period. We account for warrants issued to non-employees
in accordance with the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." We use the Black- Scholes option pricing model to value warrants
granted to non-employees.
Revenue Recognition. Our revenues are derived primarily from sales of
automated test equipment and avionics products. Revenues from sales of automated
test equipment and avionics products are recognized upon delivery of merchandise
or performance of services. Revenues from sales of other products are generally
recognized upon shipment of the product. Revenues from services are recognized
upon performance of the services. Revenues from long-term fixed price contracts
are recognized by the percentage-of-completion method. We apply this method when
the total of the costs of the contract can reasonably be estimated. Revenues
11
ascribed to each period represent costs incurred during the period, with the
addition of estimated earnings accrued, based on the extent of progress towards
completion during the period. The percentage-of-completion is determined for
each contract at the rate that costs incurred to date bear to the total
estimated cost to be incurred over the duration of each contract. With regard to
contracts on which a loss is anticipated, a provision is made for the entire
amount of the estimated loss. Contracts are considered to be 100% complete when
the customer accepts the project and when the project is delivered, or when the
project complies with performance specifications, depending upon the specific
situation. Revenues from test and repair services are recognized upon
performance of the maintenance services.
Revenues from certain arrangements may include multiple elements within a
single contract. Our accounting policy complies with the revenue determination
requirements set forth in EITF 00-21, relating to the separation of multiple
deliverables into individual accounting units with determinable fair values. Our
arrangements are accounted for as one unit of accounting.
Fair Value of Warrants. In September 2003, we finalized an agreement with
Bank Hapoalim B.M. and Bank Leumi Le Israel B.M., or our Banks, to restructure
$3,451,000 of our debt to them. Pursuant to the agreement, we paid the Banks
$1,100,000 on account of our debt to them and they forgave $1,100,000 in debt
and agreed to accept warrants to purchase 3,781,995 of our ordinary shares,
exercisable at par value per share, to purchase ordinary shares in lieu of
$1,251,000 of debt. This transaction was recorded in accordance with FASB No.
15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." The
warrants issued to the Banks were recorded at fair value using the Black and
Scholes pricing model, since we do not believe that the market price of an
ordinary share on on the date of consummation reflects fair value. The fair
value of the warrants was based on the value of an ordinary share at the
consummation date of the transaction, based on a valuation of the warrants
prepared by an external valuation expert. The difference between the
consideration paid to the Banks and the carrying amount of the debt was
recognized as a gain on restructuring of debt, net of issuance expenses.
Significant Expenses
Cost of Revenues. Cost of revenues consists primarily of manufacturing
costs, depreciation of fixed assets, software development costs, impairment
losses on long-lived assets and amortization of capitalized software.
Research and Development Expenses. Research and development expenses
consist primarily of salaries of employees and subcontractors engaged in
on-going research and development activities and other related expenses.
Research and development expenses are expensed as incurred.
Marketing, Selling, General and Administrative Expenses. Marketing and
Selling expenses consist primarily of expenses for sales and marketing
personnel, sales commissions, marketing activities, public relations,
promotional materials, travel expenses and trade show exhibit expenses. General
and administrative expenses consist primarily of salaries and related expenses
for executive, accounting, administrative personnel, professional fees,
provisions for doubtful accounts, and other general corporate expenses.
12
Financial Income (Expenses), Net. Financial expenses consist of interest
and bank expenses and currency remeasurement losses. Financial income consists
of interest on cash and cash equivalent balances, currency remeasurement gains
and gain on restructuring of debt.
Other Expenses, Net. Other expenses, net relate primarily to items of
income or expenses outside our ordinary course of business.
Nine Months Ended September 30, 2004 Compared with Nine Months Ended September
30, 2003
Revenues. Our revenues increased 46% to $ 10.65 million in the nine months
ended September 30, 2004 from $7.32 million in the nine months Ended September
30, 2003. The increase in our revenues is primarily attributable to the increase
of revenues from the sale of GDS and DAS to Smiths Aerospace Electronic Systems
for the PM-V Program and sale of FACE systems to the Portuguese Air Force and
the U.S. NAVY. We expect that this growth rate will continue in the fourth
quarter of 2004 and that the growth will be generated primarily from sales of
our traditional products.
Cost of Revenues. Cost of revenues increased 35% to $7.77 million in the
nine months ended September 30, 2004 from $5.76 million in the nine months Ended
September 30, 2003. the increase is mainly due to increased revenues.
Gross Profit. Our gross profit increased 85% to approximately $2.88 million
in the nine months ended September 30, 2004 from $1.55 million in the nine
months ended September 30, 2003. Our profit margin increased to 27% in the nine
months ended September 30, 2004 from 21% in the nine months ended September 30,
2003. The improved margins reflects our reaching a sales level that provides for
better utilization of our fixed overhead costs. Our margins should improve
further with better utilization of our manufacturing facilities.
Marketing, Selling, General and Administrative Expenses. Marketing,
selling, general and administrative expenses increased 7% to $2.12 million in
the nine months ended September 30, 2004 from $1.98 million in the nine months
ended September 30, 2003. We are continuing our costs savings measures, but we
have increased our sales efforts in our current and new markets, which has
resulted in increased marketing and selling expenses .
Financial Income (Expenses), Net. Our financial expense, net was $321,000
in the nine months ended September 30, 2004. In the nine months ended September
30, 2003 we had financial income of $733,000. Our financial income in 2003 was
primarily attributable to an approximate $1 million gain on our restructuring of
debt with our banks.
Liquidity and Capital Resources
As of September 30, 2004 we did not have any bank debt. At September 30,
2004, we had working capital surplus of $150,000 and cash and cash equivalents
of $1.9 million.
13
In the third quarter of 2004, we raised $5.88 million from investors in a
private placement. The investment consisted of $3.0 million in convertible
debentures and $2.88 million of equity. The price of the equity was $1.60 per
share, and the convertible debentures can be converted at $2.10 per share. In
addition, the investors have an Additional Investment Right (AIR) to invest
$2.31 million at $2.10 per share, and $2.34 million upon the exercise of
warrants at an exercise price of $2.50 per share.
We had capital expenditures of $187,000 in the nine months ended September
30, 2004. We currently do not have any significant capital spending or purchase
commitments.
Net cash used in operating activities was $11 million in the nine months
ended September 30, 2004. This was attributable primarily to our net income of
$0.5 million, an increase in trade receivables of approximately $1.1 million, a
decrease in deferred revenues of approximately $0.2 million, which was offset in
part by depreciation and amortization of $0.7 million, an increase in
inventories of approximately $0.7 million and an increase in costs and estimated
earnings in excess of billings on uncompleted contracts, net of approximately
$0.4 million.
Net cash used in investing activities was approximately $1.3 million for
the nine months ended September 30, 2004, mainly due to investment in long term
restricted cash of $1.1 million.
Net cash generated from financing activities was $3.8 million for the nine
months ended September 30, 2004, mainly due to the net proceeds of $5.7
million(net) from issuance of our shares and convertible notes in a private
placement and repayment of $1.9 million of short term bank debt.
We have been dependent in recent years on receiving financial support from
our principal shareholders. We cannot assure that they will continue to provide
us with funds when requested, and that such funds, if any, will be sufficient to
finance our operations. The failure of our principal shareholders or other new
investors to provide us with the necessary financing may result in a significant
scale back or elimination of some aspects of our operations. Based on our
current financial condition, the anticipated continued financial support from
our shareholders and existing and anticipated shipments in the remainder of
2004, we anticipate that our capital resources will be adequate to satisfy our
working capital and capital expenditure requirements until December 31, 2005. We
may need to raise additional funds thereafter.
As of September 30, 2004 there were 19,486,838 warrants outstanding to
purchase 19,486,838 of our ordinary shares. Of such warrants, 3,781,991 warrants
have an exercise price of (par value) per share, 13,667,347 warrants have an
exercise price of $2.00 per share, 1,100,000 warrants have an exercise price of
$2.1 per share and 937,500 warrants have an exercise price of $2.50 per share.
To the extent any warrants are exercised the proceeds will be added to our
working capital.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
14
Tabular Disclosure of Contractual Obligations
The following table summarizes our minimum contractual obligations and
commercial commitments, as of September 30, 2004 and the effect we expect them
to have on our liquidity and cash flow in future periods.
Contractual Obligations Payments due by Period
--------------------------------- ------------------------------------------------------------
Less than 3-5 More than
Total 1 year 1-3 Years Years 5 years
---------- --------- ---------- ----- ---------
Long-term debt obligations....... $2,562,000 - $2,562,000 - -
Capital (finance) lease
obligations.................. - - - - -
-
Operating lease obligations...... $338,000 $270,000 $68,000 - -
Other long-term liabilities
reflected on the company's balance
sheet under U.S. GAAP ........... - - - - -
Total............................ $2,900,000 $270,000 $2,630,000 - -
In addition, we have long-term liabilities for severance pay that is
calculated pursuant to Israeli severance pay law generally based on the most
recent salary of the employees multiplied by the number of years of employment,
as of the balance sheet date. Employees are entitled to one month's salary for
each year of employment or a portion thereof. As of September 30, 2004 our
severance pay liability was $2.1 million.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Rada Electronic Industries Ltd.
(Registrant)
By: /s/Herzle Bodinger
------------------
Herzle Bodinger, Chairman
Date: November 15, 2004