SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F/A
Amendment No. 1
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
12 (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, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number: 0-15375
RADA ELECTRONIC INDUSTRIES LTD.
(Exact Name of Registrant as Specified in Its Charter
and Translation of Registrant's Name Into English)
Israel
(Jurisdiction of Incorporation or Organization)
7 Giborei Israel Street, Netanya 42504, Israel
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to Section
12(b) of the Act:
None
Securities registered or to be registered pursuant to Section
12(g) of the Act:
Ordinary Shares, NIS 0.005 Par Value
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Ordinary Shares, par value NIS 0.005 per share............... 20,448,364
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No _____
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 Item 18 X
This annual report on Form 20-F/A is incorporated by reference into the
registrant's Registration Statements on Form F-3, Registration Nos. 333-12074,
333-115598 and 333-117954.
Explanatory Note
This Amendment No. 1 on Form 20-F/A hereby amends Items 4,15, 18 and 19
of RADA Electronic Industries Ltd.'s Annual Report on Form 20-F for the fiscal
year ended December 31, 2004, which was filed on March 31, 2005. This Amendment
No. 1 is being filed for the purpose of providing additional details to our
disclosures in the original report pursuant to comments received from the Staff
of the U.S. Securities and Exchange Commission in connection with its review of
our periodic filings.
This Amendment is not intended to revise other information presented in
our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 as
originally filed and all such other information in the original filing, which
remains unchanged.
This Amendment does not reflect events occurring after the filing of the
original Form 20-F and does not modify or update the disclosure therein in any
way other than as required to reflect the amendments discussed above. As a
result, this Amendment continues to speak as of March 31, 2005.
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TABLE OF CONTENTS
Page No.
--------
PART I.........................................................................1
ITEM 4. INFORMATION ON THE COMPANY.........................................1
A. History and Development of the Company.......................1
B. Business Overview............................................1
C. Organizational Structure....................................14
D. Property, Plants and Equipment..............................15
PART II.......................................................................16
ITEM 15. CONTROLS AND PROCEDURES...........................................16
PART III......................................................................17
ITEM18. FINANCIAL STATEMENTS..............................................17
ITEM19. EXHIBITS..........................................................17
S I G N A T U R E S...........................................................19
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PART I
ITEM 4. INFORMATION ON THE COMPANY
--------------------------
A. HISTORY AND DEVELOPMENT OF THE COMPANY
RADA Electronic Industries Ltd. was incorporated under the laws of the
State of Israel on December 8, 1970 for an indefinite term. We are a public
limited liability company under the Israeli Companies Law 1999-5759, or the
Israeli Companies Law, and operate under this law and associated legislation.
Our registered offices and principal place of business are located at 7 Giborei
Israel Street, Netanya 42504, Israel, and our telephone number is
972-9-892-1111. Our address on the internet is www.rada.com. The information on
our website is not incorporated by reference into this annual report.
We develop, manufacture and sell automated test equipment, avionics
products and ground debriefing systems and provide manufacturing services for
military and commercial use, mainly in Israel, the U.S. and Europe. We refer to
these activities as our core business. We also provide test and repair services
using our CATS(R) testers and test program sets through our Chinese subsidiary.
In April 1985, we completed an initial public offering. We traded on the
Nasdaq National Market under the symbol "RADIF" since our initial public
offering in 1985 until June 10, 2002 when the listing of our ordinary shares was
transferred to the Nasdaq SmallCap Market. On December 13, 2004, we changed our
symbol to "RADI."
In February 2005, we purchased all the assets of Vectop Ltd., an Israeli
company specializing in the design, development, marketing and sale of
electro-optic equipment and debriefing systems. Such assets included the
know-how, intellectual property and patents that were used by, or connected to
Vectop's business.
B. BUSINESS OVERVIEW
Our Core Business
We provide integrated avionic solutions. Our aim is to provide not only
a state of the art product but also a comprehensive end to end solution for one
or more avionic systems. The first integrated system that we provided was for
the A-4 avionics upgrade program of the Israeli Air Force, or IAF. This program
is the first comprehensive and complete avionics system to be provided entirely
by us. During 2004 we increased our involvement and development efforts in the
area of unmanned aircraft vehicles.
Our solutions include the following:
o Advanced training solutions, based on our recently completed Net
Centric Digital Recorder;
o Integrated trainer aircraft avionics packages;
o Flight data recorders and supporting ground analysis;
o Integrated weapons management systems;
o Video cameras for ground and airborne applications, based on the
Vectop's Ltd. products;
o Inertial and global positioning system based on navigation
solutions; o Unmanned aerial vehicle avionics; and
o Automatic testing solutions;
We also provide manufacturing services to original equipment
manufacturers in Israel and in the United States, using the manufacturing
capabilities of our Beit-She'an plant. We offer production of turnkey solutions,
in "build to print" or "build to specification" modes. To date, we have provided
our manufacturing services to, among others, Smiths, Israeli Aircraft
Industries, or IAI, and RAFAEL Armament Development Authority Ltd., or RAFAEL.
Our China based subsidiary provides test and repair services using our CATS(R)
testers and test program sets.
Our core business activity is based in Israel. Our U.S.-based
subsidiaries have been inactive since January 1, 2002.
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Advanced Training Solutions
General
Our training solutions are based on a complete and integrated system
that incorporates an airborne component installed in the aircraft and a
ground-based component, installed in the squadron facilities. Recent
technological developments, undertaken primarily for the IAF, enable system
adaptation to any kind of aircraft, regardless of its onboard avionics systems.
Our recent solutions are based on our newly developed Net Centric Digital
Recorder, that allows the integration of our airborne digital video recordings
with numerous other digital data items and provides the essential building
blocks for a squadron information management network, or SIMNET, as a ground
component.
Autonomous Air Combat Evaluation System - ACE(TM)
ACE(TM) is an avionics system used for debriefing air combat missions
and is based on data recordings from digital and analog communication channels
in the aircraft. The system converts the data into digital form and inserts it
on unused portions of the recording tape in the existing aircraft analog
videocassette recorder, or VCR. The data is extracted from the videocassette and
utilized by our ground debriefing station to generate 3-D graphic displays that
portray all the aircraft maneuvers during operational and training missions, and
fully synchronize between all the participating aircrafts. For each individual
aircraft, the graphic display is fully synchronized with the heads-up display
image captured on the VCR media. The IAF (F-16 A/B, A-4) and three other air
forces (F-5, F-16 A/B) currently utilize the ACE(TM) system.
Debriefing of air combat maneuvers can also be implemented as an
expansion application to our FACE(TM) system. The Royal Netherlands Air Force
has upgraded its FACE(TM) system s with this capability to debrief its aircrews.
The latest enhancement of the ACE(TM) concept resulted in a contract
with the Israeli Ministry of Defense and the IAF in the first quarter of 2003.
Under the contract we will upgrade all of the existing IAF A-4 aircraft with our
advanced ACE(TM) debriefing capabilities. The absence of advanced avionics
systems and associated data onboard the A-4 aircraft required us to integrate a
stand-alone Internal Navigation System, or INS, and a Global Positioning System,
or GPS, on board the aircraft. We believe this enhanced solution will open the
market segment of aircraft fleets not equipped with modern avionics platforms
for the ACE(TM). We believe that this program uniquely positions us as the
ultimate provider for debriefing solutions for all the advanced IAF trainers.
Squadron Information Management Network (SIMNET)
Since 1999 we have offered operational ground debriefing stations
complementing our airborne systems. The operational ground debriefing station is
a PC-based application operating in a Windows NT/2000(R) environment, supported
by a proprietary plug-in board. The solution, designed by our employees (IAF
F-16 and F-15 pilots in reserve service), provides a state-of-the-art debriefing
environment, fully capitalizing on all available digital and video information
in a highly synchronized presentation. Further capitalizing on current day
technology, individual
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stations have a networking capability, providing data sharing, as well as
cross-unit and inter-air force debriefing.
The IAF and two other air forces have purchased ground debriefing
systems for their F-16 A/B, F-5 and A-4 fleets.
Net Centric Digital Recorder (NCDR) Based Training Systems
Recent developments in digital video recording systems and the
significant reduction in size and cost of solid state memory hardware have
turned solid state digital video recording systems into the de-facto standard
solution for airborne applications. These systems have begun penetrating the
aviation industry, in new aircraft such as the F-16I as well as in the retrofit
market. Identifying this trend, we have ported our debriefing solutions to the
digital domain, with the initial system developed for the new IAF F-16Is,
delivered under the Peace Marble, or PM-V, Program and the new Net Centric
Digital Recorder. We developed our Net Centric Digital Recorder with the view of
capturing sales from the potential retrofit market for airborne video tape
recorders. This new solution focuses on the throughput, data management and
archiving requirements of the massive amounts of information generated by each
aircraft, as well as on seamless data sharing within the squadron and the air
force as a whole.
Based on the PM-V Program, we delivered two additional debriefing
systems to Lockheed Martin Aerospace during the fourth quarter of 2002 for use
in integration and flight-testing. We are in the midst of the development,
integration and delivery of a complete digital debriefing system for the new
F-16s purchased by the Chilean Air Force. As an extension of the development
work completed as part of the PM-V Program, we are supplying the Chilean Air
Force with a digital video recorder for each F-16 aircraft as well as an
advanced digital video ground debriefing station. This station will be linked to
the F-5 ground debriefing station we previously delivered to the Chilean Air
Force, creating a common network debriefing solution for both front-line
aircraft.
We have identified a growing need for digital video replacement of aging
analogue airborne tape recorders (approximately 15,000 VTRs are installed
onboard fighter aircraft today) and have initiated a world wide marketing effort
to promote the replacement of these aging VTRs with our new NCDR. The NCDR,
together with our ground debriefing system, enables advanced debriefing at an
affordable price. During 2004, we completed the development of the NCDR and it
is now being proposed to several customers. The NCDR will be marketed jointly by
us and Smiths, utilizing Smiths' better access to some of the world markets,
especially in the U.S.
Integrated Trainer Aircraft Avionics Package
Following our selection by the IAF to provide the ACE(TM) for their
advanced trainer, the A-4 Skyhawk, we were awarded a follow on program aimed at
total replacement of the aging avionics package of the A-4 aircraft with a new,
upgraded package. The new avionics package replaces the current weapon delivery
and navigation system of the aircraft with a new state of the art system that
will significantly improve the A-4 capabilities, increase its' reliability and
provide it with advanced training capabilities.
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The upgraded system includes INS, GPS, head up display, or HUD, camera,
central weapon delivery and navigation processor based on enhanced flight
monitoring unit, which is the core of the ACE(TM) system and a control and
display unit.
The upgraded A-4 prototype began its planned flight testing phase on
schedule and the serial production line is operating at full capacity. We plan
to complete the upgrade of all the IAF A-4 fleet during 2005.
We believe that this program places us among the few companies that
performed a complete aircraft avionics system upgrade. As a result of the A-4
system development, we have proposed similar, very cost effective, trainer
aircraft avionics packages to other customers. The A-4 avionics package
provides, at a very affordable price, a complete and modern avionics suite
tailored for trainer aircraft. We have already launched marketing efforts to
promote this package for different customers.
Flight Data Recorders and Supporting Ground Analysis
General
Our fleet maintenance management solutions are based on our existing
programs and products developed and supplied over the course of the past two
years. These programs include airborne data collection and recording equipment
(such as FACE(TM) or DAS) as well as ground support software packages (such as
PERFORMS) that provide the infrastructure for efficient data logging and
analysis to support fleet maintenance management.
Fatigue Analysis and Autonomous Air Combat Evaluation System - FACE(TM)
The FACE(TM) system is an avionics system designed to acquire, process
and record data from various aircraft systems as well as from strain gauges
(sensors) affixed to an aircraft structure. This data is used to streamline and
manage the ongoing monitoring and maintenance of an aircraft and its systems.
The FACE(TM) system communicates with a squadron's ground support logistic
station, enabling downloading of data from an aircraft, analyzing the data,
managing ongoing maintenance, creating and modifying the set-up configuration
files and determining data for recording, as well as providing an interface to
other applications.
The FACE(TM) system is capable of communicating in real time with a
voice and data recorder, which is a crash survival unit known as a "black box"
manufactured by Smiths, for the purpose of recording flight safety related data.
We are currently upgrading the FACE(TM) systems supplied to the Royal
Netherlands Air Force for its F-16 aircraft between the years 1996 and 1999 with
this capability. During 2004 we supplied FACE(TM) systems for the F-16 fleets of
the Portuguese Air Force and the U.S. Navy, and we plan to supply FACE(TM)
systems to the Jordanian Air Force for its F-16 fleet starting in 2005.
Data Acquisition System - DAS
The DAS is an advanced avionics data acquisition system designed to
acquire, process and record data from various aircraft systems. We jointly
developed and marketed the DAS with Smiths for the new IAF F-16I aircraft. DAS
consists of two sub-systems, a data acquisition unit, or DAU, and an enhanced
crash survival memory unit, or ECSMU. The DAU interfaces to numerous data
systems and data channels in the aircraft and acquires, processes and records
data,
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mostly for maintenance purposes. The ECSMU is a "black box" capable of recording
digital data and digitized audio transferred through the DAU. DAS is a form fit
replacement for the CSFDR system, which is currently installed on most F-16
aircraft worldwide. DAS has been offered as a substitute in various projects
that require a flight data recorder with advanced capabilities and growth
potential.
The DAS is designed to meet all commercial aviation requirements for
"black box" recorders, thus expanding its market potential. During 2004, we
started supplying production DAS units to the IAF and entered into contracts to
supply DAS units to the Polish Air Force and the Korean Air Force starting in
2005.
PERFORMS (Processing, Evaluating, and Reporting of Force Management Data
Software)
Starting in mid-2001 we have been the primary sub-contractor to
Lockheed Martin Aerospace in the development of a new aircraft data logging and
analysis software package; accordingly, we provide design and development
services for the new product, known as PERFORMS. PERFORMS is designed to replace
the aging and hard to support data processing station, or DPS, that was
developed to provide data logging and fatigue analysis for all F-16 aircraft
users. PERFORMS is a Windows 2000R-based software package, utilizing a state of
the art graphics user interface, and provides all the required infrastructure to
perform any type of analysis on data acquired by all F-16 airborne flight data
recorders.
The analysis includes fatigue monitoring, engine usage monitoring and
other applications that may be added, as required by different users. The
recorded data is downloaded to the station and stored in a commercial off the
shelf database with an interface for "plug-in" applications, allowing those
applications to access the data, manipulate and analyze it and provide a variety
of maintenance management tools. The program is managed by Lockheed Martin
Aerospace and is supplied to F-16 users in evolving software "builds" delivered
every 12 months starting in April 2003. Under the agreement, we were granted a
non-exclusive license to use the developed software in support of our FACE and
DAS products to supply the application to our flight data recorder customers.
The first PERFORMS delivery in June 2003, exposed us to F-16 users at a
higher level than we had ever previously experienced. This exposure led us to
initiate business development activities with regard to PERFORMS add-on
packages. Since 2004, we have presented this product to the F-16 user's
community in seminars and conferences.
Updated and upgraded PERFORMS software packages were delivered during
2004 and are scheduled for delivery in 2005. Various air force customers already
use the software, and we expect to receive requests to support the installation
and operation of the software from these users.
Integrated Weapons Management Systems
In the early 1980s we started to develop, manufacture and sell an
armament interface unit which controls the various weapon stations of an
aircraft based on commands from the main on-board computer. The unit interfaces
between the digital commands of the main controller and the analog weapons
stations, performing a unique hybrid task. The armament interface unit was
designed for IAI's worldwide upgrade programs. Later versions of the system are
designed for
6
installation in attack helicopters as well as in fighter aircraft. We are
currently in the process of supplying a derivative of the system to IAI for a
F-5 upgrade program in Spain and are proposing the system and its offshoots for
multiple other applications in Israel and abroad. One of the major potential
sales channels for the armament interface unit is IAI, through its upgrade
programs and other ongoing projects.
We also provide complete armament testing solutions for aircraft using a
variety of weapons management systems. The test unit verifies the serviceability
of the armament management system during periodic maintenance or prior to
installation of sophisticated weapons.
Video Cameras for Airborne and Ground Vehicles
The recent acquisition of the Vectop Ltd.'s assets in February 2005
provides us with a new product line. Airborne cameras are integral part of any
training and debriefing system airborne onboard military platforms. Our
customers include major Israeli integrators (such as IAF, IAI and Elbit) as well
as foreign customers. In 2005, our products in this line include:
Eye Witness
An airborne HUD camera, sold to many customers in different
configurations represents a significant part of the future revenues related to
the assets purchased from Vectop Ltd.
Night Witness
A night vision camera installed on any night vision goggles enables
the recording of the pilot's view through the night vision goggles. Its unique
capability has been integrated in several fighter aircraft and helicopter
programs.
Armor Sentry
A video camera developed for ground armored vehicles and tanks. This
system is being delivered to the Israeli ground forces for installation in the
new "Merkava" battle tank and is generating interest in foreign markets.
Sniper Witness
The Sniper Witness enables sniper training facilities to better analyze
the activities of the trainees as well as accurately debrief the operation
resulting in better training. The system is based on a miniature video camera
attached to the sniper sight and portable video recorder. The system is used by
the Israeli armed forces training facility and is currently being demonstrated
to other armed forces around the world.
Inertial and GPS based Navigation Solutions
During 2003, we developed low cost navigation systems based on a ring
laser gyro, or RLG, and GPS. Our RLG based system is now qualified and
operational as part of the IAF A-4 upgrade program. This development provided us
with the know-how to further develop navigation solutions based on other
sensors.
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During 2005, we plan to integrate two different sensors into our
navigation system, which is based on attitude sensors and fiber optic gyros.
Navigation systems based on these sensors are significantly more cost effective
and provide good performance at a -low price.
We are offering our customers the existing RLG Navigation System, or
RNS, as part of our avionics packages and as a stand alone system and we plan to
propose the new navigation systems by the end of 2005.
Unmanned Aerial Vehicles (UAV) Avionics
We identified the UAV avionics market as a fast growing area that will
gradually replace the manned military airborne avionics market. This market has
many common aspects with the manned avionics product lines; however, it requires
slightly different technology and understanding of the various requirements.
Typically, a UAV avionics package needs to be smaller, lighter, more
reliable and inexpensive than its comparable manned aircraft suite. The major
advantage of UAV avionics systems is the envisioned large number of UAVs.
We initiated efforts to penetrate this market during 2001. Since then we
have entered into a contract with IAI, to develop and provide them with an Input
Output Controller, or IOC, a unit that is part of our data acquisition systems
product line, for IAI's next generation UAV. We are continuing our efforts to
widen our participation in this important program as well as in other programs.
During 2004, we developed and delivered a miniature avionics module to
IAI. This unit is aimed at the miniature UAV market and provides complete
avionics capabilities in a single, miniaturized unit. This product can be
proposed to other customers and we have initiated marketing activities for that
purpose.
Automatic Testing Solutions
General
Our business expansion into the automatic test equipment, or ATE, market
is based on our existing products as well as the added value we deliver with the
dedicated expertise and the wide-range experience we have acquired in this area.
We rely on the preference indicated by OEMs to outsource the acquisition of ATE
and have positioned our company as a strategic supplier/partner to provide ATEs
and test solutions. We offer our ATEs with our own Advanced Test Environment,
including all the required development tools. After a long period of inactivity
in this market, we see some growing interest, especially from small maintenance
houses rather than airlines, especially in the U.S.
CATS(R) - Commercial Aviation Test Stations
The Commercial Aviation Test Stations, or CATS(R), is a family of
multi-purpose, computerized automatic test equipment that meets the specific
needs of airlines and third party maintenance companies. The CATS(R) stations
test and repair a variety of electronic units in existing commercial aircraft,
incorporating tools for testing, troubleshooting, and performing
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diagnostic procedures. CATS(R) replaces or augments test stations from aircraft
manufacturers or avionics OEM suppliers, while automating multiple manual test
procedures.
Manufacturing Services
In 2000 we began providing manufacturing services to OEMs located in
Israel and the United States, using the excess manufacturing capacity at our
Beit-She'an plant. We offer manufacturing turnkey solutions, either in "build to
print" or "build to specification" modes. To date, we have provided our
manufacturing services to Smiths, IAI, RAFAEL, and other Israeli companies, both
in the defense and commercial sectors.
Test and Repair Stations
We operate a test and repair shop based on the use of our CATS(R) tester
in Beijing, China through CACS, our 80% owned Chinese subsidiary. CACS was
established as a joint venture company with Tianzu Forest Development Company,
which owns the remaining 20% equity interest. Pursuant to the joint venture
agreement, Tianzu Forest Development provided the facilities for CACS'
operations while we provided CATS(R) testers and test program set services.
Sales and Marketing
Strategy
Our sales and marketing strategy is based on the following principles:
o Maintaining our business focus on avionics for the military
market and our family of testing solutions for the commercial and
military markets.
o Expanding our product line by adding new products and
applications to our existing products by using our current
development programs as the basis for new developments.
o Expanding our customer base by including our products in
solutions and integrated systems. This approach was successful
both in Chile where, in 2002, we were awarded a contract to
provide a complete debriefing solution for the F-16 aircraft
purchased by the Chilean Air Force, and with the IAF, to whom we
supply complete weapon delivery and navigation system for the A-4
aircraft.
o Establishing marketing channels with system integrators and major
aircraft manufacturers such as The Boeing Company, Lockheed
Martin Aerospace, Smiths, IAI and RAFAEL.
o Expanding large potential markets, especially in the military and
the unmanned combat air vehicle areas, and developing new
marketing channels aimed directly at these customers.
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As part of this strategy, we have entered into a number of strategic
relationships and have focused our marketing and sales efforts to support these
relationships.
Lockheed Martin Aerospace. Our sales of avionics products focus mainly
on the F-16 aircraft manufactured by Lockheed Martin Aerospace, the most popular
fighter aircraft in the Western world today. In February 1999, we signed a
memorandum of understanding with Lockheed Martin pursuant to which we will
provide certain avionics systems for the F-16 aircraft under the PM-V Program.
In September 1999, the U.S. and the State of Israel signed a letter of
acceptance pursuant to which the U.S. will provide the IAF with 50 F-16I
aircraft and an option for an additional 52 aircraft, which was exercised in
June 2001 for a total of 102 F-16I aircraft. In cooperation with Smiths, we are
developing and supplying the data acquisition system that includes the advanced
data acquisition unit and an enhanced crash survivable memory unit, which will
be manufactured in our Beit-She'an facility. We are currently negotiating with
Lockheed Martin with respect to the development of additional capabilities of
this system for different applications.
In addition, in March 2001 we signed an agreement with the Aircraft
Structural Integrity Program Group of Lockheed Martin pursuant to which we are
assisting in the development of a fatigue analysis system based on a PC computer
for analyzing structural fatigue of the F-16 aircraft. As the main
subcontractor, our principal task is to develop the software for the fatigue
analysis system. The fatigue analysis system will utilize data collected from
the data acquisition unit and our FACE(TM) system, as well as other systems used
by air forces operating F-16 aircraft. This five year development program will
end in March 2006.
Smiths Aerospace Electronic Systems. In February 1999, we entered into
an agreement with Smiths that outlines joint marketing activities for our
FACE(TM) system and Smiths' voice and data recorder for F-16 A/B aircraft.
Smiths is a worldwide leader in avionics systems for fighter and commercial
aircraft. The two systems successfully passed flight tests conducted on the
Royal Netherlands Air Force's F-16 aircraft by Lockheed Martin and the Royal
Netherlands Air Force. The FACE(TM) system and the voice and data recorder
complement each other and are intended to replace outdated data recording
systems, mechanical strain recorders and flight load recorders. No sales under
this agreement have been made to date.
In June 2000, we signed a memorandum of understanding with Smiths
pursuant to which the parties agreed to establish a team for worldwide
marketing, developing and manufacturing of the data acquisition system and its
associated ground support that is intended to grow into an infrastructure for
recording, processing and managing all data types available on board the
aircraft. No sales of the systems have been made to date under this agreement.
We cannot assure you that we will successfully negotiate a definitive agreement
with a customer nor can we provide at present any forecast that the agreement
with Smiths will result in future sales of avionics systems.
In October 2003, we signed a teaming agreement with Smiths. The teaming
agreement establishes cooperation in connection with the products developed
jointly by Smiths and us for the PM-V Program and its derivatives. In addition,
the agreement details commitments made by Smiths to purchase production services
from us in the coming years.
During 2004, we expanded our cooperation with Smiths to include our
newly developed Net Centric Digital Recorder and have jointly offered this
product to potential customers.
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Smiths was a principal customer in 2002 and 2003 and we expect that it
will be one of our principal customers in 2005. In addition to the PM-V
cooperation with Smiths, we are currently supplying the Royal Netherlands Air
Force with an integration package for our FACE(TM) System and Smiths' black box
for its F-16 MLU fleet. A similar package is also being supplied to the
Portuguese Air Force.
Israel Aircraft Industries. IAI was our fourth largest customer in 2004,
accounting for approximately 8% of our total annual revenues. We are actively
supplying avionics and test equipment to four different divisions of IAI. We
have identified the Israeli government-owned aerospace industries as a potential
customers and cooperation entities. In particular the Lahav and Malat divisions
of IAI, major aircraft integrators, require our services as avionics and test
equipment providers. During 2004, in the IAF avionics upgrade program, where we
are the prime contractor, we have cooperated with IAI, as our sub-contractor, to
support various parts of this program.
RAFAEL Armament Development Authority Ltd. RAFAEL was one of our largest
Israeli customers in 2004. Our sales to RAFAEL during 2004 were primarily for
test equipment and build to print services. The addition of the Solid State
Recording, or SSR, family of products to the products we supply to RAFAEL adds
our own developed products to these sales. We expect that the SSR will result in
significant sales to RAFAEL.
Marketing
Our chairman and president, Herzle Bodinger, our chief executive
officer, Adar Azancot, and our vice president business development, Zvi Alon,
lead our marketing efforts. We currently employ four other persons in marketing
our core business products and plan to employ an additional person. Our
engineering department supports our marketing staff with respect to product
pricing and technical demonstrations. In addition, we have sales consultants,
agents and representatives in Europe, South America, China and India who receive
commissions for sales effected through them.
The Israeli Ministry of Defense has historically supported and continues
to support our marketing efforts through its Export and Defense Assistance
division, or SIBAT, through various projects for the Israeli Defense Forces and
its related divisions. The Israeli Ministry of Industry and Commerce supports
our marketing efforts via its Industrial Cooperation Authority through the
exploitation of "offset commitments" by Lockheed Martin Aerospace and The Boeing
Company to the State of Israel. Such future assistance is not guaranteed.
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Principal Customers
Generally, we complete a few transactions each year, each in an amount
comprising approximately 10% of our revenues for such year. As a result, each
year a significant portion of our revenues is derived from a small number of
customers. The following table sets forth our principal customers for the years
2003 and 2004:
2003 2004
---- ----
Smiths Electronic Systems...................... 22% 5%
The Boeing Company............................. 14% 10%
Israeli Ministry of Defense.................... 11% 19%
Israel Aviation Industries..................... 12% 6%
Portuguese Air Force........................... 19% 17%
U.S. Navy...................................... - 11%
Although we are striving to increase the number of our customers, we
anticipate that a significant portion of our future revenues will continue to be
derived from sales to a small number of customers.
Like many companies deriving a substantial portion of their revenues
from government contracts, we are subject to business risks, including changes
in governmental appropriations and changes in national defense policies and
priorities. Although many of the programs in which we participate as a
contractor or subcontractor may extend for several years, our business is
dependent upon annual appropriations and funding of new and existing contracts.
Most of the contracts are subject to termination for the convenience of the
customer, pursuant to which the customer pays only for reimbursement of costs
incurred and the applicable profit on work performed. We cannot assure you that
the Israeli Government or any other government will continue to fund the
purchase of our products over the long term.
Markets
We sell our products to various air forces and companies. Our main
market is in Israel with 35% of our sales in 2004, 26% in 2003 and 14% in 2002.
The second largest market is the U.S. with 33% of our sales in 2004, 42% in 2003
and 64% in 2002. Western Europe is our third largest market with 21% of our
sales in 2004, 28% in 2003 and 15% in 2002. Sales to the rest of the world
accounted for 10%, 4% and 7% of our sales in 2004, 2003 and 2002, respectively.
Competition
The markets for our products are highly competitive, and we may not be
able to compete effectively in those markets. Our principal competitors in the
avionics market are Harris, Rockwell Collins, Honeywell, Elbit Systems Ltd.,
IAI, R.S.L. Ltd., TEAK and Elisra Systems Ltd. We expect to continue to face
competition from these and other competitors. Most of our competitors are
larger, have greater resources including financial, technological, marketing and
distribution capabilities, and enjoy greater market recognition than we do.
These competitors may be able to achieve greater economies of scale and may be
less vulnerable to price
12
competition than us. We may not be able to offer our products as part of
integrated systems to the same extent as our competitors or successfully develop
or introduce new products that are more cost effective or offer better
performance than those of our competitors. Failure to do so could adversely
affect our business, financial condition and results of operations.
Export Policy
Exports of military related products are subject to the military export
policy of the State of Israel. Current Israeli Government policy encourages
export to approved customers of military products similar to those manufactured
by us, provided that such export does not run counter to Israeli policy or
national security considerations. We must obtain a permit to initiate a sales
proposal and ultimately an export license for the transaction is required. We
cannot assure you that we will obtain export permits or licenses in the future
or that governmental policy with respect to military exports will not be
altered. However, to date we have not encountered any significant difficulties
in obtaining necessary permits or licenses for sale of our products.
Fixed Price Contracts
Most of our contracts, especially with the Government of Israel, its
agencies and other foreign governments, are generally fixed-price contracts.
Under fixed-price contracts, the price is not subject to adjustment by reason of
the costs incurred in the performance of the contracts, as long as the costs
incurred and work performed fall within governmental guidelines. Under our
fixed-price contracts, we assume the risk that increased or unexpected costs may
reduce our profits or generate a loss. This risk can be particularly significant
under a fixed-price contract for research and development involving a new
technology.
Our books and records may be subject to audits by the Israeli Ministry
of Defense and other governmental agencies including the U.S. Department of
Defense. These audits may result in adjustments to contract costs and profits.
To date, we have not incurred any liability as a result of such audits.
Proprietary Information
We were granted a patent for our ACE(TM) system in both Israel and the
United States (No. 5467274.) Nevertheless, we generally do not consider patent
protection significant to our current operations and rely upon a combination of
security devices, copyrights, trademarks, trade secret laws and contractual
restrictions to protect our rights in our products. Our policy is to require
employees and consultants to execute confidentiality agreements upon the
commencement of their relationships with us. These measures may not be adequate
to protect our technology from third-party infringement, and our competitors
might independently develop technologies that are substantially equivalent or
superior to ours. Additionally, our products may be sold in foreign countries
that provide less protection for intellectual property rights than that provided
under U.S. or Israeli laws.
The Israeli Government usually retains certain rights to technologies
and inventions resulting from our performance as a prime contractor or
subcontractor under Israeli Government contracts and may generally disclose such
information to third parties, including other defense contractors. When the
Israeli Government funds research and development, it may acquire rights to
proprietary data and title to inventions; we may retain a non-exclusive,
royalty-free license for
13
such inventions. However, if the Israeli Government purchases only the end
product, we may retain the principal rights and the Government may use the data
and take an irrevocable, non-exclusive, royalty-free license.
Manufacturing and Supply
Our main production facilities are located in Beit-She'an, Israel. The
plant is equipped to handle most of our manufacturing processes and testing
requirements. For several specific processes we utilize subcontractors. This
approach is a key to our flexibility and versatility.
We stress quality control in our product realization process. Commencing
with customer requirements and expectations via raw material inspection through
completion, specifications are repeatedly checked. We maintain a quality
assurance team that participates in every stage of the design and manufacture of
our products. Our quality management standards are certified by the Standards
Institute of Israel, or SII, pursuant to ISO 9001 for hardware design and
production and ISO 9000.3 for software, both since 1995. SII performs quality
system audits twice a year and various customers perform audits four to six
times a year. In April 2001, SII certified our Environmental Management System
pursuant to ISO 14001. Our Quality Management System was revised to comply with
ISO 9001:2000. This process was concluded in June 2003.
According to the standard warranty incorporated in most of our sales
contracts, we warrant that our products will be free from defects in design,
materials or workmanship, and guarantee repair or replacement of defective parts
for the twelve months following delivery of a product to the customer. We also
provide maintenance services to customers who sign maintenance contracts.
Source and Availability of Raw Materials
We acquire most of the components for the manufacturing of our products
from a limited number of suppliers and subcontractors, most of whom are located
in Israel and the United States. Certain of these suppliers are currently the
sole source of one or more components upon which we are dependent. Since many of
our purchases require long lead-times, a delay in supply of an item can
significantly delay the delivery of a product. To date, we have not experienced
any particular difficulty in obtaining timely deliveries of necessary
components. See Item 3D "Risk Factors." We depend on a limited number of
suppliers of components for our products and if we are unable to obtain these
components when needed, we would experience delays in manufacturing our products
and our financial results could be adversely affected.
C. ORGANIZATIONAL STRUCTURE
We had one active subsidiary in 2004, Beijing Huarui Aircraft Components
Maintenance and Services Co., an 80% owned subsidiary based in China that is
engaged in aircraft repair services.
14
D. PROPERTY, PLANTS AND EQUIPMENT
Facilities
We own a 30,000 square feet building in Beit-She'an, Israel. The
building, which includes manufacturing facilities, warehouse space and a portion
of our development facilities, is situated on land leased from the Israel Land
Authority for a period of 49 years until 2034. The plant has sufficient capacity
to meet our current requirements. If volume was to increase significantly, we
would be able to increase the number of workers or shifts at the plant, or use
more subcontractors.
Our executive offices and research and development facilities are
located in a 12,500 square foot office facility in Netanya, Israel. The lease
for this facility expires in January 2006 and we have an option to extend the
lease until January 2008.
Our Chinese subsidiary, CACS, conducts its business in an approximately
16,000 square foot facility in Beijing that includes offices and test and repair
facilities. The land for this facility was leased by Beijing Tianzu Forestry
Company or Tianzu, the minority shareholder in CACS, from the Chinese government
for 30 years. Under a joint venture agreement, and in consideration for its
equity investment in CACS, Tianzu granted CACS usage rights in the land,
constructed the buildings and granted CACS the ownership of these buildings.
However, the transfer of the title to the land and the buildings has not been
completed, which may prevent the disposition of these assets should CACS desire
to do so. Although Tianzu is legally obligated to complete such transfer of
title to the land and the buildings, we can not guarantee that such transfer
will be completed, or that we will not be required to initiate litigation in
order to enforce our rights to receive title to the land and buildings.
The aggregate annual rent for our offices in Israel and China was
approximately $152,000 in 2004.
15
PART II
ITEM 15. CONTROLS AND PROCEDURES
-----------------------
Our management, including our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the
period covered by this annual report on Form 20-F. Based upon that evaluation,
our chief executive officer and chief financial officer have concluded that, as
of such date, our disclosure controls and procedures were effective to ensure
that information required to be disclosed by our company in the reports that we
file or submit under the U.S. Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There were no changes to our internal control over financial reporting
that occurred during the period covered by this annual report on Form 20-F that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting
Although our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, all internal control
systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective may not prevent or detect misstatements
and can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
16
PART III
ITEM 18. FINANCIAL STATEMENTS
--------------------
Consolidated Financial Statements
Index to Financial Statements.....................................F-1
Report of Independent Registered Public Accounting Firm...........F-2
Report of Independent Auditors....................................F-3
Consolidated Balance Sheets.......................................F-4
Consolidated Statements of Operations.............................F-5
Statements of Changes in Shareholders' Equity ....................F-6
Consolidated Statements of Cash Flows.............................F-7
Notes to Consolidated Financial Statements........................F-9
ITEM 19. EXHIBITS
--------
Index to Exhibits
Exhibit Description
------- -----------
3.1* Memorandum of Association of the Registrant
3.2* Articles of Association of the Registrant
4.1* Specimen of Share Certificate
8**** List of Subsidiaries of the Registrant
10.1* 1994 Employee Stock Option Plan, as amended
10.2* 1996 Employee Stock Option Plan, as amended
10.3* 1999 Employee Stock Option Plan, as amended
10.4*** 2003 Employee Stock Option Plan, as amended
10.5* Form of warrants to directors
10.6* Loan Agreement dated June 3, 2001 between the Registrant
and Mr. Howard Yeung
10.7* Deed of Termination of Joint Venture Agreement dated
June 3, 2001, effective as of January 1, 2000 and
Agreement for the acquisition of
17
part of the issued share capital of New Reef Holding
Ltd. dated June 3, 2001
10.8*** Memorandum of Agreement dated June 23 2003 between the
Registrant and Bank Hapoalim B.M. and Bank Leumi
Le-Israel B.M.
12.1 Certification of the Chief Executive Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended
12.2 Certification of the Chief Financial Officer pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities
Exchange Act, as amended
13.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
13.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
23.1 Consent of Kost Forer Gabbay & Kasierer, a Member of
Ernst & Young Global, Independent Registered Public
Accounting Firm (Israel) with respect to our
Registration Statements on Form F-3 and S-8
23.2 Consent of Luboshitz Kasierer, an affiliate member of
Ernst & Young International, Independent Auditors
(Israel) with respect to our Registration Statements on
Form F-3 and S-8
------------------
* Filed as an exhibit to our Annual Report on Form 20-F for the year ended
December 31, 2000 and incorporated herein by reference.
** Filed as an exhibit to our Annual Report on Form 20-F for the year ended
December 31, 2001 and incorporated herein by reference.
*** Filed as an exhibit to our Annual Report on Form 20-F for the year ended
December 31, 2002 and incorporated herein by reference.
**** Filed as an exhibit to our Annual Report on Form 20-F for the year ended
December 31, 2004 and incorporated herein by reference.
18
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2004
U.S. DOLLARS IN THOUSANDS
INDEX
Page
------------
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Auditors F-3
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Statements of Changes in Shareholders' Equity F-6
Consolidated Statements of Cash Flows F-7 - F-8
Notes to Consolidated Financial Statements F-9 - F-31
- - - - - - - - - - - - - - - -
F-1
ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
RADA ELECTRONIC INDUSTRIES LTD.
We have audited the accompanying consolidated balance sheets of Rada
Electronic Industries Ltd. (the "Company") and its subsidiary as of December 31,
2004 and 2003 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for each of the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiary as of December 31, 2004 and 2003, and the results
of its operations and its cash flows for each of the years then ended, in
conformity with U.S. generally accepted accounting principles.
/s/Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 1, 2005 A Member of Ernst & Young Global
F-2
ERNST & YOUNG
REPORT OF INDEPENDENT AUDITORS PUBLIC ACCOUNTING FIRM
To the Shareholders of
RADA ELECTRONIC INDUSTRIES LTD.
We have audited the accompanying consolidated statement of operations,
changes in shareholders' equity and cash flows of Rada Electronic Industries
Ltd. (the "Company") and its subsidiary for the year ended December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of the Company and its subsidiary for the year ended December 31, 2002, in
conformity with U.S. generally accepted accounting principles
/s/Luboshitz Kasierer
Tel-Aviv, Israel Luboshitz Kasiserer
An affiliate member of Ernst & Young International
June 23, 2003
F-3
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
December 31,
------------------------
Note 2004 2003
------- ----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,464 $ 467
Trade receivables (net of allowance for doubtful accounts
of $ 221 and $ 214, at December 31, 2004 and 2003,
respectively) 1,643 3,496
Other receivables and prepaid expenses 208 250
Costs and estimated earnings in excess of billings on
uncompleted contracts 3 1,385 176
Inventories 4 1,824 873
-------- --------
Total current assets 8,524 5,262
----- -------- --------
LONG-TERM RECEIVABLES AND DEPOSITS:
Long-term receivables 5 988 990
Long-term restricted cash 1,002 -
Leasing deposits 94 71
Severance pay fund 1,638 1,511
-------- --------
Total long-term receivables and deposits 3,722 2,572
----- -------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 6 4,283 4,728
-------- --------
OTHER ASSETS:
Intangible assets, net 7 1,709 1,987
Deferred charges, net 59 -
-------- --------
Total other assets 1,768 1,987
----- -------- --------
Total assets $ 18,297 $ 14,549
----- ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit and loans 8 $ 14 $ 1,123
Trade payables 1,080 640
Other payables and accrued expenses 9 3,612 3,317
Deferred revenues 488 1,062
Billings in excess of costs and estimated earnings on
uncompleted contracts 3 1,065 1,836
-------- --------
Total current liabilities 6,259 7,978
----- -------- --------
LONG-TERM LIABILITIES:
Convertible note 11 2,346 -
Long-term loans 8 - 1,220
Accrued severance pay 2,063 2,048
-------- --------
Total long-term liabilities 4,409 3,268
----- -------- --------
COMMITMENTS AND CONTINGENT LIABILITIES 10
MINORITY INTERESTS 397 425
-------- --------
SHAREHOLDERS' EQUITY: 11
Share capital-
Ordinary shares of NIS 0.005 par value - Authorized:
45,000,000 shares at December 31, 2004 and 2003; Issued
and outstanding: 20,448,364 and 18,510,716 shares at
December 31, 2004 and 2003, respectively 110 108
Additional paid-in capital 61,851 59,139
Warrants 2,223 1,405
Accumulated deficit (56,952) (57,774)
-------- --------
Total shareholders' equity 7,232 2,878
----- -------- --------
Total liabilities and shareholders' equity $ 18,297 $ 14,549
----- ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
Year ended December 31,
-----------------------------------------
Note 2004 2003 2002
-------- ----------- ----------- ------------
Revenues: 15
Products $ 11,123 $ 8,977 $ 6,773
Services 3,037 3,338 3,626
-------- -------- ---------
14,160 12,315 10,399
-------- -------- ---------
Cost of revenues:
Products 9,111 6,933 6,685
Services 1,176 2,659 2,538
-------- -------- ---------
10,287 9,592 9,223
-------- -------- ---------
Gross profit 3,873 2,723 1,176
-------- -------- ---------
Operating expenses:
Research and development - - 122
Marketing and selling 738 781 808
General and administrative 2,116 1,917 2,281
-------- -------- ---------
Total operating expenses 2,854 2,698 3,211
----- -------- -------- ---------
Operating income (loss) 1,019 25 (2,035)
Financial income (expenses), net 13a (248) 708 (364)
Other income (expenses), net 13b 23 (2) (290)
-------- -------- ---------
794 731 (2,689)
Minority interests in losses of subsidiary 28 27 206
-------- -------- ---------
Net income (loss) 16 $ 822 $ 758 $ (2,483)
======== ======== =========
Net income (loss) per share:
Basic net income (loss) per share $ 0.04 $ 0.04 $ (0.15)
======== ======== =========
Diluted net income (loss) per share $ 0.03 $ 0.04 $ (0.15)
======== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
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, 2002 13,816,839 $ 103 $56,646 $ - $(56,049) $ 700
Issuance of Ordinary
shares and warrants,
net *) 1,938,775 2 792 41 - 835
Conversion of loan into
Ordinary shares and
warrants 2,755,102 3 1,347 83 - 1,433
Net loss - - - - (2,483) (2,483)
---------- ------ ------- ------ -------- -------
Balance at December 31,
2002 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,
2003 18,510,716 108 59,139 1,405 (57,774) 2,878
Issuance of Ordinary
shares and warrants,
net *) 1,864,313 2 2,482 818 - 3,302
Beneficial conversion
feature
on convertible note - - 180 - - 180
Exercise of options 73,335 **) - 50 - - 50
Net income - - - - 822 822
---------- ------ ------- ------ -------- -------
Balance at December 31,
2004 20,448,364 $ 110 $61,851 $2,223 $ (56,952) $ 7,232
========== ====== ======= ====== ========= =======
*) Net of issuance expenses of approximately $ 95, $ 38 and $ 115 for the
years ended December 31, 2004, 2003 and 2002, respectively.
**) Less than $ 1.
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
-----------------------------------
2004 2003 2002
----------- -------- ----------
Cash flows from operating activities:
-------------------------------------
Net income (loss) $ 822 $ 758 $(2,483)
Adjustments required to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,066 2,072 2,388
Loss (gain) on extinguishment of debt - (1,013) 83
Provision of long-term receivable - - 290
Stock compensation expense - fair value of warrants issued
to suppliers - 14 -
Minority interests in losses of subsidiary (28) (27) (206)
Accrued interest and translation differences on long-term
receivables 2 (97) (40)
Amortization expenses on convertible note 106 - -
Capital loss on property, plant and equipment 16 - -
Decrease (increase) in trade receivables, net 1,853 (1,664) (1,015)
Decrease (increase) in other receivables and prepaid
expenses 42 (157) (26)
Decrease (increase) in costs and estimated earnings in
excess of billings, net (1,980) 1,085 460
Decrease (increase) in inventories (951) 204 539
Increase (decrease) in trade payables 440 5 (162)
Increase in other payables and accrued expenses 295 722 63
Decrease in deferred revenues (574) (709) (592)
Accrued severance pay, net (112) (172) 276
------- ------- -------
Net cash provided by (used in) operating activities 997 1,021 (425)
------- ------- -------
Cash flows from investing activities:
-------------------------------------
Investment in long- term restricted cash (1,002) - -
Purchase of property, plant and equipment (349) (49) (85)
Proceeds from sale of property and equipment - - 94
Repayment of loans granted to employees - - 20
Investments in leasing deposits (23) (1) (70)
------- ------- -------
Net cash used in investing activities (1,374) (50) (41)
------- ------- -------
Cash flows from financing activities:
-------------------------------------
Proceeds from issuance of shares, net 2,484 - 835
Proceeds from issuance of convertible note, net 2,351 - -
Proceeds of short-term loans - 946 4,397
Repayments of short-term loans (1,359) (4,096) (888)
Decrease (increase) in short-term bank credits, net (970) 2,076 (3,732)
Issuance of warrants 818 - -
Exercise of options 50 - -
Proceeds from issuance of loan to a related party - - 550
Repayment of loan to a related party - - (200)
------- ------- -------
Net cash provided by (used in) financing activities 3,374 (1,074) 962
------- ------- -------
Increase (decrease) in cash and cash equivalents 2,997 (103) 496
Cash and cash equivalents at the beginning of the year 467 570 74
------- ------- -------
Cash and cash equivalents at the end of the year $ 3,464 $ 467 $ 570
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
Year ended December 31,
--------------------------------------
2004 2003 2002
-------- -------- ----------
Non-cash transactions:
----------------------
Conversion of shareholder's loan into Ordinary
shares and warrants $ - $ - $ 1,350
======== ======== =========
Fair value of warrants issued in connection with
settlement of debt $ - $ 1,305 $ -
======== ======== =========
Adjustment of accrual for issuance expenses $ - $ 354 $ -
======== ======== =========
Supplemental disclosures of cash flow activities:
-------------------------------------------------
Net cash paid during the year for:
Income taxes $ 3 $ 5 $ 7
======== ======== =========
Interest $ 290 $ 240 $ 326
======== ======== =========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
NOTE 1:- GENERAL
a. RADA Electronic Industries Ltd., an Israeli corporation ("the
Company"), is engaged in the development, manufacture and sale of
Automated Test Equipment ("ATE") products, avionics equipment and
aviation data acquisition and debriefing systems.
b. As reflected in the consolidated financial statements, as of
December 31, 2004, the Company had an accumulated deficit of $
56,952. During 2004, the Company concluded a private placement of
1,800,000 Ordinary shares and issued convertible notes to
investors in the amount of approximately $ 5,800 (see Note 11).
Management believes that the abovementioned round of financing
and anticipated cash flows from operations will enable the
Company to finance its operations at least through December 31,
2005.
c. 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.
d. As for major customers, see Note 15.
e. In 2003, the Company changed the estimated useful life of the
remaining intangible assets associated with its Aircraft Test
Systems Programs Sets ("TPSs") from a range of eight to eighteen
years to a range of five to ten years. The effect of the change
in estimated useful life of these assets on the net income and
net income per share for the years ended December 31, 2004 and
2003 resulted in a decrease of $ 221 (or $ 0.01 per share) and
$ 136 (or $ 0.01 per share), respectively.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles. The significant
accounting policies followed in the preparation of the financial
statements, applied on a consistent basis, are as follows:
a. Use of estimates:
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
F-9
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
b. Financial statements in U.S. dollars:
Most of the revenues of the Company and its subsidiary are
generated in U.S. dollars ("dollar"). In addition, a substantial
portion of the costs of the Company and its subsidiary is
incurred in dollars. The Company's management believes that the
dollar is the primary currency of the economic environment in
which the Company operates. Thus, the functional and reporting
currency of the Company is the dollar.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into U.S. dollars in accordance
with Statement of the Financial Accounting Standard Board No. 52,
"Foreign Currency Translation" ("SFAS No. 52"). All transaction
gains and losses of the remeasured monetary balance sheet items
are reflected in the statement of operations as financial income
or expenses, as appropriate. The representative exchange rate at
December 31, 2004 was U.S. $ 1.00 = NIS 4.308 (December 31, 2003
- NIS 4.379).
c. Basis of consolidation:
The consolidated financial statements include the accounts of the
Company and its subsidiary. Inter-company transactions and
balances have been eliminated upon consolidation.
d. Cash equivalents and restricted cash:
All highly liquid investments that are readily convertible to
cash and are not restricted as to withdrawal or use and the
period to maturity of which did not exceed three months at time
of deposit, are considered cash equivalents.
Restricted cash is invested in a long-term bank deposit, which is
used as security for the Company's guarantees to customers. The
deposit is in U.S. dollars and bears interest at an average rate
of 2.3%
e. Inventories:
Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising from
slow-moving items, excess inventories, and for market prices
lower than cost. As for write-offs included in these financial
statements, see Note 4.
Cost is determined as follows:
Raw materials and components - using the "first-in, first-out"
cost method.
Work in progress and finished goods - represents the cost of
manufacturing with the addition of allocable indirect
manufacturing costs.
Amounts related to long-term contracts as determined by the
percentage of completion method of accounting are recorded as
"Costs and estimated earnings in excess of billings."
F-10
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
f. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation. Depreciation is calculated by the straight-line
method over the estimated useful lives of the assets. Annual
rates of depreciation are as follows:
%
------------
Factory and other buildings 2.5 - 4
Machinery and equipment 10 - 15, 33
Office furniture and equipment 6 - 15
Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease period.
Assets in respect of which investment grants have been received,
are presented at cost less the related grant amount. Depreciation
is based on net cost.
g. Intangible assets:
Capitalized software costs are amortized by the greater of the
amount computed using the: (i) ratio of current gross revenues
from sales of the software to the total of current and
anticipated future gross revenues from sales of that software, or
(ii) the straight-line method over the estimated useful life of
the product. The Company assesses the recoverability of these
intangible assets on a regular basis by determining whether the
amortization of the asset over its remaining life can be
recovered through undiscounted future operating cash flows from
the specific software product sold. As for impairment charges
included in these financial statements, see Note 7.
h. Impairment of long-lived assets:
The Company's long-lived assets are reviewed for impairment in
accordance with Statement of Financial Accounting Standards No.
144" Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") whenever events or changes in
circumstances indicate that the carrying amount of the assets may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an assets
to the future undiscounted cash flows expected to be generated by
the assets. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets. As for write-down charges included in these financial
statements, see Note 6.
i. Research and development costs:
Statement of Financial Accounting Standards No. 86, "Accounting
for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", ("SFAS No. 86") requires capitalization of
certain software development, costs subsequent to the
establishment of technological feasibility. Based on the
Company's product development process, technological feasibility
is established upon completion of a working model.
F-11
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Research and development costs incurred in the process of
developing product masters, product enhancements and the
Company's Test System Programs Sets ("TPS") software library,
integrated with the Company's test station, are charged to
expenses as incurred.
Costs incurred by the Company between completion of the working
model and the point at which the product is ready for general
release, have been capitalized.
j. Income taxes:
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standard No. 109, "Accounting
for Income Taxes" ("SFAS 109"). This statement prescribes the use
of the liability method whereby deferred tax assets and liability
account balances are determined based on differences between
financial reporting and tax based assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. The Company
provides a valuation allowance, if necessary, to reduce deferred
tax assets to their estimated realizable value.
k. Severance pay:
The Company's liability for severance pay 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. The Company's liability for all of its Israeli employees
is partly provided by monthly deposits for insurance policies
and/or pension funds and by an accrual. The value of these
policies is recorded as an asset in the Company's balance sheet.
The deposited funds of the Company's employees include profits
accumulated up to the balance sheet date. The deposited funds may
be withdrawn only upon the fulfillment of the obligation pursuant
to Israeli severance pay law or labor agreements. The value of
the deposited funds is based on the cash surrendered value of
these policies, and includes immaterial profits.
Severance expenses recorded in the statement of operations is net
of interest and other income accumulated in the deposits.
Severance expenses for the years ended December 31, 2004, 2003
and 2002 amounted to $ 76, $ 132 and $ 541, respectively.
l. Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating fair value and disclosures for financial instruments.
The carrying amount of cash and cash equivalents, trade
receivables, short-term bank credit, long-term deposits and trade
payables approximate their fair value due to the short-term
maturity of these instruments.
Long-term loans and convertible notes are estimated by
discounting the future cash flows using current interest rates
for loans of similar terms and maturities. The carrying amount of
the long-term loans and convertible notes approximate their fair
value.
F-12
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
m. Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, long-term deposit, trade receivables and
long-term receivables.
The Company's cash and cash equivalents and long-term deposit are
mainly held in U.S. dollars with major banks in Israel.
Management believes that the financial institutions that hold the
Company's investments are financially sound and, accordingly,
minimal credit risk exists with respect to these investments.
The Company's trade receivables are derived from sales to large
and solid organizations located mainly in the United States,
Europe and Israel. The Company performs ongoing credit
evaluations of its customers and to date has not experienced any
material losses. An allowance for doubtful accounts is determined
with respect to these amounts that the Company has determined to
be doubtful of collection. The allowance is computed for specific
debts and the collectibility is determined based upon the
Company's experience. The Company granted loans in prior years to
its former CEO and a former officer amounting to approximately $
983 as of December 31, 2004 and 2003. These loans are unsecured
and the Company is currently in litigation with these officers
regarding such loans. If the Company's claims for recovery of the
loans will be dismissed, the Company will incur a loss equal to
the amount of the loans, net of the respective provision against
these loans. See also Note 10a (1) for additional information
about the various legal proceedings with the former CEO and
officer.
The Company has no off-balance sheet credit risks.
n. Warranty:
In connection with the sale of its products, the Company provides
product warranties for periods between one to two years. Based on
past experience and engineering estimates, the liability from
these warranties is immaterial at balance sheet date.
o. Share based compensation:
The Company accounts for employee stock based compensation under
the intrinsic value model in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and FASB Interpretation No. 44, "Accounting
for Certain Transactions Involving Stock Compensation" ("FIN No.
44"). In accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), the Company discloses
pro forma data assuming the group had accounted for employee
stock option grants using the fair value-based method defined in
SFAS No. 123.
Pro forma information regarding the Company's net loss and net
loss 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.
The following table illustrates the effect on net loss and net
loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee
compensation.
F-13
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Year ended December 31,
-------------------------------------
2004 2003 2002
----------- ----------- -----------
Net income (loss), as reported $ 822 $ 758 $ (2,483)
Add: Stock-based employee compensation
included in reported net income (loss) - - -
Deduct: Total stock-based employee
compensation expense under fair value
based methods (73) (58) -
--------- --------- ---------
Pro forma net income (loss) $ 749 $ 700 $ (2,483)
========= ========= =========
Basic and diluted net income (loss) per share:
Basic net income (loss) per share as reported $ 0.04 $ 0.04 $ (0.15)
Pro forma basic net income (loss) per share $ 0.04 $ 0.04 $ (0.15)
Basic net income (loss) per share as reported $ 0.03 $ 0.04 $ (0.15)
Pro forma basic net income (loss) per share $ 0.03 $ 0.04 $ (0.15)
The fair value for options granted in 2004, 2003 and 2002 was
estimated at the date of grant using a Black-Scholes options
pricing model with the following weighted average assumptions:
Year ended December 31,
-----------------------------------
2004 2003 2002
----------- ----------- ---------
Expected life of option 2 years 2 years 2 years
Dividend yield 0% 0% 0%
Expected volatility 68% 31% 24%
Risk-free interest rate 2.6% 1.0% 2.0%
The Company applies SFAS No. 123 and Emerging Issues Task Force
No. 96-18 "Accounting for Equity Instruments That Are Issued to
Other Than Employees for "Acquiring, or in Conjunction with
Selling, Goods or Services" ("EITF 96-18"), with respect to
options and warrants issued to non-employees. SFAS No. 123
requires the use of option valuation models to measure the fair
value of the options and warrants at the measurement date.
p. Revenue recognition:
The Company generates revenues mainly from the sale of products
and from long-term fixed price contracts for ATE, avionics and
ground debriefing systems. In addition, the Company leases ATE
and provides manufacturing, development and product support
services.
F-14
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Product revenues:
The Company recognizes revenue from sales of products and
aircraft spare parts in accordance with Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition". Product revenue is
recognized when there is persuasive evidence of an arrangement,
the fee is fixed or determinable, delivery of the product to the
customer has occurred and the Company has determined that
collection of the fee is probable. If the product requires
specific customer acceptance, revenue is deferred until customer
acceptance occurs or the acceptance provisions lapse, unless the
Company can objectively and reliably demonstrate that the
criteria specified in the acceptance provisions are satisfied.
Revenues from certain long-term fixed price contracts are
recognized in accordance with Statement of Position No. 81-1,
"Accounting for Performance of Construction - Type and Certain
Production - Type Contracts" ("SOP 81-1"), using contract
accounting on a percentage of completion method in accordance
with the "Input Method". The percentage of completion is
determined based on the ratio of actual costs incurred to total
costs estimated to be incurred over the duration of the contract.
With regard to contracts for which a loss is anticipated, a
provision is made for the entire amount of the estimated loss at
the time such loss becomes evident. As of December 31, 2004, the
estimated losses identified are $ 392. Estimated gross profit or
loss from long-term contracts may change due to changes in
estimates resulting from differences between actual performance
and original forecasts. Such changes in estimated gross profit or
loss are recorded in results of operations when they are
reasonably determinable by management, on a cumulative catch-up
basis.
The Company believes that the use of the percentage of completion
method is appropriate as the Company has the ability to make
reasonably dependable estimates of the extent of progress towards
completion, contract revenues and contract costs. In addition,
contracts executed include provisions that clearly specify the
enforceable rights regarding services to be provided and received
by the parties to the contracts, the consideration to be
exchanged and the manner and terms of settlement. In all cases
the Company expects to perform its contractual obligations and
its licensees are expected to satisfy their obligations under the
contract.
According to SOP 81-1, costs that are incurred and are directly
associated with a specific anticipated contract are being
deferred, subject to evaluation of their probable recoverability,
and recorded as unbilled contract costs.
Revenues from certain arrangements may include multiple elements
within a single contract. The Company's accounting policy
complies with the provisions of Emerging Issues Task Force Issue
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF
00-21"), relating to the separation of multiple deliverables into
individual accounting units with determinable fair value. The
Company's arrangements are accounted for as one unit of
accounting since there is no objective and reliable evidence of
fair value of the undelivered elements in the contract. When the
undelivered elements are not essential to the functionality of
the delivered elements, revenues are recognized for the delivered
element when the respective fee is payable and noncontingent and
all other revenue recognition criteria are met.
F-15
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
Service revenues:
Revenues from services are recognized as the services are
performed.
Revenue under operating leases of equipment are recognized
ratably over the lease period, in accordance with Statement of
Financial Accounting Standard No. 13, "Accounting for Leases"
("SFAS No. 13").
Deferred revenues include unearned amounts received under
services contracts, and amounts received from customers but not
yet recognized as revenues.
q. Basic and diluted net income (loss) per share:
Basic net income (loss) per share is computed based on the
weighted average number of Ordinary shares outstanding during
each year. Diluted net income (loss) per share is computed based
on the weighted average number of Ordinary shares outstanding
during each year, plus dilutive potential Ordinary shares
considered outstanding during the year in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings
Per Share". Options and warrants to purchase 16,005,112,
14,862,237 and 13,718,037 Ordinary shares have been excluded from
the computation of diluted net income (loss) per share for the
years ended December 31, 2004, 2003 and 2002, respectively,
because their effect is anti-dilutive for all periods presented.
r. Recently issued accounting pronouncements:
SFAS No. 123 (Revised 2004) Share-based Payment
On December 16, 2004, the FASB issued Statement No. 123 (revised
2004), Share-Based Payment ("Statement 123(R)"), which is a
revision of FASB Statement No. 123, Accounting for Stock-Based
Compensation ("Statement 123"). Generally, the approach in
Statement 123(R) is similar to the approach described in
Statement 123. However, Statements 123 permitted, but not
required, share-based payments to employees to be recognized
based on their fair values while Statement 123(R) requires all
share-based payments to employees to be recognized based on their
fair values. Statement 123(R) also revises, clarifies and expands
guidance in several areas, including measuring fair value,
classifying an award as equity or as a liability and attributing
compensation cost to reporting periods. The new standard will be
effective for the Company in the first interim period beginning
after June 15, 2005 (July 1, 2005 for the Company). The Company
does not expect this Statement to have a material effect on the
Company's financial statements or its results of operations in
future periods.
F-16
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
FAS 151 Inventory Costs - an amendment of ARB 43, Chapter 4:
In November 2004, the FASB issued Statement of Financial
Accounting Standard No. 151, "Inventory Costs, an Amendment of
ARB No. 43, Chapter 4". ("SFAS 151"). SFAS 151 amends Accounting
Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that
abnormal amounts of idle facility expense, freight handling costs
and wasted materials (spoilage) should be recognized as
current-period charges. In addition, SFAS 151 requires that the
allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production
facilities. SFAS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005 (January 1,
2006 for the Company). The provisions of this Statement shall be
applied prospectively. The Company does not expect this Statement
to have a material effect on its financial statements or its
results of operations.
FAS 153 Exchanges of Nonmonetary Assets - An Amendment of APB
Opinion No. 29:
In December 2004, the FASB issued Statement of Financial
Accounting Standard No. 153, Exchanges of Nonmonetary Assets, an
Amendment of APB Opinion No. 29 ("SFAS 153"). The guidance in APB
Opinion No. 29, Accounting for Nonmonetary Transactions ("APB
29"), is based on the principle that exchanges of nonmonetary
assets should be measured based on the fair value of the assets
exchanged. APB 29 includes certain exceptions to that principle.
SFAS 153 amends APB 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not
have a commercial substance. A nonmonetary exchange has
commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange.
SFAS 153 is effective for nonmonetary assets exchanges occurring
in fiscal periods beginning after June 15, 2005. The Company does
not expect that the adoption of SFAS 153 will have a material
effect on its financial position or results of operations.
F-17
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
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:
December 31,
------------------------
2004 2003
---------- ----------
Costs incurred on uncompleted contracts $ 5,774 $ 862
Estimated earnings 50 324
---------- ----------
5,824 1,186
Less - billings and progress payments 4,439 1,010
---------- ----------
$ 1,385 $ 176
========== ==========
b. Billings in excess of costs and estimated earnings on uncompleted
contracts:
December 31,
---------------------
2004 2003
--------- ---------
Costs incurred on uncompleted contracts $ 4,336 $ 3,711
Estimated earnings 1,454 1,019
--------- ---------
5,790 4,730
Less - billings and progress payments 6,855 6,566
--------- ---------
$ (1,065) $ (1,836)
========= =========
NOTE 4:- INVENTORIES
December 31,
---------------------------
2004 2003
---------- ----------
Raw materials and components $ 1,178 $ 668
Work in progress 447 112
Finished goods 199 93
---------- ----------
$ 1,824 $ 873
========== ==========
Write-down of inventories for the years ended December 31, 2004, 2003
and 2002 amounted to $ 0, $ 0 and $ 623, respectively. The write-down
in 2002 was due to excess and slow moving inventories and was included
in cost of revenues.
F-18
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 5:- LONG-TERM RECEIVABLES
December 31,
---------------------------
2004 2003
---------- ----------
Loan to former chief executive officer *) $ 705 $ 705
Loan to a former officer *) 278 278
Loans to employees 5 7
---------- ----------
$ 988 $ 990
========== ==========
*) See also Note 10a.
NOTE 6:- PROPERTY, PLANT AND EQUIPMENT, NET
December 31,
---------------------------
2004 2003
---------- ----------
Cost:
Factory building $ 1,940 $ 1,940
Other building 1,042 1,042
Machinery and equipment 13,321 13,044
Office furniture and equipment 512 459
Leasehold improvements 23 20
---------- ----------
16,838 16,505
---------- ----------
Accumulated depreciation:
Factory building 1,203 1,132
Other building 219 175
Machinery and equipment 10,779 10,145
Office furniture and equipment 334 305
Leasehold improvements 20 20
---------- ----------
12,555 11,777
---------- ----------
Depreciated cost $ 4,283 $ 4,728
========== ==========
The Company's factory building in Beit-She'an, Israel, is located on
land leased from the Israel Lands Administration until the year
2034.
Depreciation expenses were $ 778, $ 932 and $ 918 for the years
ended December 31, 2004, 2003 and 2002, respectively. Write-down of
property and equipment, which is not in use by the Company, was $ 0,
$ 0 and $ 490 for the years ended December 31, 2004, 2003 and 2002,
respectively. The write-downs were included in cost of revenues.
As for charges, see Note 10e.
F-19
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 7:- INTANGIBLE ASSETS, NET
December 31,
---------------------------
2004 2003
---------- ----------
Test Systems Programs Sets:
Cost $ 8,275 $ 8,275
Less - accumulated amortization 6,566 6,288
---------- ----------
Amortized cost $ 1,709 $ 1,987
========== ==========
Amortization expenses were $ 278, $ 382 and $ 730 for the years ended
December 31, 2004, 2003 and 2002, respectively. The expected
amortization expenses in the next five years are approximately as
follows:
2005 $ 275
2006 275
2007 275
2008 177
2009 177
------
$1,179
======
Impairment of intangible assets was $ 0, $ 758 and $ 251 for the years
ended December 31, 2004, 2003 and 2002, respectively included in cost
of revenues. The impairment was recorded in prior years since the
Company did not anticipate future revenues on specific Test Systems
Program Sets ("TPSs"). The weighted average useful life of the
intangible assets is six years.
NOTE 8:- SHORT-TERM BANK CREDIT AND LOANS
December 31,
-------------------------
2004 2003
---------- ----------
Short-term:
Current maturities of long-term loan
in U.S. dollars (1) $ - $ 180
Short-term bank credit in NIS (2) 14 943
---------- ----------
$ 14 $ 1,123
========== ==========
Long-term:
Loans in U.S. dollars (1) $ - $ 1,220
========== ==========
(1) The interest rate at December 31, 2003 is 4.25%-5.13%. The
weighted average interest rate as of December 31, 2003 - 4.25 %.
(2) The interest rate at December 31, 2004 is 11.7% (December 31,
2003 - 8%).
During 2003, the Company restructured a portion of its debt with the
banks (see Note 11c).
The total authorized credit line of the Company at December 31, 2004
is $4,123.
As for collateral, see Note 10e.
F-20
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 9:- OTHER PAYABLES AND ACCRUED EXPENSES
December 31,
---------------------------
2004 2003
---------- ----------
Payroll and related accruals $ 969 $ 860
Provision for legal proceedings 567 748
Accrued royalties 679 644
Accrued commissions 480 491
Contracts in progress - provision
for estimated losses 392 -
Other 525 574
---------- ----------
$ 3,612 $ 3,317
========== ==========
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
a. As of December 31, 2004, the Company was a party to various legal
proceedings, including the following:
1. In June 1998, the Company's Board of Directors accepted the
resignation of the Company's former CEO. In December 1998,
the former CEO commenced legal proceedings against the
Company in the Tel Aviv Labor Court, claiming approximately
$ 500 in respect of salary, severance pay, vacation pay and
other fringe benefits. The former CEO also claimed that a
personal loan that was provided to him by the Company had
been forgiven and that the Company is to bear the tax in
respect thereof. In May 2001, an additional claim of
approximately $ 230 was filed by the former CEO against the
Company in the Tel-Aviv District Court for damages allegedly
caused to him as a result of attachment imposed on certain
of his assets by the Company that was subsequently cancelled
by the Court. In addition, in 2001, the Company filed a
claim against a former director. In the event the former
CEO's claim in the Labor Court is accepted by the Court,
damages in the amount of $ 250 should be covered by the
former director. The Company filed additional lawsuits
against the former CEO and a former director in the amount
of $ 250 for funds that they allegedly transferred from the
Company to a third party. In September 1999, the Company
filed a lawsuit against the former CEO and the former
director with the District Court of Tel Aviv in the amount
of $ 1,400 for damages caused to the Company in the purchase
of a subsidiary and negligence of management. In August
2000, the Company filed an additional lawsuit against the
former CEO in the amount of approximately $ 460 regarding
the repayment of the loan provided to him. Management
believes, based on the advice of its legal counsel, that the
Company has valid defenses against all claims made against
it.
2. In 1999 and 2000, the former CEO and his son filed a number
of complaints against the Company's president and are
seeking damages for alleged slander by the defendant in the
amount of approximately $ 750. The claim by the former CEO
was withdrawn and replaced by a new claim filed in 2004,
while his son's claim was dismissed and an appeal is pending
in the Supreme Court. Management believes, based on the
advice of its legal counsel, that the Company has strong
defenses against the allegations and accordingly did not
record any provision.
F-21
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
3. In 2001, a former employee and officer of the Company filed
a claim against the Company with the Tel Aviv Labor Court
claiming approximately $ 580 in respect of severance pay,
vacation pay and other fringe benefits. This claim was filed
as a counter-claim to a claim filed by the Company in 2000,
in the amount of $ 300 in respect of the repayment of a
personal loan that was provided to the former employee.
Management believes based on its legal counsel advice that
the Company has a strong defense against the employee's
counter-claim and accordingly did not record any provision.
4. In 2001, a former director filed a claim against the
Company, claiming that he is entitled to 600,000 options to
purchase Ordinary shares of the Company. Management believes
based on its legal counsel advice that the claim does not
have any merit and accordingly did not recorded any
provision.
5. In 2002, a claim was filed by an individual against the
Company, claiming that he served as a broker in an agreement
signed between the Company and a customer and is entitled to
commissions (or finder's fee) in the amount of $ 250.
Management believes based on its legal counsel advice that
the Company has a strong defense against the allegations.
6. The Company is involved from time to time in various legal
claims in the ordinary course of business, including claims
by agents and others for commissions, royalties and others
The Company has accrued an amount which it believes is
sufficient to cover any damages, if any, that may result
from these claims. The Company's management, based on the
advice of its legal counsel, believes that such claims will
not have a material adverse effect on the financial position
or results of operations of the Company.
b. The Company's research and development efforts have been
partially financed through royalty-bearing programs sponsored by
the Office of the Chief Scientist of the Ministry of Industry and
Trade of Israel ("OCS"). In return for the OCS's participation,
the Company is committed to pay royalties at a rate ranging from
3% to 5% of sales of the products supported by the OCS, up to
100% of the amount of such participation received linked to the
U.S. dollar. The obligation to pay these royalties is contingent
on actual sales of the products and in the absence of such sales,
no payment is required. The Company's total obligation for
royalties, net of royalties paid or accrued totaled approximately
$ 641 as of December 31, 2004.
The total amount of royalties charged to operations in the years
ended December 31, 2004, 2003 and 2002 was approximately $ 60, $
73 and $ 98, respectively.
c. Research and development projects undertaken by the Company were
partially financed by the Binational Industrial Research and
Development Fund ("BIRD") Foundation. The Company is committed to
pay royalties to the BIRD Foundation at a rate of 5% of sales
proceeds generating from projects for which the BIRD Foundation
provided funding up to 150% of the sum financed by the BIRD
Foundation. The Company's total obligation for royalties, net of
royalties paid or accrued, totaled approximately $ 1,958 as of
December 31, 2004. The obligation to pay these royalties is
contingent on actual sales of the products and in the absence of
such sales, no payment is required.
F-22
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
The total amount of royalties charged to operations for the years
ended December 31, 2004, 2003 and 2002 was approximately $ 20, $
15 and $ 13, respectively.
d. The Netanya offices of the Company are rented under a
non-cancelable operating lease expiring January 31, 2006 and
there is an option to renew it again, until January 2008. In
addition, certain of the Company's vehicles and computers are
under operating leases. Annual minimum future rental commitments
under these leases, at exchange rates in effect on December 31,
2004, are approximately as follows:
2005 $ 468
2006 306
2007 235
-------
$ 1,009
=======
Lease expenses for the years ended December 31, 2004, 2003 and
2002 were $ 508, $ 447 and $ 277, respectively.
e. Floating charges have been registered on all of the Company's
assets and specific charges have been registered on certain
assets in respect of the Company's liabilities to its banks and
other creditors.
f. The Company obtains mainly short-term bank guarantees to its
customers in the ordinary course of business. These guarantees
are provided to customers to secure advances received at
commencement of a project or to secure performance of operational
milestones. The total amount of bank guarantees provided to
customers as of December 31, 2004 is approximately $ 4,123.
NOTE 11:- SHAREHOLDERS' EQUITY
a. Share capital:
Ordinary shares confer upon their holders voting rights, the
right to receive cash dividends and the right to share in excess
assets upon liquidation of the Company.
In July 2004, the Company issued 1,800,000 shares, an aggregate
of $3,000 principal amount of convertible notes, additional
investment rights to purchase up to an aggregate of 1,100,000
Ordinary shares at an exercise price of $ 2.10 per share, (with a
term of two years commencing six months following the closing)
and warrants to purchase up to an aggregate of 937,500 Ordinary
shares at an exercise price of $ 2.50 per share (for a term of
five years commencing six months following the closing) .to
investors in a private placement for a total consideration of $
5,880 ($ 5,712 net of issuance expenses) (see also c. below). The
consideration was allocated based on the relative fair values of
the Ordinary shares, notes and warrants in accordance with APB
No. 14, "Accounting for Convertible Debt and Debt Issued with
Stock Purchase Warrants". The convertible notes bear interest at
a rate of six-month LIBOR plus 2.5%. The principal is due in July
2007 and the interest is payable in quarterly installments until
July 2007. The notes are convertible to Ordinary shares at a
conversion price of $ 2.10. In connection with the issuance of
the notes, additional of investment rights and warrant, $180 was
recorded as a beneficial conversion feature in accordance with
EITF 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or
F-23
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)
Contingently Adjustable Conversion Ratios". The total amount of
the deemed discount on the notes as a result of the warrants
issuance and the beneficial conversion feature amounting to $
760, is amortized over the term of the notes using the interest
method. At December 31, 2004, the unamortized balance on the
deemed discount on the convertible notes was $ 654. The fair
value of the warrants (including additional investment rights)
was based on a valuation prepared using the Black-Scholes pricing
model assuming a risk free interest of 2.64% and 3.69%,
respectively, a volatility factor of 0.67 and 0.68, respectively,
dividend yield of 0% and contractual life of two years and five
years, respectively. In addition, the valuation considered that
the warrants were restricted for the first six months, the
warrants were not traded on the market at any time, and the
underlying asset had low marketability. The valuation result was
judged to be reasonable by comparison to benchmarks in similar
circumstances. The Company's management is responsible for the
valuation.
Costs incurred with respect to the issuance of the convertible
notes of $69 have been recorded as deferred charges and are
amortized as financial expenses over the term of the notes using
the interest method.
In June 2002, the Company issued 1,938,775 Ordinary shares in a
private placement to certain investors in consideration for an
aggregate amount of $ 950 ($ 835, net of issuance expenses). The
shares were issued at a 30% discount from the Ordinary share
price on NASDAQ at the date of issuance, which was deemed to be
the fair value of a "restricted" Ordinary share. See (c). below
for warrants issued to investors.
In June 2002, the Company issued 2,755,102 Ordinary shares in a
private placement to a shareholder in consideration for
conversion of a loan that was given to the Company in the amount
of $ 1,350. The shares were issued at the same price as the
shares issued in the 2002 private placement described above. See
(c). below for warrants issued to a shareholder.
b. Stock option plans:
In 1996, 1999 and 2003, the Company's Board of Directors approved
the adoption of Employee Stock Option Plans (the "Plans"), which
authorized the grant of options to purchase up to an aggregate of
240,000, 1,040,000 and 2,000,000 Ordinary shares, respectively,
to officers, directors, consultants and key employees of the
Company and its subsidiary. Options granted under the Plans
expire within a maximum of ten years from adoption of the plan.
Options granted under the Company's Plans vest ratably over three
years, one third on each anniversary of the grant.
The exercise price of an option granted to an employee may not be
less than 60% of the fair market value of the Ordinary shares on
the date of grant of the option. The exercise price of an option
granted to a non-employee director or consultant may not be less
than 80% of the fair market value of the Ordinary shares on the
date of grant of the option. Any options that are cancelled or
forfeited before expiration, become available for future grants.
At December 31, 2004, 226,032 options were available for grant
under the Plans described above.
F-24
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)
In 2003, the Company granted suppliers/consultants, options to
purchase 100,000 Ordinary shares at an exercise price ranging
from $ 0.69 - $ 2.00. At the grant date, the fair value of the
options was determined using the Black and Scholes pricing model
assuming a risk free rate of 1%, a volatility factor ranging from
30% to 70%, dividend yield of 0% and a contractual life of two to
five years. In relation to the options, the Company recorded $ 14
as operating expenses.
Transactions related to the above Plans (including warrants to
directors) during the years ended December 31, 2004, 2003 and
2002 were as follows:
Year ended December 31,
---------------------------------------------------------------
2004 2003 2002
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Amount average Amount average Amount average
of exercise of exercise of exercise
options price options price options price
---------- --------- ---------- --------- ---------- ---------
Options outstanding
at beginning
of year 2,223,200 $ 1.60 526,000 $ 4.89 1,638,000 $ 5.48
Granted 100,000 $ 1.29 1,852,000 $ 1.07 - $ -
Exercised (73,335) $ 0.69 - $ - - $ -
Expired (36,400) $ 4.58 - $ - - $ -
Forfeited or $ 5.76
cancelled (182,032) $ 1.89 (154,800) $ 6.34 (1,112,000)
---------- --------- ----------
Options
outstanding at
end of year 2,031,433 $ 1.56 2,223,200 $ 1.60 526,000 $ 4.89
========= ======= ========= ======= ========== =======
Exercisable
options at end
of year 1,425,434 $ 1.71 1,045,200 $ 2.23 411,600 $ 4.85
========= ======= ========= ======= ========== =======
No options were granted in 2002. No compensation expense was
recorded for the years ended December 31, 2004, 2003 and 2002.
The options outstanding as of December 31, 2004 have been
separated into ranges of exercise price, as follows:
Options outstanding Options exercisable
---------------------------------------- --------------------------
Weighted
At average Weighted Weighted
Range of December remaining average At average
exercise 31, contractual exercise December 31, exercise
price 2004 life price 2004 price
-------------- ------------ ----------- ------------- -------------- ----------
(years)
-----------
$ 0.69 - 1.00 685,500 9.00 $ 0.70 522,501 $ 0.70
$ 1.29 - 2.00 1,082,333 8.95 $ 1.37 639,333 $ 1.38
$ 3.09 - 4.13 135,600 5.46 $ 3.52 135,600 $ 3.52
$ 4.88 - 6.75 128,000 5.49 $ 5.63 128,000 $ 5.63
--------- ---------
2,031,433 $ 1.56 1,425,434 $ 1.71
========= ======== ========= ========
F-25
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)
c. Warrants:
As of December 31, 2004, warrants to purchase 19,486,840 Ordinary
shares were outstanding.
In July 2004, in connection with the issuance of Ordinary shares
and convertible notes described in a. above, the Company granted
the investors additional investment rights to purchase up to an
aggregate of 1,100,000 Ordinary shares at an exercise price of $
2.10 per share, (with a term of two years commencing six months
following the closing) and warrants to purchase up to an
aggregate of 937,500 Ordinary shares at an exercise price of $
2.50 per share (for a term of five years commencing six months
following the closing).
In September 2003, the Company signed an agreement with Bank
Hapoalim B.M. and Bank Leumi Le-Israel B.M. (the "Banks") to
restructure a portion of the debt owed to the Banks. The carrying
value of the restructured debt was $ 3,451. As part of the
restructuring, the Company issued 3,781,995 warrants to the
Banks, paid cash of $ 1,100 and the Banks forgave the remaining
debt. The warrants issued to the Banks have an exercise price
equal to par value of the shares and a term of 2.5 years. The
warrants have a lock-up period of 21 months. The Banks have a put
option to sell the warrants to the Company's major shareholder
for a consideration of $ 1,251. The put option is exercisable by
the Banks only once during the period of 45 days commencing after
the end of the period of 18 months from the date of the
agreement. In addition, the Banks granted the Company's major
shareholder a call option that requires the Banks to sell the
warrants to the shareholder at the exercise price of the put
option with an additional payment equal up to 25% of the increase
in the market share price from the date of the agreement up to a
maximum of $ 0.14 per warrant. The call option may be exercised
by the shareholder during the period of 18 months from the date
of the agreement and during a period of 45 days commencing after
the termination of the put option. In addition, as part of the
restructuring, the Company issued to the Banks 1,100,000 warrants
having an exercise price of $ 2.00 per share, and a term of five
years.
The transaction was recorded in accordance with SFAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt
Restructurings". The above warrants (3,781,995 warrants and
1,100,000 warrants) that were issued to the Banks were recorded
at fair value ($ 1,267, net of issuance expenses). The fair value
of the warrants was based on a valuation prepared at the
consummation date of the transaction. The valuation took into
consideration the long lock-up period and a marketability
discount. The valuation result was judged to be reasonable by
comparison to benchmarks in similar circumstances. The Company's
management is responsible for the valuation.
The difference between the consideration paid to the Banks (cash
and warrants) and the carrying amount of the debt of $ 1,013, was
recognized as a gain on restructuring of debt, net of issuance
expenses, presented in financial income (expenses), net, in the
statement of operations.
In June 2002, in connection with the private placement described
in a. above, the investors were issued warrants to purchase
4,302,041 of the Company's Ordinary shares. Such warrants are
valid for five years and are exercisable during the first 36
months after issuance at an exercise price of $ 2 per share, and
thereafter, during the following 24-month period, at an exercise
price which will be equal to the higher of: (i) $ 2 per share or
(ii) 50% of the average closing price during the ten trading days
prior to the exercise date. The proceeds allocated to the
warrants, based on the relative fair value of the warrants and
shares issued amounted to $ 41.
F-26
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)
In June 2002, in connection with the conversion of a loan that
was given to the Company by a shareholder in the amount of $
1,350 as described in a. above, the Company issued the
shareholder warrants to purchase 8,265,306 Ordinary shares. Such
warrants have the same terms as the warrants described above. The
proceeds allocated to the warrants, based on the relative fair
value of warrants and shares issued amounted to $ 78. The benefit
arising on conversion of the loan amounting to $ 83, was recorded
as interest expense.
The fair value of the warrants described above was estimated
using Black-Scholes option-pricing model with the following
weighted-average assumptions: risk-free interest rate of 2%,
dividend yield of 0%, expected volatility of 24%, and expected
life of warrant of five years.
NOTE 12:- TAXES ON INCOME
a. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured and adjusted in accordance
with the change in the CPI. As explained in Note 2b, the
consolidated financial statements are presented in U.S. dollars.
The differences between the change in the Israeli CPI and in the
NIS/U.S. dollar exchange rate cause a difference between taxable
income or loss and the income or loss before taxes reflected in
the consolidated financial statements. In accordance with
paragraph 9(f) of SFAS No. 109, the Company has not provided
deferred income taxes on this difference between the financial
reporting basis and the tax bases of assets and liabilities.
b. Tax benefits under the Law for the Encouragement of Industry
(Taxes), 1969:
The Company is an "Industrial Company" under the Law for the
Encouragement of Industry. The principal benefit from the above
law is the deduction of expenses in connection with a public
offering.
c. The Company in Israel is subject to tax at the rate of 35% of
taxable income for 2004, 34% for 2005, 32% for 2006 and 30% for
2007 onwards. As of December 31, 2004, the net operating loss
carryforward for tax purposes relating to the Company in Israel
amounted to approximately $ 44,400. Carryforward losses in Israel
may be carried forward indefinitely and may be offset against
future taxable income.
As of December 31, 2004, carryforward losses relating to
non-Israeli companies (U.S. and China), amounted to approximately
$9,750.
As the Company believes that the tax assets in respect of these
carryforward losses amounting to approximately $19,000 are not
more likely than not to be realized, the Company has recorded a
valuation allowance in respect of the entire amount of the
deferred tax asset relating to the carryforward losses.
F-27
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 12:- TAXES ON INCOME (Cont.)
d. Income (loss) before income taxes:
Year ended December 31,
-----------------------------------------
2004 2003 2002
------------ ------------ -----------
Domestic $ 937 $ 867 $ (2,175)
Foreign (115) (109) (308)
------------ ------------ -----------
$ 822 $ 758 $ (2,483)
============ ============ ===========
e. The main reconciling items between the statutory tax rate of the
Company and the effective tax rate is the valuation allowance
recorded in respect of the tax assets relating to net operating
loss carryforwards and other temporary differences due to the
uncertainty of the realization of such tax assets.
NOTE 13:- SELECTED STATEMENTS OF OPERATIONS DATA
a. Financial income (expenses), net:
Year ended December 31,
---------------------------------------
2004 2003 2002
--------- --------- --------
Income:
Gain on restructuring of debt, net
(see Note 11c) $ - $ 1,013 $ -
Foreign currency exchange differences 234 - 169
Interest on cash equivalents 4 9 4
--------- --------- --------
238 1,022 173
--------- --------- --------
Expenses:
Interest on convertible note 64 - -
Amortization of beneficial conversion
feature on convertible note 115 - -
Foreign currency exchange differences 79 22 -
Interest on short-term loans and
other credit balances 82 230 253
Bank commissions 116 59 96
Interest to related parties - - 89
Loss on extinguishment of debt - - 83
Others 30 3 16
--------- --------- --------
486 314 537
--------- --------- --------
$ (248) $ 708 $ (364)
========= ========= ========
b. Other income (expenses), net:
Impairment of loan $ - $ - $ (290)
Others, net 23 (2) -
--------- --------- --------
$ 23 $ (2) $ (290)
========= ========= ========
F-28
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 14:- RELATED PARTY TRANSACTIONS
There are no related party balances as of December 31, 2004 and 2003.
Related party transactions reflected in the statement of operations
for the years ended December 31, 2004, 2003 and 2002 are as follows:
Year ended December 31,
--------------------------------
2004 2003 2002
--------- --------- --------
Related party (*):
Revenues $ - $ - $ 394
========= ========= ========
Shareholder:
Interest expense $ - $ - $ 89
========= ========= ========
Loss on extinguishment of loan $ - $ - $ 83
========= ========= ========
(*) A company controlled by a Company shareholder. See also Note 11c.
NOTE 15:- MAJOR CUSTOMERS AND 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:
Year ended December 31,
-------------------------------------
2004 2003 2002
--------- --------- --------
North America $ 4,715 $ 5,115 $ 6,671
Europe 3,022 3,436 1,599
Israel 4,998 3,224 1,442
Others 1,425 540 687
--------- --------- --------
Total $ 14,160 $ 12,315 $ 10,399
========= ========= ========
F-29
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 15:- MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
c. Major customers:
Revenues from single customers that exceed 10% of the total
revenues in the reported years as a percentage of total revenues,
are as follows:
Year ended December 31,
---------------------------------------
2004 2003 2002
----------- ---------- ----------
%
---------------------------------------
Customer A 19 11 *)
Customer B *) 12 *)
Customer C *) 22 34
Customer D 10 14 19
Customer E 11 - -
Customer F 17 19 *)
*) Less than 10%.
d. Long lived assets by geographic areas:
December 31,
------------------------------------
2004 2003 2002
------ ------ ------
Israel $4,718 $5,179 $6,977
China 1,333 1,536 1,761
------ ------ ------
$6,051 $6,715 $8,738
====== ====== ======
F-30
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 16:- NET INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted
net earnings (loss) per share:
Year ended December 31,
----------------------------------------
2004 2003 2002
----------- ------------ -----------
Numerator:
Net income (loss) $ 822 $ 758 $ (2,483)
=========== ========== ==========
Denominator:
Weighted average number of shares of Ordinary
stock outstanding during the year used to
compute basic net income (loss) per share
(in thousands) 19,374 18,511 16,555
Incremental shares attributable to exercise of
outstanding options and warrants (assuming
proceeds would be used to purchase Treasury
stock) (in thousands) 4,310 1,193 -
---------- ---------- ----------
Weighted average number of shares of Ordinary
stock outstanding during the year used to
compute diluted net income (loss) per
share(in thousands) 23,684 19,704 16,555
========== ========== ==========
Basic net income (loss) per share $ 0.04 $ 0.04 $ (0.15)
========== ========== ==========
Diluted net income (loss) per share $ 0.03 $ 0.04 $ (0.15)
========== ========== ==========
NOTE 17:- SUBSEQUENT EVENT
On February 2005, the Company's Board of Directors approved the
purchase of all the assets that are used by, or related to the
operation of Vectop Limited ("Vectop"), an Israeli company
specializing in the design, development, marketing and sale of
electro-optic equipment and debriefing systems business. Vectop's
assets also include know-how, patents and intellectual property to
produce off-the-shelf products such as cameras and video recorders,
which are currently operational onboard aircraft and tanks in Israel
and other countries. The Company purchased Vectops assets for $ 280 in
cash and future consideration based on revenues derived from Vectop
projects. In addition, the Company is assuming $ 800 of Vectop's bank
debt, payable commencing in 2006 over a two-year period, as well as
other operational liabilities.
- - - - - - - - - - - - - - - - - -
F-31
S I G N A T U R E S
-------------------
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
RADA ELECTRONIC INDUSTRIES LTD.
By: /s/Herzle Bodinger
------------------
Name: Herzle Bodinger
Title: President
Dated: September 1, 2005
19