SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
F O R M 6-K
REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16
UNDER THE SECURITIES EXCHANGE ACT OF 1934
For the month of
September 2005
RADA ELECTRONIC INDUSTRIES LIMITED
(Name of Registrant)
7 Giborei Israel Street, Netanya 42504, Israel
(Address of Principal Executive Office)
Indicate by check mark whether the registrant files or will
file annual reports under cover of Form 20-F or Form 40-F.
Form 20-F [X] Form 40-F [ ]
Indicate by check mark if the registrant is submitting the
Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): [ ]
Indicate by check mark if the registrant is submitting the
Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7): [ ]
Indicate by check mark whether by furnishing the information
contained in this Form, the registrant is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the Securities
Exchange Act of 1934.
Yes [ ] No [X]
If "Yes" is marked, indicate below the file number assigned to
the registrant in connection with Rule 12g3-2(b): 82-____________
This Form 6-K is being incorporated by reference into the Company's
Form F-3 Registration Statements File Nos. 333- 12074, 333-115598, 333-117954
and 333-127491.
RADA ELECTRONIC INDUSTRIES LTD.
6-K Items
1. Consolidated Financial Statements of RADA Electronic Industries Ltd.
as of June 30, 2005 and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the six months ended
June 30, 2005.
ITEM 1
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2005
IN U.S. DOLLARS
UNAUDITED
INDEX
Page
----------------
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Statements of Changes in Shareholders' Equity 3
Condensed Consolidated Statements of Cash Flows 4-5
Notes to Condensed Consolidated Financial Statements 6-9
- - - - - - - - - - - - - - - -
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
June 30, December 31,
Note 2005 2004
--------- ----------------- ----------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,573 $ 3,464
Trade receivables (net of allowance for doubtful accounts of $ 221 at
June 30, 2005, unaudited, and December 31, 2004) 3,756 1,643
Other receivables and prepaid expenses 292 208
Costs and estimated earnings in excess of billings on uncompleted
contracts 3 1,344 1,385
Inventories 4 2,780 1,824
----------------- ----------------
Total current assets 9,745 8,524
----- ----------------- ----------------
LONG-TERM RECEIVABLES AND DEPOSITS:
Long-term receivables 983 988
Long-term restricted cash 1,212 1,002
Leasing deposits 92 94
Severance pay fund 1,617 1,638
----------------- ----------------
Total long-term receivables and deposits 3,904 3,722
----- ----------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET 4,237 4,283
----------------- ----------------
OTHER ASSETS:
Intangible assets, net 2,495 1,709
Deferred charges, net 50 59
----------------- ----------------
Total other assets 2,545 1,768
----- ----------------- ----------------
Total assets $ 20,431 $ 18,297
----- ================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit and loans $ 616 $ 14
Trade payables 1,280 1,080
Other payables and accrued expenses 3,095 3,612
Deferred revenues 84 488
Billings in excess of costs and estimated earnings on uncompleted
contracts 3 728 1,065
----------------- ----------------
Total current liabilities 5,803 6,259
----- ----------------- ----------------
LONG-TERM LIABILITIES:
Convertible note 2,451 2,346
Long-term loans 350 -
Accrued severance pay 2,005 2,063
----------------- ----------------
Total long-term liabilities 4,806 4,409
----- ----------------- ----------------
MINORITY INTERESTS 386 397
----------------- ----------------
SHAREHOLDERS' EQUITY:
Share capital
Ordinary shares of NIS 0.005 par value - Authorized: 47,500,000 and
45,000,000 shares at June 30, 2005 and December 31, 2004,
respectively; Issued and outstanding: 22,356,032 and 20,448,364
shares at June 30, 2005 and December 31, 2004, respectively 112 110
Additional paid-in capital 64,541 61,851
Warrants 2,321 2,223
Accumulated deficit (57,538) (56,952)
----------------- ----------------
Total shareholders' equity 9,436 7,232
----- ----------------- ----------------
Total liabilities and shareholders' equity $ 20,431 $ 18,297
----- ================= ================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
1
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data
Six months ended Three months ended Year ended
June 30, June 30, December
-------------------------- -------------------------- 31,
Note 2005 2004 2005 2004 2004
--------- ------------ ------------ ------------ ------------- ---------------
(unaudited) (unaudited)
Revenues: 5
Products $ 5,426 $ 5,210 $ 3,178 $ 4,419 $ 11,123
Services 1,222 1,708 628 814 3,037
------------ ------------ ------------ ------------- ---------------
6,648 6,918 3,806 5,233 14,160
------------ ------------ ------------ ------------- ---------------
Cost of revenues:
Products 4,817 4,360 2,590 3,285 9,111
Services 596 873 290 587 1,176
------------ ------------ ------------ ------------- ---------------
5,413 5,233 2,880 3,872 10,287
------------ ------------ ------------ ------------- ---------------
Gross profit 1,235 1,685 926 1,361 3,873
------------ ------------ ------------ ------------- ---------------
Operating expenses:
Marketing and selling 538 410 360 130 738
General and administrative 997 968 469 444 2,116
------------ ------------ ------------ ------------- ---------------
Total operating expenses 1,535 1,378 829 574 2,854
----- ------------ ------------ ------------ ------------- ---------------
Operating income (loss) (300) 307 97 787 1,019
Financial expense, net (297) (172) (178) (77) (248)
Other income, net - 10 - 5 23
------------ ------------ ------------ ------------- ---------------
(597) 145 (81) 715 794
Minority interests in losses of
subsidiary 11 18 3 8 28
------------ ------------ ------------ ------------- ---------------
Net income (loss) $ (586) $ 163 $ (78) $ 723 $ 822
============ ============ ============ ============= ===============
Income (loss) per share:
Basic income (loss) per share $ (0.03) $ 0.01 $ (0.004) $ 0.04 $ 0.04
============ ============ ============ ============= ===============
Diluted income (loss) per share $ (0.03) $ 0.01 $ (0.004 $ 0.03 $ 0.03
============ ============ ============ ============= ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
STATEMENTS OF CHANGES IN SHARHOLDERS' EQUITY
-------------------------------------------------------------------------------
U.S. dollars in thousands, except share data
Number of Additional Total
Ordinary Share paid-in Accumulated shareholders'
shares capital capital Warrants deficit equity
------------- ------------ ------------ ----------- -------------- --------------
Balance at January 1, 2004 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
Issuance of Ordinary shares
and warrants, net *) 965,934 1 629 376 - 1,006
Exercise of warrants 909,066 1 2,038 (278) - 1,761
Exercise of options 32,668 **) - 23 - - 23
Net loss - - - - (586) (586)
------------- ------------ ------------ ----------- -------------- --------------
Balance at June 30, 2005 22,356,032 $ 112 $ 64,541 $ 2,321 $ (57,538) $ 9,436
(unaudited) ============= ============ ============ =========== ============== ==============
*) Net of issuance expenses of approximately $ 233, and $ 95 for the six
months period ended June 30, 2005 and the year ended December 31, 2004,
respectively.
**) Less than $ 1.
3
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands
-----------------------------
Six Months ended June 30,
-----------------------------
2005 2004
------------ -------------
(unaudited)
Cash flows from operating activities:
-------------------------------------
Net income (loss) $ (586) $ 163
Adjustments required to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 654 402
Minority interests in losses of subsidiary (11) (18)
Accrued interest and translation differences on long-term receivables 5 (11)
Amortization expenses on convertible note 105
Decrease (increase) in trade receivables, net (1,515) 44
Increase in other receivables and prepaid expenses (54) (269)
Increase in costs and estimated earnings in excess of billings, net (296) (293)
Increase in inventories (638) (628)
Increase (decrease) in trade payables (600) 957
Increase (decrease) in other payables and accrued expenses (683) 91
Decrease in deferred revenues (404) (694)
Accrued severance pay, net (37) (38)
------- -------
Net cash used in operating activities (4,060) (294)
------- -------
Cash flows from investing activities:
-------------------------------------
Payment for acquisition of assets of Vectop (a) (1,083) -
Investment in long- term restricted cash (210) -
Purchase of property, plant and equipment (282) -
Investments in leasing deposits 2 (14)
------- -------
Net cash provided by (used in) investing activities (1,573) (14)
------- -------
Cash flows from financing activities:
-------------------------------------
Proceeds from issuance of shares and warrants, net 1,006 -
Proceeds of long-term loan 700 -
Decrease (increase) in short-term bank credits, net 252 (12)
Exercise of warrants 1,761 -
Exercise of options 23 27
------- -------
Net cash provided by financing activities 3,742 15
------- -------
Decrease in cash and cash equivalents (1,891) (293)
Cash and cash equivalents at the beginning of the period 3,464 467
------- -------
Cash and cash equivalents at the end of the period 1,573 174
======= =======
4
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
--------------------------------------------------------------------------------
U.S. dollars in thousands
------------------------------
Six months ended June 30,
------------------------------
2005 2004
--------------- --------------
(unaudited)
(a) Payment for acquisition of assets of Vectop (see also note 5):
Working capital, net $ 20 $ -
Property, plant and equipment (62) -
Intangible assets, net (1,041) -
------------- --------------
$ (1,083) $ -
============= ==============
Supplemental disclosures of cash flow activities:
-------------------------------------------------
Net cash paid during the year for:
Income taxes $ 2 $ 2
============= ===============
Interest $ 198 $ 95
============= ===============
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 1:- GENERAL
a. RADA Electronic Industries Ltd., an Israeli corporation (the
"Company") is engaged in the development, manufacturing and sale
of Automated Test Equipment ("ATE") products, avionics equipment
and aviation data acquisition and debriefing systems.
b. The Company operates a test and repair shop using its ATE
products in Beijing, China through its 80% owned Chinese
subsidiary, Beijing Huari Aircraft Components Maintenance and
Services Co. Ltd. ("CACS" or "subsidiary"). CACS was established
with a third party, which owns the remaining 20% equity interest.
c. 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
Vectop's 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.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The Company's unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information. The significant policies
followed in the preparation of the condensed consolidated financial
statements, applied on 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.
b. Unaudited information:
The consolidated financial statements include the unaudited
consolidated balance sheet as of June 30, 2005, the related
unaudited consolidated statements of operations for the three and
six months ended June 30, 2005 and 2004, unaudited statement of
changes in shareholders' equity for the six month ended June 30,
2005 and cash flows for the six-month periods ended June 30, 2005
and 2004 presented in accordance with accounting principles
generally accepted for interim financial reporting. This
unaudited information has been prepared by the Company on the
same basis as the audited annual consolidated financial
statements and, in management's opinion, reflects all adjustments
(consisting only of normal recurring accruals) necessary for a
fair presentation of the financial information, for the periods
presented. Accordingly, they do not include all of the
information and footnotes required by generally
6
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
accepted accounting principles for audited financial statements.
Results for interim periods are not necessarily indicative of the
results expected for the entire year.
c. 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 income (loss)
and net income (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.
Six months
ended June 30, Year ended
------------------------------- December 31,
2005 2004 2004
-------------- -------------- ----------------
(unaudited)
Net income (loss) as reported $ (586) $ 163 $ 822
Add: Stock-based employee compensation included in
reported net income (loss) - - -
Deduct: Total stock-based employee compensation
expense under fair value based methods (36) (29) (73)
-------------- -------------- ----------------
Pro forma net income (loss) $ (622) $ 134 $ 749
-------------- -------------- ----------------
Basic and diluted net income (loss) per share:
Basic net income (loss) per share as reported $ (0.03) $ 0.01 $ 0.04
Pro forma basic net income (loss) per share $ (0.03) $ 0.01 $ 0.04
Diluted net income (loss) per share as reported $ (0.03) $ 0.01 $ 0.03
Pro forma diluted net income (loss) per share $ (0.03) $ 0.01 $ 0.03
7
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED 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
June 30, December 31,
2005 2004
----------------- ----------------
(unaudited)
Costs incurred on uncompleted contracts $ 5,033 $ 5,774
Estimated earnings (loss) (250) 50
----------------- ----------------
4,783 5,824
Less - billings and progress payments 3,439 4,439
----------------- ----------------
$1,344 $1,385
================= ================
b. Billings in excess of costs and estimated earnings on uncompleted
contracts:
June 30, December 31,
2005 2004
---------------- ----------------
(unaudited)
Costs incurred on uncompleted contracts $ 7,221 $ 4,336
Estimated earnings 678 1,454
---------------- ----------------
7,899 5,790
Less - billings and progress payments 8,627 6,855
---------------- ----------------
$ (728) $ (1,065)
================ ================
NOTE 4:- INVENTORIES
June 30, December 31,
2005 2004
---------------- -----------------
(unaudited)
----------------
Raw materials and components $ 1,850 $ 1,178
Work in progress 776 447
Finished goods 154 199
---------------- -----------------
$ 2,780 $ 1,824
================ =================
8
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 5:- 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:
Six months ended Year ended
June 30, December 31,
--------------------------------- ------------------
2005 2004 2004
--------------- -------------- ------------------
(unaudited)
North America $ 2,220 $ 1,518 $ 4,715
Europe 300 1,961 3,022
Israel 3,394 1,902 4,998
Others 734 1,537 1,425
--------------- -------------- ------------------
Total $ 6,648 $ 6,918 $ 14,160
=============== ============== ==================
9
Management's Discussion and Analysis of Financial Condition and Results of
--------------------------------------------------------------------------------
Operations
----------
This information should be read in conjunction with the condensed
consolidated financial statements and notes included in Item 1 of Part I of this
Quarterly Report and the audited financial statements and notes thereto and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the year ended December 31, 2004 contained in our 2004 Annual
Report on Form 20-F. The discussion and analysis which follows may contain trend
analysis and other forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934 which reflect our current views with
respect to future events and financial results. These include statements
regarding our earnings, projected growth and forecasts, and similar matters that
are not historical facts.
We remind shareholders that forward-looking statements are merely
predictions and therefore are inherently subject to uncertainties and other
factors that could cause the future results to differ materially from those
described in the forward-looking statements.
Overview
We develop, manufacture and sell automated test equipment and avionics
products for military and commercial use mainly in Israel, Europe and the United
States. We also provide test and repair services using our CATS(R) testers and
test program sets through our Chinese subsidiary, CACS. In addition, we provide
manufacturing services to third parties engaged mainly in the avionics market.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the notes to our consolidated financial
statements. These policies have been consistently applied in all material
respects and address such matters as revenue recognition. While the estimates
and judgments associated with the application of these policies may be affected
by different assumptions or conditions, we believe the estimates and judgments
associated with the reported amounts are appropriate in the circumstances.
The significant accounting policies listed in Note 2 of our consolidated
financial statements that we believe are the most critical to aid in fully
understanding and evaluating our financial condition and results of our
operations under generally accepted accounting principles are discussed below.
Intangible Assets. Costs of producing our TPS software library, which is
integrated with our test station, incurred subsequent to achieving technological
feasibility, were capitalized, and are amortized by the greater of the amount
computed using the: (i) ratio that 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. We assess the recoverability of these intangible
assets at each balance sheet date 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 products sold. The use of
different assumptions with respect to the expected cash flows from our assets
and other
10
economic variables may lead to different conclusions regarding the
recoverability of our assets' carrying values and to the potential need to
record an impairment loss for our intangible assets. As of June 30, 2005, no
impairment was required.
Impairment of Long-Lived Assets. We are required to assess the impairment
of long-lived assets whenever events or changes in circumstances indicate that
the carrying value may not be recoverable. We assess the impairment of our
assets based on a number of factors, including any significant changes in the
manner of our use of the respective assets or the strategy of our overall
business and significant negative industry or economic trends. Upon
determination that the carrying value of a long-lived asset may not be
recoverable, based upon a comparison of expected future cash flows (undiscounted
and without interest charges) to the carrying amount of the asset, an impairment
charge is recorded. Under different assumptions with respect to the
recoverability of our long-lived assets, our determination may be different,
which may negatively affect our financial position and results of operations. As
of June 30, 2005, no impairment was required.
Share-Based Compensation. We account for stock-based compensation using the
intrinsic value model. Accordingly, we measure compensation cost as the excess,
if any, of the closing market price of our stock at the date of grant over the
exercise price of the option granted. We recognize compensation cost for stock
options, if any, ratably over the vesting period. We disclose pro forma data
assuming we had accounted for employee stock option grants using the fair
value-based method. We account for options and warrants issued to non-employees.
We use the Black-Scholes option pricing model to value warrants granted to
non-employees. This policy will change effective with our reporting period
beginning January 1, 2006.
Revenue Recognition. Our revenues are derived from sales of automated test
equipment and avionics products and from long-term fixed price contracts for
ATE, avionics and ground debriefing systems. In addition, we lease ATE and
provide manufacturing, development and product support services. 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 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.
Revenues from long-term fixed price contracts are recognized by the
percentage-of-completion method in accordance with the "Input Method." We apply
this method when the total of the costs and revenues of the contract can
reasonably be estimated. 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. 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 determined by management on a cumulative catch-up basis.
11
Revenues from services are recognized when the service is performed.
Revenue under operating leases of equipment are recognized ratably over the
lease period.
Revenues from certain arrangements may include multiple elements within a
single contract. Our accounting policy separates multiple deliverables into
individual accounting units with determinable fair values. Our 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.
Loans to Employees and Provision for Litigation. We have an outstanding
balance of loans due to us from our former chief executive officer and a former
officer. Both officers claim that they are not obliged to repay the loans. There
are pending legal actions between us and each of the former officers concerning,
among other things, the repayment of the loans. According to our legal
consultants, we have a strong case with regard to our claims for repayment of
the outstanding loans. We recorded a provision for the loans receivable in the
amount that we believe is sufficient to reflect the recoverability of the asset,
based on management's estimation. In addition, we have several additional legal
proceedings outstanding. We have recorded provisions for litigation for claims
that were estimable and for which there is a high probability that we will be
held responsible based on our legal consultants' opinions and management's
estimations.
Fair Value of Warrants. In July 2004, we consummated a private placement,
whereby we issued 1,800,000 shares, an aggregate of $3 million principal amount
of convertible notes and warrants (including additional investment rights) to
purchase an aggregate of 2,037,500 ordinary shares to investors for a total
consideration of $5.7 million, net of issuance expenses. The consideration was
allocated based on the respective fair values of the ordinary shares, notes and
warrants. The fair value of the warrants and the additional investment rights
was based on a valuation prepared using the Black-Scholes pricing model. The
valuation result was judged to be reasonable by the Company's management by
comparison to benchmarks in similar circumstances.
Significant Expenses
Cost of Revenues. Cost of revenues consists primarily of manufacturing
costs, depreciation of fixed assets, software development costs, impairment
losses on long-lived assets and amortization of capitalized software.
Marketing, Selling, General and Administrative Expenses. Marketing and
selling expenses consist primarily of expenses for sales and marketing
personnel, sales commissions, marketing activities, public relations,
promotional materials, travel expenses and trade show exhibit expenses. General
and administrative expenses consist primarily of salaries and related expenses
for executive, accounting, administrative personnel, professional fees,
provisions for doubtful accounts, and other general corporate expenses.
12
Financial Income (Expenses), Net. Financial expenses consist of interest and
bank expenses, interest on convertible note, amortization of beneficial
conversion feature on convertible note and currency remeasurement losses.
Financial income consists of interest on cash and cash equivalent balances,
currency remeasurement gains and gain on restructuring of debt.
Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004
Revenues. Revenues decreased by 3.9% to $6.6 million, in the six month
ended June 30, 2005 from $6.9 million in the six months offended June 30, 2004.
We expect a slight increase in revenues in the second half of the year.
Cost of Revenues. Cost of revenues increased by 3.4% to $5.4 million in the
six months ended June 30, 2005 from $5.2 million in the six months ended June
30, 2004. The increase is mainly due to the higher per portion of our revenues
attributable to development programs that have lower profit margins.
Gross Profit. Our gross profit decreased by 26.7% to approximately $1.2
million in the six months ended June 30, 2005 from $1.7 million in the six
months ended June 30, 2004. Our profit margin decreased to 18.6% in the six
months ended June 30, 2005 from 24.3% in the six months ended June 30, 2004. The
decrease in gross margin, is due to the mix between the traditional products
that the company sells and the newer lower margin products which are developed
together with the customer.
Marketing, Selling, General and Administrative Expenses. Marketing,
selling, general and administrative expenses increased by 11.4% to $1.53 million
in the six months ended June 30, 2005 from $1.4 million in the six months ended
June 30, 2004. We are continuing our costs savings measures, but we have
increased our sales efforts in our current and new markets, which has resulted
in increased marketing and selling expenses.
Financial Expenses, Net. Our financial expenses, net were $297,000 in the
six months ended June 30, 2005. In the six months ended June 30, 2004 we had
financial expense of $172,000. The increase in our financial expenses was mainly
due to higher interest rates.
Liquidity and Capital Resources
At June 30, 2005, we had working capital surplus of $3.94 million and cash
and cash equivalents of $1.6 million. As of June 30, 2005 we had long term debt
to our banks of $350,000.
We had capital expenditures of $282,000 in the six months ended June 30,
2005. We currently do not have any significant capital spending or purchase
commitments.
Net cash used in operating activities was $4.1 million in the six months
ended June 30, 2005. This was attributable primarily to our loss of $586,000,
depreciation and amortization of $654,000 and an increase in trade receivables
of $1.5 million, offset by a net increase in costs and estimated earnings in
excess of billings of $296,000, a $638,000 increase in inventories, and a
$404,0000 decrease in deferred revenues. Net cash used in operating activities
was $294,000 in the six months ended June 30, 2004. This was attributable
primarily to our net income of
13
$163,000, depreciation and amortization of $402,000, a net increase in costs and
estimated earnings in excess of billings of $293,000 and a $957,000 increase in
other payables and accrued expenses, $44,000 decrease in trade receivables and a
$694,000 decrease in deferred revenues.
Net cash used in investing activities was approximately $1.6 million in the
six months ended June 30, 2005, and $14,000 in the six months ended June 30,
2004. In 2005 we purchased net assets of $11 million, invested $282,000 in plant
and equipment and invested $210,000 in long-term restricted cash.
Net cash provided by financing activities was $3.7 million in the six
months ended June 30, 2005. This amount was principally in respect of proceeds
of $2.8 million from issuance of shares and warrants and from the exercise of
warrants and a $ 700,000 long-term loan received from the bank.
As of June 30, 2005 there were 20,452,774 warrants outstanding to purchase
20,452,774 of our ordinary shares. Of such warrants, 3,781,995 warrants have an
exercise price of zero (par value) per share, 13,667,345 warrants have an
exercise price of $2.00 per share, 2,065,934 warrants have an exercise price of
$2.1 per share and 937,500 warrants have an exercise price of $2.50 per share.
To the extent any warrants are exercised the proceeds will be added to our
working capital.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
Tabular Disclosure of Contractual Obligations
The following table summarizes our minimum contractual obligations and
commercial commitments, as of June 30, 2005 and the effect we expect them to
have on our liquidity and cash flow in future periods.
Contractual Obligations Payments due by Period
---------------------------------------- --------------------------------------------------------------------
More
Less than 3-5 than 5
Total 1 year 1-3 Years Years years
---------- ------- ---------- ------ -------
Long-term debt obligations ............. $3,151,000 $700,000 $2,451,000 - -
Operating lease obligations............. $636,000 $274,000 $362,000 - -
---------- -------- ---------- ----- ------
Total................................... $3,787,000 $974,000 $2,813,000 - -
In addition, we have long-term liabilities for severance pay that is
calculated pursuant to Israeli severance pay law generally based on the most
recent salary of the employees multiplied by the number of years of employment,
as of the balance sheet date. Employees are entitled to one month's salary for
each year of employment or a portion thereof. As of June 30, 2005 our severance
pay liability was $2.0 million.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Rada Electronic Industries Ltd.
(Registrant)
By: /s/Herzle Bodinger
------------------
Herzle Bodinger, Chairman
Date: September 30, 2005