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 2006
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 Registrant's Form F-3
Registration Statements File Nos. 333-12074, 333-115598, 333-117954, and
333-127491 and Form S-8 Registration Statement File No. 333-111437.
RADA ELECTRONIC INDUSTRIES LTD.
6-K Items
1. Consolidated Financial Statements of RADA Electronic Industries Ltd. as of
June 30, 2006 and Management's Discussion and Analysis of Financial
Condition and Results of Operations for the six months ended June 30, 2006.
ITEM 1
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2006
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
--------------------------------
December 31,
June 30, 2006 2005
-------------- --------------
Unaudited Audited
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,312 $ 350
Restricted cash 1,050 1,017
Trade receivables (net of allowance for doubtful accounts of $ 0 and $ 6
at June 30, 2006 and December 31, 2005, respectively) 1,961 4,920
Other receivables and prepaid expenses 321 156
Costs and estimated earnings in excess of billings on uncompleted contracts 1,229 1,396
Inventories 2,208 1,942
-------- --------
Total current assets 8,081 9,781
----- -------- --------
LONG-TERM RECEIVABLES AND DEPOSITS:
Long-term receivables 983 983
Leasing deposits 77 72
Severance pay fund 1,688 1,614
-------- --------
Total long-term receivables and deposits 2,748 2,669
----- -------- --------
PROPERTY AND EQUIPMENT, NET 3,578 3,931
OTHER ASSETS:
Intangible assets, net 2,210 2,469
Deferred charges, net 30 40
-------- --------
Total other assets 2,240 2,509
----- -------- --------
Total assets $ 16,647 $ 18,890
----- ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank credit and loans $ 943 $ 877
Trade payables 1,867 1,671
Other payables and accrued expenses 3,286 3,217
Deferred revenues - 50
Billings in excess of costs and estimated earnings on uncompleted contracts 182 391
-------- --------
Total current liabilities 6,278 6,206
----- -------- --------
LONG-TERM LIABILITIES:
Convertible note 2,672 2,560
Accrued severance pay 2,077 2,009
-------- --------
Total long-term liabilities 4,749 4,569
----- -------- --------
MINORITY INTERESTS 380 380
-------- --------
SHAREHOLDERS' EQUITY:
Share capital
Ordinary shares of NIS 0.005 par value - Authorized: 47,500,000
shares at March 31, 2006 and December 31, 2005; Issued and
outstanding: 26,170,527 and 26,144,027 shares at June 30, 2006 and
December 31, 2005, respectively 116 116
Additional paid-in capital 66,955 66,900
Accumulated deficit (61,831) (59,281)
-------- --------
Total shareholders' equity 5,240 7,735
----- -------- --------
Total liabilities and shareholders' equity $ 16,647 $ 18,890
----- ======== ========
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
June 30, June 30, Year ended
------------------- ---------------------- December 31,
2006 2005 2006 2005 2005
------- -------- -------- --------- ---------
(Unaudited) (Audited)
-------------------------------------------- ---------
Revenues:
Products $ 3,661 $ 5,426 $ 2,151 $ 3,178 $ 11,303
Services 916 1,222 419 628 2,118
-------- -------- -------- -------- --------
4,577 6,648 2,570 3,806 13,421
-------- -------- -------- -------- --------
Cost of revenues:
Products 4,957 4,817 2,749 2,590 10,829
Services 581 596 295 290 1,481
-------- -------- -------- -------- --------
5,538 5,413 3,044 2,880 12,310
-------- -------- -------- -------- --------
Gross profit (loss) (961) 1,235 (474) 926 1,111
-------- -------- -------- -------- --------
Operating expenses:
Research and development 69 - 44 - -
Marketing and selling 440 538 213 360 927
General and administrative 800 997 405 469 1,939
-------- -------- -------- -------- --------
Total operating expenses: 1,309 1,535 662 829 2,866
----- -------- -------- -------- -------- --------
Operating income (loss) (2,270) (300) (1,136) 97 (1,755)
Financial expenses, net (347) (297) (227) (178) (624)
Other income (expenses), net 68 - (3) - 33
-------- -------- -------- -------- --------
(2,549) (597) (1,366) (81) (2,346)
Minority interests in losses of subsidiary - 11 9 3 17
-------- -------- -------- -------- --------
Net loss $ (2,549) $ (586) $ (1,357) $ (78) $ (2,329)
======== ======== ======== ======== ========
Net loss per share:
Basic and diluted net loss per share $ (0.10) $ (0.03) $ (0.05) $ (0.004) $ (0.10)
======== ======== ======== ======== ========
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 deficit equity
-------------- ------------ ------------- -------------- --------------
Balance at January 1, 2005 20,448,364 110 64,074 (56,952) 7,232
Issuance of Ordinary shares and warrants,
net *) 965,934 1 1,005 - 1,006
Exercise of warrants, net **) 4,691,061 5 1,794 - 1,799
Exercise of options 38,668 ***) - 27 - 27
Net loss - - - (2,329) (2,329)
---------- ------- -------- --------- ------
Balance at December 31, 2005 26,144,027 116 66,900 (59,281) 7,735
Exercise of options - - 18 - 18
Stock based compensation - - 37 - 37
Net loss - - - (2,550) (2,550)
---------- ------- -------- ---------- -------
Balance at June 30, 2006 (Unaudited) 26,144,027 $ 116 $ 66,955 $ (61,831) $ 5,240
========== ======= ======== ========= =======
*) Net of issuance expenses of approximately $ 85.
**) Net of issuance expenses of approximately $ 148.
***) Represents and amount lower than $ 1.
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
--------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands
---------------------------------
Six Months ended June 30,
---------------------------------
2006 2005
-------------- ---------------
(Unaudited)
Cash flows from operating activities:
-------------------------------------
Net loss $(2,550) $ (586)
Adjustments required to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 685 654
Minority interests in losses of subsidiary - (11)
Amortization expenses on convertible note 112 105
Decrease (increase) in trade receivables, net 2,959 (1,512)
Increase in other receivables and prepaid expenses (165) (55)
Increase in costs and estimated earnings in excess of billings, net (42) (296)
Increase in inventories (266) (638)
Increase (decrease) in trade payables 196 (610)
Decrease in other payables and accrued expenses (3) (566)
Increase (decrease) in deferred revenues 22 (534)
Accrued severance pay, net (6) (37)
------- --------
Net cash provided by (used in) operating activities 942 (4,086)
------- --------
Cash flows from investing activities:
-------------------------------------
Cash paid in conjunction with the acquisition of certain assets and
liabilities of Vectop, net (a) - (129)
Investment in restricted cash (33) (210)
Purchase of property, plant and equipment (63) (282)
Loans repaid by employees - 5
Investments in leasing deposits, net (5) 2
------- --------
Net cash used in investing activities (101) (614)
------- --------
Cash flows from financing activities:
-------------------------------------
Proceeds from issuance of shares and warrants, net - 1,006
Proceeds of long-term loan - 700
Increase in short-term bank credit, net 66 252
Repayments of loans (933)
Exercise of warrants, net - 1,761
Exercise of options 55 23
------- --------
Net cash provided by financing activities 121 2,809
------- --------
Increase (decrease) in cash and cash equivalents 962 (1,891)
Cash and cash equivalents at the beginning of the period 350 3,464
------- --------
Cash and cash equivalents at the end of the period 1,312 1,573
======= ========
4
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)
--------------------------------------------------------------------------------
U.S. dollars in thousands
-------------------------------------
Six months ended June 30,
-------------------------------------
2006 2005
------------------ ------------------
(Unaudited)
(a) Cash paid in conjunction with the acquisition of certain assets and
liabilities of Vectop (see also note 5):
Working capital, net $ 844
Equipment (62)
Intangible assets (1,041)
Deferred revenues 130
$ (129)
==========
Supplemental disclosures of cash flow activities:
-------------------------------------------------
Net cash paid during the period for:
Income taxes $ 7 $ 2
========== ==========
Interest $ 172 $ 198
========== ==========
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 13, 2005, the Company purchased certain assets and
assumed certain liabilities related to the operations of Vectop
Limited ("Vectop") in order to increase its customer base. Vectop
is an Israeli company specializing in the design, development,
marketing and sale of electro-optic equipment and debriefing
systems. 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 net assets for $ 381 in cash and
additional future royalties based on revenues derived from Vectop
projects five years from the date of the agreement up to $ 500.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The Company's unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the United States.. The significant policies followed in
the preparation of the condensed consolidated 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.
b. Unaudited information:
The consolidated financial statements include the unaudited
consolidated balance sheet as of June 30, 2006, the related
unaudited consolidated statements of operations for the three and
six months ended June 30, 2006 and 2005, unaudited statement of
changes in shareholders' equity for the six month ended June 30,
2006 and cash flows for the six-month periods ended June 30, 2006
and 2005 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 accepted
accounting principles for audited financial statements. Results
for interim periods are not necessarily indicative of the results
expected for the entire year.
6
RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)
c. Share based compensation:
Effective January 1, 2006, the Company adopted FASB Statement No.
123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)") , and
related Securities and Exchange Commission rules included in
Staff Accounting Bulletin No. 107, on a modified prospective
basis. Under this method, compensation cost recognized beginning
January 1, 2006 will include costs related to 1) all share-based
payments (stock options and restricted stock awards) granted
prior to but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original
provisions of FAS 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), and 2) all share-based payments granted subsequent
to December 31, 2005 based on the grant-date fair value estimated
in accordance with the provisions of SFAS 123(R). Compensation
cost for stock options is generally recognized ratably over the
vesting period.
The Company had unvested options granted to employees upon its
adoption of SFAS 123(R) on January 1, 2006 and did not grant any
options during the six months ended June 30, 2006. The impact of
the adoption of SFAS 123(R) on January 1, 2006 was an increase of
approximately $ 37 thousands on the Company's net loss for the
six months ended June 30, 2006 as compared to if the Company had
continued to account for share-based compensation under APB 25.
Prior to the adoption of SFAS 123(R), the Company applied SFAS
123, amended by SFAS 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure," which allowed
companies to apply the existing accounting rules under APB 25,
"Accounting for Stock Issued to Employees," and related
Interpretations. In general, as the exercise price of options
granted under these plans was equal to the market price of the
underlying common stock on the grant date, no stock-based
employee compensation cost was recognized in the net loss
attributed to common stockholders for periods prior to the
adoption of SFAS 123(R).
The following table illustrates the effect on net loss and net
loss per share, assuming that the Company had applied the fair
value recognition provisions of SFAS No. 123 on its stock-based
employee compensation:
Six months Year ended
ended December
June 30, 2006 31, 2005
------------- -------------
(Unaudited) (Audited)
------------- -------------
Net loss as reported $ (586) $ (2,329)
Deduct: Total stock-based employee compensation
expense under fair value based methods (36) (136)
------- ---------
Pro forma net loss $ (622) $ (2,465)
------- ---------
Basic and diluted net loss per share:
Basic and diluted net loss per share as reported $ (0.03) $ (0.10)
Pro forma Basic and diluted net loss per share $ (0.03) $ (0.11)
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,
2006 2005
----------- ------------
(Unaudited) (Audited)
----------- ------------
Costs incurred on uncompleted contracts $ 6,361 $ 7,625
Estimated earnings 473 435
----------- ---------
5,888 7,190
Less - billings and progress payments 4,659 5,794
----------- ---------
$ 1,229 $ 1,396
=========== =========
b. Billings in excess of costs and estimated earnings on uncompleted
contracts:
June 30, December 31,
2006 2005
----------- ------------
(Unaudited) (Audited)
----------- ------------
Costs incurred on uncompleted contracts $ 2,307 $ 7,426
Estimated earnings 855 1,380
---------- --------
3,162 8,806
Less - billings and progress payments 3,344 9,197
---------- --------
$ (182) $ (391)
========== ========
NOTE 4:- INVENTORIES
June 30, December 31,
2006 2005
----------- ------------
(Unaudited) (Audited)
----------- ------------
Raw materials and components $ 1,161 $ 1,348
Work in progress 482 541
Finished goods 565 53
----------- ------------
$ 2,208 $ 1,942
=========== ============
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:
Year ended
Six months ended --------------
June 30, December 31,
------------------------------- --------------
2006 2005 2005
(Unaudited) (Audited)
------------------------------- --------------
North America $ 2,613 $ 2,220 $ 5,096
Europe 386 300 586
Israel 1,234 3,394 5,546
Others 344 734 2,193
--------- --------- ---------
Total $ 4,577 $ 6,648 $ 13,421
========= ========= =========
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, 2005 contained in our 2005 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, avionics
products and ground debriefing systems and provide manufacturing services for
military and commercial use, mainly in Israel, the U.S. and Europe. We also
provide test and repair services using our CATS(TM) testers and test program
sets through our Chinese subsidiary.
Discussion of Critical Accounting Policies and Estimations
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. 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
can be integrated with our CATS 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 software. 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 economic variables may lead to different conclusions regarding the
recoverability of
10
our assets' carrying values and to the potential need to record an impairment
loss for our intangible assets. An intangible asset related to customer
relationships has been recorded as a result of our acquisition of certain assets
and liabilities of Vectop in February 2005 and is being amortized using a
straight line basis over the expected useful life of five years. For the six
months period ended June 30, 2006, 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 undiscounted future cash flows
to the carrying amount of the asset, an impairment charge is recorded in the
amount the carrying value of the asset exceeds its fair value. Using 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. For the six months period ended June 30,
2006, no impairment was required.
Share-Based Compensation. We account for employee share based
compensation using fair value-based method. Under this method, compensation cost
recognized beginning January 1, 2006 will include costs related to (i) all
share-based payments granted prior to but not yet vested as of January 1, 2006,
and (ii) all share-based payments granted subsequent to December 31, 2005 based
on the grant-date fair value estimated. Compensation cost for stock options is
generally recognized ratably over the vesting period.
Revenue Recognition. Our revenues are mainly derived from sales of ATE
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.
Revenues from services are recognized when the service is performed.
11
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. Generally 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 elements when the respective fee is payable and
non-contingent, and all other revenue recognition criteria are met.
Revenues from software arrangements are recognized when persuasive
evidence of an arrangement exists, delivery of the product has occurred, the fee
is fixed or determinable, and collectability is probable. Arrangements with
payment terms extending beyond customary payment terms are considered not to be
fixed or determinable. If the fee is considered not to be fixed or determinable,
revenue is deferred and recognized when payments become due from the customer or
are actually collected when collectability is not probable, providing that all
other revenue recognition criteria have been met.
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. We are engaged in
legal actions with our 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. If our estimations are wrong, we may incur additional litigation
expenses.
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, warrants and additional investment rights. The fair
value of the warrants and the additional investment rights was based on a
valuation prepared by an independent, valuation expert using the Black-Scholes
pricing model. The valuation result was judged to be reasonable by our
management based on comparisons to benchmarks in similar circumstances.
Significant Expenses
Cost of Revenues. Cost of revenues consist primarily of manufacturing
costs, depreciation of fixed assets, project development costs, impairment
losses on long-lived assets and amortization of capitalized software and
customer relationship assets and inventory write-downs.
12
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.
Financial Income (Expenses), Net. Financial expenses consist of
interest and bank expenses, interest on convertible note, amortization of
discount on convertible note and currency re-measurement losses. Financial
income consists of interest on cash and cash equivalent balances, currency
re-measurement gains and gain on restructuring of debt.
Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005
Revenues. Revenues decreased by 30% to $4.6 million, in the six month
ended June 30, 2006 from $6.6 million in the six months ended June 30, 2005.
Programs that were expected to commence in the first half of the year were
delayed and are expected to take place in the second half of 2006. Accordingly,
we expect an increase in revenues in the second half of 2006.
Cost of Revenues. Cost of revenues increased by 2% to $5.5 million in
the six months ended June 30, 2006 from $5.4 million in the six months ended
June 30, 2005. We expect that our cost of revenues as a percentage of revenues
will decrease in the second half of the year. as a result of a higher proportion
of our revenues being attributable to off-the-shelf products and a more
efficient utilization of our workforce.
Gross Profit (Loss). We incurred a loss of approximately $0.9 million
in the six months ended June 30, 2005 as compared to a profit of $1.2 million in
the six months ended June 30, 2005. The decrease in gross profit is due to
reduction in sales as well as the mix between the traditional products that the
company sells and the newer lower margin products which we are developing with
our customers.
Marketing, Selling, General and Administrative Expenses. Marketing,
selling, general and administrative expenses decreased by 20% to $1.2 million in
the six months ended June 30, 2006 from $1.5 million in the six months ended
June 30, 2005. The decrease in marketing and selling expenses is mainly
attributable to changes in the timing of avionic exhibitions. The decrease in
general and administrative expenses is mainly attributable to our continued
costs savings measures.
Financial Expenses, Net. Our financial expenses, net were $347,000 in
the six months ended June 30, 2006 compared to $297,000 in the six months ended
June 30, 2005. The increase in our financial expenses was mainly due to higher
interest payable on the $3 million of convertible notes issued in 2004.
13
Liquidity and Capital Resources
At June 30, 2006, we had working capital of $1.8 million and cash and
cash equivalents of $1.3 million. As of June 30, 2006, we had short term debt
owed to our banks of $943,000.
We had capital expenditures of $63,000 in the six months ended June 30,
2006, but we currently do not have any significant capital spending or purchase
commitments.
Net cash provided by operating activities was $0.9 million in the six
months ended June 30, 2006. This was attributable primarily to our loss of $2.5
million, a net increase in inventories of $266,000, and a $165,000 increase in
other receivables; offset by a decrease in trade receivables of $2.9 million, a
$196,000 decrease in trade payables, and depreciation and amortization of
$685,000. 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, a net increase in trade receivables of $1.5 million, a $638,000
increase in inventories, a $600,000 decrease in trade payables, an increase in
costs and estimated earnings in excess of billings of $296,000, and a $404,000
decrease in deferred revenues, offset by depreciation and amortization of
$654,000.
Net cash used in investing activities was approximately $100,000 in
the six months ended June 30, 2006, and approximately $600,000 in the six months
ended June 30, 2005. In 2006, we invested $63,000 in equipment. In 2005, we
purchased net assets of $129,000, invested $282,000 in plant and equipment and
invested $210,000 in long-term restricted cash.
Net cash provided by financing activities was $0.1 million in the six
months ended June 30, 2006. This amount was principally in respect of short-term
bank credits. 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, 2006, there were 16,670,779 warrants outstanding to
purchase ordinary shares. Of such warrants, 13,667,345 warrants have an exercise
price of $2.00 per share, 2,065,934 warrants have an exercise price of $2.10 per
share and 937,500 warrants have an exercise price of $2.50 per share. To the
extent any warrants are exercised, the proceeds will be added to our working
capital.
Off-Balance Sheet Arrangements
We are not a party to any material off-balance sheet arrangements. In
addition, we have no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
14
Tabular Disclosure of Contractual Obligations
The following table summarizes our minimum contractual obligations and
commercial commitments, as of June 30, 2006 and the effect we expect them to
have on our liquidity and cash flow in future periods.
Contractual Obligations Payments due by Period
---------------------------------------- ---------------------------------------------------------------------
Less than More than
Total 1 year 1-3 Years 3-5 Years 5 years
---------- --------- --------- --------- -------
Long-term debt obligations ............. $3,109,000 $437,000 $2,672,000 - -
Operating lease obligations............. $1,026,000 $576,000 $653,000 - -
---------- ---------- ---------- --------- ---------
Total................................... $4,148,000 $1,519,000 $3,325,000 - -
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, 2006 our severance
pay liability was $2.1 million.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Rada Electronic Industries Ltd.
(Registrant)
By: /s/Herzle Bodinger
------------------
Herzle Bodinger, Chairman
Date: September 27, 2006