SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO ________
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
DATE OF EVENT REQUIRING THIS SHELL COMPANY REPORT ........
COMMISSION FILE NUMBER: 0-16050
TAT TECHNOLOGIES LTD.
---------------------
(Exact name of Registrant as specified in its charter
and translation of Registrant's Name into English)
ISRAEL
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(Jurisdiction of incorporation or organization)
P.O. BOX 80, GEDERA 70750, 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 0.90 PAR VALUE
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
ORDINARY SHARES, PAR VALUE NIS 0.90 PER SHARE
AS OF DECEMBER 31, 2005 .........................6,042,671
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
Yes [ ] No [X]
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 [ ] Item 18 [X]
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
INTRODUCTION
TAT Technologies Ltd. is engaged in the manufacture and sale of a broad
range of heat transfer equipment used in mechanical and electronic systems on
board commercial and military aircraft and in a variety of other electronic
equipment. We are also engaged in the remanufacture, overhaul and repair of heat
transfer equipment and other aircraft components manufactured by us and other
companies. In `addition, we manufacture, sell and service certain related
products for use in aircraft and electronic systems. We were incorporated under
the laws of the State of Israel in April 1985 to develop the computerized
systems business of our parent company, TAT Industries Ltd., or TAT Industries,
a publicly held Israeli corporation engaged in the manufacture and sale of
aeronautical equipment. In December 1991, we acquired the heat exchanger
operations of TAT Industries and in February 2000, we entered into an agreement
to purchase its operations relating to the manufacture of aviation accessories
and to lease certain of its properties. We conduct business in the United States
through our wholly owned subsidiary Airepair International Inc., or
Limco-Airepair, an Oklahoma corporation, and its subsidiary, Piedmont Aviation
Component Services, LLC, or Piedmont, an Kernersville, North Carolina based
company. Limco-Airepair is certified by the Federal Aviation Administration, or
FAA, to engage in the remanufacture, overhaul and repair of heat transfer
equipment for the aviation industry. In July, 2005, we purchased Piedmont, an
FAA certified company engaged in the repair and overhaul of various aircraft
accessories.
From our public offering in March 1987 until July 1998, our ordinary
shares were listed on the NASDAQ National Market (symbol: TATTF). In July 1998,
the listing of our ordinary shares was transferred to the NASDAQ Capital Market
and since August 2005, our shares have been also traded on the Tel Aviv Stock
Exchange, or TASE. As used in this annual report, the terms "we," "us" and "our"
mean TAT Technologies Ltd. and its subsidiaries, unless otherwise indicated.
Except for the historical information contained in this annual report, the
statements contained in this annual report are "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, as amended, with respect to our
business, financial condition and results of operations. Such forward-looking
statements reflect our current view with respect to future events and financial
results.
Statements which use the terms "anticipate," "believe," "do not believe,"
"expect," "plan," "intend," "estimate," "anticipate" and similar expressions are
intended to identify forward-looking statements. We remind readers that
forward-looking statements are merely predictions and therefore inherently
subject to uncertainties and other factors and involve known and unknown risks
that could cause the actual results, performance, levels of activity, or our
achievements, or industry results, to be materially different from any future
results, performance, levels of activity, or our achievements expressed or
implied by such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof. Except as required by applicable law, including the securities laws
of the United States, we undertake no obligation to publicly release any update
or revision to any forward looking statements to reflect new information, future
events or circumstances, or otherwise after the date hereof. We have attempted
to identify significant uncertainties and other factors affecting
forward-looking statements in the Risk Factors section that appears in Item 3.
"Key Information - Risk Factors."
Our consolidated financial statements appearing in this annual report are
prepared in dollars and in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP. All references in this annual
report to "dollars" or "$" are to dollars and all references in this annual
report to "NIS" are to New Israeli Shekels.
i
Statements made in this annual report concerning the contents of any
contract, agreement or other document are summaries of such contracts,
agreements or documents and are not complete descriptions of all of their terms.
If we filed any of these documents as an exhibit to this annual report or to any
previous filing with the Securities and Exchange Commission, you may read the
document itself for a complete recitation of its terms.
ii
PART I .................................................................... 1
Item 1. Identity of Directors, Senior Management and
Advisers ............................................. 1
Item 2. Offer Statistics and Expected Timetable .............. 1
Item 3. Key Information ...................................... 1
A. Selected Financial Data .............................. 1
B. Capitalization and Indebtedness ...................... 2
C. Reasons for the Offer and Use of Proceeds ............ 2
D. Risk Factors ......................................... 2
Item 4. Information on the Company ........................... 10
A. History and Development of the Company ............... 10
B. Business Overview .................................... 11
C. Organizational Structure ............................. 18
D. Property, Plants and Equipment ....................... 18
Item 4A. Unresolved Staff Comments ............................ 19
Item 5. Operating and Financial Review and Prospects ......... 19
A. Operating Results .................................... 25
B. Liquidity and Capital Resources ...................... 31
C. Research and Development, Patents and Licenses ....... 33
D. Trend Information .................................... 33
E. Off-balance Sheet Arrangements ....................... 33
F. Tabular Disclosure of Contractual Obligations ........ 34
Item 6. Directors, Senior Management and Employees ........... 34
A. Directors and Senior Management ...................... 34
B. Compensation ......................................... 37
C. Board Practices ...................................... 38
D. Employees ............................................ 45
E. Share Ownership ...................................... 46
Item 7. Major Shareholders and Related Party Transactions .... 48
A. Major Shareholders ................................... 48
B. Related Party Transactions ........................... 49
C. Interests of Experts and Counsel ..................... 50
Item 8. Financial Information ................................ 50
A. Consolidated Statements and Other Financial
Information .......................................... 50
iii
B. Significant Changes .................................. 51
Item 9. The Offer and Listing ................................ 51
A. Offer and Listing Details ............................ 51
B. Plan of Distribution ................................. 52
C. Markets .............................................. 52
D. Selling Shareholders ................................. 52
E. Dilution ............................................. 52
F. Expense of the Issue ................................. 52
Item 10. Additional Information ............................... 52
A. Share Capital ........................................ 52
B. Memorandum and Articles of Association ............... 52
C. Material Contracts ................................... 55
D. Exchange Controls .................................... 56
E. Taxation ............................................. 56
F. Dividend and Paying Agents ........................... 67
G. Statement by Experts ................................. 67
H. Documents on Display ................................. 67
I. Subsidiary Information ............................... 68
Item 11. Quantitative and Qualitative Disclosures about
Market Risk .......................................... 68
Item 12. Description of Securities Other than Equity
Securities ........................................... 68
PART II ................................................................... 69
Item 13. Defaults, Dividend Arrearages and Delinquencies ...... 69
Item 14. Material Modifications to the Rights of
Security Holders ..................................... 69
Item 15. Controls and Procedures .............................. 69
Item 16. [Reserved] ........................................... 69
Item 16A. Audit Committee Financial Expert ..................... 69
Item 16B. Code of Ethics ....................................... 69
Item 16C. Principal Accounting Fees and Services ............... 69
Item 16D. Exemptions from the Listing Requirements and
Standards for Audit Committee ........................ 70
Item 16E. Purchase Of Equity Securities By The Issuer and
Affiliated Purchasers ................................ 70
PART III .................................................................. 71
Item 17. Financial Statements ................................. 71
Item 18. Financial Statements ................................. 71
Item 19. Exhibits ............................................. 71
iv
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The following selected consolidated financial data for and as of the five
years ended December 31, 2005 are derived from our audited consolidated
financial statements which have been prepared in accordance with U.S. GAAP. The
selected consolidated financial data as of December 31, 2005 and 2004 and for
the years ended December 31, 2005, 2004 and 2003 have been derived from our
audited consolidated financial statements and notes included elsewhere in this
annual report. The selected consolidated financial data for the year ended
December 31, 2005 include the results of operations of Piedmont as of July 1,
2005. The selected consolidated financial data as of December 31, 2003, 2002 and
2001 and for the years ended December 31, 2002 and 2001 have been derived from
audited consolidated financial statements not included in this annual report.
The selected consolidated financial data set forth below should be read in
conjunction with and are qualified by reference to Item 5. "Operating and
Financial Review and Prospects" and our consolidated financial statements and
notes thereto included elsewhere in this annual report.
STATEMENT OF OPERATIONS DATA:
Year Ended December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(in thousands, except per share data)
Revenues ........................................... $ 49,193 $ 33,243 $ 30,682 $ 26,280 $ 25,051
Cost of revenues ................................... 35,592 22,166 20,068 17,750 17,237
-------- -------- -------- -------- --------
Gross profit ....................................... 13,601 11,077 10,614 8,530 7,814
-------- -------- -------- -------- --------
Research and development costs, net ................ 72 125 120 204 257
Selling and marketing expenses ..................... 2,495 1,894 1,958 1,483 1,510
General and administrative expenses ................ 5,138 3,793 3,476 2,994 3,235
-------- -------- -------- -------- --------
Operating income ................................... 5,896 5,265 5,060 3,849 2,812
Financial income (expenses), net ................... (441) 87 (25) 99 (78)
Other income (loss), net ........................... 210 54 24 8 (1)
-------- -------- -------- -------- --------
Income from continuing operations before taxes on
income ......................................... 5,665 5,406 5,059 3,956 2,733
Taxes on income .................................... 2,136 1,667 1,225 367 75
Net income ......................................... $ 3,529 $ 3,739 $ 3,834 $ 3,589 $ 2,658
======== ======== ======== ======== ========
Basic net earnings per share ....................... $ 0.584 $ 0.72 $ 0.85 $ 0.80 $ 0.59
Diluted net income per share ....................... $ 0.580 $ 0.67 $ 0.78 $ 0.77 $ 0.57
Weighted average number of shares used in computing
basic and diluted net income per share ......... 6,042 5,166 4,510 4,483 4,483
Weighted average number of shares used in computing
diluted net income per share ................... 6,087 5,564 4,907 4,483 4,671
Cash dividend per share ............................ $ 0.18 $ 1.18 $ 0.70 -- --
BALANCE SHEET DATA:
As of December 31,
----------------------------------------------------
2005 2004 2003 2002 2001
-------- -------- -------- -------- --------
(in thousands)
Working capital ................................... $ 30,387 $ 26,623 $ 22,336 $ 19,685 $ 18,510
Total assets ...................................... 60,246 41,207 39,392 35,318 30,426
Long-term debt, excluding current maturities ...... 13,786 4,054 3,793 3,362 3,316
Shareholder's equity .............................. $ 34,861 $ 32,526 $ 28,684 $ 25,419 $ 23,848
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
INVESTING IN OUR ORDINARY SHARES INVOLVES A HIGH DEGREE OF RISK AND
UNCERTAINTY. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE INVESTING IN OUR ORDINARY SHARES. OUR BUSINESS, PROSPECTS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED DUE TO
ANY OF THE FOLLOWING RISKS. IN THAT CASE, THE VALUE OF OUR ORDINARY SHARES COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATED TO OUR BUSINESS AND OUR INDUSTRY
ECONOMIC CONDITIONS MAY ADVERSELY AFFECT THE OPERATING CONDITIONS OF OUR
CUSTOMERS, WHICH IN TURN CAN AFFECT DEMAND FOR OUR PRODUCTS AND SERVICES AND OUR
RESULTS OF OPERATIONS.
Our operating results are impacted by general industry and economic
conditions that can cause changes in spending and capital investment patterns,
demand for our products and services and the level of our manufacturing costs.
Our operating results are directly tied to cyclical industry and economic
conditions, including global demand for air travel as reflected in new aircraft
production and/or the retirement of older aircraft, global flying hours, and
business and general aviation aircraft utilization rates, as well as the level
of U.S. and Israeli government appropriations for defense (as further discussed
below). The challenging operating environment faced by the commercial airline
industry is expected to continue and may be influenced by a wide variety of
factors, including aircraft fuel prices, labor issues, airline insolvencies,
terrorism and safety concerns, and changes in regulations. Future terrorist
actions or pandemic health issues could dramatically reduce both the demand for
air travel and our Aerospace aftermarket sales and margins.
A REDUCTION IN MILITARY BUDGETS WORLDWIDE MAY CAUSE A REDUCTION IN OUR REVENUES,
WHICH WOULD ADVERSELY AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION.
A significant portion of our revenues is derived from the sale of products
for military applications. These revenues totaled approximately $14.67 million,
or 29.8% of revenues in 2005, $13.7 million, or 41.2% of revenues in 2004 and
$15.2 million, or 49.5% of revenues, in 2003. In recent years the military
budgets of a number of countries have been reduced and may be further reduced in
the future. Declines in military budgets may result in reduced demand for our
products and manufacturing services. Any decline could result in reduction in
our core business revenues and adversely affect our business, results of
operations and financial condition.
2
WE DERIVE A SUBSTANTIAL PART OF OUR REVENUES FROM SEVERAL MAJOR CUSTOMERS. IF WE
LOSE ANY OF THESE CUSTOMERS OR THEY REDUCE THE AMOUNT OF BUSINESS THEY DO WITH
US, OUR REVENUES MAY BE SERIOUSLY AFFECTED.
One of our governmental customers accounted for approximately 11.1% of our
revenues in 2005. Four customers accounted for a total of approximately 26.3%
and 44.9% of our revenues in 2005 and 2004 respectively, and four customers
accounted for approximately 50.2% of our revenues in 2003. These customers may
not maintain the same volume of business with us in the future. If we lose any
of these customers or they reduce the amount of business they do with us, our
revenues may be seriously affected.
A SUBSTANTIAL PART OF OUR REVENUES ARE FROM CONTRACTS WITH THE U.S. AND ISRAELI
GOVERNMENTS AND IS SUBJECT TO SPECIAL RISKS. A LOSS OF ALL, OR A MAJOR PORTION,
OF OUR REVENUES FROM GOVERNMENT CONTRACTS COULD HAVE A MATERIAL ADVERSE EFFECT
ON OUR OPERATIONS.
A substantial portion of our revenues are from contracts with the U.S. and
Israeli governments. Sales to the U.S. and Israeli governments, accounted for
approximately 11.1% and 1.7% of our revenues for 2005, 10.6% and 2.6% of our
revenues for 2004, and approximately 15.3% and 3.3% of our revenues for the year
ended December 31, 2003, respectively.
Business with the U.S. and Israeli governments, as well as with the
governments of other countries, is subject to risks which are not as relevant in
business with private parties. For example:
o legislative or administrative requirements may delay payment for
performance of contracts;
o our sales to government agencies, authorities and companies are
directly affected by these customers' budgetary constraints and the
priority given in their budgets to the procurement of our products;
o since these contracts are generally terminable-at-will, a government
may terminate contracts for its convenience, because of a change in
its requirements, policies or budgetary constraints, or as a result
of a change in the administration; and
o our costs may be adjusted as a result of audits or we may have
increased or unexpected costs causing losses or reduced profits
under fixed-price contracts.
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.
We acquire most of the components for the manufacture of our products from
a limited number of suppliers, 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. Suppliers of some of these components
require us to place orders with significant lead-time to assure supply in
accordance with our requirements. Inadequacy of operating funds may cause us to
delay placement of such orders and may result in delays in supply. Delays in
supply may significantly hurt our ability to fulfill our contractual obligations
and may significantly hurt our business and results of operations. We may not be
able to continue to obtain such components from these suppliers on satisfactory
commercial terms.
3
WE MAY FACE INCREASED COSTS AND A REDUCED SUPPLY OF RAW MATERIALS. WE MAY NOT BE
ABLE TO RECOUP ANY FUTURE INCREASES IN THE COST OF RAW MATERIALS OR IN ELECTRIC
POWER COSTS FOR OUR OPERATIONS THROUGH PRICE INCREASES FOR OUR PRODUCTS.
Since 2003, the cost of raw materials used in our production has
fluctuated significantly due to market and industry conditions. The cost of
electric power used in our operations has also increased in the last several
years. We may not be able to recoup any future increases in the cost of raw
materials or electric power costs through price increases for our products.
WE OPERATE IN A HIGHLY COMPETITIVE FIELD. 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.
The market for heat exchangers and other heat transfer products is highly
competitive, and we may not be able to compete effectively in our market. Our
principal competitors are Honeywell Corporation, or Honeywell, Hamilton
Sunstrand, or Hamilton, Triumph Group Inc, or Triumph, Lytron Incorporated, or
Lytron, and Niagara Thermal. Some of our competitors are far larger, have
substantially greater resources, including technical, financial, research and
development, marketing and distribution capabilities than we have, and enjoy
greater market recognition. These competitors may be able to achieve greater
economies of scale and may be less vulnerable to price 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.
WE MAY NOT BE ABLE TO SUCCESSFULLY OPERATE PIEDMONT IN THE FUTURE. IF PIEDMONT
IS UNSUCCESSFUL, OUR FUTURE RESULTS OF OPERATIONS WILL BE ADVERSELY AFFECTED.
On July 7, 2005, our subsidiary, Limco-Airepair, purchased Piedmont, an
FAA certified company based in Kernersville, North Carolina, that is engaged in
the repair and overhaul of various aircraft accessories. Under the terms of the
acquisition, we paid $5.34 million for Piedmont, including acquisition costs,
and repaid $11 million of its outstanding indebtedness. In 2004 and in 2003,
Piedmont had revenues of $27,485,315 and $23,881,884 and a net loss of $168,234
and net income of $135,093, respectively. In the six month period ended December
31, 2005, Piedmont had revenues of $16,259,503 and a net income of $872,573. We
may not be successful in maintaining profitable operations of Piedmont in the
future. If Piedmont is not profitable in the future, we may lose our investment
in this company and our future results of operations will be adversely affected.
WE MAY ENGAGE IN FUTURE ACQUISITIONS THAT COULD DILUTE OUR STOCKHOLDERS' EQUITY
AND HARM OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
We have pursued, and will continue to pursue, growth opportunities through
internal development and acquisition of complementary businesses, products and
technologies. We are unable to predict whether or when any other prospective
acquisition will be completed. The process of integrating an acquired business
may be prolonged due to unforeseen difficulties and may require a
disproportionate amount of our resources and management's attention. We may not
be able to successfully identify suitable acquisition candidates, complete
acquisitions, integrate acquired businesses into our operations, or expand into
new markets. Further, once integrated, acquisitions may not achieve comparable
levels of revenues, profitability or productivity as our existing business or
otherwise perform as expected. The occurrence of any of these events could harm
our business, financial condition or results of operations.
4
Future acquisitions may require substantial capital resources, which may require
us to seek additional debt or equity financing.
Future acquisitions by us could result in the following, any of which
could seriously harm our results of operations or the price of our ordinary
shares:
o issuance of equity securities that would dilute our current
shareholders' percentages of ownership;
o large one-time write-offs;
o the incurrence of debt and contingent liabilities;
o difficulties in the assimilation and integration of operations,
personnel, technologies, products and information systems of the
acquired companies;
o diversion of management's attention from other business concerns;
o contractual disputes;
o risks of entering geographic and business markets in which we have
no or only limited prior experience; and
o potential loss of key employees of acquired organizations.
RAPID TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT THE MARKET ACCEPTANCE OF OUR
PRODUCTS.
The aerospace market in which we compete is subject to technological
changes, introduction of new products, change in customer demands and evolving
industry standards. Our future success will depend upon our ability to keep pace
with technological developments and to timely address the increasingly
sophisticated needs of our customers by supporting existing and new technologies
and by developing and introducing enhancements to our current products and new
products. We may not be able to successfully develop and market enhancements to
our products that will respond to technological change, evolving industry
standards or customer requirements. We may experience difficulties that could
delay or prevent the successful development, introduction and sale of such
enhancements; and such enhancements may not meet the requirements of the market
or achieve any significant degrees of market acceptance. If release dates of our
new products or enhancements are delayed, or if when released, they fail to
achieve market acceptance, our business, operating results and financial
condition would be materially adversely affected.
WE FACE SPECIAL RISKS FROM INTERNATIONAL SALES OPERATIONS AND CURRENCY EXCHANGE
FLUCTUATIONS. ONE OR MORE OF THESE FACTORS MAY HAVE A MATERIAL ADVERSE EFFECT ON
OUR FUTURE REVENUES AND, AS A RESULT, OUR BUSINESS, OPERATING RESULTS AND
FINANCIAL CONDITION.
Our international sales and operations, including exports, comprise a
growing proportion of our operating results. 91.6% of our sales in 2005, 84.7%
of our sales in 2004 and 84.4% of our sales in 2003 resulted from our
international operations. This subjects us to many risks inherent in
international business, including: currency exchange fluctuations, limitations
and disruptions resulting from the imposition of government controls, changes in
regulatory requirements, export license requirements, economic or political
instability, trade restrictions, changes in tariffs, currency fluctuations,
longer receivable collection periods and greater difficulty in accounts
receivable collection, difficulties in managing overseas subsidiaries and
international operations and potential adverse tax consequences.
5
We may not be able to sustain or increase revenues from international
operations or we may encounter significant difficulties in connection with the
sale of our products in international markets or one or more of these factors
may have a material adverse effect on our future revenues and, as a result, our
business, operating results and financial condition.
IF WE DO NOT RECEIVE THE GOVERNMENTAL APPROVALS NECESSARY FOR THE EXPORT OF OUR
PRODUCTS, OUR REVENUES MAY DECREASE. SIMILARLY IF OUR SUPPLIERS AND PARTNERS DO
NOT RECEIVE THEIR GOVERNMENT APPROVALS NECESSARY TO EXPORT THEIR PRODUCTS OR
DESIGNS TO US, OUR REVENUES MAY DECREASE AND WE MAY FAIL TO IMPLEMENT OUR GROWTH
STRATEGY.
Under Israeli law, the export of certain of our products and know-how is
subject to approval by the Israeli Ministry of Defense. To initiate sales
proposals with regard to exports of our products and know-how and to export such
products or know-how, we must obtain permits from the Ministry of Defense. We
may not be able to receive in a timely manner all the required permits for which
we may apply in the future.
Similarly, under foreign laws the export of certain military products,
technical designs and spare parts require the prior approval of, or export
license from, such foreign governments. In order to maintain our third party
production, certain co-development activities and procurements required for the
performance of certain contracts, we must receive detailed technical designs,
products or product parts' samples from our strategic partners or suppliers. We
may not be able to receive all the required permits and/or licenses in a timely
manner. Consequently, our revenues may decrease and we may fail to implement our
growth strategy.
FIXED PRICE CONTRACTS MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Our governmental contracts are generally fixed price contracts. In
addition, we have fixed contracts with commercial airlines such as Lufthansa and
KLM. Under fixed price contracts, the price is not subject to adjustment by
reason of the costs incurred in the performance of the contracts. Accordingly
increased or unexpected costs may reduce our profits or generate a loss.
WE ARE DEPENDENT ON OUR SENIOR MANAGEMENT AND KEY PERSONNEL, WHOSE LOSS COULD
ADVERSELY AFFECT OUR BUSINESS.
Our future success depends in large part on the continued services of our
senior management and key personnel. We do not carry key-person life insurance
on our senior management or key personnel. Any loss of the services members of
senior management or other key personnel could negatively and materially affect
our business.
COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.
As a result of changing laws, regulations and standards relating to
accounting, corporate governance and public disclosure, the costs of being a
public company in general have increased in recent years. The Sarbanes-Oxley Act
of 2002 requires changes in some of our corporate governance and securities
disclosure or compliance practices. We expect that the on-going implementation
of these regulations will further increase our legal compliance costs and will
make some activities more time consuming. We are presently evaluating and
monitoring regulatory developments and cannot estimate the magnitude of
additional costs we may incur as a result of such developments. When we are
required to implement Section 404 of the Sarbanes-Oxley Act of 2002, which
governs internal controls and procedures for financial reporting, we will need
to expend significant management time and financial resources to comply with the
applicable requirements. This and other proposed legislation may increase the
fees of our professional advisors and our insurance premiums.
6
RISK FACTORS RELATED TO OUR ORDINARY SHARES
OUR SHARE PRICE HAS BEEN VOLATILE IN THE PAST AND MAY DECLINE IN THE FUTURE.
Our ordinary shares have experienced significant market price and volume
fluctuations in the past and may experience significant market price and volume
fluctuations in the future in response to factors such as the following, some of
which are beyond our control:
o quarterly variations in our operating results;
o operating results that vary from the expectations of securities
analysts and investors;
o changes in expectations as to our future financial performance,
including financial estimates by securities analysts and investors;
o announcements of technological innovations or new products by us or
our competitors;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
o changes in the status of our intellectual property rights;
o announcements by third parties of significant claims or proceedings
against us;
o additions or departures of key personnel;
o future sales of our ordinary shares;
o de-listing of our shares from the NASDAQ Capital Market; and
o stock market price and volume fluctuations.
Domestic and international stock markets often experience extreme price
and volume fluctuations. Market fluctuations, as well as general political and
economic conditions, such as a recession or interest rate or currency rate
fluctuations or political events or hostilities in or surrounding Israel, could
adversely affect the market price of our ordinary shares.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources both of which could have a material adverse effect on our business
and results of operations.
7
SUBSTANTIAL FUTURE SALES OF OUR ORDINARY SHARES BY OUR PRINCIPAL SHAREHOLDERS
MAY DEPRESS OUR SHARE PRICE.
Our principal shareholders, TAT Industries and T.O.P, Limited Partnership,
or T.O.P hold 51.70% and 22.46% of our outstanding ordinary shares. If they sell
substantial amounts of our ordinary shares, including shares issued upon the
exercise of options, or if the perception exists that our principal shareholders
may sell a substantial number of our ordinary shares, the market price of our
ordinary shares may fall. Any substantial sales of our shares in the public
market also might make it more difficult for us to sell equity or equity-related
securities in the future at a time, in a place and on terms we deem appropriate.
RISKS RELATING TO OUR LOCATION IN ISRAEL
BECAUSE WE HAVE SIGNIFICANT OPERATIONS IN ISRAEL, WE MAY BE SUBJECT TO
POLITICAL, ECONOMIC AND OTHER CONDITIONS AFFECTING ISRAEL THAT COULD INCREASE
OUR OPERATING EXPENSES AND DISRUPT OUR BUSINESS.
We are incorporated under the laws of, and our executive offices,
manufacturing plant and research and development facilities are located in, the
State of Israel. As a result, we are directly affected by the political,
economic and military conditions affecting Israel. Specifically, we could be
adversely affected by any major hostilities involving Israel, a full or partial
mobilization of the reserve forces of the Israeli army, the interruption or
curtailment of trade between Israel and its present trading partners, or a
significant downturn in the economic or financial condition of Israel.
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Since September 2000, there has been
a marked increase in violence, civil unrest and hostility, including armed
clashes, between the State of Israel and the Palestinians, and acts of terror
have been committed inside Israel and against Israeli targets in the West Bank
and Gaza. These developments have adversely affected the regional peace process,
placed the Israeli economy under significant stress, and have negatively
influenced Israel's relationship with several Arab countries. In August 2005,
Israel evacuated all Israeli settlements in the Gaza Strip and four settlements
in the West Bank. In January 2006, Hamas won the elections in the Palestinian
Authority and as a result the diplomatic relations between Israel and the
Palestinian Authority have worsened. The implications of these developments
cannot at this time be foreseen. Any future armed conflict, political
instability or violence in the region may have a negative effect on our business
condition, harm our results of operations and adversely affect our share price.
Furthermore, there are a number of countries that restrict business with
Israel or Israeli companies. Restrictive laws or policies of those countries
directed towards Israel or Israeli businesses had, and may in the future
continue to have, an adverse impact on our operations, our financial results or
the expansion of our business. No predictions can be made as to whether or when
a final resolution of the area's problems will be achieved or the nature thereof
and to what extent the situation will impact Israel's economic development or
our operations.
OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY AFFECTED BY THE OBLIGATION OF OUR
PERSONNEL IN ISRAEL TO PERFORM MILITARY SERVICE.
Many of our executive officers and employees in Israel are obligated to
perform annual military reserve duty and are subject to being called for active
duty under emergency circumstances. If a military conflict or war arises, these
individuals could be required to serve in the military for extended periods of
time. Our operations could be disrupted by the absence for a significant period
of one or more of our executive officers or key employees or a significant
number of other employees due to military service. Any disruption in our
operations could adversely affect our business.
8
WE MAY BE ADVERSELY AFFECTED BY A CHANGE IN THE EXCHANGE RATE OF THE NIS AGAINST
THE DOLLAR. BECAUSE EXCHANGE RATES BETWEEN THE NIS AND THE DOLLAR FLUCTUATE
CONTINUOUSLY, EXCHANGE RATE FLUCTUATIONS, PARTICULARLY LARGER PERIODIC
DEVALUATIONS, MAY HAVE AN IMPACT ON OUR PROFITABILITY AND PERIOD TO PERIOD
COMPARISONS OF OUR RESULTS.
Because exchange rates between the NIS and the dollar fluctuate
continuously, exchange rate fluctuations, particularly larger periodic
devaluations, may have an impact on our profitability and period to period
comparisons of our results. In 2001, 2002 and 2005 the rate of devaluation of
the NIS against the dollar was 9.3%, 7.3% and 6.8 %, respectively, while in 2003
and 2004 the NIS appreciated in value in relation to the dollar by 7.6% and
1.6%, respectively. A portion of our expenses, primarily labor expenses, is
incurred in NIS and a part of our revenues are quoted in NIS. Additionally,
certain assets, as well as a portion of our liabilities, are denominated in NIS.
Our results may be adversely affected by the devaluation of the NIS in relation
to the dollar (or if such devaluation is on lagging basis), if our revenues in
NIS are higher than our expenses in NIS and/or the amount of our assets in NIS
are higher than our liabilities in NIS. Alternatively, our results may be
adversely affected by an appreciation of the NIS in relation to the dollar (or
if such appreciation is on a lagging basis), if the amount of our expenses in
NIS are higher than the amount of our revenues in NIS and/or the amount of our
liabilities in NIS are higher than our assets in NIS.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS ON US AND OUR DIRECTORS AND OFFICERS
MAY BE DIFFICULT TO OBTAIN.
Service of process upon our directors and officers and the Israeli experts
named herein, all of whom reside outside the United States, may be difficult to
obtain within the United States. Furthermore, substantially all of our assets,
all of our directors and officers and the Israeli experts named in this annual
report are located outside the United States, any judgment obtained in the
United States against us or these individuals or entities may not be collectible
within the United States.
There is doubt as to the enforceability of civil liabilities under the
Securities Act and the Securities Exchange Act in original actions instituted in
Israel. However, subject to certain time limitations and other conditions,
Israeli courts may enforce final judgments of United States courts for
liquidated amounts in civil matters, including judgments based upon the civil
liability provisions of those Acts.
PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE THE ACQUISITION OF OUR
COMPANY DIFFICULT, WHICH COULD PREVENT A CHANGE OF CONTROL AND THEREFORE DEPRESS
THE PRICE OF OUR SHARES.
Provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger with, or other
acquisition of, us. This could cause our ordinary shares to trade at prices
below the price for which third parties might be willing to pay to gain control
of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because
of these provisions of Israeli law.
9
YOUR RIGHTS AND RESPONSIBILITIES AS A SHAREHOLDER WILL BE GOVERNED BY ISRAELI
LAW AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF
SHAREHOLDERS UNDER U.S. LAW.
We are incorporated under Israeli law. The rights and responsibilities of
holders of our ordinary shares are governed by our memorandum of association,
articles of association and by Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of an Israeli company
has a duty to act in good faith in exercising his or her rights and fulfilling
his or her obligations toward the company and other shareholders and to refrain
from abusing his power in the company, including, among other things, in voting
at the general meeting of shareholders on certain matters. Israeli law provides
that these duties are applicable in shareholder votes on, among other things,
amendments to a company's articles of association, increases in a company's
authorized share capital, mergers and interested party transactions requiring
shareholder approval. In addition, a controlling shareholder of an Israeli
company or a shareholder who knows that it possesses the power to determine the
outcome of a shareholder vote or who has the power to appoint or prevent the
appointment of a director or executive officer in the company has a duty of
fairness toward the company. However, Israeli law does not define the substance
of this duty of fairness. Because Israeli corporate law has undergone extensive
revision in recent years, there is little case law available to assist in
understanding the implications of these provisions that govern shareholder
behavior.
AS A FOREIGN PRIVATE ISSUER WHOSE SHARES ARE LISTED ON THE NASDAQ NATIONAL
MARKET, WE MAY FOLLOW CERTAIN HOME COUNTRY CORPORATE GOVERNANCE PRACTICES
INSTEAD OF CERTAIN NASDAQ REQUIREMENTS.
As a foreign private issuer whose shares are listed on the NASDAQ National
Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the NASDAQ Marketplace Rules,
including the composition of our Board of Directors, director nomination
procedure, compensation of officers, distribution of annual reports to
shareholders, and quorums at shareholders' meetings. In addition, we may follow
Israeli law instead of the NASDAQ Marketplace Rules that require that we obtain
shareholder approval for certain dilutive events, such as for the establishment
or amendment of certain equity based compensation plans, an issuance that will
result in a change of control of our company, certain transactions other than a
public offering involving issuances of a 20% or more interest in our company and
certain acquisitions of the stock or assets of another company.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
We were incorporated under the laws of the State of Israel in April 1985
under the name Galaxy Graphics Ltd., or Cresta Ltd. In August 1986 we changed
our name to Galagraph Ltd. In May 1992 we changed our name to TAT Technologies
Ltd. 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 Re'em Industrial Park Neta, Boulevard Bnei Ayish, Gedera, Israel
70750 and our telephone number is 972-8-859-5411. Our address on the Internet is
www.tat.co.il. The information on our website is not incorporated by reference
into this annual report.
We are principally engaged in the manufacture and sale of a broad range of
heat transfer equipment used in mechanical and electronic systems on-board
commercial and military aircraft and in a variety of other electronic equipment.
These systems, which include environmental control, avionics cooling and other
mechanical and electronic systems, generate heat during operation that must be
removed and dissipated in order to function properly. We are also engaged in the
remanufacture, overhaul and repair of heat transfer equipment and other aircraft
components manufactured by us and other companies. In addition, we manufacture,
sell and service certain related products for use in aircraft and electronic
systems. We conduct business in the United States through our wholly owned
subsidiary Limco-Airepair and its subsidiary Piedmont. Limco-Airepair is
certified by the FAA to engage in the remanufacture, overhaul and repair of heat
transfer equipment for the aviation industry. Piedmont is engaged in the repair
and overhaul of various aircraft accessories.
10
We were founded in 1985 to develop the computerized systems business of
our parent company, TAT Industries Ltd., a publicly held Israeli corporation
engaged in the manufacture and sale of aeronautical equipment. In December 1991,
we acquired the heat exchanger operations of TAT Industries and in February
2000, we entered into an agreement to purchase its operations relating to the
manufacture of aviation accessories and to lease certain of its properties.
In March 1987, we completed an initial public offering of our securities
in the United States. We were listed on NASDAQ National Market from our initial
public offering until July 1998 when the listing of our ordinary shares was
transferred to the NASDAQ Capital Market. Since August 2005 our shares are also
traded on the TASE.
On July 7, 2005, our subsidiary, Limco-Airepair, purchased Piedmont, an
FAA certified company engaged in the repair and overhaul of various aircraft
accessories. Under the terms of the acquisition, we paid $5.34 million including
acquisition costs for Piedmont and agreed to repay part of Piedmont's
outstanding indebtedness. Piedmont is a recognized leader in the overhaul,
repair, maintenance, service and supply of propellers, landing gear, auxiliary
power units, or APU, and line replace units, or LRU. In addition Piedmont offers
inventory management services for parts, accessories, systems and sub-systems
for airlines, aircraft leasing companies and other customers. We also agreed to
pay the former shareholders of Piedmont $200,000 per year for a term of three
years, in consideration for their agreement not to compete with Piedmont during
this period.
B. BUSINESS OVERVIEW
INDUSTRY OVERVIEW
We manufacture a complete line of heat transfer equipment both in the
United States and Israel, including heat exchangers, precoolers, oil coolers and
cold plates, or Heat Transfer Equipment. Heat Transfer Equipment facilitates the
necessary removal and dissipation of heat generated during the operation of
mechanical and electronic systems. Our Heat Transfer Equipment is generally
integrated into a complete cooling system. Using our technological expertise, we
design each of our heat transfer products to meet the specific space, power,
performance and other needs of our customers. Heat Transfer Equipment is
marketed worldwide for applications in commercial and military aircraft and
electronic systems, the primary users of such equipment. Our customers include
Liebherr-Aerospace Toulouse S.A., or Liebherr, Boeing McDonnell Douglas
Aerospace, or Boeing, Israel Aircraft Industries, or IAI, and Cessna Aircraft
Company, or Cessna, as well as the United States Air Force and Navy. Such
customers typically enter into supply contracts with us pursuant to which we
manufacture specified Heat Transfer Equipment in connection with the customers'
production or retrofitting of particular aircraft equipment. Such supply
contracts are generally for a period of between one to four years.
We are also engaged in the remanufacture, overhaul and repair of
commercial and military Heat Transfer Equipment and other aviation equipment, or
Overhaul Services. Heat Transfer Equipment and other aviation equipment
typically require Overhaul Services or replacement after three to five years of
service. Remanufactured units are generally given the same warranties as are
provided by the original manufacturers of new units of the same type. We
primarily market our Overhaul Services to major commercial airlines, such as KLM
Royal Dutch Airlines, or KLM, and Lufthansa Technic, or Lufthansa. We also
provide Overhaul Services to Liebherr, a manufacturer of air systems for
commercial aircraft, and Hamilton Sundstrand, a supplier of technologically
advanced aerospace equipment. We are also engaged with the United States
Government and Navy in overhaul and repair of military heat transfer equipment.
11
In addition, we design, develop and manufacture aviation accessories.
These accessories include fuel components, such as valves and pumps, secondary
power systems, various instrumentation and electronic assemblies. Customers for
our aviation accessories include Lockheed-Martin Corp, or Lockheed-Martin,
Teledyne Continental Motors, or Teledyne, the Israeli Air Force, IAI, as well as
the United States Air Force and Navy. We currently overhaul emergency power
systems, hydrazine tanks, jet fuel starters, and cooling turbines and valves for
F-16s. In addition we overhaul anti-icing valves and starters for the Apache
helicopter. Customers for our systems overhaul services include the Israeli Air
Force, IAI, NATO air forces, as well as the United States Air Force and Navy.
We also design, develop, manufacture and market military air conditioning
systems, or AC Systems, and market nuclear, biological, and chemical systems, or
NBC Systems, produced by other manufacturers, used in military shelters, tents
and armored vehicles. These systems are marketed worldwide to government
agencies and to shelter manufacturers. We market our products and services both
through our internal marketing staff and through a worldwide network of
independent representatives. These efforts are coordinated and directed by our
marketing personnel.
Piedmont is engaged in overhaul, repair, maintenance, and service of
propellers, landing gear, APU, and LRU. In addition Piedmont offers inventory
management services for parts, accessories, systems and sub-systems for
airlines, aircraft leasing companies and other customers. Piedmont's customers
include Fokker Services B.V., or Fokker, Delta Airlines Inc., or Delta, Jet
Support Services Inc., or JSSI, Pace Airlines Inc., or Pace, Jazz Air LP, or
Jazz, and Turbine Engines Consultants Inc., or Turbine.
MARKET AND BUSINESS STRATEGY
Our principal growth strategy both in the United States and Israel is to:
(i) expand our Heat Transfer Equipment business in existing and new markets;
(ii) provide overhaul and repair services for additional aircraft components;
(iii) expand our marketing of overhaul and repair services to additional
segments of the aerospace industry; and (iv) use our technological expertise to
expand into related businesses.
Capitalizing on the continuing trend in the aerospace industry to reduce
costs by prolonging the useful life of existing equipment, we have initiated a
concentrated marketing effort for our Overhaul Services, which we previously
provided only for widebody commercial aircraft. This marketing strategy has
enabled us to penetrate the regional, helicopter, general aviation and military
aircraft markets. In addition, we have targeted the after sale market for
certain other products in addition to our Heat Transfer Equipment.
We have identified the electronics industry as a market with significant
growth potential for our Heat Transfer Equipment. For the past several years we
have been engaged in the design, development and manufacture of electronic heat
dissipation equipment such as cold plates, heat sinks, cold walls and other
components which remove and dissipate heat from electronic systems. Our Heat
Transfer Equipment is currently used primarily in airborne radar systems,
electronic warfare packages, avionics, electronic pods and other airborne
electronic systems. Our customers for these products include Elta Electronics
Industries Ltd. (a subsidiary of IAI), or Elta, Rafael Armament Development
Authority Ltd., Elisra Electronics Systems Ltd. and El-Op Electronics Industries
Ltd. (a division of Elbit Systems Ltd).
12
In April 1999, we entered into a license and technical assistance
agreement with a subsidiary of Liebherr. Pursuant to this agreement, we supplied
intellectual property, technology and technical assistance for the development
and manufacture of certain types of advanced aeronautical equipment in
consideration of $4,250,000 payable over five years. We received our last
payment under the agreement in December 2005. In addition, pursuant to the
agreement, beginning in the fourth quarter of 2003, and for a period of ten
years thereafter, any order that Liebherr receives for the production of
products developed with our intellectual property, technology and technical
assistance will be divided equally between us and Liebherr will pay us royalties
of 7.5% of the income from its 50% interest. As of December 31, 2005, we have
received $850,000 from orders received by Liebherr and royalties in the amount
of $158,049.
PRODUCTS AND SERVICES
The table below sets forth, for the periods indicated, the revenues
derived from sales, and the percentage of total revenues, of our products and
services:
Years Ended
---------------------------------------
December 31, 2005 December 31, 2004
------------------ ------------------
(Dollars in thousands)
Amount Percent Amount Percent
-------- ------- -------- -------
Sources of Revenues
Heat Transfer Equipment and
aeronautical accessories
manufacturing................... $ 16,067 32.66% $ 20,724 62.3%
Overhaul services.................. 28,007 56.93% 11,398 34.3%
Other products..................... 5,119 10.14% 1,121 3.4%
-------- ------- -------- -------
Total ............................. $ 49,193 100.0% $ 33,243 100.0%
======== ======= ======== =======
HEAT TRANSFER EQUIPMENT
We manufacture a wide range of Heat Transfer Equipment both in the United
States and Israel. Heat Transfer Equipment, such as heat exchangers, precoolers,
evaporators, oil coolers and cold plates, are integral components of a wide
variety of environmental control systems and mechanical and engine systems, as
well as a wide range of electronic systems. These systems generate heat during
operation that must be removed and dissipated. Heat Transfer Equipment
components facilitate the exchange of the heat created through the operation of
these systems by transmitting the heat from a hot medium (air, oil or other
fluids) to a cold medium for disposal.
As a component in a larger operating system, Heat Transfer Equipment must
be efficient, compact, lightweight and reliable. In the aerospace industry,
there is a constant need for improvements in performance, weight, cost and
reliability. In addition, as electronic systems become smaller and more densely
packed, the need for sophisticated and efficient Heat Transfer Equipment to
provide the cooling functions becomes more critical. Using our technological
expertise, we believe we are well positioned to respond to these industry
demands through continued new product development and product improvements.
Our principal Heat Transfer Equipment products include air-to-air heat
exchangers and precoolers and liquid-to-air heat exchangers. Typically, the
air-to-air heat exchangers and precoolers cool a jet engine's hot "bleed air"
which, when cooled, is then used in the aircraft's air conditioning,
pressurization and pneumatic systems. The liquid-to-air heat exchangers cool
liquids such as engine oil, hydraulic oil and other liquid coolants used in
other systems.
13
We provide anywhere from one to all of the different types of Heat
Transfer Equipment in certain aircraft. Widebody planes require approximately
seven different types of Heat Transfer Equipment, while regional aircraft and
helicopters contain approximately three types. Our heat exchangers and
precoolers, which are types of Heat Transfer Equipment found in most aircraft,
are generally sold for between $1,000 and $20,000 per unit.
A substantial portion of our Heat Transfer Equipment is sold to customers
in connection with the original manufacture or retrofitting of particular
aircraft equipment. We generally enter into long-term supply contracts with our
customers, which require us to supply Heat Transfer Equipment as part of a
larger project.
We also manufacture heat dissipation equipment, such as evaporators, cold
plates, cooling chests, heat sinks and cold walls (which may be air-to-air,
liquid-to-air or liquid-to-liquid), which control and dispose of heat emitted by
the operation of various electronic systems. These heat dissipation products are
currently utilized mainly in radar systems, avionics, electronic warfare systems
and various pods for targeting, navigation and night vision.
Our Heat Transfer Equipment is marketed worldwide for applications in
commercial and military aircraft and electronics systems. Our customers for Heat
Transfer Equipment include: Liebherr, Boeing, IAI, Cessna, Bell Helicopter, or
Bell, and Raytheon Air Craft Company, or Raytheon, as well as the United States
Air Force and Navy. As a result of the specialized nature of the systems in
which our parts are included, spare and replacement parts for the original heat
transfer systems are usually provided by us.
REMANUFACTURE, OVERHAUL AND REPAIR SERVICES
We remanufacture, overhaul and repair Heat Transfer Equipment through
Limco-Airepair's FAA certified repair station. We primarily market our Overhaul
Services to major commercial airlines, such as KLM and Lufthansa. We also
provide Overhaul Services to Liebherr, Hamilton Sundstrand and the U.S. Air
Force and Navy.
Heat transfer products typically require Overhaul Services or replacement
after three to five years of service. We offer our customers repair services on
three levels. If the damage is significant, we will remanufacture the unit,
which generally entails replacing the core matrix of the damaged or old heat
transfer product in lieu of replacing the entire unit with a new one. We design
and develop these customized remanufacture programs as cost effective
alternatives to new part replacement. In cases of less severe damage, we will
either overhaul or repair the unit as necessary. Remanufactured units carry
warranties identical to those provided with new units.
We currently overhaul emergency power systems, hydrazine tanks, jet fuel
starters, and cooling turbines and valves for F-16s. In addition we overhaul
anti-icing valves and starters for the Apache helicopter. Our customers for our
systems overhaul services include the Israeli Air Force, IAI, NATO air forces,
as well as the U.S. Air Force and Navy.
Piedmont repairs and overhauls other aircraft accessories such as
propellers, landing gear, APU, and LRU mainly for regional and corporate
aircraft. Part of the revenues related to the APU activities, are being
generated through long term agreements with several customers. Piedmont
customers include Fokker, Delta, JSSI, Pace, Jazz and Turbine.
14
SYSTEM DESIGN, DEVELOPMENT AND MANUFACTURE
We are engaged in the design, development and manufacture of aviation
accessories. These accessories include fuel component systems, such as valves
and pumps, secondary power systems, various instrumentation and electronic
assemblies. Our customers for the design, development and manufacture of
aviation accessories include Lockheed-Martin, Boeing, Teledyne, the Israeli Air
Force, IAI, as well as the U.S. Air Force and Navy.
CONVENTIONAL AIR CONDITIONING SYSTEMS
We offer a wide range of highly reliable and affordable military AC
systems that feature high performance and simplicity. We manufacture a
comprehensive line of versatile AC systems which provide a complete solution for
applications where heat removal is essential. Simple installation, maintenance
and easy integration make the systems user-friendly. The units meet the
MIL-STD-810 and MIL-STD-461 requirements and are designed for operation in
difficult climatic conditions. Our AC systems have been installed in military
communications shelters, mobile shelters, and armored vehicles, and used in many
other military applications. Beside our standard units, we manufacture
custom-made systems based on customer specification. We have transferred our AC
systems know how to our U.S. subsidiary, Limco-Airepair, which initiated partial
production of AC systems on its premises. Our revenues from sales of AC systems
from 2002 through 2005 were not material.
NUCLEAR, BIOLOGICAL, AND CHEMICAL SYSTEMS
We market NBC systems manufactured by Bet-El Industries Ltd. as a
complementary solution for our AC systems. We generally offer these systems to
customers who ask for a complete solution. Our revenues from sales of NBC
systems from 2002 through 2005 were not material.
PARTS DISTRIBUTION
Piedmont offers inventory management services for parts, accessories,
systems and sub systems for airlines aircraft leasing companies and other
customers. Piedmont's customers for these services include Pace, Turbine,
Mercury Aviation Inc. and The Timken Company.
SALES AND MARKETING
We derive our revenues mainly from sales to customers in the United
States, Israel and Europe. The geographic distribution of such sales is as
follows:
Years Ended
----------------------------------------------------
December 31, 2005 December 31, 2004
---------------------- -----------------------
(Dollars in thousands)
Geographic Region Amount Percent Amount Percent
----------------- -------- ------- -------- -------
Israel ................. $ 4,122 8.38% $ 5,095 15.33%
Asia ................... 1,983 4.03% 1,430 4.30%
United States .......... 30,495 61.99% 17,569 52.85%
Europe ................. 11,256 22.88% 8,736 26.28%
Other .................. 1,337 2.72% 413 1.24%
-------- ------- -------- -------
Total .............. $ 49,193 100.00% $ 33,243 100.00%
15
We market our products and services through our marketing staff and a
worldwide network of independent representatives. Our representatives are
strategically located near key customer sites in offices throughout the United
States, Europe, Asia, the Middle East and South America. Our staff is in regular
contact with engineering and procurement personnel and program managers of
existing and target customers to identify new programs and needs for our
products, obtain requests for quotations and identify new product opportunities.
Our marketing activities also include advertising in technical publications
which target Heat Transfer Equipment and related markets, attending exhibitions,
trade shows and professional conferences, organizing seminars and direct mailing
of advertisements and technical brochures to current and potential customers.
MAJOR CUSTOMERS
Our products and services are provided worldwide to original equipment
manufacturers, or OEMs, and end-user customers in the commercial, military and
industrial markets. Our major customers include OEMs such as Elta, Liebherr,
Lockheed-Martin, Hamilton, Cessna, IAI and Boeing and end-users such as KLM,
Lufthansa, Bell, Raytheon and the U.S. Air Force and Navy. During the fiscal
years ended December 31, 2005, 2004 and 2003, Elta accounted for approximately
2.5%, 9.8% and 12.1%, respectively, of our revenues. For the fiscal years ended
December 31, 2005, 2004 and 2003, Liebherr accounted for 5.8%, 15.4% and 12.9%,
respectively, of our revenues.
Sales to the U.S. and Israeli governments accounted for approximately
11.1% and 1.7% of our revenues in 2005, approximately 10.1% and 2.6% of our
revenues in 2004, and approximately 15.3% and 3.3% of our revenues in 2003,
respectively. Government contracts are generally terminable by the governmental
customer at will.
BACKLOG
On June 1, 2006, we had a backlog of approximately $17 million for
products to be delivered through December 31, 2008. On June 20, 2005, we had a
backlog of approximately $19 million for products to be delivered through
December 31, 2007. We anticipate that approximately $15 million of our backlog
at June 1, 2006 will be delivered by December 31, 2006 and approximately $2
million will be delivered by December 31, 2007.
COMPETITION
The heat transfer field requires specialized technology, equipment and
facilities, an experienced technical and engineering staff, as well as highly
sophisticated and trained technicians. Although these factors have tended to
limit the number of manufacturers who enter this field, it nonetheless remains
very competitive. The major manufacturers in the field are Honeywell and
Hamilton. Other manufacturers in the United States are Hughes-Treitler
Manufacturing Corp., Ametek Inc., Stewart Warner South Wind Corp., United
Aircraft Products, Triumph, Lytron and Lockhart Industries Inc., and
manufacturers based in Europe include I.M.I. Marston Ltd., Normalair Garrett
Ltd., or NGL, Honeywell-SECAN France, or SECAN, and Behr Industry GMBH & Co KG.
Our major competitor in the Overhaul Services business is Lori, a
subsidiary of Honeywell. Other competitors include SECAN and NGL, which are
based in Europe.
Piedmont's major competitors are Standard Aero Group, Aerotech
International Inc, Honeywell, Almada Aerospace, JetSet Aerospace,LLC,
Messier-Dowty Aerospace (MD), Computer Sciences Corporation, AAR Corp., Hawker
Pacific APRO, Aircraft Propeller Service Inc, Pacific Propeller International
LLC, and H&H Propeller.
16
PRODUCT AND SERVICE WARRANTIES
We provide warranties for our products and services ranging from one to
five years, which vary with respect to each contract and in accordance with the
nature of each specific product. To date, our warranty costs have not been
substantial. As of December 31, 2005 the aggregate amount of the warranty
provision is not material.
ENGINEERING AND MANUFACTURING
We and our subsidiaries employ 322 persons engaged in engineering and
manufacturing, remanufacturing, repair, and testing of products. Our engineering
staff has extensive knowledge and experience related to our Heat Transfer
Equipment. Most of our product lines have a designated project manager who is an
experienced engineer and is in charge of all the activities in his area. The
product manager interfaces with the customer, engineering department,
manufacturing department and vendors, and is responsible for all aspects of the
program including scheduling, adherence to specifications, customer support and
reporting.
In general, we have manufacturing capabilities for most of the components
of our Heat Transfer Equipment. We also manufacture the necessary tools,
fixtures, test equipment and special jigs required to manufacture, assemble and
test these products. We have developed proprietary design techniques and
computer-aided design software which assists in the mechanical design and
manufacturing of our products. All of our products are inspected and tested by
trained inspectors using highly sophisticated test equipment in accordance with
customer requirements.
We are dependent upon single sources of supply for certain components and
seek to maintain an adequate inventory of all imported components. Our Israeli
operations employ the services of a purchasing agent, which is a corporation
wholly-owned by certain of our officers and directors. See Item 13. "Interest of
Management in Certain Transactions."
SOURCE AND AVAILABILITY OF RAW MATERIALS
We acquire most of the components for the manufacture 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. Generally, we have not
experienced any particular difficulty in obtaining timely deliveries of
necessary components. 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. See Item 3.D. "Risk Factors."
REGULATION
Our operations in the United States are regulated by the FAA and the U.S.
Department of Defense. We are required to comply with FAA regulations, which
generally require us to obtain FAA approval prior to the sale of new products
for aircraft applications. We currently hold all necessary FAA authorizations
required for the production of our products. In addition, we hold FAA repair
station certificates which permit us to provide our Overhaul Services. We are
also required to comply with the U.S. Department of Defense federal acquisition
regulations, which governs all of our work for military applications.
17
Our operations in Israel are subject to supervision by the Ministry of
Defense and Civil Aviation Administration. We are certified by the Israeli Air
Force for the Ministry of Defense for both manufacturing and maintenance. We are
also licensed as a repair station for certain components by the Israeli Civil
Aviation Administration. In addition, our export of certain products and/or
know-how is subject to approval by The Foreign Defense Assistance and Defense
Export Organization of the Israeli Ministry of Defense, or SIBAT. Permits from
SIBAT must be obtained for the initiation of sales proposals with regard to such
exports, as well as for the actual export of such products.
EXPORT POLICY
Exports of military related products are subject to the military export
policy of the State of Israel. Current Israeli Government policy encourages
exports to approved customers, provided that such exports do 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 may not be able to obtain export permits or licenses in the
future. In addition, governmental policy with respect to military exports may be
altered. However, to date we have not encountered any significant difficulties
in obtaining necessary permits or licenses for sale of our products.
PROPRIETARY RIGHTS
At the present time we do not own any patents. We rely on laws protecting
trade secrets, and consider such items proprietary, but believe that our success
depends less on the ownership of such proprietary rights than on our innovative
skills, technical competence marketing and engineering abilities. We have no
existing material registered trademarks.
C. ORGANIZATIONAL STRUCTURE
We are 51.70% owned by TAT Industries, a public company incorporated under
the law of the State of Israel whose shares are traded on the TASE. TAT
Industries is a holding company.
Our wholly-owned subsidiary Limco-Airepair is incorporated under the laws
of Oklahoma and located in Tulsa, Oklahoma. Limco-Airepair is certified by the
FAA to engage in the remanufacture, overhaul and repair of Heat Transfer
Equipment for the aviation industry.
Limco-Airepair's wholly-owned subsidiary Piedmont is incorporated under
the laws of North Carolina and its facilities are located in Kernersville and
Winston Salem, North Carolina. Piedmont is certified by the FAA to engage in the
repair and overhaul of various aircraft accessories.
D. PROPERTY, PLANTS AND EQUIPMENT
Our executive offices, research and development and manufacturing
facilities in Israel are located in a 31,679 square foot facility located in
Park Re'em near Gedera. The land of this facility is leased from the Israeli
Government pursuant to a lease that expires in 2020, which was assigned, but not
registered, to us by TAT Industries in connection with our acquisition of TAT
Industries' heat exchanger operations in December 1991. See Item 7. "Major
Shareholders and Related Party Transactions."
In connection with the purchase of the operations relating to the
manufacture of aviation accessories of TAT Industries in February 2000, we and
TAT Industries entered into a lease agreement, pursuant to which we are leasing
from TAT Industries approximately 329,000 square feet, including 90,000 square
feet of office space, for a period of 24 years and 11 months. From 2000 to 2004
we paid TAT Industries annual rental fees of approximately $300,000 per year,
with an additional incremental payment of 2% per year. The rental fee is subject
to revaluation every fifth year. In 2005 the rental fee was reviewed by a real
estate appraiser, and as a result was increased to $310,000 per year. The rental
fee will be subject to an increase in 2010. We are entitled to a one-time right
of termination of the agreement after 10 years.
18
Limco-Airepair owns its Tulsa, Oklahoma facility, which consists of
approximately 55,000 square feet.
Piedmont leases approximately 56,000 square feet space for its facility in
Kernersville, North Carolina. In 2006 the annual rental expenses for this
property will decrease to $58,200 from $54,000 in 2005. The lease expires on
October 30, 2006. The lease include three renewal options, each for a five year
term. In addition, Piedmont leases approximately 31,000 square feet space for
its facility in Winston Salem, North Carolina. The lease which provides for an
annual rental expense of $6,000 in 2005 expires in November 30, 2007, and we
expect a significant increase in the rental expense for this facility.
Management believes that our present facilities are well maintained, in
good condition and are sufficient for us to continue to operate and meet our
production needs. Our utilization of our production capacity varies from time to
time based on fluctuations in our business and other factors.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
THE FOLLOWING DISCUSSION OF OUR RESULTS OF OPERATIONS SHOULD BE READ
TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES, WHICH
APPEAR ELSEWHERE IN THIS ANNUAL REPORT. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT PLANS, ESTIMATES AND BELIEFS
AND INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND ELSEWHERE IN
THIS ANNUAL REPORT.
BACKGROUND
We were incorporated under the laws of the State of Israel in April 1985.
We are principally engaged in the manufacture and sale of a broad range of Heat
Transfer Equipment used in mechanical and electronic systems on-board commercial
and military aircraft and in a variety of other electronic equipment. We have
two wholly owned subsidiaries in the United States, Limco-Airepair and Piedmont,
which are engaged in the remanufacture, overhaul and repair of Heat Transfer
Equipment and other aircraft accessories.
OVERVIEW
Our revenues and cost of revenues may vary significantly from year to year
due to fluctuations in the mix of products ordered by customers and in the
timing of orders and deliveries. As a result, comparisons of one period to
another in any given year are not necessarily an accurate indication of future
trends.
19
A substantial portion of our revenues is derived from the sale of products
for the non-military market in the United States, Israel and Europe,
nevertheless, our management believes that the success and development of our
business will continue to depend in part upon our ability to participate in the
defense programs of the United States, Israel and other governments. Certain of
such defense programs have been reduced or terminated as a result of current
political conditions and budgetary constraints; it is not possible to determine
the extent to which such reductions have affected our revenues. These
governments may not continue to commit to the current level of resources to such
programs, we may not be able to continue to participate in such programs, and
changes to such programs may materially affect our financial condition. As a
result, our historical results of operations and financial position are not
necessarily indicative of any future operating results or financial position.
GENERAL
Our consolidated financial statements appearing in this annual report are
prepared in U.S. dollars and in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP. All references in this annual
report to "dollars" or "$" are to U.S. dollars and all references in this annual
report to "NIS" are to New Israeli Shekels. Transactions and balances originally
denominated in dollars are presented at their original amounts. Transactions and
balances in other currencies are remeasured into dollars in accordance with the
principles set forth in Financial Accounting Standards Board Statement No. 52.
The majority of our sales are made outside Israel in dollars. In addition,
substantial portions of our costs are incurred in dollars. Since the dollar is
the primary currency of the economic environment in which we and our
subsidiaries operate, the dollar is our functional and reporting currency and,
accordingly, monetary accounts maintained in currencies other than the dollar
are remeasured using the foreign exchange rate at the balance sheet date.
Operational accounts and non-monetary balance sheet accounts are measured and
recorded at the exchange rate in effect at the date of the transaction. All
balance sheet accounts have been translated using the exchange rates in effect
at the balance sheet date. Statement of operations amounts have been translated
using the average exchange rate for the period. The resulting translation
adjustments are reported as a component of shareholders' equity in accumulated
other comprehensive income (loss).
ACQUISITION OF PIEDMONT
In July 2005 Limco-Airepair purchased Piedmont, an FAA certified company
engaged in the repair and overhaul of various aircraft accessories. Under the
terms of the acquisition, we paid $5.34 million, including acquisition costs,
for Piedmont and agreed to repay part of Piedmont's outstanding indebtedness. In
addition, we agreed to pay the former shareholders of Piedmont $200,000 per year
for a term of three years, in consideration for their agreement not to compete
with Piedmont during this period. Piedmont is a recognized leader in the
overhaul, repair, maintenance, service and supply of propellers, landing gear
and APU/LRU units, and its acquisition strengthens our position as a Overhaul
Services provider in the United States.
Based upon a valuation of tangible and intangible assets acquired and
liabilities assumed, we have allocated the total cost of the acquisition to
assets and liabilities, as follows:
ASSET FAIR MARKET VALUE
(in thousands)
TANGIBLE ASSETS
Current assets, net liabilities (9,888)
Inventories 7,046
Property and equipment 1,173
Other Assets 99
--------
Net tangible assets $ (1,667)
INTANGIBLE ASSETS
Customer relationships $ 1,937
Non compete agreement 653
Certificates 76
Lease at below market rates 97
Consulting service agreements 6
Tradename 128
Workforce 803
Goodwill 3,964
--------
TOTAL FAIR MARKET VALUE $ 5,997
========
20
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATIONS
Our consolidated financial statements are prepared in accordance with U.S.
GAAP. These accounting principles require management to make certain estimates,
judgments and assumptions based upon information available at the time that they
are made, historical experience and various other factors that are believed to
be reasonable under the circumstances. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the periods presented. While all the accounting policies
impact the financial statements, certain policies may be viewed to be critical.
These policies are those that are both most important to the portrayal of our
financial condition and results of operations and require our management's most
difficult, subjective and complex judgments and estimates. Actual results could
differ from those estimates.
In many cases, the accounting treatment of a particular transaction is
specifically dictated by generally accepted accounting principles in the United
States and does not require management's judgment in its application. There are
also areas in which management's judgment in selecting among available
alternatives would not produce a materially different result. Our management has
reviewed these critical accounting policies and related disclosures with the
Audit Committee.
Our management believes the significant accounting policies which affect
management's more significant judgments and estimates used in the preparation of
our consolidated financial statements and which are the most critical to aid in
fully understanding and evaluating the our reported financial results include
revenue recognition and inventory valuation.
SEGMENTS
We manage our business on the basis of two reportable segments, repair and
OEM and parts, and follow the requirements of Statement of Financial Accounting
Standard No. 131 "Disclosures About Segments of an Enterprise and Related
Information." The repair and OEM segment focuses on remanufacture, overhaul and
repair of heat exchangers and other heat transfer products for military and
civilian aircraft. The parts segment focuses on sales of parts of APU's
propellers and landing gears.
REVENUE RECOGNITION
We derive our revenue primarily from two sources: product revenues and
service revenues. Revenue related to sales of our products is generally
recognized when persuasive evidence of an arrangement exists; the product has
been delivered and title and risk of loss have passed to the buyer; the sales
price is fixed and determinable; no further obligations exist; and
collectibility is probable. Revenue from remanufacture repair and overhaul
services are recognized as services are performed.
21
Part of the revenues related to the APU activities are generated from long
term agreements, or Power-by-the-Hour. The monthly revenues generated from those
agreements are based on flight hours estimation. Every three months we make an
adjustment between the actual flight hours and the estimated flight hours that
was applied.
INVENTORY VALUATION
Our policy for valuation of inventory and commitments to purchase
inventory, including the determination of obsolete or excess inventory, requires
us to perform a detailed assessment of inventory at each balance sheet date
which includes a review of, among other factors, an estimate of future demand
for products within specific time frames, valuation of existing inventory, as
well as product lifecycle and product development plans. The business
environment in which we operate, the wide range of products that we offer and
the relatively short sales-cycles we experience all contribute to the exercise
of judgment relating to maintaining and writing-off of inventory levels. The
estimates of future demand that we use in the valuation of inventory are the
basis for our revenue forecast, which is also consistent with our short-term
manufacturing plan. Inventory reserves are also provided to cover risks arising
from non-moving items. Inventory management remains an area of management focus
as we balance the need to maintain strategic inventory levels to ensure
competitive lead times against the risk of inventory obsolescence because of
rapidly changing technology and customer requirements.
WARRANTY PERIOD POLICY
We provides warranties for our products and services ranging from one to
five years, which vary with respect to each contract and in accordance with the
nature of each specific product. We estimate the costs that may be incurred
under our warranty and records a liability in the amount of such costs at the
time the product is shipped. We periodically assess the adequacy of our recorded
warranty liabilities and adjusts the amounts as necessary.
CREDIT POLICY
Our trade receivables are derived mainly from sales to customers in the
United States, Israel and Europe. We generally do not require collateral,
however, in certain circumstances we may require letters of credit. Our
management believes that credit risks relating to trade receivables are minimal
since our customers are financially sound. We perform ongoing credit evaluations
of our customers' financial condition. The allowance for doubtful accounts is
determined with respect to specific debts that are doubtful of collection.
MARKETABLE SECURITIES
Marketable securities consist of available for sale securities, which are
debt securities in which we invested with the intention of holding until the
maturity dates of such securities. If it is determined, based on valuations,
that a decline in the fair value of any of the investments is not temporary, an
impairment loss is recorded and included in the consolidated statements of
income as financial expenses.
INCOME TAXES AND VALUATION ALLOWANCE
We operate within multiple taxing jurisdictions and are subject to audits
in these jurisdictions. These audits can involve complex issues, which may
require an extended period of time to resolve. In management's opinion, adequate
provisions for income taxes have been made for all years. Although management
believes that its estimates are reasonable, no assurance can be given that the
final tax outcome of these issues will not be different than those that are
reflected in our historical income tax provisions.
22
Deferred taxes are determined utilizing the asset and liability method
based on the estimated future tax effects of differences between the financial
accounting and tax bases of assets and liabilities under the applicable tax
laws. Valuation allowances are provided if based upon the weight of available
evidence, it is more likely than not that some or all of the deferred tax assets
will not be realized.
INTANGIBLE ASSETS
As a result of the acquisition of Piedmont in 2005, our balance sheet as
of December 31, 2005 includes acquired intangible assets, such as goodwill,
customer relations and trade names, which totaled approximately $7.66 million.
In the course of the analysis and valuation of intangible assets, we use
financial and other information, including financial projections and valuations
provided by third parties. Although we evaluate our intangible assets when there
is an indication of impairment, our projections are based on the information
available at the respective valuation dates, and may differ from actual results.
GOODWILL
In accordance with Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets", ("SFAS No.142"), goodwill acquired in a
business combination that closes on or after July 1, 2001 is deemed to have
indefinite life and will not be amortized. SFAS 142 requires goodwill to be
tested for on adoption and at least annually thereafter or between annual tests
in certain circumstances, and impaired, rather than being amortized as required
by previous accounting standards. As of December 31, 2005 we had total goodwill
of $5.3 million on our balance sheet. Goodwill is tested for impairment by
comparing the fair value of the reporting unit with its carrying value. The fair
value was determined based on our management's future operations projections,
using discounted cash flows and market approach and market multiples valuation
methods. No indication of impairment was identified. In assessing the
recoverability of our goodwill and other intangible assets, we must make
assumptions regarding the estimated future cash flows and other factors to
determine the fair value of the respective assets. If these estimates or their
related assumptions change in the future, we may be required to record
impairment charges for these assets.
RECENTLY ISSUED ACCOUNTING STANDARDS
On December 16, 2004, the Financial Accounting Standards Board, or FASB,
issued FASB Statement No. 123 (revised 2004), "Share-Based Payment", which is a
revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation."
Statement 123(R) supersedes Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and amends FASB Statement No. 95,
"Statement of Cash Flows". Generally, the approach in Statement 123(R) is
similar to the approach described in Statement 123. However, FAS 123 permitted,
but did not require, share-based payments to employees to be recognized based on
their fair values while Statement 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the
income statement based on their fair values. Accordingly, pro forma disclosure
is no longer an alternative. SFAS 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 us in the first interim period
beginning after January 1, 2006.
23
As permitted by Statement 123, we currently account for share-based
payments to employees using intrinsic value method of Accounting Principles
Board Opinion No. 25, or APB No. 25. Under APB No. 25, when the exercise price
of the Company's stock options is less than the market price of the underlying
shares on the date of grant, compensation expense is recognized over the vesting
period. Accordingly, generally we recognize no compensation cost for employee
stock options. The adoption of Statement 123(R)'s fair value method will have no
material impact on our results of operations and no material impact on our
overall financial position. Had we adopted Statement 123(R) in prior periods,
the impact of that standard would have approximated the impact of Statement 123
as described in the disclosure of pro forma net income and earnings per share in
Note 2u to the consolidated financial statements.
We will implement FAS 123(R) using the modified prospective method
starting January 1, 2006. Under this method, we will begin recognizing
compensation cost for equity-based compensation for all new and existing
unvested share-based awards after the date of adoption. We expect that the
adoption of the SFAS No. 123(R) fair value method will have no material impact
on the consolidated results of operations, and no material impact on our overall
consolidated financial position or consolidated cash flows.
In March 2005, the SEC staff issued Staff Accounting Bulletin No. 107, or
SAB 107, to give guidance on implementation of SFAS 123R, which we plan to adopt
in implementing SFAS 123R.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections", which supersedes APB Opinion No. 20, "Accounting Changes" and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements". SFAS 154
provides guidance and changes the requirements for the accounting for and
reporting of accounting changes and error corrections. APB No. 20 previously
required that most voluntary changes in accounting principles be recognized by
including in net income for the period of the change the cumulative effect of
changing to the new accounting principle. SFAS 154 requires retroactive
application to prior periods' financial statements of a voluntary change in
accounting principles unless it is impracticable. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. As of December 31, 2005 adoption of SFAS 154 did not
have a material impact on our financial position or results of operations.
In November 2004, the FASB issued SAFS 151 "Inventory Costs, an Amendment
of ARB No. 43, Chapter 4". 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 allocation of fixed
production overheads to the costs of conversion be based on normal capacity of
the production facilities. SAFS 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. We do not expect that the
adoption of SFAS 151 will have a material effect on our financial position or
results of operations.
In November 2005, the FASB issued FASB Staff Position 115-1, or FSP. The
FSP addresses the determination as to when an investment is considered impaired,
whether that impairment is other than temporary, and the measurement of an
impairment loss. The FSP also includes accounting considerations subsequent to
the recognition of other than-temporary- impairments. The guidance in this FSP
amends FASB Statements 115, "Accounting for Certain Investments in Debt and
Equity". The FSP replaces the impairment evaluation guidance if EITF Issue No.
03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments", with references to the existing other-than-temporary
impairment guidance. The FSP clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell an impaired security has not
been made. The guidance in this FSP is to be applied to reporting periods
beginning after December 15, 2005. As of December 31, 2005, adoption of FSP
115-1 did not have a material impact on our financial position or results of
operations.
24
A. OPERATING RESULTS
The following table presents, for the periods indicated, information
concerning our results of operations:
Year ended December 31
-------------------------------------
2005 2004 2003
-------- -------- --------
(in thousands)
Revenues
Products ........................... $ 22,856 $ 20,724 $ 19,255
Services and other ................. 26,337 12,519 11,427
-------- -------- --------
49,193 33,243 30,682
Cost of revenues ...................... 35,592 22,166 20,068
-------- -------- --------
Gross profit .......................... 13,601 11,077 10,614
-------- -------- --------
Research and development costs, net ... 72 125 120
Sales and marketing expenses .......... 2,495 1,894 1,958
General and administrative expenses ... 5,138 3,793 3,476
-------- -------- --------
7,705 5,812 5,554
Operating income ...................... 5,896 5,265 5,060
Financial income (expenses), net ...... (441) 87 (25)
Other income .......................... 210 54 24
-------- -------- --------
Income before income taxes ............ 5,665 5,406 5,059
Income taxes .......................... 2,136 1,667 1,225
-------- -------- --------
Net income ............................ $ 3,529 $ 3,739 $ 3,834
======== ======== ========
The following table presents, for the periods indicated, information
concerning our results of operations as a percentage of our revenues:
Year ended December 31
-------------------------------------
2005 2004 2003
-------- -------- --------
Revenues
Products ........................... 46% 62% 63%
Services ........................... 54 38 37
-------- -------- --------
100 100 100
Cost of revenues ...................... 72 67 65
-------- -------- --------
Gross profit .......................... 28 33 35
-------- -------- --------
Research and development costs, net ... * * *
Sales and marketing expenses .......... 5 6 6
General and administrative expenses ... 10 11 11
-------- -------- --------
Operating income ...................... 12 16 17
Financial income (expenses) , net ..... (1) * 1
Other income .......................... * * *
-------- -------- --------
Income before income taxes ............ 11 16 16
Income taxes........................... 4 5 4
-------- -------- --------
Net income............................. 7% 11% 12%
======== ======== ========
------------
* less than one percent.
25
YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004
REVENUES. Our revenues increased 48.0% to $49.2 million in 2005 from $33.2
million in 2004. The increase in our revenues in 2005 is mainly due to the
purchase of Piedmont in July 2005. We included Piedmont revenues for the period
after its acquisition in our 2005 financial statements. In 2005, we had revenues
of $45.2 million from manufacturing and services and revenues of $4.0 million
from the sale of parts. We expect that our revenues will increase in 2006 as a
result of the increase from Piedmont's activity for the full year in 2006.
COST OF REVENUES. Cost of revenues increased 60% to $35.5 million in 2005
from $22.2 million in 2004, representing, 72% and 67% of revenues, respectively.
The increase in cost of revenues is mainly due to the costs associated with
revenues of Piedmont in the second half of 2005. Cost of revenues consists of
labor, materials and royalties. We expect that our cost of revenues will
increase in 2006 consistent with the expected increase in revenues from
Piedmont's activity.
GROSS PROFIT. Gross Profit increased 22.8% to $13.6 million in 2005 from
$11.1 million in 2004. The increase in our gross profit in 2005 is mainly due to
the purchase of Piedmont in July 2005.
RESEARCH AND DEVELOPMENT COSTS. Our research and development costs
decreased 43% to $72,000 in 2005, compared to $125,000 in 2004. We do not
anticipate any material change in our cost of research and development in 2006.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses increased
31.8% to $2.5 million in 2005 from $1.9 million in 2004, representing 5.1% and
5.7% of revenues, respectively. The increase in our selling and marketing
expenses in 2005 was mainly due to Piedmont's selling and marketing expenses of
$590,000. Selling and marketing expenses consist primarily of salaries,
commissions, advertising, trade shows, travel and other related expenses. We
expect that our selling and marketing expenses will increase in 2006 consistent
with the expected increase in revenues from Piedmont.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 35.2% to $5.1 million in 2005 from $3.8 million in 2004, representing
10.4% and 11.4% of revenues, respectively. The increase in our general and
administrative expenses in 2005 was mainly due to Piedmont's general and
administrative expenses of $1.74 million. General and administrative expenses
consist primarily of salaries, annual rentals, management services, and other
expenses. We expect that our general and administrative expenses will increase
consistent with the inclusion of a full year of Piedmont's operations.
OPERATING INCOME. Operating income in 2005 increased 9.4% to $5.8 million,
or 10.4% of revenues, compared to $5.3 million in 2004 or 11.4% of revenues.
FINANCIAL INCOME (EXPENSES). We incurred financial expenses of $441,000 in
2005 compared to financial income of $87,000 in 2004, as a result of the
interest expenses, arising from the loans we incurred in connection with the
purchase of Piedmont. We expect that our financial expenses will increase in
2006 as a result of a full year of interest payments on these loans.
26
OTHER INCOME. We had other income of $210,000 in 2005 compared to other
income of $54,000 in 2004. Other income in 2005 resulted from the sale of
marketable securities and equipment.
INCOME TAXES. Our total income tax expenses for 2005 amounted to $2.1
million, compared to $1.7 million in 2004. As a result of the operations of our
subsidiaries in the U.S., our effective tax rate increased in 2005 to 37.7% from
30.8% in 2005.
NET INCOME. In 2005, we had net income of $3.53 million, compared with net
income of $3.74 million in 2004.
YEAR ENDED DECEMBER 31, 2004 COMPARED WITH YEAR ENDED DECEMBER 31, 2003
REVENUES. Our revenues increased 8.3% to $33.2 million in 2004 from $30.7
million in 2003. The increase in our revenues in 2004 is mainly due to an
increase in our sales of products and services to the U.S. market.
COST OF REVENUES. Cost of revenues increased 10.5% to $22.2 million in
2004 from $20.1 million in 2003, representing, 67% and 65% of revenues,
respectively. The increase in cost of revenues is mainly due to change in our
product mix, and to the worldwide increase in raw material prices.
RESEARCH AND DEVELOPMENT COSTS. Our research and development costs were
$125,000 in 2004 and $120,000 in 2003.
SELLING AND MARKETING EXPENSES. Selling and marketing expenses decreased
by 3.2% to $1.9 million in 2004 from $2.0 million 2003, representing 5.7% and
6.4% of revenues, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased 9.1% to $3.8 million in 2004 from $3.5 million in 2003, representing
11.4% and 10.4% of revenues, respectively, consistent with our increase in
revenues.
OPERATING INCOME. Operating income in 2004 increased 4.1% to $5.3 million
compared to $5.1 million in 2003.
FINANCIAL INCOME (EXPENSES). We had financial income of $87,000 in 2004
compared to financial expenses of $25,000 in 2003, as a result of the
appreciation in value of the exchange rate against the dollar in 2004 and the
increase in our cash position.
OTHER INCOME. We had other income of $54,000 in 2004 compared to other
income of $24,000 in 2003. Other income in 2004 resulted from the sale of
marketable securities and equipment.
INCOME TAXES. As a result of the depletion of the tax credits we
accumulated in prior years, our total income tax expenses for 2004 amounted to
$1.7 million, compared to $1.2 million in 2003.
NET INCOME. In 2004, we had net income of $3.74 million, compared with net
income of $3.8 million in 2003.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited quarterly financial
information for the two years ended December 31, 2005. The data has been
prepared on a basis consistent with our audited consolidated financial
statements included elsewhere in this annual report and include all necessary
adjustments, consisting only of normal recurring adjustments, that we consider
necessary for a fair presentation. The operating results for any quarter are not
necessarily indicative of results for any future periods.
27
Three months ended
------------------------------------------------------------------------------------------
2005 2004
------------------------------------------- -------------------------------------------
Mar. 31, Jun. 30, Sept. 30, Dec. 31, Mar. 31, Jun. 30, Sept. 30, Dec. 31,
-------- -------- --------- -------- -------- -------- --------- --------
Revenues .............................. $ 8,389 $ 8,961 $ 14,403 $ 17,440 $ 8,654 $ 8,107 $ 8,412 $ 8,070
Cost of revenues ...................... 5,737 5,837 10,561 13,457 5,690 5,423 5,887 5,166
Gross profit .......................... 2,652 3,124 3,842 3,983 2,964 2,684 2,525 2,904
Research and development costs, net ... 17 22 15 18 38 31 29 27
Sales and marketing expenses .......... 465 558 620 852 497 408 458 531
General and administrative expenses ... 985 1,091 1,617 1,445 955 962 762 1,114
Operating income ...................... 1,185 1,453 1,591 1,667 1,474 1,283 1,276 1,232
Financial income (expenses) , net ..... (1) (5) (308) (127) 16 37 19 15
Other Income .......................... 21 118 72 (1) 28 6 14 6
Income before income taxes ............ 1,205 1,566 1,354 1,540 1,518 1,326 1,309 1,253
Income tax ............................ 417 668 494 557 532 491 297 347
Net income ............................ 788 898 860 983 986 835 1,012 906
Revenues .............................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues ...................... 68.4% 65.1% 73.3% 77.2% 65.8% 66.9% 70.0% 64.0%
Gross profit .......................... 31.6% 34.9% 26.7% 22.8% 34.3% 33.1% 32.0% 36.0%
Research and development costs, net ... 0.2% 0.3% 0.1% 0.1% 0.4% 0.4% 0.3% 0.3%
Sales and marketing expenses .......... 5.5% 6.2% 4.3% 4.9% 5.7% 5.0% 5.4% 6.6%
General and administrative expenses ... 11.7% 12.2% 11.2% 8.3% 11.0% 11.9% 9.1% 13.8%
Operating income ...................... 14.1% 16.2% 11.1% 9.6% 17.0% 15.8% 15.2% 15.3%
Financial income (expenses) , net ..... 0% 0% (2.1)% (0.7)% 0.0% 0.1% 0.0% 0.0%
Other Income .......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Income before income taxes ............ 68.4% 65.1% 73.3% 77.2% 65.8% 66.9% 69.9% 64.0%
Income tax ............................ 31.6% 34.9% 26.7% 22.8% 34.3% 33.1% 31.8% 36.0%
Net income ............................ 0.2% 0.3% 0.1% 0.1% 0.4% 0.4% 0.3% 0.3%
SEASONALITY
Our operating results are generally not subject to seasonal variance.
IMPACT OF INFLATION AND DEVALUATION ON RESULTS OF OPERATIONS, LIABILITIES AND
ASSETS
For many years prior to 1986, the Israeli economy was characterized by
high rates of inflation and devaluation of the Israeli currency against the
dollar and other currencies. However, since the institution of the Israeli
Economic Program in 1985, inflation, while continuing, has been significantly
reduced and the rate of devaluation has substantially diminished. Because
governmental policies in Israel linked exchange rates to a weighted basket of
foreign currencies of Israel's major trading partners, the exchange rate between
the NIS and the dollar remained relatively stable during reported periods.
The following table sets forth, for the periods indicated, information
with respect to the rate of inflation in Israel, the rate of devaluation of the
NIS against the dollar, and the rate of inflation in Israel adjusted for such
devaluation:
ISRAELI INFLATION
YEAR ENDED ISRAELI INFLATION ISRAELI DEVALUATION ADJUSTED FOR
DECEMBER 31, RATE % RATE % DEVALUATION %
------------ ----------------- ------------------- -----------------
2001 1.4 9.3 (7.9)
2002 6.5 7.3 (0.8)
2003 (1.9) (7.6) 5.7
2004 1.2 (1.6) 2.8
2005 2.4 6.8 (4.4)
28
Since most of our sales and purchases are quoted in dollars and in other
foreign currencies, and a significant portion of our expenses, namely salaries
for our Israeli employees, are incurred in NIS, our results are adversely
affected by a change in the rate of inflation in Israel when such change is not
offset (or is offset on a lagging basis) by a corresponding devaluation of the
NIS against the dollar and other foreign currencies. We do not use any hedging
instruments in order to protect ourselves from currency fluctuation or inflation
risks.
CONDITIONS IN ISRAEL
We are incorporated under the laws of, and our principal executive offices
and manufacturing facilities are located in, the State of Israel. Accordingly,
we are directly affected by political, economic and military conditions in
Israel. Specifically, we could be adversely affected by any major hostilities
involving Israel, a full or partial mobilization of the reserve forces of the
Israeli army, the interruption or curtailment of trade between Israel and its
present trading partners, and a significant downturn in the economic or
financial condition of Israel.
POLITICAL CONDITIONS
Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. In 1979, Israel signed a peace
agreement with Egypt under which full diplomatic relations were established. In
October 1994, a peace treaty was signed between Israel and Jordan which
provides, among other things, for the commencement of full diplomatic relations
between the two countries. To date, there are no peace treaties between Israel
and Syria or Lebanon.
Since 1993, several agreements have been signed between Israel and the
Palestinian representatives concerning conditions in the West Bank and Gaza and
outlining several interim Palestinian self-government arrangements. The
implementation of these agreements have been subject to difficulties and delays.
Since September 2000, relations between Israel and the Palestinian
Authority have deteriorated and there has been a marked increase in violence,
civil unrest and hostility, including armed clashes, between the State of Israel
and the Palestinians, and acts of terror have been committed inside Israel and
against Israeli targets in the West Bank and Gaza. These developments have
adversely affected the regional peace process, placed the Israeli economy under
significant stress, and have negatively influenced Israel's relationship with
several Arab countries. In August 2005, Israel evacuated all Israeli settlements
in the Gaza Strip and four settlements in the West Bank. In January 2006, Hamas
won the elections in the Palestinian Authority and as a result the diplomatic
relations between Israel and the Palestinian Authority have worsened. The
implications of these developments cannot at this time be foreseen. Any future
armed conflict, political instability or violence in the region may have a
negative effect on our business condition, harm our results of operations and
adversely affect our share price.
Furthermore, there are a number of countries that restrict business with
Israel or Israeli companies. Restrictive laws or policies of those countries
directed towards Israel or Israeli businesses may have an adverse impact on our
operations, our financial results or the expansion of our business.
29
In addition, some of our executive officers and employees in Israel are
obligated to perform up to 36 days, depending on rank and position, of military
reserve duty annually and are subject to being called for active duty under
emergency circumstances. If a military conflict or war arises, these individuals
could be required to serve in the military for extended periods of time. Our
operations could be disrupted by the absence for a significant period of one or
more of our executive officers or key employees or a significant number of other
employees due to military service. Any disruption in our operations could
adversely affect our business.
To date, no executive officer or key employee has been recruited for
military service for any significant time period. Any further escalation in the
hostilities between Israel and the Palestinian Authority into a full scale
conflict might require more significant military reserve service by some of our
employees, which may have a material adverse effect on our business.
ECONOMIC CONDITIONS
In recent years Israel has been going through a period of recession in
economic activity, resulting in low growth rates and growing unemployment. Our
operations could be adversely affected if economic conditions in Israel further
deteriorate.
TRADE RELATIONS
Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is a member of the World Trade Organization and is a
signatory to the General Agreement on Tariffs and Trade. In addition, Israel has
been granted preferences under the Generalized System of Preferences from the
United States, Australia, Canada and Japan. These preferences allow Israel to
export the products covered by such programs either duty-free or at reduced
tariffs.
Israel and the EEC, known now as the "European Union," concluded a Free
Trade Agreement in July 1975 that confers some advantages with respect to
Israeli exports to most European countries and obligates Israel to lower its
tariffs with respect to imports from these countries over a number of years. In
1985, Israel and the United States entered into an agreement to establish a Free
Trade Area. The Free Trade Area has eliminated all tariff and some non-tariff
barriers on most trade between the two countries. On January 1, 1993, an
agreement between Israel and the European Free Trade Association, known as the
"EFTA," established a free-trade zone between Israel and the EFTA nations. In
November 1995, Israel entered into a new agreement with the European Union,
which includes a redefinition of rules of origin and other improvements, such as
allowing Israel to become a member of the Research and Technology programs of
the European Union. In recent years, Israel has established commercial and trade
relations with a number of other nations, including Russia, China, India, Turkey
and other nations in Eastern Europe and Asia.
Israel receives significant amounts as economic assistance from the United
States. In the last several years, Israel has received from the U.S.
approximately $3 billion per year. We cannot assure you that U.S. economic
assistance will continue, or that the amounts received will not be reduced. If
U.S. economic assistance is eliminated or reduced significantly, the Israeli
economy could suffer material adverse consequences which may have material
adverse impact on our financial condition and results of operations.
30
CORPORATE TAX RATE
Until December 31, 2003, the regular tax rate applicable to income of
companies was 36%. In June 2004 and in July 2005, the "Knesset" (Israeli
parliament) passed amendments to the Income Tax Ordinance (No. 140 and Temporary
Provision), 2004 and (No. 147), 2005, which determine, among other things, that
the corporate tax rate is to be gradually reduced to the following tax rates:
35% for 2004, 34% for 2005, 31% for 2006, 29% for 2007, 27% for 2008, 26% for
2009 and 25% for 2010 and thereafter.
Israeli companies were generally subject to corporate tax at the rate of
34% of their taxable income in 2005. Pursuant to tax reform legislation that
came into effect in 2003, the corporate tax rate is to undergo staged reductions
to 25% by the year 2010. In order to implement these reductions, the corporate
tax rate is scheduled to decline to 31% in 2006, 29% in 2007, 27% in 2008, and
26% in 2009. However, because we have elected to participate in the alternative
package of tax benefits for our current approved enterprise, the income derived
from that enterprise will be exempt from Israeli corporate tax for a specified
benefit period (except to the extent that dividends are distributed during the
tax-exemption period other than upon liquidation) and subject to reduced
corporate tax rates for an additional period. The period of tax benefits for our
approved enterprise expires in 2012. Certain investment income derived by us
from investments may not be regarded by the Israeli tax authorities as income
from its approved enterprise and consequently may be taxed at the regular
statutory rate in Israel.
Our non -Israeli. subsidiaries are taxed based on the tax laws in its
country of residence, the tax rate for our U.S. subsidiaries is currently 40%.
B. LIQUIDITY AND CAPITAL RESOURCES
GENERAL
From our inception until our initial public offering in March 1987, we
financed our activities mainly through cash flow from operations and bank loans.
In March 1987, we received proceeds of $4,025,000 from an initial public
offering of 268,333 ordinary shares. In October 1993 we raised $27,183,153 from
a follow-on offering of 1,599,009 ordinary shares. On June 15, 2004 we raised
$6,000,001 through the private placement of 857,143 of our shares. The proceeds
from these equity financings, together with cash flow from operations and our
credit facilities are our main sources of working capital.
We had cash and cash equivalents and short-term investments of $7.5
million and marketable securities of $300,000, totaling $7.8 million as of
December 31, 2005, as compared with cash and cash equivalents and short-term
investments of $7.1 million and marketable securities of $1.6 million, totaling
$8.7 million as of December 31, 2004.
On June 15, 2004, we entered into a share purchase agreement with T.O.P, a
wholly-owned subsidiary of Ta-Tek Ltd., an Israeli private company wholly-owned
by FIMI Opportunity Fund. Under the agreement we sold 857,143 of our shares to
T.O.P for $6,000,001. We also granted T.O.P warrants to purchase an aggregate of
500,000 of our ordinary shares at $8.50 per share, which price was adjusted to
$6.94 per share because of our 2004, 2005 and 2006 dividend payment. The
warrants are exercisable for 66 months. In addition, we entered into a credit
line agreement with FIMI, which provides for a line of credit in an amount of up
to $2,000,000. Loans made pursuant to the credit line bear interest at 5% per
annum and are repayable on or before December 15, 2009. We will pay an annual
commitment fee equal to 0.5% of the amount of the credit line. We also entered
into a management agreement which provides that we will engage FIMI to provide
certain management services to us in exchange for annual payments equal to 3% of
our operating profit exceeding $500,000; provided, however, that in no event
will the total management fees in any given year exceed $250,000. The agreements
were approved by our shareholders on August 10, 2004.
31
On May 24, 2005, our subsidiary, Limco-Airepair, purchased Piedmont, a FAA
certified company, engaged in the repair and overhaul of various aircraft
accessories. Under the terms of the acquisition, we paid $5.29 million for
Piedmont and repaid $11 million of its outstanding indebtedness. In addition, we
agreed to pay the former shareholders $200,000 per year, for a term of three
years, in consideration for their agreement not to compete with Piedmont during
this period. This acquisition was funded from our working capital and bank
loans. In the future we may issue convertibles notes in order to repay part of
the bank loans.
CASH FLOWS
The following table summarizes our cash flows for the periods presented:
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004 2003
------- ------- -------
Net cash provided by (used in) operating activities ..... $ 4,140 $ 1,908 $ 3,777
Net cash used in investing activities ................... (5,511) 1,312 (2,348)
Net cash provided by (used in) financing activities ... 1,276 (1,209) (2,520)
Net (decrease) increase in cash and cash equivalents .... (95) 2,011 (1,091)
Cash and cash equivalents at beginning of period ........ 7,078 5,067 6,158
Cash and cash equivalents at end of period .............. 6,983 7,078 5,067
Net cash provided by operating activities was approximately $4.1 million,
$1.9 million and $3.8 million in the years ended December 31, 2005, 2004 and
2003, respectively. Net cash provided by operating activities in 2005 consisted
primarily of net income in the amount of $3.5 million, depreciation and
amortization in the amount of $1.4 million, a decrease in trade receivables in
the amount of $1.1 million and an increase in other accounts payable and accrued
expenses in the amount of $0.57 million, which was offset by an increase in
inventories in the amount of $1.4 million and a decrease in trade payables in
the amount of $1.0 million. Net cash provided by operating activities in 2004
consisted primarily of net income in the amount of $3.7 million and depreciation
and amortization in the amount of $1.0, which was offset by an increase in trade
receivables in the amount of $1.6 million and a decrease in other accounts
payable and accrued expenses in the amount of $1.2 million. Net cash provided by
operating activities in 2003 consisted primarily of net income in the amount of
$3.8 million, an increase in other accounts payable and accrued expenses in the
amount of $1.1 million and depreciation and amortization in the amount of $1.0
million, which was offset by an increase in trade receivables in the amount of
$1.4 million and an increase in inventories in the amount of $1.3 million.
Net cash used in investing activities was $5.5 million in the year ended
December 31, 2005, primarily for the acquisition of Piedmont. In the year ended
December 31, 2004, $1.3 million of cash was provided by investing activities,
resulting from sale of marketable securities and short term deposits. In the
year ended December 31, 2003 $2.3 million of cash was used in investing
activities primarily for the purchase of marketable securities, property and
equipment.
Capital expenditures in the year ended December 31, 2005, consist mainly
of our investment in Piedmont and purchase of equipment. Capital expenditures in
the year ended December 31, 2004 and 2003, consist mainly of purchase of
equipment. We estimate that our capital expenditures for in the year ending
December 31, 2006 will total approximately $1,500 thousands, of which 65% will
be spent in Israel and35% in the U.S. We expect to finance these expenditures
primarily from our cash and cash equivalents, operating cash flow and our credit
facilities. However, the actual amount of our capital expenditures for 2006 will
depend on a variety of factors, including general economic conditions, changes
in the demand for our products and the risks and uncertainties involved in doing
business in Israel.
32
In the year ended December 31, 2005, net cash provided by financing
activities in the amount of $1.3 million was primarily attributable to increase
in proceeds from long-term loans in the amount of $12.0 million, which was
offset in part by sort-term bank credit in the amount of $8.5 , cash dividend in
the amount of $1.1 million and repayments of long-term loans in the amount of $1
million. In the year ended December 31, 2004 net cash used in financing
activities in the amount of $1.2 million was primarily attributable to
distribution of dividend in the amount of $7.1 million, which was offset in part
by issuance of shares in the amount of $5.7 million and exercise of options in
the amount of $1.2 million. In the year ended December 31, 2003 net cash used in
financing activities in the amount of $2.5 million was primarily attributable to
distribution of dividend in the amount of $3.1 million, which was offset in part
by exercise of options in the amount of $0.5 million.
In 2005, we incurred $6 million in long term debt from Bank Leumi for a
period of five years, through two loans for the purchase of Piedmont. The loans
are to be repaid in three equal annual installments and the first payment is due
on July 1, 2008. One of the loans bears interest of Libor + 1% and the second
loan bears annual interest of 5.25%. Interest installments under both loans are
paid quarterly. Under the terms of the loans we are required to maintain
consolidated shareholders' equity of not less than $15 million.
After our purchase of Piedmont, Piedmont incurred $6 million in long term
debt from Bank Leumi USA. The two year loan bears an annual interest of Libor +
1.3%. Under the terms of the loan Piedmont is required to maintain a ratio of
funded debt to EBITDA of not more than 3.25 to 1, a fixed charge coverage ratio
of at least 2.5 to 1 and net profit of not less than $1 million. In addition, we
as the guarantor may not pay dividends without the prior written consent of the
bank. In November 2005, Piedmont repaid $1 million of this loan.
As of December 31, 2005, we and Piedmont were in compliance with all
required financial covenants.
We believe that anticipated cash flow from operations and our current cash
balances will be sufficient to meet our cash requirements for at least 12
months. Our continued operations thereafter will depend upon cash flow from
operations and the availability of equity or debt financing.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES
As of June 1, 2006, we had one employee engaged in research and
development.
D. TREND INFORMATION
There are no significant recent trends that are material to production,
sales and inventory, the state of the order book and costs and selling prices
since the latest fiscal year.
E. 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.
33
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table summarizes our minimum contractual obligations and
commercial commitments as of December 31, 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 than 5
Total 1 year 1-3 Years 3-5 Years years
------------ ----------- ----------- ----------- ------
Long-term debt obligations .............. $ 11,000,000 $ 1,000,000 $ 6,000,000 $ 4,000,000 $ --
Operating lease obligations ............. 1,699,517 364,200 657,498 677,819 --
Purchase obligations .................... -- -- -- -- --
Total ................................... $ 12,699,517 $ 1,364,200 $ 6,657,498 $ 4,677,819 --
OTHER OBLIGATIONS
In addition, pursuant to the terms of the agreement we entered into with
TAT Industries in 2000 to purchase its operations relating to the manufacture of
aviation accessories, we entered into a lease agreement, pursuant to which we
leased from TAT Industries, effective as of January 1, 2000, the real estate and
buildings encompassing an area of approximately 312,000 square feet for a period
of 24 years and eleven months. In consideration for the lease agreement, we
agreed to pay TAT Industries annual rentals of approximately $310,000, with an
additional incremental payment of 2% per year, such rental rates are subject to
revaluation every fifth year.
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 December 31, 2005, our
severance pay liability was $3,159,016.
We have attempted to identify additional significant uncertainties and
other factors affecting forward-looking statements in the Risk Factors section
that appears in Item 3. "Key Information."
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
Set forth below are the name, age, principal position and a biographical
description of each of our directors and executive officers:
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
Shlomo Ostersetzer .......... 78 Chief Executive Officer and Chairman of the Board of Directors
Dov Zeelim .................. 65 President and Vice Chairman of the Board of Directors
Israel Ofen ................. 57 Executive Vice President and Chief Financial Officer
Shraga Katz ................. 61 Vice President Operations
Avi Kahana .................. 62 Secretary and Manager of Import and Export Division
Jacob Danan ................. 65 Chief Engineer and Vice President of Marketing
Shaul Menachem .............. 59 President Limco-Airepair and Piedmont
Eran Frenkel (1) ........... 40 V.P. Business Development - Limco-Airepair
Yossi Rosenberg (2) ........ 40 Vice-President Economics
Dr. Meir Dvir ............... 75 Director
Yaacov Fish ................. 59 Director
Ishay Davidi ................ 44 Director
Gillon Beck ................ 44 Director
Yechiel Gutman .............. 60 Director
Michael Shevi ............... 70 Outside Director
Rami Daniel ................. 40 Outside Director
----------
(1) Mr. Frenkel is the son-in-law of Dov Zeelim.
(2) Mr. Rosenberg is the son-in-law of Shlomo Ostersetzer.
34
Each of our directors (except our outside directors) is elected to serve
until the next annual general meeting of shareholders and until his successor
has been elected. Officers serve at the discretion of the Board of Directors.
On June 15, 2004, we entered into a share purchase agreement with T.O.P.
See Item 4.A. "Information on the Company - History and Development of the
Company." As part of the transaction, our parent company, TAT Industries, and
T.O.P entered into a shareholders' agreement, which provides among other things
that each of TAT Industries and T.O.P vote all of the shares held by them for
the election to our Board of Directors of six designees of TAT Industries and
three designees of T.O.P. TAT Industries designees include Messrs. Ostersetzer,
Zeelim, Fish, Shevi and Daniel and Dr. Dvir. T.O.P designees include Messrs.
Davidi, Beck and Gutman.
SHLOMO OSTERSETZER has served as the Chairman of our Board of Directors
since April 1985. Mr. Ostersetzer has also served as our Chief Executive Officer
since 1990. Mr. Ostersetzer is one of the founders of TAT Industries and is a
controlling shareholder, and he has served in various capacities with TAT
Industries since 1970, including President, Managing Director and Chairman of
its Board of Directors. Mr. Ostersetzer holds an M.Sc. in Mechanical Engineering
from ETH-Polytechnical Institute in Zurich, Switzerland.
DOV ZEELIM has served as our Vice Chairman of the Board of Directors since
April 1985 and has served as our President and Chief Operating Officer since
August 2000. In addition, Mr. Zeelim has served in various managerial capacities
at TAT Industries for over 21 years, including Managing Director, Executive Vice
President and Vice Chairman. Mr. Zeelim is a licensed certified public
accountant in Israel.
ISRAEL OFEN has served as our Executive Vice President and Chief Financial
Officer since August 1993, as Managing Director since March 1991 and has held
other managerial positions since April 1985. In addition, Mr. Ofen served as
Vice President, Finance of TAT Industries from 1983 through August 31, 1993 and
as its President since January 2000. Mr. Ofen also serves as a director of TAT
Industries. Mr. Ofen holds a B.A. in Economics from Bar llan University in
Ramat-Gan and is a licensed certified public accountant in Israel.
35
SHRAGA KATZ has served as our V.P. Operations since March 1998. From
August 1995 to March 1998, he served as General Manger of Limco. From 1986 to
1995, he served as manager of the Israeli heat exchanger operations division of
TAT Industries and has served as manager of our heat exchange operations since
1991. Mr. Katz is a retired Lieutenant Colonel of the Israeli Air Force in which
he served for 20 years. Mr. Katz holds a B.Sc. in Mechanical Engineering from
the Technion, Israel Institute of Technology and an M.Sc. in Aeronautical
Engineering from AFIT Air Force Institute of Technology.
AVI KAHANA has served as our Secretary since January 1998. During the past
five years, Mr. Kahana has been the Manager of our import and export division.
Mr. Kahana has also worked for TAT Industries and its subsidiaries since 1984.
JACOB DANAN has served as our Chief Engineer since September 1996, and,
since January 1, 1998 as our Vice President of Marketing. Mr. Danan has been
with us since 1980. Mr. Danan holds a B.Sc. in Aeronautical Engineering from the
Technion, Israel Institute of Technology.
SHAUL MENACHEM has served as the President of Limco-Airepair since
February 1998and of Piedmont as of July 2005. Mr. Menachem holds a M.Sc. in
Engineering Management from Bridgeport University.
ERAN FRENKEL has served as Vice President Business Development of
Limco-Airepair since June 2003. Mr. Frenkel is the son-in-law of Dov Zeelim. Mr.
Frenkel holds a B.A. in Economics and Accounting from the Tel-Aviv University
and an M.B.A. from Pace University in New York, and is a licensed certified
public accountant in Israel.
YOSSI ROSENBERG has served as our Vice President of Economics and as a
Director of TAT Industries since June 2003. From February 2001 until March 2003,
Mr. Rosenberg served as an economist and as a financial consultant to our C.E.O.
Mr. Rosenberg is the son-in-law of Shlomo Ostersetzer. Mr. Rosenberg holds a
B.A. in Business Administration from the College of Management in Tel Aviv.
DR. MEIR DVIR has served as a director since December 1994. Mr. Dvir has
served as deputy General Manager of Business Research and Development and also
as General Manager of Israeli Aircraft Industries Ltd. He is also a director of
T.T.I. Telecom Ltd. and Bank Leumi Ltd. Mr. Dvir holds a Ph.D. in Mathematics
and Physics from the Hebrew University in Jerusalem.
YAACOV FISH has served as a director since January 1994. From 1992 to
1997, Mr. Fish served as Managing Director of Magen Central Pension Fund Ltd.
Mr. Fish served as a financial advisor to Shalev Transportation Cooperative Ltd.
from 1990 to 1994 and served as general comptroller of Egged Ltd., Israel's
large bus company, from 1977 to 1990. Mr. Fish holds a B.Sc. in Economics from
Bar llan University in Tel Aviv.
ISHAY DAVIDI has served as a director since September 1, 2004. Mr. Davidi
has served as the Chief Executive Officer and Senior Partner of FIMI Opportunity
Fund since 1996. Mr. Davidi also serves as the Chairman and Senior Partner of
FITE (First Israel Turnaround Enterprise), another Israeli investment fund
established by the FIMI Group, and as a director of Tadiran Communications,
Lipman Electronic Engineering, Ltd., Tedea Technological Development and
Automation Ltd., TG Precision Products Ltd., Formula Systems Ltd. and
Medtechnica Ltd. Mr. Davidi holds a B.Sc. in Industrial Engineering from Tel
Aviv University and an M.B.A. in Finance from Bar Ilan University.
36
GILLON BECK has served as a director since September 1, 2004. Mr. Beck has
served as a partner in FIMI Opportunity Fund and a director of several of the
fund's portfolio companies since 2003. Prior thereto and from 1999, Mr. Beck
served as Chief Executive Officer and President of Arad Ltd. Group, a leading
manufacturer of water measurement technologies. Mr. Beck serves as a director of
Medtechnia Ltd., Tedea Technological Development and Automation Ltd. and Formula
Vision Ltd. Mr. Beck holds a B.Sc. in Industrial Engineering from the Technion,
Israel Institute of Technology and an M.B.A. in Finance from Bar Ilan
University.
YECHIEL GUTMAN has served as a director since September 1, 2004. Mr.
Gutman serves as a public member of the Israeli Security Authority (ISA). He
also serves as a director of many Israeli companies, including Israel Refinery
Company, El-Al (the Israeli national airline), and Bank Otzar Hachayal (a
subsidiary of Bank Hapoalim). In the past Mr. Gutman served as an advisor to the
Israeli Minster of Justice. Mr. Gutman holds L.L.B. and M.A. degrees from The
Hebrew University, Jerusalem. Mr. Gutman serves as an independent director.
MICHAEL SHEVI has served as an outside director since June 10, 2004. Mr.
Shevi has served as Managing Director of Cham Foods since 1973. Currently, Mr.
Shevi is a director of Cham Foods (Israel) Ltd. Mr. Shevi is licensed as a
certified public accountant in Israel.
RAMI DANIEL has served as an outside director since June 10, 2004. Mr.
Daniel has served as V.P. of Finance of Ganden Real Estate since 2001. Mr.
Daniel is licensed as a Certified Public Accountant in Israel and holds B.S.c.
in Economics from the College of Management in Tel Aviv.
B. COMPENSATION
The following table sets forth all the compensation we paid with respect
to all of our directors and executive officers as a group for the year ended
December 31, 2005.
Pension,
Salaries, fees, retirement Compensation due
commissions and and similar to exercise of
bonuses benefits options
--------------- ----------- ----------------
All directors and executive officers
as a group, (16) persons $ 1,828,657 $ 341,027 --
During the year ended December 31, 2005, we paid our outside directors a
per meeting attendance fee of NIS 1,270 (approximately $276), plus an annual fee
of NIS 24,574 (approximately $5,342)
As of December 31, 2005, our directors and executive officers as a group,
consisting of sixteen persons, held options to purchase an aggregate of 10,000
ordinary shares at an exercise price of $1.625 per share. All of such options
were vested and will expire on January 19, 2009. All options were issued under
our 1999 Employee Stock Option Plans. See below in this Item 6.E. -"Share
Ownership-Stock Option Plans."
Pursuant to their employment agreements, the chairman of our Board of
Directors, Mr. Shlomo Ostersetzer, and the vice chairman of the Board of
Directors, Mr. Dov Zeelim, are entitled each to a bonus of 2.5% of the annual
consolidated operating income, in excess of $500,000. In the years ended
December 31, 2005, 1004 and 2003 Messrs. Ostersetzer and Zeelim received total
payments of approximately $292,298, $246,488 and $239,794.
37
C. BOARD PRACTICES
INTRODUCTION
According to the Israeli Companies Law and our Articles of Association,
the management of our business is vested in our board of directors. The board of
directors may exercise all powers and may take all actions that are not
specifically granted to our shareholders. Our executive officers are responsible
for our day-to-day management. The executive officers have individual
responsibilities established by our chief executive officer and board of
directors.
ELECTION OF DIRECTORS
Our articles of association provide for a board of directors consisting of
no less than two and no more than eleven members or such other number as may be
determined from time to time at a general meeting of shareholders. Our board of
directors is currently composed of nine directors, including two outside
directors.
Pursuant to our articles of association, all of our directors are elected
at our annual general meeting of shareholders by a vote of the holders of a
majority of the voting power represented and voting at such meeting. All the
members of our Board of Directors (except the outside directors) may be
reelected upon completion of their term of office. All of our current directors
(except one of our outside directors) were elected by our shareholders at our
annual general meeting of shareholders held December 6, 2005.
We are exempt from the requirements of the NASDAQ Marketplace Rules with
regard to the nomination process of directors since we are a controlled company
within the meaning of NASDAQ Marketplace Rule 4350(c)(5), or Rule 4350(c)(5).
See below in this Item 6C. "Directors, Senior Management and Employees - Board
Practices - NASDAQ Exemptions for a Controlled Company."
INDEPENDENT AND OUTSIDE DIRECTORS
The Israeli Companies Law requires Israeli companies with shares that have
been offered to the public in or outside of Israel to appoint at least two
outside directors. Outside directors must be Israeli residents, unless the
company's shares have been offered to the public outside of Israel or have been
listed on a stock exchange outside of Israel. No person may be appointed as an
outside director if, at the time of the appointment or during the two years that
preceded the appointment, the person or the person's relative, partner, employer
or an entity of which he is a controlling shareholder had an interest in the
company, in a person who was a controlling shareholder of the company at the
time of the appointment, or in an entity which was controlled by the company or
its controlling shareholder at the time of the appointment or during the two
years that preceded the appointment.
A director of one company may not be appointed as an outside director of
another company if, at the time of the appointment, a director of the other
company serves as an outside director of the first company. Furthermore, no
person may be appointed as an outside director if he is an employee of the
Israeli Securities Authority or a stock exchange in Israel.
No person may serve as an outside director if the person's position or
other activities create, or may create, a conflict of interest with the person's
responsibilities as an outside director or may otherwise interfere with the
person's ability to serve as an outside director. If, at the time outside
directors are to be appointed, all current members of the board of directors are
of the same gender, then at least one outside director must be of the other
gender.
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According to a March 2005 amendment to the Israeli Companies Law,
effective as of January 2006 at least one of the outside directors must be an
accounting and financial expert and the other outside directors must be
professional experts, as such terms are defined by regulations promulgated under
the Israeli Companies Law. This requirement does not apply to outside directors
appointed prior to the March 2005 amendment, however a company can not renew the
appointment of any such outside director for an additional term unless the
outside director is (i) an accounting and financial expert or (ii) a
professional expert and at the time the appointment is to be renewed, an outside
director who is an accounting and financial expert serves on the board of
directors and such other number of directors who are accounting and financial
experts serve on the board of directors as determined by the board of directors
of the company.
Outside directors are elected by shareholders. The shareholders voting in
favor of their election must include at least one-third of the shares of the
non-controlling shareholders of the company who voted on the matter. This
minority approval requirement need not be met if the total shareholdings of
those non-controlling shareholders who vote against their election represent 1%
or less of all of the voting rights in the company. Outside directors serve for
a three-year term, which may be renewed for only one additional three-year term.
Outside directors can be removed from office only by the same special percentage
of shareholders as can elect them, or by a court, and then only if the outside
directors cease to meet the statutory qualifications with respect to their
appointment or if they violate their duty of loyalty to the company.
Any committee of the board of directors must include at least one outside
director and the audit committee must include all the outside directors. An
outside director is entitled to compensation as provided in regulations adopted
under the Israeli Companies Law and is otherwise prohibited from receiving any
other compensation, directly or indirectly, in connection with such service.
In addition, the NASDAQ Marketplace Rules require us to establish an audit
committee comprised of at least three members all of which must be independent
directors, each of whom satisfies the respective "independence" requirements of
the Securities and Exchange Commission and NASDAQ.
Our board of directors has determined that Messrs. Rami Daniel and Michael
Shevi qualify both as independent directors under the Securities and Exchange
Commission and NASDAQ requirements and as outside directors under the Israeli
Companies Law requirements. Our board of directors has further determined that
Mr. Yaacov Fish and Mr. Meir Dvir qualify as independent directors under the
Securities and Exchange Commission and NASDAQ Stock Market requirements.
As a controlled company within the meaning of NASDAQ Marketplace Rule
4350(c)(5), we are exempted from the NASDAQ Marketplace Rule which requires that
a majority of our board of directors must qualify as independent directors
within the meaning of the NASDAQ Marketplace Rules. See Item 6.C. "Directors,
Senior Management and Employees - Board Practices - NASDAQ Exemptions for a
Controlled Company."
AUDIT COMMITTEE
Our audit committee, which was established in accordance with Section 114
of the Israeli Companies Law and Section 3(a)(58)(A) of the Securities Exchange
Act of 1934, assists our board of directors in overseeing the accounting and
financial reporting processes of our company and audits of our financial
statements, including the integrity of our financial statements, compliance with
legal and regulatory requirements, our independent public accountants'
qualifications and independence, the performance of our internal audit function
and independent public accountants, finding any defects in the business
management of our company for which purpose the audit committee may consult with
our independent auditors and internal auditor, proposing to the board of
directors ways to correct such defects, approving related-party transactions as
required by Israeli law, and such other duties as may be directed by our board
of directors.
39
The responsibilities of the audit committee also include approving
related-party transactions as required by law. Under Israeli law, an audit
committee may not approve an action or a transaction with a controlling
shareholder, or with an office holder, unless at the time of approval two
outside directors are serving as members of the audit committee and at least one
of the outside directors was present at the meeting in which an approval was
granted.
Our audit committee currently consists of four board members who satisfy
the respective "independence" requirements of the Securities and Exchange
Commission, NASDAQ and Israeli Law for audit committee members. Our audit
committee members are Messrs. Michael Shevi, Rami Daniel and Yaacov Fish and Dr.
Meir Dvir. Mr. Yaacov Fish has been elected as the Chairman of the Audit
Committee, and our Board of Directors has determined that he qualifies as a
financial expert. The audit committee meets at least once each quarter.
INTERNAL AUDIT
The Israeli Companies Law also requires the board of directors of a public
company to appoint an internal auditor nominated by the audit committee. A
person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. The role of the internal auditor is to
examine, among other things, the compliance of the company's conduct with
applicable law and orderly business practice. Our internal auditor complies with
the requirements of the Companies Law. Our Internal Auditor is Yair Shilhav.
DIRECTORS' SERVICE CONTRACTS
We do not have any service contracts with our directors. Our directors are
not entitled to any benefits upon termination of their service as our directors.
EMPLOYMENT AGREEMENTS
In November 2000, Shlomo Ostersetzer and Dov Zeelim entered into
substantially similar employment agreements with us. These agreements provided
for a base salary and a package of benefits including a bonus of 2.5% of the
annual consolidated operating income, in excess of $500,000, and contained
certain non-competition and confidentiality provisions. According to the
agreements, in the event that the employment of Messrs. Ostersetzer or Zeelim
with us is terminated under circumstances that entitle them to severance pay
under Israeli law, they will be entitled to receive the higher of severance pay
due under Israeli law or the amounts that have accumulated in managers insurance
funds, as a result of our monthly contribution on their behalf, as well as
amounts accumulated in education funds as a result of our monthly contribution
to these funds. Under the agreements, the terms of Messrs. Ostersetzer's and
Zeelim's employment will continue until at least January 1, 2007. After such
date we may terminate the agreements subject to providing Messrs. Ostersetzer
and Zeelim with twelve-months' prior notice. Messrs. Ostersetzer and Zeelim may
terminate their agreements without notice after January 1, 2008.
40
APPROVAL OF RELATED PARTY TRANSACTIONS UNDER ISRAELI LAW
The Israeli Companies Law codifies the fiduciary duties that "office
holders," including directors and executive officers, owe to a company. An
"office holder" is defined in the Israeli Companies Law as a director, general
manager, chief business manager, deputy general manager, vice general manager,
other manager directly subordinate to the managing director or any other person
assuming the responsibilities of any of the foregoing positions without regard
to such person's title. An office holder's fiduciary duties consist of a duty of
care and a duty of loyalty. The duty of care requires an office holder to act at
a level of care that a reasonable office holder in the same position would
employ under the same circumstances. This includes the duty to utilize
reasonable means to obtain (i) information regarding the appropriateness of a
given action brought for his approval or performed by him by virtue of his
position and (ii) all other information of importance pertaining to the
foregoing actions. The duty of loyalty requires an office holder to act in good
faith and for the company's interest, including, avoiding any conflict of
interest between the office holder's position in the company and any other
position he holds or his personal affairs, avoiding any competition with the
company's business, avoiding exploiting any business opportunity of the company
in order to receive personal gain for the office holder or others, and
disclosing to the company any information or documents relating to the company's
affairs which the office holder has received by virtue of his position as an
office holder. Each person identified as a director or executive officer in the
table in Item 6.A. "Directors and Senior Management" is an office holder. Under
the Israeli Companies Law, arrangements as to compensation of office holders who
are not directors require approval of our board of directors and insurance and
indemnification arrangements of office holders who are not directors require
approval of our audit committee and board of directors. The compensation of
office holders who are directors and office holders who are controlling
shareholders, or their family members must be approved by our audit committee,
board of directors and shareholders.
The Israeli Companies Law requires that an office holder promptly disclose
any "personal interest" that he or she may have and all related material
information known to him or her, in connection with any existing or proposed
transaction by us. A "personal interest" of an office holder includes the
interest of the office holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any of the foregoing, or by
any corporation in which the office holder or a relative is a 5% or greater
shareholder, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. Some transactions, actions
and arrangements involving an office holder (or a third party in which an office
holder has an interest) must be approved by the board of directors or as
otherwise provided for in a company's articles of association, as not being
adverse to the company's interest. In some cases, including in the case of an
"extraordinary transaction" in which control holder or director has personal
interest, such a transaction, action and arrangement must be approved by the
audit committee and by the board of directors itself, and further shareholder
approval is required to approve the terms of compensation of an office holder
who is a director. Transaction is considered "extraordinary transaction", if it
is not in the ordinary course of business, it is not on market terms, or it is
likely to have a material impact on the company's profitability, assets or
liabilities. An office holder who has a personal interest in a matter, which is
considered at a meeting of the board of directors or the audit committee, may
not be present during the board of directors or audit committee discussions and
may not vote on this matter, unless the majority of the members of the board or
the audit committee have a personal interest, as the case may be. In the event
that a majority of the board have personal interest the matter should be also
approved by the shareholders.
The Israeli Companies Law also provides that an extraordinary transaction
with a controlling shareholder or in which a controlling shareholder of the
company has a personal interest (including private offerings in which a
controlling shareholder has a personal interest) and a transaction with a
controlling shareholder or his relative regarding terms of service and
employment, must be approved by the audit committee, the board of directors and
shareholders. The shareholder approval for such transactions must include at
least one-third of the shareholders who have no personal interest in the
transaction who voted on the matter. The transaction can be approved by
shareholders without this one-third approval, if the total shareholdings of
those shareholders who have no personal interest and voted against the
transaction do not represent more than one percent of the voting rights in the
company.
41
However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Israeli Companies Law and
amended in January 2002, and in March 2006 certain transactions between a
company and its controlling shareholder(s) and certain transaction with its
director(s) regarding terms of compensation do not require shareholder approval.
In addition, directors' compensation and employment arrangements do not
require the approval of the shareholders if both the audit committee and the
board of directors agree that such arrangements are only for the benefit of the
company. If the director or the office holder is a controlling shareholder of
the company then the employment and compensation arrangements of such director
or office holder do not require the approval of the shareholders providing
certain criteria is met.
The above relief will not apply if one or more shareholder, holding at
least 1% of the issued and outstanding share capital of the company or of the
company's voting rights, objects to the grant of such relief, provided that such
objection is submitted to the company in writing not later than fourteen (14)
days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.
The Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would hold greater than a
45% interest in the company, unless there is another shareholder holding more
than a 45% interest in the company. These requirements do not apply if, in
general, the acquisition (1) was made in a private placement that received
shareholder approval, (2) was from a 25% or greater shareholder of the company
which resulted in the acquiror becoming a 25% or greater shareholder of the
company, or (3) was from a shareholder holding more than a 45% interest in the
company which resulted in the acquiror becoming a holder of more than a 45%
interest in the company.
If, as a result of an acquisition of shares, the acquirer will hold more
than 90% of a company's outstanding shares, the acquisition must be made by
means of a tender offer for all of the outstanding shares. If less than 5% of
the outstanding shares are not tendered in the tender offer, all the shares that
the acquirer offered to purchase will be transferred to the acquirer. The
Israeli Companies Law provides for appraisal rights if any shareholder files a
request in court within three months following the consummation of a full tender
offer. If more than 5% of the outstanding shares are not tendered in the tender
offer, then the acquiror may not acquire shares in the tender offer that will
cause his shareholding to exceed 90% of the outstanding shares.
Regulations under the Israeli Companies Law provide that the Israeli
Companies Law's tender offer rules do not apply to a company whose shares are
publicly traded outside of Israel, if pursuant to the applicable foreign
securities laws and stock exchange rules there is a restriction on the
acquisition of any level of control of the company, or if the acquisition of any
level of control of the company requires the purchaser to make a tender offer to
the public shareholders.
42
EXCULPATION, INDEMNIFICATION AND INSURANCE OF DIRECTORS AND OFFICERS
EXCULPATION OF OFFICE HOLDERS
The Israeli Companies Law provides that an Israeli company cannot
exculpate an office holder from liability with respect to a breach of his duty
of loyalty, but may, if permitted by its articles of association, exculpate in
advance an office holder from his liability to the company, in whole or in part,
with respect to a breach of his duty of care. However, a company may not
exculpate in advance a director from his liability to the company with respect
to a breach of his duty of care in the event of distributions. Our articles of
association allow us to exculpate any office holder from his or her liability to
us for breach of duty of care, to the maximum extent permitted by law, before
the occurrence giving rise to such liability.
INSURANCE OF OFFICE HOLDERS
The Israeli Companies Law provides that a company may, if permitted by its
articles of association, enter into a contract for the insurance of the
liability of any of its office holders with respect to an act performed by him
in his capacity as an office holder, for: (i) a breach of his duty of care to us
or to another person; (ii) a breach of his duty of loyalty to us, provided that
the office holder acted in good faith and had reasonable cause to assume that
his act would not prejudice our interests; or (iii) a financial liability
imposed upon him in favor of another person.
Our articles of association provide that, subject to any restrictions
imposed by the Israeli Companies Law, we may enter into an insurance contract
providing coverage for the liability of any of our office holders for a breach
of his duty of care to us or to another person; breach of his duty of loyalty to
us, provided that the office holder acted in good faith and had reasonable cause
to assume that his act would not prejudice our interests; or a financial
liability imposed upon him in favor of another person.
INDEMNIFICATION OF OFFICE HOLDERS
The Israeli Companies Law provides that a company may, if permitted by its
articles of association, indemnify an office holder for acts or omissions
performed by the office holder in such capacity for: (i) a financial obligation
imposed upon the office holder in favor of another person by any judgment,
including a settlement or an arbitrator's award approved by a court; (ii)
reasonable litigation expenses, including attorney's fees, incurred by the
office holder as a result of an investigation or proceeding instituted against
him or her by a competent authority, provided that such investigation or
proceeding concluded without the filing of an indictment against the office
holder or the imposition of any financial liability in lieu of criminal
proceedings, or concluded without the filing of an indictment against the office
holder and a financial liability was imposed on him or her in lieu of criminal
proceedings with respect to a criminal offense that does not require proof of
criminal intent; and (iii) reasonable litigation expenses, including attorney's
fees, incurred by the office holder or charged to him or her by a court: (a) in
a proceeding instituted against the office holder by or on behalf of the company
or by another person, (b) in a criminal charge from which the office holder was
acquitted, or (c) in a criminal proceeding in which the office holder was
convicted of a crime which does not require proof of criminal intent.
43
The Israeli Companies Law provides that a company's articles of
association may permit the company to indemnify an office holder following a
determination to this effect made by the company after the occurrence of the
event in respect of which the office holder will be indemnified. It also
provides that a company's articles of association may permit the company to
undertake in advance to indemnify an office holder, except that with respect to
a financial liability imposed on the office holder by any judgment, settlement
or court-approved arbitration award, the undertaking must be limited to types of
events, which, in the opinion of the company's board of directors, are, at the
time of giving the undertaking, foreseeable due to our company's activities and
to an amount or standard that the board of directors has determined is
reasonable under the circumstances. Our articles of association provide that we
may undertake to indemnify in advance an office holder, in accordance with the
conditions set under applicable law, against any liabilities he or she may incur
in such capacity, provided that such undertaking is limited with respect to
categories of events that can be expected as determined by our board of
directors when authorizing such undertaking, and with respect to such amounts
determined by our board of directors as reasonable in the circumstances.
Furthermore, under our articles of association, we may indemnify any past or
present office holder, in accordance with the conditions set under any law, with
respect to any past occurrence, whether or not we are obligated under any
agreement to indemnify such office holder in respect of such occurrence.
LIMITATIONS ON EXCULPATION, INSURANCE AND INDEMNIFICATION
These provisions are specifically limited in their scope by the Israeli
Companies Law, which provides that a company may not indemnify an office holder,
nor exculpate an office holder, nor enter into an insurance contract which would
provide coverage for any monetary liability of an office holder, incurred as a
result of certain improper actions.
Under the Israeli Companies Law, exculpation of, procurement of insurance
coverage for, and an undertaking to indemnify or indemnification of, our office
holders must be approved by our audit committee and our board of directors and,
if the office holder is a director, also by our shareholders.
We have agreed to indemnify our office holders to the fullest extent
permitted by law. We currently maintain directors' and officers' liability
insurance with a per claim and aggregate coverage limit of the higher of $5
million or 25% of the Company's equity capital (net worth).
OTHER CORPORATE GOVERNANCE MATTERS
Our board of directors has recently passed a resolution which provides
that the independent directors of our company will meet at least twice a year in
executive session. At such sessions the independent directors will recommend the
compensation of all our senior officers and will nominate directors to be
approved by our shareholders at the Annual General Meeting. Our executive
officers do not participate in any discussions or decisions that involve any
aspect of their compensation.
We have adopted a Code of Business Conduct and Ethics applicable to all of
our principal officers and all employees. The Code of Ethics which is
distributed to all officers and employees may be viewed at our website.
Our audit committee approves all audit and non-audit services rendered by
our independent registered public accountants. All members of our audit
committee are considered financially literate in accordance with the NASDAQ
definition.
NASDAQ EXEMPTIONS FOR A CONTROLLED COMPANY
We are a controlled company within the meaning of Rule 4350(c)(5) because
TAT Industries holds more than 50% of our voting shares.
Under Rule 4350(c)(5), a controlled company is exempt from the following
requirements of NASDAQ Marketplace Rule 4350(c) effective as of July 31, 2005:
44
o the majority of the company's board of directors must qualify as
independent directors, as defined under NASDAQ Marketplace Rules.
o the compensation of the chief financial officer and all other
executive officers must be determined, or recommended to the board
of directors for determination, either by (i) a majority of the
independent directors or (ii) a compensation committee comprised
solely of independent directors.
o director nominees must either be selected or recommended for the
board of directors, either by (a) a majority of independent
directors or (b) a nominations committee comprised solely of
independent directors.
We intend to continue to rely on these exemptions provided under Rule 4350
(C)(5).
NASDAQ MARKETPLACE RULES AND HOME COUNTRY PRACTICES
NASDAQ Marketplace Rule 4350, or Rule 4350, was recently amended to permit
foreign private issuers to follow certain home country corporate governance
practices without the need to seek an individual exemption from NASDAQ. Pursuant
to such provision, a foreign private issuer must provide NASDAQ with a letter
from outside counsel in its home country certifying that the issuer's corporate
governance practices are not prohibited by home country law.
On June 22, 2005, we provided NASDAQ with a notice of non-compliance with
Rule 4350. We informed NASDAQ that we do not comply with the requirement of Rule
4350 that we distribute to shareholders, and file with NASDAQ, copies of an
annual report containing audited financial statements of our company and its
subsidiaries within a reasonable period of time prior to our annual meeting of
shareholders, and instead follow Israeli law and practice. Under Israeli law, as
a company that is publicly traded both in Israel and outside of Israel, we are
not required to distribute such annual reports to our shareholders. Our annual
report on Form 20-F and audited financial statements are available on our
website (www.tat.co.il).
D. EMPLOYEES
On December 31, 2005, we and our subsidiaries employed 412 persons, of
whom 291 were employed in manufacturing and quality control, 90 were employed in
administration, sales and marketing, and 31 were employed in engineering and
research and development. On December 31, 2005 Limco-Airepair employed 130
full-time employees and Piedmont employed 116 full-time employees.
On December 31, 2004, we and our subsidiary employed 284 persons, of whom
193 were employed in manufacturing and quality control, 58 were employed in
administration, sales and marketing, and 33 were employed in engineering and
research and development. On December 31, 2004 Limco-Airepair employed 116
full-time employees
On December 31, 2003, we and our subsidiary employed 270 persons, of whom
193 were employed in manufacturing and quality control, 48 were employed in
administration, sales and marketing, and 29 were employed in engineering and
research and development. On December 31, 2003 Limco-Airepair employed 100
full-time employees.
45
Certain provisions of the collective bargaining agreements between the
Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of
Economic Organizations (including the Industrialists Association) are applicable
to our Israeli employees by order of the Israeli Ministry of Labor. These
provisions concern mainly the length of the workday, minimum daily wages for
professional workers, contributions to a pension fund, insurance for
work-related accidents, procedures for dismissing employees, determination of
severance pay and other conditions of employment. We generally provide our
employees with benefits and working conditions beyond the required minimums.
Furthermore, under the collective bargaining agreements, the wages of most of
our employees are linked to the Consumer Price Index, although the extent of the
linkage is limited.
In addition, Israeli law generally requires severance pay upon the
retirement or death of an employee or termination of employment without due
cause. Furthermore, Israeli employees and employers are required to pay
predetermined sums to the National Insurance Institute which is similar to the
United States Social Security Administration. The payments thereto amount to
approximately 13% of wages, with the employee contributing approximately 40% and
the employer approximately 60%.
A general practice followed by us, although not legally required, is the
contribution of monies on behalf of its senior employees to a fund known as
"Management Insurance." This fund provides a combination of savings plan,
insurance and severance pay benefits to the employee, giving the employee a lump
sum payment upon retirement and securing his right to receive severance pay, if
legally entitled, upon termination of employment. The employee contributes an
amount equal to approximately 5% of his wages and the employer contributes an
additional amount of approximately 13-1/3% - 16% of such wages.
E. SHARE OWNERSHIP
BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTOR
The following table sets forth information as of June 22, 2006 regarding
beneficial ownership by each of our directors and executive officers.
Number of Ordinary
Shares Percentage of
Name Beneficially Owned (1) Ownership (2)
---------------------------------------- ---------------------- -------------
Shlomo Ostersetzer (3)(4) .............. 249,412 4.13%
Dov Zeelim (3)(4) ...................... 175,000 2.89%
Israel Ofen (3) ........................ 81,000 1.34%
Shraga Katz (3) ........................ 10,000 *
Avi Kahana (3) ......................... - -
Jacob Danan (3) ........................ 2,000 *
Shaul Menachem (3) ..................... - -
Eran Frenkel (3) ....................... 400 *
Yossi Rosenberg (3) .................... - -
Dr. Meir Dvir (3)(5) ................... 7,000 *
Yaacov Fish (3)(5) ..................... 5,000 *
Ishay Davidi (3) ....................... - -
Gillon Beck (3) ........................ - -
Yechiel Gutman (3) ..................... - -
Michael Shevi (3) ...................... - -
Rami Daniel (3) ........................ - -
All directors and executive officers
as a group, (16) persons (6) ........... 529,812 8.75%
----------
* less than one percent
46
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares relating to options
and warrants currently exercisable or exercisable within 60 days of the date of
this table are deemed outstanding for computing the percentage of the person
holding such securities but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table above
have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) The percentages shown are based on 6,042,671 ordinary shares issued
and outstanding as of June 22, 2006.
(3) The business addresses of Messrs. Ostersetzer, Zeelim, Ofen, Katz,
Kahana, Danan, Frenkel, Rosenberg, Menachem, Fish, Davidi, Beck, Gutman, Shevi
and Daniel and Dr. Dvir is c/o TAT Technologies Ltd. P.O. Box 80, Gedera, Israel
70750.
(4) Mr. Shlomo Ostersetzer, an officer, director and controlling
shareholder of TAT Industries, and Dov Zeelim, an officer, director and
controlling shareholder of TAT Industries, disclaim beneficial ownership of the
3,124,150 ordinary shares held by TAT Industries, except to the extent of their
proportional interest therein.
(5) Includes 5,000 ordinary shares subject to currently exercisable
options granted under our 1999 stock option plan, at an exercise price of $1.625
per share. The options expire in January 2009.
(6) Includes 10,000 ordinary shares subject to currently exercisable
options granted under our 1999 stock option plan, at an exercise price of $1.625
per share. The options expire in January 2009.
STOCK OPTION PLANS
In January 1999, our Board of Directors adopted a share option plan (the
"1999 Plan") for which 500,000 ordinary shares have been reserved and granted at
an exercise price of $1.625 per share as follows: Shlomo Ostersetzer-125,000
shares; Dov Zeelim-175,000 shares; Israel Ofen-102,500 shares; and an aggregate
of 97,500 shares to other employees and directors. As of June 20, 2006 there
were 17,500 options outstanding, at an exercise price of $1.625 per share, and
no options were available for future grant pursuant to the 1999 Plan. As of June
20, 2006, our executive officers and directors as a group, consisting of sixteen
persons, held 10,000 options under the 1999 Plan. The 1999 Plan will terminate
in January 2009. All options have a term of 10 years.
47
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
TAT Industries is the beneficial holder of 51.70 % of our outstanding
shares. Accordingly, TAT Industries controls our company.
The following table sets forth certain information as of June 22, 2006,
regarding the beneficial ownership by all shareholders known to us to own
beneficially 5% or more of our ordinary shares:
Number of
Ordinary Shares Percentage of
Name Beneficially Owned(1) Ownership(2)
---- --------------------- -------------
TAT Industries Ltd. (3)................. 3,124,150 51.70%
T.O.P (4)(5)............................ 1,357,143 22.46%
----------
(1) Beneficial ownership is determined in accordance with the rules of
the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Ordinary shares relating to options
and warrants currently exercisable or exercisable within 60 days of the date of
this table are deemed outstanding for computing the percentage of the person
holding such securities but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and subject to
community property laws where applicable, the persons named in the table above
have sole voting and investment power with respect to all shares shown as
beneficially owned by them.
(2) The percentages shown are based on 6,042,671 ordinary shares issued
and outstanding as of June 22, 2006.
(3) The address of TAT Industries is Re'em Industrial Park Neta,
Boulevard Bnei Ayish, Gedera, Israel 70750.
(4) The address of T.O.P is 37 Mencham Begin Boulevard, Tel Aviv,
Israel.
(5) Includes 500,000 ordinary shares issuable upon the exercise of
currently exercisable warrants, granted under the Share Purchase Agreement with
T.O.P, at an exercise price of $6.94 per share. The warrants expire in January
2010.
SIGNIFICANT CHANGES IN THE OWNERSHIP OF MAJOR SHAREHOLDERS
On June 15, 2004, we entered into a share purchase agreement with T.O.P, a
wholly-owned subsidiary of Ta-Tek Ltd., an Israeli private company wholly-owned
by FIMI Opportunity Fund. Under the agreement T.O.P purchased 14.18% of our
outstanding shares and was granted warrants for the purchase of additional 8.27%
of our outstanding shares, at an exercise price of $7.32, subject to certain
anti-dilution provisions. Such warrants expire in January 2010.
MAJOR SHAREHOLDERS VOTING RIGHTS
Our major shareholders do not have different voting rights.
48
RECORD HOLDERS
Based on a review of the information provided to us by our transfer agent,
as of June 27, 2006, there were 51 holders of record of our ordinary shares, of
which 41 record holders holding approximately 50% of our ordinary shares had
registered addresses in the United States and 10 record holders holding
approximately 50% of our ordinary shares had registered addresses in the Israel.
These numbers are not representative of the number of beneficial holders of our
shares nor is it representative of where such beneficial holders reside since
many of these ordinary shares were held of record by brokers or other nominees
including CEDE & Co., the nominee for the Depositary Trust Company (the central
depositary for the U.S. brokerage community), which held approximately 50% of
our outstanding ordinary shares as of said date.
B. RELATED PARTY TRANSACTIONS
MANAGEMENT AND SERVICES AGREEMENT
In February 2000, we entered into an agreement with TAT Industries, our
controlling shareholder, to purchase operations of TAT Industries relating to
the manufacture of aviation accessories and the lease of certain real estate and
buildings. Pursuant to the terms of this agreement, all of the employees of TAT
Industries were transferred to us effective January 1, 2000, without any change
in the conditions of their employment. TAT Industries pays us $50,000 per year
for administrative and accounting personnel and secretarial staff, who served as
employees of TAT Industries before they were transferred to us and who continue
to provide such services.
In addition, pursuant to the terms of the agreement, we entered into a
lease agreement, pursuant to which we lease from TAT Industries, effective as of
January 1, 2000, an area of approximately 329,000 square feet, including 90,000
square feet of manufacturing, office and storage space, for a period of 24 years
and eleven months. In consideration for the lease agreement, we agreed to pay
TAT Industries annual rental fee of $300,000, with an additional incremental
payment of 2% per year, such rental fee is subject to revaluation every fifth
year. In 2005 the rental fee was revaluated by a real estate appraiser, and as a
result the base fee was increased to $310,000 per year. The rental fee will be
revaluated again in 2010.
OTHER TRANSACTIONS
Our Israeli operations employ the services of an agent, Gal Tech Inc. (a
company owned by Messrs. Shlomo Ostersetzer, Dov Zeelim and Israel Ofen, all of
whom are officers and directors of our company). According to an export
agreement, dated April 14, 1992, Gal Tech Inc. receives a handling fee in the
amount of 10% of all purchases by our company in North America per year and a
handling fee in the amount of 3% of all sales by our company to North America
per year (not including sales of heat transfer products). However, pursuant to
this agreement, the total amount to be paid by us to Gal Tech will not exceed
the sum of 5% of our purchases in North America and 5% of our sales to North
America (not including sales of heat transfer products) per year. In the years
ended December 31, 2003, 2004 and 2005, we paid approximately $487,000, $377,000
and $537,,000 respectively, to Gal Tech, in accordance with such agreement.
Effective January 1, 2003, Ifat Frenkel (the daughter of Dov Zeelim) became the
President of Gal Tech.
Pursuant to their employment agreements, the chairman of our Board of
Directors, Mr. Shlomo Ostersetzer, and the vice chairman of our Board of
Directors, Mr. Dov Zeelim, are entitled each to a bonus of 2.5% of the annual
consolidated operating income, in excess of $500,000. In the years ended
December 31, 2005, 2004 and 2003, our chairman and vice chairman of our Board
received a total payments of approximately $292,298, $246,488, and $239,794.
49
T.O.P, one of our major shareholders, provides us with management and
consulting services in consideration for the lesser of: (i) 3% of the
consolidated operating income in excess of $500,000, or (ii) $250,000 per year.
In the years ended December 31, 2004 and 2005, we paid T.O.P $53,980 and
$175,379 for such services.
OTHER MATTERS
Mr. Shlomo Ostersetzer also serves as the Chairman of the Board of TAT
Industries. Mr. Dov Zeelim also serves as Vice Chairman of TAT Industries.
Messrs. Zeelim and Ostersetzer are both controlling shareholders of TAT
Industries, our controlling shareholder. Mr. Israel Ofen also serves as
President of TAT Industries.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the Index to Consolidated Financial Statements accompanying this
report on Page F-1.
LEGAL PROCEEDINGS
In August 2004, two former temporary employees filed a claim against us
and against an employment agency, alleging breach of contract and seeking
compensation for salary delays and salary differences in the amount of $235,000.
At this time, we are unable to predict the ultimate outcome of these claims;
however, we believe that such claims are without merit. As such, no provision
was provided.
DIVIDEND DISTRIBUTION
In December 2002, we declared a cash dividend of $0.45 per share (an
aggregate of $2,017,582) paid in January 2003. In May 2003, we declared a cash
dividend of $0.25 per share (an aggregate of $1,120,879) payable in July 2003.
In September 2004, we declared a cash dividend of $1.18 per share (an aggregate
of $7,130,352) payable in November 2004. In August 2005, we declared a cash
dividend of $0.18 per share (an aggregate of $ 1,087,000) payable in November
2005. In April 2006, we declared a cash dividend of $0.20 per share (an
aggregate of $1,209,000) payable in May 2006. Our intention is to pay up to 40%
of our net profit as a cash dividend annually, depending on cash flow and
profitability and other factors affecting our business. There can be no
assurance that we will declare any further dividends.
According to the Israeli Companies Law, a company may distribute dividends
out of its profits, so long as the company reasonably believes that such
dividend distribution will not prevent the company from paying all its current
and future debts. Profits, for purposes of the Israeli Companies Law, means the
greater of retained earnings or earnings accumulated during the preceding two
years. In the event cash dividends are declared, such dividends will be declared
in dollars.
We do not intend to distribute earnings of our foreign subsidiaries in the
foreseeable future. We currently intend to permanently reinvest all future
earnings of such subsidiaries in order to finance their operations and expand
their business.
50
B. SIGNIFICANT CHANGES
Since the date of the annual consolidated financial statements included in
this annual report, no significant change has occurred.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
ANNUAL STOCK INFORMATION
The following table sets forth, for each of the years indicated, the range
of high ask and low bid prices of our ordinary shares on the NASDAQ Capital
Market and the TASE :
NASDAQ CAPITAL MARKET TEL AVIV STOCK EXCHANGE
--------------------- -----------------------
HIGH LOW HIGH LOW
--------- --------- ---------- ----------
Fiscal Year Ended December 31, 2001 $3.25 $1.39 - -
Fiscal Year Ended December 31, 2002 4.10 1.65 - -
Fiscal Year Ended December 31, 2003 8.00 2.06 - -
Fiscal Year Ended December 31, 2004 9.80 6.21 - -
Fiscal Year Ended December 31, 2005 9.35 5.25 NIS 35.50 NIS 29.70
QUARTERLY STOCK INFORMATION
The following table sets forth, for each of the full financial quarters in
the two most recent full financial years and any subsequent period, the range of
high ask and low bid prices of our ordinary shares on the NASDAQ Capital Market
and the TASE:
NASDAQ CAPITAL MARKET TEL AVIV STOCK EXCHANGE
--------------------- -----------------------
HIGH LOW HIGH LOW
--------- --------- ---------- ----------
2004
----
First Quarter ..................... $9.85 $7.15 - -
Second Quarter .................... 9.29 7.55 - -
Third Quarter ..................... 9.00 7.00 - -
Fourth Quarter .................... 8.94 6.21 - -
2005
----
First Quarter ..................... $9.35 $7.41 - -
Second Quarter .................... 8.81 7.19 - -
Third Quarter ..................... 7.80 5.25 NIS 35.50 NIS 35.50
Fourth Quarter .................... 7.16 5.60 35.50 29.70
2006
----
First Quarter ..................... $7.00 $5.92 NIS 32.79 NIS 30.40
51
MONTHLY STOCK INFORMATION
The following table sets forth, for the most recent six months, the range
of high ask and low bid prices of our ordinary shares on the NASDAQ Capital
Market and the TASE:
NASDAQ CAPITAL MARKET TEL AVIV STOCK EXCHANGE
--------------------- -----------------------
HIGH LOW HIGH LOW
--------- --------- ---------- ----------
2005
----
December........................... $7.16 $6.20 NIS 29.70 NIS 29.70
2006
----
January ........................... $7.00 $6.63 NIS32.79 NIS31.45
February........................... 6.88 5.92 32.20 30.40
March.............................. 6.75 6.41 32.40 32.06
April.............................. 6.61 6.30 31.31 29.59
May................................ 8.00 6.49 35.38 29.59
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
Our ordinary shares traded on the NASDAQ National Market under the symbol
"TATTF" from March 1987 until July 1998 when the listing of such shares was
transferred to the NASDAQ Capital Market. On August 16, 2005, we listed its
shares for trade on the Tel-Aviv Stock Exchange as a dual listed company.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSE OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
We are registered with the Israeli Companies Registry and have been
assigned company number [520035791]. Section 2 of our memorandum of association
provides that we were established for the purpose of engaging in the business of
providing services of planning, development, consultation and instruction in the
electronics field. In addition, the purpose of our company is to perform various
corporate activities permissible under Israeli law.
52
On February 1, 2000, the Israeli Companies Law came into effect and
superseded most of the provisions of the Israeli Companies Ordinance (New
Version), 5743-1983, except for certain provisions which relate to liens,
bankruptcy, dissolution and liquidation of companies. Under the Israeli
Companies Law, various provisions, some of which are detailed below, overrule
the current provisions of our articles of association.
THE POWERS OF THE DIRECTORS
Under the provisions of the Israeli Companies Law and our Articles of
Association, a director cannot participate in a meeting nor vote on a proposal,
arrangement or contract in which he or she is materially interested. In
addition, our directors cannot vote compensation to themselves or any members of
their body without the approval of our audit committee and our shareholders at a
general meeting. See Item 6.C. "Directors, Senior Management and Employees -
Board Practices - Approval of Related Party Transactions Under Israeli Law."
The authority of our directors to enter into borrowing arrangements on our
behalf is not limited, except in the same manner as any other transaction by us.
Our articles of association do not impose any mandatory retirement or
age-limit requirements on our directors and our directors are not required to
own shares in our company in order to qualify to serve as directors.
RIGHTS ATTACHED TO SHARES
Our authorized share capital consists of 10,000,000 ordinary shares of a
nominal value of NIS 0.90 each. All outstanding ordinary shares are validly
issued, fully paid and non-assessable.
The rights attached to the ordinary shares are as follows:
DIVIDEND RIGHTS. Holders of our ordinary shares are entitled to the full
amount of any cash or share dividend subsequently declared. The board of
directors may declare interim dividends and propose the final dividend with
respect to any fiscal year only out of the retained earnings, in accordance with
the provisions of the Israeli Companies Law. See Item 8.A. "Financial
Information - Consolidated and Other Financial Information - Dividend
Distribution." If after one year a dividend has been declared and it is still
unclaimed, the board of directors is entitled to invest or utilize the unclaimed
amount of dividend in any manner to our benefit until it is claimed. We are not
obligated to pay interest or linkage differentials on an unclaimed dividend.
VOTING RIGHTS. Holders of ordinary shares have one vote for each ordinary
share held on all matters submitted to a vote of shareholders. Such voting
rights may be affected by the grant of any special voting rights to the holders
of a class of shares with preferential rights that may be authorized in the
future.
The quorum required for an ordinary meeting of shareholders consists of at
least two shareholders present in person or represented by proxy who hold or
represent, in the aggregate, at least one third of the voting rights of the
issued share capital. A meeting adjourned for lack of a quorum generally is
adjourned to the same day in the following week at the same time and place or
any time and place as the directors designate in a notice to the shareholders.
At the reconvened meeting, the required quorum consists of any two members
present in person or by proxy.
53
Under our Articles of Association, any resolution, including resolutions
for the declaration of dividends, amending our memorandum of association or
articles of association, approving any change in capitalization, winding-up,
authorization of a class of shares with special rights, or other changes as
specified in our Articles of Association, requires approval of the holders of a
majority of the voting rights represented at the meeting, in person, by proxy or
by written ballot, and voting thereon.
Pursuant to our articles of association, our directors are elected at our
annual general meeting of shareholders by a vote of the holders of a majority of
the voting power represented and voting at such meeting. See Item 6.C.
"Directors, Senior Management and Employees - Board Practices - Election of
Directors."
RIGHTS TO SHARE IN OUR COMPANY'S PROFITS. Our shareholders have the right
to share in our profits distributed as a dividend and any other permitted
distribution.
RIGHTS TO SHARE IN SURPLUS IN THE EVENT OF LIQUIDATION. In the event of
our liquidation, after satisfaction of liabilities to creditors, our assets will
be distributed to the holders of ordinary shares in proportion to the nominal
value of their holdings. This right may be affected by the grant of preferential
dividend or distribution rights to the holders of a class of shares with
preferential rights that may be authorized in the future.
LIABILITY TO CAPITAL CALLS BY OUR COMPANY. Under our memorandum of
association and the Israeli Companies Law, the liability of our shareholders is
limited to the par value of the shares held by them.
LIMITATIONS ON ANY EXISTING OR PROSPECTIVE MAJOR SHAREHOLDER. See Item
6.C. "Directors and Senior Management -Board Practices - Approval of Related
Party Transactions Under Israeli Law."
CHANGING RIGHTS ATTACHED TO SHARES
According to our Articles of Association, in order to change the rights
attached to any class of shares, unless otherwise provided by the terms of the
class, such change must be adopted by a general meeting of the shareholders and
by a separate general meeting of the holders of the affected class with a
majority of the voting rights represented at the meeting, in person, by proxy or
by written ballot, and voting thereon.
ANNUAL AND EXTRAORDINARY MEETINGS
The Board of Directors must convene an annual meeting of shareholders at
least once every calendar year, within fifteen months of the last annual
meeting. Notice of at least twenty-one days prior to the date of the meeting is
required. An extraordinary meeting may be convened by the board of directors, as
it decides or upon a demand of any two directors or 25% of the directors,
whichever is less, or of one or more shareholders holding in the aggregate at
least 5% of our issued capital and at least 1% of the voting rights in our
company. An extraordinary meeting must be held not more than thirty-five days
from the publication date of the announcement of the meeting. See Item 10.B.
"Additional Information -- Memorandum and Articles of Association -- Rights
Attached to Shares--Voting Rights."
54
LIMITATIONS ON THE RIGHTS TO OWN SECURITIES IN OUR COMPANY
Neither our memorandum of association or our articles of association nor
the laws of the State of Israel restrict in any way the ownership or voting of
shares by non-residents, except with respect to subjects of countries which are
in a state of war with Israel.
PROVISIONS RESTRICTING CHANGE IN CONTROL OF OUR COMPANY
The Israeli Companies Law requires that mergers between Israeli companies
be approved by the board of directors and general meeting of shareholders of
both parties to the transaction. The approval of the board of directors of both
companies is subject to such boards' confirmations that there is no reasonable
doubt that after the merger the surviving company will be able to fulfill its
obligations towards its creditors. Each company must notify its creditors about
the contemplated merger. Under the Israeli Companies Law, our Articles of
Association are deemed to include a requirement that such merger be approved by
an extraordinary resolution of the shareholders, as explained above. The
approval of the merger by the general meetings of shareholders of the companies
is also subject to additional approval requirements as specified in the Israeli
Companies Law and regulations promulgated thereunder. See also Item 6.C.
"Directors, Senior Management and Employees - Board Practices - Approval of
Related Party Transactions Under Israeli Law."
DISCLOSURE OF SHAREHOLDERS OWNERSHIP
The Israeli Securities Law and regulations promulgated thereunder do not
require a company whose shares are publicly traded solely on a stock exchange
outside of Israel, as in the case of our company, to disclose its share
ownership.
CHANGES IN OUR CAPITAL
Changes in our capital are subject to the approval of the shareholders at
a general meeting by a majority of the voting rights represented at the meeting,
in person, by proxy or by written ballot, and voting thereon.
There are no restrictions on the rights of nonresident or foreign
shareholders to hold or vote the Ordinary Shares.
C. MATERIAL CONTRACTS
On June 15, 2004, we entered into a share purchase agreement with T.O.P, a
wholly-owned subsidiary of Ta-Tek Ltd., an Israeli private company wholly-owned
by FIMI Opportunity Fund. Under the agreement we sold 857,143 of our shares to
T.O.P for $6,000,001. T.O.P was given certain demand and piggy-back registration
rights with respect to these shares. As part of the transaction, our parent
company, TAT Industries, and T.O.P entered into a shareholders' agreement, which
provides among other things that T.O.P will have the right to designate three
members to serve on our Board of Directors. The shareholders' agreement also
provides for: (i) certain standard bring-along and tag-along rights; (ii) a
right of first refusal with respect to any shares proposed to be sold by any of
the parties; (iii) a lock-up whereby no party may sell more than 150,000 shares
prior to June 2006, and (iv) a standstill restriction, which provides that T.O.P
will not purchase (in the open market or otherwise) such number of shares that
would increase its holdings of our shares to more than 35%.
55
As part of the transaction, T.O.P received warrants to purchase an
aggregate of 500,000 of our ordinary shares at $8.50 per share, which price was
adjusted to $6.94 per share because of our 2006 dividend payment. The warrants
are exercisable for 66 months. In addition, we entered into a credit line
agreement with FIMI, which provides for a line of credit in an amount of up to
$2,000,000. Loans made pursuant to the credit line bear interest at 5% per annum
and are repayable on or before December 15, 2009. We pay an annual commitment
fee equal to 0.5% of the amount of the credit line. We also entered into a
management agreement which provides that we will engage FIMI to provide certain
management services to us in exchange for annual payments equal to 3% of our
operating profit exceeding $500,000; provided, however, that in no event will
the total management fees in any given year exceed $250,000. The agreements were
approved by our shareholders on August 10, 2004.
On July 7, 2005 our subsidiary, Limco-Airepair, purchased Piedmont, an FAA
certified company, engaged in the repair and overhaul of various aircraft
accessories. Under the terms of the acquisition, we paid $5.29 million for
Piedmont and repaid $11 million of its outstanding indebtedness. In addition, we
agreed to pay the former shareholders of Piedmont $200,000 per year, for a term
of three years, in consideration for their agreement not to compete with
Piedmont in this period.
D. EXCHANGE CONTROLS
Israeli law and regulations do not impose any material foreign exchange
restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new
"general permit" was issued under the Israeli Currency Control Law, 1978, which
removed most of the restrictions that previously existed under such law, and
enabled Israeli citizens to freely invest outside of Israel and freely convert
Israeli currency into non-Israeli currencies.
Non-residents of Israel who purchase our ordinary shares will be able to
convert dividends, if any, thereon, and any amounts payable upon our
dissolution, liquidation or winding up, as well as the proceeds of any sale in
Israel of our ordinary shares to an Israeli resident, into freely repatriable
dollars, at the exchange rate prevailing at the time of conversion, provided
that the Israeli income tax has been withheld (or paid) with respect to such
amounts or an exemption has been obtained.
E. TAXATION
MATERIAL INCOME TAX CONSIDERATIONS
The following is a summary of the current tax structure applicable to
companies incorporated in Israel, with special reference to its effect on us.
The following also contains a discussion of the material Israeli consequences to
purchasers of our ordinary shares and Israeli government programs benefiting us.
To the extent that the discussion is based on new tax legislation which has not
been subject to judicial or administrative interpretation, we cannot assure you
that the views expressed in the discussion will be accepted by the appropriate
tax authorities or the courts. The discussion is not intended, and should not be
construed, as legal or professional tax advice and is not exhaustive of all
possible tax considerations
Holders of our ordinary shares should consult their own tax advisors as to
the United States, Israeli or other tax consequences of the purchase, ownership
and disposition of ordinary shares, including, in particular, the effect of any
foreign, state or local taxes.
ISRAELI TAX CONSIDERATIONS
STATUTORY CORPORATE TAX RATE
Israeli companies were generally subject to corporate tax at the rate of
34% of their taxable income in 2005. Pursuant to tax reform legislation that
came into effect in 2003, the corporate tax rate is to undergo staged reductions
to 25% by the year 2010. In order to implement these reductions, the corporate
tax rate is scheduled to decline to 31% in 2006, 29% in 2007, 27% in 2008, and
26% in 2009.
56
However, the effective tax rate payable by a company that derives income
from an approved enterprise, discussed further below, may be considerably less.
See "-Tax Benefits under the Law for the Encouragement of Capital Investments,
1959."
STAMP DUTY
The Israeli Stamp Duty on Documents Law, 1961, or the Stamp Duty Law,
provides that any document (or part thereof) that is signed in Israel or that is
signed outside of Israel and refers to an asset in Israel or to an action that
is executed or will be executed in Israel, is subject to stamp duty, generally
at a rate of between 0.4% and 1% of the value of the subject matter of such
document. De facto, it has been common practice in Israel not to pay such stamp
duty unless a document is filed with a governmental authority. An amendment to
the Stamp Duty Law from June 1, 2003, determines, among other things, that stamp
duty on most agreements shall be paid by the parties that signed such agreement,
jointly or severally, or by the party that undertook under such agreement to pay
the stamp duty. As a result of such amendment, the Israeli tax authorities have
approached many companies in Israel and requested disclosure of all agreements
signed by such companies after June 1, 2003, with the aim of collecting stamp
duty on such agreements. Under an order published in December 2005, the
requirement to pay the stamp duty was terminated with respect to agreements
signed after January 1, 2006.
Accordingly, we may be liable to pay stamp duty with respect to documents
that were signed in the period beginning June 1, 2003 and ending on December 31,
2005. Based on legal advice, our management believes that the potential costs
arising from this matter are not material.
CAPITAL GAINS TAX ON SALES OF OUR ORDINARY SHARES
Israeli law generally imposes capital gains tax on the sale of any capital
assets by residents of Israel, and on the sale of capital assets located in
Israel, including shares in Israeli companies, by both residents and
non-residents of Israel, unless a specific exemption is available or unless a
tax treaty between Israel and the seller's country of residence provides
otherwise. The law distinguishes between real gain and inflationary surplus. The
inflationary surplus is a portion of the total capital gain which is equivalent
to the increase of the relevant asset's purchase price which is attributable to
the increase in the Israeli consumer price index or, in certain circumstances, a
foreign currency exchange rate, between the date of purchase and the date of
sale. The real gain is the excess of the total capital gain over the
inflationary surplus.
Generally, until 2006, capital gains tax was imposed on Israeli resident
individuals at a rate of 15% on real capital gains derived on or after January
1, 2003, from the sale of shares in Israeli companies publicly traded on a
recognized stock exchange outside of Israel, in a country that has a treaty for
the prevention of double taxation with Israel. This tax rate was contingent upon
the shareholder not claiming a deduction for financing expenses in connection
with such shares (in which case the gain was generally taxed at a rate of 25%),
and did not apply to: (i) the sale of shares to a relative (as defined in the
Israeli Income Tax Ordinance); (ii) the sale of shares by dealers in securities;
(iii) the sale of shares by shareholders that report in accordance with the
Inflationary Adjustments Law (that were taxed at corporate tax rates for
corporations and at marginal tax rates for individuals); or (iv) the sale of
shares by shareholders who acquired their shares prior to an initial public
offering (that may be subject to a different tax arrangement).
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As of January 1, 2006, the tax rate applicable to capital gains derived
from the sale of shares, whether listed on a stock market or not, is 20% for
Israeli individuals, unless such shareholder claims a deduction for financing
expenses in connection with such shares, in which case the gain will generally
be taxed at a rate of 25%. Additionally, if such shareholder is considered a
"material shareholder" at any time during the 12-month period preceding such
sale, i.e., such shareholder holds directly or indirectly, including with
others, at least 10% of any means of control in the company, the tax rate shall
be 25%. Israeli companies are subject to the Corporate Tax rate on capital gains
derived from the sale of shares, unless such companies were not subject to the
Adjustments Law (or certain regulations) at the time of publication of the
aforementioned amendment to the Tax Ordinance that came into effect on January
1, 2006, in which case the applicable tax rate is 25%. The foregoing tax rates
do not apply to: (i) dealers in securities; and (ii) shareholders who acquired
their shares prior to an initial public offering (that may be subject to a
different tax arrangement).
The tax basis of shares acquired prior to January 1, 2003 will be
determined in accordance with the average closing share price in the three
trading days preceding January 1, 2003. However, a request may be made to the
tax authorities to consider the actual adjusted cost of the shares as the tax
basis if it is higher than such average price.
Non-Israeli residents are exempt from Israeli capital gains tax on any
gains derived from the sale of shares of Israeli companies publicly traded on a
recognized stock exchange or regulated market outside of Israel, provided
however that such capital gains are not derived from a permanent establishment
in Israel, such shareholders are not subject to the Adjustments Law, and such
shareholders did not acquire their shares prior to an initial public offering.
However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident (i) has a controlling interest of 25% or more in such
non-Israeli corporation, or (ii) is the beneficiary or is entitled to 25% or
more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.
In some instances where our shareholders may be liable to Israeli tax on
the sale of their ordinary shares, the payment of the consideration may be
subject to the withholding of Israeli tax at the source.
Pursuant to the Convention Between the government of the United States of
America and the government of Israel with Respect to Taxes on Income, as amended
(the "U.S.-Israel Tax Treaty"), the sale, exchange or disposition of ordinary
shares by a person who (i) holds the ordinary shares as a capital asset, (ii)
qualifies as a resident of the United States within the meaning of the
U.S.-Israel Tax Treaty and (iii) is entitled to claim the benefits afforded to
such person by the U.S.-Israel Tax Treaty, generally, will not be subject to the
Israeli capital gains tax. Such exemption will not apply if (i) such Treaty U.S.
Resident holds, directly or indirectly, shares representing 10% or more of our
voting power during any part of the 12-month period preceding such sale,
exchange or disposition, subject to certain conditions, or (ii) the capital
gains from such sale, exchange or disposition can be allocated to a permanent
establishment in Israel. In such case, the sale, exchange or disposition of
ordinary shares would be subject to Israeli tax, to the extent applicable;
however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would be
permitted to claim a credit for such taxes against the U.S. federal income tax
imposed with respect to such sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel Tax
Treaty does not relate to U.S. state or local taxes.
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS,
1959
TAX BENEFITS PRIOR THE 2005 AMENDMENT
The Law for the Encouragement of Capital Investments, 1959, commonly
referred to as the Investment Law, provides that a proposed capital investment
in eligible facilities may, upon application to the Investment Center of the
Ministry of Industry and Commerce of the State of Israel, be designated as an
approved enterprise. The Investment Center bases its decision as to whether or
not to approve an application, among other things, on the criteria set forth in
the Investments Law and regulations, the then prevailing policy of the
Investment Center, and the specific objectives and financial criteria of the
applicant. Each certificate of approval for an approved enterprise relates to a
specific investment program delineated both by its financial scope, including
its capital sources, and by its physical characteristics, e.g., the equipment to
be purchased and utilized pursuant to the program.
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The Investments Law provides that an approved enterprise is eligible for
tax benefits on taxable income derived from its approved enterprise programs.
The tax benefits under the Investments Law also apply to income generated by a
company from the grant of a usage right with respect to know-how developed by
the approved enterprise, income generated from royalties, and income derived
from a service which is auxiliary to such usage right or royalties, provided
that such income is generated within the approved enterprise's ordinary course
of business. If a company has more than one approval or only a portion of its
capital investments are approved, its effective tax rate is the result of a
weighted average of the applicable rates. The tax benefits under the Investments
Law are not, generally, available with respect to income derived from products
manufactured outside of Israel. In addition, the tax benefits available to an
approved enterprise are contingent upon the fulfillment of conditions stipulated
in the Investments Law and regulations and the criteria set forth in the
specific certificate of approval, as described above. In the event that a
company does not meet these conditions, it would be required to refund the
amount of tax benefits, plus a consumer price index linkage adjustment and
interest.
The Investments Law also provides that an approved enterprise is entitled
to accelerated depreciation on its property and equipment that are included in
an approved enterprise program in the first five years of using the equipment.
Taxable income of a company derived from an approved enterprise is subject
to corporate tax at the maximum rate of 25%, rather than the regular corporate
tax rate, for the benefit period. This period is ordinarily seven years
commencing with the year in which the approved enterprise first generates
taxable income, and is limited to 12 years from commencement of production or 14
years from the date of approval, whichever is earlier. Please note that the
limitation does not apply to the exemption period.
A company may elect to receive an alternative package of benefits. Under
the alternative package of benefits, a company's undistributed income derived
from the approved enterprise will be exempt from corporate tax for a period of
between two and ten years from the first year the company derives taxable income
under the program, depending on the geographic location of the approved
enterprise within Israel, and such company will be eligible for a reduced tax
rate for the remainder of the benefits period. A company that has elected the
alternative package of benefits, such as us, that subsequently pays a dividend
out of income derived from the approved enterprise during the tax exemption
period will be subject to corporate tax in respect of the gross amount
distributed, including any taxes thereon, at the rate which would have been
applicable had it not elected the alternative package of benefits, generally
10%-25%, depending on the percentage of the company's ordinary shares held by
foreign shareholders. The dividend recipient is subject to withholding tax at
the rate of 15% applicable to dividends from approved enterprises, if the
dividend is distributed during the tax exemption period or within twelve years
thereafter. The company must withhold this tax at source. The 12 years
limitation does not apply to foreign investment company.
A company that has an approved enterprise program is eligible for further
tax benefits if it qualifies as a "foreign investors" company. A "foreign
investors" company is a company which more than 25% of its share capital and
combined share and loan capital is owned by non-Israeli residents. A company
that qualifies as a "foreign investors" company and has an approved enterprise
program is eligible for tax benefits for a ten-year benefit period. As specified
above, depending on the geographic location of the approved enterprise within
Israel, income derived from the approved enterprise program may be exempt from
tax on its undistributed income for a period of between two to ten years, and
will be subject to a reduced tax rate for the remainder of the benefits period.
The tax rate for the remainder of the benefits period will be 25%, unless the
level of foreign investment exceeds 49%, in which case the tax rate will be 20%
if the foreign investment is more than 49% and less than 74%; 15% if more than
74% and less than 90%; and 10% if 90% or more.
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Subject to applicable provisions concerning income under the alternative
package of benefits, dividends paid by a company are considered to be
attributable to income received from the entire company and the company's
effective tax rate is the result of a weighted average of the various applicable
tax rates, excluding any tax-exempt income. Under the Investments Law, a company
that has elected the alternative package of benefits is not obliged to
distribute retained profits, and may generally decide from which year's profits
to declare dividends.
Currently, we have one Approved Enterprise program under the alternative
track of the Investment Law. We are therefore eligible for a tax exemption for a
limited period on undistributed Approved Enterprise income, and an additional
subsequent period of reduced corporate tax rates ranging between 10% and 25%,
depending on the level of foreign ownership of our shares. We intend to continue
to apply for Approved Enterprise programs, but we cannot assure you that we will
do so or that we will be successful. We intend to reinvest the entire amount of
our tax-exempt income and not to distribute this income as a dividend.
TAX BENEFITS UNDER THE 2005 AMENDMENT
The Investment Law was amended on April 1, 2005. The amendment to the
Investment Law, or the Amendment, includes revisions to the criteria for
investments qualified to receive tax benefits as an Approved Enterprise. The
Amendment applies to new investment programs and investment programs commencing
after 2004, and does not apply to investment programs approved prior to December
31, 2004.
The Amendment does not apply to benefits included in any certificate of
approval that was granted before the Amendment came into effect, which will
remain subject to the provisions of the Investment Law as they were on the date
of such approval.
We will continue to enjoy our current tax benefits in accordance with the
provisions of the Investment Law prior to the Amendment, but if we are granted
any new benefits in the future they will be subject to the provisions of the
amended Investment Law.
The Amendment simplifies the Approved Enterprise approval process.
According the Amendment, only Approved Enterprises receiving cash grants require
the approval of the Investment Center. The Investment Center will be entitled to
approve such programs only until December 30, 2007.
Tax benefits are available under the Amendment to production facilities
(or other eligible facilities), which are generally required to derive more than
25% of their business income from export (referred to as a "Benefited
Enterprise"). Under the Amendment, in order to receive the tax benefits, the
company must make an investment in the Benefited Enterprise exceeding a certain
percentage or a minimum amount specified in the Law. Such investment may be made
over a period of no more than three years ending at the end of the year in which
the company requested to have the tax benefits apply to the Benefited Enterprise
(the "Year of Election"). Where the company requests to have the tax benefits
apply to an expansion of existing facilities, then only the expansion will be
considered a Benefited Enterprise and the company's effective tax rate will be
the result of a weighted combination of the applicable rates. In this case, the
minimum investment required in order to qualify as a Benefited Enterprise is
required to exceed a certain percentage or a minimum amount of the company's
production assets before the expansion.
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The duration of tax benefits is between of seven to ten years from the
commencement year, or 12 years from the first day of the Year of Election. The
tax benefits granted to a Benefited Enterprise are determined, as applicable to
its geographic location within Israel, according to one of the following new tax
benefits packages, which may be applicable to us:
(i) similar to the currently available alternative benefits package,
exemption from corporate tax on undistributed income for a period of two to ten
years, depending on the geographic location of the Benefited Enterprise within
Israel, and a reduced corporate tax rate of 10% to 25% for the remainder of the
benefits period, depending on the level of foreign investment in each year.
Benefits may be granted for a term of seven to ten years, depending on the level
of foreign investment in the company. If the company pays a dividend out of
income derived from the Benefited Enterprise during the tax exemption period,
such income will be subject to corporate tax at the applicable rate (10%-25%) in
respect of the gross amount of the dividend that we may distribute. The company
is required to withhold tax at the source at a rate of 15% from any dividends
distributed from income derived from the Benefited Enterprise; or
(ii) a special tax benefits package, which enables companies owning
facilities in certain geographical locations in Israel to pay corporate tax at
the rate of 11.5% on income of the Benefited Enterprise. The benefits period is
ten years. Upon payment of dividends, the company is required to withhold tax at
source at a rate of 15% for Israeli residents and at a rate of 4% for foreign
residents.
Generally, a company that is "Abundant in Foreign Investment" (as defined
in the Investments Law) is entitled to an extension of the benefits period by an
additional five years, depending on the rate of its income that is derived in
foreign currency.
The Amendment changes the definition of "foreign investment" in the
Investments Law so that the definition now requires a minimal investment of NIS
5 million (approximately $1.06 million) by foreign investors. Furthermore, such
definition now also includes the purchase of shares of a company from another
shareholder, provided that the company's outstanding and paid-up share capital
exceeds NIS 5 million. Such changes to the aforementioned definition will take
effect retroactively from 2003.
The Amendment will apply to approved enterprise programs in which the year
of election under the Investments Law is 2004 or later, unless such programs
received approval from the Investment Center on or prior to December 31, 2004,
in which case the Amendment provides that terms and benefits included in any
certificate of approval already granted will remain subject to the provisions of
the law as they were on the date of such approval.
TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXATION),
1969
According to the Law for the Encouragement of Industry (Taxation), 1969,
commonly referred to as the Industry Encouragement Law, an industrial company is
a company resident in Israel, that at least 90% of its income in any tax year
(determined in Israeli currency, exclusive of income from certain government
loans, capital gains, interest and dividends), is derived from an industrial
enterprise owned by it. An industrial enterprise is defined as an enterprise
whose major activity in a given tax year is industrial production activity. We
believe that we currently qualify as an industrial company within the definition
of the Industry Encouragement Law. Under the Industry Encouragement Law,
industrial companies are entitled to the following preferred corporate tax
benefits:
o deduction of purchases of know-how and patents over an eight-year
period for tax purposes;
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o right to elect, under specified conditions, to file a consolidated
tax return with related Israeli Industrial Companies; and
o accelerated depreciation rates on equipment and buildings.
o Deductions over a three-year period of expenses involved with the
issuance and listing of shares on the Tel Aviv Stock Exchange or, on
or after January 1, 2003, on a recognized stock market outside of
Israel.
Eligibility for the benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. The
Israeli tax authorities may determine that we do not qualify as an industrial
company, which would entail the loss of the benefits that relate to this status.
In addition, no assurance can be given that we will continue to qualify as an
industrial company, in which case the benefits described above will not be
available in the future.
SPECIAL PROVISIONS RELATING TO MEASUREMENT OF TAXABLE INCOME
We are taxed under the Income Tax Law (Inflationary Adjustments), 1985,
generally referred to as the Inflationary Adjustments Law. The Inflationary
Adjustments Law is highly complex and represents an attempt to overcome the
problems presented to a traditional tax system by an economy undergoing rapid
inflation. Its features, which are material to us, are summarized as follows:
o Where a company's equity, as calculated under the Inflationary
Adjustments Law, exceeds the depreciated cost of its fixed assets
(as defined in the Inflationary Adjustments Law), a deduction from
taxable income is permitted equal to the excess multiplied by the
applicable annual rate of inflation. The maximum deduction permitted
in any single tax year is 70% of taxable income, with the unused
portion permitted to be carried forward, linked to the Israeli
consumer price index. The unused portion that was carried forward
may be deductible in full in the following year.
o Where a company's depreciated cost of fixed assets exceeds its
equity, then the excess multiplied by the applicable annual rate of
inflation is added to taxable income. (hereinafter: "Inflation
supplement"). Note, the inflation supplement will only be added to
the corporate income but not to other incomes such as capital gains.
o Subject to specified limitations, depreciation deductions on fixed
assets and losses carried forward are adjusted for inflation based
on the change in the consumer price index.
The Minister of Finance may, with the approval of the Knesset Finance
Committee, determine by decree, during a certain fiscal year (or until February
28th of the following year) in which the rate of increase of the Israeli
consumer price index would not exceed or did not exceed, as applicable, 3.0%,
that some or all of the provisions of the Inflationary Adjustments Law shall not
apply with respect to such fiscal year, or that the rate of increase of the
Israeli consumer price index relating to such fiscal year shall be deemed to be
0%, and to make the adjustments required to be made as a result of such
determination.
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TAXATION OF NON-RESIDENT HOLDERS OF SHARES
Non-residents of Israel are subject to income tax on income accrued or
derived from sources in Israel. Such sources of income include passive income
such as dividends, royalties and interest, as well as non-passive income from
services rendered in Israel. On distributions of dividends other than bonus
shares, or stock dividends, income tax is withheld at the source at the
following rates: (i) for dividends distributed prior to January 1, 2006 - 25%;
(ii) for dividends distributed on or after January 1, 2006 - 20%, or 25% for a
shareholder that is considered a "material shareholder" at any time during the
12-month period preceding such distribution, unless a different rate is provided
in a treaty between Israel and the shareholder's country of residence. Under the
U.S.-Israel Tax Treaty, the maximum tax on dividends paid to a holder of
ordinary shares who is a Treaty U.S. Resident is 25%. However, under the
Investments Law, dividends generated by an Approved Enterprise (or Benefited
Enterprise) are taxed at the rate of 15%. Furthermore, dividends not generated
by an Approved Enterprise (or Benefited Enterprise) paid to a U.S. corporation
holding at least 10% of our issued voting power during the part of the tax year
which precedes the date of payment of the dividend and during the whole of its
prior tax year, are generally taxed at a rate of 12.5%.
For information with respect to the applicability of Israeli capital gains
taxes on the sale of ordinary shares by United States residents, see above "--
Capital Gains Tax on Sales of Our Ordinary Shares."
FOREIGN EXCHANGE REGULATIONS
Dividends, if any, paid to the holders of the ordinary shares, and any
amounts payable upon dissolution, liquidation or winding up, as well as the
proceeds of any sale in Israel of the ordinary shares to an Israeli resident,
may be paid in non-Israeli currency or, if paid in Israeli currency, may be
converted into freely repatriable U.S. dollars at the rate of exchange
prevailing at the time of conversion, however, Israeli income tax is required to
have been paid or withheld on these amounts. In addition, the statutory
framework for the potential imposition of exchange controls has not been
eliminated, and may be restored at any time by administrative action.
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material U.S. federal income tax
consequences that apply to U.S. Holders who hold ordinary shares as capital
assets. This summary is based on the United States Internal Revenue Code of
1986, as amended (the "Code"), Treasury regulations promulgated thereunder,
judicial and administrative interpretations thereof, and the U.S.-Israel Tax
Treaty, all as in effect on the date hereof and all of which are subject to
change either prospectively or retroactively. This summary does not address all
tax considerations that may be relevant with respect to an investment in
ordinary shares. This summary does not discuss all the tax consequences that may
be relevant to a U.S. Holder in light of such holder's particular circumstances
or to U.S. Holders subject to special rules, including persons that are non-U.S.
Holders, broker dealers, financial institutions, certain insurance companies,
investors liable for alternative minimum tax, tax exempt organizations,
regulated investment companies, non-resident aliens of the U.S. or taxpayers
whose functional currency is not the dollar, persons who hold the ordinary
shares through partnerships or other pass-through entities, persons who acquired
their ordinary shares through the exercise or cancellation of employee stock
options or otherwise as compensation for services, investors that actually or
constructively own 10 percent or more of our voting shares, and investors
holding ordinary shares as part of a straddle or appreciated financial position
or as part of a hedging or conversion transaction.
If a partnership or an entity treated as a partnership for U.S. federal
income tax purposes owns ordinary shares, the U.S. federal income tax treatment
of a partner in such a partnership will generally depend upon the status of the
partner and the activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of holding and disposing of
ordinary shares.
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This summary does not address the effect of any U.S. federal taxation
other than U.S. federal income taxation. In addition, this summary does not
include any discussion of state, local or foreign taxation.
You are urged to consult your tax advisors regarding the foreign and
United States federal, state and local tax considerations of an investment in
ordinary shares.
For purposes of this summary, the term "U.S. Holder" means an individual
who is a citizen or, for U.S. federal income tax purposes, a resident of the
United States, a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any political subdivision
thereof, an estate whose income is subject to U.S. federal income tax regardless
of its source, or a trust that (a) is subject to the primary supervision of a
court within the United States and the control of one or more U.S. persons or
(b) has a valid election in effect under applicable U.S. Treasury regulations to
be treated as a U.S. person.
TAXATION OF DIVIDENDS
Subject to the discussion below under the heading "Passive Foreign
Investment Companies", the gross amount of any distributions received with
respect to ordinary shares, including the amount of any Israeli taxes withheld
therefrom, will constitute dividends for U.S. federal income tax purposes, to
the extent of our current and accumulated earnings and profits as determined for
U.S. federal income tax purposes. You will be required to include this amount of
dividends in gross income as ordinary income. Distributions in excess of our
current and accumulated earnings and profits will be treated as a non taxable
return of capital to the extent of your tax basis in the ordinary shares and any
amount in excess of your tax basis will be treated as gain from the sale of
ordinary shares. See " Disposition of Ordinary Shares" below for the discussion
on the taxation of capital gains. Dividends will not qualify for the dividends
received deduction generally available to corporations under Section 243 of the
Code.
Dividends that we pay in NIS, including the amount of any Israeli taxes
withheld therefrom, will be included in your income in a dollar amount
calculated by reference to the exchange rate in effect on the day such dividends
are received. A U.S. Holder who receives payment in NIS and converts NIS into
dollars at an exchange rate other than the rate in effect on the day the
dividends are received may have a foreign currency exchange gain or loss that
would be treated as ordinary income or loss. U.S. Holders should consult their
own tax advisors concerning the U.S. tax consequences of acquiring, holding and
disposing of NIS.
Subject to complex limitations, any Israeli withholding tax imposed on
such dividends will be a foreign income tax eligible for credit against a U.S.
Holder's U.S. federal income tax liability (or, alternatively, for deduction
against income in determining such tax liability). The limitations set out in
the Code include computational rules under which foreign tax credits allowable
with respect to specific classes of income cannot exceed the U.S. federal income
taxes otherwise payable with respect to each such class of income. Dividends
generally will be treated as foreign source passive income or, in the case of
certain U.S. Holders, financial services income for United States foreign tax
credit purposes. U.S. Holders should note that recently enacted legislation
eliminates the "financial services income" category with respect to taxable
years beginning after December 31, 2006. Under this legislation, the foreign tax
credit limitation categories will be limited to "passive category income" and
"general category income." Further, there are special rules for computing the
foreign tax credit limitation of a taxpayer who receives dividends subject to a
reduced tax, see discussion below. A U.S. Holder will be denied a foreign tax
credit with respect to Israeli income tax withheld from dividends received on
the ordinary shares to the extent such U.S. Holder has not held the ordinary
shares for at least 16 days of the 31-day period beginning on the date which is
15 days before the ex dividend date or to the extent such U.S. Holder is under
an obligation to make related payments with respect to substantially similar or
related property. Any days during which a U.S. Holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward
meeting the 16-day holding period required by the statute. The rules relating to
the determination of the foreign tax credit are complex, and you should consult
with your personal tax advisors to determine whether and to what extent you
would be entitled to this credit.
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Subject to certain limitations, "qualified dividend income" received by a
noncorporate U.S. Holder in tax years beginning on or before December 31, 2010
will be subject to tax at a reduced maximum tax rate of 15 percent.
Distributions taxable as dividends paid on the ordinary shares should qualify
for the 15 percent rate provided that either: (i) we are entitled to benefits
under the income tax treaty between the United States and Israel (the "Treaty")
or (ii) the ordinary shares are readily tradable on an established securities
market in the United States and certain other requirements are met. We believe
that we are entitled to benefits under the Treaty and that the ordinary shares
currently are readily tradable on an established securities market in the United
States. However, no assurance can be given that the ordinary shares will remain
readily tradable. The rate reduction does not apply unless certain holding
period requirements are satisfied. With respect to the ordinary shares, the U.S.
Holder must have held such shares for at least 61 days during the 121-day period
beginning 60 days before the ex-dividend date. The rate reduction also does not
apply to dividends received from passive foreign investment companies, see
discussion below, or in respect of certain hedged positions or in certain other
situations. U.S. Holders of ordinary shares should consult their own tax
advisors regarding the effect of these rules in their particular circumstances.
DISPOSITION OF ORDINARY SHARES
If you sell or otherwise dispose of ordinary shares, you will recognize
gain or loss for U.S. federal income tax purposes in an amount equal to the
difference between the amount realized on the sale or other disposition and your
adjusted tax basis in the ordinary shares. Subject to the discussion below under
the heading "Passive Foreign Investment Companies," such gain or loss generally
will be capital gain or loss and will be long term capital gain or loss if you
have held the ordinary shares for more than one year at the time of the sale or
other disposition. In general, any gain that you recognize on the sale or other
disposition of ordinary shares will be U.S. source for purposes of the foreign
tax credit limitation; losses, will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the
Code.
In the case of a cash basis U.S. Holder who receives NIS in connection
with the sale or disposition of ordinary shares, the amount realized will be
based on the dollar value of the NIS received with respect to the ordinary
shares as determined on the settlement date of such exchange. A U.S. Holder who
receives payment in NIS and converts NIS into United States dollars at a
conversion rate other than the rate in effect on the settlement date may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss.
An accrual basis U.S. Holder may elect the same treatment required of cash
basis taxpayers with respect to a sale or disposition of ordinary shares,
provided that the election is applied consistently from year to year. Such
election may not be changed without the consent of the Internal Revenue Service
(the "IRS"). In the event that an accrual basis U.S. Holder does not elect to be
treated as a cash basis taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder may have a
foreign currency gain or loss for U.S. federal income tax purposes because of
differences between the dollar value of the currency received prevailing on the
trade date and the settlement date. Any such currency gain or loss would be
treated as ordinary income or loss and would be in addition to gain or loss, if
any, recognized by such U.S. Holder on the sale or disposition of such ordinary
shares.
65
PASSIVE FOREIGN INVESTMENT COMPANIES
For U.S. federal income tax purposes, we will be considered a passive
foreign investment company ("PFIC") for any taxable year in which either (i) 75%
or more of our gross income is passive income, or (ii) at least 50% of the
average value of all of our assets for the taxable year produce or are held for
the production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. federal income tax purposes, highly complex
rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are
urged to consult your tax advisors regarding the application of such rules.
Based on our current and projected income, assets and activities, we
believe that we are not currently a PFIC nor do we expect to become a PFIC in
the foreseeable future. However, because the determination of whether we are a
PFIC is based upon the composition of our income and assets from time to time,
there can be no assurances that we will not become a PFIC for any future taxable
year.
If we are treated as a PFIC for any taxable year, dividends would not
qualify for the reduced maximum tax rate, discussed above, and, unless you elect
either to treat your investment in ordinary shares as an investment in a
"qualified electing fund" (a "QEF election") or to "mark to market" your
ordinary shares, as described below:
o you would be required to allocate income recognized upon receiving
certain dividends or gain recognized upon the disposition of
ordinary shares ratably over the holding period for such ordinary
shares,
o the amount allocated to each year during which we are considered a
PFIC other than the year of the dividend payment or disposition
would be subject to tax at the highest individual or corporate tax
rate, as the case may be, in effect for that year and an interest
charge would be imposed with respect to the resulting tax liability
allocated to each such year,
o the amount allocated to the current taxable year and any taxable
year before we became a PFIC would be taxable as ordinary income in
the current year, and,
o you would be required to make an annual return on IRS Form 8621
regarding distributions received with respect to ordinary shares and
any gain realized on your ordinary shares.
If you make either a timely QEF election or a timely mark to market
election in respect of your ordinary shares, you would not be subject to the
rules described above. If you make a timely QEF election, you would be required
to include in your income for each taxable year your pro rata share of our
ordinary earnings as ordinary income and your pro rata share of our net capital
gain as long term capital gain, whether or not such amounts are actually
distributed to you. You would not be eligible to make a QEF election unless we
comply with certain applicable information reporting requirements.
66
Alternatively, if the ordinary shares are considered "marketable stock"
and if you elect to "mark to market" your ordinary shares, you will generally
include in income any excess of the fair market value of the ordinary shares at
the close of each tax year over your adjusted basis in the ordinary shares. If
the fair market value of the ordinary shares had depreciated below your adjusted
basis at the close of the tax year, you may generally deduct the excess of the
adjusted basis of the ordinary shares over its fair market value at that time.
However, such deductions generally would be limited to the net mark to market
gains, if any, that you included in income with respect to such ordinary shares
in prior years. Income recognized and deductions allowed under the mark to
market provisions, as well as any gain or loss on the disposition of ordinary
shares with respect to which the mark to market election is made, is treated as
ordinary income or loss.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments in respect of ordinary shares may be subject to information
reporting to the IRS and to U.S. backup withholding tax at a rate equal to the
fourth lowest income tax rate applicable to individuals (which, under current
law, is 28%). Backup withholding will not apply, however, if you (i) are a
corporation or come within certain exempt categories, and demonstrate the fact
when so required, or (ii) furnish a correct taxpayer identification number and
make any other required certification.
Backup withholding is not an additional tax. Amounts withheld under the
backup withholding rules may be credited against a U.S. Holder's U.S. tax
liability, and a U.S. Holder may obtain a refund of any excess amounts withheld
under the backup withholding rules by filing the appropriate claim for refund
with the IRS.
Any U.S. holder who holds 10% or more in vote or value of our ordinary
shares will be subject to certain additional United States information reporting
requirements.
U.S. GIFT AND ESTATE TAX
An individual U.S. Holder of ordinary shares will be subject to U.S. gift
and estate taxes with respect to ordinary shares in the same manner and to the
same extent as with respect to other types of personal property.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the reporting requirements of the United States
Securities Exchange Act of 1934, as amended, as applicable to "foreign private
issuers" as defined in Rule 3b-4 under the Exchange Act, and in accordance
therewith, we file annual and interim reports and other information with the
Securities and Exchange Commission.
As a foreign private issuer, we are exempt from certain provisions of the
Exchange Act. Accordingly, our proxy solicitations are not subject to the
disclosure and procedural requirements of Regulation 14A under the Exchange Act
and transactions in our equity securities by our officers and directors are
exempt from reporting and the "short-swing" profit recovery provisions contained
in Section 16 of the Exchange Act. In addition, we are not required under the
Exchange Act to file periodic reports and financial statements as frequently or
as promptly as United States companies whose securities are registered under the
Exchange Act. However, we make available on our website www.tat.co.il, our
annual audited financial statements, which have been examined and reported on,
with an opinion expressed by, an independent public accounting firm, and we
intend to file reports with the Securities and Exchange Commission on Form 6-K
containing unaudited financial information for the first three quarters of each
fiscal year.
67
This annual report on Form 20-F and the exhibits thereto and any other
document we file pursuant to the Exchange Act may be inspected without charge
and copied at prescribed rates at the following Securities and Exchange
Commission public reference room at 100 F Street, N.E., Room 1580, Washington,
D.C. 20549; and on the Securities and Exchange Commission Internet site
(http://www.sec.gov) and on our website www.tat.co.il. You may obtain
information on the operation of the Securities and Exchange Commission's public
reference room in Washington, D.C. by calling the Securities and Exchange
Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities
and Exchange Commission filings is 0-16050.
In addition, since August 16, 2005 we are also listed on the TASE. From
such date we submit copies of all our filings with the SEC to the Israeli
Securities Authority and TASE. Such copies can be retrieved electronically
through the TASE internet messaging system (www.maya.tase.co.il) and, in
addition, through the MAGNA distribution site of the Israeli Securities
Authority (www.magna.isa.gov.il).
The documents concerning our company which are referred to in this annual
report may also be inspected at our offices located at Re'em Industrial Park
Neta, Boulevard Bnei Ayish, Gedera, Israel.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not own and have not issued any market risk sensitive instruments
about which disclosure is required to be provided pursuant to this Item.
EFFECTS OF CHANGES IN INTEREST RATES. We pay interest on our long-term
loans facilities at a rate per annum equal to 1%-1.14% in excess of the Libor
Rate. As a result, changes in the general level of interest rates directly
affect the amount of interest payable by us under these facilities.
EFFECTS OF CURRENCY EXCHANGE FLUCTUATIONS. Our financial statements are
stated in dollars, but not all our expenses are incurred in dollars or in
currencies linked to the dollar. Ass a result our operations may be affected by
fluctuations in currency exchange rates.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
68
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
None.
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 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 and that such
information was made known to them by others within the company, as appropriate
to allow timely decisions regarding required disclosure.
ITEM 16. [RESERVED]
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Mr. Yaakov Fish, one of our
outside directors, who qualifies as an independent director as such term is
defined in NASDAQ's Market Rule 4200, meets the definition of an audit committee
financial expert, as defined in Item 401 of Regulation S-K. For a brief listing
of Mr. Fish's relevant experience, see Item 6.A. "Directors, Senior Management
and Employees -- Directors and Senior Management."
ITEM 16B. CODE OF ETHICS
We have adopted a code of ethics that applies to our chief executive
officer and all senior financial officers of our company, including the chief
financial officer, chief accounting officer or controller, or persons performing
similar functions. The code of ethics is publicly available on our website at
www.tat.co.il. Written copies are available upon request. If we make any
substantive amendment to the code of ethics or grant any waivers, including any
implicit waiver, from a provision of the codes of ethics, we will disclose the
nature of such amendment or waiver on our website.
ITEM 16C. PRINCIPAL ACCOUNTS FEES AND SERVICES
FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS
The following table sets forth, for each of the years indicated, the fees
paid to our principal independent registered public accounting firm.
69
Year Ended December 31,
-----------------------
2005 2004
-------- -------
Services Rendered Fees Fees
----------------------- -------- -------
Audit (1) ................... $132,500 $57,000
Audit-related (2) ........... 28,000 --
Tax (3) ..................... 10,000 14,000
Other (4) ................... --
-------- -------
Total ....................... $170,500 $71,000
----------
(1) Audit fees consist of services that would normally be provided in
connection with statutory and regulatory filings or engagements, including
services that generally only the independent accountant can reasonably
provide.
(2) Audit-related fees relate to assurance and related services that are
reasonably related to the performance of the audit or review of our
financial statements and are not reported under "Audit Fees." In 2005,
these services primarily consist of due diligence services related to the
Piedmont acquisition.
(3) Tax fees relate to professional services rendered for tax compliance, tax
advice and tax planning. These services include assistance regarding
international and Israeli tax services.]
(4) Other fees relate to products and services provided by the independent
accountant, other than the services reported under the categories above.
We did not have such services in 2005 and 2004.
PRE-APPROVAL POLICIES AND PROCEDURES
Our Audit Committee has adopted a policy and procedures for the
pre-approval of audit and non-audit services rendered by our independent public
accounting firm, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global.
Pre-approval of an audit or non-audit service may be given as a general
pre-approval, as part of the audit committee's approval of the scope of the
engagement of our independent auditor, or on an individual basis. Any proposed
services exceeding general pre-approved levels also requires specific
pre-approval by our audit committee. The policy prohibits retention of the
independent public accountants to perform the prohibited non-audit functions
defined in Section 201 of the Sarbanes-Oxley Act or the rules of the SEC, and
also requires the Audit Committee to consider whether proposed services are
compatible with the independence of the public accountants.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEE
Not Applicable.
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Neither we, nor any "affiliated purchaser" of our company, purchased any
of our securities during 2004.
70
PART III
ITEM 17. FINANCIAL STATEMENTS
We have elected to furnish financial statements and related information
specified in Item 18.
ITEM 18. FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
Index to Financial Statements ....................................... F-1
Report of Independent Registered Public Accounting Firm ............. F-2
Consolidated Balance Sheets ......................................... F-3
Consolidated Statements of Income ................................... 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
The following exhibits are filed as a part of this Report:
1.1 Memorandum of Association of the Company (1)
1.2 Articles of Association of the Company (1)
2.1 Specimen Certificate for Ordinary Shares (1)
4.1 The Company's 1999 Stock Purchase Plan (2)
4.2 Agreement dated February 10, 2000 between the Company and TAT Industries
Ltd. (English summary translation) (2)
4.3 Export Agreement dated April 14. 1992, between the Company and E.T Export
Services Inc. (Gal Tech Inc.) (3)
4.4 Share Purchase Agreement dated June 15, 2004 between the Company and
T.O.P, Limited Partnership (3)
4.5 Shareholders Agreement dated June 15, 2004 between TAT Industries and
T.O.P, Limited Partnership (3)
4.6 Registration Rights Agreement dated June 15, 2004 with T.O.P, Limited
Partnership, TAT Industries Ltd. and certain shareholders of our company
(3)
4.7 Credit Line Agreement dated June 15, 2004 between the Company and T.O.P,
Limited Partnership (3)
4.8 Warrant Agreement dated June 15, 2004 between the Company and T.O.P,
Limited Partnership (3)
4.9 Membership Interest Purchase Agreement dated May 24, 2005 between
Limco-Airepair International, Inc., certain Members of Piedmont Aviation
Component Services, LLC, and Piedmont Aviation Component Services, LLC (3)
8 List of Subsidiaries of the Registrant
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
71
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
----------
(1) Incorporated by reference to the Company's Annual Report on Form 20-F for
the year ended December 31, 1992.
(2) Incorporated by reference to the Company's Annual Report on Form 20-F for
the year ended December 31, 1999.
(3) Incorporated by reference to the Company's Annual Report on Form 20-F for
the year ended December 31, 2004.
72
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
IN U.S. DOLLARS
INDEX
PAGE
----------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED BALANCE SHEETS F-3 - F-4
CONSOLIDATED STATEMENTS OF INCOME 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-36
----------
F-1
[ERNST & YOUNG LOGO] o KOST FORER GABBAY & KASIERER o Phone: 972-3-6232525
3 Aminadav St. Fax: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
TAT TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of TAT
Technologies Ltd. ("the Company") and its subsidiaries as of December 31, 2005
and 2004, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2005. 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 did not audit the financial
statements of Limco-Airepair Inc., a wholly-owned subsidiary and its subsidiary,
which statements reflect total assets constituting 33% in 2004 and total
revenues constituting 42% in 2004 and 40% in 2003 of the related consolidated
totals. Those statements were audited by other auditors whose reports have been
furnished to us, and our opinion, insofar as it relates to amounts included for
Limco-Airepair Inc., is based solely on the reports of the other auditors.
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. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropiate 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 and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2004 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2005, in conformity with generally accepted accounting
principles in the United States.
/s/ Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
June 25, 2006 A Member of Ernst & Young Global
F-2
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,983 $ 7,078
Short-term deposit 515 -
Marketable securities (Note 3) 322 1,566
Trade receivables (net of allowance for doubtful accounts of $ 396 and $ 237 at
December 31, 2005 and 2004, respectively) 10,855 7,936
Other accounts receivable and prepaid expenses 1,715 1,488
Inventories (Note 4) 21,596 13,182
----------- -----------
TOTAL current assets 41,986 31,250
----------- -----------
LONG-TERM INVESTMENTS:
Severance pay fund 3,159 3,304
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, NET (Note 5) 6,920 5,852
----------- -----------
INTANGIBLE ASSETS, NET (Note 6) 2,815 202
----------- -----------
GOODWILL 5,366 599
----------- -----------
TOTAL assets $ 60,246 $ 41,207
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31,
-------------------------
2005 2004
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term loans (Note 9) $ 1,000 $ -
Trade payables 5,451 1,810
TAT (the parent company) - current account (Note 8) 103 73
Other accounts payable and accrued expenses (Note 7) 5,045 2,744
----------- -----------
TOTAL current liabilities 11,599 4,627
----------- -----------
LONG-TERM LIABILITIES:
Long-term loans, net of current maturities (Note 9) 10,000 -
Accrued severance pay 3,275 3,495
Long-term deferred tax liability 511 559
----------- -----------
TOTAL long-term liabilities 13,786 4,054
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 10)
SHAREHOLDERS' EQUITY:
Share capital (Note 12) -
Ordinary shares of NIS 0.9 par value - Authorized: 7,000,000 shares at
December 31, 2005 and 2004; Issued and outstanding: 6,042,671 shares at
December 31, 2005 and 2004 2,094 2,094
Additional paid-in capital 35,704 35,704
Accumulated other comprehensive income (loss) (1) 106
Accumulated deficit (2,936) (5,378)
----------- -----------
TOTAL shareholders' equity 34,861 32,526
----------- -----------
TOTAL liabilities and shareholders' equity $ 60,246 $ 41,207
=========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
June 25, 2006 /s/ Shlomo Ostersetzer /s/ Dov Zeelim /s/ Israel Ofen
----------------------- ----------------------- ---------------------- ------------------------
Date of approval of the Shlomo Ostersetzer Dov Zeelim Israel Ofen
financial statements Chairman of the Vice Chairman of the Executive Vice President
Board of Directors and Board of Directors and and Chief Financial
Chief Executive Officer President Officer
F-4
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
U.S DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
YEAR ENDED DECEMBER 31,
---------------------------------------
2005 2004 2003
----------- ----------- -----------
Revenues:
Products (Note 15) $ 22,856 $ 20,724 $ 19,255
Services and other 26,337 12,519 11,427
----------- ----------- -----------
49,193 33,243 30,682
Cost of revenues 35,592 22,166 20,068
----------- ----------- -----------
Gross profit 13,601 11,077 10,614
----------- ----------- -----------
Research and development costs 72 125 120
Selling and marketing expenses 2,495 1,894 1,958
General and administrative expenses 5,138 3,793 3,476
----------- ----------- -----------
7,705 5,812 5,554
----------- ----------- -----------
Operating income 5,896 5,265 5,060
Financial income (expenses) (Note 16a) (441) 87 (25)
Other income, net (Note 16b) 210 54 24
----------- ----------- -----------
Income before income taxes 5,665 5,406 5,059
Income taxes (Note 14) 2,136 1,667 1,225
----------- ----------- -----------
Net income $ 3,529 $ 3,739 $ 3,834
=========== =========== ===========
Basic net earnings per share (Note 13) $ 0.584 $ 0.72 $ 0.85
=========== =========== ===========
Diluted net earnings per share (Note 13) $ 0.580 $ 0.67 $ 0.78
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
ACCUMULATED
SHARE CAPITAL ADDITIONAL OTHER TOTAL TOTAL
------------------ PAID-IN COMPREHENSIVE ACCUMULATED COMPREHENSIVE SHAREHOLDERS'
NUMBER AMOUNT CAPITAL INCOME (LOSS) DEFICIT INCOME EQUITY
--------- ------- ---------- ------------- ----------- ------------- -------------
Balance as of January 1, 2003 4,483,516 $ 1,781 $ 28,311 $ 26 $ (4,699) $ 25,419
Exercise of options 153,565 32 452 - - 484
Comprehensive income:
Net income - - - - 3,834 $ 3,834 3,834
Unrealized gain on available-for-sale
securities net of reclassification
adjustments for gain realized - - - 69 - 69 69
Cash dividends - - - - (1,122) - (1,122)
--------- ------- ---------- ------------- ----------- ------------- -------------
Total comprehensive income $ 3,903
=============
Balance as of December 31, 2003 4,637,081 1,813 28,763 95 (1,987) 28,684
Exercise of options 548,447 111 1,119 - - 1,230
Issuance of shares 857,143 170 5,822 - - - 5,992
Comprehensive income:
Net income - - - - 3,739 $ 3,739 3,739
Unrealized gain on available-for-sale
securities net of reclassification
adjustments for gain realized - - - 11 - 11 11
Cash dividends - - - - (7,130) - (7,130)
--------- ------- ---------- ------------- ----------- ------------- -------------
Total comprehensive income $ 3,750
=============
Balance as of December 31, 2004 6,042,671 2,094 35,704 106 (5,378) 32,526
Comprehensive income:
Net income - - - - 3,529 $ 3,529 3,529
Unrealized gain on available-for-sale
securities net of reclassification
adjustments for gain realized - - - (107) - (107) (107)
Cash dividends - - - - (1,087) (1,087) (1,087)
--------- ------- ---------- ------------- ----------- ------------- -------------
Total comprehensive income $ 2,335
=============
Balance as of December 31, 2005 6,042,671 $ 2,094 $ 35,704 $ (1) $ (2,936) $ 34,861
========= ======= ========== ============= =========== =============
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,529 $ 3,739 $ 3,834
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,427 1,031 1,004
Gain on sale of property and equipment (22) (17) (63)
Loss (gain) on sale of marketable securities (120) (35) 39
Deferred income taxes, net (233) 168 63
Decrease (increase) in trade receivables 1,062 (1,607) (1,401)
Decrease (increase) in other accounts receivable and prepaid
expenses 359 (208) 27
Decrease (increase) in inventories (1,368) 167 (1,281)
Increase (decrease) in trade payables (984) (112) 505
Increase (decrease) in other accounts payable and accrued
expenses 565 (1,186) 1,109
Accrued severance pay, net (75) (32) (59)
---------- ---------- ----------
Net cash provided by operating activities 4,140 1,908 3,777
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from short-term bank deposits - 396 44
Proceeds from sale of available-for-sale securities 2,146 2,973 1,650
Proceeds from sale of property and equipment 56 30 89
Purchase of bank deposits (515) - -
Purchase of property and equipment (1,072) (926) (1,451)
Purchase of available-for-sale securities (889) (1,161) (2,680)
Cash and cash equivalents used in the acquisition of
a subsidiary (2) (5,237) - -
---------- ---------- ----------
Net cash provided by (used in) investing activities (5,511) 1,312 (2,348)
---------- ---------- ----------
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------------
2005 2004 2003
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank credit, net (8,667) (290) 290
Repayments of long-term loans (1,000) (294) (249)
Cash dividend (1,087) (7,130) (3,140)
Exercise of options - 1,230 484
TAT (the parent company) - current account 30 (452) 95
Issuance of shares - 5,727 -
Proceeds from long-term loans 12,000 - -
---------- ---------- ----------
Net cash provided by (used in) financing activities 1,276 (1,209) (2,520)
---------- ---------- ----------
Increase (decrease) in cash and cash equivalents (95) 2,011 (1,091)
Cash and cash equivalents at the beginning of the year 7,078 5,067 6,158
---------- ---------- ----------
Cash and cash equivalents at the end of the year $ 6,983 $ 7,078 $ 5,067
========== ========== ==========
(1) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Issuance of warrants in connection with a credit line
agreement $ - $ 265 $ -
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH ACTIVITIES:
Cash paid during the year for:
Interest $ 150 $ 16 $ 12
========== ========== ==========
Income taxes $ 1,993 $ 2,491 $ 105
========== ========== ==========
(2) CASH AND CASH EQUIVALENTS FROM THE ACQUISITION OF
A SUBSIDIARY (SEE ALSO NOTE 1):
Net fair value of the assets acquired and liabilities
assumed at the acquisition date was as follows:
Working capital, net (excluding cash and cash
equivalents) $ 3,600
Property and equipment (1,173)
Existing customer relationship (1,937)
Trade name (128)
Certificates (76)
Lease at below-market prices (97)
Non-compete agreements (653)
Consulting services agreements (6)
Workforce in place (803)
Goodwill (3,964)
----------
$ (5,237)
==========
The accompanying notes are an integral part of the consolidated financial
statements.
F-8
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL
a. TAT Technologies Ltd., an Israeli corporation, together with its
U.S. subsidiaries ("the Company"), is principally engaged in the
manufacture and sale of a broad range of heat transfer equipment
used in mechanical and electronic systems on-board commercial and
military aircraft and in a variety of other electronic equipment.
The Company is also engaged in the remanufacture, overhaul and
repair of heat transfer equipment and other aircraft components
manufactured by the Company and in maintenance, repair and
overhaul of auxiliary power units, propellers, landing gears and
related components. In addition, the Company is also engaged in
the design, development and manufacture of aviation accessories.
These accessories include fuel components, such as valves and
pumps, secondary power systems, various instrumentation and
electronic assemblies. The Company has few long-term service
contracts for the maintenance and overhaul of certain airplane
parts and equipment. The principal markets of the Company are
Israel, Europe and the United States. The Company sells its
products mainly to the aircraft industry.
b. The Company has two wholly-owned subsidiaries: (1) Limco Airepair
Inc. ("Limco"), a U.S. subsidiary and (2) Piedmont Aviation
Component Services LLC ("Piedmont"), a U.S. subsidiary.
c. On August 16, 2005, the Company listed its shares for trade on
the Tel-Aviv Stock Exchange as a dual listed Company.
d. Acquisition of Piedmont Aviation Component, LLC.
On July 7, 2005, the Company entered into a membership interest
purchase agreement pursuant to the terms of which the Company,
through its subsidiary Limco, acquired 100% of the membership
interest in Piedmont in a cash transaction for an aggregate
purchase price of $ 5,997.
Piedmont Aviation Component Services, LLC ("Piedmont") was
established in August 2002, as a limited liability company under
the law of the State of North Carolina. Piedmont is primarily
engaged in the business of maintenance, repair and overhaul of
auxiliary power units ("APU"), propellers and landing gear for
aviation customers located throughout the world. Piedmont also
distributes aviation parts to its customers.
The purchase price of the acquired company, as of the acquisition
date, consisted of cash payment, the fair value related to non
compete agreements with the former owners and acquisition related
costs as provided in the table below:
USD
ITEM (IN THOUSANDS)
------------------------------------- --------------
Cash Payment to the seller $ 5,290
Liability with respect of non-compete
agreements 653
Transaction costs 54
--------------
Total Consideration $ 5,997
==============
F-9
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
The acquisition has been accounted for using the purchase method
of accounting as determined in FASB Statement No.141 and
accordingly, the purchase price has been allocated to the assets
acquired and the liabilities assumed based on the estimated fair
value at the date of acquisition.
Based upon a valuation of tangible and intangible assets
acquired, the Company has allocated the total cost of the
acquisition, as follows:
JULY 7, 2005
------------
ASSETS:
Current assets $ 11,291
Property and equipment 1,173
Other non-current assets 99
INTANGIBLE ASSETS:
Goodwill 4,767
Customer relationships 1,937
Non-compete agreement 653
Tradename 128
Certificates 76
Lease at below market rates 97
Consulting service agreements 6
------------
Total assets acquired 20,227
------------
LIABILITIES ASSUMED:
Current liabilities (14,230)
------------
Net assets acquired $ 5,997
============
The allocation of the intangible assets was determined based on
appraisals performed by an independent third party using several
valuation approaches.
The value assigned to the customer relationships, non-compete
agreement, tradename, certificates, lease at below market rates
and consulting service agreement amounted to $ 1,937, $ 653, $
128, $ 76, $ 97 and $ 6, respectively. Piedmont 's customer
relationships, non-compete agreement, tradename, certificates
lease at below market rates and consulting service agreement have
been valued using the Income Approach on the basis of the present
value of cash flows attributable to the asset over the expected
future life of 10 years, 3 years, 20 years, 20 years, 2.5 years
and 0.3 years, respectively.
The amounts allocated to intangible assets other than goodwill,
are amortized on a straight-line basis over a weighted average
amortization period of 8.9 years, ranging between 0.3 to 20 years
(see also Note 2i and Note 6).
F-10
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL (CONT.)
The excess of $ 4,767 of the cost over the net amounts assigned
to assets acquired and liabilities assumed is recognized as
goodwill. An acquired workforce, that do not meet the
separability criteria, have been included in the amount
recognized as goodwill.
The operations of Piedmont are included in the consolidated
statements since July 1, 2005.
The unaudited pro forma information below assumes that the
acquisition had been consummated on January 1, 2005, and includes
the effect of amortization of intangible assets from that date.
This date is presented for information purposes only and is not
necessarily indicative of the results of future operations or the
results that would have been achieved had the acquisition taken
place on those dates. The pro forma information is as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
UNAUDITED
-----------------------------
Net revenues $ 65,159 $ 60,728
============ ============
Net income $ 2,986 $ 2,788
============ ============
Basic net earnings per share $ 0.578 $ 0.461
============ ============
Diluted net earnings per share $ 0.537 $ 0.458
============ ============
The allocation period was closed on December 21, 2005, when the
Company determined that it is no longer waiting for information,
which is known to be available or obtainable in order to properly
identify and measure the fair value of the assets acquired and
the liabilities assumed.
e. The Company depends on a limited number of suppliers for some
standard and custom designed components for its systems. If such
supplier fails to deliver the necessary components, the Group may
be required to seek alternative sources of supply. A change in
suppliers could result in manufacturing delays, which could cause
a possible loss of sales and, consequently, could adversely
affect the Group's results of operations and cash position.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States
("U.S. GAAP").
a. Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
F-11
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
b. Financial statements in U.S. dollars:
The majority of the Company's revenues are generated in U.S.
dollars ("dollar") and a substantial portion of the Company's
costs is incurred in dollars. In addition, the Company's
financings have been obtained in dollars. Accordingly, the dollar
is the currency of the primary economic environment in which the
Company operates and the functional and reporting currency of the
Company is the dollar.
Accordingly, monetary accounts maintained in currencies other
than the dollar are remeasured into dollars in accordance with
Statement of the Financial Accounting Standard No. 52 "Foreign
Currency Translation" ("SFAS No. 52"). All transaction gains and
losses from the remeasurement of monetary balance sheet items are
reflected in the statement of operations as appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany balances
and transactions, including profits from intercompany sales not
yet realized outside the Company, have been eliminated upon
consolidation.
d. Cash equivalents:
Cash equivalents are short-term highly liquid investments that
are readily convertible to cash with original maturities of three
months or less.
e. Short-term bank deposit:
Bank deposits with maturities of more than three months and up to
one year are included in short-term bank deposits. As of December
31, 2005, the bank deposit is in U.S. dollars and bears interest
at an annual rate of 4.0%. The deposits are presented at their
cost, including accrued interest.
f. Marketable securities:
Management determines the classification of its investments in
debt securities with fixed maturities at the time of purchase and
reevaluates such designations as of each balance sheet date. At
December 31, 2005 and 2004, all marketable securities covered by
Statement of Financial Accounting Standard Board No. 115,
"Accounting for Certain investments in Debt and Equity
Securities" (SFAS No. 115), were designated as
available-for-sale.
Accordingly, these securities are stated at fair value, with the
unrealized gains and losses, reported in accumulated other
comprehensive income (loss) as separate component of
shareholders' equity. The amortized cost of available-for-sale
securities is adjusted for amortization of premiums to maturity.
Such amortization and interest are included in financial income,
net.
F-12
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Realized gains and losses on sales of investments, as determined
on a specific identification basis, are included in the
consolidated statement of income, among "Other income, net".
According to Staff Accounting Bulletin No. 59, "Accounting for
Non-current Marketable Equity Securities" ("SAB No. 59")
management is required to evaluate each period whether a
security's decline in value is other than temporary. In all
reported periods, the Company did not record an other than
temporary decline in the carrying value of its marketable
securities.
g. Inventories:
Inventories are stated at the lower of cost or market value.
Inventories write-offs are provided to cover risks arising from
dead and slow-movies items, discontinued products and excess
inventories according to revenue forecasts.
Cost is determined as follows:
Raw materials and components - using the average cost method.
Work in progress - represents the cost of raw materials,
components and, manufacturing costs which include direct and
indirect allocable costs. Cost of raw materials and components is
determined as described above. Manufacturing costs are determined
on average basis.
h. Property, plant and equipment:
Property, plant and equipment are stated at cost, net of
accumulated depreciation. Depreciation is calculated using the
straight-line method over the estimated useful lives of the
assets. The annual rates of depreciation are as follows:
%
------------------------
Buildings 4
Machinery and equipment 10 - 25 (mostly 10%)
Motor vehicles 15
Office furniture and equipment 6 - 33 (mostly 10%)
i. Intangible assets:
Intangible assets subject to amortization are being amortized
over their useful life, using a method of amortization that
reflects the pattern in which the economic benefits of the
intangible assets are consumed or otherwise used up, in
accordance with SFAS No. 142.
Technology - Depreciated on a straight-line basis over 6 years.
Non-Compete agreements - Depreciated on a straight line basis
over 3 years.
Lease at below market prices - Depreciated on a straight line
basis over 2.5 years.
Existing costumer relationship - Depreciated on a straight line
basis over 10 years.
F-13
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Consulting services agreement - Depreciated on a straight line
basis over 0.3 years.
Tradename - Depreciated on a straight line basis over 20 years.
Certificates - Depreciated on a straight line basis over 20
years.
Deferred finance cost - Over the term of the loan.
Amortization expenses amounted to $ 237, $ 9 and $ 33 for the
years ended December 31, 2005, 2004 and 2003, respectively.
j. Impairment of long-lived assets:
The Company's long-lived assets (except goodwill - see k below)
are reviewed for impairment in accordance with SFAS No. 144
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset 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 of
December 31, 2005 and 2004, no impairment losses have been
identified.
k. Goodwill:
Goodwill represents the excess of purchase cost over the fair
value of identifiable net assets of acquired companies. Prior to
January 1, 2002, goodwill was amortized on a straight-line basis
over a weighted average period of 12 years. On January 1, 2002,
the Company adopted, Statement of Financial Accounting Standard
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
As a result, goodwill is no longer amortized but is subject to
annual impairment tests (or more frequent tests if impairment
indicators arise).
SFAS 142 requires goodwill and indefinite lived intangible assets
to be tested for impairment at least annually or between annual
tests if certain events or indicators of impairments occur. The
impairment tests consist of a comparison of the fair value of
intangible assets with its carrying amount. If the carrying
amount of the intangible assets exceeds its fair value, an
impairment loss is recognized in an amount equal to that excess.
Goodwill is tested for impairment at the reporting unit level by
a comparison of the fair value of the reporting unit with its
carrying amount
On the date that the Company performed its annual impairment
test, December 31, 2005, the Company determined that two
reporting units exist - the Repair and OEM Segment and the Parts
Segment - (see also Note 15a). Based on management projections,
expected future discounted operating cash flows and market
multiples, no indication of goodwill impairment was identified as
of such date.
F-14
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
l. Revenue recognition:
The Company generates its revenues from the sale of products and
from providing services - remanufacture, repair and overhaul
services and long-term service contracts. Revenues from the sale
of products are recognized in accordance with Staff Accounting
Bulletin No. 104, "Revenue Recognition in Financial Statements"
("SAB No. 104") when persuasive evidence of an arrangement
exists, delivery of the product has occurred, provided the
collection of the resulting receivable is probable, the price is
fixed or determinable and no significant obligation exists. The
Company does not grant a right of return.
Revenues from remanufacture, repair and overhaul services are
recognized as services are performed.
Revenues from long-term service contracts are recognized ratably
over the term of the contract.
Revenues from royalties from sales of products developed with the
intellectual property, technology and technical assistance are
recognized when the related sales are made.
m. Research and development:
Research and development costs net of grants and participations
received are charged to expenses as incurred.
n. Grants:
Royalty-bearing and non royalty-bearing grants and participations
from the Government of Israel and royalty-bearing grants from the
BIRD Foundation for funding certain approved research and
development projects are recognized at the time in which the
Company is entitled to such grants, on the basis of the costs
incurred. Such grants and participations are included as a
deduction of research and development costs. The Company did not
receive any research and development grants in 2005, 2004 or
2003.
o. Warranty costs:
The Company provides warranties for its products and services
ranging from one to five years, which vary with respect to each
contract and in accordance with the nature of each specific
product.
The Company estimates the costs that may be incurred under its
warranty and records a liability in the amount of such costs at
the time the product is shipped. The Company periodically
assesses the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
As of December 31, 2005 the aggregate amount of the warranty
provision is immaterial.
F-15
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
p. Income taxes:
Income taxes are accounted for in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109"). This statement prescribes the use of the
liability method, whereby deferred tax assets and liability
account balances are determined based on temporary differences
between financial reporting and tax bases of assets and
liabilities and for tax loss carryforwards. Deferred taxes are
measured using the enacted laws and tax rates 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.
Results for tax purposes are measured and reflected in real terms
in accordance with the changes in the Israeli Consumer Price
Index ("CPI"). As explained in b above, the consolidated
financial statements are presented in U.S. dollars. In accordance
with paragraph 9(f) of SFAS No. 109, the Company has not provided
deferred income taxes on the differences resulting from changes
in exchange rate and indexing for tax purposes.
q. Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and
cash equivalents, short-term bank deposits, marketable securities
and trade receivables.
Cash and cash equivalents and short-term bank deposits, are
deposited with major banks in Israel and the United States. Such
deposits in the United States may be in excess of insured limits
and are not insured in other jurisdictions. Management believes
that the financial institutions that hold the Company's cash and
cash equivalents and short-term bank deposits, are financially
sound, and, accordingly, minimal credit risk exists with respect
to these financial instruments.
The Company's marketable securities include investment in
debentures and in shares. Management believes that the companies
that issued the debentures and the shares are financially sound,
the portfolio is well diversified, and accordingly, minimal
credit risk exists with respect to the marketable securities.
The Company's trade receivables are derived mainly from sales to
customers in the United States, Israel and Europe. The Company
generally does not require collateral, however, in certain
circumstances; the Company may require letters of credit.
Management believes that credit risks relating to trade
receivables are minimal since the Company's customers are
financially sound. The Company performs ongoing credit evaluation
of their customers' financial condition. The allowance for
doubtful accounts is determined with respect to specific debts
that are doubtful of collection.
The allowance for doubtful accounts expenses for the years ended
December 31, 2005, 2004 and 2003, was $ 44, $ 70 and $ 24,
respectively.
F-16
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The Company has no off-balance-sheet concentration of credit risk
such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.
r. Severance pay:
The Company's liability for severance pay is calculated pursuant
to Israeli Severance Pay Law based on the most recent salary of
the employees multiplied by the number of years of employment as
of the balance sheet date. The liability is presented on the
undiscounted basis. The Company records as an expense the net
increase in its severance liability. The Company's liability for
all of its employees is fully covered for by monthly deposits
with severance pay funds, insurance policies, Mivtahim Social
Insurance Institution Ltd. ("Mivtahim") and by an accrual.
The liability covered by deposits with Mivtahim is irrevocably
transferred to Mivtahim. Accordingly, neither the amounts
accumulated with Mivtahim, nor the corresponding liabilities for
severance pay are reflected in the balance sheet.
The value of the policies, other than the value of Mivtahim
policies, is included as an asset in the Company's balance sheet.
The deposited funds 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 expense was $ 312, $ 274 and $ 284 for the years ended
December 31, 2005, 2004 and 2003, respectively.
s. Fair value of financial instruments:
The estimated fair value of financial instruments has been
determined by the Company using available market information and
valuation methodologies. Considerable judgment is required in
estimating fair values. Accordingly, the estimates may not be
indicative of the amounts the Company could realize in a current
market exchange.
The carrying amounts of cash and cash equivalents, short-term
deposits, trade receivables, other accounts receivable, trade
payables and other accounts payable approximate their fair
values, due to the short-term maturities of such instruments.
The fair value for marketable securities classified as
available-for-sale is based on quoted market prices.
The fair value of long-term liabilities were estimated by
discounting the future cash flows, using the rate currently
available for liabilities of similar terms and maturity. The
carrying amount of the Company's long-term liabilities
approximate their fair value.
F-17
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
t. Basic and diluted net earnings per share:
Basic net earnings per share are computed based on the weighted
average number of Ordinary shares outstanding during each year.
Diluted net earnings per share further include the effect of
stock options outstanding dilutive during the year all, in
accordance with Statement of Financial Accounting Standard
Statement No. 128, "Earnings Per Share" ("SFAS No. 128").
The weighted average number of outstanding options excluded from
the calculations of diluted net earnings per share, due to their
anti dilutive effect, was 500,000, 500,000 and 0 for the years
ended December 31, 2005, 2004 and 2003, respectively.
u. Accounting for stock-based compensation:
The Company applies the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB
No. 25") and FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation" ("FIN No. 44") in
accounting for its employee stock options. According to APB No.
25, compensation expense is measured under the intrinsic value
method, whereby compensation expense is equal to the excess, if
any, of the quoted market price of the stock over the exercise
price at the grant date of the award.
Pro forma information regarding the Company's net income and net
earnings per share, is required by SFAS 123 as if the company had
accounted for its employee stock options under the fair value
based method. Since all share options were vested preceding to
all reported periods, the Company's net income would not have
changed for all reported periods if the Company had applied the
fair value recognition provisions according to SFAS 123.
v. Reclassification:
Certain amounts from prior years have been reclassified to
conform to current classification. The amounts reclassified were
immaterial to the total presentation.
w. Impact of recently issued Accounting Standards:
1. On December 16, 2004, the Financial Accounting Standards
Board (FASB) issued FASB Statement No. 123 (revised 2004),
Share-Based Payment, which is a revision of FASB Statement
No. 123, Accounting for Stock-Based Compensation. Statement
123(R) supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends FASB Statement No. 95,
Statement of Cash Flows. Generally, the approach in
Statement 123(R) is similar to the approach described in
Statement 123. However, Statement 123(R) requires all
share-based payments to employees, including grants of
employee stock options, to be recognized in the income
statement based on their fair values. Pro forma disclosure
is no longer an alternative. The new standard will be
effective for the Company in the first interim period
beginning after January 1, 2006.
F-18
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
As permitted by Statement 123, the Company currently
accounts for share-based payments to employees using
Opinion 25's intrinsic value method and, as such, generally
recognizes no compensation cost for employee stock options.
In addition, non-compensatory plans under APB 25 will be
considered compensatory for FAS 123(R) purposes.
Accordingly, the adoption of Statement 123(R)'s fair value
method will have no material impact on the Company result
of operations and no material impact on the Company overall
financial position. Had the Company adopted Statement
123(R) in prior periods, the impact of that standard would
have approximated the impact of Statement 123 as described
in the disclosure of pro forma net income and earnings per
share in Note 2u to the consolidated financial statements.
The Company will implement FAS 123(R) using the modified
prospective method starting January 1, 2006. Under this
method, the Company will begin recognizing compensation
cost for equity-based compensation for all new and existing
unvested share-based awards after the date of adoption. The
Company expects that the adoption of the SFAS No. 123(R)
fair value method will have no material impact on the
consolidated results of operations, and no material impact
on the Company's overall consolidated financial position or
consolidated cash flows.
In March 2005, the SEC staff issued Staff Accounting
Bulletin No. 107 (SAB 107) to give guidance on
implementation of SFAS 123R, which the Company plans to
adopt in implementing SFAS 123R.
2. In May 2005, the FASB issued Statement of Financial
Accounting Standard No. 154 ("SFAS 154"), "Accounting
Changes and Error Corrections", a replacement of APB No.
20, "Accounting Changes" and SFAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements". SFAS
154 provides guidance on the accounting for and reporting
of accounting changes and error corrections. APB No. 20
previously required that most voluntary changes in
accounting principles be recognized by including in net
income for the period of the change the cumulative effect
of changing to the new accounting principle. SFAS 154
requires retroactive application to prior periods'
financial statements of a voluntary change in accounting
principles unless it is impracticable. SFAS 154 is
effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. As
of December 31, 2005 adoption of SFAS 154 will not have a
material impact on the Company's financial position or
results of operations.
3. In November 2004, the FASB issued Statement of Financial
Accounting Standard No. 151, "Inventory Costs, an Amendment
of ARB No. 43, Chapter 4" ("SAFS 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 allocation of fixed
production overheads to the costs of conversion be based on
normal capacity of the production facilities. SAFS 151 is
effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not expect
that the adoption of SFAS 151 will have a material effect
on its financial position or results of operations.
F-19
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
4. In November 2005, the FASB issued FASB Statement Position
115-1 ("FSP"). The FSP addresses the determination as to
when an investment is considered impaired, whether that
impairment is considered impaired, whether that impairment
is other than temporary, and the measurement of an
impairment loss. The FSP also includes accounting
considerations subsequent to the recognition of other
than-temporary- impairments. The guidance in this FSP
amends FASB Statements No. 115, "Accounting for Certain
Investments in Debt and Equity". The FSP replaces the
impairment evaluation guidance if EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments", with references to the
existing other-than-temporary impairment guidance.
The FSC clarifies that an investor should recognize an
impairment loss no later than when the impairment is deemed
other-than-temporary, even if a decision to sell an
impaired security has not been made. The guidance in this
FSP is to be applied to reporting periods beginning after
December 15, 2005. As of December 31, 2005, adoption of FSP
115-1 will not have a material impact on the Company's
financial position or results of operations.
NOTE 3:- MARKETABLE SECURITIES AND LONG-TERM MARKETABLE SECURITIES
The following is a summary of available-for-sale marketable securities:
DECEMBER 31,
-----------------------------------------------------------------------------
2005 2004
------------------------------------ --------------------------------------
GROSS ESTIMATED ESTIMATED
UNREALIZED FAIR GROSS FAIR
AMORTIZED GAINS MARKET AMORTIZED UNREALIZED MARKET
COST (LOSSES) VALUE COST GAINS VALUE
---------- ---------- ---------- ------------ ---------- ----------
Available-for-sale:
Shares $ 109 $ 2 $ 111 $ 758 $ 94 $ 852
Debentures and convertible
debentures 214 (3) 211 702 12 714
---------- ---------- ---------- ------------ ---------- ----------
$ 323 $ (1) $ 322 $ 1,460 $ 106 $ 1,566
========== ========== ========== ============ ========== ==========
Unrealized losses amounted to $ 7 and $ 1 on December 31, 2005 and
2004, respectively.
During 2005, 2004 and 2003, the Company recorded proceeds from
redemption and sales of these securities in the amounts of $ 2,146, $
2,973 and $ 1,650, respectively. The related gains (losses) amounting
to $ 120, $ 36 and $ (39), in 2005, 2004 and 2003, respectively, were
recorded in other income, net.
F-20
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 4:- INVENTORIES
Inventories are composed of the following:
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
Raw materials and components $ 10,414 $ 4,736
Work in progress 11,182 8,446
---------- ----------
$ 21,596 $ 13,182
========== ==========
As for charges, see Note 11.
NOTE 5:- PROPERTY, PLANT AND EQUIPMENT, NET
Composition of assets, grouped by major classifications, is as follows:
Cost:
Land and buildings (1) $ 2,758 $ 2,294
Machinery and equipment 20,561 19,157
Motor vehicles 1,302 1,187
Office furniture and equipment 411 333
---------- ----------
25,032 22,971
Accumulated depreciation 18,112 17,119
---------- ----------
Depreciated cost $ 6,920 $ 5,852
========== ==========
Depreciation expenses amounted to $ 1,143, $ 1,022 and $ 974 for the
years ended December 31, 2005, 2004 and 2003, respectively.
(1) Including lease rights to land in the amount of $ 1 under a
sub-lease agreement with TAT. The lease period ends in 2020 and
includes a renewal option if TAT exercises the option granted by
the Israel Land Administration. See also Note 8a.
Registration with the Land Registrar of the transfer of sub-lease
rights from TAT to the Company has not yet been finalized due to
technical reasons.
As for charges, see Note 11.
F-21
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 6:- INTANGIBLE ASSETS, NET
a. Intangible assets:
DECEMBER 31,
-----------------------
2005 2004
---------- ----------
Cost:
Customer relationships $ 1,937 $ -
Lease at below market rates 97 -
Consulting service agreements 6 -
Non-compete agreement 653 -
Technology 254 254
Long-term deferred financing cost 265 265
Tradename 128 -
Certificates 76 -
---------- ----------
3,416 519
---------- ----------
Accumulated amortization:
Customer relationships 97 -
Lease at below market rates 19 -
Consulting service agreements 6 -
Non-compete agreement 109 -
Technology 254 250
Long-term deferred financing cost 116 67
Tradename - -
Certificates - -
---------- ----------
601 317
---------- ----------
Amortized cost $ 2,815 $ 202
========== ==========
b. Estimated amortization expenses for the years ended:
YEAR ENDED DECEMBER 31, AMORTIZATION EXPENSES
----------------------- ---------------------
2006 508
2007 508
2008 361
2009 252
2010 and after 1,186
F-22
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
--------------------
2005 2004
--------- --------
Employees and payroll accruals $ 2,023 $ 1,422
Government authorities 609 -
Accrued expenses 1,388 677
Deferred revenue 104 86
Liability with respect to non-compete agreement 562 -
Other 359 559
--------- --------
$ 5,045 $ 2,744
========= ========
NOTE 8:- TRANSACTIONS WITH RELATED PARTIES
a. Transactions with TAT:
YEAR ENDED DECEMBER 31,
-------------------------
2005 2004 2003
------ ------ -------
Management fees $ 50 $ 50 $ 50
====== ====== =======
Other manufacturing costs $ 39 $ 59 $ 134
====== ====== =======
Lease expenses (1) $ 310 $ 324 $ 318
====== ====== =======
(1) During 2000, the Company entered into a lease
agreement with TAT for a period of 25 years.
According to the agreement, the Company leases from
TAT the factory premises for an annual amount of
approximately $ 300, increased by 2% annually,
subject to a revaluation based on market value every
five years. The Company is entitled to a one-time
right of termination of the agreement after 10 years.
During 2005, a revaluation of the lease agreement was
prepared by a valuation consultant, determining the
annual lease fee as $ 310.
b. Balances with related parties:
DECEMBER 31,
--------------------
2005 2004
--------- --------
TAT - current account (1) $ 103 $ 73
========= ========
(1) The current account is linked to the Israeli Consumer
Price Index and bears no interest.
F-23
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 8:- TRANSACTIONS WITH RELATED PARTIES (CONT.)
YEAR ENDED DECEMBER 31,
-------------------------------
2005 2004 2003
---------- --------- ------
c. Commissions to a company owned by certain
shareholders (see Note 10b) $ 361 $ 377 $ 487
========== ========= ======
Management fee (see f below) $ 176 $ 54 $ -
========== ========= ======
Salaries of principal owners (1) $ 500 $ 2,582 $ 492
========== ========= ======
(1) Includes an amount of $2,065 benefit due to exercise of
options in year 2004.
d. The Chairman of the Board of Directors and the Vice Chairman
of the Board of Directors are entitled each to a bonus of 2.5%
of the annual consolidated operating income, in excess of $
500. Bonus expenses were $ 292, $ 246 and $ 240 in 2005, 2004
and 2003, respectively, and were recorded as part of the
general and administrative expenses.
e. A shareholder of the Company (see Note 12b) provides the
Company with management and consulting services in
consideration of the lower of: (i) 3% of the consolidated
operating income in excess of $ 500, or (ii) $ 250. Consulting
expenses were $ 176, $ 54 and $ 0 in 2005, 2004 and 2003,
respectively, and were recorded a part of the general and
administrative expenses.
NOTE 9:- LONG-TERM LOANS
a. Terms of the loans:
WEIGHTED AVERAGE
CURRENCY INTEREST DECEMBER 31,
----------- --------------------- --------------------
2005 2004 2005 2004
----------- ------- -------- ---------
%
---------------------
Long-term loan (1) U.S. dollar Libor + 1.3 - $ 5,000 $ -
Long-term loan (2) U.S. dollar Libor + 1 - 3,000 -
Long-term loan (2) U.S. dollar 5.25 - 3,000 -
Less - current maturities (1,000) -
-------- ---------
$ 10,000 $ -
======== =========
(1) In July 2005, Piedmont signed a loan agreement in the
amount of $ 6,000 with Bank Leumi USA. The loan bears an
annual interest of Libor + 1.3%. The loan shall be
repaid on July 1, 2007. Piedmont is required to maintain
certain financial covenants as follows:
A ratio of funded debt to EBITDA will not exceed 3.25 to
1. A fixed charge coverage ratio shall be at least 2.5
to 1 and net profit of not less than $ 1.
F-24
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 9:- LONG-TERM LOANS (CONT.)
In addition, the Company, as the guarantor, is obligated
not to pay dividends without the prior written consent of
the bank.
In November 2005, Piedmont repaid $ 1,000 of the loan
amount.
(2) In July 2005, as part of Piedmont's acquisition, the
Company entered into two loan agreements in an aggregate
amount of $ 6,000 to be repaid in three annual installments
beginning July 1, 2008. The first loan bears interest of
Libor + 1% compounded annually and the second loan bears an
annual interest of 5.25%, both to be paid quarterly. The
Company is required to maintain a consolidated
shareholders' equity of not less than $ 15 thousand.
As of December 31, 2005, the Company and Piedmont are
maintaining all required financial covenants.
b. Aggregate maturities of long-term loans:
DECEMBER 31,
--------------------
2005 2004
-------- ---------
First year (current maturities) $ 1,000 $ -
Second year 4,000 -
Third year 2,000 -
Fourth year 2,000 -
Fifth year 2,000 -
-------- ---------
$ 11,000 $ -
======== =========
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
a. The Company obtained from the BIRD Foundation grants for the
support of research and development projects aggregating to $
551. The Company is obligated to pay royalties of between to 2.5%
to 5% of the sales of the products generated from such projects,
up to an amount equal to 100% of the grant received. The
contingent liability in respect of the aforementioned grants
amounted to $ 551. The Company does not expect any sales
generated from these projects in the future.
b. The Company is committed to pay commissions to a company owned by
certain of its shareholders for representing the heat exchangers
division in North America (see Note 8c). The commissions were
recorded as part of the selling and marketing expenses.
According to the agreement, the commissions are to be paid at
a rate of 10% of the amount of inventories purchased in North
America and 3% of the sales made in North America. The
commissions were recorded as part of the cost of revenues and
selling and marketing expenses, respectively.
F-25
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
c. The Company is committed to pay royalties to a third party of
between 5% to 12% of sales of products developed by a third party
or developed through the intellectual property and goodwill which
were purchased from that third party. Royalties expenses were $
425, $ 245 and $ 499 for the years ended December 31, 2005, 2004
and 2003, respectively. The royalties were recorded as part of
the cost of revenues.
d. The Company is committed to pay marketing commissions to salesmen
at a range of 1% to 12% of total sales contracts which were
received through promotion and distribution carried out by them.
Commission expenses were $ 529, $ 346 and $ 500 for the years
ended December 31, 2005, 2004 and 2003, respectively. The
commissions were recorded as part of the selling and marketing
expenses.
e. Lease commitments:
The Company entered into operating lease agreements which expire
in 2007. As of December 31, 2005, future minimum rental payments
under non-cancelable operating leases are as follows:
2006 $ 48
2007 6
----------------
$ 54
================
Total rent expenses for the years ended December 31, 2005, 2004
and 2003 were approximately $ 20, $ 30 and $ 30, respectively. As
for the lease of the factory premises by the Company, see Note
8a.
f. During 2004, two former employees filed a claim against the
Company and against an employment agency, alleging breach of
contract and seeking compensation for salary delays and salary
differences in the amount of $ 235. The Company, with the advice
of its legal counsel, is unable to predict the ultimate outcome
of these claims, yet believes that such claims are without merit.
As such, no provision was provided.
On November 16, 2005, Piedmont received a payment demand of sales
tax from Governmental authorities of approximately $ 194. The
Company, with the advice of its professional advisors, has
recorded a provision on the estimated amount to be paid of $ 95.
F-26
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 11:- CHARGES AND GUARANTEES
a. To secure bank credit received by the Company from banks, an
unlimited fixed charge was recorded on all of the assets of the
Company. In addition, the bank credit includes limitation on
payment of dividend, on current ratio, and on the financial
leverage ratios. As of December 31, 2005, the Company has not
withdrawn any amounts from the bank credit.
b. The liabilities secured by collaterals are as follows:
DECEMBER 31,
--------------------------------
2005 2004
--------------- --------------
Customer advances $ - $ 201
=============== ==============
Israeli customs $ 54 $ 58
=============== ==============
NOTE 12:- SHAREHOLDERS' EQUITY
a. The Company's shares are registered with the Securities and
Exchange Commission in the United States and are traded on the
NASDAQ (Capital Market). The Company's Ordinary shares confer
upon their holders voting rights, the right to receive dividends,
if declared, and any amounts payable upon the dissolution,
liquidation or winding up of the affairs of the Company.
On August 16, 2005, the Company listed its shares for trade on
the Tel-Aviv Stock Exchange.
b. On August 10, 2004, the Company entered into an investment
agreement, according to which the investor purchased 857,143
Ordinary shares of NIS 0.9 par value of the Company, and was
granted 500,000 warrants to purchase 500,000 Ordinary shares of
NIS 0.90 par value at an exercise price of $ 8.50 per share. The
warrants are exercisable for 66 months from the date of grant.
The total cash received was $ 6,000. As of December 31, 2005, no
warrants were exercised.
In addition, the investor and the Company entered into a credit
line agreement, under which the investor made a line of credit
available to the Company in the amount of up to $ 2,000.
The amount of the credit withdrawn from the investor shall not be
less than $ 1,000. The withdrawn credit bears interest at an
annual rate of 5%, in addition to an annual handling fee of 0.5%
of the credit line amount. The withdrawn credit will be settled
in four equal payments, no later than 66 months from the date of
the agreement. As of December 31, 2005, the Company has not
withdrawn any amounts from the credit line.
The Company recorded the fair value of the credit line, which
amounted to $ 265, as deferred charges, which will be amortized
throughout the term of the credit line agreement.
As such, the total proceeds received for the issuance of shares
and warrants, consisting of cash and a provision of a credit
line, amounted to $ 6,265, from which issuance expenses in the
amount of $ 273 were deducted. Regarding a consulting agreement
entered with the investors, see also Note 8e.
F-27
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
c. Stock option plans:
1. In June 1994, the Company adopted a stock option plan for
its employees, directors and service providers, whereby up
to 125,000 options to purchase Ordinary shares were to be
granted, at an exercise price of $ 4 per share (the market
price at the date of the grant). Out of this plan 116,000
options, out of which 87,500 stock options were granted to
executives, were granted. Under the terms of the plan, the
options vested ratably over a period of five years
commencing with the date of grant. This stock option plan
expired in June 2004 and no options are outstanding.
2. In March 1995, the Company adopted a stock option plan for
its employees, employees of the parent company, directors
and service providers, whereby up to 400,000 options to
purchase Ordinary shares were to be granted, at an exercise
price of $ 4.5 per share (the market price at the date of
grant). Out of this plan 372,500 options (out of which
315,000 stock options were granted to executives) were
granted. Under the terms of the plan, the options vested
after a period of five years commencing with the date of
grant. In March 2005, options to purchase 267,500 shares
expired and no options are outstanding as of December 31,
2005.
3. In January 1999, the Company adopted a stock option plan
for its employees, directors and officers of the Company,
whereby up to 500,000 options to purchase Ordinary shares
(out of which 402,500 stock options were granted to
executives) were to be granted, at an exercise price of $
1.625 per share (which equaled the market price on the date
of grant). All of the options have been granted under the
above plan. Under the terms of the plan, the options were
fully vested as of the grant date. These options expire in
January 2009. As of December 31, 2005, 17,500 options are
still outstanding.
The following table is a summary of the activity of the
Company's stock Option plans:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2005 2004 2003
---------------------- ---------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF OPTIONS PRICE OF OPTIONS PRICE OF OPTIONS PRICE
---------- --------- ---------- --------- ---------- ---------
Outstanding at the
beginning of the year 285,000 $ 4.323 834,935 $ 2.95 988,500 $ 2.99
Exercised - $ - (548,435) $ 2.25 (153,565) $ 2.36
Forfeited - $ - (1,500) $ 4.00 - $ -
Expired (267,500) 4.5 - - - $ -
---------- ---------- ----------
Outstanding at the end
of the year 17,500 $ 1.625 285,000 $ 4.323 834,935 $ 2.95
========== =========== ========== ========= ========== =========
Exercisable options 17,500 $ 1.625 285,000 $ 4.323 834,395 $ 2.95
========== =========== ========== ========= ========== =========
F-28
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)
The options outstanding as of December 31, 2005, have been
separated into ranges of exercise prices, as follows:
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE EXERCISABLE EXERCISE
AS OF REMAINING AS OF PRICE OF
EXERCISE DECEMBER 31, CONTRACTUAL DECEMBER 31, OPTIONS
PRICE 2005 LIFE (YEARS) 2005 EXERCISABLE
---------- ------------ ------------- ------------- ------------
$ 1.625 17,500 3.08 17,500 $ 1.625
============ ============= ============
d. Dividends:
Dividends on the Ordinary shares, if any, will be declared and
paid in U.S. dollars. The Company's intentions are to pay up to
40% of the Company's net profit as a cash dividend annually,
depending on cash flow and profitability and other factors
affecting the Company's business.
On September 8, 2004, the Company declared a dividend in the
amount of $ 7,130. The ex-date was set for October 18, 2004, and
the dividend was fully paid on November 8, 2004.
On August 31, 2005, the Company declared a dividend in the amount
of $ 1,087. The ex-date was set for October 20, 2005, and the
dividend was fully paid on November 15, 2005.
NOTE 13:- NET EARNINGS PER SHARE
The following table sets forth the computation of historical basic and
diluted net earnings per share:
YEAR ENDED DECEMBER 31,
------------------------------------------
2005 2004 2003
------------ ------------ ------------
Numerator:
Net income $ 3,529 $ 3,739 $ 3,834
============ ============ ============
Denominator:
Weighted average number of Ordinary shares
outstanding during the year 6,042,671 5,166,218 4,509,891
============ ============ ============
Basic net earnings per share - weighted average
number of shares 6,042,671 5,166,218 4,509,891
Effect of dilutive securities:
Stock options and warrants 44,045 397,842 397,529
------------ ------------ ------------
Denominator for diluted net earnings per share 6,086,716 5,564,060 4,907,420
============ ============ ============
F-29
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14:- INCOME TAXES
a. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
In accordance with the above law results for tax purposes are
measured and reflected in real terms in accordance with the
changes in the Israeli Consumer Price Index (CPI).
b. Tax benefits under Israel's Law for the Encouragement of Industry
(Taxation), 1969:
The Company is an "industrial company", as defined by the law for
the Encouragement of Industry (Taxes), 1969, and as such, is
entitled to certain tax benefits, which mainly consist of
amortization of costs relating to know-how and patents over eight
years, the right to claim public issuance expenses, and
accelerated depreciation.
c. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 ("the Law"):
A certain expansion plan of the Company has been granted an
"Approved Enterprise" status, under the Law. The Company has
elected to receive its benefits through the "alternative benefits
track", waiving grants in return for tax exemptions. Pursuant
thereto, the increase in income from the date of commencement of
the program which is the income of the Company derived from the
following "Approved Enterprise" expansion programs is tax-exempt
for the periods stated below and will be eligible for reduced tax
rates thereafter (such reduced tax rates are dependent on the
level of foreign investments in the Company), as described below.
Income derived from the program, which commenced in 2003, will
entitle the Company to a tax exemption for the two-year period
ending December 31, 2004, and to a reduced tax rate of 10%-25%
for an additional five to eight years ending December 31, 2009 to
2012 (depending on the level of foreign investments in the
Company).
The entitlement to the above benefits is conditional upon the
Company fulfilling the conditions stipulated by the
abovementioned law, regulations published thereunder and the
letters of approval for the specific investments in "approved
enterprises". In the event of failure to comply with these
conditions, the benefits may be canceled and the Company may be
required to refund the amount of the benefits, in whole or in
part, including interest. As of December 31, 2005, management
believes that the Company is meeting all of the aforementioned
conditions.
The tax-exempt income attributable to the "Approved Enterprise"
can not be distributed to shareholders without imposing tax
liability on the Company other than in complete liquidation. As
of December 31, 2005, there is approximately $ 170 tax-exempt
income earned by the Company's "Approved Enterprise".
F-30
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14:- INCOME TAXES (CONT.)
If the retained tax-exempt income is distributed to shareholders,
it would be taxed at the corporate tax rate applicable to such
profits as if the Company had not elected the alternative tax
benefits track (currently - 25%).
Income in the Company from sources other than the "Approved
Enterprise" during the benefit period will be subject to tax at
the effective standard corporate tax rate in Israel.
On April 1, 2005, an amendment to the Investment Law came into
effect ("the Amendment") and has significantly changed the
provisions of the Investment Law. The Amendment limits the scope
of enterprises which may be approved by the Investment Center by
setting criteria for the approval of a facility as an Approved
Enterprise, such as provisions generally requiring that at least
25% of the Approved Enterprise's income will be derived from
export. Additionally, the Amendment enacted major changes in the
manner in which tax benefits are awarded under the Investment Law
so that companies no longer require Investment Center approval in
order to qualify for tax benefits.
However, the Investment Law provides that terms and benefits
included in any certificate of approval already granted will
remain subject to the provisions of the law as they were on the
date of such approval. Therefore, the Company's existing Approved
Enterprise will generally not be subject to the provisions of the
Amendment. As a result of the amendment, tax-exempt income
generated under the provisions of the new law, will subject the
Company to taxes upon distribution or liquidation and the Company
may be required to record deferred tax liability with respect to
such tax-exempt income. As of December 31, 2005, the Company did
not generate income under the provision of the new law.
d. Reduction in Israeli tax rate:
Until December 31, 2003, the regular tax rate applicable to
income of companies (which are not entitled to benefits due to
"Approved Enterprise", as described above) was 36%. In June 2004
and in July 2005, the "Knesset" (Israeli parliament) passed
amendments to the Income Tax Ordinance (No. 140 and Temporary
Provision), 2004 and (No. 147), 2005 respectively, which
determine, among other things, that the corporate tax rate is to
be gradually reduced to the following tax rates: 2004 - 35%, 2005
- 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26% and 2010
and thereafter - 25%.
e. Non-Israeli subsidiaries:
Non-Israeli subsidiaries are taxed based on the tax laws in its
country of residence- the tax rate in the U.S. subsidiaries is
currently 40%.
f. Tax assessments:
The Company received tax assessments considered as final through
2001.
F-31
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14:- INCOME TAXES (CONT.)
g. Income tax reconciliation:
A reconciliation of the theoretical tax expense assuming all
income is taxed at the statutory rate and the actual tax expense
is as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
2005 2004 2003
------------- ----------- ------------
Income before income taxes as reported in the
statements of income $ 5,665 $ 5,406 $ 5,059
============= =========== ============
Statutory tax rate in Israel 34% 35% 36%
============= =========== ============
Theoretical tax expenses $ 1,926 $ 1,892 $ 1,821
Increase (decrease) in income taxes resulting
from:
Tax adjustment in respect of foreign
subsidiaries subject to a different tax rate 181 76 67
Difference in basis of measurement for financial
reporting and income tax purposes (150) (94) (519)
Tax in respect of prior years 78 (310) (258)
Non-deductible expenses 101 103 114
------------- ----------- ------------
Income taxes as reported in the statements of
income $ 2,136 $ 1,667 $ 1,225
============= =========== ============
h. Income before income taxes is comprised as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------
2005 2004 2003
------------- ----------- ------------
Domestic (Israel) $ 2,648 $ 3,880 $ 3,387
Foreign (United States) 3,017 1,526 1,672
------------- ----------- ------------
$ 5,665 $ 5,406 $ 5,059
============= =========== ============
F-32
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 14:- INCOME TAXES (CONT.)
i. Income taxes included in the statements of income:
Current:
Domestic (Israel) $ 1,048 $ 999 $ 627
Foreign (United States) 1,321 500 535
---------- --------- ----------
2,369 1,499 1,162
---------- --------- ----------
Deferred:
Domestic (Israel) 14 112 27
Foreign (United States) (247) 56 36
---------- --------- ----------
(233) 168 63
---------- --------- ----------
$ 2,136 $ 1,667$ $ 1,225
========== ========= ==========
j. Deferred income taxes:
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets are as follows:
DECEMBER 31,
-------------------
2005 2004
--------- -------
Deferred tax assets (liabilities):
Allowance for doubtful accounts $ 57 $ 92
Unrealized gains 159 117
Provisions for employee benefits and other temporary
differences 556 293
Tax loss carryforwards 15 100
--------- -------
Deferred tax assets - short-term 787 602
========= =======
Deferred tax liabilities mainly derived from property and
equipment - long-term (511) (559)
========= =======
Net deferred tax assets
As of December 31, 2005, the Company did not provide a valuation
allowance in respect of deferred tax assets, since management
currently believes that it is more likely than not that the
deferred tax asset will be realized in the future.
The Company does not intend to distribute earnings of a foreign
subsidiary aggregating $ 18,570 as of December 31, 2005, and
accordingly, no deferred tax liability has been established
relative to these earnings. If these amounts were not considered
permanently reinvested, a deferred tax liability would have been
required.
F-33
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- MAJOR CUSTOMER AND GEOGRAPHICAL INFORMATION
a. Segment Activities Disclosure:
In 2005, following the acquisition of Piedmont, there was a
change in the reported segments of the Company. Accordingly,
commencing 2005, the Company began reporting on two segments
comparing to one reportable segment in previous years.
The Company manages its business on a basis of two reportable
segments (See Note 1a for a brief description of the Company's
business) and follows the requirements of Statement of Financial
Accounting Standard No. 131 "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS No. 131").
The Company's reportable segments are as follows:
Repair and OEM (manufacturing) segment focuses on remanufacture,
overhaul and repair of heat transfer equipment and other aircraft
components and of repair of APU's, propellers and landing gears.
Parts Segment (part of Piedmont's business) focuses on sales of
parts of APU's, propellers and landing gears.
b. Operational segments statement operation disclosure:
The following financial information is the information that
management uses for analyzing the results. The figures are
presented in consolidated method as presented to management.
YEAR ENDED DECEMBER 31, 2005
--------------------------------------------
REPAIR AND
OEM PARTS CONSOLIDATED
-------------- ------------ ------------
Revenues $ 45,138 $ 4,055 $ 49,193
Cost of revenues 32,890 2,702 35,592
-------------- ------------ ------------
Gross profit $ 12,248 $ 1,353 $ 13,601
============== ============ ============
c. The following financial information identifies the assets to
segment:
YEAR ENDED DECEMBER 31, 2005
--------------------------------------------
REPAIR AND
OEM PARTS CONSOLIDATED
-------------- ------------ ------------
Assets (*) $ 46,021 $ 3,246 $ 49,267
Depreciation and amortization $ 1,398 $ 29 $ 1,427
Capital investments $ 1,072 $ - $ 1,072
F-34
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- MAJOR CUSTOMER AND GEOGRAPHICAL INFORMATION (CONT.)
d. The following presents total revenues, based on the location of
the end customers, for the years ended December 31, 2005, 2004
and 2003 and long-lived assets as of December 31, 2005, 2004 and
2003:
2005 2004 2003
--------------------------- --------------------- ------------------------
TOTAL LONG-LIVED TOTAL LONG-LIVED TOTAL LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
------------ ------------ --------- ---------- --------- ----------
Israel $ 4,122 $ 4,103 $ 5,095 $ 4,235 $ 4,796 $ 4,332
Asia 1,983 - 1,430 - 1,845 -
United States 30,495 10,998 17,569 2,418 15,441 2,241
Europe 11,256 - 8,736 - 8,340 -
Other 1,337 - 413 - 260 -
------------ ------------ --------- ---------- --------- ----------
$ 49,193 $ 15,101 $ 33,243 $ 6,653 $ 30,682 $ 6,573
============ ============ ========= ========== ========= ==========
e. Major customer data as a percentage of total revenues:
YEAR ENDED DECEMBER 31,
----------------------------------
2005 2004 2003
--------- --------- ----------
%
----------------------------------
Customer A 11.1 10.1 15.3
Customer B 5.8 15.4 12.9
Customer C 2.9 9.8 12.1
Customer D 6.5 9.6 11.9
F-35
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 16:- SELECTED STATEMENTS OF INCOME DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------
2005 2004 2003
----------- ----------- -------------
a. Financial income (expenses), net:
Financial income:
Foreign currency translation adjustments $ 29 $ 86 $ 49
Interest on cash equivalents, short-term
bank deposits and others 222 147 46
----------- ----------- -------------
251 233 95
----------- ----------- -------------
Financial expenses:
Bank charges (82) (68) (47)
Interest on short-term loans - (6) (12)
Interest on long-term loans (357) (28) (13)
Foreign currency translation adjustments (153) (42) (20)
Others (100) (2) (28)
----------- ----------- -------------
(692) (146) (120)
----------- ----------- -------------
$ (441) $ 87 $ (25)
=========== =========== =============
b. Other income, net:
Gain on sale of property and equipment $ 22 $ 17 $ 63
Gain (loss) on sale of marketable securities
classified as available-for-sale 120 35 (39)
Other income 68 2 -
----------- ----------- -------------
$ 210 $ 54 $ 24
=========== =========== =============
----------
F-36
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report on Form 20-F to be
signed on its behalf by the undersigned, thereunto duly authorized.
TAT TECHNOLOGIES LTD.
By: /s/ Israel Ofen
-------------------------------------
Israel Ofen, Executive Vice President
and Chief Financial Officer
Date: June 28, 2006
73