SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
-------------------
Commission File No. 0-17253
T.A.T. TECHNOLOGIES LTD.
(Exact name of Registrant as specified in its charter and translation of
Registrant's name into English)
-------------------
ISRAEL
(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 NOMINAL VALUE PER SHARE
(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: 4,483,516 Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No ___
-----
Indicate by check mark which financial statement item the Registrant has elected
to follow: Item 17. X Item 18. ___
TABLE OF CONTENTS
PAGE
PART I........................................................................
Item 1. Identity of Directors, Senior Management and Advisers.....1
Item 2. Offer Statistics and Expected Timetable...................1
Item 3. Key Information...........................................1
Selected Financial Data..................................1
Risk Factors.............................................3
Item 4. Information on the Company................................6
Business Overview........................................6
Property, Plants and Equipment...........................15
History and Development of the Company...................17
Organizational Structure.................................17
Item 5. Operating and Financial Review and Prospects..............17
Operating Results........................................17
Liquidity and Capital Resources..........................19
Research and Development.................................21
Off-balance sheet arrangements...........................21
Tabular disclosure of contractual obligations............21
Item 6. Directors, Senior Management and Employees................21
Directors and Senior Management..........................21
Compensation.............................................23
Board Committees.........................................24
Employees................................................26
Share Ownership..........................................26
Stock Option Plan
Dividend Policy
Item 7. Major Shareholders and Related Party Transactions.........28
Major Shareholders.......................................28
Related Party Transactions...............................28
Item 8. Financial Information.....................................29
Consolidated Statements and Other Financial Information..29
Legal Proceedings........................................29
Item 9. The Offer and Listing.....................................30
Nature of Trading Market.................................30
Item 10. Additional Information....................................31
By-Laws and Articles of Incorporation....................31
Exchange Controls........................................31
Taxation.................................................31
Documents on Display.....................................34
Item 11. Quantitative and Qualitative Disclosures About
Market Risk..........................................35
Item 12. Description of Securities Other than Equity Securities...35
PART II.......................................................................35
Item 13. Defaults, Dividend Arrearages and Delinquencies..........35
Item 14. Material Modifications to the Rights of Security Holders.35
Item 15. Controls and Procedures..................................35
Item 16. [Reserved]...............................................35
PART III......................................................................35
Item 17. Financial Statements.....................................35
Item 18. Financial Statements.....................................35
Item 19. Exhibits.................................................35
FORWARD-LOOKING STATEMENTS
This annual report includes forward-looking statements. You can
identify these forward-looking statements when you see words such as "expect",
"anticipate", "estimate", "project", "plans", "intends", "management believes",
"we believe" and similar words or phrases. These forward-looking statements
cover, among other items:
[] acceptance of our products and services in the marketplace;
[] our marketing and sales plans;
[] our expectations about the markets for our products and services;
[] our ability to successfully develop our technologies;
[] our future capital needs;
[] our expectations about our future profitability, operating results and
financial condition; and
[] the success of our protection of our proprietary technology.
We have based these forward-looking statements largely on our current
expectations. However, forward-looking statements are subject to a number of
risks and uncertainties, certain of which are beyond out control. Actual results
could differ materially from those anticipated as a result of the factors
described under "Risk Factors," including, among others:
[] a recession in the aerospace industry;
[] the business failure of any of our major commercial customers;
[] reductions in government military spending;
[] implementation and enforcement of government regulations.
We do not undertake any obligation to publicly update or revise any
forward-looking statements contained in this annual report or that are
incorporated by reference, whether as a result of new information, future events
or otherwise. Because of these risks and uncertainties, the forward-looking
events and circumstances discussed in this annual report might not transpire.
-1-
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
SELECTED FINANCIAL DATA
The following selected consolidated financial data as of, and for
each of the years ended, December 31, 1998, 1999, 2000, 2001 and 2002 have been
derived from, and should be read in conjunction with, the Company's consolidated
financial statements and notes thereto set forth elsewhere in this report. These
financial statements have been prepared in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP"). The financial
information set forth below is qualified by and should be read in conjunction
with the Consolidated Financial Statements of the Company and the notes thereto
included elsewhere in this Report and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
STATEMENT OF OPERATIONS DATA:
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(UNAUDITED)
-----------
(figures in thousands, except per share data)
Revenues .......................... $ 21,901 $ 26,682 $ 28,424 $ 25,051 $ 26,280
Cost of revenues .................. 15,912 18,361 18,430 16,924 17,158
-------- -------- -------- -------- --------
Gross profit ...................... 5,989 8,321 9,994 8,127 9,122
-------- -------- -------- -------- --------
Research and development costs,
Net .......................... 622 485 334 257 204
Selling and marketing expenses .... 2,075 2,001 1,681 1,823 2,075
General and administrative
Expenses ..................... 3,068 3,063 3,472 3,235 2,994
-------- -------- -------- -------- --------
5,765 5,549 5,487 5,315 5,273
-------- -------- -------- -------- --------
Operating income (loss) ........... 224 2,772 4,507 2,812 3,849
Financial income (expenses), net .. (341) (25) 211 (78) 99
Other income (loss), net .......... (536) 1,856 752 (1) 8
-------- -------- -------- -------- --------
Income (loss) from continuing
operations before taxes on
Income ....................... (653) 4,603 5,470 2,733 3,956
Taxes on income ................... -- 147 (23) (75) (367)
Equity in net loss of affiliates .. (358) (340) -- -- --
Net income (loss) ................. $ (1,011) $ 4,410 $ 5,447 $ 2,658 $ 3,589
======== ======== ======== ======== ========
Basic net earnings
per share .................... $ (0.23) $ 0.99 $ 1.22 $ 0.59 0.80
Diluted net income (loss)
per share .................... $ (0.23) $ 0.97 $ 1.13 $ 0.57 $ 0.77
Weighted average number of
shares used in computing basic
and diluted net income (loss)
per share .................... 4,483 4,483 4,483 4,483 4,483
Weighted average number of shares
used in computing diluted
net income (loss) per share .. 4,483 4,483 4,651 4,671 4,483
-2-
BALANCE SHEET DATA:
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(UNAUDITED)
-----------
(figures in thousands)
Working capital ................. $14,199 $20,279 $17,256 $18,510 $20,164
Total assets .................... 27,842 33,546 31,819 30,426 34,745
Long-term debt, excluding current
maturities ................. 3,721 3,819 5,417 3,316 3,362
Shareholder's equity ............ $19,979 $25,198 $21,190 $23,848 $25,419
- ----------------------
-3-
RISK FACTORS
OUR BUSINESS IS DEPENDENT ON THE AEROSPACE INDUSTRY
We sell our products and services primarily to the commercial and
military aerospace industry. Sales to customers in these markets generally
fluctuate with changes in military expenditure budgets and the rate of new
aircraft construction, levels of which have been declining over the past few
years. Our results of operations could be adversely affected in the event that
these industry conditions continue to affect our customers, or by a downturn in
the worldwide economy.
WE DERIVE A LARGE PART OF OUR REVENUES FROM SEVERAL MAJOR CUSTOMERS AND
GOVERNMENT BUSINESS
One of our non-government customers accounted for approximately 12.8%
of our revenues in 2002. Four customers accounted for a total of approximately
38.2% of our revenues in 2001, and four customers accounted for approximately
46.1% of our revenues for the year ended December 31, 2002. We can't be sure
that any of these customers will 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 will be seriously affected.
A substantial portion of our revenues are from contracts with the
U.S. and Israeli governments, acting through their various departments and
agencies. Sales to the U.S. and Israeli governments, accounted for approximately
14.6% and 4.1% of our revenues for 2001, respectively, and approximately 17.3%
and 3.2% of our revenues for the year ended December 31, 2002, 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 prevalent
in business with private parties. For example:
[] legislative or administrative requirements may delay payment for
performance of contracts;
[] 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
[] 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.
While 50.28% of our revenues is derived from the sale of products for
the non-military market in the United States, Israel and abroad, we believe that
the success and development of our business depends upon our ability to
participate in the defense programs of the United States, Israeli and other
governments and the continued commitment by these governments of substantial
resources to such programs. A loss of all, or a major portion, of our revenues
from government contracts could have a material adverse effect on the Company's
operations.
WE OPERATE IN A HIGHLY COMPETITIVE FIELD
The market for heat exchangers and other heat transfer products is
highly competitive. Some of the companies with which we compete have much
greater technical, financial, research and development and marketing resources
than we have. We may face increased competition in the future from these or
other companies, and if we are unable to compete successfully, whether on
technology, marketing or price, our revenues and operations will suffer.
WE FACE SPECIAL RISKS FROM INTERNATIONAL SALES AND CURRENCY EXCHANGE
FLUCTUATIONS
Export sales represented approximately 39.8% of our revenues in 2001,
and approximately 43.3% of our revenues for the year ended December 31, 2002. We
expect exports will continue to be a significant part of our business. This
business is subject to various risks common to international activities, such as
the need to comply with complex and varied export laws, tariff regulations and
regulatory requirements, and political and economic instability in certain
regions.
-4-
Since our financial statements are stated in U.S. Dollars, but not
all our expenses are incurred in U.S. Dollars or incurred in currencies linked
to the U.S. Dollar, our operations have been, and may continue to be, affected
by fluctuations in currency exchange rates.
WE HAVE NOT REGISTERED OUR INTELLECTUAL PROPERTY RIGHTS
We rely primarily on unpatented proprietary know-how and trade
secrets, and employ various methods including confidentiality agreements with
employees, to protect our trade secrets and know-how. However, such methods may
not afford complete protection and there is no way to be sure that others will
not independently develop such trade secrets and know-how or obtain access
thereto, which could adversely affect our business.
THE PRICE OF OUR ORDINARY SHARES MAY BE VOLATILE
In recent years, our company have experienced extreme price and
volume fluctuations, often unrelated to operating performance. The market price
of our ordinary shares may be strongly affected by many things, including
fluctuations in our quarterly revenues and earnings.
WE ARE LOCATED IN ISRAEL
We are directly influenced by the political, economic and military
conditions affecting Israel. (See "Conditions in Israel")
IT MAY BE DIFFICULT TO ENFORCE CERTAIN US LAWS AGAINST TAT OR ITS OFFICERS OR
DIRECTORS
Service of process upon directors and officers of TAT and the Israeli
experts named herein, all of whom reside outside the United States, may be
difficult to obtain within the United States. Our legal counsel in Israel,
Berkman Wechsler, has informed us that civil liabilities under the Securities
Act and the Exchange Act may not be enforceable in actions instituted in Israel.
However, subject to certain time limitations, Israeli courts may enforce U.S.
final executory judgments for liquidated amounts in civil matters, obtained
after due process before a court of competent jurisdiction (according to the
rules of private international law currently prevailing in Israel) which
enforces similar Israeli judgments, provided that: (i) due service of process
has been effected; (ii) such judgments or the enforcement thereof are not
contrary to the law, public policy, security or sovereignty of the State of
Israel; (iii) such judgments were not obtained by fraud and do not conflict with
any other valid judgment in the same matter between the same parties; and (iv)
an action between the same parties in the same matter is not pending in any
Israeli court at the time the lawsuit is instituted in the foreign court. We
have irrevocably appointed Samuel F. Ottensoser, Esq. of Gersten, Savage,
Kaplowitz, Wolf & Marcus, LLP, 101 E. 52nd Street, New York, New York 10022, as
our agent to receive service of process in any action against TAT in any Federal
court or court of the State of New York.
-5-
ITEM 4. INFORMATION ON THE COMPANY
BUSINESS OVERVIEW
TAT Technologies Ltd. (the "Company" or "TAT") is principally engaged
in the design, 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. The Company is also engaged in the
remanufacture, overhaul and repair of heat transfer equipment and other aircraft
components manufactured by TAT and other companies. The Company also
manufactures, sells and services certain related products for use in aircraft
and electronic systems.
The Company was founded in 1985 to develop the computerized systems
business of TAT Industries, Ltd. (formerly TAT Aero Equipment Industries, Ltd.)
and is an Israeli corporation, which is publicly-held in Israel, engaged in the
manufacture and sale of aeronautical equipment and owns approximately 69.44% of
the Company. The Company completed an initial public offering of its securities
in the United States in 1987.
In February 2000, the Company entered into an agreement (the
"Agreement") with TAT Industries (See "Control of Registrant") to purchase the
business and operations of TAT Industries for the manufacture of aviation
accessories and the lease of certain real estate and buildings (the
"Transaction"). The Transaction with TAT Industries was effective as of January
1, 2000 and included inventory, equipment, tools, goodwill, manufacturing
licenses and know-how, orders from customers, vehicles, the transfer of
liabilities with respect to a bank loan and employee liabilities from TAT
Industries to the Company and other assets and rights connected directly with
the activities of the factory, as well as the sub-lease of certain real estate
and buildings.
The Company conducts business in the United States through Limco-
Airepair International Inc. ("Airepair"), which is FAA certified to engage in
the remanufacture, overhaul and repair of heat transfer equipment for the
aviation industry.
The Company manufactures a complete line of heat transfer equipment
both in the United States and Israel, including heat exchangers, precoolers, oil
coolers and cold plates ("Heat Transfer Equipment"). Heat Transfer Equipment
facilitates the necessary removal and dissipation of heat generated during the
operation of mechanical and electronic systems. The Company's Heat Transfer
Equipment is generally integrated into a complete cooling system. Using its
technological expertise, the Company designs each of its heat transfer products
to meet the specific space, power, performance and other needs of its customers.
Heat Transfer Equipment is marketed worldwide for applications in commercial and
military aircraft and electronic systems, the primary users of such equipment.
The Company's customers for its Heat Transfer Equipment include Lockheed,
Liebherr, Boeing, Israel Aircraft Industries and Cessna, as well as the United
States Air Force and Navy. Such customers typically enter into contracts with
the Company pursuant to which the Company manufactures specified Heat Transfer
Equipment in connection with the customers' production or retrofittings of
particular aircraft equipment. Such contracts are generally for a period of
between one to three years.
The Company is also engaged in the remanufacture, overhaul and repair
of heat transfer and other aviation equipment ("Overhaul Services"). Heat
transfer products typically require Overhaul Services or replacement after three
to five years of service. The Company services heat transfer equipment for up to
60% of the replacement cost of a new unit and provides service warranties which
vary with the extent of services performed. Remanufactured units are generally
given the same warranties as are provided by the original manufacturers of new
units of the same type. The Company primarily markets its Overhaul Services to
major commercial airlines, KLM, FedEx, Lufthansa and military customers.
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's customers for its design, development and
manufacture of aviation accessories include Lockheed-Martin, Boeing Co.,
Teledyne, Israeli Air Force, Israel Aircraft Industries, as well as the United
States Air Force and Navy. The Company currently overhauls secondary and
emergency power systems and jet fuel starters for F-16's, fuel injection
governors, power and cooling turbines and valves. The Company's customers for
its systems overhaul services include the Israeli Air Force, Israel Aircraft
Industries, NATO airforces, as well as the United States Air Force and Navy.
-6-
The Company markets its products and services both through its
internal marketing staff and through a worldwide network of independent
representatives. These efforts are coordinated and directed by the Company's
internal marketing personnel. The Company implemented its current marketing
network following the acquisitions of Airepair and Limco in order to capitalize
on the complementary products and services of those businesses.
The Company believes that it is one of the few companies which both
manufactures Heat Transfer Equipment and provides Overhaul Services and as a
result, is able to cross-sell its Heat Transfer Equipment and Overhaul Services.
MARKET AND BUSINESS STRATEGY
The Company's principal growth strategy both in the United States and
Israel is to: (i) expand its heat transfer business in existing and new markets;
(ii) provide overhaul and repair services for additional aircraft components;
(iii) expand its marketing of overhaul and repair services to additional
segments of the aerospace industry; and (iv) use its 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, the Company
initiated a concentrated marketing effort for its Overhaul Services, which was
previously provided only to widebody commercial aircraft. This marketing
strategy has enabled the Company to penetrate the regional, helicopter, general
aviation and military aircraft markets. In addition, the Company has targeted
the aftersale market for certain of its products other than Heat Transfer
Equipment.
The Company has identified the electronics industry as a market with
significant growth potential for its Heat Transfer Equipment. For the past
several years the Company has 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. The Company's Heat Transfer Equipment is currently used
primarily in airborne radar systems, electronic warfare packages, avionics,
electronic pods and other airborne electronic systems. The Company's current
customers for these products include Elta (a division of Israel Aircraft
Industries), Raytheon, Rafael and Elisra.
The electronics industry has also seen a trend toward miniaturization
of electronic systems. Although smaller, these systems often generate the same
level of heat as larger systems. The Company intends to design and develop high
technology heat dissipation products to meet the size, weight and efficiency
requirements of the electronics industry.
The Company believes that its technical expertise in the field of
heat transfer will facilitate its entry into related businesses.
In April 1999, the Company entered into a License and Technical
Assistance Agreement with a subsidiary of a large international corporation (the
"LTA Agreement"). Pursuant to LTA Agreement the Company has supplied the
facility know-how, technology and technical assistance for the development and
manufacturing of certain types of advanced aeronautical equipment for a total of
$4,250,000 in payments over the next three to five years. As of June 15, 2003,
the Company received $3,177,500 in payments. At the end of the Project, the
Company which bought the know-how and the technology will perform 50% of the
Mutual Projects that we have today and they will pay us royalties of 7.5% for 10
years.
In May 1999, the Company entered into an agreement with ENERCO, an
Israeli company, to acquire the know-how and production rights of its line of
military air conditioning systems which are used in military communication
shelters, mobile shelters and armored vehicles for $274,500 and royalty payments
ranging from 1.5% to 5% of sales from 1999 through 2006.
PRODUCTS AND SERVICES
The table below sets forth, for the periods indicated, the revenues
derived from sales, and the percentage of total revenues, of the Company's
products and services.
-7-
Years Ended
December 31, 2002 December 31, 2001
---------------------- -------------------
Revenues Derived AMOUNT PERCENT AMOUNT PERCENT
From Sale of ------ ------- ------ -------
(In thousands)
Heat Transfer Equipment and avironautical $15,936 60.6% $15,228 60.8%
accessories Manufacturing
Overhaul Services 9,710 36.9% 8,326 33.2%
Other Products 634 2.5% 1,497 6.0%
------- ----- ------- -----
Total: $26,280 100.0% $25,051 100.0%
======= ===== ======= =====
HEAT TRANSFER EQUIPMENT
The Company manufactures 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 used in a wide variety of environmental control systems, 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
in particular, 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 serve the cooling functions becomes more critical. Using its technological
expertise, the Company believes it is well positioned to respond to these
industry demands through continued new product development and product
improvements.
The principal Heat Transfer Equipment of the Company are air-to-air
heat exchangers and precoolers and liquid-to-air heat exchangers. Typically, the
air-to-air heat exchangers and precoolers cool the 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.
The Company provides anywhere from one to all of the different types
of heat transfer equipment in a particular aircraft. Widebody planes require
approximately seven different types of heat transfer equipment, while regional
aircraft and helicopters contain approximately three types. The Company's 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 the Company's Heat Transfer Equipment is
sold to customers in connection with the original manufacture or retrofitting of
particular aircraft equipment. The Company generally enters into long-term
contracts with its customers, which require the Company to supply a designated
piece of Heat Transfer Equipment for an entire project. The Company's contracts
with such customers generally range from one to three years.
The Company also manufactures 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.
The Heat Transfer Equipment has been marketed worldwide for
applications in commercial and military aircraft and electronics systems, the
primary users of such equipment. The Company's customers for its Heat Transfer
Equipment include Lockheed, Liebherr, Boeing, Israel Aircraft Industries and
Cessna, as well as the United States Air Force and Navy. As a result of the
specialized nature of the systems in which the Company's parts are included,
spare and replacement parts for the original heat transfer systems are usually
provided by the Company.
-8-
SYSTEM DESIGN, DEVELOPMENT AND MANUFACTURE
The Company is also 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. The Company's customers for its
design, development and manufacture of aviation accessories include
Lockheed-Martin, Boeing Co., Teledyne, Israeli Air Force, Israel Aircraft
Industries, as well as the U.S. Air Force and Navy.
REMANUFACTURE, OVERHAUL AND REPAIR SERVICES
The Company remanufactures, overhauls and repairs heat transfer
equipment through its FAA certified repair station. In the past, the Company has
primarily marketed these Overhaul Services to major commercial airlines, such as
Air Canada, FedEx, Sabena and Lufthansa. The Company is also engaged with the
U.S. Air Force and Navy and Bell Helicopters in overhaul and repair of military
heat transfer products.
Heat transfer products typically require Overhaul Services or
replacement after three to five years of service. The Company offers its
customers repair services on three levels. If the damage is significant, the
Company 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. The Company designs and develops these customized
remanufacture programs as cost effective alternatives to new part replacement.
Remanufacture programs account for more than 50% of the Company's Overhaul
Services. In cases of less severe damage, the Company will either overhaul or
repair the unit as necessary. The Company's Overhaul Services generally cost a
customer up to approximately 60% of the price of replacement with a new unit,
and come with warranties which vary with the extent of service performed.
Remanufactured units carry warranties identical to those provided with new
units.
The Company currently overhauls secondary and emergency power systems
and jet fuel starters for F-16's, fuel injection governors, power and cooling
turbines and valves. The Company's customers for its systems overhaul services
include the Israeli Air Force, Israel Aircraft Industries, NATO airforces, as
well as the U.S. Air Force and Navy.
CONVENTIONAL AIR CONDITIONING SYSTEMS
TAT Technologies offers a wide range of highly reliable and
affordable Military Air Conditioners and NBC Systems, featuring high performance
and simplicity. TAT manufactures a comprehensive line of versatile air
conditioning systems, which provide a complete solution for application 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 Air Conditioning and NBC Systems have been installed on Military
Communications Shelters, Mobile Shelters, Armored Vehicles and used in many
other military applications. Beside our standard units, we may propose
custom-made systems as per customer specification.
SALES AND MARKETING
The Company derives its revenues mainly from sales to customers in
the United States, Israel and Europe. The geographic distribution of such sales
is as follows:
-9-
GEOGRAPHIC REGION Years Ended
- -----------------
--------------------------------------------------------
December 31, 2002 December 31, 2001
------------------------ -----------------------
(In thousands)
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
Israel $ 4,277 16.27% $ 5,482 21.88%
Other Asian countries 1,382 5.25% 1,327 5.30%
United States 13,531 51.48% 12,393 49.47%
Europe 6,879 26.18% 5,680 22.67%
Other 211 0.81% 169 0.68%
------- ------ ------- ------
Total: $26,280 100.00% $25,051 100.00%
The Company markets its products and services through its internal
marketing staff and a worldwide network which consists of independent
representatives. These efforts are coordinated and directed by the Company's
internal marketing personnel. The Company's representatives are strategically
located near key customer sites in certain offices throughout the United States,
in addition to offices in Europe, Asia, the Middle East, South America and
Australia. The Company implemented its current marketing network following the
acquisitions of Airepair and Limco in order to capitalize on the complementary
products and services of these businesses and the increased customer base.
Representatives are in regular contact with engineering and procurement
personnel and program managers of existing and target customers to identify new
programs and needs for the Company's products, obtain requests for quotations
and identify new product opportunities. The Company's 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
The Company's products and services are provided worldwide to OEMs
and end-user customers in the commercial, military and industrial markets. The
Company's major customers include OEMs such as Liebherr, Lockheed,
Hamilton-Sundsrand, Israel Aircraft Industries and Boeing and end-users such as
KLM, FedEx, Lufthansa and the United States Government. During the fiscal years
ended December 31, 2001 and 2002 Elta Electronics Industries Ltd. (a subsidiary
of I.A.I. Ltd.) accounted for approximately 15.6% and 119%, respectively, of the
Company's revenues. For the fiscal years ended December 31, 2001 and 2002,
Liebherr - Aerospace Toulouse Ltd. accounted for 11.4% and 12.8%, respectively,
of the Company's revenues.
Sales to the U.S. and Israeli governments, acting through their
various departments and agencies, accounted for approximately 14.6% and 4.4% of
the Company's revenues in 2001, respectively, and approximately 17.3% and 3.2%
of the Company's revenues in 2002, respectively. Government contracts are
generally terminable by the government at will.
PRODUCT AND SERVICE WARRANTIES
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. To date, warranty costs to
the Company have not been substantial.
ENGINEERING AND MANUFACTURING
The Company maintains a staff of 261 employees in engineering and
manufacturing to design, manufacture, remanufacture, repair and test its
products. See "Item 13 - Interest of Management in Certain Transactions." The
Company's engineering department is responsible for the design and development
of all heat exchangers and other products as well as the methods, tooling, test
instructions and test equipment. The engineering staff provides the Company with
extensive knowledge and experience related to its Heat Transfer Equipment. Most
of the Company's 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.
-10-
In general, the Company has manufacturing capabilities for most of
the parts and accessories of its Heat Transfer Equipment. The Company also
manufactures the necessary tools, fixtures, test equipment and special jigs
required to manufacture, assemble and test its products. The Company has
developed proprietary design techniques and computer aided design software which
assist in the mechanical design and manufacturing of the Company's products. All
products are produced and tested by trained inspectors using highly
sophisticated test equipment in accordance with customer requirements.
The Company provides its Overhaul Services through its in-house
engineering and manufacturing staff. The Company's Chief Engineer and Quality
Assurance Manager of its Overhaul Services have been certified as an
FAA-Designated Engineering Representative and an FAA-Designated Manufacturing
Inspection Representative, respectively, and work together with the Company's
engineers to assure compliance with FAA guidelines and provide the necessary
inspection of products during development and manufacture.
The Company is generally not dependent upon any single source of
supply, and seeks to maintain an adequate inventory of all imported components.
The Company's Israeli operations employ the services of a purchasing agent, a
corporation which is wholly-owned by certain officers and directors of the
Company. See "Item 13 - Interest of Management in Certain Transactions."
REGULATION
The Company's operations in the United States are regulated by the
FAA and the U.S. Department of Defense.
The Company is required to comply with the FAA's Federal Aviation
Regulation, which generally requires the Company to obtain FAA approval prior to
the sale of new products for aircraft applications. The Company currently holds
all necessary FAA authorizations required for the production of its products. In
addition, the Company holds an FAA repair station certificate which permits the
Company to provide its Overhaul Services.
The Company is also required to comply with the U.S. Department of
Defense's Federal Acquisition Regulation, which governs all of the Company's
work for military applications.
The Company's operations in Israel are subject to supervision by the
Ministry of Defense and Civil Aviation Administration. The Company is certified
by the Israeli Air Force for the Ministry of Defense for both manufacturing and
maintenance. The Company is also licensed as a repair station for certain
components by the Israeli Civil Aviation Administration. In addition, the
Company's export of certain products and/or know-how is subject to approval by
SIBAT, a corporation controlled by the government of Israel. Permits from SIBAT
must be obtained for the initiation of sales proposals with regard to such
exports, as well as for the actual exports of such products.
BACKLOG
At June 15, 2003, the Company had a backlog of approximately $28.0
million for products to be delivered through December 31, 2005, as compared to
June 15, 2002, when the Company had a backlog of approximately $26.0 million for
products to be delivered through December 31, 2004. The Company anticipates that
approximately $16.6 million of its backlog at June 15, 2003 will be delivered by
December 31, 2003, approximately $8.5 million by December 31, 2004 and
approximately $2.9 million by December 31, 2005.
COMPETITION
The field of heat transfer 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
Corporation and Hamilton Sunstrand. Other manufacturers in the United States are
Hughes-Treitler Manufacturing Corp., Stewart Warner South Wind Corp., United
Aircraft Products, Lytron Inc. and Lockhart Industries Inc., and manufacturers
based in Europe include I.M.I. Marston Ltd., Normalair Garrett Ltd. ("NGL"),
Secan and Behr.
-11-
The Company's major competitor in the Overhaul Services business is
Lori, a subsidiary of Honeywell, a U.S. company. Other competitors include Secan
and NGL, which are based in Europe.
PROPRIETARY RIGHTS
At the present time the Company owns two U.S. patents and one Israeli
patent with respect to this technology relating to Air Cycle Air Conditioning
Systems and Condenser Heat Exchange technology. Except for such patents, neither
the Company nor any of its subsidiaries holds any material patents and none of
them is currently seeking additional patent protection in any country. The
Company relies on confidentiality agreements with its significant employees as
well as on laws protecting trade secrets, and considers such items proprietary,
but believes that its success depends less on the ownership of such proprietary
rights than on its innovative skills, technical competence and marketing
abilities. The Company has no existing material registered trademarks.
PROPERTY, PLANT AND EQUIPMENT
The Company's executive offices, research and development and
manufacturing facilities in Israel are located in a 9,500 square foot facility
located in Gedera. This facility is leased from the Israeli government pursuant
to a lease which expires in 2020, which was assigned, but not registered, to the
Company by TAT Industries in connection with the Company's acquisition of TAT
Industries' heat exchanger operations. See "Item 7 - Major Shareholders and
Related Party Transactions."
In connection with the purchase of the business and operations of TAT
Industries, in February 2000, the Company and TAT Industries entered into a
lease agreement, pursuant to which the Company leases from TAT Industries, the
real estate and buildings encompassing an area of approximately 29.5 dunams for
a period of 24 years and 11 months. The Company pays TAT Industries annual
rentals of approximately $300,000, with an additional incremental payment of 2%
per year, and which rentals are subject to revaluation every fifth year.
The Company owns its Tulsa, Oklahoma facility which consists of
approximately 55,000 square feet.
Management believes that the Company's present facilities are well
maintained, in good condition and are sufficient for the Company to continue to
operate and meet its production needs. The Company's utilization of its
production capacity varies from time to time based on fluctuations in its
business and other factors.
CONDITIONS IN ISRAEL
The Company's principal executive offices and manufacturing and
research and development facilities are located in the State of Israel.
Accordingly, the Company is directly affected by political, economic and
military conditions in Israel.
Political Conditions
Potential political, economic and military instability in Israel may
harm our results of operations. We are organized under the laws of the State of
Israel and a substantial portion of our assets, and our principal operations,
are located in Israel. Our operations, financial condition and results of
operations are directly influenced by economic, political and military
conditions in and affecting Israel. We could be adversely affected if major
hostilities break out in the Middle East or if trade between Israel and its
present trading partners is curtailed. Since the establishment of the State of
Israel in 1948, a state of hostility has existed between Israel and the Arab
countries in the region. Any future armed conflicts or political instability in
the region could negatively affect our business or harm our results of
operations. We cannot predict whether a full resolution of these problems will
be achieved, the nature of any such resolution or any consequences that any of
these factors may have on us. In addition, since October 2000, there has been a
significant increase in violence, primarily in the West Bank and Gaza Strip. The
peace process between Israel and the Palestinian Authority has seriously
deteriorated due to the recent increased violence between Israelis and
-12-
Palestinians. Israeli companies and companies doing business with them have been
subject to an economic boycott initiated by the Arab countries. This boycott and
policies may seriously harm our operating results or the expansion of our
business. We cannot predict the effect on the region of the increase in the
degree of violence between Israel and the Palestinians . However, in May 2003,
as a result of the publication of the "roadmap" by the Quartet (the EU, Russia,
UN and the United States) attempts are being made to reinstitute the peace
process between Israel and the Palestinians. The current situation in Israel
could adversely affect our operations if our customers and/or strategic allies
believe that instability in the region could affect our ability to fulfill our
commitments.
All male adult citizens and permanent residents of Israel under the
age of 45 are, unless exempt, obligated to perform up to 30 days of military
reserve duty annually. Additionally, all such residents are subject to being
called to active duty at any time under emergency circumstances. Many of the
Company's officers and employees are currently obligated to perform annual
reserve duty. While the Company has operated effectively under these
requirements since it began operations the Company cannot assess the full impact
of such requirements on its workforce or business if conditions should change
and the Company cannot predict the effect on it of any expansion or reduction of
such obligations.
Economic Conditions
Israeli's economy has been subject to numerous destabilizing
factors, including a period of rampant inflation in the early to mid-1980s, low
foreign exchange reserves, fluctuations in world commodity prices, military
conflicts and civil unrest. The Israeli government has, for these and other
reasons, intervened in various sectors of the economy, by utilizing, among other
means, fiscal and monetary policies, import duties, foreign currency
restrictions and control of wages, prices and foreign currency exchange rates.
In 1998, the Israeli currency control regulations were liberalized
significantly, as a result of which Israeli residents may deal in foreign
currency and non-residents of Israel may purchase and sell Israeli currency and
assets. The Israeli government has periodically changed its policies in all
these areas. There are currently no Israeli currency control restrictions or
remittances of dividends on the ordinary shares or the proceeds from the sale of
the shares, however, legislation remains in effect pursuant to which currency
controls can be imposed by administrative action at any time. In addition,
Israeli residents are required to file reports pertaining to specific types of
actions or transactions.
The Israeli government's monetary policy contributed to relative
price and exchange rate stability in recent years, despite fluctuating rates of
economic growth and a high rate of unemployment. There can be no assurance that
the Israeli government will be successful in its attempts to keep prices and
exchange rates stable. Price and exchange rate instability may have a material
adverse effect on the Company.
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, Australis, 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 which 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 agreement with the European Union, which
includes redefinement 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.
-13-
HISTORY AND DEVELOPMENT OF THE COMPANY
The Company was incorporated in 1985 pursuant to the laws of Israel
under the name Galaxy Graphics Ltd. and the name was changed to TAT Technologies
Ltd. in May 1992. The Company was formed to develop the computerized systems
business of TAT Aero Equipment Industries, Ltd., an affiliate and majority
shareholder of the Company, which in August 1994 changed its name to TAT
Industries, Ltd. The Company's registered office is located at P.O. Box 80,
Gedera, Israel 70750 and our telephone number is 972-8-859-5411.
For a discussion of our capital expenditures and divestitures,
shareholders should review "Item 5. Operating and Financial Review and
Prospects."
ORGANIZATIONAL STRUCTURE
The Company is approximately 70% owned by TAT Industries, Ltd., an
Israeli corporation. The Company's wholly-owned subsidiary, Limco-Airepair
International, Inc. ("Airepair), is located in Tulsa, Oklahoma.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION
WITH ITEM 3 -"SELECTED FINANCIAL DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO
HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND
UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND
INTENTIONS. SEE " FORWARD-LOOKING STATEMENTS."
OPERATING RESULTS
OVERVIEW
The Company's 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.
Sales to the United States and Israeli governments accounted for
approximately 14.6% and 4.4%, respectively, of the Company's revenues for 2001
and for approximately 17.3% and 3.2%, respectively, of the Company's revenues
for 2002. See " Item 1-Business-Major Customers." While a substantial portion of
the Company's revenues is derived from the sale of products for the non-military
market in the United States, Israel and abroad, management of the Company
believes that the success and development of its business will continue to
depend in part upon its ability to participate in the defense programs of the
United States, Israel and other governments. While 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 the Company's revenues. There can be no
assurance that any of these governments will continue to commit the current
level of resources to such programs, that the Company will be able to continue
to participate in such programs, or that changes thereto will not materially
affect the financial condition of the Company. As a result, the Company's
historical results of operation and financial position are not necessarily
indicative of any future operating results or financial position.
The Company maintains its accounts and presents its financial
statements in U.S. Dollars, the primary currency of the Company's operations.
Transactions and balances denominated in currencies other than the U.S. Dollar
have been presented in U.S. Dollars based on representative rates of exchange of
such currencies.
-14-
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
REVENUES. Revenues in 2002 amounted to approximately $26.28 million
compared to approximately $25.05 million in 2001. The increase in revenues from
2002 compared to 2001, is attributable to the recognition in revenues from the
sale of know-how to Liebherr and an increase in revenues from the Company's U.S.
subsidiary.
COST OF REVENUES. Cost of revenues increased to approximately $17.2
million in 2002 from approximately $16.9 million in 2001. This increase is a
direct result of the Company's increase in revenues.
COST OF RESEARCH AND DEVELOPMENT. Cost of research and development
was $0.2 million in December 31, 2002 compared to $0.3 million in December 31,
2001.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 2002 amounted to approximately $5.07 million compared
to approximately $5.06 million in 2001.
OPERATING INCOME. Operating income in 2002 increased approximately
37% to $3.8 million compared to approximately $2.8 million in 2001, as a direct
result of an increase in sales.
FINANCIAL EXPENSES. The financial income (expenses) were $99 thousand
in 2002 compared toexpenses of approximately $(78) thousand in 2001, as a result
of the devaluation of the Israeli shekel against the U.S. dollar.
OTHER INCOME (LOSS). Other income (loss) of $8 thousand in 2002
compared to gain of $(1) thousand in 2001.
NET INCOME. Based on the foregoing, in 2002, the Company had a net
income of approximately $3,589 thousand compared to a net of approximately
$2,658 thousand in 2001.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. Revenues in 2001 amounted to approximately $25.05 million
compared to approximately $28.42 million in 2000. The decrease in revenues from
2001 compared to 2000, is primarily attributable to the cancellation of orders
in connection with the events that occurred on September 11, 2001 and postponed
revenues from sale of know-how to Liebherr.
COST OF REVENUES. Cost of revenues decreased to approximately $16.9
million in 2001 from approximately $18.4 million in 2000 as a direct result of a
decrease in revenues in 2001.
COST OF RESEARCH AND DEVELOPMENT. Cost of research and development
remained the same during the year ended December 31, 2001 as compared to
December 31, 2000 at $0.3 million.
SELLING GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in 2001 amounted to approximately $5.06 million compared
to approximately $5.15 million in 2000.
OPERATING INCOME (LOSS) Operating income in 2001 decreased
approximately 38% to $2.8 million compared to approximately $4.5 million in
2000, as a direct result of a decrease in revenues during 2001 and without a
reduction in the Company's fixed expenses.
FINANCIAL EXPENSES. The financial income (expenses) were $(79)
thousand in 2001 compared to expenses of approximately $211 thousand in 2000, as
a result of the devaluation of the Israeli shekel against the U.S. dollar.
OTHER INCOME (LOSS). Other income (loss) of $(1) thousand in 2001 to
gain of $752 thousand in 2000. See Note 17(c) to the Company's Consolidated
Financial Statements.
NET INCOME FROM CONTINUED OPERATIONS. Based on the foregoing, in
2001, the Company had a net income of approximately $2,658 thousand compared to
a net of approximately $5,447 thousand in 2000.
-15-
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had working capital of
approximately $20.2 million. To date, the Company has financed its operations
through the initial public offering in 1987, the public offering (the "Public
Offering") of its Ordinary Shares in November 1993 (approximately $13.8
million), the private placement of Ordinary Shares to certain investors in
December 1992 (approximately $5 million) (the "Private Placement"), the sale of
TVG ordinary shares owned by the Company, the sale of Aryt shares, cash flow
from operations, short-term, interest-free borrowings from TAT Industries and
export loans.
In the year ended December 31, 2002, the Company provided
approximately $4,823,000 in cash to cover operating activities compared to
approximately $2,050,000 in 2001. In the years ended December 31, 2002 and 2001,
the Company provided (used) approximately $(973,000) and approximately
$1,963,000 respectively, in its investing activities. The cash used in operating
and investing activities in 2002 and 2001 was funded by proceeds from cash
generated from operating activities.
Current liabilities increased to approximately $5.96 million at
December 31, 2002 from approximately $3.3 million at December 31, 2001.
As of July 1, 1992, the Company acquired Airepair for an aggregate
consideration of $2.9 million, consisting of a $500,000 cash payment and a
promissory note payable to the former shareholder of Airepair in the amount of
$1.4 million, payable in monthly installments of $11,667 each, which amount
includes interest. In connection with the acquisition, the Company entered into
a consulting agreement with the former shareholder of Airepair requiring an
aggregate payment of $1 million, payable in monthly installments of $8,333 over
a 10 year period. Such payments are reflected in the Consolidated Financial
Statements at present value calculated annual interest rate of 9%. This
agreement expired on July 2002.
Management believes that anticipated cash flow from operations and
its current cash balances will be sufficient to meet the Company's cash
requirements through at least December 31, 2003. The Company's continued
operations thereafter will depend upon cash flow from operations and the
availability of equity or debt financing.
OFF-BALANCE SHEET ARRANGEMENTS
There are no obligations required to be reported hereunder which does not appear
in the financial statement.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
Not applicable.
IMPACT OF INFLATION, DEVALUATION AND FLUCTUATION OF
CURRENCIES ON RESULTS OF OPERATION, 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
U.S. Dollar and other currencies. Since the institution of the Israeli Economic
Program in 1985, the rate of inflation, while continuing upward, has been
significantly reduced and the rate of devaluation has been substantially
diminished. During the calendar years of 1990 through 1994, the annual rates of
inflation were approximately 18%, 18%, 9%, 11% and 14.5%, respectively. During
1989 and 1990 the U.S. Dollar declined in value relative to major world
currencies. Because government 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 U.S. Dollar remained relatively stable
during this period. However, during 2000, 2001 and 2002 Israel effected
devaluations of the NIS against the U.S. Dollar of (2.7%), (9.2%) and 7.27%,
respectively.
During each of the three years in the period ended December 31, 1991
and during the two years ended December 31, 1994, the rate of inflation in
Israel exceeded the rate of devaluation of the NIS against the U.S. Dollar, but
in 1992, the rate of devaluation of the NIS against the U.S. Dollar exceeded the
rate of inflation in Israel.
-16-
The U.S. Dollar cost of the Company's operations in Israel is
influenced by the extent to which any increase in the rate of inflation in
Israel over the rate of inflation in the United States is offset by a
devaluation of the NIS in relation to the U.S. Dollar. Inflation in Israel will
have a negative effect on the profitability to the Company of contracts under
which the Company is to receive payment in U.S. Dollars or other foreign
currencies, unless such inflation is offset by a devaluation of the NIS.
A devaluation of the NIS in relation to the U.S. Dollar will have the
effect of decreasing the U.S. Dollar value of any assets of the Company
denominated in NIS or receivables payable in NIS (unless linked to the U.S.
Dollar). Such a devaluation would also have the effect of reducing the U.S.
Dollar amount of any liabilities of the Company which are payable in NIS (unless
linked to the U.S. Dollar). Thus, for example, by refinancing outstanding U.S.
Dollar-linked borrowings with NIS borrowings unlinked to either the U.S. Dollar
or the Consumer Price Index ("CPI"), the Company was able to reduce financing
expenses when the NIS was devalued in 1992. Conversely, any increase in the
value of the NIS in relation to the U.S. Dollar would have the effect of
increasing the U.S. Dollar value of any unlinked NIS assets of the Company and
the U.S. Dollar amount of any unlinked NIS liabilities of the Company.
Because exchange rates between the NIS and the U.S. Dollar fluctuate
continuously (albeit with a declining trend in the value of the NIS), exchange
rate fluctuations and especially larger periodic devaluations have an impact on
the Company's profitability and period-to-period comparisons of the Company's
results. For the years ended December 31, 1999, 2000, 2001 and 2002, such impact
did not have a material effect on the Company's operations. The caption
"Financial expenses - net" in the Company's financial statements includes the
impact of these factors.
The following table sets forth for the periods indicated certain
information with respect to the rate of inflation in Israel, as measured by the
CPI, the devaluation of Israeli currency in relation to the U.S. Dollar, the
annual inflation rate adjusted for devaluation and the rate of inflation in the
United States:
ISRAELI ANNUAL
CONSUMER CLOSING INFLATION RATE U.S.
YEAR ENDED PRICE ANNUAL EXCHANGE ANNUAL ADJUSTED FOR INFLATION
DECEMBER 31 INDEX(1) INFLATION(2) RATE(3) DEVALUATION(4) DEVALUATION(5) RATE(6)
- ----------- -------- ------------ ------- -------------- -------------- -------
1995 19,703,393 8.1 3.135 3.9 4.0 2.5
1996 21,789,455 10.6 3.251 3.7 6.8 3.3
1997 23,312,127 7.0 3.536 8.8 (1.6) 1.7
1998 25,322,057 8.6 4.160 17.6 (8.3) 1.6
1999 25,662,314 1.3 4.153 (0.17) 1.4 2.7
2000 25,758,608 0.4 4.041 (2.7) 3.1 3.4
2001 26,023,994 1.0 4.416 9.3 (8.2) 1.6
2002 27,714,529 6.5 4.737 7.3 (0.8) 2.4
- -------------------
<FN>
(1) For purposes of this table, the CPI figures use average 1951=100.
These figures are based on reports of the Israel Central Statistics
Bureau.
(2) "Annual Inflation" is the percentage change in the CPI between
December of the year indicated and December of the preceding year.
(3) "Closing Exchange Rate" is the rate of exchange between Israeli
currency and the U.S. Dollar at December 31 of the year indicated as
reported by the Bank of Israel.
(4) "Annual Devaluation" is the percentage increase in the value of the
U.S. Dollar in relation to Israeli currency during the year
indicated.
(5) "Annual Inflation Adjusted for Devaluation" is obtained by dividing
the December CPI (Column 1) by the closing exchange rate (Column 3),
thus first obtaining a U.S. Dollar adjusted CPI, and then calculating
the yearly percentage changes in this adjusted index.
(6) "U.S. Inflation Rate" is obtained by calculating the change in the
U.S. CPI for All Urban Consumers, as published by the Bureau of Labor
Statistics of the U.S. Department of Labor.
</FN>
-17-
RESEARCH AND DEVELOPMENT
As of June 15, 2003, the Company employed a research and development
staff of two people. The Company continually utilizes its engineering and
manufacturing capabilities in the design and development of new products and
services and cost effective management techniques.
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.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
The directors, officers and key employees of the Company are as
follows:
NAME AGE POSITION WITH THE COMPANY
- ---- --- -------------------------
Shlomo Ostersetzer 76 Chief Executive Officer and Chairman
of the Board of Directors
Dov Zeelim 63 President, Vice Chairman of the Board
of Directors
Israel Ofen 54 Executive V.P., Chief Financial
Officer and Director
Shraga Katz 58 Vice President Operations
Avi Kahana 59 Secretary
Moshe Tachnai 61 Director
Jacob Danan 62 Chief Engineer and Vice President of
Marketing
Shaul Menachem 56 President - Limco-Airepair
Eran Frenkel *(1) 36 V.P. Business Development -
Limco-Airepair
Yossi Rosenberg *(2) 38 Vice-President Economics
Dr. Meir Dvir 72 Director
Yaacov Fish 56 Director
Yael Rosenberg 34 Director
Lior Zeelim (3) 34 Director
Each Director of the Company 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.
SHLOMO OSTERSETZER has served as Chairman of the Board of Directors
of the Company since April 1985. Mr. Ostersetzer has also served as Chief
Executive Officer of the Company since 1990. Mr. Ostersetzer was one of the
founders of TAT Industries and has served as Chairman of the Board of Directors
of TAT Industries since 1970. See "Item 13 - Interest of Management Certain
Transaction." Prior to serving as TAT Industries' Chairman, Mr. Ostersetzer
served as the President and Managing Director of TAT Industries. Mr. Ostersetzer
has served with TAT Industries since 1968.
DOV ZEELIM has been the President of the Company since January 2000
and has served as Vice Chairman of the Board of Directors of the Company since
April 1985 and has served as Managing Director of TAT Industries since 1983.
Prior to this position, Mr. Zeelim served as Executive Vice President and as
Vice Chairman of TAT Industries. Mr. Zeelim has served with TAT Industries since
1969. Mr. Zeelim is licensed as a C.P.A. in Israel.
ISRAEL OFEN has served as Executive Vice President and Chief
Financial Officer of the Company since August 1993, as Managing Director since
March 1991 and has held other managerial positions with the Company since April
1985. In addition, Mr. Ofen served as Vice President, Finance of TAT Industries
from 1983 through August 31, 1993 and President since January 2000. Mr. Ofen is
licensed as a C.P.A. in Israel.
-18-
SHRAGA KATZ has served as V.P. Operations of the Company 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 the heat exchange
operations for the Company since 1991. Mr. Katz is a retired lieutenant colonel
of the Israeli Air Force in which he served for 20 years.
AVI KAHANA has served as Secretary of the Company since January 1,
1998. During the past five years Mr. Kahana has been the Manager of Import and
Export, and he has worked for TAT Industries and its subsidiaries since 1984.
MOSHE TACHNAI has been a Director of the Company since 1985 and
previously served as Senior Vice President, Operations of the Company from April
1985 to May 1988. Prior thereto, Mr. Tachnai served in various capacities with
TAT Industries since 1968. Presently, Mr. Tachnai is a Manager with Memtech
Ltd., a company engaged in electronics and computer systems and a director of
Novo Media Ltd., a company engaged in printing.
JACOB DANAN is Chief Engineer of the Company, and, as of January 1,
1998, was appointed Vice President of Marketing. Mr. Danan has been with the
company since 1980. He is an aeronautic engineer, and received his degree from
the Technion in Haifa.
SHAUL MENACHEM has served as the President of Limco-Airepair (wholly
owned subsidiary) since February 1998. Mr. Menachem received his MSc. in
Engineering Management from Bridgeport University of Connecticut.
(1) 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 received his Masters in Business Administration from Pace University in
New-York.
(2) YOSSI ROSENBERG has served as Vice President of Economics of the
company and Director of TAT Industries Ltd. since June 2003. Mr. Rosenberg is
the son in law of Shlomo Ostersetzer.
DR. MEIR DVIR has served as a Director of the Company since December
1994. Mr. Dvir has served as deputy General Manager of Business Research and
Development of the Israeli Aircraft Industries since 1985. He is also a director
of Elta, Komodur Aviation and DTS.
YAACOV FISH has served as a Director of the Company 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. Mr. Fish served as general
comptroller of Egged Ltd. from 1977 to 1990.
YAEL ROSENBERG has served as a Director of the Company since December
1999 and has served as a director of TAT Industries since November 1996. Mrs.
Rosenberg is the daughter of Shlomo Ostersetzer, who is Chairman of the Board of
the Company and TAT Industries. She is employed as a lawyer in the law offices
of Meitar, Liqvornik, Geva and Co. Mrs. Rosenberg received her B.A. in law at
the Administration and Management College in Tel Aviv.
(3) LIOR ZEELIM has served as a Director of the Company since
December 1999. Mr. Zeelim is the son of Dov Zeelim, Vice Chairman of the Board
of the Company and TAT Industries and President of TAT Industries. He is a
registered representative who trades in the stock market for his own account.
COMPENSATION
During 2002, the Company paid its officers and directors compensation
in the aggregate amount of $1,651,601 and the Company anticipates that the
aggregate compensation paid to its officers and directors during 2003 will be
approximately $1,650,000. The foregoing includes amounts set aside for or
accrued to provide pension, retirement or similar benefits but does not include
amounts expended by the Company for automobiles made available to its officers,
expenses (including business travel, professional and business association dues
and expenses) reimbursed to officers and other benefits commonly reimbursed and
paid for by companies in Israel.
-19-
EMPLOYEE'S NAME SALARIES & SOCIAL BONUS OPTION PLAN REALIZATION PLAN
BENEFITS
- -----------------------------------------------------------------------------------------------------
Shlomo Ostersetzer $240,717 $81,859 250,000 -- 125,000 125,000
Dov Zeelim $261,994 $81,859 350,000 50,000 125,000 175,000
Israel Ofen $169,777 $26,176 205,000 37,500 65,000 102,500
Jacob Danan $175,084 $34,553 40,750 2,000 13,750 25,000
Shraga Katz $122,134 $16,680 27,000 2,000 5,000 20,000
Shaul Menachem $187,692 $35,000 10,000 -- -- 10,000
Eran Frenkel 73,278 -- -- -- -- --
Yossi Rozenberg $70,583 $2,122 -- -- -- --
Avi Kahana $38,264 $743 -- -- - --
Moshe Tachnai $6,833 -- 7,500 2,500 - 5,000
Meir Dvir $6,833 -- 7,500 2,500 - 5,000
Yaakov Fish $6,833 -- 7,500 2,500 - 5,000
Yael Rozenberg $6,428 -- -- -- -- --
Lior Zeelim $6,159 -- -- -- -- --
Board Committees
The Articles of Association of the Company provide that any director
may, by written notice to the Company, appoint another person to serve as an
alternate director, subject to the approval of a majority of the Directors, and
may cancel such appointment. Any person, whether or not already a director, may
act as an alternate, and the same person may act as the alternate for several
directors and shall have the corresponding number of votes equivalent to the
number of directors who appointed him. The term of appointment of an alternate
director may be for a specified period, or until notice is given of the
termination of the specified period, or of the appointment. No director
currently intends to appoint any other person as an alternate director, except
if the director is unable to attend a meeting of the Board of Directors. In the
event of a tie vote, under the Articles of Association of the Company, the
Chairman of the Board shall have a second or casting vote.
INDEPENDENT DIRECTORS
Under an amendment effective July 1987 to the Israeli Companies
Ordinance (New Version), 1983, publicly held Israeli companies are required to
appoint at least two independent directors (the "Independent Directors") who
have been approved by a statutory committee consisting of the Chairman of the
Israeli Securities Authority, the Chairman of the Tel Aviv Stock Exchange and a
member of the Israeli judiciary who acts as a chairman of the committee (the
"Committee"). The Companies Ordinance details certain standards for the
independence of these directors. These directors must be residents of Israel and
unaffiliated with the Company and its principals. They are entitled to obtain
all information relating to the Company's management and assets and to receive
assistance, in special cases, from outside experts at the expense of the
Company. The law imposes an obligation on these directors to report
infringements of law and good business practice as well as improper conduct to
the Chairman of the Board of a company and in some cases to the Israeli
Securities Authority. Under the Companies Ordinance, any committee of the Board
of Directors must include at least one Independent Director. The Companies
Ordinance also mandates the appointment of an independent audit committee
composed of three or more directors, including all of the Independent Directors.
See "- Approval of Certain Transactions under the Companies Ordinance; Audit
Committee."
-20-
An Independent Director shall be appointed for five consecutive years
and may not be reappointed until two years have passed since the conclusion of
his previous term.
The District Court of Tel Aviv ruled on June 6, 1993 that companies
registered under the laws of Israel (like the Company) whose shares have been
offered to the public outside Israel, as in the case of the Company, are also
obligated to comply with the requirements of this statute. In October 1993, the
Israeli Supreme Court issued a stay of execution of the District Court's
decision pending the Supreme Court final decision the Company intends to
designate and apply to the Committee for the approval of two Independent
Directors.
The Board of Directors of a company which is obliged to nominate
Independent Directors must also appoint an internal controller, in accordance
with the proposal of the audit committee. The role of the internal controller is
to examine, inter alia, whether the company's acts comply with the law,
integrity, and orderly business procedure.
APPROVAL OF CERTAIN TRANSACTIONS UNDER THE COMPANY'S ORDINANCE; AUDIT COMMITTEE
A 1991 amendment to the Israeli Companies Ordinance defines the
duties of care and skill and the fiduciary duties of loyalty and good faith owed
by directors and officers to a corporation. It is nevertheless premature to
determine how these provisions will be interpreted and enforced by the courts.
As permitted by the Companies Ordinance and the Company's Articles of
Association, the Company has agreed to indemnify and insure its directors and
senior officers against certain liabilities which they may incur in connection
with the performance of their duties. Under the terms of such indemnification
provisions, the Company may, to the extent permitted by law, advance funds for
legal expenses in connection with such indemnification.
The Companies Ordinance, as amended, requires that an "Office Holder"
disclose to the Company if he or she has a direct or indirect personal interest
in transactions to which the Company intends to be a party. An "Office Holder"
is defined in the Companies Ordinance as director, managing director, chief
business manager, executive vice president, vice president, other manager
directly subordinate to the managing director and any other person assuming the
responsibilities of any of the foregoing positions without regard to such
person's title.
The Companies Ordinance requires that certain transactions, actions
and arrangements be approved as provided for in a company's Articles of
Associations and/or by an audit committee of a company's Board of Directors
whose members meet certain Criteria of Independence as defined in the Companies
Ordinance (the "Audit Committee") and by the Board of Directors itself. All of
the Independent Directors must serve on the Audit Committee. In certain
circumstances, shareholders approval is also required. The vote required by the
Audit Committee and the Board of Directors for approval of such matters, in each
case, is a majority of the disinterested directors participating in a duly
convened meeting.
The Audit Committee of the Board of Directors of the Company is
comprised of: Dov Zeelim, Moshe Tachnai, Meir Dvir and Yaacov Fish. Approval by
the Audit Committee and the Board is required for such matters as: (i) certain
transactions to which the Company intends to be a party and in which an Office
Holder or certain other parties (including affiliates of the Company or Office
Holder) have a direct or indirect personal interest; (ii) actions or
arrangements which could otherwise be deemed to constitute a breach of fiduciary
duty or the duty of care of an Office Holder to the Company; (iii) arrangements
with directors as to the term of their service; (iv) indemnification of Officer
Holders; and (v) certain transactions defined in the Companies Ordinance as
extraordinary transactions (a transaction which is not in the ordinary course of
business or is not at market conditions, or a transaction which is likely to
have a material impact on the profitability, property or obligations of the
Company). Arrangements with directors regarding their service and, in certain
circumstances, the other matters enumerated above, may also require shareholder
approval.
-21-
Directors with respect to whom the foregoing matters are brought for
the approval of the Board of Directors or the Audit Committee are not entitled
to vote thereon, and Office Holders (including directors) with respect to whom
such matters are brought for such approval may not be present during discussions
of the Board of Directors pertaining thereto.
The Company has entered into employment contracts with its executive
officers in Israel, which generally provide for termination by either party for
any reason upon written notice ranging from 14-90 days and has entered into
confidentiality agreements with its executive officers and technical personnel.
The Company's agreement with Israel Ofen provides for termination by the Company
upon twelve months written notice. The Company does not have employment or
confidentiality agreements with any of its United States employees.
EMPLOYEES
As of June 15, 2003, the Company employed a total of 261 persons, of
whom 166 are involved in manufacturing and quality control, 67 in
administration, sales and marketing and 28 in engineering and research and
development.
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 the Company's 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. The Company generally
provides its employees with benefits and working conditions beyond the required
minimums. Furthermore, under the collective bargaining agreements, the wages of
most of the Company's 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 the Company, 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.
SHARE OWNERSHIP
The following table sets forth as of June 15, 2003 the number of
Ordinary Shares, nominal value NIS 0.90 per share, of the Company (the "Ordinary
Shares") owned beneficially by all officers and directors of the Company.
-22-
Number of Ordinary Percent of
Name and Address Shares Owned Ordinary Shares
TAT Industries(1) 3,113,409 69.44%
Shlomo Ostersetzer(1)(2) 325,437(3)(4) 5.94%
Dov Zeelim(1)(2) 390,587(3)(4) 7.14%
Israel Ofen(2) 205,000(4) 3.75%
Dvir Meir (2) 7,500 0.13%
Fish Yaakov (2) 7,500 0.13%
Tachnai Moshe (2) 7,500 0.13%
(1) TAT Industries and each of Messrs. Ostersetzer, Zeelim and Ofen has
an address at P.O. Box 80, Gedera, Israel 70750.
(2) On a fully diluted basis.
(3) Such number does not include shares beneficially held by TAT
Industries. Mr. Shlomo Ostersetzer, Chairman of the Board of
Directors and Chief Executive Officer of the Company, is the Chairman
of the Board of TAT Industries and owns approximately 43.63% of the
equity rights and the voting rights in TAT Industries as of June 15,
2003. Mr. Dov Zeelim, President and Vice Chairman of the Board of
Directors of the Company, is the Vice Chairman of TAT Industries and
owns approximately 22.0% of the equity rights and the voting rights
in TAT Industries as of June 15, 2003.
(4) Includes Ordinary Shares that the following persons have the right to
acquire upon the exercise of stock options: Shlomo Ostersetzer,
250,000 Ordinary Shares; Dov Zeelim, 350,000 Ordinary Shares; and
Israel Ofen, 205,000 Ordinary Shares.
STOCK OPTION PLANS
In June 1994, the Board of Directors of the Company adopted a share
option plan (the "1994 Plan"), pursuant to which 125,000 Ordinary Shares have
been reserved for issuance upon the exercise of options granted under the 1994
Plan. All options granted under the 1994 Plan are granted on the condition that
the grantee remains employed by the Company for at least five years from the
date of grant as an employee, officer or consultant and are granted on a pro
rata basis during that period. In June 1994, the Board of Directors approved the
granting of options under the 1994 Plan at an exercise price of $4.00 per share
as follows: Israel Ofen: 37,500; Dov Zeelim: 50,000; and an aggregate of 37,500
to other directors, employees of the Company and service renderers. In
September, 1994 the Company's shareholders approved the 1994 Plan and the
granting of the foregoing options.
In March 1995, the Board of Directors of the Company adopted a share
option plan (the "1995 Plan"), and approved by the Company's shareholders in
August 1995 pursuant to which 400,000 Ordinary Shares have been reserved for
issuance upon the exercise of options granted under the 1995 Plan. In June 1995,
the Board of Directors approved the granting of options under the 1995 Plan at
an exercise price of $4.50 per share as follows: Shlomo Ostersetzer: 125,000;
Dov Zeelim: 125,000; Israel Ofen: 65,000; and an aggregate of 85,000 to other
employees and services renderers of the Company.
In January 1999, the Board of Directors adopted a new share option
plan ("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; Dov Zeelim: 175,000; Israel Ofen: 102,500 and an aggregate of 97,500 to
other employees and directors.
-23-
DIVIDEND POLICY
IN DECEMBER 2002, THE COMPANY DECLARED A CASH DIVIDEND OF $0.45 PER
SHARE (AGGREGATE OF $2,017,582) PAID IN JANUARY 2003. IN ADDITION, IN MAY 2003,
THE COMPANY DECLARED A FURTHER CASH DIVIDEND OF $0.25 PER SHARE (AGGREGATE OF
$1,120,879) PAYABLE IN JULY 2003. FURTHER DIVIDENDS, IF ANY, WILL BE DETERMINED
BY THE BOARD OF DIRECTORS DEPENDING ON CASH FLOW AND PROFITABILITY AND OTHER
FACTORS BUSINESS AND LEGAL. THERE CAN BE NO ASSURANCE THAT THERE WILL BE FURTHER
DIVIDENDS.
Nonresidents of Israel who have purchased ordinary shares of the
Company will be able to receive dividends and any amounts payable upon the
dissolution, liquidation or winding up of the affairs of the Company, as well as
the proceeds of any sale in Israel of the ordinary shares to an Israeli resident
freely repatriable in certain non-Israeli currencies (including dollars) at the
rate of exchange prevailing at the time of conversion, pursuant to a general
permit issued by the Controller of Foreign Currency at the Bank of Israel under
the Currency Control Law, 1978, as amended in May 1998, provided that Israeli
income tax had been paid on such amounts by the Company.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
For information concerning the beneficial ownership of our
outstanding Ordinary Shares for all shareholders known to the Company to
beneficially own or exercise control or direction over more than 5% of our
Ordinary Shares, see "Item 6. Share Ownership." None of such shareholders have
different voting rights with respect to the Company's affairs.
RELATED PARTY TRANSACTIONS
MANAGEMENT AND SERVICES AGREEMENTS
In February 2000, the Company signed an agreement with TAT
Industries, to purchase the business and operations of TAT Industries for the
manufacture of aviation accessories and the lease of certain real estate and
buildings. Pursuant to the terms of the agreement, all of the employees of TAT
Industries were transferred to the Company effective January 1, 2000, without
any change in the conditions of their employment. TAT Industries will pay the
Company $50,000 per year for administrative and accounting personnel, and
secretarial staff who served as employees of TAT Industries that are being
transferred to the Company and will continue to provide such services.
In addition, pursuant to the terms of the February 2000 agreement,
the Company and TAT Industries entered into a lease agreement, pursuant to which
the Company leased from TAT Industries, effective as of January 1, 2000, the
real estate and buildings encompassing an area of approximately 29.5 dunams for
a period of 24 years and eleven months. In consideration for the lease
agreement, the Company will pay TAT Industries annual rentals of approximately
$300,000, with an additional incremental payment of 2% per year, and which
rentals are subject to revaluation every fifth year.
OTHER TRANSACTIONS
The Company's Israeli operations employ the services of an agent, Gal
Tech Inc. (a company owned by Shlomo Ostersetzer, Dov Zeelim and Israel Ofen,
all of them are officers and Directors of the Company) which receives 10%
commission on all purchases in North America and 3% commission on sales to North
America [not including sales of heat transfer products] (with a limitation that
these amounts won't exceed 5% commission on purchases plus 5% commission on
sales). In the years ended December 31, 2001 and 2002, the Company paid
approximately $395,000 and $503,000 to Gal Tech, respectively, in accordance
with such agreement. Effective January 1, 2003 Ifat Frenkel (the daughter of Dov
Zeelim) became the President of GalTech.
TAT Industries granted the Company an option to purchase the EFACS
technology and all of the rights related thereto for an aggregate consideration
which includes a 17% royalty on the first $10 million in revenues received by
the Company from sales of products (including licensing fees) utilizing the
EFACS technology, a 7% royalty on all such revenues in excess of $10 million,
and the payment of all royalties due to the office of the Chief Scientist. The
Company exercised this option in January 1994. TAT Industries has a right of
first refusal on the manufacture of parts for products utilizing the EFACS
technology. In the event that the Company sells any of the EFACS technology, TAT
Industries would receive 25% of all amounts received by the Company in
connection therewith.
-24-
OTHER MATTERS
Mr. Shlomo Ostersetzer serves as the Chairman of the Board of TAT
Industries. Mr. Dov Zeelim serves as Vice Chairman of TAT Industries. Messrs.
Zeelim and Ostersetzer are both controlling shareholders of TAT Industries,
which is the controlling shareholder of the Company.
Mr. Israel Ofen also serves as President of TAT Industries.
CERTAIN CONSULTANTS TO THE COMPANY
In connection with the acquisition of Airepair, the Company entered
into a consulting and non-compete agreement with the former shareholder of
Airepair. The agreement, which expires in July 2002, provides that such
shareholder shall receive $500 for each day worked at the request of the
Company, in addition to monthly payments of $8,333, or an aggregate of $1.0
million over the term of such agreement. The agreement may be terminated only
upon full payment of the $1.0 million to the former shareholder or his heirs.
In February 2000, the Company entered into an agreement with Renana
Economic Consultancy Ltd. ("Renana") whereby Renana will provide the Company
with economic and business consulting services in connection with the
introduction of the Company on the capital market and with raising capital for
the Company. In consideration for Renana's consulting services, the Company gave
Renana warrants on 225,000 shares of stock which are exercisable over a minimum
of 14 trading days for prices per share ranging from $5 to $8 commencing from
May 1, 2000 through December 31, 2002. All of such warrants have expired.
Item 8. Financial Information
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See the Index to Consolidated Financial Statements accompanying this
report on Page F-1
LEGAL PROCEEDINGS
The Company is not engaged in any legal proceedings, and is not aware
of any pending or threatened litigation, which, in management's view, would have
a material adverse effect on the Company's results of operations or financial
condition. See "Note 11(g) to the Company's Consolidated Financial Statements."
SIGNIFICANT CHANGES
None.
ITEM 9. THE OFFER AND LISTING
NATURE OF TRADING MARKET
The following table sets forth for the fiscal periods indicated the
closing high and low sales prices of the Ordinary Shares in the NASDAQ SmallCap
Market.
The Ordinary Shares were quoted on Nasdaq under the symbol "TATTF"
and began trading on the Nasdaq National Market on November 11, 1993 under the
same symbol. There is currently no trading market for the Ordinary Shares
outside the United States.
-25-
Ordinary Shares
--------------- ---- -----------------------
High Low
Fiscal Year Ended December 31, 1998 4.25 0.75
Fiscal Year Ended December 31, 1999 3.625 1.00
Fiscal Year Ended December 31, 2000 7.5 2.563
Fiscal Year Ended December 31, 2001 3.25 1.70
Fiscal Year Ended December 31, 2002 3.63 1.71
Ordinary Shares
--------------- ----- ----------------------
Calendar Period High Low
Fiscal Year Ended December 31, 2000
First Quarter 7.5 3.344
Second Quarter 5.875 3.5
Third Quarter 5.594 3.813
Fourth Quarter 4.875 2.563
Fiscal Year Ended December 31, 2001
First Quarter 3.250 2.375
Second Quarter 3.250 2.71
Third Quarter 2.94 1.70
Fourth Quarter 2.08 1.70
Fiscal Year Ended December 31, 2002
First Quarter 3.05 2.15
Second Quarter 2.75 1.91
Third Quarter 2.49 2.01
Fourth Quarter 3.63 1.71
Fiscal Year Ended December 31, 2002
First Quarter 3.05 2.15
Second Quarter (through June 17, 2002) 2.75 1.65
Ordinary shares
High Low
January 2003 3.60 2.63
February 2003 2.67 2.22
March 2003 3.25 2.35
April 2003 3.60 3.06
May 2003 6.30 3.68
June 1, 2003 through June 3, 2003 6.65 6.00
As of June 3, 2003, there were 92 holders of record of the Company's
4,483,516 outstanding Ordinary Shares. There is currently no trading market for
the Ordinary Shares outside the United States.
The closing sales price for the Ordinary Shares on June 3, 2003 was
$6.16.
ITEM 10. ADDITIONAL INFORMATION
BY-LAWS AND ARTICLES OF INCORPORATION
Neither the Memorandum of Association or Articles of the Company nor
the laws of the State of Israel restrict in any way the ownership or voting or
ordinary shares by nonresidents of Israel, except with respect to citizens of
countries which are in a state of war with Israel.
-26-
EXCHANGE CONTROLS
Nonresidents of Israel who purchase any of the Ordinary Shares
outside of Israel will be able to receive dividends, if such be declared, and
any amounts payable upon the dissolution, liquidation or winding up of the
affairs of the Company, which will be freely repatriable in non-Israeli
currencies (including U.S. Dollars), provided that Israeli income tax has been
paid on such amounts by the holders of such Ordinary Shares.
Prior to May 16, 1998, certain transactions outside of Israel by the
Company required specific approval from the Controller. Since that date, the
aforementioned restrictions have ceased to apply, and there are now virtually no
currency control restrictions in Israel.
LIMITATIONS AFFECTING SECURITY HOLDERS
There are no restrictions on the rights of nonresident or foreign
shareholders to hold or vote the Ordinary Shares.
TAXATION
The following is a summary of the current tax laws of the State of
Israel as they relate to the Company and its shareholders. In addition, the
following also includes a discussion of certain Israeli government programs
benefiting various Israeli businesses including the Company. To the extent that
the discussion is based on legislation which has not yet been the subject of
judicial or administrative interpretation, there can be no assurance that the
views expressed herein will accord with any such interpretation in the future.
This discussion is not intended and should not be construed as legal or
professional tax advice, and does not cover all possible tax considerations.
TAX REFORM
ON JANUARY 1, 2003, THE LAW FOR AMENDMENT OF THE INCOME TAX ORDINANCE
(AMENDMENT NO. 132), 5762-2002, KNOWN AS THE TAX REFORM, CAME INTO EFFECT,
FOLLOWING ITS ENACTMENT BY THE ISRAELI PARLIAMENT ON JULY 24, 2002. ON DECEMBER
17, 2002, THE ISRAELI PARLIAMENT APPROVED A NUMBER OF AMENDMENTS TO THE TAX
REFORM, WHICH CAME INTO EFFECT ON JANUARY 1, 2003.
THE TAX REFORM, AIMED AT BROADENING THE CATEGORIES OF TAXABLE INCOME
AND REDUCING THE TAX RATES IMPOSED ON EMPLOYMENT INCOME, INTRODUCED THE
FOLLOWING, AMONG OTHER THINGS:
[] Reduction of the tax rate levied on capital gains (other than gains
deriving from the sale of listed securities) derived after January 1,
2003, to a general rate of 25% for both individuals and corporations.
Regarding assets acquired prior to January 1, 2003, the reduced tax
rate will apply to a proportionate part of the gain, in accordance
with the holding periods of the asset, before or after January 1,
2003, on a linear basis;
[] Imposition of Israeli tax on all income of Israeli residents,
individuals and corporations, regardless of the territorial source of
income, including income derived from passive sources such as
interest, dividends and royalties;
[] Introduction of controlled foreign corporation (CFC) rules into the
Israeli tax structure. Generally, under such rules, an Israeli
resident who holds, directly or indirectly, 10% or more of the rights
are held directly or indirectly by Israeli residents, and a majority
of whose income in a tax year is considered passive income, will be
liable for tax on the portion of such income attributed to his
holdings in such corporation, as if such income were distributed to
him as a dividend; and
[] Imposition of capital gains tax on capital gains realized by
individuals as of January 1, 2003, from the sale of shares of
publicly traded companies (such gain was previously exempt from
capital gains tax in Israel). FOR INFORMATION WITH RESPECT TO THE
APPLICABILITY OF ISRAELI CAPITAL GAINS TAXES ON THE SALE OF ORDINARY
SHARES, SEE "CAPITAL GAINS TAX ON SALES OF OUR ORDINARY SHARES "
BELOW:
[] Introduction of a new regime for the taxation of shares and options
issued to employees and officers (including directors).
-27-
GENERAL CORPORATE TAX STRUCTURE
In general, Israeli companies are currently subject to Company Tax at
the rate of 36% of taxable income. Commencing in the tax year 1993, the regular
rate of company tax to which Israeli companies are subject, decreased by 1% each
year, i.e. from 39% in 1993 down to 36% in 1996 and thereafter. However, the
effective rate payable by a company which derives income from an "Approved
Enterprise" (as further discussed below) may be considerably less. See "Law for
the Encouragement of Capital Investments, 1959."
TAXATION UNDER INFLATIONARY CONDITIONS
The Income Tax Law (Adjustment for Inflation), 1985 (the "Adjustment
for Inflation Law") was designed to neutralize the erosion of capital
investments in businesses for Israeli tax purposes and to prevent unintended tax
benefits resulting from the deduction of inflationary financial expenses. The
law applies a supplementary set of inflationary adjustments to the normal
taxable profit computed according to regular historical cost principles.
The Adjustment for Inflation Law introduced a special tax adjustment
for the preservation of equity based on changes in the Consumer Price Index
whereby certain corporate assets are classified broadly into fixed (inflation
resistant) assets and non-fixed assets. Where the "equity aggregate," as defined
in the Adjustment for Inflation Law, exceeds zero, a tax deduction which takes
into account the effect of inflationary change on such excess is allowed (up to
a ceiling of 70% of taxable income for companies in any single tax year, with
the unused portion permitted to be carried forward on a linked basis with no
ceiling). If the "equity aggregate" is below zero, then such excess multiplied
by the annual inflation change is added to taxable income.
In addition, subject to certain limitations, depreciation on fixed
assets and losses carried forward are adjusted for inflation based on changes in
the Consumer Price Index.
LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969
The Company currently qualifies as an "Industrial Company" within the
definition of the Law for the Encouragement of Industry (Taxes), 1969 (the
"Industry Encouragement Law"). According to the Industry Encouragement Law, an
"Industrial Company" is a company resident in Israel, at least 90% of the income
of which in any tax year (exclusive of capital gains, interest, dividends and
income from defense loans) is derived from an "Industrial Enterprise" owned by
it. An "Industrial Enterprise" is defined by that law as an enterprise whose
major activity in a given tax year is industrial production activity.
Included among the tax benefits for an Industrial Company are
deductions of 12.5% per annum of the purchase price of a good-faith acquisition
of a patent or of know-how.
Eligibility for the benefits under the Industry Encouragement Law is
not subject to receipt of prior approval from any governmental authority. No
assurance can be given that the Company will continue to qualify as an
"Industrial Company" or that the benefits described above will be available in
the future.
LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959
The production facilities of the Company have been granted "Approved
Enterprise" status under the Law for the Encouragement of Capital Investments,
1959, as amended (the "Investment Law"). The Investment Law provides that a
capital investment in production facilities (or other eligible facilities) may,
after application to the Israel Investment Center, be designated as an Approved
Enterprise. 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 its physical characteristics, i.e., the equipment to be
purchased and utilized pursuant to the program. The tax benefits derived from
any such certificate of approval relate only to taxable profits attributable to
the specific Approved Enterprise.
-28-
The principal tax benefits under the Investment Law include: (i)
reduced Company Tax rates (25% rather than the prevailing Company Tax rate, or,
in a partly approved enterprise known as a "mixed enterprise," a weighted
combination of the various applicable rates) for a period of up to seven to 10
years commencing with the year in which the Approved Enterprise first generated
taxable income (limited to 12 years from commencement of production or 14 years
from the date of approval, whichever is earlier); (ii) certain government
grants, or, at the Company's election to forgo such grants, an alternative
package of tax benefits (the "Alternative Package"), in which the Company's
undistributed income derived from an Approved Enterprise will be exempt from
both Company Tax and Income Tax for a period of between two and 10 years
generally (depending on geographic location), and eligibility for other benefits
under the Investment Law for the remainder of the benefits period; (iii) reduced
tax rates on dividends (15% generally, and under the Alternative Package company
tax) resulting in a combined Israeli tax burden on distributed profits totaling
23.5% to 36.25%, if they are derived from income of an Approved Enterprise
during the benefits period, if paid during the benefits period or at any time up
to twelve years thereafter; and (iv) charging accelerated depreciation in
respect of machinery and equipment used by the Approved Enterprise.
Grants and certain other incentives received by a company in
accordance with the Investment Law remain subject to final ratification by the
Israel Investment Center, such ratification being conditional upon fulfillment
of all terms of the approved program. Failure to comply with all such terms may
require the return of such grants and incentives (inclusive of interest as from
the date of the grant).
CAPITAL GAINS AND INCOME TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS
Under existing regulations, any gain realized by a shareholder with
respect to the Ordinary Shares will be exempt from Israeli Capital Gains Tax as
long as the Ordinary Shares are listed on an approved foreign securities market
(which term includes the Nasdaq SmallCap over the counter system in the United
States) and provided that the Company continues to qualify as an Industrial
Company or Industrial Holding Company (generally, a company at least 80% of
whose assets are invested in shares or loans of more than three years' maturity
to an Industrial Company which is an Israeli resident).
On the distribution of dividends other than bonus shares (stock
dividends), income tax is withheld at source at the rate of 25% (or the lower
rate payable with respect to Approved Enterprises - see "Law for the
Encouragement of Capital Investments, 1959"), unless a double taxation treaty is
in effect between Israel and the shareholder's country which provides for a
lower tax rate in Israel on dividends. Residents of the United States generally
will have withholding tax in Israel deducted at source. A treaty between Israel
and the United States (the "Treaty") relating to relief from double taxation
came into effect in 1995. Generally, under the Treaty, the maximum tax on
dividends paid to a holder of Ordinary Shares who is a resident of the United
States will be 25%. Dividends derived from income of an Israeli Company from an
Approved Enterprise will generally be subject to a 15% withholding tax, which
rate is further reduced to 12.5% on dividends not derived from an Approved
Enterprise which are paid to a U.S. corporation owning 10% or more of an Israeli
Company's voting share capital, subject to certain conditions.
A nonresident of Israel who has had income derived or accrued in
Israel from which tax was withheld at source and which constitutes income from
sources including dividends is currently exempt from the duty to file an Israeli
tax return with respect to such income, provided such income was not derived
from a business carried on in Israel by such nonresident, and the nonresident
has no other taxable sources of income in Israel.
LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT,
1984
Under the Law for the Encouragement of Industrial Research and
Development (the "Research Law"), research and development programs approved by
the Research Committee of the Chief Scientist (the "Research Committee") are
eligible for grants or loans if they meet certain criteria in return for the
payment of royalties from the sale of the product developed in accordance with
the program. Once a project is approved the Chief Scientist will award grants of
up to 66% of the project's expenditures in return for royalties.
The terms of these grants prohibit the manufacture outside of Israel,
or the transfer of the technology developed pursuant to the terms of these
grants to any person or entity without the prior consent of the Research
Committee. The Research Law also provides that know-how from the research and
development which is used to produce the product may not be transferred to third
parties without the approval of the Research Committee. Approval of the transfer
may be granted only if the recipient abides by all of the provisions of the
Research Law and regulations promulgated thereunder, including the restrictions
on the transfer of know-how and the obligation to pay additional royalties.
There can be no assurance that any requested consents would be granted.
-29-
The Company is generally required to pay royalties at the rate of
2%-5% of sales of products developed with such grants, up to a dollar linked
amount equal to up to 150% of such grant.
TAX BENEFITS AND GRANTS FOR RESEARCH AND DEVELOPMENT
Israeli tax law allows under certain conditions a tax deduction in
the year incurred for expenditures (including capital expenditures) in
scientific research and development projects, if the research is approved by the
relevant Israeli Government Ministry (determined by the field of research) and
the research is for the promotion of the enterprise and is carried out by or on
behalf of the company seeking such deduction. Expenditures not so approved are
deductible over a three-year period. However, expenditures made out of proceeds
made available to the Company through Government grants are not deductible
according to Israeli Supreme Court decisions.
DOCUMENTS ON DISPLAY
See page 42 and the Exhibits.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not own and has not issued any market risk sensitive
instruments about which disclosure is required to be provided pursuant to this
Item.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable
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 CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER HAVE CONCLUDED, BASED ON
THEIR EVALUATION WITHIN 90 DAYS OF THE FILING DATE OF THIS REPORT, THAT OUR
DISCLOSURE CONTROLS AND PROCEDURES ARE EFFECTIVE FOR GATHERING, ANALYZING AND
DISCLOSING THE INFORMATION WE ARE REQUIRED TO DISCLOSE IN OUR REPORTS FILED
UNDER THE SECURITIES EXCHANGE ACT OF 1934. THERE HAVE BEEN NO SIGNIFICANT
CHANGES IN OUR INTERNAL CONTROLS OR IN OTHER FACTORS THAT COULD SIGNIFICANTLY
AFFECT THESE CONTROLS SUBSEQUENT TO THE DATE OF THE PREVIOUSLY MENTIONED
EVALUATION
ITEM 16. [RESERVED]
-30-
PART III
ITEM 17. FINANCIAL STATEMENTS
See the Index to Consolidated Financial Statements accompanying this
report on page F-1.
Item 18. Financial Statements
Not applicable.
ITEM 19. EXHIBITS
The following exhibits are filed as a part of this Report:
3.1 Memorandum of Association of the Company. (1)
3.2 Articles of Association of the Company. (1)
4.1 Form of Representatives' Warrant. (2)
4.2 Specimen Certificate for Ordinary Shares. (1)
10.1 The Company's 1988 Stock Purchase Plan. (2)
10.2 The Company's 1992 Stock Option Plan. (2)
10.3 Capital Stock and Real Estate Purchase Agreement dated July 8, 1992
among James Magee, Airepair International, Inc., the Company and
TAT-Industries Equipment Industries Ltd. (English Translation). (1)
10.4 Asset Sale and Purchase Agreement dated as of November 30, 1992
between the Company and Limco Manufacturing Corporation. (1)
10.5 Investment Agreement dated December 30, 1992 among the Company and
certain investors. (1)
10.6 Registration Rights Agreement dated December 30, 1992 among the
Company and certain investors, as amended by a Letter Agreement dated
July 23, 1993. (1)
10.7 Option Agreement for EFACS. (2)
10.8 Agreement dated December 1992 between the Company and Poalim. (2)
10.9 Agreement dated November 1991 between the Company and M. H. Meyerson &
Co. Inc. (2)
10.11 Agreement dated November 26, 1992 between the Company and Mulican Ltd.
(2)
10.12 Agreement dated January 1993 between the Company and Sunrise Financial
Group, Inc. (2)
10.13 Agreement dated September 1993 between the Company and Vertical
Financial Ltd. (2)
10.14 Agreement dated March 1993 between the Company and The Canis Major
Group, Inc. (2)
10.15 Agreement dated December 1992 between the Company and Trade Sources
International. (2)
10.16 Agreement dated as of February 3, 1992 between the Company and TAT
Industries relating to the acquisition of the heat exchanger
operations. (2)
10.17 Agreement dated as of January 1, 1993 between the Company and TVG
relating to the transfer of the computerized systems operations. (2)
10.18 Services Agreement, dated January 1992, between the Company and TAT
Industries. (2)
10.19 Services Agreement, dated January 1993, between TAT Industries and
TVG. (1)
10.20 Services Agreement, dated April 23, 1992, between the Company and TAT
Industries. (2)
10.21 Management, Services and Mutual Charges Agreement dated September 29,
1993 between TAT Industries and the Company. (2)
10.22 Voting Agreement, dated September 26, 1993. (2)
10.23 Agreement dated as of January 1, 1994 between the Company and I.
Rotstein Information Systems Ltd. (English summary translation) (3)
10.24 Asset Purchase Agreement, dated December 12, 1994, between Limco
Manufacturing Corporation and Lunn Industries, Inc. (4)
10.25 Capital Stock Purchase Agreement, dated February 24, 1994 among Jamco
Inc., F. Dale Sparks, Airepair International Inc. and the Company. (4)
10.26 Agreement dated December 27, 1994 among the Company, Aryt Industries
Ltd., G.S.T. Ltd., D.T. Industries Inc. and JP MFG. Corp. (English
summary translation).
10.27 Form of subscription agreement (including form of convertible
debenture). (5)
10.28 Agreement between TAT Technologies Ltd. and Meir G. Gold, dated March
28, 1999. (6)
10.29 Agreement dated February 10, 2000 between the Company and TAT
Industries Ltd. (English summary translation). (7)
10.30 The Company's 1999 Share Option Plan. (7)
*23.1 Consent of Kost Forer & Gabbay, independent accountants for the
Company.
-31-
- ----------------------
(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 Registration Statement,
File No. 33-68644
(3) Incorporated by reference to the Company's Annual Report on Form 20-F
for the year ended December 31, 1993.
(4) Incorporated by reference to the Company's Annual Report on Form 20-F
for the year ended December 31, 1994.
(5) Incorporated by reference to the Company's Annual Report on Form 20-F
for the year ended December 31, 1995.
(6) Incorporated by reference to the Company's Annual Report on Form 20-F
for the year ended December 31, 1998.
(7) Incorporated by reference to the Company's Annual Report on Form 20-F
for the year ended December 31, 1999.
(8) Incorporated by reference to the Company's Annual Report on Form 20-F
for the year ended December 31, 2000.
* Filed herewith
-32-
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 20, 2003
-33-
CERTIFICATIONS
CERTIFICATION BY SHLOMO OSTERSETZER PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Shlomo Ostersetzer, certify that:
1. I have reviewed this annual report on Form 20-F of TAT Technologies Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 20, 2003
/S/ Shlomo Ostersetzer
- ----------------------
CHIEF EXECUTIVE OFFICER AND CHAIRMAN
-34-
CERTIFICATION BY DOV ZEELIM PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Dov Zeelim, certify that:
1. I have reviewed this annual report on Form 20-F of TAT Technologies Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 20, 2003
/S/ Dov Zeelim
- --------------
PRESIDENT AND VICE CHAIRMAN
-35-
>
CERTIFICATION BY ISRAEL OFEN PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Israel Ofen, certify that:
1. I have reviewed this annual report on Form 20-F of TAT Technologies Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 20, 2003
/S/ Israel Ofen
- ---------------
CHIEF FINANCIAL OFFICER
-36-
CERTIFICATION BY AVI KAHANA PURSUANT TO
SECURITIES EXCHANGE ACT RULE 13A-14
I, Avi Kahana, certify that:
1. I have reviewed this annual report on Form 20-F of TAT Technologies Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 20, 2003
/S/ Avi Kahana
- --------------
SECRETARY
-37-
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NO. DESCRIPTION NUMBERED PAGES
- ----------- ----------- --------------
*23.1 Consent of Kost Forer & Gabbay, independent accountants for 111
the Company.
*99.1 Certification of Chief Executive Officer pursuant to the
Sarbanes-Oxley Act of 2002
*99.2 Certification of Chief Financial Officer pursuant to the
Sarbanes-Oxley Act of 2002
* Filed herein.
- ---------------------------------
-38-
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2002
IN U.S. DOLLARS
INDEX
PAGE
--------
REPORT OF INDEPENDENT AUDITORS 2
CONSOLIDATED BALANCE SHEETS 3 - 4
CONSOLIDATED STATEMENTS OF INCOME 5
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY 6
CONSOLIDATED STATEMENTS OF CASH FLOWS 7 - 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 - 32
- - - - - - - - - - -
[LOGO] ERNST & YOUNG KOST FORER & GABBAY PHONE: 972-3-6232525
3 Aminadav St. FAX: 972-3-5622555
Tel-Aviv 67067, Israel
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
TAT TECHNOLOGIES LTD.
We have audited the accompanying consolidated balance sheets of TAT
Technologies Ltd. ("the Company") and its subsidiary as of December 31, 2002 and
2001, 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, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We did not audit the financial statements of Limco-Airepair Inc., a
wholly-owned U.S. subsidiary, which assets included in consolidation constitute
approximately 33% and 35% of total consolidated assets as of December 31, 2002
and 2001, respectively, and which revenues included in consolidation constitute
approximately 40%, 39% and 36% of total consolidated revenues for the years
ended December 31, 2002, 2001 and 2000, respectively. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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 the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiary as of December 31, 2002 and 2001, and the
consolidated results of their operations and cash flows for each of the three
years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States.
Tel-Aviv, Israel KOST FORER & GABBAY
March 25, 2003 A Member of Ernst & Young Global
F-2
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands
DECEMBER 31,
------------------
2002 2001
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,158 $ 2,841
Restricted short-term bank deposit (Note 11d) 440 889
Marketable securities (Note 3) 2,271 1,787
Trade receivables (net of allowance for
doubtful accounts of $ 143 and $ 120 as of
December 31, 2002 and 2001, respectively) 4,928 4,792
Other accounts receivable and prepaid expenses 836 377
Inventories (Note 4) 11,495 11,086
------- -------
TOTAL current assets 26,128 21,772
------- -------
LONG-TERM INVESTMENTS:
Severance pay fund 2,462 2,401
------- -------
TOTAL long-term investments 2,462 2,401
------- -------
PROPERTY, PLANT AND EQUIPMENT, NET (Note 5) 5,510 5,569
------- -------
OTHER ASSETS, NET
Goodwill, net (Note 6) 599 599
Other intangible assets, net (Note 7) 46 85
------- -------
645 684
------- -------
TOTAL assets $34,745 $30,426
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
DECEMBER 31,
--------------------
2002 2001
--------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term loans (Note 10) $ 249 $ 414
Trade payables 1,417 1,037
TAT - current account (Note 9) 32 151
Other accounts payable and accrued expenses (Note 8) 2,248 1,660
Declared dividend (Note 13e) 2,018 --
-------- --------
TOTAL current liabilities 5,964 3,262
-------- --------
LONG-TERM LIABILITIES:
Long-term loans, net of current maturities (Note 10) 294 543
Accrued severance pay 2,744 2,697
Long-term deferred tax liability 324 76
-------- --------
TOTAL long-term liabilities 3,362 3,316
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)
SHAREHOLDERS' EQUITY:
Share capital (Note 13):
Ordinary shares of NIS 0.9 par value -
Authorized: 7,000,000 shares as of December 31,
2002 and 2001; Issued and outstanding:
4,483,516 shares as of December 31, 2002 and 2001 1,781 1,781
Additional paid-in capital 28,311 28,311
Accumulated other comprehensive loss (424) (424)
Accumulated deficit (4,249) (5,820)
-------- --------
TOTAL shareholders' equity 25,419 23,848
-------- --------
TOTAL liabilities and shareholders' equity $ 34,745 $ 30,426
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
U.S DOLLARS IN THOUSANDS (EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
-------- ------- -------
Revenues (Note 16) $ 26,280 $ 25,051 $ 28,424
Cost of revenues 17,158 16,924 18,430
-------- -------- --------
Gross profit 9,122 8,127 9,994
-------- -------- --------
Research and development costs, net (Note 17a) 204 257 334
Sales and marketing expenses 2,075 1,823 1,681
General and administrative expenses 2,994 3,235 3,472
-------- -------- --------
5,273 5,315 5,487
-------- -------- --------
Operating income 3,849 2,812 4,507
Financial income (expenses), net (Note 17b) 99 (78) 211
Other income (expenses), net (Note 17c) 8 (1) 752
-------- -------- --------
Income before income taxes 3,956 2,733 5,470
Income taxes (Note 15) 367 75 23
-------- -------- --------
Net income $ 3,589 $ 2,658 $ 5,447
======== ======== ========
Basic net earnings per share (Note 14) $ 0.80 $ 0.59 $ 1.22
======== ======== ========
Diluted net earnings per share (Note 14) $ 0.77 $ 0.57 $ 1.13
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
F-5
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
ACCUMULATED TOTAL
ADDITIONAL OTHER PARENT COMPRE- TOTAL
SHARE PAID-IN COMPREHENSIVE ACCUMULATED COMPANY HENSIVE SHAREHOLDERS'
CAPITAL CAPITAL INCOME (LOSS) DEFICIT SHARES INCOME EQUITY
-------------------------------------------------------------------------------------
Balance as of January 1, 2000 $ 1,781 $ 34,794 $ 966 $(12,251) $ (92) $ 25,198
Comprehensive income:
Net income -- -- -- 5,447 -- $ 5,447 5,447
Realization of available-for-sale
marketable securities,net -- -- (1,303) -- -- (1,303) (1,303)
Distribution to the parent company -- (6,478) -- (1,674) -- -- (8,152)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income $ 4,144
========
Balance as of December 31, 2000 1,781 28,316 (337) (8,478) (92) 21,190
Comprehensive income:
Net income -- -- -- 2,658 -- $ 2,658 2,658
Realization of available-for-sale
marketable securities, net -- -- (87) -- -- (87) (87)
Other comprehensive income (loss):
Realization of parent company shares -- (5) -- -- 92 -- 87
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income $ 2,571
========
Balance as of December 31, 2001 1,781 28,311 (424) (5,820) -- 23,848
Comprehensive income:
Net income -- -- -- 3,589 -- $ 3,589 3,589
Declared dividend -- -- -- (2,018) -- -- (2,018)
-------- -------- -------- -------- -------- -------- --------
Total comprehensive income $ 3,589
========
Balance as of December 31, 2002 $ 1,781 $ 28,311 $ (424) $ (4,249) $ -- $ 25,419
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
---------------------------
2002 2001 2000
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,589 $ 2,658 $ 5,447
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 994 1,230 1,246
Accrued interest on short-term and
restricted bank deposits -- -- (48)
Loss (gain) on sale of property and equipment (11) 10 127
Loss (gain) on sale of marketable securities 3 (9) (879)
Deferred income taxes, net 131 27 --
Trading securities, net 50 (755) 777
Decrease (increase) in trade receivables (136) 624 (170)
Decrease (increase) in other accounts receivable
and prepaid expenses (342) 74 (145)
Increase in inventories (409) (1,063) (482)
Increase (decrease) in trade payables 380 (770) 250
Increase (decrease) in other accounts payable
and accrued expenses 588 (465) 53
Accrued severance pay, net (14) (8) (357)
------- ------- -------
Net cash provided by operating activities 4,823 1,553 5,819
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in short-term and restricted bank deposits -- -- (2,224)
Proceeds from short-term bank deposits 449 2,329 1,706
Proceeds from sale of available-for-sale securities 1,089 3,988 941
Proceeds from related parties -- 8 84
Proceeds from sale of property and equipment 14 523 117
Proceeds from sale of investment in an affiliate -- -- 579
Proceeds from withdrawal of long-term deposits -- 5 --
Proceeds from sale of investment in TAT -- 87 --
Purchase of property and equipment (899) (1,131) (2,175)
Purchase of available-for-sale securities (1,626) (3,349) (1,500)
Investment in long-term deposits -- -- (5)
------- ------- -------
Net cash provided by (used in) investing activities (973) 2,460 (2,477)
------- ------- -------
The accompanying notes are an integral part of the
consolidated financial statements.
F-7
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
YEAR ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank credit, net -- (22) 22
Principal payments of long-term loans (414) (732) (582)
Repayment of loan from TAT -- (1,988) --
Purchase of other assets -- (37) (115)
Distribution to the parent company (1) -- -- (4,942)
TAT - current account (119) (64) 215
------- ------- -------
Net cash used in financing activities (533) (2,843) (5,402)
------- ------- -------
Effect of exchange rate changes on cash and cash equivalents -- -- (32)
------- ------- -------
Increase (decrease) in cash and cash equivalents 3,317 1,170 (2,092)
Cash and cash equivalents at the beginning of the year 2,841 1,671 3,763
------- ------- -------
Cash and cash equivalents at the end of the year $ 6,158 $ 2,841 $ 1,671
======= ======= =======
(1) DISTRIBUTION TO THE PARENT COMPANY:
The net book value of the assets acquired
at the date of acquisition:
Working capital, net $ 143
Property and equipment, net 879
Long-term investments 200
Long-term loan from TAT 1,988
Distribution to the parent company (8,152)
-------
$(4,942)
=======
(2) SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING
AND FINANCING ACTIVITIES:
Sale of property and equipment $ -- $ -- $ 480
Receivables on account of
property and equipment -- -- (480)
Declared dividend 2,018 -- --
------- ------- -------
$ 2,018 $ -- $ --
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:
Cash paid during the year for:
Interest $ 32 $ 171 $ 190
======= ======= =======
Income taxes $ 99 $ 116 $ 134
======= ======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
F-8
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 1:- GENERAL
a. TAT Technologies Ltd. (the "Company") is an Israeli corporation. The
Company and Limco-Airepair Inc. ("Limco-Airepair"), a wholly-owned U.S.
subsidiary, are engaged in the manufacture, repair and overhaul of heat
exchanging equipment. The principal markets of the Company and its
subsidiary are Israel, Europe and the United States. The Company and
its subsidiary sell their products mainly to the aircraft industry.
b. During the first quarter of 2000 (effective January 1st), an agreement
was signed between the Company and TAT Industries Ltd. (the "parent
company" or "TAT"), according to which the Company acquired TAT's
business and related assets, including inventories and equipment, in
the field of aircraft industry.
The Company also assumed TAT's liabilities to its employees and to the
bank in the amount of $ 2,200. The excess of payment over the book
value of the acquired assets and business totaled $ 2,323.
To secure the loan from TAT and other commitments according to the
agreement, the Company placed an unlimited fixed charge on its property
and equipment.
The following is a summary of the net book value of the assets acquired
and liabilities assumed:
Working capital, net $ 3,278
Property and equipment 1,131
Long-term loan (1,300)
Long-term liabilities (436)
---------
$ 2,673
=========
The Company has accounted for the acquisition of the assets and
business of TAT as a combination of businesses under common control in
a manner similar to a pooling of interests.
c. As of December 31, 2002, TAT holds in 69.44% of the Company's shares.
F-9
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.
b. Financial statements in U.S. dollars:
The majority of the Company and its subsidiary's revenues is generated
in U.S. dollars ("dollar"). In addition, a substantial portion of the
Company and its subsidiary's costs is incurred in dollars. The
Company's management believes that the dollar is the primary currency
of the economic environment in which the Company and its subsidiary
operate. Thus, the functional and reporting currency of the Company and
its subsidiary is the dollar.
Accordingly, monetary accounts maintained in currencies other than the
dollar are remeasured into dollars in accordance with Statement of
financial Accounting Standard No. 52 "Foreign Currency Translation"
("SFAS No. 52"). All transaction gains and losses of the remeasured
monetary balance sheet items are reflected in the statement of
operations as financial income or expense, as appropriate.
c. Principles of consolidation:
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. Intercompany balances and
transactions, including profits from intercompany sales not yet
realized outside the Group, 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. Restricted short-term bank deposit:
A restricted short-term bank deposit is a deposit with maturity of more
than three months but less than one year. The deposit is NIS and bears
interest at a rate of 9%. The short-term deposit is presented at its
cost including accrued interest. The short-term bank deposit is used as
security for the Company's bank loan.
F-10
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
f. Marketable securities:
The Company accounts for its investments in marketable securities in
accordance with Statement of Financial Accounting Standard Board No.
115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS No. 115").
Management determines the classification of its investments in
marketable debt and equity securities at the time of purchase and
reevaluates such determinations as of each balance sheet date. As of
December 31, 2002 and 2001, all marketable securities covered by SFAS
115, were designated as available-for-sale and trading securities. Debt
securities for which the Company does not have the intent or ability to
hold to maturity are classified as available-for-sale, along with any
investments in equity securities that have not been classified as
"trading securities". Securities available-for-sale are carried at fair
value, with the unrealized gains and losses, net of income taxes,
reported as a separate component of shareholders' equity, "Accumulated
other comprehensive income (loss)". 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
(expenses)".
The Company's trading securities are carried at fair value based upon
the quoted market price of those investments. Net realized and
unrealized gains and losses on these securities are included in the
statements of income as "Other income (expenses)", as appropriate.
g. Inventories:
Inventories are stated at the lower of cost or market value. Inventory
write-offs are provided to cover risks arising from slow-moving items.
Cost is determined as follows:
Raw materials and components - using the "first-in, first-out" method.
Work in progress - represents the cost of manufacturing with the
addition of allocable indirect manufacturing costs net of customer
advances.
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:
%
--------
Land and buildings 4
Machinery and equipment 10-25
Motor vehicles 15
Office furniture and equipment 6-33
F-11
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
i. The Company's long-lived assets and certain identifiable intangibles
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. Assets to be disposed
of, are reported at the lower of the carrying amount or fair value less
costs to sell.
j. Intangible assets:
Intangible assets arising from the acquisition prior to July 1, 2001,
are being amortized on a straight-line basis over their useful life.
Know-how and deferred charges are amortized over 6-10 years.
k. Goodwill:
Goodwill represents excess of the costs over the net assets of
businesses acquired. Goodwill arising from acquisitions prior to July
1, 2001, was amortized until December 31, 2001, on a straight-line
basis over 6-20 years. As from January 1, 2002, Statement of Financial
Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142") requires goodwill to be tested for impairment on
adoption and at least annually thereafter or between annual tests in
certain circumstances, and written down when impaired, rather than
being amortized as previous accounting standards required. Goodwill
attributable to each of the reporting unit is tested for impairment by
comparing the fair value of each reporting unit with its carrying
value. Fair value is determined using discounted cash flows, market
multiples and market capitalization. Significant estimates used in the
methodologies include estimates of future cash flows, future short-term
and long-term growth rates, weighted average cost of capital and
estimates of market multiples for the reportable unit.
l. Research and development:
Research and development costs net of grants and participations
received are charged to expenses as incurred.
m. 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 and included as a
deduction of research and development costs. Research and development
grants amounted to $ 42, $ 65 and $ 38 in 2002, 2001 and 2000,
respectively.
F-12
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
n. 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. Based on the
Company's experience, warranty expenses have been immaterial and,
therefore, the Company did not record warranty provision.
o. Income taxes:
The Company and its subsidiary account for income taxes 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 differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company and its subsidiary
provide a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.
p. Revenue recognition:
Revenues from the sales of products are recognized in accordance with
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements" ("SAB No. 101") when persuasive evidence of an arrangement
exists, delivery of the product has occurred, provided the collection
of resulting receivable is probable, the price is fixed or determinable
and no significant obligation exists. The Company does not grant right
of return.
Revenues from heat exchanging manufacturing technology agreement are
recognized in accordance with Statement of Position 81-1 "Accounting
for Performance of Construction -Type and Certain Production -Type
Contracts" ("SOP 81-1"), using contract accounting on a percentage of
completion method, based on the relationship of actual working hours
incurred to total working hours estimated to be incurred over the
duration of the contract and in accordance with the "Input Method".
Provisions for estimated losses on uncompleted contracts are made in
the period in which losses are first determinable, in the amount of the
estimated loss on the entire contract. As of December 31, 2002 no such
estimated losses were identified.
q. Concentrations of credit risk:
Financial instruments that potentially subject the Company and its
subsidiary to concentrations of credit risk consist principally of cash
and cash equivalents, restricted short-term bank deposit, marketable
securities and trade receivables.
F-13
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Cash and cash equivalents and restricted short-term bank deposit 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 and its subsidiary's cash
and cash equivalents and restricted short-term bank deposit, 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 and long-term investments.
The Company's and its subsidiary's trade receivables are derived mainly
from sales to customers in the United States, Israel and Europe. The
Company and its subsidiary generally do not require collateral,
however, in certain circumstances, the Company may require letters of
credit, other collateral or additional guarantees. Management believes
that credit risks are moderated by the diversity of its end customers
and geographic sales areas. The Company and its subsidiary perform
ongoing credit evaluation of its customers' financial condition. The
allowance for doubtful accounts is determined with respect to specific
debts that are doubtful of collection.
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 expense the net increase in its funded or
unfunded severance liability. The Company's liability for all of its
employees is fully provided by monthly deposits with severance pay
funds, insurance policies, Mivtahim Social Insurance Institution Ltd.
("Mivtahim") and by an accrual. The value of the policies that are
under the control of the Company 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.
The liability provided by deposits with Mivtahim is irrevocably
transferred to Mivtahim and therefore not included in the Company's
balance sheet. Accordingly, the amounts accumulated with Mivtahim, that
are not under the Company's control or management, are not included in
the balance sheet.
Severance expenses were $ 346, $ 318 and $ 427 for the years ended
December 31, 2002, 2001 and 2000, respectively.
F-14
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
s. Fair value of financial instruments:
The following methods and assumptions were used by the Company and its
subsidiary in estimating their fair value disclosures for financial
investments.
The carrying amounts of cash and cash equivalents, restricted
short-term bank deposit, trade receivables, other accounts receivable,
short-term bank credit and 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 trading or
available-for-sale is based on quoted market prices.
The carrying amounts of the Company's long-term borrowing arrangements
approximates their fair value. Fair values were estimated by
discounting the future cash flows using rates currently used for loans
of similar terms and maturities.
t. Basic and diluted net earnings per share:
Basic net earnings per share is computed based on the weighted average
number of Ordinary shares outstanding during each year. Diluted net
earnings per share is computed based on the weighted average number of
Ordinary shares outstanding during each year, plus dilutive potential
Ordinary shares considered outstanding during the year, in accordance
with Statement of Financial Accounting Standard Statement No. 128,
"Earnings Per Share" ("SFAS No. 128").
The weighted average number of shares related to the outstanding
options excluded from the calculations of diluted net earnings per
share was 713,500, 713,500 and 225,000, for the years ended December
31, 2002, 2001 and 2000, respectively.
u. Accounting for stock-based compensation:
The Company has elected to follow Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving
Stock Compensation" ("FIN 44") in accounting for its employee stock
option plans. Under APB 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. Pro-forma
information regarding net income and net earnings per share is required
by Financial Accounting Standard No. 123 "Accounting for Stock Based
Compensation" ("SFAS No. 123"), and has been determined as if the
Company had accounted for its employee stock options under the fair
value method of that Statement. The fair value for these options was
estimated at the grant date using a Black-Scholes option pricing model
with the following weighted-average assumptions: for 1999 risk-free
interest rate of 6% for all periods, a volatility factor of the
expected market price of the Company's Ordinary shares of 0.899,
Dividend yields of 0% for all periods, and a weighted-average expected
life of approximately five years.
F-15
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
The weighted average fair value of the options at their grant dates in
1999, was $ 1.37.
The following table illustrates the effect on net loss if the Company
had applied the fair value recognition provisions SFAS No. 123.
Pro-forma information is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000
------------------- ------------------- -------------------
Net income as reported $ 3,589 $ 2,658 $ 5,447
=================== =================== ===================
Pro forma net income $ 3,589 $ 2,658 $ 5,414
=================== =================== ===================
Pro forma basic net earnings per share $ 0.80 $ 0.59 $ 1.21
=================== =================== ===================
Pro forma diluted net earnings per share $ 0.77 $ 0.57 $ 1.12
=================== =================== ===================
The Company applies SFAS No. 123 and EITF 96-18 "Accounting for Equity
Instruments that are Issued to Other than Employees for Acquiring or in
Conjunction with selling, Goods or Services" with respect to options
issued to non-employees. SFAS 123 requires the use of an option
valuation model to measure the fair value of the options at the grant
date.
v. Recently issued accounting pronouncements in the U.S.:
In June 2002, the FASB issues Statement of Financial Accounting
Standard No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS No. 146"), which addresses significant
issue regarding the recognition, measurement, and reporting of costs
associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 requires that costs associated with exit or
disposal activities be recognized when they are incurred rather than at
the date of a commitment to an exit or disposal plan. SFAS No. 146 is
effective for all exit or disposal activities initiated after December
31, 2002. The Company does not expect the adoption of SFAS No. 146 to
have a material impact on its results of operations or financial
position.
In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, an
interpretation of FASB Statements No. 5, 57, and 107 and Rescission of
FASB Interpretation No. 34" ("FIN No. 45"). FIN No. 45 elaborates on
the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain
F-16
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
FIN No. 45 does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term of the
related guarantee. It also incorporates, without change, the guidance
in FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of
Indebtedness of Others," which is being superseded. The disclosure
provisions of FIN No. 45 are effective for financial statements of
interim or annual periods that end after December 15, 2002, and the
provisions for initial recognition and measurement are effective on a
prospective basis for guarantees that are issued or modified after
December 31, 2002, 45 to have a material impact on its results of
operations or financial position.
In May 2003, the FASB issued Statement of Financial Accounting Standard
No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances) because that financial
instrument embodies an obligation of the issuer. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. The Company
does not expect that the adoption of this standard will have a material
effect on its financial position or results of operations.
w. Reclassification
Certain amounts from prior years have been reclassified to confer with
current classification.
NOTE 3:- MARKETABLE SECURITIES
DECEMBER 31,
----------------------------------------------
2002 2001
---------------------- ---------------------
Debentures and convertible debentures $ 1,198 $ 1,591
Shares 1,073 196
---------------------- ---------------------
$ 2,271 $ 1,787
====================== =====================
The Company's available for sale securities fair value as of December
31, 2002 and 2001 amounted to $ 1,492 and $ 966, respectively. During
2002, 2001 and 2000 the Company recorded proceeds from sales of these
securities in 2002 in the amount of $ 1,089, $ 3,988 and $ 941,
respectively and related gains (losses) of $ (11), $ 17 and $ 819,
respectively, in other income (expenses), net.
The Company's trading securities fair value as of December 31, 2002 and
2001 amounted to $ 779 and $ 821, respectively. During 2002, 2001 and
2000 the Company recorded gains (losses) of $ 8, $ (8) and $ 60,
respectively, on these securities in other income (expenses), net.
F-17
NOTE 4:- INVENTORIES
DECEMBER 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
Raw materials and components $ 2,929 $ 3,255
Work in progress 9,139 8,184
Less - advances from customers (573) (353)
--------------------- ---------------------
$ 11,495 $ 11,086
===================== =====================
NOTE 5:- PROPERTY, PLANT AND EQUIPMENT, NET
Cost:
Land and buildings (1) $ 2,147 $ 2,113
Machinery and equipment (2) 17,571 16,862
Motor vehicles 986 917
Office furniture and equipment 307 296
--------------------- ---------------------
21,011 20,188
--------------------- ---------------------
Accumulated depreciation:
Buildings (1) 510 452
Machinery and equipment (2) 14,175 13,404
Motor vehicles 529 484
Office furniture and equipment 287 279
--------------------- ---------------------
15,501 14,619
--------------------- ---------------------
Depreciated cost $ 5,510 $ 5,569
===================== =====================
Depreciation expenses amounted to $ 955, $ 1,011 and $ 1,025 for the
years ended December 31, 2002, 2001 and 2000, 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 Land
Administration.
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.
(2) Including depreciated cost of equipment manufactured by the Company for
internal use of $ 436 and $ 500 as of December 31, 2002 and 2001,
respectively.
As for charges, see Note 12.
F-18
NOTE 6:- GOODWILL
The changes in the carrying amount of goodwill for the year ended
December 31, 2002 are as follows:
Balance as of January 1, 2002 $ 599
Impairment losses -
-------------------
Balance as of December 31, 2002 $ 599
===================
The unaudited results of operations presented below for the three years
ended December 31, 2002, 2001 and 2000, reflect the impact on results
of operations had the Company adopted the non-amortization provisions
of SFAS No. 142 effective January 1, 2000:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000
----------------- ----------------- -----------------
Reported net income $ 3,589 $ 2,658 $ 5,447
Goodwill amortization - 99 99
----------------- ----------------- ------------------
Adjusted net income $ 3,589 $ 2,757 $ 5,546
================= ================= ==================
Basic earnings per share:
Reported net income $ 0.80 $ 0.59 $ 1.22
Goodwill amortization - 0.02 0.02
----------------- ----------------- ------------------
Adjusted net income $ 0.80 $ 0.61 $ 1.24
================= ================= ==================
Diluted earnings-per-share:
Reported net income $ 0.77 $ 0.57 $ 1.13
Goodwill amortization - 0.02 0.02
----------------- ----------------- ------------------
Adjusted net income $ 0.77 $ 0.59 $ 1.15
================= ================= ==================
As for charges, see Note 12.
F-19
NOTE 7:- OTHER ASSETS, NET
DECEMBER 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
Original amounts:
Deferred charges in respect of Limco-Airepair Inc. $ 1,108 $ 1,108
Rights to know-how 253 253
--------------------- ---------------------
1,361 1,361
--------------------- ---------------------
Accumulated amortization:
Deferred charges in respect of Limco-Airepair Inc. 1,083 1,054
Rights to know-how 232 222
--------------------- ---------------------
1,315 1,276
--------------------- ---------------------
Amortized cost $ 46 $ 85
===================== =====================
Amortization expenses amounted to $ 39, $ 120 and $ 122 for the years
ended December 31, 2002, 2001 and 2000, respectively.
As for charges, see Note 12.
NOTE 8:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
Employees and payroll accruals $ 1,174 $ 1,076
Accrued expenses 359 345
Deferred income 320 -
Other 395 239
--------------------- ---------------------
$ 2,248 $ 1,660
===================== =====================
NOTE 9:- TRANSACTIONS WITH RELATED PARTIES
a. As for the acquisition of assets and business from TAT, see Note 1.
b. TAT retains a first refusal right for a period of ten years ending July
2004 for the purchase of the heat exchanger production line at terms
proposed by the other buyer, and an unlimited first refusal right to
purchase the land and buildings, should the Company be willing to sell
them. (See also Note 11f).
F-20
NOTE 9:- TRANSACTIONS WITH RELATED PARTIES (CONT.)
c. Transactions with TAT:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000
------------------- ------------------ ------------------
Revenues from management fees $ 50 $ 50 $ 50
=================== ================== ==================
Other manufacturing costs (recorded as a deduction
from revenues) $ 210 $ 115 $ 111
=================== ================== ==================
Lease expenses (1) $ 312 $ 306 $ 300
=================== ================== ==================
(1) According to the acquisition agreement of TAT, the Company leased from
TAT the factory premises for an annual amount of approximately $ 300,
increased by 2% annually, subject to a revaluation based on market
value in every five years.
d. Balances with related parties:
DECEMBER 31,
---------------------------------------------
2002 2001
--------------------- ---------------------
TAT - current account (1) $ 32 $ 151
===================== =====================
(1) Linked to the Israeli Consumer Price Index and bears no interest.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
e. Salaries and related benefits to directors employed by
the Company (1) $ 862 $ 915 $ 1,010
================== ================== ==================
Number of directors 3 3 3
================== ================== ==================
(1) The Company paid 5% of the profit that derived from the sale of T.V.G.
Technologies Ltd. shares in 2000, to two directors employed by the
Company.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
2002 2001 2000
------------------ ------------------ -------------------
f. Commissions to a company owned by certain shareholders
(see Note 11b) $ 503 $ 395 $ 442
================== ================== ==================
g. In November, 2000, the Company's Board authorized a modification of the
employment terms of the chairman and a director, as follows:
1. A 25% increase in their salaries and related benefits, effective from
January 1, 2000;
2. Each one is entitled to a bonus of 2.5% of the annual consolidated
operating income, in excess of $ 500.
3. Each one is entitled to an advance notice of 12 months upon
termination.
F-21
NOTE 10:- LONG-TERM LOANS
a. Linkage terms and average interest rates:
CURRENCY WEIGHTED AVERAGE
INTEREST DECEMBER 31
---------------- ------------------------ -------------------------------------
2002 2001 2002 2001
------------ ----------- ----------------- -----------------
%
------------------------
Banks U.S. dollars 3.4 4.1 $ 543 $ 791
Other U.S. dollars - 8.5 - 166
----------------- -----------------
543 957
Less - current maturities 249 414
----------------- -----------------
$ 294 $ 543
================= =================
b. Aggregate maturities of long-term loans:
DECEMBER 31,
---------------------------------------------
2002 2001
--------------------- ----------------------
First year (current maturities) $ 249 $ 414
--------------------- ----------------------
Second year 249 249
Third year 45 249
Fourth year - 45
--------------------- ----------------------
294 543
--------------------- ----------------------
$ 543 $ 957
===================== ======================
c. As for collaterals, see Note 12.
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES
a. The Company and Limco-Airepair obtained from the BIRD Foundation grants
for the support of research and development projects aggregating to $
511. The Company is obligated to pay royalties amounting to 2.5% - 5%
of the sales of the products generated from such projects, up to an
amount equal to 150% of the grant received linked to the U.S. dollars.
The Company does not expect any sales generated from these projects in
the future.
b. The Company is committed to pay to a company owned by certain of its
shareholders for representing the heat exchangers division in North
America (See Note 10f).
As part of the agreement, the Company is committed to represent the
acquired business in North America and to maintain all of the
privileges and commitments of TAT to the mentioned company, i.e. paying
handling fees of 10% of the amount of purchases and 3% of total sales
in North America (provided that these amounts will not exceed 5%
commissions on purchases plus 5% commissions on sales).
F-22
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
c. The Company is committed to pay royalties to another company amounting
to 5% - 6% of sales of products developed through the know-how and
goodwill which were purchased from that company. Total royalties
accrued or paid amounted to $ 39, $ 45 and $ 46 as of December 31,
2002, 2001 and 2000, respectively.
d. The Company is committed to pay marketing commissions to salesmen
amounting to 1% - 12% of total sales contracts which were received
through promotion and distribution carried out by them. Total marketing
commissions accrued or paid amounted to $ 241, $ 233 and $ 224 as of
December 31, 2002, 2001 and 2000, respectively.
e. The Company is committed to pay royalties to a foreign company
amounting to 9% - 12% of sales of the products developed by the other
company. Total royalties accrued or paid amounted to $ 321, $ 158 and $
126 as of December 31, 2002, 2001 and 2000, respectively.
f. The Company entered into an agreement with TAT, whereby in April 1994
the Company exercised the option and purchased the prototype and rights
to manufacture and distribute an air conditioning system without freon
gas (EFACS) for aircraft and trains, which was developed by TAT (see
Note 9b).
The following are the terms of the agreement:
1. TAT has a first refusal right for the manufacture of components of the
air conditioning systems, which are included among the technologies and
components which TAT deals with or will deal with from time to time.
2. The Company is committed to pay TAT the following:
a) Royalties amounting to 17% on the first $ 10,000 in revenues from sales
of the systems, directly or indirectly, and 7% on all such revenues in
excess of $ 10,000.
b) Reimbursement of the royalties due to the Chief Scientist in connection
with sales of the systems.
c) 25% of the proceeds in connection with the transfer or sale of know-how
and/or any rights related to the system.
As of December 31, 2002, the Company has not sold EFACS and, therefore,
the Company has not paid or accrued for this commitment.
g. Litigation:
In July 2000, the District Court rejected the lawsuit of TAT's three
shareholders against the Company and its managers. The Court stated
that the Company and its subsidiary were managed properly and took into
consideration all shareholders interests. It was also stated that all
the related parties transactions were confirmed and reported legally.
The Court ruled that the plaintiffs need to compensate the Company in
the amount of $ 304.
F-23
NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
The plaintiffs appealed to the Supreme Court. In June 2002, the
Company, its managers and the plaintiffs reached an agreement, whereby
the Company waived the court ruling mentioned above and reimbursed the
plaintiffs for litigation expenses in the amount of $ 125 (of which $
90 is covered by the insurance company) and, in return, all mutual
claims were dismissed.
h. Lease commitments:
Limco-Airepair entered into operating lease agreements which expire in
2005. As of December 31, 2002, future minimum rental payments under
non-cancelable operating leases are as follows:
2003 $ 12
2004 7
2005 2
------------
$ 21
============
Total rent expenses for the years ended December 31, 2002, 2001 and
2000 were approximately $ 29, $ 64 and $ 34, respectively. The expenses
for the year ended December 31, 2001 includes expenses paid according
to certain rent agreements with employees.
As for the lease of the factory premises by the Company, see Note 9c.
i. In 2002, the Company's subsidiary has a commitment to purchase
non-serviceable aircraft spare parts assemblies and the complete
technical documentation, as identified in the agreement, in the amount
of $ 1,134. A ten percent down-payment was required and the remaining $
1,021 will be paid in several separate payments according to the terms
of the agreement. As of December 31, 2002, approximately $ 135 of the
commitment had been fulfilled. The Company has a proposed agreement
with a third party to share equally in this purchase commitment and
sales proceeds.
NOTE 12:- CHARGES AND GUARANTEES
a. To secure the Company's liabilities to banks and others, an unlimited
fixed charge was placed on the unpaid share capital, goodwill and motor
vehicles and a floating charge was placed on all of the assets of the
Company.
b. To secure the compliance with the approved enterprise status, the
Company placed a floating charge on the equipment, tools, instruments,
installations and real estate in favor of the State of Israel.
F-24
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)
NOTE 12:- CHARGES AND GUARANTEES (CONT.)
Grants and certain other incentives received by the Company in
accordance with the Investment Law remain subject to Final ratification
by the Israel Investment Center, such ratification being conditional
upon fulfillment of all terms of the approved program. Failure to
comply with all such terms may require the return of such grants and
incentives (inclusive of interest as from the date of the grants).
c. To secure a bank credit received by the Company, the Company pledged a
bank deposit in the amount of $ 440 in 2002 and $ 888 in 2001.
d. The Company provided guarantees in the amount of $ 717 and $ 318, to
secure customer advances and Israeli customs, respectively.
e. The liabilities secured by collaterals are as follows:
DECEMBER 31,
----------------------------------------------
2002 2001
---------------------- ---------------------
Long-term loans, including current maturities $ 543 $ 957
====================== =====================
NOTE 13:- SHAREHOLDERS' EQUITY
The Company's shares are registered with the Securities and Exchange
Commission in the United States and are traded on the NASDAQ (Small Cap
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, as well as the proceeds of any sale in Israel of the
Ordinary shares.
a. Investment in TAT:
In December 1998, the Company acquired 0.48% of the shares of TAT, its
parent company. The investment was presented at cost in the Company's
books.
The Company adopted EITF 98-2 "Accounting by a subsidiary or Joint
Venture for an Investment in the Stock of Its Parent Company or Joint
Venture Company ("EITF 98-2"). EITF 98-2 prescribes that in the
separate financial statements of a subsidiary an investment in the
stock of a parent whose only significant asset is its investments in
the subsidiary is essentially the same as stock of the subsidiary and
should be classified as a reduction from shareholders' equity, in a
manner similar to treasury stock. During the third quarter of 2001, the
Company sold its investment to TAT in consideration of $ 87. The
difference between the proceeds from sale of the investment and the
cost of the investment, in the amount of $ 5, was recorded in
additional paid-in capital.
F-25
NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)
b. 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
Ordinary shares (out of which 87,500 stock options were granted to the
Company's general manager and the vice chairman of the Board) will be
issued upon the exercise of the options granted, at an exercise price
of $ 4 per share. Out of this plan 122,000 options were granted and
3,000 options are still available for future grant. In 1996, 6,000
options have been exercised. Under the terms of the plan, the options
vest ratably over a period of five years commencing with the date of
grant. These options expire in June 2004.
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 Ordinary shares (out of which 315,000
stock options were granted to the Company's general manager and the
Chairman of the Board) will be issued upon the exercise of the options
granted, at an exercise price of $ 4.5 per share (the market price at
the day of grant). Out of this plan 372,500 options were granted and
27,500 options are still available for future grant. Under the terms of
the plan, the options vest after a period of five years commencing with
the date of grant. These options expire in March 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
Ordinary shares (out of which 402,500 stock options were granted to the
Company's general manager, vice general manager and the Chairman of the
Board) will be issued upon the exercise of the options granted, at an
exercise price of $ 1.625 (which approximates the market price on the
date of grant). No options are available for future grant. Under the
terms of the plan, the options are fully vested as of the grant date.
These options expire in January 2009.
The following table is a summary of the activity of the Company's stock
Option plans:
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
2002 2001 2000
------------------------- ----------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ------------ ---------- ------------ ------------ ------------
Outstanding at the beginning of 988,500 $ 2.99 988,500 $ 2.99 988,500 $ 2.99
the year
Granted - $ - - $ - - $ -
----------- ---------- ------------
Outstanding at the end of the year 988,500 $ 2.99 988,500 $ 2.99 988,500 $ 2.99
=========== ============ ========== ============ ============ ============
Exercisable options 988,500 $ 2.99 988,500 $ 2.99 988,500 $ 2.99
=========== ============ ========== ============ ============ ============
F-26
NOTE 13:- SHAREHOLDERS' EQUITY (CONT.)
The options outstanding as of December 31, 2002, have been separated into
ranges of exercise prices, as follows:
OPTIONS WEIGHTED OPTIONS EXERCISE
OUTSTANDING AVERAGE EXERCISABLE
AS OF REMAINING AS OF PRICE OF
EXERCISE DECEMBER 31, CONTRACTUAL DECEMBER 31, OPTIONS
PRICE 2002 LIFE (YEARS) 2002 EXERCISABLE
-------------------------- ------------------ ------------------ ------------------ ------------------
$ 4 116,000 1.4 116,000 $ 4
$ 4.5 372,500 2.2 372,500 $ 4.5
$ 1.625 500,000 6 500,000 $ 1.625
------------------ ------------------
988,500 988,500 $ 2.99
================== ================== ==================
c. In February 2000, the Company entered into an agreement with a
consulting company whereby the consulting company will provide the
Company with consulting services and in consideration will receive
225,000 warrants. Each warrant was exercisable into one Ordinary share
of the Company at an exercise price of $ 5. Each warrant was
exercisable from May 1, 2001 until December 31, 2002. The vesting
schedule for the warrants, was dependent on the market price of the
Company's shares.
Through December 31, 2002 none of the options are vested.
d. Dividends:
Dividends on the Ordinary shares, if any, will be declared and paid in
NIS. Dividends paid to shareholders outside Israel will be paid in
dollars on the basis of the exchange rate prevailing at the date of
payment.
On December 26, 2002, the Company declared a dividend in the amount of
$ 2,018. The dividend was paid on January 23, 2003.
F-27
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)
NOTE 14:- NET EARNINGS PER SHARE
The following table sets forth the computation of historical basic and
diluted net earnings per share:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Numerator: Net income $ 3,589 $ 2,658 $ 5,447
================== ================== ==================
Denominator:
Weighted average Ordinary shares outstanding 4,483,516 4,483,516 4,483,516
================== ================== ==================
Basic net earnings per share - weighted average number of 4,483,516 4,483,516 4,483,516
shares
Effect of dilutive securities:
Employee and non-employee stock options and warrants 167,497 187,980 349,376
------------------ ------------------ ------------------
Denominator for diluted net earnings per share 4,651,013 $ 4,671,496 $ 4,832,892
================== ================== ==================
NOTE 15:- INCOME TAXES
a. Tax benefits under the Law for the Encouragement of Industry
(Taxation), 1969:
The Company is an "industrial company", as defined by this law and, as
such, is entitled to certain tax benefits, mainly accelerated
depreciation of machinery and equipment, as prescribed by regulations
published under the Inflationary Adjustments Law, the right to claim
public issuance expenses and amortization of patents and other
intangible property rights, as a deduction for tax purposes.
b. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured in terms of earnings in NIS after
certain adjustments for increases in the Israeli CPI. As explained in
Note 2b, the financial statements are measured in U.S. dollars. The
difference between the annual change in the Israeli CPI and in the
NIS/dollar exchange rate causes a further difference between taxable
income and the income before taxes shown in the financial statements.
In accordance with paragraph 9(f) of SFAS No. 109, the Company has not
provided deferred income taxes on the difference between the reporting
currency and the tax bases of assets and liabilities.
c. Operating losses carryforward:
The Company has accumulated losses for tax purposes as of December 31,
2002, in the amount of approximately $ 700, which may be carried
forward and offset against taxable income in the future for an
indefinite period.
The Company has accumulated capital losses for tax purposes as of
December 31, 2002, in the amount of approximately $ 1,900, which may be
offset against future capital gains for an indefinite period.
F-28
TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS
NOTE 15:- INCOME TAXES (CONT.)
d. Tax assessments
The Company received tax assessment considered as final through 1996.
Tax assessment process has commenced, for the years 1997-2001. Based on
preliminary negotiations with the income tax authorities, management of
the Company believes that there will be no material additional tax
liability.
e. Income tax reconciliation's:
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,
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Income before taxes as reported in the statements of
income $ 3,956 $ 2,733 $ 5,470
======= ======= =======
Statutory tax rate in Israel 36% 36% 36%
======= ======= =======
Theoretical tax expenses $ 1,424 $ 984 $ 1,969
Increase (decrease) in income taxes resulting from:
Carryforward losses for which valuation allowance was
provided (1,019) (933) (2,298)
Tax adjustments in respect of inflation in Israel and
others (122) (45) 135
Non-deductible expenses for which deferred taxes were
not provided 84 69 217
------- ------- -------
Income taxes as reported in the statements of income $ 367 $ 75 $ 23
======= ======= =======
f. Income before income taxes is composed as follows:
Domestic (Israel) $ 2,961 $ 1,811 $ 4,506
Foreign (United States) 995 922 964
------- ------- -------
$ 3,956 $ 2,733 $ 5,470
======= ======= =======
F-29
NOTE 15:- INCOME TAXES (CONT.)
g. Income taxes included in the statements of income:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Current:
Domestic (Israel) $ - $ - $ -
Foreign (United States) 236 48 23
------------------ ------------------ ------------------
236 48 23
------------------ ------------------ ------------------
Deferred:
Domestic (Israel) - - -
Foreign (United States) 131 27 -
------------------ ------------------ ------------------
131 27 -
------------------ ------------------ ------------------
$ 367 $ 75 $ 23
================== ================== ==================
h. 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:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Deferred tax assets (liabilities):
Provisions for employee benefits and other
temporary differences $ 383 $ 282 $ 352
Tax loss carryforward 168 1,886 3,062
------------------ ------------------ ------------------
Deferred tax assets 551 2,168 3,414
------------------ ------------------ ------------------
Property, plant and equipment (425) (321) (153)
Inventories (254) (215) -
------------------ ------------------ ------------------
Deferred tax liabilities 679 (536) (153)
------------------ ------------------ ------------------
Deferred tax assets before valuation allowance (128) 1,632 3,261
Valuation allowance - (1,629) (3,231)
------------------ ------------------ ------------------
Net deferred tax assets $ (128) $ 3 $ 30
================== ================== ==================
Domestic (Israel) $ - $ - $ -
Foreign (United States) (128) 3 30
------------------ ------------------ ------------------
$ (128) $ 3 $ 30
================== ================== ==================
As of December 31, 2002, the Company and its subsidiary did not provide
valuation allowance in respect of deferred tax assets. Management
currently believes that it is more likely than not that the deferred
tax regarding the loss carryforwards and other temporary differences
will be realized in the foreseeable future.
F-30
NOTE 16:- MAJOR CUSTOMER AND GEOGRAPHICAL INFORMATION
a. Summary information about geographic areas:
The Company and its subsidiary operate in one industry segment. Total
revenues are attributed to geographic areas based on the location of
end customers. This data is presented in accordance with Statement of
Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131").
The following presents total revenues, based on the location of the end
customers, for the years ended December 31, 2002, 2001 and 2000 and
long-lived assets as of December 31, 2002, 2001 and 2000:
2002 2001 2000
------------------------------ ------------------------------- --------------------------------
TOTAL LONG-LIVED TOTAL LONG-LIVED TOTAL LONG-LIVED
REVENUES ASSETS REVENUES ASSETS REVENUES ASSETS
-------------- -------------- --------------- --------------- --------------- ---------------
Israel $ 4,277 $ 4,075 $ 5,482 $ 4,294 $ 8,333 $ 4,451
Asia (excluding Israel) 1,382 - 1,327 - 968 -
United States 13,531 2,080 12,393 1,959 12,956 1,953
Europe 6,879 - 5,680 - 5,758 -
Other 211 - 169 - 409 -
-------------- -------------- --------------- --------------- --------------- ---------------
$ 26,280 $ 6,155 $ 25,051 $ 6,253 $ 28,424 $ 6,404
============== ============== =============== =============== =============== ===============
b. Major customer data as a percentage of total revenues:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
%
------------------------------------------------------------
Customer A 17.3 14.6 5.3
Customer B 12.8 11.4 9.9
Customer C 11.9 15.6 20.6
F-31
NOTE 17:- SELECTED STATEMENTS OF INCOME DATA
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
a. Research and development costs, net:
Total cost $ 246 $ 322 $ 372
Less - grants and participations 42 65 38
------------------ ------------------ ------------------
$ 204 $ 257 $ 334
================== ================== ==================
b. Financial income (expenses), net:
Financial income:
Interest on short-term bank deposit and others $ 203 284 395
------------------ ------------------ ------------------
Financial expenses:
Bank charges (56) (200) (59)
Interest on long-term loans (30) (55) (192)
Foreign currency translation adjustments (18) (107) 67
------------------ ------------------ ------------------
(104) (362) (184)
------------------ ------------------ ------------------
$ 99 (78) 211
================== ================== ==================
c. Other income (expenses), net:
Gain (loss) on sale of property and equipment $ 11 $ (10) $ (127)
Gain on sale of marketable securities classified as
available-for-sale (11) 17 819
Gain (loss) on sale of marketable
securities classified as trading 8 (8) 60
------------------ ------------------ ------------------
$ 8 $ (1) $ 752
================== ================== ==================
NOTE 18:- SUBSEQUENT EVENTS
On May 28, 2003, the Company declared a dividend in the amount of $
1,121. The dividend will be paid on July 21, 2003 to the Company's
shareholders on July 1, 2003 (the ex-date).
F-32