UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 20-F





o
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934





OR




x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended December 31, 2012




OR


o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from __________ to __________




OR


o
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Date of event requiring this shell company report.................




Commission file number: 0-15375




RADA ELECTRONIC INDUSTRIES LTD.


(Exact name of Registrant as specified in its charter


and translation of Registrant's name Into English)




Israel


(Jurisdiction of incorporation or organization)




7 Giborei Israel Street, Netanya 42504, Israel


(Address of principal executive offices)





Shiri Lazarovich, CFO, +972 9 892 1122 (phone), + 972 9 885 5885 (fax)


7 Giborei Israel Street, Netanya 42504, Israel


(Name, telephone, facsimile number and address of company contact person)




Securities registered or to be registered pursuant to Section 12(b) of the Act:




Title of each class
Name of each exchange on which registeredOrdinary Shares, NIS 0.015 Par Value
NASDAQ Capital Market




Securities registered or to be registered pursuant to Section 12(g) of the Act: None





Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None





Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report:





Ordinary Shares, par value NIS 0.015 per share...8,918,647


(As of December 31, 2012)





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.




Yes oNo x









If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.





Yes oNo x




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.




Yes xNo o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).





Yes xNo o





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):




Large accelerated filer o
Accelerated filer o
Non-accelerated filer x




Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:




U.S. GAAP x
International Financial Reporting Standards as issued by the International Accounting Standards Board o
Other o





If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:





Item 17 oItem 18 o




If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).




Yes oNo x










INTRODUCTION





We are an Israel based defense electronics contractor.  We specialize in the development, manufacture and sale of data recording and management systems (such as digital video and data recorders, ground debriefing stations, head-up display cameras), inertial navigation systems for air and land applications, avionics solutions (such as aircraft upgrades, avionics for unmanned aircraft vehicles, or UAVs, store management systems and interface computers) and land radars for force and border protection applications (active protection systems for armored fighting vehicles, hostile fire detection and perimeter surveillance).




Our shares are traded on the NASDAQ Capital Market under the symbol "RADA."  As used in this annual report, the terms "we," "us" and "our" mean RADA Electronic Industries Ltd. and its subsidiaries, unless otherwise indicated.




Our consolidated financial statements appearing in this annual report are prepared in U.S. dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP.  All references in this annual report to "dollars" or "$" are to U.S. dollars and all references in this annual report to "NIS" are to New Israeli Shekels.




Statements made in this annual report concerning the contents of any contract, agreement or other document are summaries of such contracts, agreements or documents and are not complete descriptions of all of their terms.  If we filed any of these documents as an exhibit to this annual report or to any previous filing with the Securities and Exchange Commission, or the SEC, you may read the document itself for a complete recitation of its terms.




Except for the historical information contained in this annual report, the statements contained in this annual report are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of operations.  Such forward-looking statements reflect our current view with respect to future events and financial results.  We urge you to consider that statements which use the terms "anticipate," "believe," "do not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar expressions are intended to identify forward-looking statements.  We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements.  Such forward-looking statements are also included in Item 4 – "Information on the Company" and Item 5 – "Operating and Financial Review and Prospects."Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward-looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof.  We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 3D. "Key Information - Risk Factors."




i





TABLE OF CONTENTS




Page NoPART IITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
1ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE
1ITEM 3.
KEY INFORMATION
1A.
Selected Financial Data
1B.
Capitalization and Indebtedness
2C.
Reasons for the Offer and Use of Proceeds
2D.
Risk Factors
2ITEM 4.
INFORMATION ON THE COMPANY
12A.
History and Development of the Company
12B.
Business Overview
12C.
Organizational Structure
20D.
Property, Plants and Equipment
20ITEM 4A.
UNRESOLVED STAFF COMMENTS
20ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
21A.
Operating Results
21B.
Liquidity and Capital Resources
27C.
Research and Development, Patents and Licenses
29D.
Trend Information
30E.
Off-Balance Sheet Arrangements
30F.
Tabular Disclosure of Contractual Obligations
30ITEM 6.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
31A.
Directors and Senior Management
31B.
Compensation
33C.
Board Practices
33D.
Employees
38E.
Share Ownership
39ITEM 7.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
40A.
Major Shareholders
40B.
Related Party Transactions
41C.
Interests of Experts and Counsel
42ITEM 8.
FINANCIAL INFORMATION
42A.
Consolidated Statements and Other Financial Information
42B.
Significant Changes
42ITEM 9.
THE OFFER AND LISTING
43A.
Offer and Listing Details
43B.
Plan of Distribution
43C.
Markets
44D.
Selling Shareholders
44E.
Dilution
44F.
Expense of the Issue
44ITEM 10.
ADDITIONAL INFORMATION
44A.
Share Capital
44B.
Memorandum and Articles of Association
44C.
Material Contracts
47D.
Exchange Controls
47E.
Taxation
47F.
Dividend and Paying Agents
53G.
Statement by Experts
53H.
Documents on Display
53I.
Subsidiary Information
54
 ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
54ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
54  ii
  PART II
55ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
55ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
55ITEM 15.
CONTROLS AND PROCEDURES
55ITEM 16.
RESERVED.
56ITEM 16A.
AUDIT COMMITTEE FINANCIAL EXPERT
56ITEM 16B.
CODE OF ETHICS
56ITEM 16C.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
57ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
57ITEM 16E.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
57ITEM 16F.
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
57ITEM 16G.
CORPORATE GOVERNANCE
57ITEM 16H.
MINE SAFETY DISCLOSURE
57PART III
58ITEM 17.
FINANCIAL STATEMENTS
58ITEM 18.
FINANCIAL STATEMENTS
58ITEM 19.
EXHIBITS
58




iii





PART I




ITEM 1.
IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS




Not applicable.




ITEM 2.
OFFER STATISTICS AND EXPECTED TIMETABLE




Not applicable.




ITEM 3.
KEY INFORMATION




A.           Selected Financial Data




We derived the following consolidated statements of operations data for the years ended December 31, 2010, 2011 and 2012 and the consolidated balance sheet data as of December 31, 2011 and 2012 from our audited consolidated financial statements included elsewhere in this annual report.  We derived the consolidated statements of operations data for the years ended December 31, 2008 and 2009, and the consolidated balance sheet data as of December 31, 2008, 2009 and 2010 from our audited consolidated financial statements that are not included in this annual report.




Year Ended December 31,2008


2009


2010


2011


2012(U.S. dollars in thousands, except per share data)Revenues

$
17,881


$
18,442


$
27,523


$
19,405


$
21,551Cost of revenues


13,665



12,223



20,117



13,800



16,233Gross profit


4,216



6,219



7,406



5,605



5,318Research and development, net


686



1,616



1,182



2,543



2,423Marketing and selling


1,517



1,607



2,563



2,106



1,664General and administrative


1,837



1,937



1,732



1,997



2,243Operating income (loss)


176



1,059



1,929



(1,041
)


(1,012
)Financial expense, net


(734
)


(832
)


(1,184
)


(478
)


(1,043
)Net Income (loss)

$
(558
)

$
227


$
745


$
(1,519
)

$
(2,055
)Net (income) loss attributable to non-controlling interest


(18
)


(14
)


(11
)


(7
)


4Net income (loss) attributable to RADA Electronic Industries' shareholders

$
(576
)

$
213


$
734


$
(1,526
)

$
(2,051
)Basic and diluted net income (loss) per Ordinary share attributable for

RADAElectronic Industries' shareholders

$
(0.07
)

$
0.02


$
0.08


$
(0.17
)

$
(0.23
)Weighted average number of shares used to

compute basic and diluted net income (loss) per share


8,855



8,862



8,869



8,899



8,919










As of December 31,2008


2009


2010


2011


2012(U.S. dollars in thousands)BALANCE SHEET DATA:Working capital

$
6,232


$
4,773


$
7,594


$
2,954


$
1,977Total assets


17,844



18,989



27,098



24,190



22,886Short-term credits and current maturities of long-term loans


162



184



4,274



6,338



7,140Convertible note - short term


-



2,482



-



2,810



3,000Long-term debt, net of current maturities


1,579



1,410



881



176



-Convertible note - long term


1,980



-



2,598



-



-Shareholders' equity


6,996



7,291



8,583



7,224



5,906




B.            Capitalization and Indebtedness





Not applicable.




C.
Reasons for the Offer and Use of Proceeds





Not applicable.




D.
Risk Factors





Investing in our ordinary shares involves a high degree of risk and uncertainty.  You should carefully consider the risks and uncertainties described below before investing in our ordinary shares.  Our business, prospects, financial condition and results of operations could be adversely affected due to any of the following risks.  In that case, the value of our ordinary shares could decline, and you could lose all or part of your investment.




Risks Related to Our Business and Our Industry




We have a history of operating losses and may not be able to sustain profitability in the future.  To the extent that we continue to incur operating losses, we may not have sufficient working capital to fund our operations in the future.




We incurred operating losses in two of the last five years and may not be able to achieve or sustain profitable operations in the future or generate positive cash flows from operations.  As of December 31, 2012, our accumulated deficit was $65 million.  To the extent that we incur operating losses in the future or are unable to generate free cash flows from our business, we may not have sufficient working capital to fund our operations and will be required to obtain additional financing.  Such financing may not be available, or, if available, may not be on terms satisfactory to us.  If adequate funds are not available to us, our business, and results of operations and financial condition will be adversely affected.




We may need to raise additional capital in the future, which may not be available to us; We are under a standstill agreement with our controlling shareholder after not repaying fully and timely the interest and principal due on a loan he provided us.




Our working capital requirements and the cash flow from our operating activities are likely to vary greatly from quarter to quarter, depending on the timing of orders and deliveries, the build-up of inventories, and the payment terms offered to our customers.  As a consequence of our historic losses and our need to invest in research and development, we incurred significant bank debt and sold equity and debt securities in private placements to fund our operating requirements.  Our controlling shareholder and other shareholders have provided us with loans in the aggregate amount of approximately $7.5 million, which are secured by second degree liens over all of our properties.  As of April 24, 2013 we have not timely and fully repaid the principal and interest due on part of such shareholders loans and therefore they may be subject to acceleration upon the demand of the lenders.  However, we reached a standstill agreement with our shareholders according to which, except in extraordinary circumstances, they will not take any action to accelerate the loans prior to January 31, 2014.




2




We may need to raise additional funds for a number of uses, including:




·
Working capital and operating activities;




·
Implementing marketing and sales activities for our products;




·
Maintaining and expanding research and development programs;




·
Hiring additional qualified personnel; and




·
Supporting an increased level of operations.




We may not be able to obtain additional funds on favorable terms.  If we cannot raise needed funds on favorable terms, we may be required to delay, scale back or eliminate some aspects of our operations and we may not be able to:




·
Develop new products;




·
Enhance our existing products;




·
Remain current with evolving industry standards;




·
Fulfill our contractual obligations;




·
Take advantage of future opportunities;




·
Respond to competitive pressures or unanticipated requirements; or




·
Retain our listing on the NASDAQ Capital Market.




If adequate funds are not available to us, our business, and results of operations and financial condition will be adversely affected.  Any equity or debt financings may cause dilution to our then existing shareholders and may increase our financial expenses.  If additional funds are raised through the issuance of equity securities, the net tangible book value per share of our ordinary shares would decrease and the percentage ownership of then current shareholders would be diluted.




Competition in the market for defense electronics is intense.  Our products may not achieve market acceptance which could adversely affect our business, financial condition and results of operations.




The market for our products is highly competitive and we may not be able to compete effectively in our market.  Our principal competitors in the defense electronics market include Elbit Systems Ltd., GE Aviation, Goodrich Corporation, Honeywell International Inc., Israel Aerospace Industries Ltd., or IAI, Northrop Grumman Corporation, Sagem Avionics Inc., Thales Group, Zodiac Group, Astronautics C.A. Ltd and SRC Inc.  We expect to continue to face competition from these and other competitors.  Most of our competitors are larger and have substantially greater resources than us, including financial, technological, marketing and distribution capabilities, and enjoy greater market recognition than we do.  These competitors are able to achieve greater economies of scale and may be less vulnerable to price competition than us.  We may not be able to offer our products as part of integrated systems to the same extent as our competitors or successfully develop or introduce new products that are more cost effective or offer better performance than those of our competitors.  Failure to do so could adversely affect our business, financial condition and results of operations.




3




We may not be able to implement our growth strategy which could adversely affect our business, financial condition and results of operations.




In line with our growth strategy, we entered into a number of strategic relationships with Embraer S.A., or Embraer, Hindustan Aeronautics Ltd., or HAL, IAI, Lockheed Martin Corporation, or Lockheed Martin, Rafael Advanced Defense Systems Ltd, or Rafael, and Israel Military Industries Ltd., or IMI,to increase our penetration into the defense electronics market.  We are currently investing and intend to continue to invest significant resources to develop these relationships and additional new relationships.  Should our relationships fail to materialize into significant agreements or should we fail to work efficiently with these companies, we may lose sales and marketing opportunities and our business, results of operations and financial condition could be adversely affected.




Our growth is dependent in part on the development of new products, based on internal research and development.  We may not accurately identify market needs before we invest in the development of a new product.  In addition, we might face difficulties or delays in the development process that will result in our inability to timely offer products that satisfy the market and competing products may emerge during the development and certification process.




Reductions in defense budgets worldwide may cause a reduction in our revenues, which would adversely affect our business, operating results and financial condition.




The vast majority of our revenues are derived from the sale of products with military applications.  These revenues totaled approximately $20.3 million, or 94% of our revenues, in 2012, $17.9 million, or 92% of our revenues, in 2011 and $26.1 million, or 95% of our revenues, in 2010.  The defense budgets of a number of countries may be reduced in the future.  Declines in defense budgets may result in reduced demand for our products and manufacturing services.  This would result in reduction in our core business' revenues and adversely affect our business, results of operations and financial condition.




Unfavorable national and global economic conditions could have a material adverse effect on our business, operating results and financial condition.




Our results of operations can be materially affected by adverse conditions in the financial markets and depressed economic conditions generally.  The turmoil in the credit markets and the global economic downturn that commenced in 2008 and continued through 2012 generally adversely impacted our target customers. During 2011 and 2012, several European countries encountered severe economic difficulties, resulted in the down grading of the credit worthiness of several European countries including France, Spain, Portugal and Greece and led to depressed conditions and the downsizing of the economies in the Euro-zone.  Worsening economic conditions, such as continued European sovereign debt uncertainty, may result in diminished demand for our products and technology and in decreased sales volumes.  In addition, this could result in longer sales cycles and increased price competition for our products.  Any of these events would likely harm our business, operating results and financial condition.




4




Sales of our products are subject to governmental procurement procedures and practices; termination, reduction or modification of contracts with our customers or a substantial decrease in our customers' budgets may adversely affect our business, operating results and financial condition.




Our products are primarily sold to governmental agencies, governmental authorities and government-owned companies, many of which have complex and time consuming procurement procedures.  A substantial period of time often elapses from the time we begin marketing a product until we actually sell that product to a particular customer.  In addition, our sales to governmental agencies, authorities and companies are directly affected by these customers’ budgetary constraints and the priority given in their budgets to the procurement of our products.  A decrease in governmental funding for our customers’ budgets would adversely affect our results of operations.  This risk is heightened during periods of global economic slowdown.  Accordingly, governmental purchases of our systems, products and services may decline in the future as the governmental purchasing agencies may terminate, reduce or modify contracts or subcontracts if:




·
their requirements or budgetary constraints change;




·
they cancel multi-year contracts and related orders if funds become unavailable;




·
they shift spending priorities into other areas or for other products; or




·
they adjust contract costs and fees on the basis of audits.




Any such event may have a material adverse effect on us.




Further, our business with the State of Israel and other governmental entities is, in general, subject to delays in funding and performance of contracts and the termination for convenience (among other reasons) of contracts or subcontracts with governmental entities.  The termination, reduction or modification of our contracts or subcontracts with the Government of Israel in the event of change in requirements, policies or budgetary constraints would have an adverse effect on our business, operating results and financial condition.




If we do not receive the governmental approvals necessary for the export of our products, our revenues may decrease.  Similarly,if our suppliers and partners do not receive government approvals necessary to export their products or designs to us, our revenues may decrease and we may fail to implement our growth strategy.




Israel's defense export policy regulates the sale of our systems and products.  Current Israeli policy encourages export to approved customers of defense systems and products, such as ours, as long as the export is consistent with Israeli government policy.  A license is required to initiate marketing activities.  We are also required to obtain a specific export license for any hardware exported from Israel.  We may not be able to receive all the required permits and licenses for which we may apply in the future.  If we do not receive the required permits for which we apply, our revenues may decrease.




We are subject to laws regulating export of "dual use" items (items that are typically sold in the commercial market, but that also may be used in the defense market) and defense export control legislation.  Additionally, our participation in governmental procurement processes in Israel and other countries is subject to specific regulations governing the conduct of the process of procuring defense contracts.  Furthermore, solicitations for procurements by governmental purchasing agencies in Israel and other countries are governed by laws, regulations and procedures relating to procurement integrity, including avoiding conflicts of interest and corruption in the procurement process.  We may not be able to respond quickly and effectively to changing laws and regulations and any failure to comply with such laws and regulations may subject us to significant liability and penalties.




We depend on sales to key customers and the loss of one or more of our key customers would result in a loss of a significant amount of our revenues, which would adversely affect our business, financial condition and results of operations.




A significant portion of our revenues is derived from a small number of customers.  During the years ended December 31, 2012 and 2011, 54% and 53% of our revenues, respectively, were attributable to three customers. We anticipate that a significant portion of our future revenues will continue to be derived from sales to a small number of customers.  If our principal customers do not continue to purchase products from us at current levels or if such customers are not retained and we are not able to derive sufficient revenues from sales to new customers to compensate for their loss, our revenues would be reduced and adversely affect our business, financial condition and results of operations.




5




We depend on a limited number of suppliers of components for our products and if we are unable to obtain these components when needed, we could experience delays in the manufacturing of our products and our financial results could be adversely affected.




We acquire most of the components for the manufacturing of our products from a limited number of suppliers and subcontractors, most of whom are located in Israel and the United States.  Certain of these suppliers are currently the sole source of one or more components upon which we are dependent.  Suppliers of some of the components for manufacturing require us to place orders with significant lead-time to assure supply in accordance with our manufacturing requirements.  Inadequacy of operating funds may cause us to delay the placement of such orders and may result in delays in supply.  Delays in supply may significantly hurt our ability to fulfill our contractual obligations and may significantly hurt our business and result of operations.  In addition, we may not be able to continue to obtain such components from these suppliers on satisfactory commercial terms.  Temporary disruptions of our manufacturing operations would ensue if we were required to obtain components from alternative sources, which may have an adverse effect on our financial results.




Rapid technological changes may adversely affect the market acceptance of our products and could adversely affect our business, financial condition and results of operations.




The defense electronics market in which we compete is subject to technological changes, introduction of new products, change in customer demands and evolving industry standards.  Our future success will depend upon our ability to keep pace with technological developments and to timely address the increasingly sophisticated needs of our customers by supporting existing and new technologies and by developing and introducing enhancements to our current products and new products.  We may not be successful in developing and marketing enhancements to our products that will respond to technological change, evolving industry standards or customer requirements.  In addition, we may experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements and such enhancements may not adequately meet the requirements of the market and may not achieve any significant degrees of market acceptance.  If release dates of our new products or enhancements are delayed or, if when released, they fail to achieve market acceptance, our business, operating results and financial condition may be adversely affected.




Breaches of network or information technology security, natural disasters or terrorist attacks could have an adverse effect on our business.




Cyber attacks or other breaches of network or IT security, natural disasters, terrorist acts or acts of war may cause equipment failures or disrupt our systems and operations. We may be subject to attempts to breach the security of our networks and IT infrastructure through cyber attack, malware, computer viruses and other means of unauthorized access.  The potential liabilities associated with these events could exceed the insurance coverage we maintain.  Our inability to operate our facilities as a result of such events, even for a limited period of time, may result in significant expenses or loss of market share to other competitors in the defense electronics market.  In addition, a failure to protect the privacy of customer and employee confidential data against breaches of network or IT security could result in damage to our reputation.  To date, we have not been subject to cyber attacks or other cyber incidents which, individually or in the aggregate, resulted in a material impact to our operations or financial condition.




We are subject to risks associated with international operations; we generate a significant portion of our sales from customers located in countries that may be adversely affected by political or economic instability and corruption.




We are a global aviation and defense company with worldwide operations. Although over 37% of our sales are in Israel, North America and Western Europe, we expect to derive an increasing portion of our sales and future growth from other regions such as Latin America, India and Central and Eastern Europe, which may be more susceptible to political or economic instability. In addition, in many less-developed markets, we rely heavily on third-party distributors and other agents for the marketing and distribution of our products and capabilities. Many of these distributors do not have internal compliance resources comparable to ours. Business activities in many of these markets have historically been more susceptible to corruption. If our efforts to screen third-party agents and detect cases of potential misconduct fail, we could be held responsible for the noncompliance of these third parties under applicable laws and regulations, which may adversely affect our reputation and our business, financial condition or results of operations.




6




Exports accounted for 75% of our sales in 2012, 64% of our sales in 2011 and 67% of our sales in 2010.  This subjects us to many risks inherent in engaging in international business, including:




·
Limitations and disruptions resulting from the imposition of  government controls;




·
Changes in regulatory requirements;




·
Export license requirements;




·
Economic or political instability;




·
Trade restrictions;




·
Changes in tariffs;




·
Currency fluctuations;




·
Longer receivable collection periods and greater difficulty in accounts receivable collection;




·
Greater difficulty in safeguarding intellectual property;




·
Difficulties in managing overseas subsidiaries and international operations; and




·
Potential adverse tax consequences.




We may not be able to sustain or increase revenues from international operations and may encounter significant difficulties in connection with the sale of our products in international markets.  Any of those events may adversely affect our business, operating results and financial condition.




In addition, as a company registered with the SEC, we are subject to the regulations imposed by the Foreign Corrupt Practices Act, or FCPA, which generally prohibits registrants and their intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business or obtaining an improper business benefit. We have adopted proactive procedures to promote compliance with the FCPA, but we may be held liable for actions taken by our strategic or local partners or agents even though these partners or agents may not themselves be subject to the FCPA. Any determination that we have violated the FCPA could materially and adversely affect our business, results of operations, and cash flows.




Currency exchange rate fluctuations in the world markets in which we conduct business could have a material adverse effect on our business, results of operations and financial condition.




Most of our revenues are in dollars or are linked to the dollar, while a portion of our expenses, principally salaries and related personnel expenses, are incurred in other currencies, particularly in NIS.  Therefore, our costs in such other currencies, as expressed in dollars, are influenced by the exchange rate between the dollar and the relevant currency.  We are also exposed to the risk that the rate of inflation in Israel will exceed the rate of depreciation of the NIS in relation to the dollar or that the timing of this depreciation lags behind inflation in Israel.  This would have the effect of increasing the dollar cost of our operations.  In the past, the NIS exchange rate with the dollar and other foreign currencies has fluctuated, generally reflecting inflation rate differentials.  We cannot predict any future trends in the rate of inflation in Israel or the rate of depreciation or appreciation of the NIS against the dollar.  If the dollar cost of our operations in Israel increases, our dollar-measured results of operations will be adversely affected. We engage in currency hedging transactions intended to partly reduce the effect of fluctuations in foreign currency exchange rates on our results of operations.  However, such transactions may not materially reduce the effect of fluctuations in foreign currency exchange rates on our results of operations.




7




We are dependent on our senior management and key personnel, and the loss of any key member of our management team could adversely affect our business.




Our future success depends in large part on the continued services of our senior management and key personnel.  In particular, we are dependent on the services of Herzle Bodinger, the executive chairman of our Board of Directors and Mr. Zvi Alon, our chief executive officer.  Any loss of their services or the services of other members of senior management or other key personnel could negatively affect our business.




Claims that our products infringe upon the intellectual property of third parties may require us to incur significant costs, enter into licensing agreements or license substitute technology.




Third parties may assert infringement claims against us or claims that we have violated a patent or infringed on a copyright, trademark or other proprietary right belonging to them.  Any infringement claim, even one without merit, could result in the expenditure of significant financial and managerial resources to defend against the claim.  Moreover, a successful claim of product infringement against us or a settlement could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology.  We might not be able to obtain a license from the third party asserting the claim on commercially reasonable terms, if at all.  We also may not be able to be able to obtain a license from another provider of suitable alternative technology to permit us to continue offering the product.  Infringement claims asserted against us could have a material adverse effect on our business, operating results and financial condition.




We may fail to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002, which could have an adverse effect on our financial results and the market price of our ordinary shares.




The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our executives and directors.  Our efforts to comply with the requirements of Section 404(a) of the Sarbanes-Oxley Act of 2002 governing internal controls and procedures for financial reporting, which started in connection with our 2007 Annual Report on form 20-F, have resulted in increased general and administrative expense and a diversion of management time and attention, and we expect these efforts to require the continued commitment of significant resources.  We may identify material weaknesses or significant deficiencies in our assessments of our internal controls over financial reporting.  Failure to maintain effective internal controls over financial reporting could result in investigation or sanctions by regulatory authorities and could have a material adverse effect on our operating results, investor confidence in our reported financial information and the market price of our ordinary shares.




Risk Factors Related to Our Ordinary Shares




Because one of our shareholders owns a majority of our outstanding shares, investors will not be able to affect the outcomes of shareholder votes.




Mr. Howard Yeung beneficially owned approximately 61.4% of our outstanding shares as of April 24, 2013.  For as long as Mr. Yeung has a controlling interest in our company, he will have the ability to exercise a controlling influence over our business and affairs, including any determinations with respect to potential mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional ordinary shares or other equity securities, our repurchase or redemption of ordinary shares and our payment of dividends. Similarly, as long as Mr. Yeung has a controlling interest in our company, he will have the power to determine or significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to elect all of the members of our board of directors (except outside directors, within the meaning of Israeli law), or prevent an acquisition or any other change in control of us.  Because the interests of Mr. Yeung may differ from the interests of our other shareholders, actions taken by him with respect to us may not be favorable to our other shareholders.




8




Our share price has been volatile in the past and may decline in the future.




Our ordinary shares have experienced significant market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future in response to factors such as the following, some of which are beyond our control:




·
Quarterly variations in our operating results;




·
Operating results that vary from the expectations of securities analysts and investors;




·
Changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;




·
Announcements of technological innovations or new products by us or our competitors;




·
Announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;




·
Changes in the status of our intellectual property rights;




·
Announcements by third parties of significant claims or proceedings against us;




·
Additions or departures of key personnel;




·
Future sales of our ordinary shares;




·
Delisting of our shares from the NASDAQ Capital Market; and




·
Stock market price and volume fluctuations.




Domestic and international stock markets often experience extreme price and volume fluctuations.  Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our ordinary shares.




In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of its securities.  We may in the future be the target of similar litigation.  Securities litigation could result in substantial costs and divert management's attention and resources both of which could have a material adverse effect on our business and results of operations.




Substantial future sales of our ordinary shares by our principal shareholder may depress our share price.




If our principal shareholder sells substantial amounts of his ordinary shares, including shares registered under effective registration statements and shares issuable upon the exercise of outstanding warrants or upon the conversion of convertible notes, or if the perception exists that our principal shareholder may sell a substantial number of our ordinary shares, the market price of our ordinary shares may fall.  Any substantial sales of our shares in the public market also might make it more difficult for us to sell equity or equity related securities in the future at a time and on terms we deem appropriate.




9




We do not intend to pay dividends.




We have never declared or paid cash dividends on our ordinary shares and do not expect to do so in the foreseeable future.  The declaration of dividends is subject to the discretion of our board of directors and will depend on various factors, including our operating results, financial condition, future prospects and any other factors deemed relevant by our board of directors.  You should not rely on an investment in our company if you require dividend income from your investment in our company.  The success of your investment will likely depend entirely upon any future appreciation of the market price of our ordinary shares, which is uncertain and unpredictable.  There is no guarantee that our ordinary shares will appreciate in value or even maintain the price at which you purchased your ordinary shares.




Risks Relating to Our Location in Israel




Political, economic and military instability in Israel may disrupt our operations and negatively affect our business condition, harm our results of operations and adversely affect our share price.




We are incorporated under the laws of, and our principal executive offices and manufacturing and research and development facilities are located in, the State of Israel.  As a result, political, economic and military conditions affecting Israel directly influence us.  Any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel could adversely affect our business, financial condition and results of operations.




Since its establishment in 1948, Israel has been involved in a number of armed conflicts with its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has continued into 2013.  Also, since 2011, riots and uprisings in several countries in the Middle East and neighboring regions have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations.  In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in neighboring areas to Israel, such as Hamas in Gaza and Hezbollah in Lebanon. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.




Our results of operations may be negatively affected by the obligation of our personnel to perform military service.




Many of our employees in Israel are obligated to perform annual military reserve duty and are subject to being called for active duty under emergency circumstances.  If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time.  Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service.  Any disruption in our operations could adversely affect our business.




Service and enforcement of legal process on us and our directors and officers may be difficult to obtain.




Service of process upon our directors and officers and the Israeli experts named in this annual report, most of who reside outside the U.S., may be difficult to obtain within the U.S.  Furthermore, since substantially most our assets, our directors and officers and the Israeli experts named in this annual report are located outside the U.S., any judgment obtained in the U.S. against us or these individuals or entities may not be collectible within the U.S.




There is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities Exchange Act in original actions instituted in Israel.  However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of U.S. courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those Acts.




10




The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from those of a typical U.S. corporation.




We are incorporated under Israeli law and the rights and responsibilities of holders of our ordinary shares are governed by our articles of association and by Israeli law.  These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations.  In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters.  Israeli law provides that these duties are applicable to shareholder votes at the general meeting with respect to, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and actions and transactions involving interests of officers, directors or other interested parties which require the shareholders’ approval.  In addition, a controlling shareholder of an Israeli company or a shareholder who knows that he or she possesses the power to determine the outcome of a vote at a meeting of our shareholders, or who has, by virtue of the company’s articles of association, the power to appoint or prevent the appointment of an office holder in the company, or any other power with respect to the company, has a duty of fairness toward the company.  However, Israeli law does not define the substance of this duty of fairness.  There is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.




Israeli government programs and tax benefits may be terminated or reduced in the future.





We participate in programs of the Office of the Chief Scientist in the Ministry of Industry, Trade and Labor, or OCS, for which we receive funding for the development of technologies and products. The benefits available under these programs depend on meeting specified conditions. For more information about these programs see Item 5. “Operating and financial review – Research & Developments – Chief Scientist (OCS).” If we fail to comply with these conditions, we may be required to pay additional penalties,makerefunds and may be denied future benefits. From time to time, the government of Israel has discussed reducing or eliminating the benefits available under these programs, and therefore these benefits may not be available to us in the future at their current levels or at all.




As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements.  We follow Israeli law and practice instead of NASDAQ rules regarding the composition of the board of directors, director nomination process, compensation of executive officers and the requirement that our independent directors have regularly scheduled meetings at which only independent directors are present.




As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate governance practices instead of certain requirements of The NASDAQ Stock Market Rules.  We follow Israeli law and practice instead of The NASDAQ Stock Market Rules regarding the requirement to obtain shareholder approval for certain dilutive events (such as for the establishment or amendment of certain equity based compensation plans, an issuance that will result in a change of control of the company, certain transactions other than a public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of another company).  As a foreign private issuer listed on the NASDAQ Capital Market, we may also follow home country practice with regard to, among other things, the composition of the board of directors, director nomination process, compensation of officers and quorum at shareholders’ meetings.  A foreign private issuer that elects to follow a home country practice instead of NASDAQ requirements must submit to NASDAQ in advance a written statement from an independent counsel in such issuer’s home country certifying that the issuer’s practices are not prohibited by the home country’s laws.  In addition, a foreign private issuer must disclose in its annual reports filed with the SEC each such requirement that it does not follow and describe the home country practice followed by the issuer instead of any such requirement.  Accordingly, our shareholders may not be afforded the same protection as provided under NASDAQ’s corporate governance rules.




11




ITEM 4.
INFORMATION ON THE COMPANY




A.            History and Development of the Company




We were incorporated under the laws of the State of Israel on December 8, 1970.  We are a public limited liability company under the Israeli Companies Law 1999-5759, or the Israeli Companies Law, and operate under this law and associated legislation.  Our registered offices and principal place of business are located at 7 Giborei Israel Street, Netanya 42504, Israel, and our telephone number is +972-9-892-1111.  Our website address is www.rada.com.  The information on our website is not incorporated by reference into this annual report.




We develop, manufacture and sell defense electronics: avionics solutions (including avionics for unmanned aerial vehicles), data/video recording and management systems, inertial navigation systems and land radars for force and border protection systems.  In addition, we continue to sell and support our commercial aviation legacy products and services, mainly through our Chinese subsidiary.




B.            Business Overview




Industry Overview




Our activity is primarily focused on the defense electronics market.  This market has grown in recent years and is currently a large part of the defense business.  The defense electronics market reflects two contradictory trends, the proliferation of defense electronics on one hand, which has been offset by the significant reduction in the price of electronic systems which is reducing the dollar value of the market.  Today, new military vehicles of all kinds are equipped with significantly more electronic systems than they used to carry in the past.  The increasing usage of advanced electronics in modern vehicles, including upgrades of existing technology and the growing use of unmanned vehicles of all kinds, have provided significant growth to the market.




Today's advanced defense electronics systems typically incorporate components that are derived from the industrial or the consumer electronics markets, especially from the telecom markets.  Most of the defense electronics systems are built with commercial components and even with sub-systems, which reduces the overall price, and at the same time generates complex obsolescence issues.




Purchasers of defense electronics products are either governments or major integrators.  Engagement in business relationships with these customers is complex, has a long sales cycle and requires long-term commitments for future support of delivered hardware.  Production batches of such products are usually small.




Suppliers of defense electronic systems are either providers of sub-systems to major integrators or providers of integrated systems to the industry or to the armed forces.  These companies are typically very large and have diversified product offerings.




New products in the defense electronic market are usually developed utilizing internal and customer sponsored research and development funds and are tailored to specific customer needs.  In many cases, the customer who pays for the design and adaptation limits the use of intellectual property that was funded by it for other applications, due to either commercial or security reasons.




Products and Services




We primarily provide integrated solutions.  Our aim is to provide not only state-of-the-art products, but to also provide comprehensive end-to-end solutions for one or more systems.




Our current product lines are:




·
Data/video recording and management for aerial and land platforms;




·
Inertial navigation systems for aerial and land platforms;




12




·
Avionics solutions (including avionics for UAVs); and




·
Radars for force and border protection systems (land based).




In addition, we continue to support our legacy commercial aviation test stations.




We also provide test and repair services through our China-based subsidiary.




Data/Video Recording and Management




We are one of the world’s leaders in the field of mission data recording, management, and post-mission analysis and debriefing.  Over the past 25 years we have developed, fielded and supported a wide range of solid-state digital recorders, cameras and debriefing systems for aerospace and military applications, including:




·
Flight data recorders, or FDR, for fighter aircraft;




·
Digital video/audio/data recorders, or DVDR (with data transfer functions);




·
High-rate (no compression) data recorders, or HRDR, for aircraft and airborne pods;




·
VRDS – video recorders and airborne data servers (the latest approach to avionic data management);




·
A wide range of head-up-displays color video cameras, or HCVC, for fighter aircraft; and




·
A variety of ground debriefing solutions, or GDS.




Featuring state-of-the-art technologies, our digital recorders are designed for both airborne and land military applications.  Our high-performance recorders feature simultaneous, high-capacity video, audio and data recording, high throughput and mass storage handling capabilities, supporting rapid dissemination and real time playback.  Our video recorders implement MPEG-2 and/or MPEG-4 (H.264) compression formats, supporting up to 128GB of solid state memory, facilitating continuous recording over extended mission durations.




Our GDS feature synchronized video, audio, data, and air combat maneuvering debriefing.  GDS vary from personal, laptop-size debriefing units, through robust desktop multi-channel systems supporting the mission debriefing of four-aircraft formations up to large-scale simultaneous debriefing systems.  These network-based systems support large numbers of participants operating from different locations, and provide advanced data management features.




Our products are fully qualified and operational with fixed and rotary-wing aircraft and land vehicles, and are backed by our teams of experts dedicated to providing global technical and maintenance support.  Our customers include leading air forces and prime integrators worldwide, such as the Israeli Air Force, or IAF, the Chilean Air Force, GE Aviation, Lockheed Martin, Boeing Company, HAL, Embraer, Rafael, IAI, and others.




Inertial Navigation Systems




Leveraging on our in-depth scientific research and algorithmic expertise, utilizing state-of-the-art fiber optic gyro, or FOG, and micro-electro mechanical systems, or MEMS, sensors, and taking advantage of our experience in electronic and mechanical design, we are introducing a line of advanced - yet affordable - inertial navigation systems, or INS.  Our INS products are adaptable to the performance and interface requirements of multiple combat platforms and weapon systems.  Among our navigation products are:




·
R-100F: FOG-based, navigation-grade Embedded GPS-INS;




·
R-200M: Compact, MEMS-based, multiple-sensor aided INS for combat platforms and weapons;




13




·
MAVINS – Modular Avionics and MEMS-Based INS: Specially-designed compact integrated solution for UAVs and disposable applications; and




·
Inertial measurement units or IMU.




Our navigation solutions introduce sophisticated and proprietary sensor fusion algorithms, and embed modular design principles leading to minimal integration efforts into larger mission systems.  The compact, reliable, and affordable INS are applicable to manned and unmanned platforms, as well as to disposable applications.




Our INS line ranges from IMUs through fully-integrated and compact modular avionics and INS/GPS for UAVs, to navigation-grade, high-performance systems.  Our navigation products are backed by our global, dedicated, and professional technical and maintenance services.  We are continuing with our research and development efforts and intend to design a complete family of applications that will provide solutions for various manufacturers' needs.  At the same time, we are marketing our products to our strategic customers and together with them are working to define the next versions of this family of solutions.




Among our customers for navigation solutions are leading air forces and prime integrators worldwide, including the IAF, IAI, Rafael, Embraer, Indra Sistemas, S.A. and India's Defense Research and Development Organization.




Avionics Solutions




We have been a developer and manufacturer of core avionics systems for over 30 years.  We currently offer a wide spectrum of military avionics systems designed for integration in new and upgraded military aircraft and UAVs worldwide.  Our avionics solutions range from fully integrated avionics suites, MOTS core avionics subsystems, to tailor-made "built-to-spec" units, backed by our teams of experts dedicated to providing global technical and maintenance support.




In 2009 we were awarded, as a prime contractor and integrator, an intelligence, reconnaissance and surveillance upgrade program by a strategic customer for its aircraft fleet.  We believe that this program places us among the few companies worldwide that are performing such upgrades and will lead to other such programs in the future.




Our avionics systems are easily adapted to western, eastern, and indigenous-origin platforms of all kinds.  We provide our avionic expertise as team members and subcontractors and as prime contractors for avionic upgrades.  In particular, our avionics for UAVs are extremely compact through modern board connectivity solutions, use of innovative conductive cooling techniques, withstand extreme environmental conditions and are very reliable and affordable.




We offer the following avionics solutions:




·
Complete integrated avionics upgrade suites for fighters and mission aircraft;




·
Mission and display computers;




·
Weapon management systems;




·
Data interface and processing computers;




·
Mission data recorders and debriefing solutions;




·
HUD video cameras;




·
INS;




·
Air data sensors; and




·
Avionics for UAVs (Interface control processors, Engine control computers, Payload management computers, and many others).




14




Our avionics solutions are accepted by leading air forces and prime integrators worldwide, such as the IAF, Lockheed Martin, Boeing Company, GE Aviation, HAL, Embraer, IAI, Rafael and many others. Our units are installed onboard the F-16, F-15, A-4, Jaguar, MiG-27, Su-30MKI, Dhruv Helicopter, MiG-29 and Super-Tucano aircraft, and onboard a continuously-growing number of UAVs.




Radars for Force and Border Protection Solutions




We develop advanced ground radars for tactical applications such as force protection and border  protection.  Our radars are pulse Doppler, software-defined radars, introducing hemispheric spatial coverage and multi-mission capabilities, are solid-state, fully digital, do not include any moving parts, are compact, mobile and highly reliable, and demonstrate unprecedented performance-to-price ratio.




The advantages of our radar technology and products are:




§
Non-uniform active electronically scanned array, or AESA Antenna, introducing spatial electronic scanning, track-while search capability and coverage of very high elevation angles




§
Accurate range and direction measurements




§
Resistance to jamming/noise using ECCM techniques




§
Multipath cancellation




§
Co-existence with nearby Systems




§
Automatic Self-Calibration




The asymmetric and irregular conflicts in which modern armies are engaged with in recent years dictate the needs for instantaneous and real-time intelligence, minimal cycle time for target acquisition, highly accurate weapons with minimal collateral damage and discrimination between hostiles and civilians. Our tactical radars, which move with the combat units in the field and are operated by them, provide the real-time knowledge of whether and from where they are being fired at, detect all relevant threats from any firing angles (including very high angles), discriminate among threats and provide the needed intelligence for any course of action, whether counter-fire or avoidance.  The performance-over-price ratio of our radars makes them ideal solutions to the requirements imposed by the asymmetric arena.




We have developed two radar hardware platforms: the compact hemispheric radar, or CHR, which is tailored for use in combat vehicles and short-range protection applications; and the multi-mission hemispheric radar, or MHR, which is tailored for use in force and border protection applications.  For each radar platform we implement several operational missions by changing the radar operational parameters.




The current operational missions of the CHR are the following:




§
TheRPS-10 radar sensors for active protection systems, or APS, detect all relevant threats that may be fired at combat vehicles, including RPGs, anti-tank guided missiles (ATGMs) and projectiles and provide 360° hemispheric coverage. The system delivers threat data to the APS, enabling it to neutralize threats.




§
TheRPS-15 comprehensive hostile fire management system for combat vehicle detects, tracks, classifies, and locates direct and elevated threats fired at combat vehicles, allowing the mobile force to successfully complete its mission while operating in a hostile environment.




The current operational missions of the MHR are the following:




§
TheRPS-40 hostile fire detection radar system detects, tracks, classifies and locates direct and elevated threats fired at stationary or mobile forces. It computes the Point-Of-Origin (POO) and Point-Of-Impact (POI) of the threats, which may be rockets, artillery, mortars, ATGMs, RPGs, and more. The system can be integrated with any protection and Command, Control, Communications, Computers and Intelligence (C4I) system and be installed at stationary bases and posts, or onboard fighting vehicles.




15




§
TheRPS-42 tactical hemispheric air surveillance radar system can detect, classify and track all types of aerial vehicles, including fighters, helicopters, UAVs, transport aircraft, etc. at tactical ranges. Mobile or stationary, the system can be integrated with any C4I system and other radars and sensors, and can operate either as a stand-alone, or as part of a large-scale surveillance system.




§
TheRHS-44 radar system for border protection can detect, identify, and track aerial and surface border intruders including slow and small aircraft, vehicles, vessels, and pedestrians at tactical ranges. The RHS-44 can operate either as a stand-alone, or as part of a large-scale surveillance system.




Support of Legacy Products




We support our customers that use our commercial aviation test stations by providing ongoing maintenance and repair services through product support agreements.




Business Development, Sales and Marketing




Strategy




Our business development strategy is based on the following principles:




·
Maintaining our business focus on electronic systems for the military and para-military markets;




·
Expanding our product offerings by adding new applications to our existing product lines and by adapting our products to land systems;




·
Expanding our customer base by including our products in solutions and integrated systems for airborne and land vehicles;




·
Establishing sales channels with system integrators and major manufacturers such as Embraer, HAL, Lockheed Martin, IMI, IAI, Rafael and others; and




·
Expanding our products base, business development and marketing activities to large potential markets, especially in the land systems and the Homeland Security segments, through identification of current and future applications that may become affordable by the injection of advanced commercial off-the-shelf technologies that offer superior performance and/or significant price savings, and developing new marketing channels aimed directly at these segments.




Strategic Relationships and Customers




As part of our strategy, we entered into a number of strategic relationships with leading global defense contractors and several air forces.  We have focused our marketing and sales efforts to support these relationships.




Lockheed Martin. Lockheed Martin is the manufacturer of the F-16 aircraft, the most popular fighter aircraft in the western world today.  We are supplying the DVDR and GDS for new F-16 aircraft production and for F-16 upgrade programs led by Lockheed Martin.




GE Aviation.  GE Aviation is a world leader in avionics systems for fighter and commercial aircraft.  We have prolonged and successful cooperation with GE for over 12 years.  We are performing built-to-print production of several products for GE, and in discussions of additional future opportunities.




Israel Military Industries.IMI is a world leader in the field of APS for land platforms and is the developer and manufacturer of the "Iron Fist" APS.  We are teamed with IMI on the integration and production of our RPS-10 radars as part of their “Iron Fist” APS solution for local and global customers.  In July 2011, the “Iron Fist” APS successfully completed trials conducted by the U.S. Defense Department.  The “Iron Fist” APS was selected by the Israel Defense Forces, or IDF, as the APS designed to protect the Namer heavy infantry fighting vehicle.




16




Israel Aircraft Industries.  We actively supply avionics and test equipment to four different divisions of IAI, and in particular to the LAHAV and MALAT divisions, who are major aircraft integrators and utilize our products and services.




Hindustan Aeronautics Ltd.  HAL is the major aerospace integrator in India.  We are currently cooperating with four divisions of HAL and supply DVDRs, HCVCs, GDS, support equipment and other services in growing numbers.




Embraer S.A.  The Military Aircraft Division of the Brazilian aircraft manufacturer is a strategic customer.  In addition to supplying avionics such as DVDR, INS and HCVC to Embraer, we are participating to a greater degree in Embraer’s programs through the development and supply of avionic units per their specifications and their training and support activities.




Rafael Advanced Defense Systems Ltd.  Rafael is a world leader in the development and supply of missiles, smart weapons and pods of various types.  Rafael has become a strategic customer of ours as a result of our development and production of a few advanced built-to-specification products in recent years.




Air Forces. We are performing a major upgrade program for an air force in Latin America. We are the sole provider of digital recorders and debriefing solutions to another air force in the region.  We are the primary provider of recorders and debriefing solutions to a major Asian air force.  All these air forces introduce the potential of prolonged cooperation and are strategic customers of ours.




Business Development and Marketing




Our executive chairman, Maj. Gen. (Ret.) Herzle Bodinger, our chief executive officer, Mr., Zvi Alon, and our chief business development officer, Mr. Dov Sella, lead our business development and marketing efforts.  We currently employ three additional professionals in the marketing and sales of our products.  Our chief technology officer and our engineering department support our marketing and sales efforts with respect to proposal preparations and products demonstrations.  In addition, we have business development consultants in Europe, South America and Asia who receive fees for business successfully obtained using their services.




The Israeli Ministry of Defense has historically supported, and continues to support, our marketing efforts through its defense export assistance branch and through various projects for the IDF and its related divisions.  The Israeli Ministry of Industry, Commerce and Labor supports our marketing efforts through its Industrial Cooperation Authority by the exploitation of "Industrial Participation” commitments made to the government of Israel by major U.S. integrators such as Lockheed Martin, Boeing Company, General Dynamics Corporation, GE Aviation and others.  There is no guarantee that this type of assistance will be available to us in the future.




In 2012, our MHR and CHR production-standard prototypes underwent highly successful field tests and demonstrations in Israel and abroad.  In October 2012, we showcased our full range of tactical land radar solutions for defense and HLS markets at the AUSA Annual Meeting in Washington, DC.




Fixed Price Contracts




The vast majority of our contracts are fixed-price contracts, under which the price is not subject to adjustment by reason of the costs incurred in the performance of the contracts, as long as the costs incurred and work performed fall within governmental guidelines.  Under our fixed-price contracts, we assume the risk of increased or unexpected costs that may reduce our profits or even generate losses.  This risk can be particularly significant under fixed-price contracts for research and development involving new technologies.




17




Our books and records may be subject to audits by the Israeli Ministry of Defense and other governmental agencies, including the U.S. Department of Defense.  These audits may result in adjustments to contract costs and profits.




Principal Customers




Generally, we complete a few major transactions each year, each in an amount comprising approximately 10% of our revenues for such year.  As a result, each year a significant portion of our revenues is derived from a small number of customers.  The following table sets forth our principal customers in 2010, 2011 and 2012:




Percentage of Revenues2010


2011


2012Embraer S.A.


3
%


23
%


32
%Israel Aerospace Industries


10
%


17
%


11
%A Latin America Customer


36
%


8
%


9
%Israeli Ministry of Defense


17
%


13
%


5
%Hindustan Aeronautics Ltd


4
%


8
%


6
%GE Aviation


7
%


7
%


4
%Russian Aircraft Corporation MiG


7
%


3
%


11
%





Although we continually strive to increase the number of our customers, we anticipate that a significant portion of our future revenues will continue to be derived from a small number of current customers.  Because of our dependency on a small number of customers and on government contracts, we are subject to business risks, including changes in governmental appropriations and changes in national defense policies and priorities.  Although many of the programs in which we participate as a contractor or subcontractor may extend for several years, our business is dependent upon annual appropriations and funding of new and existing contracts.  Most of the contracts are subject to termination for the convenience of the customer, pursuant to which the customer pays only for reimbursement of costs incurred and the applicable profit on work performed.  The Israeli government or any other government may discontinue funding purchases of our products over the long term. See Item 3D “Key Information – Risk Factors - Risks Related to Our Business and Our Industry.”




Markets




We sell our products to various air forces and companies worldwide.  The following table presents our revenues by geographical markets for the periods indicated:




2010


2011


2012Israel


33
%


36
%


25
%South and Latin America


39
%


37
%


41
%Asia


14
%


16
%


21
%North America


13
%


10
%


11
%Europe


1
%


1
%


1
%




Competition




The markets for our products are highly competitive.  Our principal competitors in the defense electronics market include Elbit Systems Ltd., GE Aviation, Goodrich Corporation, Honeywell International Inc., IAI, Northrop Grumman Corporation, Sagem Avionics Inc., Thales Group, Zodiac Group, Astronautics C.A. Ltd and SRC Inc.  We expect to continue to face competition from these and other competitors.  Most of our competitors are larger and have substantially greater resources than us, including financial, technological, marketing and distribution capabilities, and enjoy greater market recognition than we do.  These competitors may be able to achieve greater economies of scale and may be less vulnerable to price competition than us.  We may not be able to offer our products as part of integrated systems to the same extent as our competitors or successfully develop or introduce new products that are more cost effective or offer better performance than those of our competitors.  Failure to do so could adversely affect our business, financial condition and results of operations.




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Government Regulations




Israel's defense export policy regulates the sales of our systems and products.  Current Israeli policy encourages export to approved customers of defense systems and products, such as ours, as long as the export is consistent with Israeli government policy.




A license is required to initiate marketing activities.  We are also required to obtain a specific export license for any hardware exported from Israel.  We are regulated by an Israeli law regulating export of "dual use" items (items that are typically sold in the commercial market, but that also may be used in the defense market) and the Defense Export Control Law and its supplemental regulations.  Those laws and regulations govern the enforcement of export control and defined certain new areas of licensing, particularly with respect to transfer of technology.  It is not certain that we will receive all the required permits and licenses for which we may apply in the future. Our participation in governmental procurement processes in Israel and other countries is subject to specific regulations governing the process of procuring defense contracts.  Furthermore, solicitations for procurements by governmental purchasing agencies in Israel and other countries are governed by laws, regulations and procedures relating to procurement integrity, including avoiding conflicts of interest and corruption in the procurement process.




In addition, antitrust laws and regulations in Israel and other countries often require governmental approvals for transactions that are considered to limit competition.  Such transactions may include cooperative agreements for specific programs or areas, as well as mergers and acquisitions.




Proprietary Information




We generally do not consider patent protection significant to our current operations and rely upon a combination of security devices, trade secret laws and contractual restrictions to protect our rights in our products.  Our policy is to require employees and consultants to execute confidentiality agreements upon the commencement of their relationships with us.  These measures may not be adequate to protect our technology from third-party infringement, and our competitors might independently develop technologies that are substantially equivalent or superior to ours.  Additionally, our products may be sold in foreign countries that provide less protection for intellectual property rights than that provided under U.S. or Israeli laws.




The Israeli government usually retains certain rights in technologies and inventions resulting from our performance as a prime contractor or subcontractor under Israeli government contracts and may generally disclose such information to third parties, including other defense contractors.  When the Israeli government funds research and development, it may acquire rights to proprietary data and title to inventions; we may retain a non-exclusive, royalty-free license for such inventions.  However, if the Israeli government purchases only the end product, we may retain the principal rights and the government may use the data and take an irrevocable, non-exclusive, royalty-free license.




Manufacturing and Supply




Our production plant is located in Beit She'an, Israel.  The plant is equipped to handle most of our manufacturing processes and testing requirements.  For several specific processes we utilize outsourced resources.  This structure allows us flexibility and versatility.




We place great emphasis on quality control in our production processes.  Commencing with customer requirements and expectations, via raw material inspection through completion, specifications are repeatedly checked.  We maintain a quality assurance team that participates in every stage of the design and manufacturing of the products.  Our quality management system is certified by the Standards Institute of Israel, or SII, pursuant to ISO 9001:2008 for hardware design and production and ISO 90003:2004 for software design.  SII performs quality system audits twice a year and various customers perform audits four to six times a year.  Our environmental management system is certified by SII to ISO 14001:2004.  Our quality management system is also certified according to AS-9100B, a quality management system for aerospace requirements.




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According to the standard warranty incorporated in most of our sales contracts, we warrant that our products will be free from defects in design, materials or workmanship, and guarantee repair or replacement of defective parts typically for periods between one to two years following delivery of a product to a customer.  We also provide maintenance services to customers who sign maintenance contracts.




Source and Availability of Raw Materials




We acquire most of the components for the manufacturing of our products from a limited number of suppliers and subcontractors, most of whom are located in Israel and the United States.  Some of these suppliers are currently the sole source of one or more components upon which we are dependent.  Since many of our purchases require long lead-times, a delay in supply of an item can significantly delay the delivery of a product.  To date, we have not experienced any particular difficulties in obtaining timely deliveries of necessary components.  We depend on a limited number of suppliers of components for our products and if we are unable to obtain these components when needed, we would experience delays in manufacturing our products and our financial results could be adversely affected.




C.           Organizational Structure




We own an 80% interest in CACS, a company based in China that is engaged in aircraft repair services.  In 2010, we and our local partner in China, Tianzhu Forest Development Co., or Tianzhu, agreed that Tianzhu would divest its 20% interest and CACS would become a wholly-owned subsidiary.  In consideration for the 20% interest in CACS, we agreed to provide Tianzhu our 80% interest in the land and building in CACS.  The agreement is subject to the approval of the Chinese authorities and other procedures which need to be performed by both parties.  While this transaction was expected to be approved and finalized in 2012, the approval of the Chinese authorities has not yet been received.




D.           Property, Plants and Equipment




We own a 30,000 square feet industrial building in Beit She'an, Israel.  The building, which includes manufacturing facilities and warehouse space, is situated on land leased from the Israel Land Authority for a period of 49 years ending in 2034.  The plant has sufficient capacity to meet our current requirements.




Our executive offices and research and development facilities are located in a 17,200square feet office facility in Netanya, Israel.  The lease for this facility expires in January 2015.  The aggregate annual rent for our offices in Israel was approximately $297,000 in 2012.




ITEM 4A.
UNRESOLVED STAFF COMMENTS




Not applicable.




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ITEM 5.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS




A.           Operating Results




The following discussion of our results of operations should be read together with our consolidated financial statements and the related notes, which appear elsewhere in this annual report.  The following discussion contains forward-looking statements that reflect our current plans, estimates and beliefs and involve risks and uncertainties.  Our actual results may differ materially from those discussed in the forward-looking statements.  Factors that could cause or contribute to such differences include those discussed below and elsewhere in this annual report.




Overview




We develop, manufacture and sell defense electronics including data recording and management systems (such as digital video and data recorders, ground debriefing stations, head-up display cameras), inertial navigation systems for air and land applications, avionics solutions (such as aircraft upgrades, avionics for UAVs, store management systems and interface computers) and radar systems for force and border protection solutions (ground radars for applications such as active protection systems for armored fighting vehicles, hostile fire detection, perimeter surveillance and alike).  We sell and support our commercial aviation electronic products and services, mainly through our 80% -owned Chinese subsidiary.




General




Our consolidated financial statements appearing in this annual report are prepared in dollars and in accordance with U.S. GAAP.  Transactions and balances originally denominated in dollars are presented at their original amounts.  Transactions and balances in other currencies are remeasured into dollars in accordance with the principles set forth in the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC 830.  The majority of our sales are made outside of Israel and a substantial part of them are in dollars.  In addition, a substantial portion of our costs are incurred in dollars.  Since the dollar is the primary currency of the economic environment in which we operate, the dollar is our functional and reporting currency and, accordingly, monetary accounts maintained in currencies other than the dollar are remeasured using the foreign exchange rate at the balance sheet date.  Operational accounts and non-monetary balance sheet accounts are measured and recorded at the exchange rate in effect at the date of the transaction.  All monetary balance sheet accounts have been remeasured using the exchange rates in effect at the balance sheet date.  Statement of operations amounts have been remeasured using the average exchange rate for the period.  The financial statements of our foreign subsidiary, whose functional currency is not the dollar, have been translated into dollars.  All balance sheet amounts have been translated using the exchange rates in effect at balance sheet date.  Statement of operation amounts have been translated using the average exchange rate prevailing during the year.  Such translation adjustments are reported as a component of accumulated other comprehensive income (loss) in shareholders' equity.




Discussion of Critical Accounting Policies and Estimations




Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the notes to our consolidated financial statements.  These policies have been consistently applied in all material respects.  While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, we believe the estimates and judgments associated with the reported amounts are appropriate under the circumstances.  We believe the following accounting policies are the most critical in fully understanding and evaluating our financial condition and results of our operations under U.S. GAAP.




Revenue Recognition.  Our revenues are mainly derived from sales of defense electronics (solid-state recorders, computers, inertial navigation systems, etc.) and their supporting ground systems (automated testers, data debriefing stations).  Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the collection of the fee is probable.  If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless we can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied.




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Revenues from long-term fixed price contracts are recognized by the percentage-of-completion method in accordance with the "input method."  We apply this method when the total of the costs and revenues of the contract can reasonably be estimated.  The percentage of completion is determined based on the ratio of actual costs incurred to total costs estimated to be incurred over the duration of the contract.  With regard to contracts for which a loss is anticipated, a provision is made for the entire amount of the estimated loss at the time such loss becomes evident.  Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts.  Such changes in estimated gross profit or loss are recorded in results of operations when they are reasonably determined by management, on a cumulative catch-up basis.  Revenues under long-term fixed-price contracts that involve both development and production are recorded using the cost-to-cost method (development phase) and units-of-delivery method (production phase) as applicable to each phase of the contract, as the basis to measure progress toward completion.




We also generate revenues from repair services using our automated test equipment, mainly through CACS Revenues from services are recognized when the service is performed.


Impairment of Long-Lived Assets.We are required to assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable.  We assess the impairment of our assets based on a number of factors, including any significant changes in the manner of our use of the respective assets or the strategy of our overall business and significant negative industry or economic trends.  Upon determination that the carrying value of a long-lived asset may not be recoverable, based upon a comparison of expected undiscounted future cash flows to the carrying amount of the asset, an impairment charge is recorded in the amount of the carrying value of the asset exceeds its fair value.  As of December 31, 2012 and 2011, no impairment losses have been identified




Impairment of Goodwill.  We are required to assess the impairment of goodwill at least annually (or more frequently if impairment indicators arise).  FASB ASC 350 "Intangibles-Goodwill and other" prescribes a two-phase process for impairment testing of goodwill.  The first phase screens for impairment while the second phase (if necessary) measures it.  In the first phase of impairment testing, goodwill attributable to each reporting unit is tested for impairment by comparing the fair value of each reporting unit with its carrying value.  We have only one reporting unit and we determine its fair value according to our market capitalization.  The goodwill was tested for impairment by comparing the fair market value with its carrying amount and as of December 31, 2012, no impairment losses have been identified.  As a result, step two was not required.




Share-Based Compensation.We account for stock-based compensation in accordance with FASB ASC 718 "Share-Based Payment," or ASC 718, applying the modified prospective method, and with SEC Staff Accounting Bulletin No. 107, "Share-Based Payment," or SAB 107.  In accordance with ASC 718 we measure the compensation cost associated with share-based payment transactions based on the fair value at the grant date of the options.  The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods, according to the straight-line method.




For employee option grants, the fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with weighted average assumptions relating to the dividend yield, expected volatility, risk free interest rate and expected life of the option by the employee, in accordance with ASC 718 and ASC 718-10.  Our assumptions with respect to these components will impact the compensation award costs and amounts expensed in each period and consequently the results of our operations.  We didn't incur share-based compensation expense for the year ended December 31, 2012.  As of December 31, 2012, we did not have any unrecognized compensation costs related to non-vested share-based compensation arrangements under our stock option plans. Accounting for income taxes.  On January 1, 2007, we adopted FASB ASC 740-10 "Income Taxes," which contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740-10.  The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.  The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement ASC 740-10.  We provided a valuation allowance in respect to the deferred tax assets resulting from operating loss carryforwards and other temporary differences.  Our management currently believes that since our company has a history of losses, it is more likely than not that the deferred tax regarding the loss carryforwards and other temporary differences will not be realized in the foreseeable future.




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Derivatives and hedging:We are required to recognize all derivatives on the balance sheet at fair value.  Derivatives that are not hedges mustbe adjusted to fair value through income as stipulated in FASB ASC 815 "Derivatives and Hedging," or ASC 815.  If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of derivatives are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings.  The ineffective portion of a derivative's change in fair value is immediately recognized in earnings.  We use derivatives to hedge certain cash flow foreign currency exposures in order to further reduce our exposure to foreign currency risks.




In 2012 and 2011, we entered into forward contracts in order to hedge certain expense transactions denominated in NIS.  Our forward contracts did not qualify as hedging instruments under ASC 815. Changes in the fair value of forward contracts are reflected in the consolidated statements of operations as financial income or expense and not against the Other Comprehensive Income.  As of December 31, 2012, the fair value of the outstanding forward contracts was $151,000 which was recorded in other receivables against financial income and as of December 31, 2011, the fair value of the outstanding forward contracts was $87,000, which was accrued against financial expenses.





Inventory valuation.The majority of our inventory consists of work in progress, raw materials and components. Inventories are valued at the lower of cost or market. Cost of finished goods is determined on the basis of direct manufacturing costs plus allocable indirect costs representing allocable operating overhead expenses and manufacturing costs. Cost of raw materials is determined using the “standard cost” method. Raw material is valued using the “FIFO” method. We assess the valuation of our inventory on a quarterly basis and periodically write down the value for different finished goods and raw material items based on their potential utilization. If we consider specific inventory to be damaged, we write such inventory down to zero. Inventory write-offs are provided to cover risks arising from slow-moving items, discontinued products, and excess inventories. The process for evaluating these write-offs often requires us to make subjective judgments and estimates concerning the future utilization of the inventory items. Inventory write-offs were $72,000, $136,000 and $133,000 as of December 31, 2012, 2011 and 2010, respectively.





Allowance for doubtful accounts.Our trade receivables are derived from sales to customers all over the world. We perform ongoing credit evaluations of our customers. In certain circumstances, we may require letters of credit or prepayments. We maintain an allowance for doubtful accounts for estimated losses from the inability of our customers to make required payments that we have determined to be doubtful of collection. We determine the adequacy of this allowance by regularly reviewing our accounts receivable and evaluating individual customers’ receivables, considering customers’ financial condition, credit history and other current economic conditions. If a customer’s financial condition were to deteriorate which might impact its ability to make payment, then additional allowances may be required. Provisions for doubtful accounts are recorded in general and administrative expenses. Our allowance for doubtful accounts was $15,000, $7,000 and $78,000 as of December 31, 2012, 2011 and 2010, respectively.





Significant Expenses




Cost of Revenues.  Cost of revenues consist primarily of manufacturing costs, depreciation of fixed assets, project development costs, amortization of capitalized software and inventories write-downs.




Marketing and Selling ExpensesMarketing andselling expenses consist primarily of expenses for payments for marketing and business development personnel, marketing activities, public relations, promotional materials, amortization of customer relationship assets, travel expenses and trade show exhibit expenses.




23




General and Administrative Expenses.General and administrative expenses consist primarily of salaries and related expenses for executive, accounting, administrative personnel, professional fees, provisions for doubtful accounts and other general corporate expenses.




Research and Development Expenses.Research and development expenses consist primarily of salary expenses for research and development personnel, use of subcontractors and other costs incurred in the process of developing product masters.




Financial Expenses, Net.  Financial expenses consist of interest and bank expenses, interest on convertible note and loans, amortization expenses of discount on convertible note, deferred charges and currency remeasurement losses.  Financial income consists of interest on cash and cash equivalent balances and currency remeasurement gains.




Results of Operations




The following table presents certain financial data expressed as a percentage of total revenues for the periods indicated:




Year Ended December 31,2010


2011


2012Revenues


100.0
%


100.0
%


100.00
%Cost of revenues


73.1
%


71.1
%


75.3
%Gross profit


26.9
%


28.9
%


24.7
%Research and development, net


4.3
%


13.1
%


11.2
%Marketing and selling


9.3
%


10.8
%


7.7
%General and administrative


6.3
%


10.3
%


10.4
%Operating income (loss)


7.0
%


(5.3
)%


(4.7
)%Financial expenses, net


(4.3
)%


(2.5
)%


(4.8
)%Net income (loss)


2.7
%


(7.8
)%


(9.5
)%Net income attributable to non-controlling interest


0.0
%


0.0
%


0.0
%Net income (loss) attributable to RADA shareholders


2.7
%


(7.8
)%


(9.5
)%





Year Ended December 31, 2012 Compared with Year Ended December 31, 2011




Revenues.  Our revenues increased by 11% to $21.6 million in 2012 from $19.4 million in 2011.  The increase in revenues is primarily attributed to two major projects, which were delayed in 2011 and resumed during the second half of 2012.




Cost of Revenues.  Cost of revenues increased by 18% to $16.2 million in 2012 from $13.8 million in 2011.  The increase is primarily due to a loss provision in one of our projects in the avionic upgrade product line.  We expect that our cost of revenues as a percentage of revenues will improve in 2013, primarily due to completion of the large scale upgrade project characterized with lower gross margins.




Gross Profit.  Our gross profit decreased by 5.1% to $5.3 million in 2012 from $5.6 million in 2011.  Our profit margin was approximately 25% in 2012 and 29% in 2011.  The decrease in gross profit in 2012 was mainly attributable to the increase in the cost of revenues.




Research and Development Expenses, Net.  Our research and development expenses, net, decreased by 5% to approximately $2.4 million in 2012 (net of $142,000 grant received from the OCS) from $2.5 million in 2011 (net of $382,000 grant received from the OCS).  We expect that our research and development expenses in 2013 will be lower than in 2012 as our inertial navigation and radar products are mature enough to enable business development and marketing activities.




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Marketing and Selling Expenses.Marketing and selling expenses decreased by 21% to approximately $1.7 million in 2012 from $2.1 million in 2011.  This decrease is primarily due to lower commissions that we paid in 2012 compared to 2011.




General and Administrative Expenses. General and administrative expenses increased by 12% to approximately $2.2 million in 2012 from $2.0 million in 2011.  In 2011, we received $130,000 in payments for past litigation, which reduced the general and administrative expenses .  We expect that in 2013 our general and administrative expenses will remain similar to those we incurred in 2012.




Financial Expenses, Net.  Our financial expenses, net, increased by 118% to $1 million in 2012 compared to $0.5 million in 2011.  Our interest expense, net, was $376,000 in 2012 compared to $166,000 in 2011.  Our expense resulting from the amortization of discount on a convertible note and loans from shareholders was $516,000 in 2012 compared to $212,000 in 2011.  Foreign currency exchange differences, net resulted in income of $105,000 in 2012 compared to income of $107,000 in 2011, primarily due to changes in the NIS/dollar exchange rate.  We expect that in 2013 our financial expenses will increase based on higher interest rates applicable to our loans from our controlling shareholder.




Year Ended December 31, 2011 Compared with Year Ended December 31, 2010




Revenues.  Our revenues decreased by 29% to $19.4 million in 2011 from $27.5 million in 2010.  The decrease is primarily due to two large scale integration projects that did not progress as expected.




Cost of Revenues.  Cost of revenues decreased by 31% to $13.8 million in 2011 from $20.1 million in 2010.  The decrease is primarily due to the decrease in our revenues.




Gross Profit.  Our gross profit decreased by 24% to $5.6 million in 2011 from $7.4 million in 2010.  Our profit margin was approximately 29% in 2011 and 27% in 2010.  The decrease in gross profit was mainly attributable to the decrease in revenues in 2011.




Research and Development Expenses, Net.  Research and development expenses, net increased by 115% to approximately $2.5 million in 2011 from $1.2 million in 2010.  The increase is primarily attributable to the development of our INS and radar technology.




Marketing and Selling Expenses.Marketing and selling expenses decreased by 18% to approximately $2.1 million in 2011 from $2.6 million in 2010.  This decrease is primarily due to lower payments for marketing and business development personnel in 2011 compared to 2010 as a result of the decrease in revenues in 2011.




General and Administrative Expenses. General and administrative expenses increased by 15% to approximately $2.0 million in 2011 from $1.7 million in 2010, primarily due to lower payments received from judgments relating to completed litigation.




Financial Expenses, Net.  Our financial expenses, net, decreased by 60% to $0.5 million in 2011 compared to $1.2 million in 2010.  Our interest expense, net, was $166,000 in 2011 compared to $252,000 in 2010.  Our amortization expense on a convertible note and loans from shareholders was $212,000 in 2011 compared to $576,000 in 2010.  Foreign currency exchange differences resulted in income of $107,000 in 2011 compared to expenses of $107,000 in 2010, primarily due to changes in the NIS/dollar exchange rate.




Our Location in Israel




We are incorporated under the laws of the State of Israel, and our principal executive offices and principal manufacture, research and development facilities are located in Israel.  See Item 3D "Key Information – Risk Factors – Risks Relating to Our Operations in Israel" for a description of governmental, economic, fiscal, monetary or political polices or factors that have materially affected or could materially affect our operations.




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Corporate Tax Rate




Israeli companies were generally subject to corporate tax at the rate of 25% in 2012.  The tax rate is expected to remain at 25% in 2013 and thereafter.




As of December 31, 2012, our net operating loss carry forward for Israeli tax purposes was approximately $62.5 million, including a capital loss carry forward of approximately $3.5 million.




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.  Israel is a member of the Organization for Economic Co-operation and Development, or the OECD, an international organization whose members are governments of mostly developed economies.  The OECD's main goal is to promote policies that will improve the economic and social well-being of people around the world.  In addition, Israel has been granted preferences under the Generalized System of Preferences from the U.S., Australia, Canada and Japan.  These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs.




Israel and the European Union Community, known as the "European Union," concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years.  In 1985, Israel and the U.S. entered into an agreement to establish a Free Trade Area.  The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between the two countries.  On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the "EFTA," established a free-trade zone between Israel and the EFTA nations.  In November 1995, Israel entered into a new agreement with the European Union, which includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the European Union.  Israel has established commercial and trade relations with other nations, including Russia, China, India, Turkey and other nations in Eastern Europe and the Asia-Pacific region.




Impact of Currency Fluctuation and of Inflation




A significant portion of the cost of our Israeli operations, primarily personnel and facility-related, is incurred in NIS.  Therefore, our NIS related costs, as expressed in dollars, are influenced by the exchange rate between the dollar and the NIS.  In addition, if the rate of inflation in Israel will exceed the rate of devaluation of the NIS in relation to the dollar, or if the timing of such devaluations were to lag considerably behind inflation, our cost as expressed in dollars may increase.  NIS linked balance sheet items, may also create foreign exchange gains or losses, depending upon the relative dollar values of the NIS at the beginning and end of the reporting period, affecting our net income and earnings per share.  Although we may use hedging techniques, we may not be able to eliminate the effects of currency fluctuations.  Therefore, exchange rate fluctuations could have a material adverse impact on our operating results and share price.  The caption "Financial expenses, net" in our consolidated financial statements includes the impact of these factors as well as traditional interest income or expense.  See Note 14 to our consolidated financial statements.




The following table sets forth, for the periods indicated, (i) depreciation or appreciation of the NIS against the most important currency for our business, the dollar, until December 31 each year and the year before, and (ii) inflation as reflected in changes in the Israeli consumer price index.




Year Ended December 31,2008


2009


2010


2011


2012NIS vs. U.S. Dollar


(1.1
)%


(0.7
)%


(6.0
)%


7.7
%


(2.3
)%Israeli Consumer Price Index


3.8
%


3.9
%


2.7
%


2.2
%


1.6
%




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Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability and period-to-period comparisons of our results.  We cannot assure you that in the future our results of operations may not be materially adversely affected by currency fluctuations.


Recently Issued Accounting Standards




Effective January 1, 2012, we retrospectively adopted a new standard issued by the FASB by presenting total comprehensive income and the components of net income and other comprehensive income (loss) in two separate but consecutive statements. The adoption of this guidance resulted only in a change in the way we present other comprehensive income in our consolidated financial statements and did not have any impact on our results of operations, financial position or cash flows. Comparative amounts of previous periods are also presented.




B.           Liquidity and Capital Resources




We have historically met our financial requirements primarily through cash generated by operations, funds generated by our public offering in 1985, private placements of our ordinary shares and debt securities, loans from our principal shareholders, short-term loans and credit facilities from banks (most recently Bank Leumi Le-Israel B.M. and the Israeli branch of State Bank of India, or the Banks), research and development grants from the government of Israel and the Israel-U.S. Binational Industrial Research and Development Foundation, investment grants for approved enterprise programs and marketing grants from the government of Israel.




As of December 31, 2012, we owed $2.0 million under an annual line of credit and $1.2 million of secured borrowing with a bank against specific accounts receivable.  In addition, the Banks provided $1.8 million of guarantees on our behalf, mainly to our customers and suppliers in the ordinary course of business.  The guarantees are secured by a first priorityfloating charge on all of our assets and by a fixed charge on our property in Beit She'an, goodwill (intangible assets), unpaid share capital and insurance rights (rights to proceeds on insured assets in the event of loss).  Our agreements with the Banks prohibit us from: (i) selling or otherwise transferring any assets except in the ordinary course of business; (ii) placing a lien on our assets without the Banks' consent; or (iii) declaring dividends to our shareholders.




Our working capital as of December 31, 2011 and December 31, 2012, was $3.0 million and $2.04 million, respectively.  Cash and cash equivalents amounted to $1.1 million as of December 31, 2011 compared to $1.2 million as of December 31, 2012.  Short-term and long-term bank deposits and restricted bank deposits amounted to $1.8 million as of December 31, 2011 compared to $1.4 million as of December 31, 2012.




In 2008, we borrowed $1.5 million from a company controlled by Mr. Yeung, our controlling shareholder, in order to facilitate further development of our INS technology.  This loan bears interest of LIBOR + 3% payable at the beginning of every quarter.  Principal payments equal to $90,000 each were payable in six equal installments commencing July 1, 2009 and the remaining principal amount was to be payable in eight equal installments, commencing April 1, 2011.  On August 29, 2012, our controlling shareholder agreed to postpone the repayment of $1.5 million of the principal that was due to be repaid to him, that 50% of such amount would be paid on December 15, 2012 and the remaining 50% would be payable on February 15, 2013. As of February 15, 2013 we have not repaid such principal amounts and as a result we are incurring default interest payment at the rate of Libor +7%.




In October 2010, a $3 million convertible note issued to Mr. Yeung in October 2007 was extended to October 2012.  In addition, the expiration date of a warrant to purchase up to an aggregate of 1,578,947 ordinary shares granted to Mr. Yeung at such time was extended to October 2014.  The convertible note bears interest at a rate of six-month LIBOR + 3.5% and is convertible into ordinary shares at a conversion price of $2.09 per share.  The Note is secured by a second degree floating charge over all of our assets. From January 2013, the loan bears default increased interest rate of LIBOR + 7.5%. See Item 7B. “Major Shareholders and Related Party Transactions - Related Party Transactions.”




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In September 2011, we entered into a revolving loan agreement with Faith Content Development Ltd., or FCD, an entity controlled by Mr. Yeung.  The loan was in the principal amount of $1.7 million, bearing interest of three month LIBOR + 2.5% per annum.  The principal and all the unpaid and accrued interest was paid on February 29, 2012 with the proceeds from a new loan from FCD and Mr. Ben Zion Gruber, a shareholder and member of our board of directors. The loan was approved by our Audit Committee and Board of Directors, and the transaction was also approved by our shareholders at an extraordinary meeting of shareholders held in January 2012.  FCD provided $2.7 million and Mr. Ben Zion Gruber provided $300,000.  We used $1.7 million of the loan to repay in full all of the amounts due and payable under the September 2011 loan, as described above.  The remaining portion of the loan was added to our working capital.  The loan bears interest at the rate of the greater of three months LIBOR + 5% per annum, or 7% per annum.  Interest is payable quarterly in arrears and the principal is due on February 28, 2014.  As of December 31, 2012, the outstanding balance of this loan was $3.0 million.  In addition, on February 28, 2012, we issued to FCD and to Mr. Ben Zion Gruber, warrants to purchase 1,080,000 and 120,000 ordinary shares, respectively, at an exercise price of $2.50 per share.  These warrants have a term of three years.  The second degree floating charge that was granted with respect to the convertible note of 2007, secures this loan as well.




Due to our cash flow and working capital difficulties we were not able to timely and fully make the repayment of interest and principal amounts to our shareholders as described above. As a result we are required to pay the default interest on account of all such loans and all such loans may be accelerated by our lenders. However, we have reached a "standstill agreement" with our lenders, according to which, except in extraordinary circumstances, no action will be taken to accelerate the loans or to exercise their rights prior to January 31, 2014.




We made capital expenditures of $705,000 in the year ended December 31, 2012, primarily for machinery and equipment.  We currently do not have any significant capital spending or purchase commitments.




Cash Flows




The following table summarizes our cash flows for the periods presented:




Year ended December 31,2010


2011


2012(U.S. dollars in thousands)Net cash provided by (used in) operating activities


(1,685
)


(1,372
)


(752
)Net cash provided by (used in) investing activities


(2,027
)


147



(219
)Net cash provided by financing  activities


3,552



1,475



1,008Effect of exchange rate changes on cash and cash equivalents


23



7



20Net increase (decrease) in cash and cash equivalents


(137
)


257



57Cash and cash equivalents at beginning of the year


987



850



1,107Cash and cash equivalents at end of the year


850



1,107



1,164




Net cash used in operating activities was $700,000 in 2012.  This was primarily due to a decrease in trade receivables of $1.5 million, a decrease in trade payables of $400,000, a decrease in other payables of $390,000, depreciation and amortization of $900,000 and amortization expense on a convertible note and loans of $516,000.  This was offset by an increase in other receivables of $339,000, costs and estimated earnings in excess of billings, net of $900,000.  Net cash used in operating activities was $1.4 million in 2011. This was primarily due to an increase in inventory of $2.1 million, a decrease in trade payables of $700,000 and a decrease in other payables of $2.0 million.  This was offset by a decrease in trade receivables of $2.5 million, costs and estimated earnings in excess of billings, net of $1.2 million, depreciation and amortization of $1.0 million and amortization expense on a convertible note and loans of $212,000. Net cash used in operating activities was $1.7 million in 2010. This was primarily due to an increase in trade receivables of $4.8 million, due to increase in revenues in 2010, particularly in the fourth quarter and an increase in costs and estimated earnings in excess of billings, net of $1.7 million.  This was offset by an increase in trade payables of $0.5 million and in other accounts payable and accrued expenses of $2.6 million, depreciation and amortization of $1.0 million and amortization expense on a convertible note and loans of $576,000.




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Net cash used by investing activities was approximately $219,000 in 2012, primarily due to change in restricted cash of $472,000 and our investment of $688,000 in property, plant and equipment.  Net cash provided by investing activities was approximately $147,000 in 2011, primarily due to change in restricted cash of $348,000.  Net cash used in investing activities was approximately $2.0 million in 2010, primarily due to change in restricted cash of $1.4 million and our investment of $603,000 in property, plant and equipment.




Net cash provided by financing activities was $1.01 million in 2012, reflecting net proceeds of $1.8_million from a shareholder loans transaction.  Net cash provided by financing activities was $1.5 million in 2011, reflecting net proceeds of $1.7 million from a shareholder loan transaction.  Net cash provided by financing activities was $3.6 million in 2010, reflecting net proceeds of $3.7 million of short term bank credit.




As a result of the foregoing, at December 31, 2012, we had working capital of $2 million and cash and cash equivalents of $1.2 million as compared to working capital of $3.0 million and cash and cash equivalents of $1.1 million at December 31, 2011.




We expect to fund our short-term liquidity needs, including our obligations under our credit facilities, other contractual agreements and any other working capital requirements, from our cash and cash equivalents, operating cash flow and our credit facilities.  We believe that our current cash and cash equivalents, credit facilities and our expected cash flow from operations will be sufficient to meet our cash requirements in 2013.




As of December 31, 2012, warrants to purchase 2,778,947 of our ordinary shares were outstanding: (i) a warrant to purchase 1,578,947 which was issued on December 10, 2007 in connection with the issuance of a $3.0 million convertible note to our controlling shareholder at an exercise price of $2.38 per share, exercisable until October 15, 2014; and (ii) warrants to purchase 1,200,000 ordinary shares which were issued on February 28, 2012 in connection with the loan agreement entered into in February 2012 at an exercise price of $2.50 per share, exercisable until February 28, 2015.  To the extent that the warrants will be exercised, the proceeds will be added to our working capital.




C.           Research and Development, Patents and Licenses




Research and Development




Our research and development investments focus on improvements to our existing products and the development of complementary products that would provide continued support for our current customers and would improve our capability to market our products to new customers.  In 2012, 2011 and 2010 we incurred $2.4 million, $2.5 million and $1.2 million, respectively, of research and development expenses, net.  The vast majority of these expenses are attributable to the research on our inertial navigation systems and radars.  In 2013, we will continue to invest in the research and development of new products.  As of December 31, 2012, we employed 45 engineers in research and development who concentrate mainly on research and development activities generated through customer orders and to a lesser extent on internal research and development activities.




The OCS encourages research and development by providing grants to Israeli companies, pursuant to the Law for the Encouragement of Industrial Research and Development, 1984, as amended. The terms of such grants prohibit the manufacture of the developed products outside of Israel and the transfer of technologies developed using the grants to any person without the prior written consent of the OCS.  During 2012, 2011 and 2010, we developed a new radar sensor for APS, partly financed by the OCS.  In 2012, 2011 and 2010, we received royalty bearing grants of $142,000, $382,000 and $179,000, respectively, from the OCS.




Pursuant to applicable Israeli law, we are currently required to pay royalties at the rate of 3-5% of sales of products developed with certain grants received from the OCS, up to 100% of the amount of such grants, adjusted by the exchange rate with the dollar.  As of December 31, 2012, our total obligation for royalty payments, net of royalties paid or accrued was approximately $1.5 million.




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We are committed to pay royalties to the Israel - United States Binational Industrial Research and Development Foundation at the rate of 5% of the sales proceeds up to 150% of the research and development expenses financed by the foundation.  Our total obligation for royalties, net of royalties paid or accrued, totaled approximately $2.1 million as of December 31, 2012.




D.           Trend Information




In 2012, our revenues increased by 11% compared to our revenues in 2011 and we expect that in 2013 our revenues will continue to increase.   However, our revenues are subject to government budgets and we cannot provide any assurances that the economic climate will not result in the cancellation or suspension of certain projects or programs.




Our future revenues will, in great measure, be dependent upon the success of our sales and marketing strategy.  We are currently focusing our sales efforts on:




·
Avionics solutions (including for UAVs);




·
Digital Video & Data Recorders and GDS;




·
INS; and




·
Radar systems for force and border protection solutions.




We cannot provide any assurances that we will be successful in meeting our targets in the future.  As a result of the unpredictable business environment in which we operate, we are unable to provide any specific guidance as to sales and profitability trends.  If we are unsuccessful in our sales efforts, it is unlikely that we will be able to achieve profitability in the future and we will require additional capital.




E.           Off-Balance Sheet Arrangements




We are not a party to any material off-balance sheet arrangements.  In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.




F.           Tabular Disclosure of Contractual Obligations




The following table summarizes our minimum contractual obligations and commercial commitments, as of December 31, 2012 and the effect we expect them to have on our liquidity and cash flow in future periods.




Contractual Obligations

Payments due by PeriodTotal


Less than 1

year


1-3 Years


3-5 Years


More than

5 yearsLong-term debt obligations

$
6,984,000


$
6,984,000



-



-



-Operating lease obligations


1,247,000



661,000



586,000



-



-Total

$
8,231,000


$
7,645,000


$
586,000



-



-





In addition, we have long-term liabilities for severance pay for certain employees that are calculated pursuant to Israeli law generally based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date.  Under Israeli law, employees are entitled to one month's salary for each year of employment or a portion thereof upon termination of employment in certain circumstances, including the retirement or death of an employee or the termination of employment of an employee without due cause.  As of December 31, 2012 our severance pay liability was $519,000.




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ITEM 6.              DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES




A.           Directors and Senior Management




Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers:




Name

Age

PositionHerzle Bodinger

70

Executive Chairman of the Board of DirectorsZvi Alon

59

Chief Executive OfficerDov Sella

57

Chief Business Development OfficerShiri Lazarovich

38

Chief Financial OfficerOleg Kiperman

59

Chief Technology OfficerAdrian Berg

65

DirectorRoy Kui Chuen Chan

66

DirectorBen Zion Gruber (1)(2)

54

DirectorMichael Letchinger

57

DirectorNurit Mor (1)(2)

69

Outside directorEli Akavia (1)(2)

65

Outside director(1) Member of the Audit Committee

(2) Member of the Compensation Committee




Messrs. Chan and Gruber will serve as directors until our 2015 annual general meeting of shareholders.  Messrs. Bodinger and Letchinger will serve as directors until our 2013 annual general meeting of shareholders.  Mr. Berg will serve as a director until our 2014 annual general meeting of shareholders.  Ms. Mor and Mr. Akavia serve as outside directors pursuant to the provisions of the Israeli Companies Law for three-year terms until October 21, 2015.




Herzle Bodinger has served as the executive chairman of our board of directors since July 1998.  General (Res.) Bodinger first joined us in May 1997 as the chief executive officer of our U.S. subsidiary and was appointed our chief executive officer in June 1998.  General Bodinger served as our chief executive officer from 1998 until 2001 and from June 2006 until July 2007.  General Bodinger served as the Commander of the IAF from January 1992 through July 1996.  During the 35 years of his service in the IDF, he also served as a fighter pilot while holding various command positions.  General Bodinger holds a B.A. degree in Economics and Business Administration from the Bar-Ilan University and completed the 100th Advanced Management Program at Harvard University.




Zvi Alonhas served as our chief executive officer since July 2007.  Mr. Alon joined us in January 2000 and served as our chief operating officer until March 2003 when he was appointed vice president of marketing and sales.  From 1982 to 1999, Mr. Alon served in various managerial positions with the IAI, as director of business development and marketing, director of electrical and avionics engineering, avionics programs manager and group leader and operational definition officer of the "Lavi" project office.  Previously, Mr. Alon served in the IAF for ten years.  Mr. Alon holds a B.Sc. degree in Mathematics and Computer Science and a M.Sc. degree in Computer Science, both from Tel Aviv University.




Shiri Lazarovich has served as our chief financial officer since December 2007.Ms. Lazarovich previously served as our controller from September2004.  Prior to that and from January 2000, Ms. Lazarovich served as a manager in the accountant, assurance and business advisory services department of PricewaterhouseCoopers, Israel.  Ms. Lazarovich holds a B.A. degree in Accounting and in Economics from the Hebrew University of Jerusalem and is a Certified Public Accountant in Israel.




Dov Sellahas served as our chief business development officer since July 2007.  Prior to that and from January 2003, Mr. Sella served as our chief operations officer.  Mr. Sella has over 20 years of senior management and product development experience.  From 1982 until 1997, Mr. Sella worked for Elbit Systems Ltd., a leading Israeli defense contractor.  Among his positions at Elbit, he served as director of programs, director of avionics engineering and director of business development.  Between 1997 and 2000, Mr. Sella served as executive vice president and vice president of business development and vice president of research and development of UltraGuide Ltd., a medical devices start-up.  During the three years prior to joining our company, Mr. Sella was the president of NeuroVision Inc., a medical technology start-up.  Mr. Sella has a B.Sc. degree (cum laude) in Computer Engineering from the Technion - Israeli Institute of Technology.  Mr. Sella served as a fighter aircraft navigator in the IAF.




31




Oleg Kiperman has served as our chief technology officer since July 2007.  Mr. Kiperman joined us in 1984 as project manager of several embedded avionics development programs and in 2000 was named as our director of engineering.  From 1982 until 1984, Mr. Kiperman served as a hardware development team leader at Tadiran developing digital communication systems.  From 1977 until 1982, Mr. Kiperman served as a senior engineer in the IAF Weapons Control Branch.  Mr. Kiperman holds a B.Sc. degree in Electrical Engineering from the Technion - Israeli Institute of Technology.





Adrian Berg has served as a director since November 1997.  Mr. Berg is a designee of Horsham Enterprises Ltd.  Since 1976, Mr. Berg has been a chartered accountant and senior partner at the U.K. firm, Alexander & Co., Chartered Accountants.  Mr. Berg holds a B.Sc. degree in Industrial Administration from the University of Salford and received his qualification as a fellow of the England & Wales Institute of Chartered Accountants in 1973 after he completed three years of training at Arthur Andersen & Co.




Roy Kui Chuen Chan has served as a director since November 1997.  Mr. Chan is a designee of Horsham Enterprises Ltd.  Mr. Chan has been legal consultant to Yeung Chi Shing Estates Limited, a Hong Kong holding company with major interests in hotels and real estate in Hong Kong, China, the United States, Canada and Australia, and its international group of companies, since 1984.  Mr. Chan presently serves as legal counsel to several Hong Kong companies, including Horsham Enterprises Ltd.  Mr. Chan received his qualification as a solicitor and has been a member of the U.K. bar since 1979 after he completed five years of training at Turners Solicitors.




Ben Zion Gruberhas served as a director since June 2002.  Mr. Gruber is a founder and manager of several real estate and construction companies and an entrepreneur involved in several hi-tech companies.  Mr. Gruber is a Colonel (Res.) of the IDF serving as Brigadier Commander of a tank battalion.  Mr. Gruber is a member of the Board of Employment Service of the government of Israel.  Mr. Gruber also serves on the board of directors of the Company for Development of Efrat Ltd., and the Association of Friends of Kefar Shaul Hospital.  Mr. Gruber serves on the Ethics Committees of the Eitanim and Kefar Shaul Hospitals as well as a director of several other charitable organizations.  Mr. Gruber holds a B.Sc. degree in Engineering of Microcomputers from "Lev" Technology Institute, an M.A. degree in Behavioral Sciences from Tel Aviv University and is currently studying for his Ph. D degree in Behavioral Sciences at the University of Middlesex, England.  In addition, Mr. Gruber is a graduate of a summer course in Business Administration at Harvard University, as well as several other courses and training in management, finance and entrepreneurship.




Michael Letchinger,has served as a director since 2004.  Mr. Letchinger is a designee of Horsham Enterprises Ltd.  Since 2000, Mr. Letchinger has been general counsel and senior vice president-managing of Potomac Golf Properties, LLC, a company engaged in real estate development and free standing golf facilities.  From 1994 to 2000, Mr. Letchinger was general counsel and senior vice president-managing of Potomac Development Associates, a sister company of Potomac Golf Properties, LLC.  Mr. Letchinger holds a B.A. degree in Economics from Brandeis University, Waltham, Massachusetts, and a J.D. degree from University of Chicago Law School.




Nurit Morhas served as one of our outside directors since August 2006.  Ms. Mor served as an outside director of two subsidiaries of Bank of Jerusalem since 2010, Aspen Real Estate Ltd., an Israeli public company, since September 2005 and of I.B.I Investment House Ltd., an Israeli public company, since May 2004 From 1973 to 2003, Ms. Mor served in senior positions at the Bank of Israel, including public complaints and banking supervision department.  Ms. Mor holds a B.A. degree in Economics and Statistics and a diploma in Business Administration from the Hebrew University of Jerusalem, and an M.A. degree in Labor Studies from Tel Aviv University.




Eli Akaviahas served as one of our outside directors since August 2006.  Mr. Akavia hasserved as an independent consultant in accounting and audit issues since August 2002.  From 1979 to 2002, Mr. Akavia served as partner in various positions in Luboshitz Kasierer, which was merged into Kost, Forer, Gabbay & Kasierer, a member firm of Ernst & Young Global.  Mr. Akavia also serves as a director of On Track Innovation Ltd., Eden Spring Ltd. and in Eshlad Ltd. Direct Funds, all of which are public Israeli companies.  Mr. Akavia has been a Certified Public Accountant (Israel) since 1975 and holds a B.Sc. degree in Mathematics and Economics from the Hebrew University of Jerusalem and an M.B.A. degree from Tel Aviv University.




32




B.            Compensation




The following table sets forth all compensation we paid with respect to all of our directors and executive officers as a group for the year ended December 31, 2012.




Salaries, fees,

commissions and bonuses


Pension, retirement

and similar benefitsAll directors and executive officers

as a group, consisting of 11 persons

$
987,296


$
264,286





During the year ended December 31, 2012, we paid each of our outside directors a per-meeting attendance fee of NIS 1,816 (approximately $500) and an annual fee of NIS 28,558 (approximately $7,900).




As of April 24, 2013, our director, Mr. Ben Zion Gruber, held warrants to purchase 120,000 ordinary shares at an exercise price of $2.50 per share that were issued pursuant to the loan agreement we entered into in February 2012.  The warrants expire in February 2015.  No other board members or executive officers held any options or warrants of our company as of that date.




C.            Board Practices




Introduction




According to the Israeli Companies Law and our articles of association, the management of our business is vested in our board of directors.  The board of directors may exercise all powers and may take all actions that are not specifically granted to our shareholders.  Our executive officers are responsible for our day-to-day management.  The executive officers have individual responsibilities established by our chief executive officer and board of directors.  Executive officers are appointed by and serve at the discretion of the board of directors, subject to any applicable agreements.




Election of Directors




Our articles of association provide for a board of directors consisting of no less than two and no more than 11 members or such other number as may be determined from time to time at a general meeting of shareholders.  All the directors in the company must be qualified to serve as a director and the time required for such position, taking into consideration the type and size of the company and the scope and complexity of its operation.  The directors must provide the electing general meeting with a detailed declaration as to the compliance with the above-listed requirements.  Our board of directors is currently composed of seven directors.




Pursuant to our articles of association, the board of directors is divided into three classes (other than outside directors).  At each annual meeting of shareholders one class of directors (other than outside directors) is elected for a term of three years by a vote of the holders of a majority of the voting power represented and voting at such meeting.  All the members of our board of directors (except the outside directors as detailed below) may be reelected upon completion of their term of office.  The majority of directors may appoint additional directors to fill any vacancies in the board of directors until the next general meeting; provided, however that the total number of directors will not exceed the maximum number, if any, fixed by or in accordance with our articles of association, and that if the total number of directors decreases below six, the board of directors may call a general meeting of shareholders, so that following such meeting there will be at least six directors in office.




33




Messrs. Chan and Gruber are Class A directors and will hold office until the Annual General Meeting of Shareholders to be held in 2015.  Messrs. Bodinger and Letchinger are Class B directors and will hold office until the Annual General Meeting of Shareholders to be held in 2013.  Mr. Berg is a Class C director and will hold office until the Annual General Meeting of Shareholders to be held in 2014.  Ms. Mor and Mr. Akavia serve as our outside directors and each will hold office for a second three year term until October 21, 2015.




We do not follow the requirements of the NASDAQ Marketplace Rules with regard to the nomination process of directors and instead follow Israeli law and practice.  See below in this Item 6C. "Directors, Senior Management and Employees - Board Practices - NASDAQ Marketplace Rules and Home Country Practices."




Outside and Independent Directors




Outside Directors.  The Israeli Companies Law requires publicly held Israeli companies to appoint at least two outside directors.  The Israeli Companies Law provides that a person may not be appointed as an outside director if the person, or the person’s relative, partner, employer or an entity under that person’s control, has or had during the two years preceding the date of appointment any affiliation with the company, or any entity controlling, controlled by or under common control with the company.  The term “relative” means a spouse, sibling, parent, grandparent, child or child of spouse or spouse of any of the above as well as a sibling, brother, sister or parent of the foregoing relatives.  In general, the term “affiliation” includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an office holder.  Furthermore, if the company does not have a controlling shareholder or a shareholder holding at least 25% of the voting rights “affiliation” also includes a relationship, at the time of the appointment, with the chairman of the board, the chief executive officer, a substantial shareholder or the most senior financial officer of such company.  Regulations promulgated under the Israeli Companies Law include certain additional relationships that would not be deemed an “affiliation” with a company for the purpose of service as an outside director.  In addition, no person may serve as an outside director if the person’s position or other activities create, or may create, a conflict of interest with the person’s responsibilities as director or may otherwise interfere with the person’s ability to serve as director.  If, at the time an outside director is appointed, all current members of the board of directors are of the same gender, then that outside director must be of the other gender.  A director of one company may not be appointed as an outside director of another company if a director of the other company is acting as an outside director of the first company at such time.




At least one of the elected outside directors must have “accounting and financial expertise” and any other outside director must have “accounting and financial expertise” or “professional qualification,” as such terms are defined by regulations promulgated under the Israeli Companies Law.  However, Israeli companies listed on certain stock exchanges outside Israel, including the NASDAQ Capital Market, such as our company, are not required to appoint an outside director with “accounting and financial expertise” if a director with accounting and financial expertise who qualifies as an independent director for purposes of audit committee membership under the laws of the foreign exchange serves on its board of directors.  All of the outside directors of such a company must have “professional qualification.”




The outside directors are elected by shareholders at a general meeting.  The shareholders voting in favor of their election must include at least a simple majority of the shares voted by shareholders other than controlling shareholders or shareholders who have a personal interest in the election of the outside director (unless such personal interest is not related to such persons relationship with the controlling shareholder).  This majority requirement will not be required if the total number of shares of such non-controlling shareholders and disinterested shareholders who vote against the election of the outside director represent 2% or less of the voting rights in the company.




In general, under the Israeli Companies Law, outside directors serve for a three-year term and may be reelected to two additional three-year terms, at the nomination of either the board of directors or any shareholder(s) holding at least 1% of the voting rights in the company.  If the board of directors proposed the nominee, the reelection must be approved by the shareholders in the same manner required to appoint outside directors for an initial term, as described above.  If such reelection is proposed by shareholders, such reelection requires the approval of the majority of the shareholders voting on the matter, excluding the votes of any controlling shareholder and other shareholders having a personal interest in the matter as a result of their relationship with the controlling shareholder(s), provided that, the aggregate votes cast by shareholders who are not controlling shareholders and do not have a personal interest in the matter as a result of their relationship with the controlling shareholder(s) who voted in favor of the nominee constitute more than 2% of the voting rights in the company.  Outside directors can be removed from office only by the same special percentage of shareholders that can elect them, or by a court order, and then only if the outside directors cease to meet the statutory qualifications with respect to their appointment or if they violate their fiduciary duty to the company.




34




Each committee of the board of directors that is authorized to exercise powers vested in the board of directors must include at least one outside director and the audit committee and the Compensation Committee must include all the outside directors.  An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service.




Independent Directors.  In general, NASDAQ Stock Market Rules require that the board of directors of a NASDAQ-listed company have a majority of independent directors and its audit committee must have at least three members and be comprised only of independent directors, each of whom satisfies the respective "independence" requirements of NASDAQ and the SEC.  However, foreign private issuers, such as our company, may follow certain home country corporate governance practices instead of certain requirements of the NASDAQ Stock Market Rules.  We do not follow the requirement of the NASDAQ Stock Market Rules to maintain a majority of independent directors on our board and instead follow Israeli law and practice (see Item 16G. "Corporate Governance").  However, we have the mandated three independent directors on our audit committee, in accordance with the rules of the SEC and NASDAQ Stock Market.




Pursuant to the Israeli Companies Law, a director may be qualified as an independent director if such director is either (i) an outside director; or (ii) a director that serves as a board member less than nine years and the audit committee has approved that he or she meets the independence requirements of an outside director.  A majority of the members serving on the audit committee and the compensation committee must be independent under the Israeli Companies Law.




Our board of directors has determined that Ms. Mor and Mr. Akavia both qualify as independent directors under the SEC and NASDAQ requirements and as outside directors under the Israeli Companies Law requirements.  Our board of directors has further determined that Mr. Gruber qualifies as an independent director under the SEC and NASDAQ  requirements.




We do not follow the requirements of the NASDAQ Stock Market Rules with regard to regularly scheduled meetings of independent directors.  Under Israeli law, outside directors are not required to hold executive sessions.  See below in this Item 6C. "Directors, Senior Management and Employees - Board Practices - NASDAQ Marketplace Rules and Home Country Practices."




Committees of the Board of Directors




Audit Committee.   Under the Israeli Companies Law, the board of directors of any public company must establish an audit committee.  The audit committee must be comprised of at least three directors, the majority of which must be independent directors.  Such independent directors must meet all of the standards required of an outside director and may not serve as a director for more than consecutive nine years (a cessation of service as a director for up to two years during any nine year period will not be deemed to interrupt the nine year period).  The audit committee may not include the chairman of the board of directors; any director employed by the company or providing services to the company on an ongoing basis; a controlling shareholder or any of the controlling shareholder’s relatives; and any director who rendered services to the controlling shareholder or an entity controlled by the controlling shareholder.  Any person who is not permitted to be a member of the audit committee may not be present in the meetings of the audit committee unless the chairman of the audit committee determines that such person’s presence is necessary in order to present a specific matter.  However, an employee who is not a controlling shareholder or relative of a controlling shareholder may participate in the audit committee’s discussions but not in any vote, and at the request of the audit committee, the secretary of the company and its legal counsel may be present during the meeting.




35




The responsibilities of the audit committee include, among other things, identifying irregularities in the management of the company’s business, approving related party transactions as required by law, review of the internal controls of the company, the internal auditor’s audit plan and the independent auditor’s engagement and compensation.  The audit committee is also required to establish and monitor whistleblower procedures.  Under Israeli law, an audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two outside directors are serving as members of the audit committee and at least one of the outside directors was present at the meeting in which an approval was granted.




In addition, the NASDAQ Stock Market Rules require us to establish an audit committee comprised of at least three members, all of whom must be financially literate, satisfy the respective "independence" requirements of the SEC and NASDAQ and one of whom must have an accounting or related financial management expertise at senior levels within a company.




Our audit committee assists our board of directors in overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent public accountants' qualifications and independence, the performance of our internal audit function and finding any defects in the business management of our company for which purpose the audit committee may consult with our independent auditors and internal auditor, proposing to the board of directors ways to correct such defects, and such other duties as may be directed by our board of directors.  Our audit committee also has the responsibility of approving related-party transactions as required by Israeli law.  Under Israeli law, an audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two outside directors are serving as members of the audit committee and at least one of the outside directors was present at the meeting in which an approval was granted.




The current members of our audit committee are Ms. Nurit Mor and Messrs. Eli Akavia and Ben Zion Gruber, each of whom satisfies the "independence" requirements of both the SEC and NASDAQ.  We also comply with Israeli law requirements for audit committee members.  The audit committee meets at least once each quarter.




Compensation Committee.  Effective December 2012, under an amendment to the Companies Law, our Board of Directors is required to appoint a compensation committee, whose role is to: (i) recommend to the board on a compensation policy for office holders and to recommend to the board, once every three years, on the approval of the continued validity of the compensation policy that was determined for a period exceeding three years; (ii)  recommend an update the compensation policy from time to time and to examine its implementation; (iii) determine whether to approve the Terms of Service and Employment of Office Holders that require the committee’s approval; and (iv) exempt a transaction from the requirement for shareholders’ approval.  The compensation committee also has oversight authority over the actual terms of employment of directors and officers and may make recommendations to the board of directors and the shareholders (where applicable) with respect to deviation from the compensation policy that was adopted by the company.  Under Israeli law, our compensation committee will consist of no less than three members, including all of our outside directors (who must constitute a majority of its members of the committee), and that the remainder of the members of the compensation committee be directors whose terms of service and employment were determined pursuant to the applicable regulations.  The amendment imposes the same restrictions on the actions and membership in the compensation committee as are discussed above under “Audit Committee” with respect to, among other things, the requirement that an outside director serve as the chairman of the committee and the list of persons who may not serve on the committee. Our board of directors established a compensation committee composed of Ms. Nurit Mor, Mr. Eli Akavia and Mr. Ben-Zion Gruber.




36




Internal Audit




The Israeli Companies Law also requires the board of directors of a publicly held company to appoint an internal auditor nominated by the audit committee.  An internal audit must satisfy the Israeli Companies Law's independence requirements.  The role of the internal auditor is to examine, among other things, the compliance of the company's conduct with applicable law and orderly business practice.  Under the Companies Law, the internal auditor may not be an interested party or an office holder, or a relative of any of the foregoing, nor may the internal auditor be the company's independent accountant or its representative.  Our internal auditor complies with the requirements of the Israeli Companies Law.




Directors' Service Contracts




We do not have any service contracts with our directors.  There are no arrangements or understandings between us and any of our subsidiaries, on the one hand, and any of our directors, on the other hand, providing for benefits upon termination of their employment or service as directors of our company or any of our subsidiaries.




Exculpation, Indemnification and Insurance of Directors and Officers




Exculpation of Office Holders




The Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his or her duty of loyalty.  If permitted by its articles of association, a company may exculpate in advance an office holder from his or her liability to the company, in whole or in part, with respect to a breach of his or her duty of care.  However, a company may not exculpate in advance a director from his or her liability to the company with respect to a breach of his duty of care in the event of distributions.




Insurance of Office Holders




The Israeli Companies Law provides that a company may, if permitted by its articles of association, enter into a contract to insure office holders in respect of liabilities incurred by the office holder with a respect to an act performed in his or her capacity as an office holder, as a result of:




·
a breach of the office holder's duty of care to the company or to another person;




·
a breach of the office holder's duty of loyalty to the company, provided that the office holder acted in good faith and had reasonable cause to assume that his or her act would not prejudice the company's interests; or




·
a financial liability imposed upon the office holder in favor of another person.




Indemnification of Office Holders




The Israeli Companies Law provides that a company may, if permitted by its articles of association, indemnify an office holder for acts or omissions performed by the office holder in such capacity for:




·
a monetary liability imposed on the office holder in favor of another person by any judgment, including a settlement or an arbitrator's award approved by a court;




·
reasonable litigation expenses, including attorney's fees, actually incurred by the office holder as a result of an investigation or proceeding instituted against him or her by a competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against the office holder or the imposition of any monetary liability in lieu of criminal proceedings, or concluded without the filing of an indictment against the office holder and a monetary liability was imposed on the officer holder in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and




37




·
reasonable litigation expenses, including attorneys' fees, incurred by the office holder or which were imposed on him or her by a court, in an action instituted by the company or on the company's behalf or by another person, against the office holder, or in a criminal charge from which he was acquitted, or in a criminal proceeding in which the office holder was convicted of a criminal offense which does not require proof of criminal intent.




In accordance with the Israeli Companies Law, a company's articles of association may permit the company to:




·
prospectively undertake to indemnify an office holder, except that with respect to a monetary liability imposed on the office holder by any judgment, settlement or court-approved arbitration award, the undertaking must be limited to types of events which the company's board of directors deems foreseeable considering the company's actual operations at the time of the undertaking, and to an amount or standard that the board of directors has determined as reasonable under the circumstances.




·
retroactively indemnify an office holder of the company.




Limitations on Exculpation, Insurance and Indemnification




The Israeli Companies Law provides that neither a provision of the articles of association permitting the company to enter into a contract to insure the liability of an office holder, nor a provision in the articles of association or a resolution of the board of directors permitting the indemnification of an office holder, nor a provision in the articles of association exculpating an office holder from duty to the company shall be valid, where such insurance, indemnification or exculpation relates to any of the following:




·
a breach by the office holder of his duty of loyalty unless, with respect to insurance coverage or indemnification, the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;




·
a breach by the office holder of his duty of care if such breach was committed intentionally or recklessly, unless the breach was committed only negligently.




·
any act or omission done with the intent to unlawfully yield a personal benefit; or




·
any fine or forfeiture imposed on the office holder.




Pursuant to the Israeli Companies Law, exculpation of, procurement of insurance coverage for, and an undertaking to indemnify or indemnification of, our office holders must be approved by our audit committee and our board of directors and, if the office holder is a director, also by our shareholders.




Our Articles of Association allow us to insure, indemnify and exempt our office holders to the fullest extent permitted by law, subject to the provisions of the Israeli Companies Law.  We currently maintain a directors and officers liability insurance policy with per claim and aggregate coverage limit of $7.5 million.




D.            Employees




As of December 31, 2012, we employed 112 persons, of whom 53 persons were employed in research, development and engineering, 46 persons in manufacturing and logistics, 4 persons in sales and marketing, and 9 persons in administration, management and finance.  All of our employees are located in Israel.  In addition, CACS, our 80%-owned subsidiary, employed 19 persons in China as of such date.




38




As of December 31, 2011, we employed 112 persons, of whom 54 persons were employed in research, development and engineering, 45 persons in manufacturing and logistics, 5 persons in sales and marketing, and 8 persons in administration, management and finance.  All of our employees are located in Israel.  In addition, CACS, our 80%-owned subsidiary, employed 21 persons in China as of such date




As of December 31, 2010, we employed 103 persons, of whom 49 persons were employed in research, development and engineering, 41 persons in manufacturing and logistics, 4 persons in sales and marketing, and 9 persons in administration, management and finance.  All of our employees are located in Israel.  In addition, CACS, our 80%-owned subsidiary, employed 21 persons in China as of such date.




Our technical employees have signed nondisclosure agreements covering all proprietary information that they might possess or to which they might have access.  Employees are not organized in any union, although they are employed according to provisions established by the Israeli Ministry of Industry, Trade and Labor.  Certain provisions of the collective bargaining agreements between the General Federation of Labor in Israel (Histadrut) and the Coordination Bureau of Economic Organizations (including the Industrialists Association) are applicable to our Israeli employees by order of the Israeli Ministry of Industry, Trade and Labor.  These provisions primarily concern the length of the workday, minimum daily wages for professional workers, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment.  We generally provide our employees with benefits and working conditions beyond the required minimums.  Under the collective bargaining agreements, the wages of most of our employees are linked to the Israeli consumer price index, although the extent of the linkage is limited.




Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment without due cause.  Further, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute; such amounts also include payments for national health insurance.  Most of our ongoing severance obligations for our Israeli employees are provided for by monthly payments made by us for insurance policies to cover these obligations.




E. Share Ownership




Beneficial Ownership of Executive Officers and Directors




The following table sets forth certain information as of April 24, 2013 regarding the beneficial ownership by each of our directors and executive officers:




Name

Number of Ordinary Shares

Beneficially Owned (1)


Percentage of

Ownership(2)Herzle Bodinger


--



--Zvi Alon


--



--Dov Sella


--



--Shiri Lazarovich


--



--Oleg Kiperman (3)


4,000



*Adrian Berg (4)


1,533



*Roy Kui Chuen Chan (5)


1,533



*Ben Zion Gruber (6)


120,000



1.3
%Michael Letchinger


--



--Nurit Mor


--



--Eli Akavia


--



--All directors and executive officers as a group (11 persons)


127,066



1.4
%


_______


*    Less than 1%




(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Ordinary shares relating to options and warrants currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.




39




(2)
The percentages shown are based on 8,918,647 ordinary shares issued and outstanding as of April 24, 2013.




(3)
The business addresses of Mr. Kiperman is c/o RADA Electronic Industries Ltd., 7 Giborei Israel Street, Netanya, Israel.




(4)
The business address of Mr. Berg is Alexander & Co., 17 St. Ann's Square, Manchester M2 7 PW, U.K.




(5)
The business address of Mr. Roy Chan is Gearhart Holdings (H.K.) Limited, 2202 Kodak House II, 39 Healthy Street, E. North Point, Hong Kong.




(6)
All such ordinary shares are subject to currently exercisable warrants granted pursuant to the loan agreement entered into in February 2012.  The warrants have an exercise price of $2.50 per share.  and  expire in February 2015. The business address of Mr. Gruber is c/o RADA Electronic Industries Ltd., 7 Giborei Israel Street, Netanya, Israel.




ITEM 7.              MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS




A.           Major Shareholders




The following table sets forth certain information as of April 24, 2013, regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our ordinary shares:




Name

Number of

Ordinary Shares

Beneficially Owned(1)


Percentage of

Ownership(2)Howard P.L. Yeung (3) (5)


7,991,872



61.4
%Kenneth Yeung (4) (5)


450,029



5.0
%


(1)
Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities.  Ordinary shares relating to options and notes currently exercisable or convertible or exercisable or convertible within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person.  Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them.




(2)
The percentages shown are based on 8,918,647 ordinary shares outstanding as of April 24, 2013.




(3)
Includes (i) 3,447,489 outstanding ordinary shares; (ii) 1,435,407 ordinary shares issuable upon conversion of a convertible note held by FCD, an affiliate of Mr. Yeung; (iii) 2,658,947 ordinary shares issuable upon the exercise of currently exercisable warrants held by Mr. Yeung; and (iv) 450,029 ordinary shares held by Horsham Enterprises Ltd., a British Virgin Islands corporation jointly owned by Messrs. Howard P.L. Yeung and his brother Kenneth Yeung. Mr. Howard Yeung may be deemed to control our company.




(4)
The shares are held by Horsham Enterprises Ltd., a British Virgin Islands corporation jointly owned by Messrs. Howard P.L. Yeung and his brother Kenneth Yeung.




(5)
The address of Messrs. Howard P.L. Yeung and Kenneth Yeung is 2202 Kodak House II, 39 Healthy Street, North Point, Hong Kong.




40




Significant Changes in the Ownership of Major Shareholders




On February 28, 2012, we entered into a $3.0 million loan agreement with FCD, an entity controlled by Mr. Yeung, our controlling shareholder, and Mr. Gruber, a shareholder and director of our company. According to this loan agreement, we issued warrants to purchase 1,080,000 and 120,000 ordinary shares to our controlling shareholder and to Mr. Gruber respectively, at an exercise price of $2.50 per share.  These warrants expire in February 2015.




Major Shareholders Voting Rights




Our major shareholders do not have different voting rights.




Record Holders




Based on a review of the information provided to us by American Stock Transfer & Trust Company, our transfer agent, as of April 24, 2013, there were 111 holders of record of our ordinary shares, of which 95 record holders holding approximately 60.8% of our ordinary shares had registered addresses in the United States, including banks, brokers and nominees.  These numbers are not representative of the number of beneficial holders of our shares nor are they representative of where such beneficial holders reside, since many of these ordinary shares were held of record by banks, brokers or other nominees.




B.           Related Party Transactions




On October 15, 2007, we entered into a $3.0 million loan agreement with Mr. Yeung, pursuant to which, we issued to Mr. Yeung a convertible note that is convertible into ordinary shares at a conversion price of $2.09 per share.  The convertible note was initially scheduled to mature on October 14, 2010.  In addition, Mr. Yeung received warrants to purchase up to an aggregate of 1,578,947 ordinary shares at an exercise price of $2.375 per share, exercisable for a period of five years beginning on October 15, 2007.  Effective as of April 2010, our Audit Committee and Board of Directors approved an amendment to the loan transaction according to which the maturity date of the notes and the expiration date of the warrants has been extended by two years, until October 14, 2012 and October 15, 2014, respectively.  Pursuant to the Israeli Companies Regulations (Relief from Related Party Transactions) 5760-2000 and based on a legal opinion that we received, we determined that shareholder approval was not required for the amendment to the loan transaction, since it extends the term of an existing transaction that was duly approved in accordance with requirements of the Israeli Companies Law.  As of April 24, 2013 we have not repaid the loan and as a result we incur default interest payment at the rate of LIBOR +7.5%.




In September 2011, we entered into a revolving loan agreement with FCD, an entity controlled by Mr. Yeung.  The loan was in the principal amount of $1.7 million, bearing interest of three month LIBOR + 2.5% per annum.  The principal and all the unpaid interest accrued thereupon was paid on February 29, 2012 from the proceeds of a loan received from FCD and Mr. Ben Zion Gruber, a shareholder and director of our company.  Pursuant to the Israeli Companies Regulations (Relief from Related Party Transactions) 5760-2000 and based on a legal opinion that we received, we determined that shareholder approval was not required for this loan because the transaction was at market terms, in the ordinary course of business and did not harm our best interests.




Subject to the approval of the Israeli Ministry of Defense, we also agreed to grant FCD a non-exclusive license to use the technology developed for non-military/commercial purposes. The non-exclusive license will automatically convert into an exclusive license should we default on any of our obligations under the loan agreement.  We have also agreed, subject to the approval of several governmental authorities including the Israeli Ministry of Defense, to establish in the future a joint venture with Mr. Yeung or an affiliated entity that will be engaged in the production and marketing of such non-military products and technology.




41




In February 2012, we entered into a $3.0 million loan agreement with FCD and Mr. Ben Zion Gruber.  The loan was approved by our Audit Committee and Board of Directors, and the transaction was also approved by our shareholders at an extraordinary meeting held in January 2012.  FCD provided $2.7 million and Mr. Ben Zion Gruber provided $300,000.  We used $1.7 million of the loan to repay in full all of the amounts due and payable under the September 2011 loan, as described above.  We intend to use the remaining $1.3 million to finance our future operations, including the continued development of our INS Technology and land radar for protection systems.  The loan bears interest at the rate of the greater of three months LIBOR + 5% per annum, or 7% per annum.  Interest is payable quarterly in arrears and the principal is due on February 28, 2014.  In addition, on February 28, 2012 we issued to FCD and to Mr. Ben Zion Gruber, warrants to purchase 1,080,000 and 120,000 ordinary shares, respectively, at an exercise price of $2.50 per share.  These warrants may be exercised within a period of three years.  As of April 24, 2013 we have not repaid part of the interest or any of the principal that was due and as a result we are incurring default interest payment at the rate of 12%. We have reached a "standstill agreement" with our controlling shareholder, according to which, except for extraordinary circumstances, they will not accelerate the loans or take any action, or otherwise exercise their rights, with respect to the collection of the loans prior to January 31, 2014.




C.           Interests of Experts and Counsel




Not applicable.




ITEM 8.
FINANCIAL INFORMATION




A.
Consolidated Statements and Other Financial Information




Export Sales




Export sales constitute a significant portion of our sales. In 2012, we had approximately $16.3 million of export sales, constituting approximately 75% of our total sales. For further information regarding the allocation of our revenues by geographic region see Item 4 –“Information on the Company-Markets”.




Legal Proceedings




Currently, we are not a party to any legal proceedings; however, from time to time we are involved in legal proceedings arising from the operation of our business.  Based on the advice of our legal counsel, management believes such current proceedings, if any, will not have a material adverse effect on our financial position or results of operations.




Dividend Distribution Policy




We have never paid cash dividends to our shareholders.  We intend to retain future earnings for use in our business and do not anticipate paying cash dividends on our ordinary shares in the foreseeable future.  Any future dividend policy will be determined by the board of directors and will be based upon conditions then existing, including our results of operations, financial condition, current and anticipated cash needs, contractual restrictions and other conditions as the board of directors may deem relevant.




According to the Israeli Companies Law, a company may distribute dividends out of its profits, so long as the company reasonably believes that such dividend distribution will not prevent the company from paying all its current and future debts.  Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years.  In the event cash dividends are declared, such dividends will be paid in NIS.




B.
Significant Changes




Except as otherwise disclosed in this annual report, no significant change has occurred since December 31, 2012.




42




ITEM 9.
THE OFFER AND LISTING




A.
Offer and Listing Details





Annual Stock Information




The following table sets forth for each of the years indicated, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Capital Market:




Year

High


Low2008

$
2.80


$
0.502009

$
3.09


$
0.522010

$
2.93


$
1.812011

$
4.48


$
1.552012

$
2.37


$
0.95





Quarterly Stock Information




The following table sets forth for each of the full financial quarters in the years indicated, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Capital Market:




2011

High


LowFirst Quarter

$
3.53


$
2.14Second Quarter

$
4.48


$
2.85Third Quarter

$
4.28


$
1.80Fourth Quarter

$
2.64


$
1.55
  2012

High


LowFirst Quarter

$
2.37


$
1.70Second Quarter

$
2.00


$
1.04Third Quarter

$
1.47


$
0.97Fourth Quarter

$
1.51


$
0.95
  2013

High


LowFirst Quarter (through April 22, 2013)

$
1.92


$
1.05




Monthly Stock Information




The following table sets forth, for the most recent six months, the range of high ask and low bid prices of our ordinary shares on the NASDAQ Capital Market:




High


LowOctober 2012

$
1.51


$
0.95November 2012

$
1.28


$
1.07December 2012

$
1.17


$
1.04January 2013

$
1.20


$
1.05February 2013

$
1.92


$
1.13March 2013

$
1.59


$
1.12April (through April 22, 2013)

$
1.19


$
0.96




B.           Plan of Distribution




Not applicable.




43




C.            Markets




Our ordinary shares traded on the NASDAQ Global Market under the symbol "RADIF" from 1985 until June 10, 2002, when the listing of our ordinary shares was transferred to the NASDAQ Capital Market.On December 13, 2005, we changed our symbol to "RADI," and on March 15, 2007,we changed our symbol to "RADA."




D.            Selling Shareholders




Not applicable.




E.           Dilution




Not applicable.




F.            Expense of the Issue




Not applicable.




ITEM 10.
ADDITIONAL INFORMATION




A.           Share Capital




Not applicable.




B.           Memorandum and Articles of Association




Purposes and Objectives of the Company




We are registered with the Israeli Companies Registry and have been assigned company number 52-003532-0.  Section 2 of our memorandum of association provides that we were established for the purpose of engaging in the business of providing services of planning, development, consultation and instruction in the electronics field.  In addition, the purpose of our company is to perform various corporate activities permissible under Israeli law.




On February 1, 2000, the Israeli Companies Law came into effect and superseded most of the provisions of the Israeli Companies Ordinance (New Version), 5743-1983, except for certain provisions which relate to liens, bankruptcy, dissolution and liquidation of companies.  Under the Israeli Companies Law, as recently amended, various provisions, some of which are detailed below, overrule the current provisions of our articles of association.




The Powers of the Directors




Under the provisions of the Israeli Companies Law, and our articles of association, a director cannot participate in a meeting nor vote on a proposal, arrangement or contract in which he or she is materially interested.  In addition, our directors cannot vote compensation to themselves or any members of their body without the approval of our audit committee and our shareholders at a general meeting.  See Item 6C. "Directors, Senior Management and Employees - Board Practices – Approval of Related Party Transactions Under Israeli Law."




The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us.




Under our articles of association, retirement of directors from office is not subject to any age limitation and our directors are not required to own shares in our company in order to qualify to serve as directors.




44




Rights Attached to Shares




Our authorized share capital consists of 16,333,333 ordinary shares of a nominal value of NIS 0.015 each.  All outstanding ordinary shares are validly issued, fully paid and non-assessable.  The rights attached to the ordinary shares are as follows:




The rights attached to the ordinary shares are as follows:




Dividend rights.Holders of our ordinary shares are entitled to the full amount of any cash or share dividend subsequently declared.  The board of directors may declare interim dividends and propose the final dividend with respect to any fiscal year only out of the retained earnings, in accordance with the provisions of the Israeli Companies Law.  Our articles of association provide that the declaration of a dividend requires approval by an ordinary resolution of the shareholders, which may decrease but not increase the amount proposed by the board of directors.  See Item 8A. "Financial Information – Consolidated and Other Financial Information – Dividend Distribution Policy."  If after one year a dividend has been declared and it is still unclaimed, the board of directors is entitled to invest or utilize the unclaimed amount of dividend in any manner to our benefit until it is claimed.  We are not obligated to pay interest or linkage differentials on an unclaimed dividend.




Voting rights.  Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders.  Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future.




An ordinary resolution, such as a resolution for the declaration of dividends, requires approval by the holders of a majority of the voting rights represented at the meeting, in person, by proxy or by written ballot and voting on the matter.  Under our articles of association, a special resolution, such as amending our memorandum of association or articles of association, approving any change in capitalization, winding-up, authorization of a class of shares with special rights, or other changes as specified in our articles of association, requires approval of a special majority, representing the holders of no less than 75% of the voting rights represented at the meeting in person, by proxy or by written ballot, and voting on the matter.




Pursuant to our articles of association, our directors are elected at our annual general meeting of shareholders for a term of three years by a vote of the holders of a majority of the voting power represented and voting at such meeting, and hold office until the third next annual general meeting of shareholders and until their successors have been elected.  All the members of our Board of Directors (except the outside directors) may be reelected upon completion of their term of office.  For information regarding the election of outside directors, see Item 6C "Directors, Senior Management and Employees - Board Practices -Election of Directors."




Rights to share in the company's profits.  Our shareholders have the right to share in our profits distributed as a dividend and any other permitted distribution.  See this Item 10B. "Additional Information – Memorandum and Articles of Association – Rights Attached to Shares – Dividend Rights."




Rights to share in surplus in the event of liquidation.  In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in proportion to the nominal value of their holdings.  This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future.




Liability to capital calls by the company.Under our memorandum of association and the Israeli Companies Law, the liability of our shareholders is limited to the par value of the shares held by them.




Limitations on any existing or prospective major shareholder.  See Item 6C. "Directors, Senior Management and Employees - Board Practices – Approval of Related Party Transactions Under Israeli Law."




Changing Rights Attached to Shares




According to our articles of association, in order to change the rights attached to any class of shares, unless otherwise provided by the terms of the class, such change must be adopted by a general meeting of the shareholders and by a separate general meeting of the holders of the affected class with a majority of 75% of the voting power participating in such meeting.




45




Annual and Special General Meetings




The board of directors must convene an annual meeting of shareholders at least once every calendar year, within 15 months of the last annual meeting.  Depending on the matter to be voted upon, notice of at least 21 days or 35 days prior to the date of the meeting is required. Our board of directors may, in its discretion, convene additional meetings as "special general meetings."  In addition, the board of directors must convene a special general meeting upon the demand of two of the directors, 25% of the nominated directors, one or more shareholders having at least 5% of the outstanding share capital and at least 1% of the voting power in the company, or one or more shareholders having at least 5% of the voting power in the company.




The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or represented by proxy who hold or represent, in the aggregate, at least one third of the voting rights of the issued share capital.  A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the directors designate in a notice to the shareholders.  At the reconvened meeting, the required quorum consists of any two members present in person or by proxy.




Limitations on the Rights to Own Securities in Our Company




Neither our memorandum of association or our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of shares by non-residents, except with respect to subjects of countries which are in a state of war with Israel.




Provisions Restricting Change in Control of Our Company




The Israeli Companies Law requires that mergers between Israeli companies be approved by the board of directors and general meeting of shareholders of both parties to the transaction.  The approval of the board of directors of both companies is subject to such board's confirmation that there is no reasonable doubt that after the merger the surviving company will be able to fulfill its obligations towards its creditors.  Each company must notify its creditors about the contemplated merger.  Generally, under the Israeli Companies Law, our articles of association are deemed to include a requirement that such merger be approved by a special resolution of the shareholders, as explained above.  The approval of the merger by the general meetings of shareholders of the companies is also subject to additional approval requirements as specified in the Israeli Companies Law and regulations promulgated thereunder.  For purposes of the shareholders' approval, the merger shall not be deemed as granted, unless the court determines otherwise, if it is not supported by the majority of the shares represented at the general meeting, other than those shares that are held by the other party to the merger or by any shareholder holding 25% or more of the outstanding share capital of the company or the right to appoint 25% or more of the members of the board of directors.  See Item 6C.  "Directors, Senior Management and Employees – Board Practices – Approval of Related Party Transactions Under Israeli Law."




The Israeli Companies Law also provides that an acquisition of shares of a public company must be made by means of a special tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company and there is no existing 25% or greater shareholder in the company.  An acquisition of shares of a public company must also be made by means of a tender offer if as a result of the acquisition the purchaser would become a 45% or greater shareholder of the company and there is no existing 45% or greater shareholder in the company.  These requirements do not apply if the acquisition (i) was made through a private placement that received shareholder approval, (ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25% shareholder of the company or (iii) was from a 45% shareholder of the company and resulted in the acquirer becoming a 45% shareholder of the company.  The special tender offer must be extended to all shareholders but, the offer may include explicit limitations allowing the offeror not to purchase shares representing more than 5% of the voting power attached to the company's outstanding shares, regardless of how many shares are tendered by shareholders.  The special tender offer may be effected only if (i) at least 5% of the voting power attached to the company's outstanding shares will be acquired by the offeror and (ii) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer.




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If, as a result of an acquisition of shares, the acquirer will hold more than 90% of the outstanding shares, the acquisition must be made by means of a tender offer for the entire outstanding shares.  In such event, if less than 5% of the outstanding shares are not tendered in the tender offer, all the shares of the company will be deemed as tendered and sold.  However, if more than 5% of the outstanding shares are not tendered in the tender offer, then the acquirer may not acquire any shares at all.  The law provides for appraisal allowing any shareholder to file a motion to the court within six months following the consummation of a full tender offer. However, in the event of a full tender offer, the offeror may determine that any shareholder who accepts the offer will not be entitled to appraisal rights.  Such determination will be effective only if the offeror or the company has timely published all the information that is required to be published in connection with such full tender offer pursuant to all applicable laws.




In addition, the purchase of 25% or more of the outstanding share capital of a company or the purchase of substantial assets of a company requires, under certain conditions the approval of the Restrictive Practices Authority.  Furthermore if the target company has received tax incentives of grants from the OCS, changes in ownership may require also the approval of the tax authorities or the OCS, as applicable.




Disclosure of Shareholders Ownership




The Israeli Securities Law and regulations promulgated thereunder do not require a company whose shares are publicly traded solely in a stock exchange outside of Israel, as in the case of our company, to disclose its share ownership.




Changes in Our Capital




Changes in our capital are subject to the approval of the shareholders at a general meeting by a special majority of 75% of the votes of shareholders participating and voting in the general meeting.




C.           Material Contracts




We do not deem any individual contract to be a material contract which is not in the ordinary course of our business.




D.           Exchange Controls




Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares.




Non-residents of Israel who purchase our ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repairable dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such amounts or an exemption has been obtained.




E.           Taxation




The following is a discussion of Israeli and United States tax consequences material to us and our shareholders.  To the extent that the discussion is based on new tax legislation which has not been subject to judicial or administrative interpretation, the views expressed in the discussion might not be accepted by the tax authorities in question.  The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible tax considerations.




Holders of our ordinary shares should consult their own tax advisors as to the United States, Israeli or other tax consequences of the purchase, ownership and disposition of ordinary shares, including, in particular, the effect of any foreign, state or local taxes.




Israeli Tax Considerations




The following is a summary of the current tax structure applicable to companies in Israel, with special reference to its effect on us.  The following also contains a discussion of the material Israeli tax consequences to purchasers of our ordinary shares and Israeli government programs benefiting us.  This summary does not discuss all the aspects of Israeli tax law that may be relevant to a particular investor in light of his or her personal investment circumstances or to some types of investors subject to special treatment under Israeli law. Examples of this kind of investor include residents of Israel or traders in securities who are subject to special tax regimes not covered in this discussion. Since some parts of this discussion are based on new tax legislation that has not yet been subject to judicial or administrative interpretation, we cannot assure you that the appropriate tax authorities or the courts will accept the views expressed in this discussion.




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General Corporate Tax Rate




The Israeli corporate tax rate was 25% in 2010, 24% in 2011 and 25% in 2012.  The corporate tax rate is expected to remain at 25% in 2013 and thereafter.  In view of this increase in the corporate tax rate to 25% in 2012, the real capital gains tax rate and the real betterment tax rate were also increased accordingly.  Capital gains derived after January 1, 2003 (the gains derived from the sale of listed securities that are taxed at the prevailing corporate tax rates) are subject to tax at a rate of 25%.




Law for the Encouragement of Industry (Taxes), 1969




The Law for the Encouragement of Industry (Taxes), 1969, generally referred to as the Industry Encouragement Law, provides several tax benefits for industrial companies. We believe that we currently qualify as an "Industrial Company" within the meaning of the Industry Encouragement Law.  The Industry Encouragement Law defines "Industrial Company" as a company resident in Israel, of which 90% or more of its income in any tax year, other than of income from defense loans, capital gains, interest and dividend, is derived from an "Industrial Enterprise" owned by it. An "Industrial Enterprise" is defined as an enterprise whose major activity in a given tax year is industrial production activity.




The following corporate tax benefits, among others, are available to Industrial Companies:




·
Amortization of the cost of purchased know-how and patents and/or right to use a patent and know-how which are used for the development or advancement of the company, over an eight-year period;




·
Accelerated depreciation rates on equipment and buildings;




·
Under specified conditions, an election to file consolidated tax returns with additional related Israeli Industrial Companies; and




·
Expenses related to a public offering are deductible in equal amounts over three years.




Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. We cannot assure that we qualify or will continue to qualify as an "Industrial Company" or that the benefits described above will be available in the future.




Capital Gains Tax on Sales of Our Ordinary Shares




Under income tax regulations shareholders that are not Israeli residents are generally exempt from Israeli capital gains tax on any gains derived from the sale, exchange or disposition of our ordinary shares, provided that (1) such shareholders did not acquire their shares prior to first initial public offering on a recognized stock exchange outside of Israel, (2) the provisions of the Income Tax Law (inflationary adjustments), 1985 do not apply to such gain, and (3) such gains did not derive from a permanent establishment or business activity of such shareholders in Israel.  However, non-Israeli corporations will not be entitled to the foregoing exemptions if an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the revenues or profits of such non-Israeli corporation, whether directly or indirectly.




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Under the U.S.-Israel Tax Treaty, the sale, exchange or disposition of our ordinary shares by a shareholder who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) holding the ordinary shares as a capital asset is exempt from Israeli capital gains tax unless either (i) the shareholder holds, directly or indirectly, shares representing 10% or more of our voting capital during any part of the 12-month period preceding such sale, exchange or disposition or (ii) the capital gains arising from such sale are attributable to a permanent establishment of the shareholder located in Israel. However, under the U.S.-Israel Tax Treaty, U.S. Residents would be permitted to claim a credit for such taxes against the U.S. federal income tax imposed with respect to such sale, exchange or disposition, subject to limitations in U.S. laws applicable to foreign tax credits. The treaty does not relate to U.S. state or local taxes.




Taxation of Foreign Resident Holders of Shares




Non-residents of Israel are generally subject to Israeli income tax on the receipt of dividends paid on our ordinary shares at the rate of 20% (25% in 2012), which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the shareholder's country of residence.  With respect to a substantial shareholder, the applicable tax rate is at 25% (30% in 2012 and tax will be withheld at source at a rate of 25% in 2012).  Under the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of withholding tax on dividends, not generated by our Approved Enterprise, that are paid to a U.S. corporation holding 10% or more of our outstanding voting capital throughout the tax year in which the dividend is distributed as well as the previous tax year, is 12.5%.




A non-resident of Israel who receives dividends from which tax was withheld is generally exempt from the duty to file returns in Israel in respect of such income; provided such income was not derived from a business conducted in Israel by the taxpayer, and the taxpayer has no other taxable sources of income in Israel.




Foreign Exchange Regulations




Dividends (if any) paid to the holders of our ordinary shares, and any amounts payable with respect to our ordinary shares upon dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely reparable U.S. dollars at the rate of exchange prevailing at the time of conversion, however, Israeli income tax is required to have been paid or withheld on these amounts.




Controlled Foreign Corporation




In general, and subject to the provisions of all relevant legislation, an Israeli resident who holds, directly or indirectly, 10% or more of the rights in a foreign corporation whose shares are not publicly traded, in which more than 50% 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 (generally referred to as a Controlled Foreign Corporation, or CFC), is liable for tax on the portion of his income attributed to holdings in such corporation, as if such income was distributed to him as a dividend.




Share Allocations to Employees and controlling shareholders




In general, the section of the Tax Ordinance that deals with taxation of share allocations to employees and/or officers (excluding controlling members) provides that a company may choose one of three courses of taxation which course must be approved by the assessing officer: (i) work income course for shares held 12 months in trust; (ii) capital gains course for shares held 24 months in trust; and (iii) allocation not through a trustee.  Each of these courses has different tax consequences.




As of January 1, 2006, the periods mentioned in the first two courses commence as of the date of grant and not as of the end of the tax year in which the shares were granted.




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Controlling shareholders will be taxable under section 3(i) to the Tax Ordinance, according to which, the grantee pays income tax rate (according to the marginal tax rate of the grantee- up to 48% in 2012) on the profit upon the sale of the underlying shares. As of January 1, 2013 the marginal tax rate (48%) of an individual will increase in 2% in case his taxable income in a tax year exceed the amount of NIS 800,000 (including capital gains from marketable securities, dividends and interest income).




United States Federal Income Tax Consequences




The following is a summary of certain material U.S. federal income tax consequences that apply to U.S. Holders who hold ordinary shares as capital assets.  This summary is based on the United States Internal Revenue Code of 1986, as amended, or the Code, Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively.  This summary does not address all tax considerations that may be relevant with respect to an investment in ordinary shares.  This summary does not discuss all the tax consequences that may be relevant to a U.S. Holder in light of such holder's particular circumstances or to U.S. Holders subject to special rules, including persons that are non-U.S. Holders, broker-dealers, financial institutions, certain insurance companies, investors liable for alternative minimum tax, tax-exempt organizations, regulated investment companies, taxpayers whose functional currency is not the U.S. dollar, persons who hold the ordinary shares through partnerships or other pass-through entities, persons who acquired their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for services, investors that actually or constructively own 10 percent or more of our voting shares, and investors holding ordinary shares as part of a straddle or appreciated financial position or as part of a hedging or conversion transaction.




If a partnership or an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares, the U.S. federal income tax treatment of a partner in such a partnership will generally depend upon the status of the partner and the activities of the partnership. A partnership that owns ordinary shares and the partners in such partnership should consult their tax advisors about the U.S. federal income tax consequences of holding and disposing of ordinary shares.




This summary does not address the effect of any U.S. federal taxation other than U.S. federal income taxation.  In addition, this summary does not include any discussion of state, local or foreign taxation.




You are urged to consult your tax advisors regarding the foreign and United States federal, state and local tax considerations of an investment in ordinary shares.




For purposes of this summary, the term "U.S. Holder" means an individual who is a citizen or, for U.S. federal income tax purposes, a resident of the United States, a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or any political subdivision thereof, an estate whose income is subject to U.S. federal income tax regardless of its source, or a trust that (a) is subject to the primary supervision of a court within the United States and the control of one or more U.S. persons or (b) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person.




Taxation of Dividends




Subject to the discussion below under "Passive Foreign Investment Companies," the gross amount of any distributions received with respect to ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes to the extent of our current and accumulated earnings and profits, as determined under U.S. federal income tax principles. You will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess of our current and accumulated earnings and profits will be treated as a non-taxable return of capital to the extent of your tax basis in the ordinary shares and any amount in excess of your tax basis will be treated as gain from the sale of ordinary shares. See "-Disposition of Ordinary Shares" below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends-received deduction generally available to corporations under Section 243 of the Code.




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Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a U.S. dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received.  A U.S. Holder who receives payment in NIS and converts NIS into U.S. dollars at an exchange rate other than the rate in effect on such day may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.  U.S. Holders should consult their own tax advisors concerning the U.S. tax consequences of acquiring, holding and disposing of NIS.




Subject to complex limitations, any Israeli withholding tax imposed on such dividends will be a foreign income tax eligible for credit against a U.S. Holder's U.S. federal income tax liability (or, alternatively, for deduction against income in determining such tax liability).  The limitations set out in the Code include computational rules under which foreign tax credits allowable with respect to specific classes of income cannot exceed the U.S. federal income taxes otherwise payable with respect to each such class of income.  Dividends generally will be treated as foreign-source passive category income or, in the case of certain U.S. Holders, general category income for United States foreign tax credit purposes.  Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax, see discussion below.  A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 31-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make related payments with respect to substantially similar or related property.  Any days during which a U.S. Holder has substantially diminished its risk of loss on the ordinary shares are not counted toward meeting the 16-day holding period required by the statute.  The rules relating to the determination of the foreign tax credit are complex, and you should consult with your personal tax advisors to determine whether and to what extent you would be entitled to this credit.




Subject to certain limitations, "qualified dividend income" received by a noncorporate U.S. Holder in tax years beginning after December 31, 2012 will be subject to tax at a reduced maximum tax rate of 20 percent.  Distributions taxable as dividends paid on the ordinary shares should qualify for the 20 percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the United States and Israel, or the Treaty, or (ii) the ordinary shares are readily tradable on an established securities market in the United States and certain other requirements are met.  We believe that we are entitled to benefits under the Treaty and that the ordinary shares currently are readily tradable on an established securities market in the United States. However, no assurance can be given that the ordinary shares will remain readily tradable.  The rate reduction does not apply unless certain holding period requirements are satisfied.  With respect to the ordinary shares, the U.S. Holder must have held such shares for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date.  The rate reduction also does not apply to dividends received from passive foreign investment companies, see discussion below, or in respect of certain hedged positions or in certain other situations.  The legislation enacting the reduced tax rate contains special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to the reduced tax rate.  U.S. Holders of ordinary shares should consult their own tax advisors regarding the effect of these rules in their particular circumstances.




Disposition of Ordinary Shares




If you sell or otherwise dispose of ordinary shares, you will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other disposition and your adjusted tax basis in the ordinary shares. Subject to the discussion below under the heading "Passive Foreign Investment Companies," such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if you have held the ordinary shares for more than one year at the time of the sale or other disposition. In general, any gain that you recognize on the sale or other disposition of ordinary shares will be U.S.-source for purposes of the foreign tax credit limitation; losses will generally be allocated against U.S. source income.  Deduction of capital losses is subject to certain limitations under the Code.




In the case of a cash basis U.S. Holder who receives NIS in connection with the sale or disposition of ordinary shares, the amount realized will be based on the U.S. dollar value of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss.




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An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary shares, provided that the election is applied consistently from year to year.  Such election may not be changed without the consent of the Internal Revenue Service, or the IRS.  In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the U.S. dollar value of the currency received prevailing on the trade date and the settlement date.  Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares.




Passive Foreign Investment Companies




For U.S. federal income tax purposes, we will be considered a passive foreign investment company, or PFIC, for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules.




Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC nor do we expect to become a PFIC in the foreseeable future. However, because the determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, there can be no assurances that we will not become a PFIC for any future taxable year.




If we are treated as a PFIC for any taxable year in your holding period, dividends would not qualify for the reduced maximum tax rate, discussed above, you would be required to make an annual return on IRS Form 8621 regarding your ordinary shares and, unless you elect either to treat your investment in ordinary shares as an investment in a "qualified electing fund," or QEF election, or to "mark-to-market" your ordinary shares, as described below:




·
you would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ordinary shares ratably over the holding period for such ordinary shares,




·
the amount allocated to each year during which we are considered a PFIC and subsequent years, other than the year of the dividend payment or disposition, would be subject to tax at the highest individual or corporate tax rate, as the case may be, in effect for that year and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year, and




·
the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxable as ordinary income in the current year.




If you make either a timely QEF election or a timely mark-to-market election in respect of your ordinary shares, you would not be subject to the rules described above. If you make a timely QEF election, you would be required to include in your income for each taxable year your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gain as long-term capital gain, whether or not such amounts are actually distributed to you.  You would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements.




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Alternatively, if the ordinary shares are considered "marketable stock" and if you elect to "mark-to-market" your ordinary shares, you will generally include in income any excess of the fair market value of the ordinary shares at the close of each tax year over your adjusted basis in the ordinary shares. If the fair market value of the ordinary shares had depreciated below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the ordinary shares over its fair market value at that time. However, such deductions generally would be limited to the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years. Income recognized and deductions allowed under the mark-to-market provisions, as well as any gain or loss on the disposition of ordinary shares with respect to which the mark-to-market election is made, is treated as ordinary income or loss (except that loss on a disposition of ordinary shares is treated as capital loss to the extent the loss exceeds the net mark-to-market gains, if any, that you included in income with respect to such ordinary shares in prior years). Gain or loss from the disposition of ordinary shares (as to which a mark-to-market election was made) in a year in which we are no longer a PFIC, will be capital gain or loss.




Additional Tax on Investment Income




In addition to the income taxes described above, U.S. Holders that are individuals, estates or trusts and whose income exceeds certain thresholds will be subject to a 3.8% Medicare contribution tax on net investment income, which includes dividends and capital gains.




Backup Withholding and Information Reporting




Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate equal to the fourth lowest income tax rate applicable to individuals (which, under current law, is 28%).  Backup withholding will not apply, however, if you (i) are a corporation or come within certain exempt categories, and demonstrate the fact when so required, or (ii) furnish a correct taxpayer identification number and make any other required certification.




Backup withholding is not an additional tax.  Amounts withheld under the backup withholding rules may be credited against a U.S. Holder's U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS.




U.S. individuals that hold certain specified foreign financial assets, including stock in a foreign corporation, with values in excess of certain thresholds are required to file Form 8938 with their U.S. Federal income tax return. Such form requires disclosure of information concerning such foreign assets, including the value of the assets. Failure to file the form when required is subject to penalties. An exemption from reporting applies to foreign assets held through a U.S. financial institution, generally including a non-U.S. branch or subsidiary of a U.S. institution and a U.S. branch of a non-US institution. Investors are encouraged to consult with their own tax advisors regarding the possible application of this disclosure requirement to their investment in ordinary shares.




Any U.S. holder who holds 10% or more in vote or value of our ordinary shares may be subject to certain additional U.S. information reporting requirements.




F.           Dividend and Paying Agents




Not applicable.




G.           Statement by Experts




Not applicable.




H.           Documents on Display




We are subject to certain of the reporting requirements of the Exchange Act, as applicable to "foreign private issuers" as defined in Rule 3b-4 under the Exchange Act.  As a foreign private issuer, we are exempt from certain provisions of the Exchange Act.  Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act, and transactions in our equity securities by our officers and directors are exempt from reporting and the "short-swing" profit recovery provisions contained in Section 16 of the Exchange Act.  In addition, we are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.  However, we file with the SEC an annual report on Form 20-F containing financial statements audited by an independent accounting firm.  We also submit to the SEC reports on Form 6-K containing (among other things) press releases and unaudited financial information.  We post our annual report on Form 20-F on our website (www.rada.com) promptly following the filing of our annual report with the SEC.  The information on our website is not incorporated by reference into this annual report.




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This annual report and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the SEC public reference room at 100 F Street, N.E., Room 1580, Washington, D.C. 20549.  You may obtain information on the operation of the SEC's public reference room in Washington, D.C. by calling the SEC at 1-800-SEC-0330.  The Exchange Act file number for our SEC filings is 000-15375.




The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR (Electronic Data Gathering, Analysis, and Retrieval) system.




The documents concerning our company that are referred to in this annual report may also be inspected at our offices located at 7 Giborei Israel Street, Netanya 42504, P.O 8606, Israel.




I.           Subsidiary Information




Not applicable.




ITEM 11.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS




Interest Rate Risk




We currently do not invest in, or otherwise hold, for trading or other purposes, any financial instruments subject to market risks.  We pay interest on our credit facilities, convertible notes and long-term and short-term loans based on Libor, for dollar-denominated loans, and Israeli prime or adjustment differences to the Israeli consumer price index, for some of our NIS-denominated loans.  As a result, changes in the general level of interest rates may affect the amount of interest payable by us under these facilities.  Accordingly, a 1% increase in the Libor rate would increase our financing expenses by approximately $41,500.




Foreign Currency Exchange Risk




The depreciation of the NIS against the dollar has the effect of reducing the dollar amount of any of our expenses or liabilities which are payable in NIS (unless such expenses or payables are linked to the dollar).  As of December 31, 2012, we had liabilities payable in NIS which are not linked to the dollar in the amount of $3.7 million and cash and receivables in the amount of $1.3 million denominated in NIS.  Accordingly, 1% appreciation of the NIS against the dollar would increase our financing expenses by approximately $51,000.  A 1% depreciation of the NIS against the dollar would decrease our financing expenses by the same amount.  Neither a 10% increase nor decrease in current exchange rates would have a material effect on our consolidated financial statements.  However, the amount of liabilities payable and/or cash and receivables in NIS is likely to change from time to time.




Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations and especially larger periodic devaluations will have an impact on our profitability and period-to-period comparisons of our results.  The effects of foreign currency re-measurements are reported in our consolidated financial statements in continuing operations.




ITEM 12.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES




Not applicable.




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PART II




ITEM 13.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES




None.




ITEM 14.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS




None.




ITEM 15.
CONTROLS AND PROCEDURES




Disclosure Controls and Procedures




We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our chief executive officer and chief financial officer to allow timely decisions regarding required disclosure.  Our management, including our chief executive officer and chief financial officer, conducted an evaluation of our disclosure controls and procedures, as defined under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Annual Report on Form 20-F.  Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective.




Management's Annual Report on Internal Control over Financial Reporting




Our management is responsible for establishing and maintaining adequate internal control over our financial reporting.  Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the company's principal executive and principal financial officers and effected by the company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:




·
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transaction and dispositions of the assets of the company;




·
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and




·
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.




Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012.  In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.  Based on that assessment, our management concluded that as of December 31, 2012, our internal control over financial reporting is effective.




55




Changes in Internal Control over Financial Reporting




There was no change in our internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.




ITEM 16.
RESERVED.




ITEM 16A.        AUDIT COMMITTEE FINANCIAL EXPERT




Our board of directors has determined that that Mr. Eli Akavia, one of our outside directors, within the meaning of the Israeli Companies Law, and an independent director, as defined by the rules of the Securities and Exchange Committee and NASDAQ, meets the definition of an audit committee financial expert, as defined by rules of the SEC.  For a brief listing of Mr. Akavia's relevant experience, see Item 6.A. "Directors, Senior Management and Employees -- Directors and Senior Management."




ITEM 16B.        CODE OF ETHICS




We have adopted a code of ethics that applies to our chief executive officer and all senior financial officers of our company, including the chief financial officer, chief accounting officer or controller, or persons performing similar functions.  Written copies of our code of ethics are available upon request.  If we make any substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such amendment or waiver on our website.




ITEM 16C.        PRINCIPAL ACCOUNTANT FEES AND SERVICES




Independent Registered Public Accounting Firm Fees




The following table sets forth, for each of the years indicated, the fees billed by our principal independent registered public accounting firm.  All of such fees were pre-approved by our Audit Committee.




Year Ended December 31Services Rendered:

2011


2012Audit (1)

$
99,000


$
93,000Total (2)

$
99,000


$
93,000


___________


(1)
Include professional services rendered by our principal accountant for the audit of our annual financial statements or services that are normally provided by our accountant in connection with statutory and regulatory filings or engagements.


(2)
No audit related, tax or other fees paid to our principal independent registered public accounting firm in 2011 and 2012.




Pre-Approval Policies and Procedures




Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent registered accounting firm, Kost Forer Gabbay & Kasierer, a Member of Ernst & Young Global.  Pre-approval of an audit or non-audit service may be given as a general pre-approval, as part of the audit committee's approval of the scope of the engagement of our independent auditor, or on an individual basis.  The policy prohibits retention of the independent public accountants to perform the prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act or the rules of the Securities and Exchange Committee, and also requires the Audit Committee to consider whether proposed services are compatible with the independence of the public accountants.




56




ITEM 16D.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES




Not applicable.




ITEM 16E.
PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS




Issuer Purchase of Equity Securities




Neither we, nor any "affiliated purchaser" of our company, has purchased any of our securities during 2012.  Although we do not believe that either Mr. Yeung, our controlling shareholder, or Mr. Gruber, a shareholder and director of our company, may be deemed to be an affiliated purchaser as defined in the Exchange Act, on February 28, 2012, we entered into a $3.0 million loan agreement with FCD, an entity controlled by Mr. Yeung, and Mr. Gruber, according to which, we issued warrants to purchase 1,080,000 and 120,000 ordinary shares to FCD and to Mr. Gruber, respectively, at an exercise price of $2.50 per share.  These warrants expire in February 2015.




ITEM 16F.
CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT




None.




ITEM 16G.
CORPORATE GOVERNANCE




Under NASDAQ Stock Market Rule 5615(a)(3), foreign private issuers, such as our company, are permitted to follow certain home country corporate governance practices instead of certain provisions of the NASDAQ Stock Market Rules.  A foreign private issuer that elects to follow a home country practice instead of any of such NASDAQ rules must submit to NASDAQ, in advance, a written statement from an independent counsel in such issuer's home country certifying that the issuer's practices are not prohibited by the home country's laws.




In May 2005 and August 2005, we informed NASDAQ that we do not comply with the following requirements of Rule 5615(a)(3), and instead follow Israeli law and practice in respect of such requirements:




·
The requirement to maintain a majority of independent directors, as defined under the NASDAQ Marketplace Rules.  Instead, under Israeli law and practice, we are required to appoint at least two outside directors, within the meaning of the Israeli Companies Law, to our board of directors. In addition, in accordance with the rules of the SEC and NASDAQ, we have the mandated three independent directors, as defined by the rules of the SEC and NASDAQ, on our audit committee.  See above in this Item 6C. "Directors, Senior Management and Employees - Board Practices - Independent and Outside Directors.




·
The requirement that our independent directors have regularly scheduled meetings at which only independent directors are present.  Under Israeli law independent directors are not required to hold executive sessions.




·
The requirement regarding the nominations process for directors.  Instead, we follow Israeli law and practice in accordance with which our board of directors recommends directors for election by our shareholders.  See above in this Item 6C. "Directors, Senior Management and Employees - Board Practices - Election of Directors."




·
The requirement regarding the compensation of officers.  Instead, we follow Israeli law and practice.   Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require the approval of the board of directors if the transaction is not an "extraordinary transaction," unless a company's articles of association provide otherwise,and if such transaction is an "extraordinary transaction," it requires the approval of the audit committee and the board of directors, in that order.  The compensation of office holders who are directors must be approved by our Audit Committee, Board of Directors and shareholders, in that order.




ITEM 16H.
MINE SAFETY DISCLOSURE




Not applicable.




57




PART III




ITEM 17.
FINANCIAL STATEMENTS




Not applicable.




ITEM 18.           FINANCIAL STATEMENTS




Consolidated Financial Statements




Index to Financial Statements
F-1Report of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets
F-3Consolidated Statements of Operations
F-5Consolidated Statements of Other Comprehensive Income (loss)
F-6Consolidated Statements of Changes in Shareholders' Equity
F-7Consolidated Statements of Cash Flows
F-8Notes to Consolidated Financial Statements
F-10





ITEM 19.           EXHIBITS




Index to Exhibits




Exhibit
Description1.1
Memorandum of Association of the Registrant (1)1.2
Articles of Association of the Registrant (1)2.1
Specimen of Share Certificate (1)4.1
Loan Agreement dated July 1, 2008, between the Registrant and Faith Content Development Ltd. (2)4.2
License Agreement dated July 2, 2008 between the Registrant and Faith Content Development Ltd. (3)4.3
Loan Agreement dated as of February 27, 2012 by and among the Registrant, Faith Content Development Limited and Mr. Benzion Gruber8.1
List of Subsidiaries of the Registrant12.1
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act, as amended12.2
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act, as amended13.1
Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 200213.2
Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002101.INS
XBRL Instance Document.* (4)101.SCH
XBRL Taxonomy Extension Schema Document.* (4)101.CAL
XBRL Taxonomy Calculation Linkbase Document.* (4)101.LAB
XBRL Taxonomy Label Linkbase Document.* (4)101.PRE
XBRL Taxonomy Presentation Linkbase Document.* (4)101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.* (4)




*
Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for the purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


(1)
Filed as an exhibit to our Annual Report on Form 20-F for the year ended December 31, 2000 and incorporated herein by reference.


(2)
Filed as Exhibit 4.4 to our Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference.


(3)
Filed as Exhibit 4.6 to our Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference.


(4)
To be filed by amendment to this Annual Report on Form 20-F for the year ended December 31, 2012.










58





RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY


CONSOLIDATED FINANCIAL STATEMENTS
  AS OF DECEMBER 31, 2012
 
 U.S. DOLLARS IN THOUSANDS
  INDEX
  PageReport of Independent Registered Public Accounting Firm
F-2Consolidated Balance Sheets
F-3 – F-4Consolidated Statements of Operations
F-5Consolidated Statements of Other Comprehensive Income (loss)
F-6Consolidated Statements of Changes in Shareholders' Equity
F-7Consolidated Statements of Cash Flows
F-8 – F-9Notes to Consolidated Financial Statements
F-10 – F-36
 
 F - 1
  Kost Forer Gabbay & Kasierer



2 Pal-Yam Avenue

Haifa 33095, Israel



Tel: 972 (4)8654000

Fax: 972 (4)8654022

www.ey.com
  REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 To the Shareholders and Board of Directors of
 
 RADA ELECTRONIC INDUSTRIES LTD.
  We have audited the accompanying consolidated balance sheets of RADA Electronic Industries Ltd. ("the Company") and its subsidiary as of December 31, 2012 and 2011 and the related consolidated statements of operations, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
  In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and subsidiary as of December 31, 2012 and 2011, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.
 
 Haifa, Israel
/s/Kost Forer Gabbay & Kasierer

KOST FORER GABBAY & KASIERERApril 24, 2013
A Member of Ernst & Young Global
 F - 2
 
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands
  December 31,2012


2011ASSETSCURRENT ASSETS:Cash and cash equivalents

$
1,164


$
1,107Restricted deposits


1,311



1,385Trade receivables (net of allowance for doubtful accounts of $15 and $7 at December 31, 2012 and 2011, respectively)


5,381



6,920Costs and estimated earnings in excess of billings on uncompleted contracts


1,748



814Other accounts receivable and prepaid expenses


939



727Inventories


7,272



7,655Total current assets


17,815



18,608LONG-TERM RECEIVABLES AND OTHER DEPOSITS


1,160



1,563PROPERTY, PLANT AND EQUIPMENT, NET


3,324



3,277OTHER ASSETS:Intangible assets, net


-



155Goodwill


587



587Total other assets


587



742Total assets

$
22,886


$
24,190
 
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 3
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 
 CONSOLIDATED BALANCE SHEETS
 U.S. dollars in thousands, except share and per share data
  December 31,2012


2011LIABILITIES AND SHAREHOLDERS' EQUITYCURRENT LIABILITIES:Bank credit

$
3,172


$
3,933Trade payables


1,948



2,380Loans from shareholders


3,968



2,405Convertible note from a shareholder, net


3,000



2,810Other accounts payable and accrued expenses


3,750



4,126Total current liabilities


15,838



15,654LONG-TERM LIABILITIES:Loans from shareholders, net


-



176Accrued severance pay and other long term liability


519



516Total long-term liabilities


519



692COMMITMENTS AND CONTINGENT LIABILITIESEQUITY:Share capital -Ordinary shares of NIS 0.015 par value - Authorized: 16,333,333 shares

at December 31, 2012 and 2011; Issued and outstanding: 8,918,647

shares at December 31, 2012 and December 31, 2011 respectively


119



119Additional paid-in capital


70,884



70,176Accumulated other comprehensive income


468



443Accumulated deficit


(65,565
)


(63,514
)Total RADA Electronic Industries shareholders' equity


5,906



7,224Non-controlling interest


623



620Total equity


6,529



7,844Total liabilities and equity

$
22,886


$
24,190
 
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 4
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 U.S. dollars in thousands, except per share data
 
 
 Year ended December 31,2012


2011


2010Revenues:Products

$
20,073


$
17,469


$
25,776Services


1,478



1,936



1,74721,551



19,405



27,523Cost of revenues:Products


15,453



12,707



19,297Services


780



1,093



82016,233



13,800



20,117Gross profit


5,318



5,605



7,406Operating costs and expenses:Research and development, net


2,423



2,543



1,182Marketing and selling


1,664



2,106



2,563General and administrative


2,243



1,997



1,732Total operating costs and expenses


6,330



6,646



5,477Operating profit (loss)


(1,012
)


(1,041
)


1,929Financial expenses, net


1,043



478



1,184Net income (loss)


(2,055
)


(1,519
)


745Less: Net (income) loss attributable to non-controlling interest


4



(7
)


(11
)Net income (loss) attributable to RADA Electronic Industries' shareholders

$
(2,051
)

$
(1,526
)

$
734Net income (loss) per share attributable to RADAElectronic Industries' shareholders:Basic and diluted net income (loss) per Ordinary share

$
(0.23
)

$
(0.17
)

$
0.08Weighted average number of Ordinary shares used for

computing basic and diluted net income (loss) per share


8,918,647



8,899,161



8,868,857
 
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 5
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 U.S. dollars in thousands
 
 
 Year ended December 31,2012


2011


2010Net income (loss)

$
(2,055
)

$
(1,519
)

$
745Less: Net (income) loss attributable to non-controlling interest


4



(7
)


(11
)Net income (loss) attributable to RADA Electronic Industries' shareholders

$
(2,051
)

$
(1,526
)

$
734Other comprehensive income:Change in foreign currency translation adjustment

$
32


$
64


$
95Less: other comprehensive income attributable to non-controlling interest


7



13



19Other comprehensive income (loss) attributable to RADA Electronic Industries' shareholders

$
25


$
51


$
76Comprehensive income (loss)

$
(2,023
)

$
(1,455
)

$
840Less: comprehensive income attributable to non-controlling interest


3



20



30Comprehensive income (loss) attributable to RADA Electronic Industries' shareholders

$
(2,026
)

$
(1,475
)

$
810
 F - 6
 
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 U.S. dollars in thousands, except share data
 
 Number of





Additional


Accumulated other





NonOrdinary


Share


paid-in


comprehensive


Accumulated


controlling


Totalshares


capital


capital


income


deficit


interest


equityBalance at January 1,2010


8,868,857



119



69,578



316



(62,722
)


570



7,861Share-based compensation for employees


-



-



31



-



-



-



31Discount on convertible loan due to

modification of debt


-



-



451



-



-



-



451Other comprehensive income


-



-



-



76



-



19



95Net income


-



-



-



-



734



11



745Balance at December 31, 2010


8,868,857



119



70,060



392



(61,988
)


600



9,183Exercise of options


49,790



*) -



116



-



-



-



116Other comprehensive income


-



-



-



51



-



13



64Net Loss


-



-



-



-



(1,526
)


7



(1,519
)Balance at December 31, 2011


8,918,647



119



70,176



443



(63,514
)


620



7,844Issuance of warrants to shareholders










708















708Other comprehensive income














25







7



32Net Loss


















(2,051
)


(4
)


(2,055
)Balance at December 31, 2012


8,918,647



119



70,884



468



(65,565
)


623



6,529
 
 *)
Represents an amount lower than $1.
 
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 7
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
 
 
 Year ended December 31,2012


2011


2010Cash flows from operating activities:Net income (loss)

$
(2,055
)

$
(1,519
)

$
745Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


897



951



962Amortization –of discount on convertible note and loans


516



212



576Share-based compensation for employees


-



-



31Severance pay, net


19



1



85Decrease (increase) in trade receivables, net


1,539



2,532



(4,777
)Increase in other accounts receivable and prepaid expenses


(337
)


(417
)


(395
)Grants received from Chief Scientist's Office (OCS)


142



382



179Decrease (increase) in unbilled receivables


(943
)


1,224



(1,659
)Decrease (increase) in inventories


325



(2,069
)


(501
)Increase (decrease) in trade payables


(463
)


(697
)


493Increase (decrease) in other accounts payable and accrued expenses


(392
)


(1,972
)


2,576Net cash provided by (used in) operating activities


(752
)


(1,372
)


(1,685
)Cash flows from investing activities:Purchase of property, plant and equipment


(688
)


(218
)


(603
)Increase (decrease) in deposits


(3
)


17



(11
)Change in restricted cash


472



348



(1,413
)Net cash provided by (used in) investing activities


(219
)


147



(2,027
)
 
 F - 8
 
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 U.S. dollars in thousands
 Year ended December 31,2012


2011


2010Cash flows from financing activities:Proceeds from  loans from a shareholder, net of issuance expenses


3,998



1,700



-Repayment of long term loan from shareholders


(2,229
)


(529
)


(160
)Short-term bank credit, net


(761
)


188



3,712Exercise of options and warrants


-



116



-Net cash provided by financing activities from continuing operations


1,008



1,475



3,552Effect of exchange rate changes on cash and cash equivalents


20



7



23Increase (decrease) in cash and cash equivalents


57



257



(137
)Cash and cash equivalents at the beginning of the year


1,107



850



987Cash and cash equivalents at the end of the year

$
1,164


$
1,107


$
850
  Year ended December 31,2012


2011


2010(b)
Supplemental disclosures of cash flow activities:Net cash paid during the year for:Income taxes

$
84


$
63


$
7Interest

$
304


$
168


$
219(c)
Non-cash transactionsTransfer of inventory to  property, plant and equipment

$
58


$
629


$
-Purchase of property, plant and equipment in credit

$
31


$
-


$
-
 The accompanying notes are an integral part of the consolidated financial statements.
  F - 9
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 1:-
GENERAL
 
 a.
RADA Electronic Industries Ltd. ("the Company") is an Israel - based defense electronics contractor that specialize in the development, manufacture and sale of data recording and management systems (such as digital video and data recorders, ground debriefing stations, head-up display cameras), inertial navigation systems for air and land applications, avionics solutions (such as aircraft upgrades, avionics for unmanned aircraft vehicles, or UAVs, store management systems and interface computers) and land radar for force and border protection applications (active protective systems for armored fighting vehicles, hostile fire detection and perimeter surveillance ). The Company also provides test and repair services using its CATS testers and test program sets for commercial aviation electronic systems mainly through its Chinese subsidiary.
 
 The Company is organized and operates as one operating segment.
 
 b.
As reflected in the consolidated financial statements as of December 31, 2012, the Company has an accumulated deficit of $65,565. Based on existing and anticipated orders in 2013 and the Company's current credit facilities, management believes that the anticipated cash flows from operations and liquidity resources will enable the Company to finance its operations at least through December 31, 2013 (see Note17).
 
 c.
The Company operates a test and repair shop using its Automated Test Equipment ("ATE") products in Beijing, China through its 80% owned Chinese subsidiary, Beijing Huari Aircraft Components Maintenance and Services Co. Ltd. ("CACS" or "subsidiary"). CACS was established with a Chinese third party, which owns the remaining 20% equity interest.
 
 d.
Revenues from major customers accounted for 68%, 64% and 73% of total revenues for the years ended December 31, 2012, 2011 and 2010, respectively. (see note 16c).
 
 F - 10
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES
 
 The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("US GAAP"). The significant accounting policies followed in the preparation of the financial statements, applied on a consistent basis, are as follows:
 
 a.
Use of estimates:
 
 The preparation of financial statements in conformity with ("US GAAP")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. The Company's management believes that the estimates, judgment and assumptions used are reasonable based upon information available at the time they were made.
 
 b.
Financial statements in U.S. dollars:
 
 Most of the revenues of the Company are generated in U.S. dollars. In addition, a substantial portion of the costs of the Company is incurred in U.S dollars. The Company's management believes that the dollar is the currency of the primary economic environment in which the Company operates. Thus, its functional and reporting currency is the dollar.
 
 Accordingly, monetary accounts maintained in currencies other than the dollar are remeasured into U.S. dollars in accordance with ASC 830, "Foreign Currency Matters". All transaction gains and losses of the remeasured monetary balance sheet items are reflected in the statement of operations as financial income or expenses, as appropriate, in the period in which the currency exchange rate changes.
 
 The financial statements of the Company's foreign subsidiary, whose functional currency is not the U.S. dollar, have been translated into dollars. All balance sheet amounts have been translated using the exchange rates in effect at balance sheet date. Statement of operation amounts have been translated using the average exchange rate prevailing during the year. Such translation adjustments are reported as a component of accumulated other comprehensive income (loss) in shareholders' equity.
 
 c.
Basis ofconsolidation:
 
 The consolidated financial statements include the accounts of the Company and its subsidiary. Inter-company transactions and balances have been eliminated upon consolidation.
 
 F - 11
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 d.
Reclassification:
 
 Certain amounts in prior years' financial statements have been reclassified to conform to the current year's presentation.Current maturities of a loan from its controlling shareholder in the amount of $2,405 were reclassified from Bank credit and current maturities to loans from shareholders. This reclassification did not impact total assets, total liabilities, stockholders’ equity, and results of operations or cash flows.
  e.
Cash equivalents:
 
 All highly liquid investments that are readily convertible to cash and are not restricted as to withdrawal or use and the period to maturity of which did not exceed three months at time of deposit, are considered cash equivalents.
 
 f.
Restricted deposit:
 
 Restricted cash is invested in short-term bank deposits (less than three months), which are mainly used as security for the Company's guarantees to customers. The deposits are in U.S. dollars and bears a variable interest of up to 1.5%.
 
 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, excess inventories and for market prices lower than cost, (see also Note 4).
 
 Cost is determined as follows:
 
 Raw materials and components - using the FIFO cost method.
 
 Work in progress and finished goods - represents the cost of manufacturing with the addition of allocable indirect manufacturing costs.
 
 Costs incurred on long-term contracts in progress include direct labor, material, subcontractors, other direct costs and an allocation of overhead, which represent recoverable costs incurred for production.
  F - 12
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 h.
Property, plant and equipment:
 
 Property plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated by the straight-line method over the estimated useful lives of the assets. Annual rates of depreciation are as follows:
 
 %Factory and other buildings
4Machinery and equipment
7 - 33Office furniture and equipment
6 - 15
  Leasehold improvements are dpreciated over the shorter of the estimated useful life or the lease period.
 
 Assets, in respect of which investment grants have been received, are presented at cost less the related grant amount. Depreciation is based on net cost.
 
 i.
Intangible assets:
 
 Capitalized software costs are amortized by the greater of the amount computed using: (i) the ratio of current gross revenues from sales of the software to the total of current and anticipated future gross revenues from sales of that software, or (ii) the straight-line method over the estimated useful life of the product. The Company assesses the recoverability of these intangible assets on a regular basis by determining whether the amortization of the asset over its remaining life can be recovered through undiscounted future operating cash flows from the specific software product sold.
 
 At each balance sheet date, the unamortized capitalized costs of the software products are compared to the net realizable value of the product. If the unamortized capitalized costs of a computer software product exceed the net realizable value of the product, such excess is written off. The net realizable value is calculated as the estimated future gross revenues from the product reduced by the estimated future costs of completing and disposing of that product, including the costs of performing maintenance and customer support required to satisfy the Company's responsibility set forth at the time of the sale.
 
 F - 13
 
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 j.
Impairment of long-lived assets:
 
 The Company's long-lived assets are reviewed for impairment in accordance with ASC 360, "Property, Plant and Equipment", whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, 2012 and 2011, no impairment losses have been identified.
 
 k.
Goodwill
 
 Goodwill represents excess of the costs over the net assets of businesses acquired. Under ASC 350, "Intangibles- Goodwill and Other", goodwill acquired in a business combination should not be amortized. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired.
 
 ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment while the second phase (if necessary) measures impairment. In the first phase of impairment testing, goodwill attributable to each of the reporting units is tested for impairment by comparing the fair value of each reporting unit with its carrying value. The Company determines its fair value according to the Company's market capitalization and the goodwill was tested for impairment by comparing the fair market value with its carrying amount. As of December 31, 2012, no impairment losses have been identified. As a result, step two was not required.
 
 l.
Research and development costs:
 
 Research and development costs, net of participation grants, include costs incurred for research and development and are expensed as incurred.
 
 The Company received royalty-bearing grants, from the Chief Scientist's Office of the Israeli Ministry of Industry, Trade and Labour ("OCS") for the purpose of partially funding research and development projects. The grants are recognized as a deduction from research and development costs or capitalized costs on the basis of costs incurred(see also note 11b).
 
 ASC 985, "Software", requires capitalization of certain software development, costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model.
 
 Research and development costs incurred in the process of developing product masters and the Company's Test System Programs Sets ("TPS") software library, integrated with the Company's test station, are charged to expenses as incurred. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release has been capitalized.
 
 F - 14
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
  m.
Income taxes:
 
 The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". This statement prescribes the use of the liability method whereby deferred tax assets and liability account balances are determined based on differences between financial reporting and tax based assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.
 
 The Company applies ASC 740-10. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.
 
 The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The adoption of ASC 740-10 did not result in a change in the Company's accumulated deficit. The Company did not record any provision in connection with ASC 740-10 as of December 31, 2012 and 2011.
 
 n.
Severance pay:
 
 The Company's agreements with most of its employees are in accordance with section 14 of the Severance Pay Law -1963, under which the Company's contributions for severance pay shall be instead of severance compensation. Upon release of the policy to the employee, no additional liability exists between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee.
 
 The Company's liability for severance pay for the employees that are not under section 14 is calculated pursuant to Israel's Severance Pay Law, based on the most recent salary of the employees as of the balance sheet date less monthly deposits for insurance policies and/or pension funds. Employees are entitled to one month's salary for each year of employment or a portion thereof.
 
 The carrying value of deposited funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligations pursuant to Israeli severance pay law or labor agreements.
 
 Severance expense recorded in the statement of operations is net of interest and other income accumulated in the deposits. Severance expense for the years ended December 31, 2012, 2011 and 2010 amounted to $562, $583 and $668, respectively.
 
 F - 15
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 o.
Fair value of financial instruments:
 
 The Company measures its financial instruments at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:
 
 Level 1 -
Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.
 
 Level 2 -
Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
 
 Level 3 -
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.
 
 The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment and the investments are categorized as Level 3.
  The carrying amount of cash and cash equivalents, restricted deposits, trade receivables, other accounts receivable, bank credit and current maturities of long term loans, trade payables and other accounts payable approximate their fair value due to the short-term maturity of these instruments.
 
 Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
 
 F - 16
 
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
  The following table presents the Company's assets (liabilities) measured at fair value on a recurring basis at December 31, 2012 and 2011:
  December 31, 2011Level 1


Level 2


Level 3


TotalDerivatives:Foreign currencies derivatives

$
-


$
(87
)

$
-


$
(87
)Total

$
-


$
(87
)

$
-


$
(87
)
  December 31, 2012Level 1


Level 2


Level 3


TotalDerivatives:Foreign currencies derivatives

$
-


$
151


$
-


$
151Total

$
-


$
151


$
-


$
151
 
 
 p.
Concentrations of credit risk:
 
 Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, restricted cash, trade receivables and long-term receivables.
 
 The Company's cash and cash equivalents and restricted cash are mainly held in U.S. dollars with major banks in Israel. Management believes that the financial institutions that hold the Company's investments are institutions with high credit standing, and accordingly, minimal credit risk exists with respect to these investments.
 
 The Company's trade receivables are derived from sales to large and solid organizations located mainly in the United States, Asia, South America and Israel. The Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is determined with respect to these amounts that the Company has determined to be doubtful of collection. The allowance is computed for specific debts and the collectability is determined based upon the Company's experience.
 
 The Company has no off-balance sheet credit risks.
 
 q.
Comprehensive income (loss):
  The Company accounts for comprehensive income in accordance with ASC 220, "Comprehensive Income". This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders.
  F - 17
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
  In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”, which is effective for annual reporting periods beginning after December 15, 2011. Accordingly, the Company adopted ASU 2011-05 on January 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. Upon adoption of the new guidance, the Company elected to present a separate statement of consolidated comprehensive income.
 The other comprehensive income, net, relates to gains on foreign currency translation adjustments were in the amount of $468 and $443 at December 31, 2012 and 2011, respectively.
  r.
Warranty:
 
 In connection with the sale of its products, the Company provides product warranties for periods between one to two years. Based on past experience and engineering estimates, the liability from these warranties is not material as of December 31, 2012 and 2011.
  s.
Share-based compensation:
 
 At December 31, 2012, the Company has one stock-based employee compensation plan, which is described in Note 12b.
 
 The Company accounts for stock-based compensation under ASC 718, "Compensation – Stock Compensation", which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors.
 
 ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's statements of operations.
 
 The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton option-pricing model. No options were granted during the years ended December 31, 2012, 2011 and 2010. In addition, all outstanding options at December 31, 2012 were expired on January 26, 2013 due to expiry of the Company's option plan after 10 years.
  F - 18
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 t.
Revenue recognition:
 
 The Company generates revenues mainly from the sale of products and from long-term fixed price contracts of defense electronics as follows: data recording and management systems, inertial navigation systems for air and land applications, avionics solutions, avionics for UAVs, and land radar for force and border protection applications. In addition, the Company provides manufacturing, development and product support services.
 
 The Company also generates revenues from repair services using its Automated Test Equipment ("ATE") mainly through CACS.
 
 Product revenues:
 
 The Company recognizes revenue from sales of products in accordance with ASC 605-10, "Revenue Recognition" (Formerly "Staff Accounting Bulletin ("SAB") No. 104"). Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the Company has determined that collection of the fee is probable. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied.
 
 Revenues from long-term fixed price contracts which provide a substantial level of development efforts are recognized in accordance with ASC 605-35 ("Construction-Type and Production-Type contracts"), using contract accounting on a percentage of completion method in accordance with the "Input Method". The percentage of completion is determined based on the ratio of actual costs incurred to total costs estimated to be incurred over the duration of the contract. With regard to contracts for which a loss is anticipated, a provision is made for the entire amount of the estimated loss at the time such loss becomes evident. As of December 31, 2012 and 2011, the provision for estimated losses identified is $583 and $56, respectively.
 
 Revenues under long-term fixed-price contracts that involve both development and production are recorded using the cost-to-cost method (development phase) and units-of-delivery method (production phase) as applicable to each phase of the contract, as the basis to measure progress toward completion.
  F - 19
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts. Such changes in estimated gross profit or loss are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis.
 
 The Company believes that the use of the percentage of completion method is appropriate as the Company has the ability to make reasonably dependable estimates of the extent of progress towards completion, contract revenues and contract costs. In addition, contracts executed include provisions that clearly specify the enforceable rights regarding services to be provided and received by the parties to the contracts, the consideration to be exchanged and the manner and terms of settlement. In all cases, the Company expects to perform its contractual obligations and its customers are expected to satisfy their obligations under the contract.
 
 Service revenues:
 
 Revenues from services are recognized as the services are performed.
 
 u.
Basic and diluted net income (loss) per share:
 
 Basic net income (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net income (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year in accordance with ASC 260, "Earnings Per Share". For the years ended December 31, 2012, 2011 and 2010, all the outstanding options, convertible notes and warrants have been excluded from the computation of diluted net income (loss) per share, since their effect is anti-dilutive.
  F - 20
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 2:-
SIGNIFICANT ACCOUNTING POLICIES (Cont.)
 
 v.
Derivativesandhedging:
 
 The Company accounts for derivatives and hedging based on ASC 815, "Derivatives and Hedging", as amended and related Interpretations. ASC 815 requires the Company to recognize all derivatives on the balances sheet at fair value. If a derivative meets the definition of a hedge and is so designated, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings (for cash flow hedge transactions) or recognized in other comprehensive income until the hedged item is recognized in earnings (for fair value hedge transactions).
 
 The ineffective portion of a derivative's change in fair value is recognized in earnings. If a derivative does not meet the definition of a hedge, the changes in the fair value are included in earnings. Cash flows related to such hedges are classified as operating activities.
 
 The Company enters into forward exchange contracts in order to limit the exposure to exchange rate fluctuation associated with payroll expenses mainly incurred in NIS. Any gain or loss derived from such instruments is recognized immediately as financial expenses, net.
 
 As of December 31, 2012 and December 31, 2011, the fair value of the outstanding forward contracts is $151 which was recorded in other receivables against financial income and $87 which was recorded in accruals against financial expenses, respectively.
 
 w.
Recently issued accounting standards:
 
 Effective January 1, 2012, the Company retrospectively adopted a new standard issued by the Financial Accounting Standards Board by presenting total comprehensive income and the components of net income and other comprehensive income (loss) in two separate but consecutive statements. The adoption of this guidance resulted only in a change in how the Company presents other comprehensive income in the Company's consolidated financial statements and did not have any impact on the Company's results of operations, financial position or cash flows. Comparative prior periods amounts are also presented.
  F - 21
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 3:-
CONTRACTS IN PROGRESS
 
 Amounts included in the consolidated financial statements, which relate to unbilled receivables are classified as current assets.. Summarized below are the components of the amounts:
 
 Costs and estimated earnings in excess of billings on uncompleted contracts:
 
 December 31,2012


2011Costs incurred on uncompleted contracts, net *)

$
13,946


$
19,464Estimated earnings (loss)


5,267



3,37719,213



22,841Less - billings and progress payments


16,401



20,943Costs and estimated earnings in excess of billings on uncompleted contracts


2,812



1,898Less: Long-term portion


(1,064
)


(1,084
)Current portion

$
1,748


$
814
 
 (*) Net of OCS grants in the amount of $313 and $275 as of December 31, 2012 and 2011 respectively (see Note 11b).
 
 NOTE 4:-
OTHER ACCOUNTS RECEIVABLES AND PREPAID EXPENSES
 
 December 31,2012


2011Prepaid expenses

$
356


$
238Government institutions


265



366Derivative instruments


151



-Other


167



123$
939


$
727
  F - 22
 
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 5:-
INVENTORIES
 
 December 31,2012


2011Raw materials and components

$
2,747


$
2,430Work in progress


3,885



4,529Finished goods


640



696$
7,272


$
7,655
 
 Write-offs of inventories for the years ended December 31, 2012, 2011 and 2010 amounted to $72, $136 and $133, respectively. The write-offs were due to slow-moving items and excess inventories and were recorded in cost of revenues.
  NOTE 6:-
LONG TERM RECEIVABLES AND DEPOSITS
 
 December 31,2012


2011Costs and estimated earnings in excess of billings on uncompleted contracts (see Note 3)

$
1,064


$
1,084Restricted deposits


42



440Leasing deposits


54



39$
1,160


$
1,563
  F - 23
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 7:-
PROPERTY, PLANT AND EQUIPMENT
 
 December 31,2012


2011Cost:Factory building

$
1,989


$
1,989Other buildings


1,329



1,319Machinery and equipment (*)


8,934



11,628Office furniture and equipment


399



393Leasehold improvements


208



20812,859



15,537Accumulated depreciation:Factory building


1,741



1,660Other buildings


622



570Machinery and equipment (*)


6,783



9,704Office furniture and equipment


293



278Leasehold improvements


96



489,535



12,260Depreciated cost

$
3,324


$
3,277
 
 (*)
Write-offs of machinery and equipment (cost and accumulated depreciation) for the years ended December 31, 2012 and 2011 amounted to $3,502 and $0, respectively. The write-offs are due to fully depreciated assets that are no longer in use.
  Depreciation expense amounted to $742, $797 and $741 for the years ended December 31, 2012, 2011 and 2010, respectively.
 
 As for charges, see Note 11f.
  F - 24
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 8:-
OTHER ASSETS
 
 a.
Intangible assets, net:
 
 December 31, 2012


December 31, 2011Useful

Life from date of acquisition


Gross carrying amount


Accumulated amortization


Amortized balance


Gross carrying amount


Accumulated amortization


Amortized balance(Years)Test Systems

Programs Sets

("TPS")


5 - 10


$
8,275


$
8,275


$
-


$
8,275


$
8,120


$
155
 
 Amortization expense was $155, $154 and $221 for the years ended December 31, 2012, 2011 and 2010, respectively.
  NOTE 9:-
BANK CREDIT AND LOANS
  a.
Current maturities
  December 31,2012


2011Loan in U.S. dollars from shareholder (1,2,3)

$
3,968


$
2,405Bank credit (5)


3,172



3,933Convertible note from its controlling shareholder, net (4)


3,000



2,810$
10,140


$
9,148
 
 b.
Long-term loans:
  December 31,2012


2011Loan in U.S. dollars from its controlling shareholder (1)

$
-


$
176
 F - 25
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
  NOTE 9:-
BANK CREDIT AND LOANS (Cont.)
 
 1.
In July 2008, the Company entered into a $1,500 loan agreement with its controlling shareholder. The loan was provided mainly in order to facilitate the development of the Company's inertial navigation system technology (“INS Technology”). The loan bears interest of LIBOR+3% payable at the beginning of every quarter. The controlling shareholder received a non-exclusive license to sell the INS Technology for non-military/commercial purposes. The non-exclusive license granted under this agreement will automatically convert into an exclusive license should the Company default on any of its obligations under the loan agreement. The fair value of the non-exclusive license at the transaction date is deemed de minimis. During September 2012 an amendment to the finance agreement was signed, according to which, the controlling shareholder agreed to lend of the company $1,148 in addition to the then remaining unpaid loan amount of $352, to support the development efforts. The loan bears interest of LIBOR+3% and which was to be payable in two equal installments of $750 each, up until February 10, 2013, and has not yet been repaid by the Company (see also Note 17). As of December 31, 2012, a total balance of $1,500 is due.
 
 2.
In September 2011 the Company entered into a revolving loan agreement ("September loan agreement") with its controlling shareholder in the amount of $1,700. The loan carried interest at the rate of three month LIBOR+2.5% per annum.
 
 3.
During February, 2012, in order to finance future operations, including the continued development of the INS Technology and land radar for protection systems, the Company entered into a $3,000 loan agreement ("February Agreement") with an entity affiliated with its controlling shareholder and another shareholder. The controlling shareholder provided $2,700 and the other shareholder provided $300. Of such amount, $1,700 was used to repay in full the outstanding amount due and payable under the September loan agreement. The  loan bears interest at the rate of the greater of three months LIBOR+5% per annum, or 7% per annum.  Interest is payable quarterly in arrears. The principal of the loan will be repaid on February 28, 2014. The loan granted by the controlling shareholder is secured by a floating charge over all of the Company's assets that are subordinated to the specific and floating charges over the Company's assets that were granted to certain banks and financing institutes. As part of this loan agreement the Company issued 1,200,000 warrants at an exercise price of $2.5 per share for a term of three years (see Note 12c). The transaction was accounted for as a Debt Instruments with Detachable Warrants in accordance with ASC 470-20. The total amount of discount on the loan as a result of the allocated proceeds attributable to the warrants feature amounting to $708, is amortized over the term of the loan using the effective interest method pursuant to ASC 835, "Interest". The loan is classified as a short term loan due to the fact that the Company has failed to repay a convertible note issued to its controlling shareholder as mentioned in section 4 below (see also Note 17).
 
 
 F - 26
 
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 9:-
BANK CREDIT AND LOANS (Cont)
 
 4.
During December 2007, the Company issued a convertible note in the amount of $3,000 to its controlling shareholder, and warrants to purchase up to an aggregate of 1,578,947 ordinary shares at an exercise price of $2.38 per share for a term of five years. The principal was due on December 2010. During October 2010, the maturity date of the convertible note was extended to October 2012 and the expiration date of the warrants was extended to October 2014. The convertible note bears interest at a rate of six-month LIBOR + 3.5% which was 3.96% at December 31, 2010 and it is convertible into Ordinary shares at a conversion price of $2.09 per share. The transaction was accounted for as a modification of debt accordance with ASC 470-50, "Debt". As a result, the Company recorded a discount on the convertible note of $451 due the modification. The discount was amortized over the term of the extended note using the interest method (see also Note 17). As of December 31, 2012, the Company did not repay the convertible note principal of $3,000. From January 2013 the loan bears default increased interest rate of LOBOR +7.5%.
 
 5.
The Company has an annual line of credit from banks of $2,000 out of which $1,986 was fully utilized as of December 31, 2012, and a line of credit for guarantees of approximately $2,340, out of which $1,790 was utilized as of December 31, 2012. In addition, the Company may secure borrowing with one of its banks against specific accounts receivables up to $1,750. As of December 31, 2012, the Company secured borrowings against specific accounts receivables in the amount of $1,186  (see also Note 11g).
 
 The annual average interest rate on the lines of credit is 3.18% at December 31, 2012.
 
 The guarantees are secured by a first priority floating charge on all of our assets and by a fixed charge on goodwill (intangible assets), unpaid share capital and insurance rights (rights to proceeds on insured assets in the event of loss).  The agreements with the Banks prohibit the Company from: (i) selling or otherwise transferring any assets except in the ordinary course of business, (ii) placing a lien on our assets without the Banks’ consent, or (iii) declaring dividends to its shareholders.
  F - 27
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 10:-
OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
 
 December 31,2012


2011Payroll and related accruals

$
1,719


$
1,951Accrued expenses - subcontractors


883



1,060Accrued expenses


564



453Accrued royalties


-



55Accrued commissions


357



201Tax authorities


140



122Advance from customers


-



112Contracts in progress - provision for estimated losses


-



56Others


87



116$
3,750


$
4,126
 
 NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES
 
 a.
As of December 31, 2012, the Company was not a party to any legal proceedings.
 
 b.
The Company's research and development efforts have been partially financed through royalty-bearing programs sponsored by the OCS. In return for the OCS's participation, the Company is committed to pay royalties at a rate ranging from 3% to 5% of sales of the products whose research was supported by grants received from the OCS, up to 100% of the amount of such participation received linked to the U.S. dollar. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required. The Company's total obligation for royalties, net of royalties paid or accrued, totaled approximately $1.5M as of December 31, 2012. The total amount of royalties charged to operations for the years ended December 31, 2012, 2011 and 2010 was approximately $0, $1 and $6, respectively. As of December 31, 2012, the company received total grants from the OCS in the amount of $5,594.



Research and development grants received from the OCS, amounted to $142, $382 and $179 in the years ended December 31, 2012, 2011 and 2010, respectively.
 c.
Research and development projects undertaken by the Company were partially financed by the Binational Industrial Research and Development Fund ("BIRD") Foundation. The Company is committed to pay royalties to the BIRD Foundation at a rate of 5% of sales proceeds generating from projects for which the BIRD Foundation provided funding up to 150% of the sum financed by the BIRD Foundation. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, nopayment is required. The Company's total obligation for royalties, net of royalties paid or accrued, totaled approximately $2,066 as of December 31, 2012. No royalties were charged to operations for the years ended December 31, 2012, 2011 and 2010.
 
 
 F - 28
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 11:-
COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
 d.
The Company's offices in Netanya, Israel are rented under a non-cancelable operating lease expiring January 31, 2015. In addition, the Company's motor vehicles are rented under operating leases.
 
 Annual minimum future rental commitments under these leases, at exchange rates in effect on December 31, 2012, are approximately as follows:
 
 2013

$
6612014


5412015


45$
1,247
 
 Lease expense for the years ended December 31, 2012, 2011 and 2010 was $783, $878 and $906, respectively.
 
 e.
In 2008, the Company entered in to a lease agreement to purchase machinery in the amount of approximately $224, which was accounted for as a capital lease under ASC 840, "Leases". The total amount of the lease liability was $16 and $45 as of December 31, 2012 and 2011 respectively.
  f.
Floating charges have been recorded on all of the Company's assets and specific charges have been recorded on certain assets in respect of the Company's liabilities to its banks and other creditors.
 
 g.
The Company provides bank guarantees to its customers and others in the ordinary course of business. The guarantees which are provided to customers are to secure advances received at the commencement of a project or to secure performance of operational milestones. The total amount of bank guarantees provided to customers and others as of December 31, 2012 is approximately $1,790.
  NOTE 12:-
SHAREHOLDERS' EQUITY
 
 a.
Share capital:
 
 Ordinary shares confer upon their holders voting rights, the right to receive cash dividends and the right to share in excess assets upon liquidation of the Company.
  b.
Stock option plans:
 
 In 2003, the Company's Board approved the adoption of Israeli Employee Stock Option Plan ("the Plan"), which authorized the grant of options to purchase up to an aggregate of 1,666,667 Ordinary shares (in 2006 the Company's Board approved an increase in the plan by an additional 500,000 options), respectively, to officers, directors, consultants and key employees of the Company and its subsidiary. Options granted under the Plan expire within a maximum of ten years from adoption of the plan. One third of the options granted under the Company's Plan vest immediately on the grant date and the remaining two thirds vest ratably over two years. Compensation expense is recognized by the straight-line method.
  F - 29
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 12:-
SHAREHOLDERS' EQUITY (Cont.)
  The exercise price of an option granted to an employee may not be less than 60% of the fair market value of the Ordinary shares on the date of grant of the option. The exercise price of an option granted to a non-employee director or consultant may not be less than 80% of the fair market value of the Ordinary shares on the date of grant of the option. Any options that are cancelled or forfeited before expiration become available for future grants. At December 31, 2012, 341,832 options were available for grant under the Plan.  Upon exercise of options by employees, the Company satisfies the requirements by issuing newly issued shares.
 
 Transactions related to the above Plan (including warrants to directors) during the year ended December 31, 2012 were as follows:
 
 Year ended December 31, 2012Amount of

options


Weighted

average

exercise

price


Weighted average remaining contractual term

(in years)


Aggregate intrinsic valueOptions outstanding at beginning of year


718,573


$
2.45



1.07


$
-Options outstanding at end of year


718,573


$
2.45



0.07


$
-Vested and expected to vest at December 31, 2012


718,573


$
2.45



0.07


$
-Exercisable options at end of year


718,573


$
2.45



0.07


$
-
 
 Share based compensation for the years ended December 31, 2012, 2011 and 2010 was $0, $0 and $31 respectively.
  F - 30
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 12:-
SHAREHOLDERS' EQUITY (Cont.)
 
 No options were granted in 2011 and 2012. All options were expired on January 26, 2013 due to expiry of the 2003 plan.
  The aggregate intrinsic value in the table above represents the total intrinsic value (the difference between the Company's closing stock price on December 31, 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2012. As of December 31, 2012, no options were in-the-money. As of December 31, 2012 there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option plans.
 
 c.
Warrants:
 
 As of December 31, 2012, warrants to purchase 2,778,947 Ordinary shares were outstanding. 1,578,947 of these warrants were issued on December 10, 2007 in connection with the issuance of a convertible note of $3,000 to its controlling shareholder, at an exercise price of $2.38 per share for a term of five years. During October 2010, the expiration date of the warrants was extended to October 2014, and the conversion price was set at $2.09 per share.
 
 During February 2012, pursuant to 2012 loan agreement the Company issued warrants to purchase 1,200,000 Ordinary shares at an exercise price of $2.5 per share for a term of three years.
 
 The fair value of the warrants was based on the Black-Scholes-Merton option-pricing model, assuming a stock price of $2.04, a risk free interest of 0.41%, a volatility factor of 52.5%, dividend yield of 0% and contractual life of three years.
  F - 31
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 13:-
TAXES ON INCOME
 
 a.
Tax rates applicable to income of companies in Israel:
 
 In December 2011, the Israeli Parliament ("Knesset") passed the Law for Adjustment of the Tax Burden (Legislative Amendments), 2011, which came into effect on January 1, 2012 ("the Law for Adjustment of the Tax Burden"). Pursuant to the Law for Adjustment of the Tax Burden, the corporate tax rate is 25% in 2012 and thereafter. In view of this increase in the corporate tax rate to 25% in 2012, the real capital gains tax rate and the real betterment tax rate were also increased accordingly.
 
 b.
Tax benefits under the Law for the Encouragement of Industry (Taxes), 1969:
 
 The Company qualifies as an "Industrial Company" under the Law for the Encouragement of Industry (Taxes), 1969 (the “Industrial Encouragement Law”). The Industrial Encouragement Law defines an “Industrial Company” as a company that is resident in Israel and that derives at least 90% of its income in any tax year, other than income from defense loans, capital gains, interest and dividends, from an enterprise whose major activity in a given tax year is industrial production.
  The principal benefit from the above law is the deduction of expenses in connection with a public offering. Also, under the industrial Encouragement Law an "Industrial Company" is entitled to special rates of depreciation for industrial equipment and in addition to amortization of the cost of purchased know-how and patents over an eight year period for tax purposes and an accelerated depreciation rate on equipment.
 
 Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority.
  c.
As of December 31, 2012, the net operating tax loss carryforward relating to the  Company in Israel amounted to approximately $ 62.6 million, including a carryforward capital loss amounting to approximately $ 3.5 million. Carryforward losses in Israel may be carried forward indefinitely and may be offset against future taxable income.
 
 As the Company believes that it is more likely than not that the deferred tax assets in respect of these carryforward losses amounting to approximately $ 16.7 million will not be utilized, the Company recorded a valuation allowance for the entire balance of the deferred tax asset relating to the carryforward losses.
  d.
The main reconciling items between the statutory tax rate of the Company and the effective tax rate is the valuation allowance recorded in respect of the deferred tax assets relating to net operating loss carryforwards and other temporary differences due to the uncertainty of the realization of such tax assets.
  F - 32
 RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 
 NOTE 13:-
TAXES ON INCOME (Cont)
 
 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 assets are as follows:
 
 December 31,2012


2011Net operating loss carry forward

$
15,653


$
15,317Allowance and reserve


334



318Total deferred tax assets before valuation allowance


15,987



15,635Valuation allowance


(15,987
)


(15,635
)Net deferred tax assets

$
-


$
-
  As of December 31, 2012 and December 31, 2011, the Company has provided valuation allowances in respect of deferred tax assets resulting from tax loss carry forward and other temporary differences, since they have a history of operating losses and current uncertainty concerning its ability to realize these deferred tax assets in the future.
 
 The Company account for its income tax uncertainties in accordance with FASB ASC No. 740 which clarifies the accounting for uncertainties in income taxes recognized in a company’s financial statements and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
 
 As of December 31, 2012 and 2011, there were no unrecognized tax benefits that if recognized would affect the annual effective tax rate.
  F - 33
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 14:-
FINANCIAL EXPENSES, NET
 
 Year ended

December 31,2012


2011


2010Income:Foreign currency exchange differences

$
166


$
395


$
70Interest on cash equivalents and restricted deposits


18



20



5Others


31



197



-215



612



75Expenses:Interest on convertible note and loans from shareholders


376



159



174Amortization of discount  on a convertible note and loans from shareholders


516



212



576Foreign currency exchange differences


60



288



177Interest on loans from banks and other credit balances


26



27



83Bank commissions and others


280



404



2491,258



1,090



1,259$
(1,043
)

$
(478
)

$
(1,184
)
  F - 34
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 15:-
RELATED PARTY BALANCE AND TRANSACTIONS
 
 For the year ended December 31, 2012, the Company incurred $248 in respect of interest on loans received from its shareholders.
 
 See also Notes 9 and 12c for transactions with the Company's shareholders.
  NOTE 16:-
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
 
 a.
In accordance with Statement of ASC 280, "Segment Reporting" , the Company is organized and operates as one business segment, which develops, manufactures and sells ATE products, avionics equipment and aviation data acquisition and debriefing systems (see also Note 1a).
 
 b.
Revenues by geographic areas:
 
 Revenues are attributed to geographic area based on the location of the end customers as follows:
 
 Year ended

December 31,2012


2011


2010Israel

$
5,329


$
7,009


$
9,187Asia


4,594



3,110



3,920North America


2,370



1,876



3,532Latin America


8,943



7,289



10,678Europe


315



121



206Total

$
21,551


$
19,405


$
27,523
 
 F - 35
  RADA ELECTRONIC INDUSTRIES LTD.
 AND ITS SUBSIDIARY
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 U.S. dollars in thousands
 NOTE 16:-
MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)
 
 c.
Major customers:
 
 Revenues from single customers that exceed 10% of the total revenues in the reported years as a percentage of total revenues are as follows:
  Year ended

December 31,2012


2011


2010%Customer A


5



13



17Customer B


11



17



10Customer C


9



8



36Customer D


32



23



3Customer E


11



3



7
  d.
Long-lived assets by geographic areas:
 
 December 31,2012


2011Israel

$
3,262


$
3,277China


649



742$
3,911


$
4,019
  NOTE 17:-
SUBSEQUENT EVENTS:
 
 
 During April, 2013, the Company entered into a "standstill agreement" with its controlling shareholder and another shareholder, according to which those shareholders will not take any action, or otherwise exercise their rights, with respect to the collection of loans in the total amount of $7,500 at least until January 31, 2014.


F - 36





SIGNATURES




The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.




RADA ELECTRONIC INDUSTRIES LTD.By:
/s/ Zvi AlonName:
Zvi AlonTitle:
Chief Executive Officer


Dated:  April 24, 2013