-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QanhfsD86fxnm5UJ4fHEtJ7lPiIxl4drFHWHYOn+so9hRl519ZEV/761cezZsRUB xydUZNIi1yRpcUG6MRYC1w== 0000910662-05-000368.txt : 20050630 0000910662-05-000368.hdr.sgml : 20050630 20050630161955 ACCESSION NUMBER: 0000910662-05-000368 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050630 DATE AS OF CHANGE: 20050630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TAT TECHNOLOGIES LTD CENTRAL INDEX KEY: 0000808439 STANDARD INDUSTRIAL CLASSIFICATION: AIRCRAFT ENGINES & ENGINE PARTS [3724] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-16050 FILM NUMBER: 05928733 BUSINESS ADDRESS: STREET 1: P.O. BOX 80 CITY: GEDERA ISRAEL STATE: L3 ZIP: 70750 BUSINESS PHONE: 2127025962 MAIL ADDRESS: STREET 1: P.O. BOX 80 STREET 2: 445 PARK AVE SUMMIT ROVINS & FELDESMAN CITY: GEDERA 70750 ISRAEL STATE: L3 FORMER COMPANY: FORMER CONFORMED NAME: GALAGRAPH LIMITED DATE OF NAME CHANGE: 19920609 20-F 1 form20ffy2004.txt FISCAL YEAR ENDED DECEMBER 31, 2004 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- FORM 20-F ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 ------------------- Commission File No. 0-17253 T.A.T. TECHNOLOGIES LTD. (Exact name of Registrant as specified in its charter and translation of Registrant's name into English) ------------------- Israel (Jurisdiction of incorporation or organization) P.O. Box 80, Gedera 70750, Israel (Address of principal executive offices) ------------------- Securities registered or to be registered pursuant to Section 12(b) of the Act: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Ordinary Shares, NIS 0.90 Par Value (Title of Class) Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: 6,042,671 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark which financial statement item the Registrant has elected to follow: Item 17. ___ Item 18. X INTRODUCTION ------------ TAT Technologies Ltd. is engaged in the manufacture and sale of a broad range of heat transfer equipment used in mechanical and electronic systems on board commercial and military aircraft and in a variety of other electronic equipment. We are also engaged in the remanufacture, overhaul and repair of heat transfer equipment and other aircraft components manufactured by us, and other companies. In addition, we manufacture, sell and service certain related products for use in aircraft and electronic systems. We were incorporated under the laws of the State of Israel in April 1985, to develop the computerized systems business of our parent company, TAT Industries Ltd., or TAT Industries, a publicly held Israeli corporation engaged in the manufacture and sale of aeronautical equipment. In December 1991, we acquired the heat exchanger operations of TAT Industries and in February 2000, we entered into an agreement with TAT Industries to purchase its operations, relating to the manufacture of aviation accessories and the lease of certain real estate and buildings. From our public offering in March 1987 until July 1998, our ordinary shares were listed on the NASDAQ National Market (symbol: TATTF). In July 1998, the listing of our ordinary shares was transferred to the NASDAQ SmallCap Market. As used in this annual report, the terms "we," "us" and "our" mean TAT Technologies Ltd. and its subsidiaries, unless otherwise indicated. Except for the historical information contained in this annual report, the statements contained in this annual report are "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, as amended, with respect to our business, financial condition and results of operations. Such forward-looking statements reflect our current view with respect to future events and financial results. Statements which use the terms "anticipate," "believe," "do not believe," "expect," "plan," "intend," "estimate," "anticipate" and similar expressions are intended to identify forward-looking statements. We remind readers that forward-looking statements are merely predictions and therefore inherently subject to uncertainties and other factors and involve known and unknown risks that could cause the actual results, performance, levels of activity, or our achievements, or industry results, to be materially different from any future results, performance, levels of activity, or our achievements expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by applicable law, including the securities laws of the United States, we undertake no obligation to publicly release any update or revision to any forward looking statements to reflect new information, future events or circumstances, or otherwise after the date hereof. We have attempted to identify significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 3. "Key Information - Risk Factors. Our consolidated financial statements appearing in this annual report are prepared in dollars and in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. All references in this annual report to "dollars" or "$" are to dollars and all references in this annual report to "NIS" are to New Israeli Shekels. 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 registration statement or annual report that we previously filed, you may read the document itself for a complete description of its terms. PART I.........................................................................5 Item 1. Identity of Directors, Senior Management and Advisers....5 Item 2. Offer Statistics and Expected Timetable..................5 Item 3. Key Information..........................................5 A. Selected Financial Data...................................5 B. Capitalization and Indebtedness...........................6 C. Reasons for the Offer and Use of Proceeds.................6 D. Risk Factors..............................................6 Item 4. Information on the Company..............................15 A. History and Development of the Company...................15 B. Business Overview........................................16 C. Organizational Structure.................................24 D. Property, Plants and Equipment...........................24 Item 5. Operating and Financial Review and Prospects............24 A. Operating Results........................................24 B. Liquidity and Capital Resources..........................33 C. Research and Development, Patents and Licenses...........34 D. Trend Information........................................34 E. Off-balance Sheet Arrangements...........................34 F. Tabular Disclosure of Contractual Obligations............35 Item 6. Directors, Senior Management and Employees.............35 A. Directors and Senior Management..........................35 B. Compensation.............................................38 C. Board Practices..........................................39 D. Employees................................................46 E. Share Ownership..........................................47 Item 7. Major Shareholders and Related Party Transactions.......48 A. Major Shareholders.......................................48 B. Related Party Transactions...............................50 C. Interests of Experts and Counsel.........................51 Item 8. Financial Information...................................51 A. Consolidated Statements and Other Financial Information..51 B. Significant Changes......................................51 Item 9. The Offer and Listing...................................52 A. Offer and Listing Details................................52 B. Plan of Distribution.....................................53 C. Markets..................................................53 D. Selling Shareholders.....................................53 E. Dilution.................................................53 F. Expense of the Issue.....................................53 Item 10. Additional Information..................................53 A. Share Capital............................................53 B. Memorandum and Articles of Association...................53 C. Material Contracts.......................................56 D. Exchange Controls........................................57 E. Taxation.................................................57 F. Dividend and Paying Agents...............................66 G. Statement by Experts.....................................66 H. Documents on Display.....................................66 I. Subsidiary Information...................................67 Item 11. Quantitative and Qualitative Disclosures about Market Risk....................................................67 Item 12. Description of Securities Other than Equity Securities..67 PART II.......................................................................67 Item 13. Defaults, Dividend Arrearages and Delinquencies.........67 Item 14. Material Modifications to the Rights of Security Holders.................................................67 Item 15. Controls and Procedures.................................67 Item 16. [Reserved]..............................................68 Item 16A. Audit Committee Financial Expert........................68 Item 16B. Code of Ethics..........................................68 Item 16C. Principal Accounting Fees and Services..................68 Item 16D. Exemptions from the Listing Requirements and Standards for Audit Committee...........................69 PART III......................................................................69 Item 17. Financial Statements....................................69 Item 18. Financial Statements....................................69 Item 19. Exhibits................................................69 PART I Item 1. Identity of Directors, Senior Management and Advisers Not applicable Item 2. Offer Statistics and Expected Timetable Not applicable Item 3. Key Information A. Selected Financial Data The following selected consolidated financial data for and as of the five years ended December 31, 2004 are derived from our audited consolidated financial statements which have been prepared in accordance with U.S. GAAP. The selected consolidated financial data as of December 31, 2004 and 2003 and for the years ended December 31, 2004, 2003 and 2002 have been derived from our audited consolidated financial statements and notes included elsewhere in this annual report. The selected consolidated financial data as of December 31, 2002, 2001 and 2000 and for the years ended December 31, 2001 and 2000 have been derived from audited consolidated financial statements not included in this annual report. The selected consolidated financial data set forth below should be read in conjunction with and are qualified by reference to Item 5. "Operating and Financial Review and Prospects" and our consolidated financial statements and notes thereto included elsewhere in this annual report. Statement of Operations Data:
Year Ended December 31, ----------------------------------------------------------------- 2000 2001 2002 2003 2004 ------- ------- ------- ------- -------- (figures in thousands, except per share data) Revenues........................................... $28,424 $25,051 $26,280 $30,682 $33,243 Cost of revenues................................... 18,602 17,237 17,750 20,068 22,166 ------- ------- ------- ------- ------- Gross profit....................................... 9,822 7,814 8,530 10,614 11,077 ------- ------- ------- ------- ------- Research and development costs, net................ 334 257 204 120 125 Selling and marketing expenses..................... 1,509 1,510 1,483 1,958 1,894 General and administrative expenses................ 3,472 3,235 2,994 3,476 3,793 ------- ------- ------- ------- ------- 5,315 5,002 4,681 5,554 5,812 ------- ------- ------- ------- ------- Operating income .................................. 4,507 2,812 3,849 5,060 5,265 Financial income (expenses), net................... 211 (78) 99 (25) 87 Other income (loss), net........................... 752 (1) 8 24 54 ------- ------- ------- ------- ------- Income from continuing operations before taxes on income.......................................... 5,470 2,733 3,956 5,059 5,406 Taxes on income.................................... 23 75 367 1,225 1,667 Equity in net loss of affiliates................... -- -- -- -- -- Net income ........................................ $5,447 $2,658 $3,589 $3,834 $3,739 ======= ======= ======= ======= ======= Basic net earnings per share ...................... $1.22 $0.59 $0.80 $0.85 $0.72 Diluted net income per share....................... $1.13 $0.57 $$0.77 $0.78 $0.67
Weighted average number of shares used in computing basic and diluted net income per share......... 4,483 4,483 4,483 4,510 5,166 Weighted average number of shares used in computing diluted net income per share.................... 4,651 4,671 4,483 4,907 5,564 Cash dividend per share............................ -- -- -- $0.70 $1.18
Balance Sheet Data: As of December 31, -------------------------------------------------------------------------------- 2000 2001 2002 2003 2004 ---------------- -------------- --------------- ---------------- --------------- Working capital............................. $17,256 $18,510 $19,685 $22,336 $26,680 Total assets................................ 31,819 30,426 35,318 39,392 41,264 Long-term debt, excluding current maturities............................... 5,417 3,316 3,362 3,793 4,111 Shareholder's equity........................ $21,190 $23,848 $25,419 $28,684 $32,526
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 rely on the aerospace industry and the continued financial crisis in this industry may adversely affect our sales in the future. We sell our products and services primarily to the commercial and military aerospace industry. Sales to customers in these markets generally fluctuate with changes in military expenditure budgets and the rate of new aircraft construction, levels of which have been declining over the past few years. Moreover, since 2001, and especially following the tragic events of September 11, 2001, the commercial airline industry has suffered from economic decline that caused the bankruptcy of several airlines and imposed financial constraints on the entire industry. As a result of these conditions, the sales of our products may decrease in the future. The continuance of the crisis in the commercial aviation industry will adversely affect our business, financial condition and results of operations. We derive a large part of our revenues from several major customers. If we lose any of these customers or they reduce the amount of business they do with us, our revenues may be seriously affected. One of our non-governmental customers accounted for approximately 15.4% of our revenues in 2004. Four customers accounted for a total of approximately 43.1% of our revenues in 2004, three customers accounted for approximately 40.3% of our revenues for the year ended December 31, 2003 and 6 four customers accounted for a total of approximately 46.1% of our revenues in 2002. We can't be sure that any of these customers will maintain the same volume of business with us in the future. If we lose any of these customers or they reduce the amount of business they do with us, our revenues may be seriously affected. We derive a large part of our revenues from government business. A loss of all, or a major portion, of our revenues from government contracts could have a material adverse effect on our operations. A portion of our revenues are from contracts with the U.S. and Israeli Governments, acting through their various departments and agencies. Sales to the U.S. and Israeli governments, accounted for approximately 10.6% and 2.6% of our revenues for 2004, respectively, approximately 15.3% and 3.3% of our revenues for the year ended December 31, 2003, respectively, and approximately 17.3% and 3.2% of our revenues for 2002, respectively. Business with the U.S. and Israeli governments, as well as with the governments of other countries, is subject to risks which are not as relevant in business with private parties. For example: o legislative or administrative requirements may delay payment for performance of contracts; o our sales to government agencies, authorities and companies are directly affected by these customers' budgetary constraints and the priority given in their budgets to the procurement of our products; o since these contracts are generally terminable-at-will, a government may terminate contracts for its convenience, because of a change in its requirements, policies or budgetary constraints, or as a result of a change in the administration; and o our costs may be adjusted as a result of audits or we may have increased or unexpected costs causing losses or reduced profits under fixed-price contracts. While 58.66% of our revenues is derived from the sale of products for the non-military markets in the United States, Israel and abroad, we believe that the success and development of our business depends upon our ability to participate in the defense programs of the United States, Israel and other governments and the continued commitment by these governments of substantial resources to such programs. A loss of all, or a major portion, of our revenues from government contracts could have a material adverse effect on our operations. We depend on a limited number of suppliers of components for our products and if we are unable to obtain these components when needed, we would experience delays in manufacturing our products and our financial results could be adversely affected. We acquire most of the components for the manufacturing of our products from a limited number of suppliers, most of whom are located in Israel and the United States. Certain of these suppliers are currently the sole source of one or more components upon which we are dependent. Suppliers of some of 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 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. We cannot assure you that we will be able to continue to obtain such components from these suppliers on satisfactory commercial terms. 7 We may face increased costs and reduced supply of raw materials. There can be no assurance that we will be able to recoup any future increases in the cost of raw materials or in electric power costs through price increases for our products. Since 2003, the cost of raw materials used in our production, has fluctuated significantly due to market and industry conditions. The cost of electric power has also increased in the last several years. There can be no assurance that we will be able to recoup any future increases in the cost of raw materials or electric power costs through price increases for our products. Reduction in military budgets worldwide may cause a reduction in our revenues, which would adversely affect our business, operating results and financial condition. A significant portion of our revenues is derived from the sale of products for military applications. These revenues, on a consolidated basis, totaled approximately $13.7 million, or 41.34 % of revenues in 2004, $15.2 million, or 49.7% of revenues, in 2003 and $13.1 million, or 49.7% of revenues, in 2002. The military budgets of a number of countries have been reduced and may be further reduced in the future. Declines in military budgets may result in reduced demand for our products and manufacturing services. This would result in reduction in our core business' revenues and adversely affect our business, results of operations and financial condition. We operate in a highly competitive field. We may not be able to offer our products as part of integrated systems to the same extent as our competitors or successfully develop or introduce new products that are more cost effective or offer better performance than those of our competitors. Failure to do so could adversely affect our business, financial condition and results of operations. The market for heat exchangers and other heat transfer products is highly competitive, and we may not be able to compete effectively in our market. Our principal competitors are Honeywell Corporation, or Honeywell, Hamilton Sunstrand, or Hamilton, and Lori Inc., or Lori. Some of our competitors are far larger, have substantially greater resources, including technical, financial, research and development and marketing and distribution capabilities than we have, and enjoy greater market recognition than we have. 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. In May 2005, we entered into an agreement for the purchase of Piedmont Aviation Component Services, LLC, subject to certain closing conditions. No assurance can be given that we will be able to successfully operate this company in the future. If this company is unsuccessful, our future results of operations will be adversely affected. On May 24, 2005, our subsidiary, Limco-Airepair, Inc., entered into an agreement, subject to certain closing conditions, for the purchase of Piedmont Aviation Component Services, LLC, or Piedmont, a private company based in Kernersville, North Carolina, engaged in the repair and overhaul of various aircraft accessories. Under the terms of the acquisition, we agreed to pay $5.5 million for Piedmont and to repay $9.5 million of its outstanding indebtedness. In 2004, Piedmont had a net lost of $168,000. No assurance can be given that Piedmont will be profitable in the future. If Piedmont is not profitable in the future, we may lose our investment in this company and our future results of operations will be adversely affected. 8 We may engage in future acquisitions that could dilute our stockholders' equity and harm our business, results of operations and financial condition. We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses, products and technologies. We are unable to predict whether or when any other prospective acquisition will be completed. The process of integrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management's attention. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm our business, financial condition or results of operations. Future acquisitions may require substantial capital resources, which may require us to seek additional debt or equity financing. Future acquisitions by us could result in the following, any of which could seriously harm our results of operations or the price of our stock: o issuance of equity securities that would dilute our current stockholders' percentages of ownership; o large one-time write-offs; o the incurrence of debt and contingent liabilities; o difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquired companies; o diversion of management's attention from other business concerns; o contractual disputes; o risks of entering geographic and business markets in which we have no or only limited prior experience; and o potential loss of key employees of acquired organizations. Rapid technological changes may adversely affect the market acceptance of our products. The aerospace market in which we compete is subject to technological changes, introduction of new products, change in customer demands and evolving industry standards. Our future success will depend upon our ability to keep pace with technological developments and to timely address the increasingly sophisticated needs of our customers by supporting existing and new technologies and by developing and introducing enhancements to our current products and new products. We cannot assure you that we will be successful in developing and marketing enhancements to our products that will respond to technological change, evolving industry standards or customer requirements; that we will not experience difficulties that could delay or prevent the successful development, introduction and sale of such enhancements; or that such enhancements will adequately meet the requirements of the market and achieve any significant degrees of market acceptance. If release dates of our new products or enhancements are delayed or, if when released, they fail to achieve market acceptance, our business, operating results and financial condition would be materially adversely affected. 9 We may encounter difficulties with our international operations and sales. We cannot assure you that we will be able to sustain or increase revenues from international operations or that we will not encounter significant difficulties in connection with the sale of our products in international markets or that one or more of these factors will not have a material adverse effect on our future revenues and, as a result, our business, operating results and financial condition. While our principal executive offices are located in Israel, 84.7% of our sales in 2004, 84.4% of our sales in 2003 and 83.7% of our sales in 2002 were exports. This subjects us to many risks inherent in international business, including: o limitations and disruptions resulting from the imposition of government controls; o changes in regulatory requirements; o export license requirements; o economic or political instability; o trade restrictions; o changes in tariffs; o currency fluctuations; o longer receivable collection periods and greater difficulty in accounts receivable collection; o difficulties in managing overseas subsidiaries and international operations; and o potential adverse tax consequences. We cannot assure you that we will be able to sustain or increase revenues from international operations or that we will not encounter significant difficulties in connection with the sale of our products in international markets or that one or more of these factors will not have a material adverse effect on our future revenues and, as a result, our business, operating results and financial condition. We face special risks from international sales and currency exchange fluctuations. Since our financial statements are stated in dollars, but not all our expenses are incurred in dollars or incurred in currencies linked to the dollar, our operations have been, and may continue to be, affected by fluctuations in currency exchange rates. Export sales represented approximately 42.4% of our revenues in 2004, approximately 43.8% of our revenues in 2003 and 43.3% of our revenues in 2002. We expect exports will continue to be a significant part of our business. This business is subject to various risks common to international activities, such as the need to comply with complex and varied export laws, tariff regulations and regulatory requirements, and political and economic instability in certain regions. Since our financial statements are stated in dollars, but not all our expenses are incurred in dollars or incurred in currencies linked to the dollar, our operations have been, and may continue to be, affected by fluctuations in currency exchange rates. 10 If we do not receive the governmental approvals necessary for the export of our products, our revenues may decrease. Similarly if our suppliers and partners do not receive their government approvals necessary to export their products or designs to us, our revenues might decrease and we may fail to implement our growth strategy. Under Israeli law, the export of certain of our products and know-how is subject to approval by the Israeli Ministry of Defense. To initiate sales proposals with regard to exports of our products and know-how and to export such products or know-how, we must obtain permits from the Ministry of Defense. We cannot assure you that we will receive in a timely manner all the required permits for which we may apply in the future. Similarly, under foreign laws the export of certain military products, technical designs and spare parts require the prior approval of, or export license from, such foreign governments. In order to maintain our third party production, certain co-development activities and procurements required for the performance of certain contracts, we must receive detailed technical designs, products or products' parts samples from our strategic partners or suppliers. We cannot assure you that we will be able to receive all the required permits and/or licenses in a timely manner. Consequently, our revenues may decrease and we may fail to implement our growth strategy. We have not registered our intellectual property rights. There is no way to be sure that others will not independently develop such trade secrets and know-how or obtain access thereto, which could adversely affect our business. We rely primarily on unpatented proprietary know-how and trade secrets, and employ various methods including confidentiality agreements with employees, to protect our trade secrets and intellectual property. However, such methods may not afford complete protection and there is no way to be sure that others will not independently develop such trade secrets and know-how or obtain access thereto, which could adversely affect our business. Our products may infringe on the intellectual property rights of others. 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. In addition, any infringement claim, even one without merit, could result in the expenditure of significant financial and managerial resources to defend. We are dependent on our senior management and key personnel, whose loss could adversely affect our business. Our future success depends in large part on the continued services of our senior management and key personnel. We do not carry key-person life insurance on our senior management or key personnel. Any loss of the services members of senior management or other key personnel could negatively and materially affect our business. Compliance with the changing corporate governance regulations and public disclosure requirements may result in additional expenses. Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission regulations and NASDAQ Stock Market rules, are creating uncertainty for companies such as ours. We are committed to maintaining high standards of corporate governance and public disclosure. As a result, we intend to 11 invest reasonably necessary resources to comply with evolving standards, and this investment may result in increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities, which could harm our operating results and business prospects. The results of legal proceedings are difficult to predict and an unfavorable resolution of a lawsuit or proceeding could have a material adverse effect on our business. We are, and have been in the past, a party to various lawsuits, including employment claims, and other legal proceedings in the normal course of our business. See "Item 8 - Financial Information." Legal proceedings can be expensive, lengthy and disruptive to normal business operations, regardless of their merit. Moreover, the results of complex legal proceedings are difficult to predict and an unfavorable resolution of a lawsuit or proceeding could have a material adverse effect on our business, results of operations or financial condition. Risk Factors Related to Our Ordinary Shares Our share price has been volatile in the past and may decline in the future. Our ordinary shares have experienced significant market price and volume fluctuations in the past and may experience significant market price and volume fluctuations in the future in response to factors such as the following, some of which are beyond our control: o quarterly variations in our operating results; o operating results that vary from the expectations of securities analysts and investors; o changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors; o announcements of technological innovations or new products by us or our competitors; o announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; o changes in the status of our intellectual property rights; o announcements by third parties of significant claims or proceedings against us; o additions or departures of key personnel; o future sales of our ordinary shares; o de-listing of our shares from the NASDAQ SmallCap Market; and o stock market price and volume fluctuations. Domestic and international stock markets often experience extreme price and volume fluctuations. Market fluctuations, as well as general political and economic conditions, such as a recession or interest rate or currency rate fluctuations or political events or hostilities in or surrounding Israel, could adversely affect the market price of our ordinary shares. 12 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 shareholders may depress our share price. If our principal shareholders sell substantial amounts of our ordinary shares, including shares issued upon the exercise of outstanding warrants, or convertible notes, or if the perception exists that our principal shareholders may sell a substantial number of our ordinary shares, the market price of our ordinary shares may fall. Any substantial sales of our shares in the public market also might make it more difficult for us to sell equity or equity-related securities in the future at a time, in a place and on terms we deem appropriate. Risks Relating to Our Location in Israel Because we have significant operations in Israel, we may be subject to political, economic and other conditions affecting Israel that could increase our operating expenses and disrupt our business. We are incorporated under the laws of, and our executive offices, manufacturing plant and research and development facilities are located in, the State of Israel. Although most of our sales are made to customers outside Israel, we are nonetheless directly affected by the political, economic and military conditions affecting Israel. Specifically, we could be adversely affected by any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. Since September 2000, there has been a marked increase in violence, civil unrest and hostility, including armed clashes, between the State of Israel and the Palestinians, and acts of terror have been committed inside Israel and against Israeli targets in the West Bank and Gaza. There is no indication as to how long the current hostilities will last or whether there will be any further escalation. Any continuation of, or further escalation in, these hostilities or any future armed conflict, political instability or violence in the region may have a negative effect on our business condition, harm our results of operations and adversely affect our share price. Furthermore, there are a number of countries that restrict business with Israel or Israeli companies. Restrictive laws or policies of those countries directed towards Israel or Israeli businesses had, and may in the future continue to have, an adverse impact on our operations, our financial results or the expansion of our business. No predictions can be made as to whether or when a final resolution of the area's problems will be achieved or the nature thereof and to what extent the situation will impact Israel's economic development or our operations. Our results of operations may be negatively affected by the obligation of our personnel to perform military service. Many of our executive officers and employees in Israel are obligated to perform annual military reserve duty and are subject to being called for active duty under emergency circumstances. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of 13 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. The economic conditions in Israel have not been stable in recent years. Our operations could be adversely affected if the economic conditions in Israel deteriorate. In recent years Israel has been going through a period of recession in economic activity, resulting in low growth rates and growing unemployment. Our operations could be adversely affected if the economic conditions in Israel deteriorate. We may be adversely affected by a change in the exchange rate of the NIS against the dollar. Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability and period to period comparisons of our results. Because exchange rates between the NIS and the dollar fluctuate continuously, exchange rate fluctuations, particularly larger periodic devaluations, may have an impact on our profitability and period to period comparisons of our results. In 2001 and 2002, the rate of devaluation of the NIS against the dollar was 9.3% and 7.3%, respectively, while in 2003 and 2004 the NIS appreciated in value in relation to the dollar by 7.6% and 1.6%, respectively. A portion of our expenses, primarily labor expenses, is incurred in NIS and a part of our revenues are quoted in NIS. Additionally, certain assets, as well as a portion of our liabilities, are denominated in NIS. Our results may be adversely affected by the devaluation of the NIS in relation to the dollar (or if such devaluation is on lagging basis), if our revenues in NIS are higher than our expenses in NIS and/or the amount of our assets in NIS are higher than our liabilities in NIS. Alternatively, our results may be adversely affected by an appreciation of the NIS in relation to the dollar (or if such appreciation is on a lagging basis), if the amount of our expenses in NIS are higher than the amount of our revenues in NIS and/or the amount of our liabilities in NIS are higher than our assets in NIS. Service and enforcement of legal process on us and our directors and officers may be difficult to obtain. Service of process upon our directors and officers and the Israeli experts named herein, all of whom reside outside the United States, may be difficult to obtain within the United States. Furthermore, substantially all of our assets, all of our directors and officers and the Israeli experts named in this annual report are located outside the United States, any judgment obtained in the United States against us or these individuals or entities may not be collectible within the United States. There is doubt as to the enforceability of civil liabilities under the Securities Act and the Securities Exchange Act in original actions instituted in Israel. However, subject to certain time limitations and other conditions, Israeli courts may enforce final judgments of United States courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those Acts. Provisions of Israeli law may delay, prevent or make the acquisition of our company difficult, which could prevent a change of control and therefore depress the price of our shares. Provisions of Israeli corporate and tax law may have the effect of delaying, preventing or making more difficult a merger with, or other acquisition of, us. This could cause our ordinary shares to trade at prices below the price for which third parties might be willing to pay to gain control of us. Third parties 14 who are otherwise willing to pay a premium over prevailing market prices to gain control of us may be unable or unwilling to do so because of these provisions of Israeli law. Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law. We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our memorandum of association, articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a company's articles of association, increases in a company's authorized share capital, mergers and interested party transactions requiring shareholder approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior. Item 4. Information on the Company A. History and Development of the Company We were incorporated under the laws of the State of Israel in April 1985 under the name Galaxy Graphics Ltd., or Cresta Ltd. In August 1986 we changed our name to Galagraph Ltd. In May 1992 we changed our name to TAT Technologies Ltd. We are a public limited liability company under the Israeli Companies Law 1999-5759, or the Israeli Companies Law, and operate under this law and associated legislation. Our registered offices and principal place of business are located at Re'em Industrial Park Neta, Boulevard Bnei Ayish, Gedera, Israel 70750 and our telephone number is 972-8-859-5411. Our mail address is P.O. Box 80, Gedera, Israel 70750. Our address on the Internet is www.tat.co.il. The information on our website is not incorporated by reference into this annual report. We are principally engaged in the manufacture and sale of a broad range of heat transfer equipment used in mechanical and electronic systems on-board commercial and military aircraft and in a variety of other electronic equipment. These systems, which include environmental control, avionics cooling and other mechanical and electronic systems, generate heat during operation that must be removed and dissipated in order to function properly. We are also engaged in the remanufacture, overhaul and repair of heat transfer equipment and other aircraft components manufactured by us, and other companies. In addition, we manufacture, sell and service certain related products for use in aircraft and electronic systems. We were founded in 1985 to develop the computerized systems business of our parent company, TAT Industries, a publicly held Israeli corporation engaged in the manufacture and sale of aeronautical equipment. In December 1991, we acquired the heat exchanger operations of TAT Industries. In February 2000, we entered into an agreement with TAT Industries to purchase its operations relating to the manufacture of aviation accessories and the lease of certain real estate and buildings. 15 We conduct business in the United States through our wholly owned subsidiary Limco-Airepair International Inc. ("Limco-Airepair"), which is certified by the Federal Aviation Administration, or FAA, to engage in the remanufacture, overhaul and repair of heat transfer equipment for the aviation industry. In March 1987, we completed an initial public offering of our securities in the United States. We were listed on NASDAQ National Market under the symbol "TATTF" from our initial public offering until July 1998 when the listing of our ordinary shares was transferred to the NASDAQ SmallCap Market. On June 15, 2004, we entered into a share purchase agreement with T.O.P, Limited Partnership, or T.O.P., a wholly-owned subsidiary of Ta-Tek Ltd., an Israeli private company wholly-owned by FIMI Opportunity Fund. Under the agreement we sold 857,143 of our shares to T.O.P for $6,000,001. T.O.P was given certain demand and piggy-back registration rights with respect to these shares. As part of the transaction, our parent company, TAT Indusries, and T.O.P entered into a shareholders' agreement, which provides among other things that T.O.P will have the right to designate three members to serve on our Board of Directors. The shareholders' agreement also provides for: (i) certain standard bring-along and tag-along rights; (ii) a right of first refusal with respect to any shares proposed to be sold by any of the parties; (iii) a lock-up whereby no party may sell more than 150,000 shares prior to June 2006, and (iv) a standstill restriction, which provides that T.O.P will not purchase (in the open market or otherwise) such number of shares that would increase its holdings of our shares to more than 35%. As part of the transaction, T.O.P received warrants to purchase an aggregate of 500,000 of our ordinary shares at $8.50 per share, which price was adjusted to $7.32 per share because of our 2004 dividend payment. The warrants are exercisable for 66 months. In addition, we entered into a credit line agreement with FIMI, which provides for a line of credit in an amount of up to $2,000,000. Loans made pursuant to the credit line bear interest at 5% per annum and are repayable on or before December 15, 2009. We will pay an annual commitment fee equal to 0.5% of the amount of the credit line. We also entered into a management agreement which provides that we will engage FIMI to provide certain management services to us in exchange for annual payments equal to 3% of our operating profit exceeding $500,000; provided, however, that in no event will the total management fees in any given year exceed $250,000. The agreements were approved by our shareholders on August 10, 2004. On May 24, 2005, our subsidiary, Limco-Airepair, Inc., entered into an agreement, subject to certain closing conditions, for the purchase of Piedmont, a private company based in Kernersville, North Carolina, engaged in the repair and overhaul of various aircraft accessories. Under the terms of the acquisition, we agreed to pay $5.5 million for Piedmont and to repay $9.5 million of its outstanding indebtedness. Piedmont is a recognized leader in the overhaul, repair, maintenance, service and supply of propellers, landing gear and APU/LRU units. In addition, we agreed to pay Piedmont former shareholders $200,000 per year, for a term of three years, in consideration for their obligation not to compete with Piedmont during this period. B. Business Overview Industry Overview - ----------------- We manufacture a complete line of heat transfer equipment both in the United States and Israel, including heat exchangers, precoolers, oil coolers and cold plates, or Heat Transfer Equipment. Heat Transfer Equipment facilitates the necessary removal and dissipation of heat generated during the operation of mechanical and electronic systems. Our Heat Transfer Equipment is generally integrated into a complete cooling system. Using our technological expertise, we design each of our heat transfer 16 products to meet the specific space, power, performance and other needs of our customers. Heat Transfer Equipment is marketed worldwide for applications in commercial and military aircraft and electronic systems, the primary users of such equipment. Our customers include Liebherr-Aerospace Toulouse S.A, or Liebherr, Boeing Mcdonnell Douglas Aerospace, or Boeing, Israel Aircraft Industries, or IAI, and Cessna Aircraft Company, or Cessna, as well as the United States Air Force and Navy. Such customers typically enter into supply contracts with us pursuant to which we manufacture specified Heat Transfer Equipment in connection with the customers' production or retrofitting of particular aircraft equipment. Such supply contracts are generally for a period of between one to four years. We are also engaged in the remanufacture, overhaul and repair of heat transfer and other aviation equipment, or Overhaul Services. Heat transfer products typically require Overhaul Services or replacement after three to five years of service. Remanufactured units are generally given the same warranties as are provided by the original manufacturers of new units of the same type. We primarily market our Overhaul Services to major commercial airlines, such as, KLM Royal Dutch Airlines, or KLM, Lufthansa Technic, or Lufthansa, S.R Technic, Fedex Corp., or Fedex, and Sabena Technic, or Sabena. In addition, we design, develop and manufacture aviation accessories. These accessories include fuel components, such as valves and pumps, secondary power systems, various instrumentation and electronic assemblies. Customers for our design, development and manufacture of aviation accessories include Lockheed-Martin Corp, or Lockheed-Martin, Teledyne Continental Motors, or Teledyne, Israeli Air Force, IAI, as well as the United States Air Force and Navy. We currently overhaul secondary and emergency power systems and jet fuel starters for F-16s, fuel injection governors, power and cooling turbines and valves. Customers for our systems overhaul services include the Israeli Air Force, IAI, NATO air forces, as well as the United States Air Force and Navy. We also design, develop, manufacture and market military air conditioning systems, or AC Systems, and market nuclear, biological, and chemical systems, or NBC Systems, produced by other manufacturers, used in military shelters, tents and armored vehicles. These systems are marketed worldwide to government agencies and to shelter manufacturers. We market our products and services both through our internal marketing staff and through a worldwide network of independent representatives. These efforts are coordinated and directed by our internal marketing personnel. We implemented our current marketing network following the acquisitions of Airepair International Inc., or Airepair, and Limco Manufacturing Corporation, or Limco, in order to capitalize on the complementary products and services of those businesses. Market and Business Strategy Our principal growth strategy both in the United States and Israel is to: (i) expand our heat transfer business in existing and new markets; (ii) provide overhaul and repair services for additional aircraft components; (iii) expand our marketing of overhaul and repair services to additional segments of the aerospace industry; and (iv) use our technological expertise to expand into related businesses. Capitalizing on the continuing trend in the aerospace industry to reduce costs by prolonging the useful life of existing equipment, we have initiated a concentrated marketing effort for our Overhaul Services, which was previously provided only to widebody commercial aircraft. This marketing strategy has enabled us to penetrate the regional, helicopter, general aviation and military aircraft markets. In addition, we have targeted the after sale market for certain of our products other than Heat Transfer Equipment. 17 We have identified the electronics industry as a market with significant growth potential for our Heat Transfer Equipment. For the past several years we have been engaged in the design, development and manufacture of electronic heat dissipation equipment such as cold plates, heat sinks, cold walls and other components which remove and dissipate heat from electronic systems. Our Heat Transfer Equipment is currently used primarily in airborne radar systems, electronic warfare packages, avionics, electronic pods and other airborne electronic systems. Our customers for these products include Elta Electronics Industries Ltd. (a subsidiary of I.A.I. Ltd.), or Elta, Rafael Armament Development Authority Ltd, Elisra Electronics Systems Ltd. and El-Op Electronics Industries Ltd. (a division of Elbit). We have also identified the need to use new materials and brazing technologies to reduce and optimize the volume and weight of the heat transfer equipment. We believe that our technical expertise in the field of heat transfer will facilitate our entry into related businesses. In April 1999, we entered into a license and technical assistance agreement with a subsidiary of Liebherr, a large international corporation, Liebherr-Aerospace Toulouse S.A France, or Liebherr France. Pursuant to this agreement, we have supplied intellectual property, technology and technical assistance for the development and manufacturing of certain types of advanced aeronautical equipment for a total of $4,250,000 payable over the next three to five years. As of June 16, 2005, we have received $4,188,750 in payments. In addition, pursuant to the agreement, beginning on the date Liebherr France starts producing any of the products for which we supplied intellectual property, technology and technical assistance, and for a period of ten years thereafter, any order that Liebherr France receives for the production of such products will be divided between them and us 50% each, and in addition, Liebherr France will pay us royalties of 7.5% on the income from its 50% of portion of such order. In May 1999, we entered into an agreement with ENERCO, an Israeli company, to acquire the know-how and production rights of its line of military air conditioning systems which are used in military communication shelters, mobile shelters and armored vehicles for $274,500 and royalty payments ranging from 1.5% to 5% of sales from 1999 through 2006. Products and Services The table below sets forth, for the periods indicated, the revenues derived from sales, and the percentage of total revenues, of our products and services:
Years Ended December 31, 2003 December 31, 2004 -------------------------------------- -------------------------------------- (amounts in thousands) -------------------------------------------------------------------------------- Amount Percent Amount Percent ------ ------- ------ ------- Revenues derived from sale of Heat Transfer Equipment and aeronautical accessories manufacturing. $19,255 62.8% $20,724 62.3% Overhaul services...................... 10,589 34.5% 11,398 34.3% Other products......................... 838 2.7% 1,121 3.4% ------- ------ ------- ------ Total .................................. $30,682 100.0% $33,243 100.0% ======= ====== ======= ======
18 Heat Transfer Equipment ----------------------- We manufacture wide range of Heat Transfer Equipment both in the United States and Israel. Heat Transfer Equipment, such as heat exchangers, precoolers, evaporators, oil coolers and cold plates, are integral components used in a wide variety of environmental control systems and mechanical and engine systems, as well as a wide range of electronic systems. These systems generate heat during operation that must be removed and dissipated. Heat transfer equipment components facilitate the exchange of the heat created through the operation of these systems by transmitting the heat from a hot medium (air, oil or other fluids) to a cold medium for disposal. As a component in a larger operating system, heat transfer equipment must be efficient, compact, lightweight and reliable. In the aerospace industry in particular, there is a constant need for improvements in performance, weight, cost and reliability. In addition, as electronic systems become smaller and more densely packed, the need for sophisticated and efficient heat transfer equipment to serve the cooling functions becomes more critical. Using our technological expertise, we believe we are well positioned to respond to these industry demands through continued new product development and product improvements. Our principal Heat Transfer Equipment includes air-to-air heat exchangers and precoolers and liquid-to-air heat exchangers. Typically, the air-to-air heat exchangers and precoolers cool a jet engine's hot "bleed air" which, when cooled, is then used in the aircraft's air conditioning, pressurization and pneumatic systems. The liquid-to-air heat exchangers cool liquids such as engine oil, hydraulic oil and other liquid coolants used in other systems. We provide anywhere from one to all of the different types of heat transfer equipment in certain aircraft. Widebody planes require approximately seven different types of heat transfer equipment, while regional aircraft and helicopters contain approximately three types. Our heat exchangers and precoolers, which are types of heat transfer equipment found in most aircraft, are generally sold for between $1,000 and $20,000 per unit. A substantial portion of our Heat Transfer Equipment is sold to customers in connection with the original manufacture or retrofitting of particular aircraft equipment. We generally enter into long-term supply contracts with our customers, which require us to supply Heat Transfer Equipment as part of a larger project. We also manufacture heat dissipation equipment, such as evaporators, cold plates, cooling chests, heat sinks and cold walls (which may be air-to-air, liquid-to-air or liquid-to-liquid), which control and dispose of heat emitted by the operation of various electronic systems. These heat dissipation products are currently utilized mainly in radar systems, avionics, electronic warfare systems and various pods for targeting, navigation and night vision. Our Heat Transfer Equipment has been marketed worldwide for applications in commercial and military aircraft and electronics systems, the primary users of such equipment. Our customers for Heat Transfer Equipment include: Liebherr France, Boeing, IAI and Cessna, as well as the United States Air Force and Navy. As a result of the specialized nature of the systems in which our parts are included, spare and replacement parts for the original heat transfer systems are usually provided by us. Remanufacture, Overhaul and Repair Services ------------------------------------------- We remanufacture, overhaul and repair heat transfer equipment through our subsidiary's FAA certified repair station. We primarily market Overhaul Services to major commercial airlines, such as, 19 KLM and Lufthansa. We are also engaged with the United States Government and Navy in overhaul and repair of military heat transfer products. Heat transfer products typically require Overhaul Services or replacement after three to five years of service. We offer our customers repair services on three levels. If the damage is significant, we will remanufacture the unit, which generally entails replacing the core matrix of the damaged or old heat transfer product in lieu of replacing the entire unit with a new one. We design and develop these customized remanufacture programs as cost effective alternatives to new part replacement. In cases of less severe damage, we will either overhaul or repair the unit as necessary. Remanufactured units carry warranties identical to those provided with new units. We currently overhaul secondary and emergency power systems and jet fuel starters for F-16s, fuel injection governors, power and cooling turbines and valves. Our customers for our systems overhaul services include the Israeli Air Force, IAI, NATO air forces, as well as the U.S. Air Force and Navy. System Design, Development and Manufacture ------------------------------------------ We are engaged in the design, development and manufacture of aviation accessories. These accessories include fuel component systems, such as valves and pumps, secondary power systems, various instrumentation and electronic assemblies. Our customers for the design, development and manufacture of aviation accessories include Lockheed-Martin, Boeing, Teledyne, Israeli Air Force, IAI, as well as the U.S. Air Force and Navy. Conventional Air Conditioning Systems ------------------------------------- We offer a wide range of highly reliable and affordable military AC systems, featuring high performance and simplicity. We manufacture a comprehensive line of versatile AC systems, which provide a complete solution for application where heat removal is essential. Simple installation, maintenance and easy integration make the systems user-friendly. The units meet the MIL-STD-810 and MIL-STD-461 requirements and are designed for operation in difficult climatic conditions. Our AC systems have been installed on military communications shelters, mobile shelters, and armored vehicles and used in many other military applications. Beside our standard units, we may propose custom-made systems as per customer specification. The know-how on military AC Systems has been transferred to our U.S. subsidiary, Limco-Airepair, and they have initiated partial production on their premises. Our revenues from sales of AC systems from 2002 through 2004 were not material. Nuclear, Biological, and Chemical Systems ----------------------------------------- We market NBC systems manufactured by Bet-El Industries Ltd. as a complementary solution for our AC systems. These systems are usually offered by us to customers who ask for complete solution. Our revenues from sales of NBC systems from 2002 through 2004 were not material. Sales and Marketing We derive our revenues mainly from sales to customers in the United States, Israel and Europe. The geographic distribution of such sales is as follows: 20
Geographic Region - ----------------- Years Ended --------------------------------------------------------------------------------- December 31, 2003 December 31, 2004 ------------------------------------- ------------------------------------- (Amounts in thousands) Amount Percent Amount Percent ------ ------- ------ ------- Israel.......................... $4,796 15.63% $5,095 15.33% Other Asian countries........... 1,845 6.02% 1,430 4.30% United States................... 15,441 50.32% 17,569 52.85% Europe.......................... 8,340 27.18% 8,736 26.28% Other........................... 260 0.85% 413 1.24% ------- ------- ------- ------ Total ...................... $30,682 100.00% $33,243 100.00%
We market our products and services through our internal marketing staff and a worldwide network which consists of independent representatives. These efforts are coordinated and directed by our internal marketing personnel. Our representatives are strategically located near key customer sites in certain offices throughout the United States, in addition to offices in Europe, Asia, the Middle East and South America. We implemented our current marketing network following the acquisitions of Airepair and Limco in order to capitalize on the complementary products and services of these businesses and the increased customer base. Representatives are in regular contact with engineering and procurement personnel and program managers of existing and target customers to identify new programs and needs for our products, obtain requests for quotations and identify new product opportunities. Our marketing activities also include advertising in technical publications which target heat transfer equipment and related markets, attending exhibitions, trade shows and professional conferences, organizing seminars and direct mailing of advertisements and technical brochures to current and potential customers. Major Customers Our products and services are provided worldwide to original equipment manufacturers, or OEMs, and end-user customers in the commercial, military and industrial markets. Our major customers include OEMs such as Liebherr, Lockheed-Martin, Hamilton, Cessna, IAI and Boeing and end-users such as, KLM, Lufthansa, S.R Technic, Fedex, Sabena and the U.S. Air Force and Navy. During the fiscal years ended December 31, 2002, 2003 and 2004, Elta accounted for approximately 11.9%, 15.3% and 10.1%, respectively, of our revenues. For the fiscal years ended December 31, 2002, 2003 and 2004, Liebherr accounted for 12.8%, 12.9%, and 15.41%, respectively, of our revenues. Sales to the U.S. and Israeli governments, acting through their various departments and agencies, accounted for approximately 17.3%, 3.2% of our revenues in 2002, respectively, approximately 15.3% and 3.3% of our revenues in 2003, respectively, and approximately 10.6%, 2.6% of our revenues in 2004, respectively. Government contracts are generally terminable by the government at will. Product and Service Warranties We provide warranties for our products and services ranging from one to five years, which vary with respect to each contract and in accordance with the nature of each specific product. To date, our warranty costs have not been substantial. Engineering and Manufacturing We maintain a staff of 226 employees in engineering and manufacturing to design, manufacture, remanufacture, repair and test products. Our engineering department is responsible for the design and development of all heat exchangers and other products as well as the methods, tooling, test instructions and test equipment. Our engineering staff has extensive knowledge and experience related to our Heat 21 Transfer Equipment. Most of our product lines have a designated project manager who is an experienced engineer and is in charge of all the activities in his area. The product manager interfaces with the customer, engineering department, manufacturing department and vendors, and is responsible for all aspects of the program including scheduling, adherence to specifications, customer support and reporting. In general, we have manufacturing capabilities for most of the parts and accessories of our Heat Transfer Equipment. We also manufacture the necessary tools, fixtures, test equipment and special jigs required to manufacture, assemble and test these products. We have developed proprietary design techniques and computer-aided design software which assists in the mechanical design and manufacturing of our products. All products are inspected and tested by trained inspectors using highly sophisticated test equipment in accordance with customer requirements. We are dependent upon single sources of supply for certain components, and seek to maintain an adequate inventory of all imported components. Our Israeli operations employ the services of a purchasing agent, a corporation which is wholly-owned by certain of our officers and directors. See Item 13. "Interest of Management in Certain Transactions." Source and Availability of Raw Materials We acquire most of the components for the 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. 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 difficulty in obtaining timely deliveries of necessary components. We depend on a limited number of suppliers of components for our products and if we are unable to obtain these components when needed, we would experience delays in manufacturing our products and our financial results could be adversely affected. See Item 3.D. Risk Factors." Regulation Our operations in the United States are regulated by the FAA and the U.S. Department of Defense. We are required to comply with FAA regulations, which generally requires us to obtain FAA approval prior to the sale of new products for aircraft applications. We currently hold all necessary FAA authorizations required for the production of our products. In addition, we hold an FAA repair station certificate which permits us to provide our Overhaul Services. We are also required to comply with the U.S. Department of Defense federal acquisition regulations, which governs all of our work for military applications. Our operations in Israel are subject to supervision by the Ministry of Defense and Civil Aviation Administration. We are certified by the Israeli Air Force for the Ministry of Defense for both manufacturing and maintenance. We are also licensed as a repair station for certain components by the Israeli Civil Aviation Administration. In addition, our export of certain products and/or know-how is subject to approval by The Foreign Defense Assistance and Defense Export Organization of the Israeli Ministry of Defense, or SIBAT. Permits from SIBAT must be obtained for the initiation of sales proposals with regard to such exports, as well as for the actual exports of such products. Backlog On June 20, 2005, we had a backlog of approximately $19 million for products to be delivered through December 31, 2007. On June 15, 2004, we had a backlog of approximately $28.0 million for 22 products to be delivered through December 31, 2005. We anticipate that approximately $8 million of our backlog at June 20, 2005 will be delivered by December 31, 2005, approximately $9, million by December 31, 2006 and approximately $2 million by December 31, 2007. Markets We sell our products to various air forces and companies. Our main market is in United States with 52.85% of our sales in 2004, 50.32% in 2003 and 51.48% in 2002. The second largest market is Europe with 26.28% of our sales in 2004, 27.18% in 2003 and 26.18% in 2002. Israel is our third largest market with 15.33% of our sales in 2004, 15.63% in 2003 and 16.27% in 2002. Sales to the rest of the world accounted for 5.54%, 6.87% and 6.06% of our sales in 2004, 2003 and 2002, respectively. Competition The heat transfer field requires specialized technology, equipment and facilities, an experienced technical and engineering staff, as well as highly sophisticated and trained technicians. Although these factors have tended to limit the number of manufacturers who enter this field, it nonetheless remains very competitive. The major manufacturers in the field are Honeywell and Hamilton. Other manufacturers in the United States are Hughes-Treitler Manufacturing Corp., Stewart Warner South Wind Corp., United Aircraft Products, Lytron Inc. and Lockhart Industries Inc., and manufacturers based in Europe include I.M.I. Marston Ltd., Normalair Garrett Ltd. ,or NGL, Secan and Behr. Our major competitor in the Overhaul Services business is Lori, a subsidiary of Honeywell, a U.S. company. Other competitors include Secan and NGL, which are based in Europe. Export Policy Exports of military related products are subject to the military export policy of the State of Israel. Current Israeli Government policy encourages export to approved customers of military products similar to those manufactured by us, provided that such export does not run counter to Israeli policy or national security considerations. We must obtain a permit to initiate a sales proposal and ultimately an export license for the transaction is required. We cannot assure you that we will obtain export permits or licenses in the future or that governmental policy with respect to military exports will not be altered. However, to date we have not encountered any significant difficulties in obtaining necessary permits or licenses for sale of our products. Fixed Price Contracts Our contracts with the government of Israel, its agencies and other foreign governments, are generally fixed price contracts. Under fixed price contracts, 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 that increased or unexpected costs may reduce our profits or generate a loss. This risk can be particularly significant under a fixed price contract for research and development involving a new technology. 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. 23 Proprietary Rights At the present time we do not own any patents. We rely on laws protecting trade secrets, and consider such items proprietary, but believe that our success depends less on the ownership of such proprietary rights than on our innovative skills, technical competence marketing and engineering abilities. We have no existing material registered trademarks. C. Organizational Structure We are 51.52% owned by TAT Industries, an Israeli publicly held corporation, engaged in the manufacture and sale of aeronautical equipment. Our wholly-owned subsidiary, Limco-Airepair is incorporated under the laws of Oklahoma and located in Tulsa, Oklahoma. D. Property, Plants and Equipment Our executive offices, research and development and manufacturing facilities in Israel are located in a 31,679 square feet facility located in Park Re'em near Gedera. The land of this facility is leased from the Israeli government pursuant to a lease that expires in 2020, which was assigned, but not registered, to us by TAT Industries in connection with our acquisition of TAT Industries' heat exchanger operations. See Item 7 "Major Shareholders and Related Party Transactions." In connection with the purchase of the operations of TAT Industries in February 2000, we and TAT Industries entered into a lease agreement, pursuant to which we are leasing from TAT Industries an area of approximately 329,000 square feet, including 90,000 square feet of buildings, for a period of 24 years and 11 months. We pay TAT Industries annual rental fees of approximately $300,000, with an additional incremental payment of 2% per year. For the year ended December 31, 2004, we paid $324,000. The rental fees are subject to revaluation every fifth year. Our subsidiary, Limco-Airepair Inc. owns its Tulsa, Oklahoma facility, which consists of approximately 55,000 square feet. Management believes that our present facilities are well maintained, in good condition and are sufficient for us to continue to operate and meet our production needs. Our utilization of our production capacity varies from time to time based on fluctuations in our business and other factors. Item 5. Operating and Financial Review and Prospects A. Operating Results The following discussion and analysis should be read in conjunction with our consolidated audited financial statements and the notes thereto, included elsewhere in this annual report. Certain Critical Accounting Policies Our consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require management to make certain estimates, judgments and assumptions based upon information available at the time that they are made, historical experience and various other factors that are believed to be reasonable under the circumstances. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. While all the accounting 24 policies impact the financial statements, certain policies may be viewed to be critical. These policies are those that are both most important to the portrayal of our financial condition and results of operations and require our management's most difficult, subjective and complex judgments and estimates. Actual results could differ from those estimates. In many cases, the accounting treatment of a particular transaction is specifically dictated by generally accepted accounting principles in the United States and does not require management's judgment in its application. There are also areas in which management's judgment in selecting among available alternatives would not produce a materially different result. Our management has reviewed these critical accounting policies and related disclosures with the Audit Committee. Our management believes the significant accounting policies which affect management's more significant judgments and estimates used in the preparation of our consolidated financial statements and which are the most critical to aid in fully understanding and evaluating the our reported financial results include revenue recognition and inventory valuation. Revenue Recognition We derive our revenue primarily from two sources: product revenues and service revenues. Revenue related to sales of our products is generally recognized when persuasive evidence of an arrangement exists; the product has been delivered and title and risk of loss have passed to the buyer; the sales price is fixed and determinable, no further obligations exist, and collectibility is probable. Revenues from remanufacture repair and overhaul services are recognized as services are performed. Inventory Valuation Our policy for valuation of inventory and commitments to purchase inventory, including the determination of obsolete or excess inventory, requires us to perform a detailed assessment of inventory at each balance sheet date which includes a review of, among other factors, an estimate of future demand for products within specific time frames, valuation of existing inventory, as well as product lifecycle and product development plans. The business environment in which we operate, the wide range of products that we offer and the relatively short sales-cycles we experience all contribute to the exercise of judgment relating to maintaining and writing-off of inventory levels. The estimates of future demand that we use in the valuation of inventory are the basis for our revenue forecast, which is also consistent with our short-term manufacturing plan. Inventory reserves are also provided to cover risks arising from non-moving items. Inventory management remains an area of management focus as we balance the need to maintain strategic inventory levels to ensure competitive lead times against the risk of inventory obsolescence because of rapidly changing technology and customer requirements. Finished Good Policy We manufacture the majority of our goods based on purchase orders received in advance. Accordingly, we do not manufacture any goods for stock. However, we do maintain a small quantity of finished goods for supporting urgent orders. Warranty Period Policy We provide warranties for our products and services ranging from one to five years, which vary with respect to each contract and in accordance with the nature of each specific product. Based on our experience, warranty expenses have been immaterial and, therefore, we did not record any warranty provision. 25 Credit Policy According to our credit policy, the credit period provided to our local customers is usually "Net plus 60 Days" and occasionally "Net plus 90 days." The credit period provided to our foreign customers varies from "Net plus 60 Days" to "Net plus 180 Days." We and our subsidiary's trade receivables are derived mainly from sales to customers in the United States, Israel and Europe. We and our subsidiary generally do not require collateral, however, in certain circumstances we may require letters of credit. Our management believes that credit risks relating to trade receivables are minimal since our customers are financially sound. We and our subsidiary perform ongoing credit evaluation of our customers' financial condition. The allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection. Marketable securities Marketable securities consist of available for sale securities, which are debt securities in which we invested with the intention of holding until the maturity dates of such securities. If it is determined, based on valuations, that a decline in the fair value of any of the investments is not temporary, an impairment loss is recorded and included in the consolidated statements of income as financial expenses. Legal contingencies We are, and have been in the past, a party to various lawsuits, including employment claims and other legal proceedings in the normal course of our business. In determining whether provisions should be recorded for pending litigation claims, we assess the allegations made and the likelihood that our company will successfully defend itself. When our management believes that it is probable that we will not prevail in a particular matter, it then estimates the amount of the provision based in part on advice of legal counsel. Income taxes and valuation allowance We operate within multiple taxing jurisdictions and are subject to audits in these jurisdictions. These audits can involve complex issues, which may require an extended period of time to resolve. In management's opinion, adequate provisions for income taxes have been made for all years. Although management believes that its estimates are reasonable, no assurance can be given that the final tax outcome of these issues will not be different than those that are reflected in our historical income tax provisions. Deferred taxes are determined utilizing the asset and liability method based on the estimated future tax effects of differences between the financial accounting and tax bases of assets and liabilities under the applicable tax laws. Valuation allowances are provided if based upon the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Overview Our revenues and cost of revenues may vary significantly from year to year due to fluctuations in the mix of products ordered by customers and in the timing of orders and deliveries. As a result, comparisons of one period to another in any given year are not necessarily an accurate indication of future trends. 26 Sales to the United States and Israeli governments accounted for approximately for approximately 15.3% and 3.3%, respectively, of our revenues for 2003 and 10.6% and 3.2%, respectively, of our revenues for 2004. While a substantial portion of our revenues is derived from the sale of products for the non-military market in the United States, Israel and abroad, our management believes that the success and development of our business will continue to depend in part upon our ability to participate in the defense programs of the United States, Israel and other governments. While certain of such defense programs have been reduced or terminated as a result of current political conditions and budgetary constraints, it is not possible to determine the extent to which such reductions have affected our revenues. There can be no assurance that any of these governments will continue to commit the current level of resources to such programs, that we will be able to continue to participate in such programs, or that changes thereto will not materially affect our financial condition. As a result, our historical results of operations and financial position are not necessarily indicative of any future operating results or financial position. We maintain our accounts and present our financial statements in dollars, the primary currency of our operations. Transactions and balances denominated in currencies other than the dollar have been presented in dollars based on representative rates of exchange of such currencies. Year Ended December 31, 2004 Compared with Year Ended December 31, 2003 Revenues. Our revenues increased 8.3% to $33.2 million in 2004 from $30.7 million in 2003. The increase in our revenues in 2004 is mainly due to an increase in our sales of products and services to the U.S. market. We expect that our revenues will increase in 2005 as a result of our purchase of Piedmont Cost of Revenues. Cost of revenues increased 10.5% to $22.2 million in 2004 from $20.1 million in 2003, representing, 67% and 65% of revenues, respectively. The increase in cost of revenues is mainly due to change in our product mix, and to the worldwide increase in raw material prices. Cost of revenues consists of labor, materials and royalties. We expect that our cost of revenues will increase in 2005. Research and Development Costs. Our research and development costs were $0.1 million in both 2004 and 2003. We do not anticipate any material change in our cost of research and development in 2005. Selling and Marketing Expenses. Selling and marketing expenses decreased by 3.2% to $1.9 million in 2004 from $2.0 million 2003, representing 5.7% and 6.4% of revenues, respectively. Selling and marketing expenses consist primarily of salaries, commissions, advertising, trade shows, travel and other related expenses. We expect that our selling and marketing expenses will increase in 2005 consistent with the expected increase in revenues. General and Administrative Expenses. General and administrative expenses increased 9.1% to $3.8 million in 2004 from $3.5 million in 2003, representing 11.4% and 10.4% of revenues, respectively. In 2004, we kept approximately the same ratio of administration expenses against revenue as in 2003. General and administrative expenses consist primarily of salaries, annual rentals, management services, and other expenses. We expect that our general and administrative expenses will increase consistent with the expected increase in revenues. Operating income. Operating income in 2004 increased 4.1% to $5.3 million compared to $5.1 million in 2003. 27 Financial Income (Expenses). We reported financial income of $87,000 in 2004 compared to financial expenses of $25,000 in 2003, as a result of the appreciation in value of the exchange rate against the dollar in 2004 and increase in our cash. We expect that our financial expenses will increase in 2005 as a result of the purchase of Piedmont. Other Income. We had income of $54,000 in 2004 compared to income of $24,000 in 2003. Income Taxes. As a result of the depletion of the tax credits we accumulated in prior years, our total income tax expenses for 2004 amounted to $1.7 million, compared to $1.2 million in 2003. Year Ended December 31, 2003 Compared with Year Ended December 31, 2002 Revenues. Revenues in 2003 amounted to approximately $30.68 million compared to approximately $26.28 million in 2002. The increase in revenues in 2003 compared to 2002 was mainly due to new agreements with aircraft manufacturers and airline companies. Cost of Revenues. Cost of revenues increased to approximately $20.1 million in 2003 from approximately $17.8 million in 2002. This increase is a direct result of the increase in revenues. Research and Development Costs. Research and development costs decreased to $120,000 in 2003 from $204,000 in 2002. Selling and Marketing Expenses. Selling and marketing expenses increased by 32% to $2.0 million in 2003 from $1.5 million 2002, representing 6.4% and 5.6% of revenues, respectively. Selling and marketing expenses consist primarily of salaries, commissions, advertising, trade shows, travel and other related expenses. The increase is a direct result of the increase in revenues. General and Administrative Expenses. General and administrative expenses increased 16% to $3.5 million in 2003 from $3.0 million in 2002, representing, 10.4% and 11.3% of revenues, respectively. General and administrative expenses consist primarily of salaries, annual rentals, management services, and other expenses. Operating income. Operating income in 2003 increased approximately 31% to $5 million compared to approximately $3.8 million in 2002, as a direct result of an increase in sales. Financial Expenses. We had financial expenses of $25,000 in 2003 compared to expenses of approximately $99,000 in 2002, as a result of the devaluation of the NIS against the dollar. Other Income. We reported other income of $24,000 in 2003 compared to $8,000 in 2002. Income Taxes. As a result of the depletion of tax credits we accumulated in prior years, our total income tax expenses for 2003 amounted to $1.23 million compared to $367,000 in 2002. Results of Operations The following table presents, for the periods indicated, information concerning our results of operations: 28
Year ended December 31 --------------------------------------------- 2004 2003 2002 ---- ---- ---- (in thousands) Revenues Products................................... $20,724 $19,255 $15,936 Services and other......................... 12,519 11,427 10,344 ------ ------ ------ 33,243 30,682 26,280 ------ ------ ------ Cost of revenues........................... 22,166 20,068 17,750 ------ ------ ------ Gross profit............................... 11,077 10,614 8,530 ------ ------ ----- Research and development costs, net........ 125 120 204 Sales and marketing expenses............... 1,894 1,958 1,483 General and administrative expenses........ 3,793 3,476 2,994 ----- ----- ----- 5,812 5,554 4,681 ----- ----- ----- Operative income........................... 5,265 5,060 3,849 Financial income (expenses), net........... 87 ( 25) 99 Other income............................... 54 24 8 -- -- -- Income before income taxes................. 5,406 5,059 3,956 Income taxes............................... 1,667 1,225 367 ----- ----- --- Net income................................. $ 3,739 $ 3,834 $ 3,589 ======= ======= =======
The following table presents, for the periods indicated, information concerning our results of operations as a percentage of our revenues:
Year ended December 31, --------------------------------------------------------- 2004 2003 2002 ---- ---- ---- % % % Revenues Products................................... 62 63 61 Services................................... 38 37 39 -- -- -- 100 100 100 --- --- --- Cost of revenues........................... 67 65 67 -- -- -- Gross profit............................... 33 35 33 -- -- -- Research and development costs, net........ 0 0 1 Sales and marketing expenses............... 6 6 6 General and administrative expenses........ 11 11 11 -- -- -- 17 17 18 -- -- -- Operating income........................... 16 17 15 Financial income (expenses) , net 0 1 0 Other income............................... 0 0 0 -- -- -- Income before income taxes................. 16 16 15 Income taxes............................... 5 4 1 -- -- -- Net income................................. 11 12 14 == == ==
29 Recently Issued Accounting Standards On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based Payment or SFAS No. 123(R), which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation," or SFAS No. 123. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123 permitted, but did not require, share-based payments to employees to be recognized based on their fair values while Statement 123(R) requires all share-based payments to employees to be recognized based on their fair values. SFAS No. 123(R) also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. The new standard will be effective for us in the first interim period beginning after January 1, 2006. We do not expect a significant impact of this standard on our results of operations and financial position. Conditions in Israel We are incorporated under the laws of, and our principal executive offices and manufacturing facilities are located in, the State of Israel. Accordingly, we are directly affected by political, economic and military conditions in Israel. Specifically, we could be adversely affected by any major hostilities involving Israel, a full or partial mobilization of the reserve forces of the Israeli army, the interruption or curtailment of trade between Israel and its present trading partners, and a significant downturn in the economic or financial condition of Israel. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors, and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel. In 1979, Israel signed a peace agreement with Egypt under which full diplomatic relations were established. In October 1994, a peace treaty was signed between Israel and Jordan which provides, among other things, for the commencement of full diplomatic relations between the two countries. To date, there are no peace treaties between Israel and Syria or Lebanon. Since 1993, several agreements have been signed between Israel and the Palestinian representatives concerning conditions in the West Bank and Gaza and outlining several interim Palestinian self-government arrangements. The implementation of these agreements have been subject to difficulties and delays. Since September 2000, relations between Israel and the Palestinian Authority have deteriorated and there has been a marked increase in violence, civil unrest and hostility, including armed clashes, between the State of Israel and the Palestinians, and acts of terror have been committed inside Israel and against Israeli targets in the West Bank and Gaza. Recently, the Israeli government has resolved to unilaterally evacuate all the Jewish settlements in Gaza Strip and a few settlements in the West Bank. In addition, following the death of Yasser Arafat, the Palestinian Authority has established a new regime which has declared it will take active actions against terrorism and caused the Palestinian terror organizations to commit to halt the execution of acts of terror in Israel. Such commitment has not been observed. There is no indication as to how long the current hostilities will last or whether there will be any further escalation. Any further escalation in these hostilities or any future armed conflict, political instability or violence in the region may have a negative effect on our business condition, harm our results of operations and adversely affect our share price. 30 Furthermore, there are a number of countries that restrict business with Israel or Israeli companies. Restrictive laws or policies of those countries directed towards Israel or Israeli businesses may have an adverse impact on our operations, our financial results or the expansion of our business. In addition, some of our executive officers and employees in Israel are obligated to perform up to 36 days, depending on rank and position, of military reserve duty annually and are subject to being called for active duty under emergency circumstances. If a military conflict or war arises, these individuals could be required to serve in the military for extended periods of time. Our operations could be disrupted by the absence for a significant period of one or more of our executive officers or key employees or a significant number of other employees due to military service. Any disruption in our operations could adversely affect our business. To date, no executive officer or key employee has been recruited for military service for any significant time period. Any further escalation in the hostilities between Israel and the Palestinian Authority into a full scale conflict might require more significant military reserve service by some of our employees, which may have a material adverse effect on our business. Economic Conditions In recent years Israel has been going through a period of recession in economic activity, resulting in low growth rates and growing unemployment. Our operations could be adversely affected if the economic conditions in Israel continue to deteriorate. In addition, due to significant economic measures proposed by the Israeli Government, there have been several general strikes and work stoppages in 2003 and 2004, affecting all banks, airports and ports. These strikes have had an adverse effect on the Israeli economy and on business, including our ability to deliver products to our customers. Following the passing by the Israeli Parliament of laws to implement the economic measures, the Israeli trade unions have threatened further strikes or work-stoppages, and these may have a material adverse effect on the Israeli economy and on us. Trade Relations Israel is a member of the United Nations, the International Monetary Fund, the International Bank for Reconstruction and Development and the International Finance Corporation. Israel is a member of the World Trade Organization and is a signatory to the General Agreement on Tariffs and Trade. In addition, Israel has been granted preferences under the Generalized System of Preferences from the United States, Australia, Canada and Japan. These preferences allow Israel to export the products covered by such programs either duty-free or at reduced tariffs. Israel and the EEC, known now as the "European Union," concluded a Free Trade Agreement in July 1975 that confers some advantages with respect to Israeli exports to most European countries and obligates Israel to lower its tariffs with respect to imports from these countries over a number of years. In 1985, Israel and the United States entered into an agreement to establish a Free Trade Area. The Free Trade Area has eliminated all tariff and some non-tariff barriers on most trade between the two countries. On January 1, 1993, an agreement between Israel and the European Free Trade Association, known as the "EFTA," established a free-trade zone between Israel and the EFTA nations. In November 1995, Israel entered into a new agreement with the European Union, which includes a redefinition of rules of origin and other improvements, such as allowing Israel to become a member of the Research and Technology programs of the European Union. In recent years, Israel has established commercial and trade relations with a number of other nations, including Russia, China, India, Turkey and other nations in Eastern Europe and Asia. 31 Israel receives significant amounts as economic assistance from the United States. In the last several years, Israel has received from the U.S. approximately $3 billion per year. We cannot assure you that U.S. economic assistance will continue, or that the amounts received will not be reduced. If U.S. economic assistance is eliminated or reduced significantly, the Israeli economy could suffer material adverse consequences which may have material adverse impact on our financial condition and results of operations. Corporate Tax Rate Under the Israeli Income Tax Ordinance [New Version], 1980 we are subject to corporate tax at the rate of 35% of taxable income for 2004, 34% for 2005, 32% for 2006 and 30% for 2007 onwards. In July 2002, Amendment 132 to the Israeli Income Tax Ordinance ("Amendment 132") was approved by the Israeli parliament and is effective as of January 1, 2003. The principal objectives of Amendment 132 were to broaden the categories of taxable income and to reduce the tax rates imposed on employment income. There are no material implications of the Amendment applicable to us. On March 29, 2005, the Israeli parliament approved an amendment to the Law for the Encouragement of Capital Investments, 1959, commonly referred to as the Investment Law, which provides expanded tax incentives for future industrial investments and simplifies the bureaucratic process for obtaining approval of investments qualifying for tax incentives, or the 2005 Amendment. Under the Investment Law, capital investments in new or expanded production facilities in Israel, upon approval by the Israeli Government, can be designated as an approved enterprise. An approved enterprise may receive cash incentives from the Israeli Government or a company may elect the "alternative benefits track" that allows it to forego the cash incentives in favor of certain tax exemptions. The 2005 Amendment primarily relates to the "alternative benefits track" tax incentives which we have elected for our Approved Enterprises. The amendments to the Investment Law include special tax incentives and expedite the approval process for companies that make minimum qualifying investments in fixed assets in production facilities located in Israel. The 2005 Amendment became effective on April 1, 2005. We are currently evaluating the impact of the 2005 Amendment on our business operations. Impact of Currency Fluctuation and of Inflation For many years prior to 1986, the Israeli economy was characterized by high rates of inflation and devaluation of the Israeli currency against the dollar and other currencies. However, since the institution of the Israeli Economic Program in 1985, inflation, while continuing, has been significantly reduced and the rate of devaluation has substantially diminished. Because governmental policies in Israel linked exchange rates to a weighted basket of foreign currencies of Israel's major trading partners, the exchange rate between the NIS and the dollar remained relatively stable during reported periods. The following table sets forth, for the periods indicated, information with respect to the rate of inflation in Israel, the rate of devaluation of the NIS against the dollar, and the rate of inflation in Israel adjusted for such devaluation: Israeli inflation Year ended Israeli inflation Israeli devaluation adjusted for December 31, rate % rate % devaluation % ------------ ------ --------------- ------------- 2000 0 (2.7) 2.7 2001 1.4 9.3 (7.9) 2002 6.5 7.3 (0.8) 2003 (1.9) (7.6) 5.7 2004 1.2 (1.6) 2.8 32 Since most of our sales are quoted in dollars and in other foreign currencies, and a significant portion of our expenses are incurred in NIS, our results are adversely affected by a change in the rate of inflation in Israel when such change is not offset (or is offset on a lagging basis) by a corresponding devaluation of the NIS against the dollar and other foreign currencies. We do not use any hedging instruments in order to protect ourselves from currency fluctuation or inflation risks. B. Liquidity and Capital Resources We have principally financed our operations through cash generated from operations. Cash and cash equivalents and short-term investments were $7.1 million and marketable securities were $1.6 million, totaling $8.7 million as of December 31, 2004, as compared with cash and cash equivalents and short-term investments of $5.0 million and marketable securities of $3.3 million, totaling $8.3 million as of December 31, 2003. Net cash provided by operating activities was approximately $1.9 million, $3.8 million and $4.8 million in 2004, 2003 and 2002, respectively. Net cash provided by operating activities for 2004 consisted primarily of net income, plus depreciation less changes in other accounts payable and receivables. Net cash provided by investing activities was $1.3 million, $(2.3) million and $(1.0) million in 2004, 2003 and 2002, respectively. Net cash provided by investing activities resulted from sale of marketable securities (available for sale securities). Our capital expenditures consist mainly of the purchase of property and equipment. In November 2004, we paid a $1.18 per share cash dividend to our shareholders, which amounted to $7.1 million. The dividend was declared by our Board of Directors after considering alternative means of increasing shareholders value. Our Board determined that the dividend would be more beneficial for our company and its shareholders. 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 are declared in dollars. Net cash used in financing activities was approximately $(1.2) million, $(2.5) million and $(0.5) million in 2004, 2003 and 2002, respectively. Net cash used in financing activities in 2004 was attributable to issuance of shares for $5.7 million, which was offset by a cash dividend payment of $ (7.1) million. Our principal sources of liquidity consist of our current cash flow from operations, financial income and our $2 million credit line. We believe that these sources of liquidity will be sufficient to satisfy our operational requirements for 2005. We believe that anticipated cash flow from operations and our current cash balances will be sufficient to meet our cash requirements through at least December 31, 2005. Our continued operations thereafter will depend upon cash flow from operations and the availability of equity or debt financing. Pursuant to an agreement with European Air Force dated December 20, 2001, our subsidiary Limco-Airepair has a commitment to purchase non-serviceable aircraft spare parts assemblies and 33 complete technical documentation, in the amount of $1,134,000. Pursuant to the agreement, 10% of this amount was paid on December 20, 2001, and the remaining $1,020,600 to be paid according to the terms of the agreement. As of March 31, 2005, approximately $1,093,000 of the commitment had been fulfilled. We entered into an agreement with a third party, to share this purchase commitment and the sales proceeds. The third party has advanced to us approximately $547,000. This amount is included in other payables and accrued expenses. On June 15, 2004, we entered into a share purchase agreement with T.O.P., a wholly-owned subsidiary of Ta-Tek Ltd., an Israeli private company wholly-owned by FIMI Opportunity Fund. Under the agreement we sold 857,143 of our shares to T.O.P for $6,000,001. We also granted T.O.P warrants to purchase an aggregate of 500,000 of our ordinary shares at $8.50 per share, which price was adjusted to $7.32 per share because of our 2004 dividend payment. The warrants are exercisable for 66 months. In addition, we entered into a credit line agreement with FIMI, which provides for a line of credit in an amount of up to $2,000,000. Loans made pursuant to the credit line bear interest at 5% per annum and are repayable on or before December 15, 2009. We will pay an annual commitment fee equal to 0.5% of the amount of the credit line. We also entered into a management agreement which provides that we will engage FIMI to provide certain management services to us in exchange for annual payments equal to 3% of our operating profit exceeding $500,000; provided, however, that in no event will the total management fees in any given year exceed $250,000. The agreements were approved by our shareholders on August 10, 2004. On May 24, 2005, our subsidiary, Limco-Airepair, Inc., entered into an agreement, subject to certain closing conditions, for the purchase of Piedmont, a private company based in Kernersville, North Carolina, engaged in the repair and overhaul of various aircraft accessories. Under the terms of the acquisition, we agreed to pay $5.5 million for Piedmont and to repay $9.5 million of its outstanding indebtedness. In addition, we agreed to pay former shareholders $200,000 per year, for a term of three years, in consideration for their obligation not to compete with Piedmont during this period. We will fund this acquisition from our working capital and bank loans. In the future we may issue convertibles notes in order to repay part of the bank loans. C. Research and Development, Patents and Licenses As of June 1, 2005, we had approximately three employees engaged in research and development. We continually utilize our engineering and manufacturing capabilities in the design and development of new products and services and cost effective management techniques. D. Trend Information There are no significant recent trends that are material to production, sales and inventory, the state of the order book and costs and selling prices since the latest fiscal year. E. Off-balance Sheet Arrangements We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations. 34 F. Tabular Disclosure of Contractual Obligations The following table summarizes our minimum contractual obligations and commercial commitments, as of December 31, 2004 and the effect we expect them to have on our liquidity and cash flow in future periods.
Contractual Obligations Payments due by Period - ---------------------------------------- ------------------------------------------------------------------ More Less than 1 than 5 Total year 1-3 Years 3-5 Years years ---------- ---------- ----------- --------- ------ Long-term debt obligations ............. - - - - - Operating lease obligations............. $1,765,060 $359,260 $691,800 $714,000 - Purchase obligations.................... $113,400 $113,400 - - - Total................................... $1,878,460 $472,660 $691,800 $714,000 -
Other Obligations In addition, pursuant to the terms of the agreement, we entered into a lease agreement, pursuant to which we leased from TAT Industries, effective as of January 1, 2000, the real estate and buildings encompassing an area of approximately 312,000 square feet for a period of 24 years and eleven months. In consideration for the lease agreement, we agreed to pay TAT Industries annual rentals of approximately $300,000, with an additional incremental payment of 2% per year, such rental rates are subject to revaluation every fifth year. In addition, we have long-term liabilities for severance pay that is calculated pursuant to Israeli severance pay law generally based on the most recent salary of the employees multiplied by the number of years of employment, as of the balance sheet date. Employees are entitled to one month's salary for each year of employment or a portion thereof. As of December 31, 2004, our severance pay liability was $191,000. We have attempted to identify additional significant uncertainties and other factors affecting forward-looking statements in the Risk Factors section that appears in Item 3. "Key Information." Item 6. Directors, Senior Management and Employees A. Directors and Senior Management Our articles of association provide for a board of directors consisting of no less than two and no more than eleven members or such other number as may be determined from time to time at a general meeting of shareholders. Our board of directors is currently composed of nine directors. Our executive officers are responsible for our day-to-day management. The executive officers have individual responsibilities established by our chief executive officer and by the board of directors. Executive officers are appointed by and serve at the discretion of the board of directors, subject to any applicable employment agreements. Set forth below are the name, age, principal position and a biographical description of each of our directors and executive officers: 35
NAME AGE POSITION WITH THE COMPANY ---- --- ------------------------- Shlomo Ostersetzer.......... 77 Chief Executive Officer and Chairman of the Board of Directors Dov Zeelim.................. 64 President and Vice Chairman of the Board of Directors Israel Ofen................. 56 Executive Vice President and Chief Financial Officer Shraga Katz................. 60 Vice President Operations Avi Kahana.................. 61 Secretary and Manager of Import and Export Division Jacob Danan................. 64 Chief Engineer and Vice President of Marketing Shaul Menachem.............. 58 President - Limco-Airepair Eran Frenkel (1) ........... 39 V.P. Business Development - Limco-Airepair Yossi Rosenberg (2) ........ 39 Vice-President Economics Dr. Meir Dvir............... 74 Director Yaacov Fish................. 58 Director Ishay Davidi................ 43 Director Gillon Beck ................ 43 Director Yechiel Gutman.............. 59 Director Michael Shevi............... 69 Outside Director Rami Daniel................. 39 Outside Director
- ----------------- (1) Mr. Frenkel is the son-in-law of Dov Zeelim. (2) Mr. Rosenberg is the son-in-law of Shlomo Ostersetzer. Each of our directors (except our outside directors) is elected to serve until the next annual general meeting of shareholders and until his successor has been elected. Officers serve at the discretion of the Board of Directors. On June 15, 2004, we entered into a share purchase agreement with T.O.P. Under the agreement we sold 857,143 of our shares to T.O.P. As part of the transaction, our parent company, TAT Industries, and T.O.P entered into a shareholders' agreement, which provides among other things that each of TAT Industries and T.O.P will vote all of the shares held by them for the election to our Board of Directors of three designees of T.O.P and six designees of TAT Industries. Shlomo Ostersetzer has served as the Chairman of our Board of Directors since April 1985. Mr. Ostersetzer has also served as our Chief Executive Officer since 1990. Mr. Ostersetzer is one of the founders of TAT Industries and is a controlling shareholder, and he has served in various capacities with TAT Industries since 1970, including President, Managing Director and Chairman of its Board of Directors. Mr. Ostersetzer holds a M.Sc. in Mechanical Engineering from ETH-Polytechnical Institute in Zurich, Switzerland. Dov Zeelim has served as our Vice Chairman of the Board of Directors since April 1985 and has served as our President and Chief Operating Officer since August 2000. In addition, Mr. Zeelim has served in various managerial capacities at TAT Industries for over 21 years, including Managing Director, 36 Executive Vice President and Vice Chairman. Mr. Zeelim is a licensed Certified Public Accountant in Israel. Israel Ofen has served as our Executive Vice President and Chief Financial Officer since August 1993, as Managing Director since March 1991 and has held other managerial positions since April 1985. In addition, Mr. Ofen served as Vice President, Finance of TAT Industries from 1983 through August 31, 1993 and as its President since January 2000. Mr. Ofen also serves as a director of TAT Industries. Mr. Ofen holds a B.A. in Economics from Bar-llan University in Ramat-Gan. Mr. Ofen is a licensed Certified Public Accountant in Israel. Shraga Katz has served as our V.P. Operations since March 1998. From August 1995 to March 1998, he served as General Manger of Limco. From 1986 to 1995, he served as manager of the Israeli heat exchanger operations division of TAT Industries and has served as manager of our heat exchange operations since 1991. Mr. Katz is a retired Lieutenant Colonel of the Israeli Air Force in which he served for 20 years. Mr. Katz hold a B.Sc. in Mechanical Engineering from the Technion, Israel Institute of Technology and an M.Sc. in Aeronautical Engineering from AFIT Air Force Institute of Technology. Avi Kahana has served as our Secretary since January 1998. During the past five years, Mr. Kahana has been the Manager of our import and export division. Mr. Kahana has worked for TAT Industries and its subsidiaries since 1984. Jacob Danan has served as our Chief Engineer since September 1996, and, since January 1, 1998 as our Vice President of Marketing. Mr. Danan has been with us since 1980. Mr. Danan holds a holds a B.Sc. in Aeronautical Engineering from the Technion, Israel Institute of Technology. Eran Frenkel has served as Vice President Business Development of Limco-Airepair since June 2003. Mr. Frenkel is the son-in-law of Dov Zeelim. Mr. Frenkel holds an M.A. in Business Administration from Pace University in New-York. Yossi Rosenberg has served as our Vice President of Economics and as a Director of TAT Industries since June 2003. From February 2001 until March 2003, Mr. Rosenberg served as an economist and as a financial consultant to our C.E.O. Mr. Rosenberg is the son-in-law of Shlomo Ostersetzer. Mr. Rosenberg holds a B.A. in Business Administration from the College of Management in Tel Aviv. Shaul Menachem has served as the President of Limco-Airepair since February 1998. Mr. Menachem holds a M.Sc. in Engineering Management from Bridgeport University of Connecticut. Dr. Meir Dvir has served as our director since December 1994. Mr. Dvir has served as deputy General Manager of Business Research and Development and also as General Manager of the Israeli Aircraft Industries Ltd. He is also a director of T.T.I Telecom Ltd. and Bank Leumi Ltd. Mr. Dvir holds a Ph.D. in Mathematics and Physics from the Hebrew University in Jerusalem. Yaacov Fish has served as our director since January 1994. From 1992 to 1997, Mr. Fish served as Managing Director of Magen Central Pension Fund Ltd. Mr. Fish served as a financial advisor to Shalev Transportation Cooperative Ltd. from 1990 to 1994 and served as general comptroller of Egged Ltd. from 1977 to 1990. Mr. Fish holds a B.Sc. in Economics from Bar-llan University in Tel Aviv. Ishay Davidi was elected on December 21, 2004 as one of three designees of FIMI Opportunity Fund. Mr. Davidi has served as the Chief Executive Officer and Senior Partner of FIMI Opportunity Fund, an Israeli investment fund, since 1996. Mr. Davidi also serves as the Chairman and Senior Partner 37 of FITE (First Israel Turnaround Enterprise), another Israeli investment fund established by FIMI Group, and as a director of Tadiran Communications, Lipman Electronic Engineering, Ltd., Tedea Technological Development and Automation Ltd., TG Precision Products Ltd. and Medtechnica Ltd. Prior to the foundation of FIMI, from 1994 to 1996 Mr. Davidi served as Chief Executive Officer of Tikvah VC Fund, an Israeli VC fund and prior to that he served as Chief Executive Officer of two Israeli industrial companies. Mr. Davidi serves as a director of Medtechnia Ltd., Tedea Technological Development and Automation Ltd. and Formula Systems Ltd. Mr. Davidi holds a B.Sc. in Industrial Engineering from Tel Aviv University and an MBA in Finance from Bar Ilan University. Gillon Beck was elected on December 21, 2004 as one of three designees of FIMI Opportunity Fund. Mr. Beck has served as a partner in FIMI Opportunity Fund and a director of several of the fund's portfolio companies since 2003. Prior thereto, from 1999 Mr. Beck served as Chief Executive Officer and President of Arad Ltd. Group, a leading manufacturer of water measurement technologies. Mr. Beck serves as a director of Medtechnia Ltd., Tedea Technological Development and Automation Ltd. and Formula Vision Ltd. Mr. Beck holds a B.Sc. in Industrial Engineering from the Technion, Israel Institute of Technology and an M.B.A. in Finance from Bar Ilan University. Yechiel Gutman was elected on December 21, 2004 as one of three designees of FIMI Opportunity Fund. Mr. Gutman serves as a public member of the Israeli Security Authority (ISA). He also serves as a director of many Israeli companies, including Israel Refinery Company, El-Al (the Israeli national airline), and Bank Otzar Hachayal (a subsidiary of Bank Hapoalim). In the past Mr. Gutman served as an advisor to the Israeli Minster of Justice. Mr. Gutman holds L.L.B. and M.A. degrees from The Hebrew University, Jerusalem. Mr. Gutman serves as an independent director. Michael Shevi has served as an outside director since June 10, 2004. Mr. Shevi has served as Managing Director of Cham Foods since 1973. Currently, Mr. Shevi is a director in Cham Foods (Israel) Ltd. Mr. Shevi is licensed as a Certified Public Accountant in Israel. Rami Daniel has served as an outside director since June 10, 2004. Mr. Daniel has served as V.P. of Finance of Ganden Real Estate since 2001. Mr. Daniel is licensed as a Certified Public Accountant in Israel and holds B.S.C. from the College of Management in Tel Aviv. B. Compensation The following table sets forth all the compensation we paid with respect to all of our directors and executive officers as a group for the year ended December 31, 2004.
Pension, Salaries, fees, retirement Compensation due commissions and and similar to exercise of bonuses benefits options --------------- ----------- ----------------- All directors and executive officers as a group, (16) persons $ 1,657,000 $318,000 $3,048,000
During the year ended December 31, 2004, we paid each of our outside directors a per meeting attendance fee of NIS 1,000 (approximately $232), plus an annual fee of NIS 24,524 (approximately $5,700. 38 As of December 31, 2004, our directors and executive officers as a group, consisting of sixteen persons, held options to purchase an aggregate of 260,000 ordinary shares, at exercise prices ranging from $1.625 to $4.50 per share, all of such option were vested. Of such options, 250,000 options expired on March 3, 2005 and 10,000 options expire on January 19, 2009. All options were issued under the 1995 and 1999 Employee Stock Option Plans. See--"Share Ownership--Stock Option Plans." During 2004 548,435 options were exercised. Pursuant to their employment agreements, the chairman of our Board of Directors, Mr. Shlomo Ostersetzer, and the vice chairman of the Board of Directors, Mr. Dov Zeelim, are entitled each to a bonus of 2.5% of the annual consolidated operating income, in excess of $500,000. In the years ended December 31, 2004, 2003 and 2002, our Board of Directors and shareholders approved total payments of approximately $246,488, $239,794 and $176,257 to the chairman and vice chairman of our Board. C. Board Practices Election of Directors Pursuant to our articles of association, all of our directors are elected at our annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented and voting at such meeting. All the members of our Board of Directors (except the outside directors) may be reelected upon completion of their term of office. All of our current directors (except one of our outside directors) were elected by our shareholders at our annual general meeting of shareholders of July 2004. Alternate Directors Our Articles of Association provide that any director may, by written notice to us, appoint another person to serve as an alternate director, subject to the approval of a majority of the directors, and may cancel such appointment. Any person, whether or not already a director, may act as an alternate, and the same person may act as the alternate for several directors and shall have the corresponding number of votes equivalent to the number of directors who appointed him. The term of appointment of an alternate director may be for a specified period, or until notice is given of the termination of the specified period, or of the appointment. No director currently intends to appoint any other person as an alternate director, except if the director is unable to attend a meeting of the Board of Directors. In the event of a tie vote, under our Articles of Association, the Chairman of the Board shall have a second or casting vote. Independent and Outside Directors The Israeli Companies Law requires Israeli companies with shares that have been offered to the public in or outside of Israel to appoint at least two outside directors. No person may be appointed as an outside director if the person or the person's relative, partner, employer or any entity under the person's control has or had, on or within the two years preceding the date of the person's appointment to serve as outside director, any affiliation with the company or any entity controlling, controlled by the company. The term affiliation includes an employment relationship, a business or professional relationship maintained on a regular basis, control and service as an officer holder, excluding service as an outside director of a company that is offering its shares to the public for the first time. No person may serve as an outside director if the person's position or other activities create, or may create, a conflict of interest with the person's responsibilities as an outside director or may otherwise interfere with the person's ability to serve as an outside director. If, at the time outside directors are to be appointed, all current members of the board of directors are of the same gender, then at least one outside director must be of the other gender. 39 Outside directors are elected by shareholders. The shareholders voting in favor of their election must include at least one-third of the shares of the non-controlling shareholders of the company who voted on the matter. This minority approval requirement need not be met if the total shareholdings of those non-controlling shareholders who vote against their election represent 1% or less of all of the voting rights in the company. Outside directors serve for a three-year term, which may be renewed for only one additional three-year term. Outside directors can be removed from office only by the same special percentage of shareholders as can elect them, or by a court, and then only if the outside directors cease to meet the statutory qualifications with respect to their appointment or if they violate their duty of loyalty to the company. Any committee of the board of directors must include at least one outside director and the audit committee must include all the outside directors. An outside director is entitled to compensation as provided in regulations adopted under the Israeli Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with such service. In addition, the NASDAQ Marketplace Rules currently require us to have at least two independent directors on our board of directors and to establish an audit committee. As of July 31, 2005, under NASDAQ Marketplace Rules promulgated pursuant to the Sarbanes-Oxley Act of 2002, our audit committee must have at least three members and be comprised only of independent directors each of whom satisfies the "independence" requirements of the Securities and Exchange Commission and NASDAQ. Our board of directors has determined that Messrs. Rami Daniel and Michael Shevi qualify both as independent directors under the Securities and Exchange Commission and NASDAQ requirements and as outside directors under the Israeli Companies Law requirements. Our board of director has further determined that Mr. Yaacov Fish and Mr. Meir Dvir qualify as independent directors under the Securities and Exchange Commission and NASDAQ requirements. As a controlled company within the meaning of NASDAQ Marketplace Rule 4350(c)(5), we are exempted from the NASDAQ Marketplace Rules promulgated pursuant to the Sarbanes-Oxley Act of 2002, effective as of July 31, 2005, according to which a majority of our board of directors must qualify as independent directors within the meaning of the NASDAQ Marketplace Rules see Item 6.C. "Directors, Senior Management and Employees - Board Practices - NASDAQ Exemptions for a Controlled Company." NASDAQ Exemptions for a Controlled Company We are a controlled company within the meaning of NASDAQ Marketplace Rule 4350(c)(5), or Rule 4350(c)(5), since TAT Industries holds more than 50% of our voting power. Under Rule 4350(c)(5), a controlled company is exempt from the following requirements of NASDAQ Marketplace Rule 4350(c) effective as of July 31, 2005: o the majority of the company's board of directors must qualify as independent directors, as defined under NASDAQ Marketplace Rules. o the compensation of the chief financial officer and all other executive officers must be determined, or recommended to the board of directors for determination, either by (i) a majority of the independent directors or (ii) a compensation committee comprised solely of independent directors. 40 o director nominees must either be selected or recommended for the board of directors, either by (a) a majority of independent directors or (b) a nominations committee comprised solely of independent directors. We intend to rely on these exemptions provided under Rule 4350 (C)(5). NASDAQ Exemptions and Home Country Practices NASDAQ Marketplace Rule 4350, or Rule 4350, was recently amended to permit foreign private issuers to follow certain home country corporate governance practices without the need to seek an individual exemption from NASDAQ. Instead, a foreign private issuer must provide NASDAQ with a letter from outside counsel in its home country certifying that the issuer's corporate governance practices are not prohibited by home country law. On June 22, 2005 we provided NASDAQ with a notice of non-compliance with Rule 4350. We do not comply with the requirement of Rule 4350 that we distribute to shareholders, and file with NASDAQ, copies of an annual report containing audited financial statements of our company and its subsidiaries within a reasonable period of time prior to our annual meeting of shareholders. Instead, we will follow Israeli Companies Law by sending our financial statements to our shareholders. We will also make it available on our website. Approval of Related Party Transactions under Israeli Law The Israeli Companies Law codifies the fiduciary duties that "office holders," including directors and executive officers, owe to a company. An "office holder" is defined in the Israeli Companies Law as a director, general manager, chief business manager, deputy general manager, vice general manager, other manager directly subordinate to the managing director or any other person assuming the responsibilities of any of the foregoing positions without regard to such person's title. An office holder's fiduciary duties consist of a duty of care and a duty of loyalty. The duty of care requires an office holder to act at a level of care that a reasonable office holder in the same position would employ under the same circumstances. This includes the duty to utilize reasonable means to obtain (i) information regarding the appropriateness of a given action brought for his approval or performed by him by virtue of his position and (ii) all other information of importance pertaining to the foregoing actions. The duty of loyalty requires an office holder to act in good faith and for the company's interest, including, avoiding any conflict of interest between the office holder's position in the company and any other position he holds or his personal affairs, avoiding any competition with the company's business, avoiding exploiting any business opportunity of the company in order to receive personal gain for the office holder or others, and disclosing to the company any information or documents relating to the company's affairs which the office holder has received by virtue of his position as an office holder. Each person identified as a director or executive officer in the table in Item 6.A. "Directors and Senior Management" is an office holder. Under the Israeli Companies Law, all arrangements as to compensation of office holders who are not directors require approval of our board of directors, and the compensation of office holders who are directors must be approved by our audit committee, board of directors and shareholders. The Israeli Companies Law requires that an office holder promptly disclose any personal interest that he or she may have and all related material information known to him or her, in connection with any existing or proposed transaction by us. In addition, if the transaction is an extraordinary transaction, that is, a transaction other than in the ordinary course of business, other than on market terms, or likely to have a material impact on the company's profitability, assets or liabilities, the office holder must also disclose any personal interest held by the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants and the spouses of any of the foregoing, or by any corporation in which the office 41 holder or a relative is a 5% or greater shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager. Some transactions, actions and arrangements involving an office holder (or a third party in which an office holder has an interest) must be approved by the board of directors or as otherwise provided for in a company's articles of association, as not being adverse to the company's interest. In some cases, including in the case of an extraordinary transaction, such a transaction, action and arrangement must be approved by the audit committee and by the board of directors itself, and further shareholder approval is required to approve the terms of compensation of an office holder who is a director. An office holder who has a personal interest in a matter, which is considered at a meeting of the board of directors or the audit committee, may not be present during the board of directors or audit committee discussions and may not vote on this matter, unless the majority of the members of the board or the audit committee have a personal interest, as the case may be. The Israeli Companies Law also provides that an extraordinary transaction with a controlling shareholder or in which a controlling shareholder of the company has a personal interest (including private offerings in which a controlling shareholder has a personal interest) and a transaction with a controlling shareholder or his relative regarding terms of service and employment, must be approved by the audit committee, the board of directors and shareholders. The shareholder approval for such transactions must include at least one-third of the shareholders who have no personal interest in the transaction who voted on the matter. The transaction can be approved by shareholders without this one-third approval, if the total shareholdings of those shareholders who have no personal interest and voted against the transaction do not represent more than one percent of the voting rights in the company. However, under the Companies Regulations (Relief From Related Party Transactions), 5760-2000, promulgated under the Israeli Companies Law and amended in January 2002, certain transactions between a company and its controlling shareholder(s) and certain transaction with its director(s) regarding terms of compensation do not require shareholder approval. In addition, directors' compensation and employment arrangements do not require the approval of the shareholders if both the audit committee and the board of directors agree that such arrangements are for the benefit of the company. If the director or the office holder is a controlling shareholder of the company then the employment and compensation arrangements of such director or office holder do not require the approval of the shareholders providing certain criteria is met. The above relief will not apply if one or more shareholder, holding at least 1% of the issued and outstanding share capital of the company or of the company's voting rights, objects to the grant of such relief, provided that such objection is submitted to the company in writing not later than seven (7) days from the date of the filing of a report regarding the adoption of such resolution by the company pursuant to the requirements of the Israeli Securities Law. If such objection is duly and timely submitted, then the compensation arrangement of the directors will require shareholders' approval as detailed above. The Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would become a 25% or greater shareholder of the company. This rule does not apply if there is already another 25% or greater shareholder of the company. Similarly, the Israeli Companies Law provides that an acquisition of shares in a public company must be made by means of a tender offer if as a result of the acquisition the purchaser would hold greater than a 45% interest in the company, unless there is another shareholder holding more than a 45% interest in the company. These requirements do not apply if, in general, the acquisition (1) was made in a private placement that received shareholder approval, (2) was from a 25% or greater shareholder of the company which resulted in the acquiror becoming a 25% or greater 42 shareholder of the company, or (3) was from a shareholder holding more than a 45% interest in the company which resulted in the acquiror becoming a holder of more than a 45% interest in the company. If, as a result of an acquisition of shares, the acquirer will hold more than 90% of a company's outstanding shares, the acquisition must be made by means of a tender offer for all of the outstanding shares. If less than 5% of the outstanding shares are not tendered in the tender offer, all the shares that the acquirer offered to purchase will be transferred to the acquirer. The Israeli Companies Law provides for appraisal rights if any shareholder files a request in court within three months following the consummation of a full tender offer. If more than 5% of the outstanding shares are not tendered in the tender offer, then the acquiror may not acquire shares in the tender offer that will cause his shareholding to exceed 90% of the outstanding shares. Regulations under the Israeli Companies Law provide that the Israeli Companies Law's tender offer rules do not apply to a company whose shares are publicly traded outside of Israel, if pursuant to the applicable foreign securities laws and stock exchange rules there is a restriction on the acquisition of any level of control of the company, or if the acquisition of any level of control of the company requires the purchaser to make a tender offer to the public shareholders. Exculpation, Indemnification and Insurance of Directors and Officers The Israeli Companies Law provides that an Israeli company cannot exculpate an office holder from liability with respect to a breach of his duty of loyalty, but may, if permitted by its articles of association, exculpate in advance an office holder from his liability to the company, in whole or in part, with respect to a breach of his duty of care. However, a company may not exculpate in advance a director from his liability to the company with respect to a breach of his duty of care in the event of distributions. Our articles of association allow us to exculpate any office holder from his or her liability to us for breach of duty of care, to the maximum extent permitted by law, before the occurrence giving rise to such liability. Additionally, the Israeli Companies Law provides that a company may, if permitted by its articles of association, enter into a contract for the insurance of the liability of any of its office holders with respect to an act performed by him in his capacity as an office holder, for: a breach of his duty of care to us or to another person; a breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or a financial liability imposed upon him in favor of another person. Our articles of association provide that, subject to any restrictions imposed by the Israeli Companies Law, we may enter into an insurance contract providing coverage for the liability of any of our office holders for a breach of his duty of care to us or to another person; breach of his duty of loyalty to us, provided that the office holder acted in good faith and had reasonable cause to assume that his act would not prejudice our interests; or a financial liability imposed upon him in favor of another person. Further, the Israeli Companies Law permits a company, if its articles of association so provide, to indemnify an office holder for acts or omissions committed in his or her capacity as an office holder of the company for: o a financial obligation 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; o reasonable litigation expenses, including attorneys' fees, incurred by the office holder as a result of an investigation or proceeding instituted against him by a 43 competent authority, provided that such investigation or proceeding concluded without the filing of an indictment against him or the imposition of any financial liability in lieu of criminal proceedings, or concluded without the filing of an indictment against him and a financial liability was imposed on him in lieu of criminal proceedings with respect to a criminal offense that does not require proof of criminal intent; and o reasonable litigation expenses, including attorney's fees, expended by such office holder or charged to him or her by a court: (a) in a proceeding instituted against him or her by or on behalf of the company or by another person, (b) in a criminal charge from which he or she was acquitted, or (c) in criminal proceedings in which he or she was convicted of a crime which does not require proof of criminal intent. The Israeli Companies Law provides that a company's articles of association may permit the company to indemnify an office holder following a determination to this effect made by the company after the occurrence of the event in respect of which the office holder will be indemnified. It also provides that a company's articles of association may permit the company to undertake in advance to indemnify an office holder, provided that the undertaking is limited to types of events, which, in the opinion of the company's board of directors, are, at the time of giving the undertaking, foreseeable due to our company's activities and to an amount or standard that the board of directors has determined is reasonable under the circumstances. Our articles of association provide that we may undertake to indemnify in advance an office holder, in accordance with the conditions set under applicable law, against any liabilities he or she may incur in such capacity, provided that such undertaking is limited with respect to categories of events that can be expected as determined by our board of directors when authorizing such undertaking, and with respect to such amounts determined by our board of directors as reasonable in the circumstances. Furthermore, under our articles of association, we may indemnify any past or present office holder, in accordance with the conditions set under any law, with respect to any past occurrence, whether or not we are obligated under any agreement to indemnify such office holder in respect of such occurrence. These provisions are specifically limited in their scope by the Israeli Companies Law, which provides that a company may not indemnify an office holder, nor exculpate an office holder, nor enter into an insurance contract which would provide coverage for any monetary liability of an office holder, incurred as a result of certain improper actions. 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. We have agreed to indemnify our office holders to the fullest extent permitted by law. We currently maintain directors' and officers' liability insurance with a per claim and aggregate coverage limit of the higher of $5 million or 25% of the Company's equity capital (net worth). Employment Agreements In November 2000, Shlomo Ostersetzer and Dov Zeelim entered into substantially similar employment agreements with us. These agreements provided for a base salary and a package of benefits including a bonus of 2.5% of the annual consolidated operating income, in excess of $500,000, and contained certain non-competition and confidentiality provisions. According to the agreements, in the event that the employment of Messrs. Ostersetzer or Zeelim with us is terminated under circumstances 44 that entitle them to severance pay under Israeli law, they will be entitled to receive the higher of severance pay due under Israeli law or the amounts that have accumulated in mangers insurance funds, as a result of our monthly contribution on their behalf, as well as amounts accumulated in education funds as a result of our monthly contribution to these funds. Under the agreements, the terms of Messrs. Ostersetzer's and Zeelim's employment will continue at least until January 1, 2007. After such date we may terminate the agreements subject to providing Messrs. Ostersetzer and Zeelim with twelve-months' prior notice. Messrs. Ostersetzer and Zeelim may terminate their agreement without notice after January 1, 2008. Audit Committee Our audit committee, established in accordance with Section 114 of the Israeli Companies Law and Section 3(a)(58)(A) of the Securities Exchange Act of 1934, assists our board of directors in overseeing the accounting and financial reporting processes of our company and audits of our financial statements, including the integrity of our financial statements, compliance with legal and regulatory requirements, our independent public accountants' qualifications and independence, the performance of our internal audit function and independent public accountants, finding any defects in the business management of our company for which purpose the audit committee may consult with our independent auditors and internal auditor, proposing to the board of directors ways to correct such defects, approving related-party transactions as required by Israeli law, and such other duties as may be directed by our board of directors. Our audit committee currently consists of four board members who satisfy the respective "independence" requirements of the Securities and Exchange Commission, NASDAQ and Israeli Law for audit committee members. Our audit committee members are Messrs. Michael Shevi, Rami Daniel and Yaacov Fish and Dr. Meir Dvir. Mr. Yaacov Fish has been elected as the Chairman of the Audit Committee, and our Board of Directors has determined that he qualifies as a financial expert. The audit committee meets at least once each quarter. Our audit committee charter is available on our website at www.tat.co.il. The responsibilities of the audit committee also include approving related-party transactions as required by law. Under Israeli law, an audit committee may not approve an action or a transaction with a controlling shareholder, or with an office holder, unless at the time of approval two outside directors are serving as members of the audit committee and at least one of the outside directors was present at the meeting in which an approval was granted. Our audit committee is authorized generally to investigate any matter within the scope of its responsibilities and has the power to obtain from the internal auditing unit, our independent auditors or any other officer or employee any information that is relevant to such investigations. Our audit committee has adopted and our board of directors has approved a company-wide Code of Business Conduct and Ethics which appears on our company's website. Our Audit Committee chooses and engages our independent auditors to audit our financial statements. In December 2004, our Audit Committee adopted a policy requiring management to obtain the Audit Committee's approval before engaging our independent auditors to provide any audit or permitted non-audit services to us or to our subsidiaries. This policy, which is designed to assure that such engagements do not impair the independence of our auditors, requires the Audit Committee to pre-approve annually various audit and non-audit services that may be performed by the our auditors. In addition, the Audit Committee limited the aggregate amount of fees that our auditors may receive during 2004 for non-audit services in certain categories. 45 The Audit Committee is not permitted to approve the engagement of our auditors for any services that fall into a category of services that is not permitted by applicable law or if the services would be inconsistent with maintaining the auditor's independence. See "Item 16. C. Principal Accounting Fees and Services." Other Corporate Governance Matters Our board of directors has recently passed a resolution which provides that the independent directors of our company will meet at least twice a year in executive session. At such sessions the independent directors will recommend the compensation of all our senior officers and will nominate directors to be approved by our shareholders at the Annual General Meeting. Our executive officers do not participate in any discussions or decisions that involve any aspect of their compensation. We have adopted a Code of Business Conduct and Ethics applicable to all of our principal officers and all employees. The Code of Ethics which is distributed to all officers and employees may be viewed at our website. Our audit committee approves all audit and non-audit services rendered by our independent registered public accountants. All members of our audit committee are considered financially literate in accordance with the NASDAQ definition. Internal Audit The Israeli Companies Law also requires the board of directors of a public company to appoint an internal auditor nominated by the audit committee. A person who does not satisfy the Companies Law's independence requirements may not be appointed as an internal auditor. The role of the internal auditor is to examine, among other things, the compliance of the company's conduct with applicable law and orderly business practice. Our internal auditor complies with the requirements of the Companies Law. Our Internal Auditor is Yair Shilhav. D. Employees On December 31, 2004, we employed 284 persons, of whom 193 were employed in manufacturing and quality control, 58 were employed in administration, sales and marketing, and 33 were employed in engineering and research and development. On December 31, 2003, we employed 270 persons, of whom 193 were employed in manufacturing and quality control, 48 were employed in administration, sales and marketing, and 29 were employed in engineering and research and development. On December 31, 2002, we employed 261 persons, of whom 166 were employed in manufacturing and quality control, 67 were employed in administration, sales and marketing, and 28 were employed in engineering and research and development. Our U.S. subsidiary employed 116 full-time employees as of December 31, 2004, 100 full-time employees at December 31, 2003 and 85 full-time employees at December 31, 2002. Certain provisions of the collective bargaining agreements between the Histadrut (General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists Association) are applicable to our Israeli employees by order of the Israeli Ministry of Labor. These provisions concern mainly the length of the workday, minimum daily wages for 46 professional workers, contributions to a pension fund, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment. We generally provide our employees with benefits and working conditions beyond the required minimums. Furthermore, under the collective bargaining agreements, the wages of most of our employees are linked to the Consumer Price Index, although the extent of the linkage is limited. In addition, Israeli law generally requires severance pay upon the retirement or death of an employee or termination of employment without due cause. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute which is similar to the United States Social Security Administration. The payments thereto amount to approximately 13% of wages, with the employee contributing approximately 40% and the employer approximately 60%. A general practice followed by us, although not legally required, is the contribution of monies on behalf of its senior employees to a fund known as "Management Insurance." This fund provides a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing his right to receive severance pay, if legally entitled, upon termination of employment. The employee contributes an amount equal to approximately 5% of his wages and the employer contributes an additional amount of approximately 13-1/3% - 16% of such wages. E. Share Ownership Beneficial Ownership of Executive Officers and Director The following table sets forth information as of June 22, 2005 regarding beneficial ownership by each of our directors and executive officers. Number of Ordinary Shares Percentage of Name Beneficially Owned (1) Ownership (2) - ---- ---------------------- ------------- Shlomo Ostersetzer (3)(4) ............ 249,412 4.13% Dov Zeelim (3)(4) .................... 175,000 2.89% Israel Ofen (3) ...................... 81,000 1.34% Shraga Katz (3) ...................... 10,000 * Avi Kahana (3) ....................... - - Jacob Danan (3) ...................... 2,000 * Shaul Menachem (3) ................... - - Eran Frenkel (3) ..................... 400 * Yossi Rosenberg (3) .................. - - Dr. Meir Dvir (3)(5).................. 7,000 * Yaacov Fish (3)(5) ................... 5,000 * Ishay Davidi (3)...................... - - Gillon Beck (3) ...................... - - Yechiel Gutman (3) ................... - - Michael Shevi (3) .................... - - Rami Daniel (3) ...................... - - All directors and executive officers as a group, (16) persons 529,812 8.75% ------------ * less than one percent 47 (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Ordinary shares relating to options and warrants currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. (2) The percentages shown are based on 6,042,671 ordinary shares issued and outstanding as of June 22, 2005. (3) The business addresses of Messrs. Ostersetzer, Zeelim, Ofen, Katz, Kahana, Danan, Frenkel, Rosenberg, Menachem, Fish, Davidi, Beck, Gutman, Shevi and Daniel and Dr. Dvir is c/o TAT Technologies Ltd. P.O. Box 80, Gedera, Israel 70750. (4) Mr. Shlomo Ostersetzer, an officer, director and controlling shareholder of TAT Industries, and Dov Zeelim, an officer, director and controlling shareholder of TAT Industries, disclaim beneficial ownership of the 3,113,409 ordinary shares held by TAT Industries, except to the extent of their proportional interest therein. (5) Includes 5,000 ordinary shares subject to currently exercisable options granted under our 1999 stock option plan, at an exercise price of $1.625 per share. The options expire in January 2009. Stock Option Plans In March 1995, our Board of Directors adopted a share option plan (the "1995 Plan"), that was approved by our shareholders in August 1995 pursuant to which 400,000 ordinary shares have been reserved for issuance upon the exercise of options granted under the 1995 Plan. In June 1995, our Board of Directors approved the granting of options under the 1995 Plan at an exercise price of $4.50 per share as follows: Shlomo Ostersetzer-125,000 shares; Dov Zeelim-125,000 shares; Israel Ofen: 65,000 shares; and an aggregate of 85,000 shares to other employees and services providers of our company. The 1995 Plan was terminated in March 2005. As of June 20, 2005 there were no options outstanding pursuant to the 1995 Plan. In January 1999, our Board of Directors adopted a share option plan (the "1999 Plan") for which 500,000 ordinary shares have been reserved and granted at an exercise price of $1.625 per share as follows: Shlomo Ostersetzer-125,000 shares; Dov Zeelim-175,000 shares; Israel Ofen-102,500 shares; and an aggregate of 97,500 shares to other employees and directors. As of June 20, 2005 there were 17,500 options outstanding, at an exercise price of $1.625 per share, and no options were available for grant pursuant to the 1999 Plan. As of June 20, 2005, our executive officers and directors as a group, consisting of sixteen persons, held 10,000 options under the 1999 Plan. The 1999 Plan will terminate on January 2009. All options are valid for 10 years. Item 7. Major Shareholders and Related Party Transactions A. Major Shareholders TAT Industries is the beneficial holder of 51.52 % of our outstanding shares. Accordingly, TAT 48 Industries controls our company. The following table sets forth certain information as of June 22, 2005, regarding the beneficial ownership by all shareholders known to us to own beneficially 5% or more of our ordinary shares: Number of Ordinary Shares Percentage of Name Beneficially Owned(1) Ownership(2) ---- --------------------- ------------ TAT Industries Ltd. (3)........ 3,113,409 51.52% T.O.P(4)(5).................... 1,357,143 22.46% ------------- (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Ordinary shares relating to options and warrants currently exercisable or exercisable within 60 days of the date of this table are deemed outstanding for computing the percentage of the person holding such securities but are not deemed outstanding for computing the percentage of any other person. Except as indicated by footnote, and subject to community property laws where applicable, the persons named in the table above have sole voting and investment power with respect to all shares shown as beneficially owned by them. (2) The percentages shown are based on 6,042,671 ordinary shares issued and outstanding as of June 22, 2005. (3) The address of TAT Industries is Re'em Industrial Park Neta, Boulevard Bnei Ayish, Gedera, Israel 70750. (4) The address of T.O.P is Mencham Begin 37, Tel Aviv, Israel. (5) Includes 500,000 ordinary shares issuable upon the exercise of currently exercisable warrants, granted under the Share Purchase Agreement with T.O.P., at an exercise price of $7.32 per share. The warrants expire in January 2010. Significant Changes in the Ownership of Major Shareholders On June 15, 2004, we entered into a share purchase agreement with T.O.P, a wholly-owned subsidiary of Ta-Tek Ltd., an Israeli private company wholly-owned by FIMI Opportunity Fund. Under the agreement T.O.P purchased 14.18% of our outstanding shares and was granted warrants for the purchase of additional 8.27% of our outstanding shares, at an exercise price of $7.32, subject to certain anti-dilution provisions. Such warrants expire in January 2010. Major Shareholders Voting Rights Our major shareholders do not have different voting rights. Record Holders Based on a review of the information provided to us by our transfer agent, as of June 10, 2005, there were 52 holders of record of our ordinary shares, of which 41 record holders holding approximately 50% of our ordinary shares had registered addresses in the United States. These numbers are not representative of the number of beneficial holders of our shares nor is it representative of where such beneficial holders reside since many of these ordinary shares were held of record by brokers or other 49 nominees including CEDE & Co., the nominee for the Depositary Company (the central depositary for the U.S. brokerage community), which held approximately 49.65% of our outstanding ordinary shares as of said date. B. Related Party Transactions Management and Services Agreement --------------------------------- In February 2000, we entered into an agreement with TAT Industries, our controlling shareholder, to purchase operations of TAT Industries relating to the manufacture of aviation accessories and the lease of certain real estate and buildings. Pursuant to the terms of this agreement, all of the employees of TAT Industries were transferred to us effective January 1, 2000, without any change in the conditions of their employment. TAT Industries pays us $50,000 per year for administrative and accounting personnel and secretarial staff, who served as employees of TAT Industries that were transferred to us and who continue to provide such services. In addition, pursuant to the terms of the agreement, we entered into a lease agreement, pursuant to which we leased from TAT Industries, effective as of January 1, 2000, an area of approximately 329,000 square feet, including 90,000 square feet of buildings, for a period of 24 years and eleven months. In consideration for the lease agreement, we agreed to pay TAT Industries annual rentals of approximately $300,000, with an additional incremental payment of 2% per year, such rental rates are subject to revaluation every fifth year. Other Transactions ------------------ Our Israeli operations employ the services of an agent, Gal Tech Inc. (a company owned by Messrs. Shlomo Ostersetzer, Dov Zeelim and Israel Ofen, all of whom are officers and directors of our company). According to an export agreement, dated April 14, 1992, Gal Tech Inc. receives a handling fee in the amount of 10% of all purchases by our company in North America per year and a handling fee in the amount of 3% of all sales by our company to North America per year (not including sales of heat transfer products). However, pursuant to this agreement, the total amount to be paid by us to Gal Tech will not exceed the sum of 5% of our purchases in North America and 5% of our sales to North America (not including sales of heat transfer products) per year. In the years ended December 31, 2002, 2003 and 2004, we paid approximately $503,000, $485,000 and $377,000, respectively, to Gal Tech, in accordance with such agreement. Effective January 1, 2003, Ifat Frenkel (the daughter of Dov Zeelim) became the President of Gal Tech. Pursuant to their employment agreements, the chairman of our Board of Directors, Mr. Shlomo Ostersetzer, and the vice chairman of our Board of Directors, Mr. Dov Zeelim, are entitled each to a bonus of 2.5% of the annual consolidated operating income, in excess of $500,000. In the years ended December 31, 2004, 2003 and 2002, our Board of Directors and shareholders approved a total payments of approximately $246,488, $239,794 and $176,257 to the chairman and vice chairman of our Board. T.O.P, one of our major shareholders, provides us with management and consulting services in consideration for the lower of: (i) 3% of the consolidated operating income in excess of $500,000, or (ii) $250,000 per year. In the year ended December 31, 2004, we paid T.O.P $49,564 for such services. 50 Other Matters Mr. Shlomo Ostersetzer also serves as the Chairman of the Board of TAT Industries. Mr. Dov Zeelim also serves as Vice Chairman of TAT Industries. Messrs. Zeelim and Ostersetzer are both controlling shareholders of TAT Industries, our controlling shareholder. Mr. Israel Ofen also serves as President of TAT Industries. C. Interests of Experts and Counsel Not applicable. Item 8. Financial Information A. Consolidated Statements and Other Financial Information See the Index to Consolidated Financial Statements accompanying this report on Page F-1. Legal Proceedings In August 2004, two former temporary employees filed a claim against us and against an employment agency, alleging breach of contract and seeking compensation for salary delays and salary differences in the amount of $250,000. At this time, we are unable to predict the ultimate outcome of these claims; however, we believe that such claims are without merit. As such, no provision was provided. Dividend Distribution In December 2002, we declared a cash dividend of $0.45 per share (an aggregate of $2,017,582) paid in January 2003. In May 2003, we declared a cash dividend of $0.25 per share (an aggregate of $1,120,879) payable in July 2003. In September 2004, we declared a cash dividend of $1.18 per share (an aggregate of $7,130,352) payable in November 2004. Our intention is to pay up to 40% of our net profit as a cash dividend annually, depending on cash flow and profitability and other factors affecting our business. There can be no assurance that we will declare any further dividends. According to the Israeli Companies Law, a company may distribute dividends out of its profits, so long as the company reasonably believes that such dividend distribution will not prevent the company from paying all its current and future debts. Profits, for purposes of the Israeli Companies Law, means the greater of retained earnings or earnings accumulated during the preceding two years. In the event cash dividends are declared, such dividends will be declared in dollars. B. Significant Changes On May 24, 2005, our subsidiary, Limco-Airepair, Inc., entered into an agreement, subject to certain closing conditions, for the purchase of Piedmont, a private company based in Kernersville, North Carolina, engaged in the repair and overhaul of various aircraft accessories. Under the terms of the acquisition, we agreed to pay $5.5 million for Piedmont and to repay $9.5 million of its outstanding indebtedness. Piedmont is a recognized leader in the overhaul, repair, maintenance, service and supply of propellers, landing gear and APU/LRU units. In addition, we agreed to pay former shareholders of Piedmont $200,000 per year, for a term of three years, in consideration for their obligation not to compete with Piedmont in this period. 51 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 SmallCap Market: High Low ---- --- Fiscal Year Ended December 31, 2000 $7.75 $2.56 Fiscal Year Ended December 31, 2001 3.25 1.39 Fiscal Year Ended December 31, 2002 4.10 1.65 Fiscal Year Ended December 31, 2003 8.00 2.06 Fiscal Year Ended December 31, 2004 9.80 6.21 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 SmallCap Market: 2003 High Low ---- ---- --- First Quarter........................ $3.86 $2.06 Second Quarter....................... 6.65 3.15 Third Quarter........................ 6.59 4.79 Fourth Quarter....................... 8.00 5.85 2004 High Low ---- ---- --- First Quarter........................ $9.80 $7.15 Second Quarter....................... 9.29 7.55 Third Quarter........................ 9.00 7.00 Fourth Quarter....................... 8.94 6.21 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 SmallCap Market: 2005 High Low ---- ---- --- January................................ $8.00 $7.41 February............................... $8.85 $7.57 March.................................. $9.35 $7.90 April.................................. $8.81 $7.19 May.................................... $8.57 $7.30 June (through June 21)................. $8.40 $7.70 52 B. Plan of Distribution Not applicable. C. Markets Our ordinary shares traded on the NASDAQ National Market under the symbol "TATTF" from March 1987 until July 1998 when the listing of our ordinary shares was transferred to the NASDAQ SmallCap Market. There is currently no trading market for the ordinary shares outside the United States. D. Selling Shareholders Not applicable. E. Dilution Not applicable. F. Expense of the Issue Not applicable. Item 10. Additional Information A. Share Capital Not applicable. B. Memorandum and Articles of Association We are registered with the Israeli Companies Registry and have been assigned company number [520035791]. Section 2 of our memorandum of association provides that we were established for the purpose of engaging in the business of providing services of planning, development, consultation and instruction in the electronics field. In addition, the purpose of our company is to perform various corporate activities permissible under Israeli law. On February 1, 2000, the Israeli Companies Law came into effect and superseded most of the provisions of the Israeli Companies Ordinance (New Version), 5743-1983, except for certain provisions which relate to liens, bankruptcy, dissolution and liquidation of companies. Under the Israeli Companies Law, various provisions, some of which are detailed below, overrule the current provisions of our articles of association. The Powers of the Directors Under the provisions of the Israeli Companies Law and our Articles of Association, a director cannot participate in a meeting nor vote on a proposal, arrangement or contract in which he or she is materially interested. In addition, our directors cannot vote compensation to themselves or any members of their body without the approval of our audit committee and our shareholders at a general meeting. See Item 6.C. "Directors, Senior Management and Employees - Board Practices - Approval of Related Party Transactions Under Israeli Law." 53 The authority of our directors to enter into borrowing arrangements on our behalf is not limited, except in the same manner as any other transaction by us. Our articles of association do not impose any mandatory retirement or age-limit requirements on our directors and our directors are not required to own shares in our company in order to qualify to serve as directors. Rights Attached to Shares Our authorized share capital consists of 7,000,000 ordinary shares of a nominal value of NIS 0.90 each. All outstanding ordinary shares are validly issued, fully paid and non-assessable. The rights attached to the ordinary shares are as follows: Dividend rights. Holders of our ordinary shares are entitled to the full amount of any cash or share dividend subsequently declared. The board of directors may declare interim dividends and propose the final dividend with respect to any fiscal year only out of the retained earnings, in accordance with the provisions of the Israeli Companies Law. See Item 8.A. "Financial Information - Consolidated and Other Financial Information - Dividend Distribution." If after one year a dividend has been declared and it is still unclaimed, the board of directors is entitled to invest or utilize the unclaimed amount of dividend in any manner to our benefit until it is claimed. We are not obligated to pay interest or linkage differentials on an unclaimed dividend. Voting rights. Holders of ordinary shares have one vote for each ordinary share held on all matters submitted to a vote of shareholders. Such voting rights may be affected by the grant of any special voting rights to the holders of a class of shares with preferential rights that may be authorized in the future. The quorum required for an ordinary meeting of shareholders consists of at least two shareholders present in person or represented by proxy who hold or represent, in the aggregate, at least one third of the voting rights of the issued share capital. A meeting adjourned for lack of a quorum generally is adjourned to the same day in the following week at the same time and place or any time and place as the directors designate in a notice to the shareholders. At the reconvened meeting, the required quorum consists of any two members present in person or by proxy. Under our Articles of Association, any resolution, including resolutions for the declaration of dividends, amending our memorandum of association or articles of association, approving any change in capitalization, winding-up, authorization of a class of shares with special rights, or other changes as specified in our Articles of Association, requires approval of the holders of a majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting thereon. Pursuant to our articles of association, our directors are elected at our annual general meeting of shareholders by a vote of the holders of a majority of the voting power represented and voting at such meeting. See Item 6.C. "Directors, Senior Management and Employees - Board Practices - Election of Directors." Rights to share in our company's profits. Our shareholders have the right to share in our profits distributed as a dividend and any other permitted distribution. Rights to share in surplus in the event of liquidation. In the event of our liquidation, after satisfaction of liabilities to creditors, our assets will be distributed to the holders of ordinary shares in 54 proportion to the nominal value of their holdings. This right may be affected by the grant of preferential dividend or distribution rights to the holders of a class of shares with preferential rights that may be authorized in the future. Liability to capital calls by our company. Under our memorandum of association and the Israeli Companies Law, the liability of our shareholders is limited to the par value of the shares held by them. Limitations on any existing or prospective major shareholder. See Item 6.C. "Directors and Senior Management -Board Practices - Approval of Related Party Transactions Under Israeli Law." Changing Rights Attached to Shares According to our Articles of Association, in order to change the rights attached to any class of shares, unless otherwise provided by the terms of the class, such change must be adopted by a general meeting of the shareholders and by a separate general meeting of the holders of the affected class with a majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting thereon. Annual and Extraordinary Meetings The Board of Directors must convene an annual meeting of shareholders at least once every calendar year, within fifteen months of the last annual meeting. Notice of at least twenty-one days prior to the date of the meeting is required. An extraordinary meeting may be convened by the board of directors, as it decides or upon a demand of any two directors or 25% of the directors, whichever is less, or of one or more shareholders holding in the aggregate at least 5% of our issued capital and at least 1% of the voting rights in our company. An extraordinary meeting must be held not more than thirty-five days from the publication date of the announcement of the meeting. See Item 10.B. "Additional Information -- Memorandum and Articles of Association -- Rights Attached to Shares--Voting Rights." Limitations on the Rights to Own Securities in Our Company Neither our memorandum of association or our articles of association nor the laws of the State of Israel restrict in any way the ownership or voting of shares by non-residents, except with respect to subjects of countries which are in a state of war with Israel. Provisions Restricting Change in Control of Our Company The Israeli Companies Law requires that mergers between Israeli companies be approved by the board of directors and general meeting of shareholders of both parties to the transaction. The approval of the board of directors of both companies is subject to such boards' confirmations that there is no reasonable doubt that after the merger the surviving company will be able to fulfill its obligations towards its creditors. Each company must notify its creditors about the contemplated merger. Under the Israeli Companies Law, our Articles of Association are deemed to include a requirement that such merger be approved by an extraordinary resolution of the shareholders, as explained above. The approval of the merger by the general meetings of shareholders of the companies is also subject to additional approval requirements as specified in the Israeli Companies Law and regulations promulgated thereunder. See also Item 6.C. "Directors, Senior Management and Employees - Board Practices - Approval of Related Party Transactions Under Israeli Law." 55 Disclosure of Shareholders Ownership The Israeli Securities Law and regulations promulgated thereunder do not require a company whose shares are publicly traded solely on a stock exchange outside of Israel, as in the case of our company, to disclose its share ownership. Changes in Our Capital Changes in our capital are subject to the approval of the shareholders at a general meeting by a majority of the voting rights represented at the meeting, in person, by proxy or by written ballot, and voting thereon. There are no restrictions on the rights of nonresident or foreign shareholders to hold or vote the Ordinary Shares. C. Material Contracts On June 15, 2004, we entered into a share purchase agreement with T.O.P, a wholly-owned subsidiary of Ta-Tek Ltd., an Israeli private company wholly-owned by FIMI Opportunity Fund. Under the agreement we sold 857,143 of our shares to T.O.P for $6,000,001. T.O.P was given certain demand and piggy-back registration rights with respect to these shares. As part of the transaction, our parent company, TAT Industries, and T.O.P entered into a shareholders' agreement, which provides among other things that T.O.P will have the right to designate three members to serve on our Board of Directors. The shareholders' agreement also provides for: (i) certain standard bring-along and tag-along rights; (ii) a right of first refusal with respect to any shares proposed to be sold by any of the parties; (iii) a lock-up whereby no party may sell more than 150,000 shares prior to June 2006, and (iv) a standstill restriction, which provides that T.O.P will not purchase (in the open market or otherwise) such number of shares that would increase its holdings of our shares to more than 35%. As part of the transaction, T.O.P received warrants to purchase an aggregate of 500,000 of our ordinary shares at $8.50 per share, which price was adjusted to $7.32 per share because of our 2004 dividend payment. The warrants are exercisable for 66 months. In addition, we entered into a credit line agreement with FIMI, which provides for a line of credit in an amount of up to $2,000,000. Loans made pursuant to the credit line bear interest at 5% per annum and are repayable on or before December 15, 2009. We will pay an annual commitment fee equal to 0.5% of the amount of the credit line. We also entered into a management agreement which provides that we will engage FIMI to provide certain management services to us in exchange for annual payments equal to 3% of our operating profit exceeding $500,000; provided, however, that in no event will the total management fees in any given year exceed $250,000. The agreements were approved by our shareholders on August 10, 2004. On May 24, 2005, our subsidiary, Limco-Airepair, Inc., entered into an agreement, subject to certain closing conditions, for the purchase of Piedmont Aviation Component Services, LLC, or Piedmont, a private company based in Kernersville, North Carolina, engaged in the repair and overhaul of various aircraft accessories. Under the terms of the acquisition, we agreed to pay $5.5 million for Piedmont and to repay $9.5 million of its outstanding indebtedness. In addition, we agreed to pay Piedmont former shareholders $200,000 per year, for a term of three years, in consideration for their obligation not to compete with Piedmont in this period. Piedmont is a recognized leader in the overhaul, repair, maintenance, service and supply of propellers, landing gear and APU/LRU units. 56 D. Exchange Controls Israeli law and regulations do not impose any material foreign exchange restrictions on non-Israeli holders of our ordinary shares. In May 1998, a new "general permit" was issued under the Israeli Currency Control Law, 1978, which removed most of the restrictions that previously existed under such law, and enabled Israeli citizens to freely invest outside of Israel and freely convert Israeli currency into non-Israeli currencies. Non-residents of Israel who purchase our ordinary shares will be able to convert dividends, if any, thereon, and any amounts payable upon our dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of our ordinary shares to an Israeli resident, into freely repatriable dollars, at the exchange rate prevailing at the time of conversion, provided that the Israeli income tax has been withheld (or paid) with respect to such amounts or an exemption has been obtained. E. Taxation Israeli Taxation, Foreign Exchange Regulation and Investment Programs --------------------------------------------------------------------- The following is a summary of the material Israeli tax consequences, Israeli foreign exchange regulations and certain Israeli government programs affecting us. To the extent that the discussion is based on new tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the tax authorities will accept the views expressed in the discussion in question. The discussion is not intended, and should not be taken, as legal or professional tax advice and is not exhaustive of all possible tax considerations. Tax Reform ---------- On January 1, 2003, the Law for Amendment of the Income Tax Ordinance (amendment No.132), 2002, commonly referred to as the Tax Reform, came into effect, following its enactment by the Israeli Parliament on July 24, 2002. On December 17, 2002, the Israeli Parliament approved a number of amendments to the Tax Reform, which came into effect on January 1, 2003. Other regulations and decrees relating to the Tax Reform were approved as well. The Tax Reform, aimed at broadening the categories of taxable income and reducing the tax rates imposed on employment income, introduced the following, among other things: o Reduction of the tax rate levied on capital gains (other than gains deriving from the sale of listed securities) derived after January 1, 2003, to a general rate of 25% for both individuals and corporations. Regarding assets acquired prior to January 1, 2003, the reduced tax rate will apply to a proportionate part of the gain, in accordance with the holding periods of the asset, before or after January 1, 2003, on a linear basis; o Imposition of Israeli tax on all income of Israeli residents, individuals and corporations, regardless of the territorial source of income, including income derived from passive sources such as interest, dividends and royalties; o Introduction of controlled foreign corporation (CFC) rules into the Israeli tax structure. Generally under such rules, an Israeli resident who holds, directly or indirectly, 10% or more of the rights in a foreign corporation whose shares are not publicly traded, in which more than 50% of rights are held directly or indirectly by Israeli residents, which has 57 undistributed profits and a majority of whose income in a tax year is considered passive income, will be liable for tax on the portion of such income attributed to his or her holdings in such corporation, as if such income were distributed to him or her as a dividend; o Imposition of capital gains tax on capital gains realized by individuals as of January 1, 2003, from the sale of shares of publicly traded companies (which was previously exempt from capital gains tax in Israel). For information with respect to the applicability of Israeli capital gains taxes on the sale of ordinary shares, see "Capital Gains Tax Applicable to Shareholders" below; o Introduction of a new regime for the taxation of shares and options issued to employees and officers (including directors). Statutory Corporate Tax Rate ---------------------------- Israeli companies are subject to corporate tax on their taxable income. The applicable rate is 35% in 2004, 34% in 2005, 32% in 2006 and 30% in 2007 and thereafter. However, the effective tax rate payable by a company that derives income from an approved enterprise, discussed further below, may be considerably less. See "-Law for the Encouragement of Capital Investments, 1959." Tax Benefits under the Law for the Encouragement of Capital ------------------------------------------------------------ Investments, 1959 ------------------ The Investment Law provides expanded tax incentives for future industrial investments and simplified the bureaucratic process for obtaining approval of investments qualifying for tax incentives. Under the Investment Law, capital investments in new or expanded production facilities in Israel, upon approval by the Israeli Government, can be designated as an approved enterprise. An approved enterprise may receive cash incentives from the Israeli Government or a company may elect the "alternative benefits track" that allows it to forego the cash incentives in favor of certain tax exemption. A certain expansion plan of our company has been granted an "Approved Enterprise" status, under the Investment Law. We have elected to receive our benefits through the "alternative benefits track", waiving grants in return for tax exemptions. Pursuant thereto, the increase in income from the date of commencement of the program, which is derived from our approved enterprise expansion program, is tax-exempt for the periods stated below and will be eligible for reduced tax rates thereafter. Such reduced tax rates are dependent on the level of non-Israeli investments in us, as described below. Income from sources other than the "Approved Enterprise" are subject to tax at the regular corporate tax rate of 35%. Income derived from the approved enterprise, which commenced in 2003, and will expire in 2014, will entitle us to a tax exemption for the two-year period ending December 31, 2005, and to a reduced tax rate of 10%-25% for an additional five to eight years ending December 31, 2014, depending on the level of non-Israel investments in our company. The entitlement to the above benefits is conditioned upon the fulfilling by us of the conditions stipulated by the Investment Law, regulations published thereunder and the letters of approval for the specific investments in the approved enterprises. In the event of failure to comply with these conditions, the benefits may be canceled and we may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2004, our management believes that we are meeting all of the aforementioned conditions. 58 The tax-exempt income attributable to the approved enterprise can not be distributed to shareholders without imposing tax liability on the company. As of December 31, 2004, there was no tax-exempt income earned by our approved enterprise. If the retained tax-exempt income is distributed to shareholders, it would be taxed at the corporate tax rate applicable to such profits as if the company had not elected the alternative tax benefits track which is currently 25%. By virtue of this law, we are entitled to claim accelerated depreciation on equipment used by the approved enterprise during five tax years. On March 29, 2005, the Israeli parliament passed an amendment to the Investment Law. The 2005 Amendment primarily relates to the "alternative benefits track" tax incentives which we have elected for our approved enterprise. The amendment include special tax incentives and expedited the approval process for companies that make minimum qualifying investments in fixed assets in production facilities located in Israel. The 2005 Amendment became effective on April 1, 2005. We are currently evaluating the impact of the 2005 Amendment on its business operations. Tax Benefits under the Law for the Encouragement of Industry ------------------------------------------------------------- (Taxation), 1969 ----------------- According to the Law for the Encouragement of Industry (Taxation), 1969, commonly referred to as the Industry Encouragement Law, an industrial company is a company resident in Israel, that at least 90% of its income in any tax year (determined in Israeli currency, exclusive of income from certain government loans, capital gains, interest and dividends), is derived from an industrial enterprise owned by it. An industrial enterprise is defined as an enterprise whose major activity in a given tax year is industrial production activity. We believe that we currently qualify as an industrial company within the definition of the Industry Encouragement Law. Under the Industry Encouragement Law, industrial companies are entitled to the following preferred corporate tax benefits: o deduction of purchases of know-how and patents over an eight-year period for tax purposes; o right to elect, under specified conditions, to file a consolidated tax return with related Israeli Industrial Companies; and o accelerated depreciation rates on equipment and buildings. Eligibility for the benefits under the Industry Encouragement Law is not subject to receipt of prior approval from any governmental authority. The Israeli tax authorities may determine that we do not qualify as an industrial company, which would entail the loss of the benefits that relate to this status. In addition, no assurance can be given that we will continue to qualify as an industrial company, in which case the benefits described above will not be available in the future. Special Provisions Relating to Measurement of Taxable Income ------------------------------------------------------------ Pursuant to the Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985, results for tax purposes are measured and reflected in real terms in accordance with the changes in the Israeli Consumer Price Index (CPI). 59 Stamp Tax --------- Under Israel's Stamp Tax on Documents Law, certain documents are subject to stamp tax. Recently promulgated regulations provide for a gradual phase-out of the stamp tax by 2008. In 2004, however, the tax authorities began an enforcement campaign involving extensive audits of companies' compliance with the stamp tax obligation with respect to all agreements which had been signed since June 2003. Capital Gains Tax Applicable to Shareholders -------------------------------------------- Israeli law generally imposes a capital gains tax on the sale of capital assets located in Israel, including shares in Israeli resident companies, by both residents and non-residents of Israel, unless a specific exemption is available or unless a treaty between Israel and the country of the non-resident provides otherwise. Regulations promulgated under the Israeli Income Tax Ordinance provided for an exemption from Israeli capital gains tax for gains accrued before January 1, 2003 and derived from the sale of shares of an industrial company, as defined by the Industry Encouragement Law, that are traded on specified non-Israeli markets, including The NASDAQ National Market, provided that the sellers purchased their shares either in the company's initial public offering or in public market transactions thereafter. This partial exemption does not apply to shareholders who are in the business of trading securities, or to shareholders that are Israeli resident companies subject to the Inflationary Adjustments Law. The Company believes that it is currently an Industrial Company, as defined by the Industry Encouragement Law. The status of a company as an Industrial Company may be reviewed by the tax authorities from time to time. There can be no assurance that the Israeli tax authorities will not deny the Company's status as an Industrial Company, possibly with retroactive effect. On January 1, 2003, the Tax Reform came into effect thus imposing capital gains tax at a rate of 15% on gains derived on or after January 1, 2003 from the sale of shares in Israeli companies publicly traded on a recognized stock exchange outside of Israel. This tax rate does not apply to: o dealers in securities; o shareholders that report in accordance with the Inflationary Adjustments Law; or o shareholders who acquired their shares prior to an initial public offering. The tax basis of shares acquired prior to January 1, 2003 will be determined as the higher between the original price paid for the share and the average closing share price in the three trading days preceding January 1, 2003. Non-Israeli residents are exempt from Israeli capital gains tax on any gains derived from the sale of shares publicly traded on the NASDAQ Stock Market, provided such shareholders did not acquire their shares prior to an initial public offering and do not have a permanent establishment in Israel. In any event, the provisions of the Tax Reform shall not affect the exemption from capital gains tax for gains accrued before January 1, 2003, as described in the previous paragraph. In addition, pursuant to the Convention Between the Government of the United States of America and the Government of Israel with respect to Taxes on Income, as amended, commonly referred to as the United States-Israel Tax Treaty, the sale, exchange or disposition of ordinary shares by a person who qualifies as a resident of the United States within the meaning of the United States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such person by the United States-Israel Tax Treaty (a "Treaty United States Resident") generally will not be subject to the Israeli capital gains tax unless such Treaty United States Resident holds, directly or indirectly, shares representing 10% or more of the company's voting power during any part of the twelve-month period preceding such sale, exchange or 60 disposition, subject to certain conditions. A sale, exchange or disposition of ordinary shares by a Treaty United States Resident who holds, directly or indirectly, shares representing 10% or more of the company's voting power at any time during such preceding twelve-month period would be subject to such Israeli tax, to the extent applicable; however, under the United States-Israel Tax Treaty, such Treaty United States Resident would be permitted to claim a credit for such taxes against the United States federal income tax imposed with respect to such sale, exchange or disposition, subject to the limitations in United States laws applicable to foreign tax credits. The United States-Israel Tax Treaty does not relate to United States state or local taxes. Taxation of Non-Resident Shareholders ------------------------------------- Non-residents of Israel are subject to Israeli income tax on income accrued or derived from sources in Israel, including passive income such as dividends, royalties and interest. On distributions of dividends, other than bonus shares and stock dividends, income tax at the rate of 25% is withheld at the source, unless a different rate is provided in a treaty between Israel and the shareholder's country of residence. If the dividends are distributed out of approved enterprise earnings, the applicable tax rate would be 15%. Under the United States - Israel Tax Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is a Treaty United States Resident will be 25%, however the tax rate is reduced to 12.5% for dividends not generated by an approved enterprise to a corporation which holds 10% or more of the company's voting power during a certain period preceding the distribution of the dividend. Dividends derived from an Approved Enterprise will still be subject to 15% tax withholding. Foreign Exchange Regulations ---------------------------- Dividends, if any, paid to the holders of the ordinary shares, and any amounts payable upon dissolution, liquidation or winding up, as well as the proceeds of any sale in Israel of the ordinary shares to an Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may be converted into freely repatriable U.S. dollars at the rate of exchange prevailing at the time of conversion, however, Israeli income tax is required to have been paid or withheld on these amounts. In addition, the statutory framework for the potential imposition of exchange controls has not been eliminated, and may be restored at any time by administrative action. Withholding and Capital Gains Taxes Applicable to non-Israeli are ------------------------------------------------------------------ holders. -------- Nonresidents of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive income such as dividends, royalties and interest, as well as non-passive income from services rendered in Israel. We are generally required to withhold income tax at the rate of 25% on all distributions of dividends, although if the dividend recipient holds 10% of our voting stock for a certain period prior to the declaration and payment of the dividend, we are only required to withhold at a 12.5% rate. Notwithstanding the foregoing, with regard to dividends generated by an approved enterprise, we are required to withhold income tax at the rate of 15%. Israeli law generally imposes a capital gains tax on the sale of publicly traded securities. Pursuant to changes made to the Israeli Income Tax Ordinance in January 2003, capital gains on the sale of our ordinary shares will be subject to Israeli capital gains tax, generally at a rate of 15%. However, as of January 1, 2003, nonresidents of Israel will be exempt from capital gains tax in relation to the sale of our ordinary shares for so long as (a) our ordinary shares are listed for trading on a stock exchange outside of Israel, (b) the capital gains are not accrued or derived by the nonresident shareholder's permanent enterprise in Israel, (c) the ordinary shares in relation to which the capital gains are accrued or derived were acquired by the nonresident shareholder after the initial listing of the ordinary shares on a stock exchange outside of Israel, and (d) neither the shareholder nor the particular capital gain is 61 otherwise subject to certain sections of the Israeli Income Tax Ordinance. As of January 1, 2003, nonresidents of Israel are also exempt from Israeli capital gains tax resulting from the sale of securities on the Tel Aviv Stock Exchange; provided that the capital gains are not accrued or derived by the nonresident shareholder's permanent enterprise in Israel. In addition, under the income tax treaty between the United States and Israel, a holder of ordinary shares who is a United States resident will be exempt from Israeli capital gains tax on the sale, exchange or other disposition of such ordinary shares unless the holder owns, directly or indirectly, 10% or more of our voting power during the 12 months preceding such sale, exchange or other disposition. A nonresident of Israel who receives interest, dividend or royalty income derived from or accrued in Israel, from which tax was withheld at the source, is generally exempt from the duty to file tax returns in Israel with respect to such income, provided such income was not derived from a business conducted in Israel by the taxpayer. Israel presently has no estate or gift tax. United States Federal Income Tax Consequences --------------------------------------------- The following is a summary of certain material U.S. federal income tax consequences that apply to U.S. Holders who hold ordinary shares as capital assets. This summary is based on the United States Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder, judicial and administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as in effect on the date hereof and all of which are subject to change either prospectively or retroactively. This summary does not address all tax considerations that may be relevant with respect to an investment in ordinary shares. This summary does not discuss all the tax consequences that may be relevant to a U.S. Holder in light of such holder's particular circumstances or to U.S. Holders subject to special rules, including persons that are non-U.S. Holders, broker dealers, financial institutions, certain insurance companies, investors liable for alternative minimum tax, tax exempt organizations, regulated investment companies, non-resident aliens of the U.S. or taxpayers whose functional currency is not the dollar, persons who hold the ordinary shares through partnerships or other pass-through entities, persons who acquired their ordinary shares through the exercise or cancellation of employee stock options or otherwise as compensation for services, investors that actually or constructively own 10 percent or more of our voting shares, and investors holding ordinary shares as part of a straddle or appreciated financial position or as part of a hedging or conversion transaction. 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. 62 Taxation of Dividends --------------------- Subject to the discussion below under the heading "Passive Foreign Investment Companies, the gross amount of any distributions received with respect to ordinary shares, including the amount of any Israeli taxes withheld therefrom, will constitute dividends for U.S. federal income tax purposes, to the extent of our current and accumulated earnings and profits as determined for U.S. federal income tax purposes. You will be required to include this amount of dividends in gross income as ordinary income. Distributions in excess of our current and accumulated earnings and profits will be treated as a non taxable return of capital to the extent of your tax basis in the ordinary shares and any amount in excess of your tax basis will be treated as gain from the sale of ordinary shares. See " Disposition of Ordinary Shares" below for the discussion on the taxation of capital gains. Dividends will not qualify for the dividends received deduction generally available to corporations under Section 243 of the Code. Dividends that we pay in NIS, including the amount of any Israeli taxes withheld therefrom, will be included in your income in a dollar amount calculated by reference to the exchange rate in effect on the day such dividends are received. A U.S. Holder who receives payment in NIS and converts NIS into dollars at an exchange rate other than the rate in effect on 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 income or, in the case of certain U.S. Holders, financial services income for United States foreign tax credit purposes. U.S. Holders should note that recently enacted legislation eliminates the "financial services income" category with respect to taxable years beginning after December 31, 2006. Under this legislation, the foreign tax credit limitation categories will be limited to "passive category income" and "general category income." Further, there are special rules for computing the foreign tax credit limitation of a taxpayer who receives dividends subject to a reduced tax, see discussion below. A U.S. Holder will be denied a foreign tax credit with respect to Israeli income tax withheld from dividends received on the ordinary shares to the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 30-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 on or before December 31, 2008 will be subject to tax at a reduced maximum tax rate of 15 percent. Distributions taxable as dividends paid on the ordinary shares should qualify for the 15 percent rate provided that either: (i) we are entitled to benefits under the income tax treaty between the United States and Israel (the "Treaty") or (ii) the ordinary shares are readily tradable on an established securities market in the United States and certain other requirements are met. We believe that we are entitled to benefits under the Treaty and that the ordinary shares currently are readily tradable on an established securities market in the United States. However, no assurance can be given that the ordinary shares will remain readily tradable. The rate reduction does not apply unless certain holding period requirements are satisfied. With respect to the ordinary shares, the U.S. Holder must have 63 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 dollar value of the NIS received with respect to the ordinary shares as determined on the settlement date of such exchange. A U.S. Holder who receives payment in NIS and converts NIS into United States dollars at a conversion rate other than the rate in effect on the settlement date may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss. An accrual basis U.S. Holder may elect the same treatment required of cash basis taxpayers with respect to a sale or disposition of ordinary shares, provided that the election is applied consistently from year to year. Such election may not be changed without the consent of the Internal Revenue Service (the "IRS"). In the event that an accrual basis U.S. Holder does not elect to be treated as a cash basis taxpayer (pursuant to the Treasury regulations applicable to foreign currency transactions), such U.S. Holder may have a foreign currency gain or loss for U.S. federal income tax purposes because of differences between the dollar value of the currency received prevailing on the trade date and the settlement date. Any such currency gain or loss would be treated as ordinary income or loss and would be in addition to gain or loss, if any, recognized by such U.S. Holder on the sale or disposition of such ordinary shares. Passive Foreign Investment Companies ------------------------------------ For U.S. federal income tax purposes, we will be considered a passive foreign investment company ("PFIC") for any taxable year in which either (i) 75% or more of our gross income is passive income, or (ii) at least 50% of the average value of all of our assets for the taxable year produce or are held for the production of passive income. For this purpose, passive income includes dividends, interest, royalties, rents, annuities and the excess of gains over losses from the disposition of assets which produce passive income. If we were determined to be a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. Based on our current and projected income, assets and activities, we believe that we are not currently a PFIC nor do we expect to become a PFIC in the foreseeable future. However, because the 64 determination of whether we are a PFIC is based upon the composition of our income and assets from time to time, there can be no assurances that we will not become a PFIC for any future taxable year. If we are treated as a PFIC for any taxable year, dividends would not qualify for the reduced maximum tax rate, discussed above, and, unless you elect either to treat your investment in ordinary shares as an investment in a "qualified electing fund" (a "QEF election") or to "mark to market" your ordinary shares, as described below: o you would be required to allocate income recognized upon receiving certain dividends or gain recognized upon the disposition of ordinary shares ratably over the holding period for such ordinary shares, o the amount allocated to each year during which we are considered a PFIC other than the year of the dividend payment or disposition would be subject to tax at the highest individual or corporate tax rate, as the case may be, in effect for that year and an interest charge would be imposed with respect to the resulting tax liability allocated to each such year, o the amount allocated to the current taxable year and any taxable year before we became a PFIC would be taxable as ordinary income in the current year, and, o you would be required to make an annual return on IRS Form 8621 regarding distributions received with respect to ordinary shares and any gain realized on your ordinary shares. If you make either a timely QEF election or a timely mark to market election in respect of your ordinary shares, you would not be subject to the rules described above. If you make a timely QEF election, you would be required to include in your income for each taxable year your pro rata share of our ordinary earnings as ordinary income and your pro rata share of our net capital gain as long term capital gain, whether or not such amounts are actually distributed to you. You would not be eligible to make a QEF election unless we comply with certain applicable information reporting requirements. Alternatively, if the ordinary shares are considered "marketable stock" and if you elect to "mark to market" your ordinary shares, you will generally include in income any excess of the fair market value of the ordinary shares at the close of each tax year over your adjusted basis in the ordinary shares. If the fair market value of the ordinary shares had depreciated below your adjusted basis at the close of the tax year, you may generally deduct the excess of the adjusted basis of the ordinary shares over its fair market value at that time. However, such deductions generally would be limited to the net mark to market gains, if any, that you included in income with respect to such ordinary shares in prior years. Income recognized and deductions allowed under the mark to market provisions, as well as any gain or loss on the disposition of ordinary shares with respect to which the mark to market election is made, is treated as ordinary income or loss. Backup Withholding and Information Reporting -------------------------------------------- Payments in respect of ordinary shares may be subject to information reporting to the U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate equal to the third highest 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. 65 Backup withholding is not an additional tax. Amounts withheld under the backup withholding rules may be credited against a U.S. Holder's U.S. tax liability, and a U.S. Holder may obtain a refund of any excess amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the IRS. Any U.S. holder who holds 10% or more in vote or value of our ordinary shares will be subject to certain additional United States information reporting requirements. U.S. Gift and Estate Tax ------------------------ An individual U.S. Holder of ordinary shares will be subject to U.S. gift and estate taxes with respect to ordinary shares in the same manner and to the same extent as with respect to other types of personal property. F. Dividend and Paying Agents Not applicable. G. Statement by Experts Not applicable. H. Documents on Display We are subject to the reporting requirements of the United States Securities Exchange Act of 1934, as amended, as applicable to "foreign private issuers" as defined in Rule 3b-4 under the Exchange Act, and in accordance therewith, we file annual and interim reports and other information with the Securities and Exchange Commission. As a foreign private issuer, we are exempt from certain provisions of the Exchange Act. Accordingly, our proxy solicitations are not subject to the disclosure and procedural requirements of Regulation 14A under the Exchange Act and transactions in our equity securities by our officers and directors are exempt from reporting and the "short-swing" profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements as frequently or as promptly as United States companies whose securities are registered under the Exchange Act. However, we distribute annually to our shareholders, and make available on our website www.tat.co.il, our financial statements, which have been examined and reported on, with an opinion expressed by, an independent public accounting firm, and we intend to file reports with the Securities and Exchange Commission on Form 6-K containing unaudited financial information for the first three quarters of each fiscal year. This annual report on Form 20-F and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied at prescribed rates at the following Securities and Exchange Commission public reference rooms: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, Washington, D.C. 20549; and on the Securities and Exchange Commission Internet site (http://www.sec.gov) and on our website www.tat.co.il. You may obtain information on the operation of the Securities and Exchange Commission's public reference room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange Commission filings is 0-30198. 66 The documents concerning our company which are referred to in this annual report may also be inspected at our offices located at 7 Giborei Israel Street, Netanya 42504, Israel. I. Subsidiary Information Not applicable. Item 11. Quantitative and Qualitative Disclosures about Market Risk We do not own and have not issued any market risk sensitive instruments about which disclosure is required to be provided pursuant to this Item. Item 12. Description of Securities Other than Equity Securities Not Applicable. PART II Item 13. Defaults, Dividend Arrearages and Delinquencies None. Item 14. Material Modifications to the Rights of Security Holders None. Item 15. Controls and Procedures Our management, including our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the period covered by this annual report on Form 20-F. Based upon that evaluation, our chief executive officer and chief financial officer have concluded that, as of such date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by our company in reports that we file or submit under the U.S. Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms and that such information was made known to them by others within the company, as appropriate to allow timely decisions regarding required disclosure. There were no changes to our internal control over financial reporting that occurred during the period covered by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective may not prevent or detect misstatements and can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, 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. 67 Item 16. [Reserved] Item 16A. Audit Committee Financial Expert Our board of directors has determined that Mr. Yakov Fish, one of our outside directors, who qualifies a an independent director as this term is defined in NASDAQ's Market Rule 4200, meets the definition of an audit committee financial expert, as defined in Item 401 of Regulation S-K. Item 16B. Code of Ethics We have adopted a code of ethics that applies to our chief executive officer and all senior financial officers of our company, including the chief financial officer, chief accounting officer or controller, or persons performing similar functions. The code of ethics is publicly available on our website at www.tat.co.il. Written copies are available upon request. If we make any substantive amendment to the code of ethics or grant any waivers, including any implicit waiver, from a provision of the codes of ethics, we will disclose the nature of such amendment or waiver on our website. Item 16C. Principal Accounting Fees and Services Fees Paid to Independent Public Accountants The table below summarizes the audit fees paid by us and our consolidated subsidiaries during each of 2003 and 2004.
Year Ended December 31, 2004 Year Ended December 31, 2003 ---------------------------- ---------------------------- Amount Percentage Amount Percentage ------ ---------- ------ ---------- (in thousands, except percentages) Audit Fees (1).............. $57 80% $57 56% Tax Fees (2).............. 14 20% 44 44 Total ...................... $71 100% $101 100%
(1) "Audit-related fees" are fees related to due diligence investigations and to other assignments relating to internal control and procedures over financial reporting. (2) "Tax fees" are fees for professional services rendered by the Company's auditors for tax compliance, tax advice on actual or contemplated transactions, tax consulting associated with international transfer prices and employee benefits. Pre-Approval Policies and Procedures Our Audit Committee has adopted a policy and procedures for the pre-approval of audit and non-audit services rendered by our independent public accountants, 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 SEC, and also requires the Audit Committee to consider whether proposed services are compatible with the independence of the public accountants. 68 Item 16D. Exemptions from the Listing Requirements and Standards for Audit Committee Not Applicable. PART III Item 17. Financial Statements Consolidated Financial Statements Index to Financial Statements......................................F-1 Report of Independent Registered Public Accounting Firm............F-2 Consolidated Balance Sheets........................................F-3 Consolidated Statements of Income..................................F-5 Statements of Changes in Shareholders' Equity .....................F-6 Consolidated Statements of Cash Flows..............................F-7 Notes to Consolidated Financial Statements.........................F-9 Appendix to Consolidated Financial Statements.....................F-31 Item 18. Financial Statements Not applicable. Item 19. Exhibits The following exhibits are filed as a part of this Report: 1.1 Memorandum of Association of the Company (1) 1.2 Articles of Association of the Company (1) 2.1 Specimen Certificate for Ordinary Shares (1) 4.1 The Company's 1999 Stock Purchase Plan (2) 4.2 Agreement dated February 10, 2000 between the Company and TAT Industries Ltd. (English summary translation) (2) 4.3 Export Agreement dated April 14. 1992, between the Company and E.T Export Services Inc. (Gal Tech Inc.) 4.4 Share Purchase Agreement dated June 15, 2004 between the Company and T.O.P, Limited Partnership 4.5 Shareholders Agreement dated June 15, 2004 between TAT Industries and T.O.P, Limited Partnership 4.6 Registration Rights Agreement dated June 15, 2004 with T.O.P, Limited Partnership, TAT Industries Ltd. and certain shareholders of our company 4.7 Credit Line Agreement dated June 15, 2004 between the Company and T.O.P, Limited Partnership 4.8 Warrant Agreement dated June 15, 2004 between the Company and T.O.P, Limited Partnership 4.9 Membership Interest Purchase Agreement dated May 24, 2005 between Limco-Airepair, Inc., certain Members of Piedmont Aviation Component Services, LLC, and Piedmont Aviation Component Services, LLC 8 List of Subsidiaries of the Registrant 12.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended 69 12.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended 13.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 13.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - ---------------------- (1) Incorporated by reference to the Company's Annual Report on Form 20-F for the year ended December 31, 1992. (2) Incorporated by reference to the Company's Annual Report on Form 20-F for the year ended December 31, 1999. 70 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2004 IN U.S. DOLLARS INDEX Page -------------- Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets F-3 - F-4 Consolidated Statements of Income F-5 Statements of Changes in Shareholders' Equity F-6 Consolidated Statements of Cash Flows F-7 - F-8 Notes to Consolidated Financial Statements F-9 - F-30 Appendix to Consolidated Financial Statements F-31 - - - - - - - - - - - F-1 ERNST & YOUNG Kost Forer Gabbay & Kasierer Phone: 972-3-6232525 3 Aminadav St. Fax: 972-3-5622555 Tel-Aviv 67067, Israel REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of TAT TECHNOLOGIES LTD. We have audited the accompanying consolidated balance sheets of TAT Technologies Ltd. ("the Company") and its subsidiary as of December 31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of Limco-Airepair Inc., a wholly-owned subsidiary, which statements reflect total assets constituting 33% in 2004 and 34% in 2003 and total revenues constituting 42% in 2004, 40% in 2003 and 40% in 2002 of the related consolidated totals. Those statements were audited by other auditors whose reports have been furnished to us, and our opinion, insofar as it relates to amounts included for Limco-Airepair Inc., is based solely on the reports of the other auditors. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to preform an audit of the company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropiate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiary at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. /s/Kost Forer Gabbay and Kasierer Tel-Aviv, Israel KOST FORER GABBAY & KASIERER March 29, 2005 A Member of Ernst & Young Global (Except as to Note 16 which the date is June 27, 2005) F-2 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- U.S. dollars in thousands December 31, -------------------- 2004 2003 -------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,078 $ 5,067 Restricted short-term bank deposit (Note 10b) -- 396 Marketable securities (Note 3) 1,566 2,841 Trade receivables (net of allowance for doubtful accounts of $ 237 and $ 167 as of December 31, 2004 and 2003, respectively) 7,936 6,329 Other accounts receivable and prepaid expenses 1,545 1,269 Inventories (Note 4) 13,182 13,349 ------- ------- Total current assets 31,307 29,251 - ----- ------- ------- LONG-TERM INVESTMENTS: Severance pay fund 3,304 3,077 Long-term marketable securities (Note 3) -- 491 ------- ------- Total long-term investments 3,304 3,568 - ----- ------- ------- PROPERTY, PLANT AND EQUIPMENT, NET (Note 5) 5,852 5,961 ------- ------- INTANGIBLE ASSETS, NET AND DEFERRED CHARGES Goodwill 599 599 Other intangible assets, net and deferred charges 202 13 ------- ------- 801 612 ------- ------- Total assets $41,264 $39,392 - ----- ======= ======= The accompanying notes are an integral part of the consolidated financial statements. F-3 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data)
December 31, -------------------- 2004 2003 -------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Short-term bank credit $ -- $ 290 Current maturities of long-term loans (Note 8) -- 248 Trade payables 1,810 1,922 TAT (the parent company) - current account (Note 7) 73 525 Other accounts payable and accrued expenses (Note 6) 2,744 3,930 -------- -------- Total current liabilities 4,627 6,915 - ----- -------- -------- LONG-TERM LIABILITIES: Long-term loans, net of current maturities (Note 8) -- 46 Accrued severance pay 3,495 3,300 Long-term deferred tax liability (Note 13) 616 447 -------- -------- Total long-term liabilities 4,111 3,793 - ----- -------- -------- COMMITMENTS AND CONTINGENT LIABILITIES (Note 9) SHAREHOLDERS' EQUITY: Share capital (Note 11) - Ordinary shares of NIS 0.9 par value - Authorized: 7,000,000 shares as of December 31, 2004 and 2003; Issued and outstanding: 6,042,671 and 4,637,093 shares as of December 31, 2004 and 2003, respectively 2,094 1,813 Additional paid-in capital 35,704 28,763 Accumulated other comprehensive income 106 95 Accumulated deficit (5,378) (1,987) -------- -------- Total shareholders' equity 32,526 28,684 - ----- -------- -------- Total liabilities and shareholders' equity $ 41,264 $ 39,392 - ----- ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
June 27, 2005 /s/Shlomo Ostersetzer /s/Dov Zeelim /s/P.P. Mazal - ----------------------- ----------------------- ---------------------- ------------------------ Date of approval of the Shlomo Ostersetzer Dov Zeelim Israel Ofen financial statements Chairman of the Vice Chairman of the Executive Vice President Board of Directors and Board of Directors and and Chief Financial Chief Executive Officer President Officer
F-4 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- U.S dollars in thousands (except per share data) Year ended December 31, ------------------------------- 2004 2003 2002 -------- -------- --------- Revenues: Products (Note 14) $ 20,724 $ 19,255 $ 15,936 Services and other 12,519 11,427 10,344 -------- -------- -------- 33,243 30,682 26,280 Cost of revenues 22,166 20,068 17,750 -------- -------- -------- Gross profit 11,077 10,614 8,530 -------- -------- -------- Research and development costs, net 125 120 204 Selling and marketing expenses 1,894 1,958 1,483 General and administrative expenses 3,793 3,476 2,994 -------- -------- -------- 5,812 5,554 4,681 -------- -------- -------- Operating income 5,265 5,060 3,849 Financial income (expenses) (Note 15a) 87 (25) 99 Other income, net (Note 15b) 54 24 8 -------- -------- -------- Income before income taxes 5,406 5,059 3,956 Income taxes (Note 13) 1,667 1,225 367 -------- -------- -------- Net income $ 3,739 $ 3,834 $ 3,589 ======== ======== ======== Basic net earnings per share (Note 12) $ 0.72 $ 0.85 $ 0.80 ======== ======== ======== Diluted net earnings per share (Note 12) $ 0.67 $ 0.78 $ 0.77 ======== ======== ======== The accompanying notes are an integral part of the consolidated financial statements. F-5 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share data)
Accumulated Share capital Additional other Total Total ---------------- paid-in comprehensive Accumulated comprehensive shareholders' Number Amount capital income deficit income equity --------- ------ ---------- ---------------- ------------- --------------- -------------- Balance as of January 1, 2002 4,483,528 $1,781 $ 28,311 $ 26 $ (6,270) $ 23,848 Comprehensive income: Net income - - - - 3,589 $ 3,589 3,589 Dividend - - - - (2,018) - (2,018) --------- ------ --------- ---------- -------- --------- --------- Total comprehensive income $ 3,589 ========= Balance as of December 31, 2002 4,483,528 1,781 28,311 26 (4,699) 25,419 Exercise of options into shares 153,565 32 452 - - 484 Comprehensive income: Net income - - - - 3,834 $ 3,834 3,834 Unrealized gain on available-for-sale securities, net - - - 69 - 69 69 Dividend - - - - (1,122) - (1,122) --------- ------ --------- ---------- -------- --------- --------- Total comprehensive income $ 3,903 ========= Balance as of December 31, 2003 4,637,093 1,813 28,763 95 (1,987) 28,684 Exercise of options into shares 548,435 111 1,119 - - 1,230 Issuance of shares and warrants, net in a private placement 857,143 170 5,822 - - - 5,992 Comprehensive income: Net income - - - - 3,739 $ 3,739 3,739 Unrealized gain on available-for-sale securities, net - - 11 - 11 11 Dividend - - - - (7,130) - (7,130) --------- ------ --------- ---------- -------- --------- --------- Total comprehensive income $ 3,750 ========= Balance as of December 31, 2004 6,042,671 $2,094 $ 35,704 $ 106 $ (5,378) $ 32,526 ========= ====== ========= ========== ======== ===========
The accompanying notes are an integral part of the consolidated financial statements. F-6 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- U.S. dollars in thousands
Year ended December 31, ------------------------------ 2004 2003 2002 ------- ------- ------- Cash flows from operating activities: - ------------------------------------- Net income $ 3,739 $ 3,834 $ 3,589 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,031 1,004 994 Gain on sale of property and equipment (17) (63) (11) Loss (gain) on sale of marketable securities (35) 39 3 Deferred income taxes, net 168 63 131 Trading securities, net -- -- 50 Increase in trade receivables (1,607) (1,401) (136) Decrease (increase) in other accounts receivable, prepaid expenses and deferred charges (208) 27 (342) Decrease (increase) in inventories 167 (1,281) (409) Increase (decrease) in trade payables (112) 505 380 Increase (decrease) in other accounts payable and accrued expenses (1,186) 1,109 588 Accrued severance pay, net (32) (59) (14) ------- ------- ------- Net cash provided by operating activities 1,908 3,777 4,823 ------- ------- ------- Cash flows from investing activities: - ------------------------------------- Proceeds from restricted short-term bank deposits 396 44 449 Proceeds from sale and redemption of available-for-sale securities 2,973 1,650 1,089 Proceeds from sale of property and equipment 30 89 14 Purchase of property and equipment (926) (1,451) (899) Purchase of available-for-sale securities (1,161) (2,680) (1,626) ------- ------- ------- Net cash provided by (used in) investing activities 1,312 (2,348) (973) ------- ------- -------
The accompanying notes are an integral part of the consolidated financial statements. F-7 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- U.S. dollars in thousands
Year ended December 31, ----------------------------- 2004 2003 2002 -------- ------- ------- Cash flows from financing activities: - ------------------------------------- Short-term bank credit, net $ (290) $ 290 $ -- Repayments of long-term loans (294) (249) (414) Cash dividend (7,130) (3,140) -- Proceeds from exercise of options 1,230 484 -- TAT (the parent company) - current account (452) 95 (119) Issuance of shares and warrants, net 5,727 -- -- ------- ------- ------- Net cash used in financing activities (1,209) (2,520) (533) ------- ------- ------- Increase (decrease) in cash and cash equivalents 2,011 (1,091) 3,317 Cash and cash equivalents at the beginning of the year 5,067 6,158 2,841 ------- ------- ------- Cash and cash equivalents at the end of the year $ 7,078 $ 5,067 $ 6,158 ======= ======= ======= (1) Supplemental disclosure of non-cash investing and financing activities: ----------------------------------- Declared dividend $ -- $ -- $ 2,018 ======= ======= ======= Issuance of share and warrants in consideration for providing credit line and cash $ 265 $ -- $ -- ======= ======= ======= Supplemental disclosure of cash flows activities: ------------------------------------------------- Cash paid during the year for: Interest $ 16 $ 12 $ 32 ======= ======= ======= Income taxes $ 2,491 $ 105 $ 99 ======= ======= =======
The accompanying notes are an integral part of the consolidated financial statements. F-8 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 1:- GENERAL a. TAT Technologies Ltd. ("the Company") is an Israeli corporation which is 52% held by TAT Industries Ltd. ("TAT" or "parent company"). The Company and Limco-Airepair Inc. ("Limco-Airepair"), a wholly owned U.S. subsidiary, are principally engaged in the manufacture and sale of a broad range of heat transfer equipment used in mechanical and electronic systems on-board commercial and military aircraft and in a variety of other electronic equipment. The Company is also engaged in the remanufacture, overhaul and repair of heat transfer equipment and other aircraft components manufactured by the Company. In addition, the Company designs, develops and manufactures aviation accessories. These accessories include fuel components, such as valves and pumps, secondary power systems, various instrumentation and electronic assemblies. The principal markets of the Company and its subsidiary are Israel, Europe and the United States. The Company and its subsidiary sell their products mainly to the aircraft industry. b. As for major customers see note 14 b. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP"). a. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. b. Financial statements in U.S. dollars: The majority of the Company and its subsidiary's revenues is generated in U.S. dollars ("dollar") and a substantial portion of the Company and its subsidiary's costs is incurred in dollars. In addition, the Company's financing is obtained in dollars. Accordingly, the dollar is the currency of the primary economic environment in which the Company and its subsidiary operate and the functional and reporting currency of the Company and its subsidiary is the dollar. Transactions and balances originally denominated in dollars are Presented at their original amounts Presented at their original amounts. Transactions and balances in other currencies have been remeasured into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards ("SFAS") No. 52 "Foreign Currency Translation: ("SFAS No. 52"). F-9 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Accordingly, items have been translated as follows: Monetary items - at the exchange rate in effect on the balance sheet date. Nonmonetary items - at historical exchange rates. Revenue and expense items - at the exchange rates in effect as of the date of recognition of those items (excluding depreciation and other items deriving from non-monetary items). All transaction gains and losses from the remeasurement of mentioned above are reflected in the statement of income as financial income (expenses), net. c. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary ("the Group"). Intercompany balances and transactions, including profits from intercompany sales not yet realized outside the Group, have been eliminated upon consolidation. d. Cash equivalents: Cash equivalents are short-term highly liquid investments that are readily convertible to cash with original maturities of three months or less. e. Short-term bank deposit: The restricted short-term bank deposit was a deposit with a maturity of more than three months but less than one year. The deposit was in NIS bearing interest at an annual rate of 4.4%. The short-term deposit was presented at its cost including accrued interest. The short-term bank deposit secured a bank credit received by the Company. f. Marketable securities: Management determines the classification of investments in debt securities with fixed maturities at the time of purchase and reevaluates such designations as of each balance sheet date. At December 31, 2004 and 2003, all marketable securities covered by Statement of Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115") were designated as available-for-sale. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income, as separate component of shareholders' equity. The amortized cost of available-for-sale securities is adjusted for amortization of premiums to maturity. Such amortization and interest are included in financial income, net. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the consolidated statement of income, among "Other income, net". F-10 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) According to Staff Accounting Bulletin No. 59, "Accounting for Non-current Marketable Equity Securities" ("SAB No. 59") management is required to evaluate each period whether a security's decline in value is other than temporary. In all reported periods , the Company did not record an other than temporary decline in the carrying value of its marketable securities. g. Inventories: Inventories are stated at the lower of cost or market value. Inventory write-offs are provided to cover risks arising from slow-moving items. Inventories write-offs are provided to cover risks arising from dead and slow-moving items, discontinued products and excess inventories according to revenue forecasts. Cost is determined as follows: Raw materials and components - using the average cost method. Work in progress - represents the cost of raw materials, components and manufacturing costs which include direct and indirect allocable costs. Cost of raw material and components is determined as described above. Manufacturing costs are determined on an average basis. h. Property, plant and equipment: Property, plant and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The annual rates of depreciation are as follows: % --------------------- Buildings 4 Machinery and equipment 10 - 25 Motor vehicles 15 Office furniture and equipment 6 - 33 i. Intangible assets: Intangible assets subject to amortization are being amortized over their useful lives, using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, in accordance with SFAS No. 142. Technology and deferred charges are amortized over 6-10 years. Amortization expenses amounted to $ 9, $ 33 and $ 39 for the years ended December 31, 2004, 2003 and 2002, respectively. F-11 TAT TECHNOLOGIES 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 (except goodwill - see k below) are reviewed for impairment in accordance with SFAS No. 144 whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. 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 their fair value. As of December 31, 2004, no impairment losses have been identified. k. Goodwill: Goodwill represents the excess of purchase cost over the fair value of identifiable net assets of acquired companies. Prior to January 1, 2002, goodwill was amortized on a straight-line basis over a weighted average period of 12 years. On January 1, 2002, the Company adopted, Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). As a result, goodwill is no longer amortized but is subject to annual impairment tests (or more frequent tests if impairment indicators arise). SFAS No. 142 prescribes a two phase process for impairment testing of goodwill. The first phase screens for impairment; while the second phase (if necessary) measures impairment. The Company performed its first phase impairment and found no instances of impairment of its recorded goodwill. In the first phase of impairment testing, goodwill is tested for impairment by comparing the fair value of the reporting unit to which the goodwill was attributed, to its carrying value. Fair value of the reporting unit was determined by the Company using market capitalization. l. Revenue recognition: The Company and its subsidiary generate their revenues from the sale of products and from providing services. Revenues from the sale of products are recognized in accordance with Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB No. 104") when persuasive evidence of an arrangement exists, delivery of the product has occurred, collection of the resulting receivable is probable, the price is fixed or determinable and no significant obligation exists. The Company does not grant its customers a right of return. Revenues from remanufacture, repair and overhaul services are recognized as services are performed. F-12 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) m. Research and development: Research and development costs, net of grants and participations received are charged to expenses as incurred. n. Grants: Royalty-bearing and non royalty-bearing grants and participations from the Government of Israel and royalty-bearing grants from the BIRD Foundation for funding certain approved research and development projects are recognized at the time in which the Company is entitled to such grants, on the basis of the costs incurred. Such grants and participations are included as a deduction of research and development costs. Research and development grants amounted to $ 0, $ 0 and $ 42 in 2004, 2003 and 2002, respectively. o. Warranty costs: The Company provides warranties for its products and services ranging from one to five years, which vary with respect to each contract and in accordance with the nature of each specific product. Based on the Company's experience, warranty expenses have been immaterial and, therefore, the Company did not record any warranty provision. p. Income taxes: Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). This statement prescribes the use of the liability method, whereby deferred tax assets and liability account balances are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and for tax loss carryforwards. Deferred taxes are measured using the enacted laws and tax rates that will be in effect when the differences are expected to reverse. The Company and its subsidiary provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. Results for tax purposes are measured and reflected in real terms in accordance with the changes in the Israeli Consumer Price Index ("CPI"). As explained in b above, the consolidated financial statements are presented in U.S. dollars. In accordance with paragraph 9(f) of SFAS No. 109, the Company has not provided deferred income taxes on the differences resulting from changes in exchange rate and indexing for tax purposes. F-13 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) q. Concentrations of credit risk: Financial instruments that potentially subject the Company and its subsidiary to concentrations of credit risk consist principally of cash and cash equivalents, marketable securities and trade receivables. Cash and cash equivalents are deposited with major banks in Israel and the United States. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. Management believes that the financial institutions that hold the Company and its subsidiary's cash and cash equivalents, are financially sound, and, accordingly, minimal credit risk exists with respect to these financial instruments. The Company's marketable securities include investment in debentures and in shares. Management believes that the companies that issued the debentures and the shares are financially sound, the portfolio is well diversified, and accordingly, minimal credit risk exists with respect to the marketable securities. The Company's and its subsidiary's trade receivables are derived mainly from sales to customers in the United States, Israel and Europe. The Company and its subsidiary generally do not require collateral, however, in certain circumstances the Company may require letters of credit. Management believes that credit risks relating to trade receivables are minimal since the Company's customers are financially sound. The Company and its subsidiary perform ongoing credit evaluation of their customers' financial condition. The allowance for doubtful accounts is determined with respect to specific debts that are doubtful of collection. The Company has no off-balance-sheet concentration of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. r. Severance pay: The Company's liability for severance pay is calculated pursuant to Israeli Severance Pay Law based on the most recent salary of the employees multiplied by the number of years of employment as of the balance sheet date. The liability is presented on an undiscounted basis. The Company records as an expense the net increase in its severance liability. The Company's liability for all of its employees is fully covered by monthly deposits with severance pay funds, insurance policies, Mivtahim Social Insurance Institution Ltd. ("Mivtahim") and by an accrual. The liability covered by deposits with Mivtahim is irrevocably transferred to Mivtahim. Accordingly, neither the amounts accumulated with Mivtahim, nor the corresponding liabilities for severance pay are reflected in the balance sheet. The value of the policies, other than the value of Mivtahim policies, is included as an asset in the Company's balance sheet. F-14 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share data) NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligation pursuant to Israeli Severance Pay Law or labor agreements. The value of the deposited funds is based on the cash surrendered value of these policies, and includes immaterial profits. Severance expense was $ 274, $ 284 and $ 297 for the years ended December 31, 2004, 2003 and 2002, respectively. s. Fair value of financial instruments: The carrying amounts of cash and cash equivalents, trade receivables, other accounts receivable, trade payables and other accounts payable approximate their fair values, due to the short-term maturities of such instruments. The fair value for marketable securities classified as available-for-sale is based on quoted market prices. t. Basic and diluted net earnings per share: Basic net earnings per share are computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net earnings per share further include the effect of dilutive stock options outstanding during the year, all in accordance with Statement of Financial Accounting Standard Statement No. 128, "Earnings Per Share". The weighted average number of outstanding options excluded from the calculations of diluted net earnings per share, due to their anti dilutive effect, was 500,000, 0 and 713,500, for the years ended December 31, 2004, 2003 and 2002, respectively. u. Accounting for stock-based compensation: The Company applies the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25") and FASB interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No. 44") in accounting for its employee stock options. According to APB NO. 25, compensation expense is measured under the intrinsic value method, whereby compensation expense is equal to the excess, if any, of the quoted market price of the stock over the exercise price at the grant date of the award. F-15 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) Pro forma information regarding the Company's net income and net earnings per share is required by SFAS 123 as if the company had accounted for its employee stock options under the fair value based method. Since all shares options were vested preceding to all reported periods, the Company's net income would not have changed for all reported periods if the Company had applied the fair value recognition provisions according to SFAS 123. v. Reclassification Certain amounts from prior years have been reclassified to conform to current classification. w. Impact of recently issued accounting standards 1. In March 2004, the Financial Accounting Standards Board approved the consensus reached on the Emerging Issues Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" ("EITF 03-1"). The objective of this Issue is to provide guidance for identifying impaired investments. EITF 03-1 also provides new disclosure requirements for investments that are deemed to be temporarily impaired. The impairment measurement and recognition guidance prescribe in EITF 03-1 is delayed until the final issuance of FSP EITF 03-01-a. The disclosure requirements for available for sale investment are effective for annual reporting periods ending after June 15, 2003.The Company has evaluated the impact of the adoption of EITF 03-1 and does not believe the impact will be significant to the Company's overall results of operations or financial position. 2. On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004 Share-Based Payment ("Statement 123R"), which is a revision of FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("Statement 123"). Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123 permitted, but did not require, share-based payments to employees to be recognized based on their fair values while Statement 123(R) requires all share-based payments to employees to be recognized based on their fair values. Statement 123R also revises, clarifies and expands guidance in several areas, including measuring fair value, classifying an award as equity or as a liability and attributing compensation cost to reporting periods. The new standard will be effective for the Company in the first interim period beginning after January 1, 2006. Currently the company has no unvested stock options. However the impact of this standard on the company's results of operations will depend on the level of share based payments granted in the future. F-16 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.) 3. In November 2004, the FASB issued Statement of Financial Accounting Standard No. 151, "Inventory Costs, an Amendment of ARB No. 43, Chapter 4" ("SAFS 151"). SFAS 151 amends Accounting Research Bulletin ("ARB") No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on normal capacity of the production facilities. SAFS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not expect that the adoption of SFAS 151 will have a material effect on its financial position or results of operations. NOTE 3:- MARKETABLE SECURITIES AND LONG TERM MARKETABLE SECURITIES The following is a summary of available-for-sale marketable securities:
December 31, ----------------------------------------------------------------------------- 2004 2003 ------------------------------------- --------------------------------------- Estimated Estimated Gross fair Gross fair Amortized unrealized market Amortized unrealized market cost gains value cost gains value ------------ ------------------------ ------------- ------------------------- Available-for-sale: ------------------- Government and agency bonds $ - $ - $ - $ 491 $ - $ 491 Shares 758 94 852 652 84 736 Debentures and convertible debentures 702 12 714 2,093 11 2,104 ------- ----- ------- ------- ---- ------- $ 1,460 $ 106 $ 1,566 $ 3,236 $ 95 $ 3,331 ======= ===== ======= ======= ==== =======
Unrealized losses amounted to $1 and $3 on December 31, 2004 and 2003, respectively. During 2004, 2003 and 2002, the Company recorded proceeds from redemption and sales of these securities in the amounts of $ 2,973, $ 1,650 and $ 1,089, respectively. The related gains (losses) amounting to $ 35, $ (39) and $ (3), in 2004 and 2003 and 2002, respectively, were recorded in other income, net. NOTE 4:- INVENTORIES December 31, ------------------------------- 2004 2003 -------------- -------------- Raw materials and components $ 4,736 $ 4,375 Work in process 8,446 8,974 -------------- -------------- $ 13,182 $ 13,349 ============== ============== As for charges, see Note 10. F-17 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 5:- PROPERTY, PLANT AND EQUIPMENT, NET December 31, ----------------------------------- 2004 2003 --------------- ----------------- Cost: Land and buildings (1) $ 2,294 $ 2,216 Machinery and equipment 19,157 18,580 Motor vehicles 1,187 1,065 Office furniture and equipment 333 316 --------------- ----------------- 22,971 22,177 Accumulated depreciation 17,119 16,216 --------------- ----------------- Depreciated cost $ 5,852 $ 5,961 =============== ================= Depreciation expenses amounted to $ 1,022, $ 974 and $ 955 for the years ended December 31, 2004, 2003 and 2002, respectively. (1) Including lease rights to land in the amount of $ 1 under a sub-lease agreement with TAT. The lease period ends in 2020 and includes a renewal option if TAT exercises the option granted by the Israel Land Administration. Registration with the Land Registrar of the transfer of sub-lease rights from TAT to the Company has not yet been finalized due to technical reasons. As for charges, see Note 10. NOTE 6:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES December 31, ------------------------------------- 2004 2003 ----------------- ----------------- Employees and payroll accruals $ 1,422 $ 1,462 Government authorities - 645 Accrued expenses 677 585 Deferred revenue - 217 Advances from customers 86 350 Other 559 671 ----------------- ----------------- $ 2,744 $ 3,930 ================= ================= F-18 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 7:- TRANSACTIONS WITH RELATED PARTIES a. The Company entered into an agreement with TAT, whereby in April 1994 the Company exercised the option and purchased the prototype and rights to manufacture and distribute an air conditioning system without freon gas (EFACS) for aircraft and trains, which was developed by TAT. The following are the terms of the agreement: 1. TAT has a right of first refusal for regarding the manufacture of components of the air conditioning systems, which are included among the technologies and components which TAT deals with or will deal with from time to time. 2. The Company is committed to pay TAT the following: a) Royalties amounting to 17% on the first $ 10,000 in revenues from sales of the systems, directly or indirectly, and 7% on all such revenues in excess of $ 10,000. b) Reimbursement of the royalties due to the Chief Scientist in connection with the sales of the systems. c) 25% of the proceeds in connection with the transfer or sale of know-how and/or any rights related to the system. As of December 31, 2004, the Company has not sold EFACS and, therefore, the Company has not paid or accrued royalties for this commitment. b. Transactions with TAT:
Year ended December 31, ---------------------------------------------------- 2004 2003 2002 ---------------- ---------------- ---------------- Revenues from management fees $ 50 $ 50 $ 50 ================ ================ ================ Other manufacturing costs $ 59 $ 134 $ 210 ================ ================ ================ Lease expenses (1) $ 324 $ 318 $ 312 ================ ================ ================
(1) During 2000, the Company entered into a lease agreement with TAT for a period of 25 years. According to the agreement, the Company leases from TAT the factory premises for an annual amount of approximately $ 300, increased by 2% annually, subject to a revaluation based on market value every five years. The Company is entitled to a one-time right of termination of the agreement after 10 years. F-19 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 7:- TRANSACTIONS WITH RELATED PARTIES (Cont.) c. Balances with related parties: December 31, ---------------------------------- 2004 2003 --------------- ---------------- TAT - current account (1) $ 73 $ 525 =============== ================ (1) The current account is denominated in NIS linked to the Israeli Consumer Price Index and bears no interest.
Year ended December 31, ----------------------------------------------------- 2004 2003 2002 ----------------- ----------------- ----------------- d. Commissions to a company owned by certain shareholders (see Note 9b) $ 377 $ 487 $ 503 ================= ================= ================= Management fee (see f below) $ 54 $ - $ - ================= ================= =================
e. The Chairman of the Board of Directors and the Vice Chairman of the Board of Directors are entitled each to a bonus of 2.5% of the annual consolidated operating income, in excess of $ 500. Bonus expenses were $ 246, $ 240, $176 in 2004, 2003 and 2002, respectively, and were recorded as part of the general and administrative expenses. f. A shareholder of the Company provides the Company with management and consulting services in consideration for the lower of: (i) 3% of the consolidated operating income in excess of $ 500, or (ii) $ 250. Consulting expenses were $50, $ 0, $0 in 2004, 2003 and 2002, respectively, and were recorded as part of the general and administrative expenses. See also Note 11b. NOTE 8:- LONG-TERM LOANS a. Terms of the loans:
Weighted average Currency interest rate December 31 -------------- -------------------- -------------------------------- 2004 2003 2004 2003 ---------- --------- --------------- --------------- % -------------------- Banks U.S. dollar - 3.4 $ - $ 294 Less - current maturities - 248 --------------- --------------- $ - $ 46 =============== ===============
b. As for collateral, see Note 10. F-20 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES a. The Company and Limco-Airepair obtained from the BIRD Foundation grants for the support of research and development projects aggregating to $ 551. The Company is obligated to pay royalties of between 2.5% to 5% of the sales of the products generated from such projects, up to an amount equal to 100% of the grant received. The contingent liability in respect of the aforementioned grants amounted to $551. The Company does not expect any sales generated from these projects in the future. b. The Company is committed to pay commissions to a company owned by certain of its shareholders for representing the heat exchangers division in North America (see Note 7d). The commissions were recorded as part of the Selling and marketing expenses. According to the agreement, the commissions are to be paid at a rate of 10% of the amount of inventories purchased in North America and 3% of the sales made in North America. The commissions were recorded as part of the Cost of revenues and Selling and marketing expenses, respectively. c. The Company is committed to pay royalties to a third party at a range of 5% to 6% of sales of products developed through the intellectual property and goodwill which were purchased from that third party. Royalties expenses were $ 31, $ 51 and $ 39 for the years ended December 31, 2004, 2003 and 2002, respectively. The royalties were recorded as part of the Cost of revenues. d. The Company is committed to pay marketing commissions to salesmen at a range 1% to 12% of the total sales contracts which were received through promotion and distribution carried out by them. Commission expenses were $ 346, $ 500, $ 241 for the years ended December 31, 2004, 2003 and 2002, respectively. The commissions were recorded as part of the Selling and marketing expenses. e. The Company is committed to pay royalties to a third party of between 9% to 12% of sales of the products developed by the third party. Royalties expenses amounted to $ 214, $ 448 and $ 321 for the years ended December 31, 2004, 2003 and 2002, respectively. The royalties were recorded as part of the Cost of revenues. f. As for commitments to TAT, see Note 7a. g. Lease commitments: Limco-Airepair entered into operating lease agreements which expire in 2006. As of December 31, 2004, future minimum rental payments under non-cancelable operating leases are as follows: 2005 $ 29 2006 14 -------- $ 43 ======== F-21 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 9:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.) Total rent expenses for the years ended December 31, 2004, 2003 and 2002 were approximately $ 30, $ 30 and $ 29, respectively. As for the lease of the factory premises by the Company, see Note 7b. h. The Company's subsidiary previously had a commitment to purchase non-serviceable aircraft spare parts assemblies and the relating complete technical documentation, as identified in the agreement, in the amount of $ 1,134. According to the agreement, the subsidiary had to pay a 10% down payment while the remaining $ 1,021 was to be paid in several separate payments according to the terms of the agreement. As of December 31, 2004, approximately $ 1,015 of the commitment had been fulfilled. The Company has a proposed agreement with a third party to share equally in this purchase commitments and sales proceeds. The third party has advanced approximately $474 to the Company which is included in other payables and accrued expenses. i. During 2004, two former employees filed a claim against the Company and against an employment agency, alleging breach of contract, and seeking compensation for salary delays and salary differences in the amount of $250. The Company, with the advice of its legal counsel, is unable to predict the ultimate outcome of these claims, yet believes that such claims are without merit. As such, no provision was provided. NOTE 10:- CHARGES AND GUARANTEES The Company provided a bank guarantee in the amount of $ 201, to secure customer advances and performance to customers. NOTE 11:- SHAREHOLDERS' EQUITY a. The Company's shares are registered with the Securities and Exchange Commission in the United States and are traded on the NASDAQ (Small Cap Market). The Company's Ordinary shares confer upon their holders voting rights, the right to receive dividends, if declared, and any amounts payable upon the dissolution, liquidation or winding up of the affairs of the Company. b. On August 10, 2004, the Company entered into an investment agreement, according to which an investor purchased 857,143 Ordinary shares of NIS 0.90 par value of the Company and was granted 500,000 warrants to purchase 500,000 Ordinary shares of NIS 0.90 par value at an exercise price of $ 8.50 per share. The warrants are exercisable for 66 months from the date of grant. The total cash received was $ 6,000. In addition, the investor and the Company entered into a credit line agreement, under which the investor made a line of credit available to the Company in the amount of up to $ 2,000. The amount of the credit withdrawn from the investor shall not be less than $ 1,000. The withdrawn credit bears interest at an annual rate of 5%, in addition to an annual handling fee of 0.5% of the credit line amount. The withdrawn credit will be settled in four equal payments, no later than 66 months from the date of the agreement. As of December 31, 2004, the Company has not withdrawn any amounts from the credit line. F-22 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 11:- SHAREHOLDERS' EQUITY (Cont.) The Company recorded the fair value of the credit line, which amounted to $ 265, as deferred charges, which will be amortized throughout the term of the credit line agreement. As such, the total proceeds received for the issuance of shares and warrants, consisting of cash and a provision of a credit line, amounted to $ 6,265, from which issuance expenses in the amount of $ 273 were deducted. Regarding a consulting agreement entered with the investors, see also Note 7f. c. Stock option plans: 1. In June 1994, the Company adopted a stock option plan for its employees, directors and service providers, whereby up to 125,000 options to purchase Ordinary shares were to be granted, at an exercise price of $ 4 per share (the market price at the date of the grant). Out of this plan 116,000 options (out of which 87,500 stock options were granted to executives) were granted. Under the terms of the plan, the options vested ratably over a period of five years commencing with the date of grant. This stock option plan together with options issued and not exercised expired in June 2004. 2. In March 1995, the Company adopted a stock option plan for its employees, employees of the parent company, directors and service providers, whereby up to 400,000 options to purchase Ordinary shares were to be granted, at an exercise price of $ 4.5 per share (the market price at the date of grant). Out of this plan 372,500 options (out of which 315,000 stock options were granted to executives) were granted. Under the terms of the plan, the options vested after a period of five years commencing with the date of grant. In March 2005, the remaining 267,500 options out of the plan expired. 3. In January 1999, the Company adopted a stock option plan for its employees, directors and officers of the Company, whereby up to 500,000 options to purchase Ordinary shares (out of which 402,500 stock options were granted to executives) were to be granted, at an exercise price of $ 1.625 per share (which equaled the market price on the date of grant). All options have been granted under the above plan. Under the terms of the plan, the options were fully vested as of the grant date. These options expired in January 2009. F-23 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 11:- SHAREHOLDERS' EQUITY (Cont.) The following table is a summary of the activity of the Company's stock Option plans: Year ended December 31, ---------------------------------------------------------------- 2004 2003 2002 -------------------- -------------------- ---------------------- Weighted Weighted Weighted Number average Number average Number average of exercise of exercise of exercise options price options price Options price ---------- --------- --------- ---------- ---------- ----------- Outstanding at the 834,935 $ 2.95 988,500 $ 2.99 988,500 $ 2.99 beginning of the year Exercised (548,435) $ 2.25 (153,565) $ 2.36 - $ - Expired (1,500) $ 4.00 - $ - - $ - --------- -------- ------- Outstanding at the end of the year 285,000 $ 4.323 834,935 $ 2.95 988,500 $ 2.99 ======= ========= ======= ======== ======= ======= Exercisable options 285,000 $ 4.323 834,395 $ 2.95 988,500 $ 2.99 ======= ========= ======= ======== ======= =======
The options outstanding as of December 31, 2004, have been separated into ranges of exercise prices, as follows:
Options Weighted Options outstanding average exercisable Exercise as of remaining as of price of Exercise December 31, contractual December 31, options price 2004 life (years) 2004 exercisable ------------------------- --------------- --------------- --------------- --------------- $ 1.625 17,500 4.08 17,500 $ 1.625 $ 4.5 267,500* 0.25 267,500* $ 4.50 ---------- ------------- 285,000 $ 4.323 285,000 $ 4.323 ========== ============ ============= =============
* In March 2005, these options were expired. d. Dividends: Dividends on the Ordinary shares, if any, will be declared and paid in U.S dollars. The Company's intentions are to pay up to 40% of the Company's net profit as a cash dividend annually, depending on cash flow and profitability and other factors affecting the Company's business. On September 8, 2004, the Company declared a dividend in the amount of $ 7,130. The ex-date was set for October 18, 2004, and the dividend was fully paid on November 8, 2004. F-24 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands (except share and per share data) NOTE 12:- NET EARNINGS PER SHARE The following table sets forth the computation of historical basic and diluted net earnings per share: Year ended December 31, ------------------------------------ 2004 2003 2002 ---------- ---------- ---------- Numerator: Net income $ 3,739 $ 3,834 $ 3,589 ========== ========== ========== Denominator: Weighted average number of Ordinary shares outstanding during the year 5,166,218 4,509,891 4,483,516 ========== ========== ========== Basic net earnings per share - weighted average 5,166,218 4,509,891 4,483,516 number of shares Effect of dilutive securities: Stock options and warrants 397,842 397,529 167,497 ---------- ---------- ---------- Denominator for diluted net earnings per share 5,564,060 4,907,420 4,651,013 ========== ========== ==========
NOTE 13:- INCOME TAXES a. Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985: In accordance with the above law results for tax purposes are measured and reflected in real terms in accordance with the changes in the Israeli Consumer Price Index (CPI). b. Tax benefits under Israel's Law for the Encouragement of Industry (Taxation), 1969: The Company is an "industrial company", as defined by the law for the Encouragement of Industry (Taxes), 1969, and as such, is entitled to certain tax benefits, which mainly consist of amortization of costs relating to know-how and patents over eight years, the right to claim public issuance expenses, and accelerated depreciation. c. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("the Law"): A certain expansion plan of the Company has been granted an "Approved Enterprise" status, under the Law. The Company has elected to receive its benefits through the "alternative benefits track", waiving grants in return for tax exemptions. Pursuant thereto, the increase in income from the date of commencement of the program which is the income of the Company derived from the following "Approved Enterprise" expansion program is tax-exempt for the periods stated below and will be eligible for reduced tax rates thereafter (such reduced tax rates are dependent on the level of foreign investments in the Company), as described below. Income from sources other than the "Approved Enterprise" are subject to tax at the regular corporate tax rate of 35%. F-25 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 13:- INCOME TAXES (Cont.) Income derived from the program, which commenced in 2003, will entitle the Company to a tax exemption for the two-year period ending December 31, 2004, and to a reduced tax rate of 10%-25% for an additional five to eight years ending December 31, 2009 to 2012 (depending on the level of foreign investments into the Company). The entitlement to the above benefits is conditional upon the Company fulfilling the conditions stipulated by the abovementioned law, regulations published thereunder and the letters of approval for the specific investments in "approved enterprises". In the event of failure to comply with these conditions, the benefits may be canceled and the Company may be required to refund the amount of the benefits, in whole or in part, including interest. As of December 31, 2004, management believes that the Company is meeting all of the aforementioned conditions. The tax-exempt income attributable to the "Approved Enterprise" can not be distributed to shareholders without imposing tax liability on the Company other than in complete liquidation. As of December 31, 2004, there is approximately $ 170 tax-exempt income earned by the Company's "Approved Enterprise" included in retained earnings. If the retained tax-exempt income is distributed to shareholders, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not elected the alternative tax benefits track (currently - 25%). By virtue of this law, the Company is entitled to claim accelerated depreciation on equipment used by the "Approved Enterprise" during five tax years. See also note 13(f). d. Amendment 132 to the Israeli Income Tax Ordinance: In July 2002, Amendment 132 to the Israeli Income Tax Ordinance ("Amendment 132") was approved by the Israeli parliament and is effective as of January 1, 2003. The principal objectives of Amendment 132 were to broaden the categories of taxable income and to reduce the tax rates imposed on employment income. The Amendment had no material impact on the Company. e. Reduction in corporate tax rate: In June 2004, the Israeli parliament approved an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision) ("the Amendment"), which progressively reduces the corporate tax rate from 36% to 35% in 2004, 34% in 2005, 32% in 2006 and 30% in 2007. F-26 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 13:- INCOME TAXES (Cont.) f. On March 29, 2005, the Israeli parliament passed an amendment to the Law for the Encouragement of Capital Investments, 1959 ("the Law"), which provides expanded tax incentives for future industrial investments and simplified the bureaucratic process for obtaining approval of investments qualifying for tax incentives ("the 2005 Amendment"). The 2005 Amendment primarily relates to the "alternative benefits track" tax incentives which the Company has elected for its Approved Enterprises. Changes include special tax incentives and an expedited approval process for companies that make minimum qualifying investments in fixed assets in production facilities located in Israel. The 2005 Amendment became effective on April 1, 2005. The Company is currently evaluating the impact of the 2005 Amendment on its business operations. g. Non-Israeli subsidiary A non-Israeli subsidiary is taxed based on the tax laws in its country of residence - the U.S. The tax rate in the U.S. is 40%. h. Tax assessments The Company received tax assessments considered as final through 2001. i. Income tax reconciliation: A reconciliation of the theoretical tax expense assuming all income is taxed at the statutory tax rate and the actual tax expense is as follows:
Year ended December 31, --------------------------------------------------- 2004 2003 2002 --------------- --------------- --------------- Income before income taxes as reported in the $ 5,408 $ 5,059 $ 3,956 statements of income =============== =============== =============== Statutory tax rate in Israel 35% 36% 36% =============== =============== =============== Theoretical tax expenses $ 1,893 $ 1,821 $ 1,424 Increase (decrease) in income taxes resulting from: Tax adjustment in respect of foreign subsidiary subject to a different tax rate 76 67 36 Reversal of valuation allowance in respect of carryforward losses - (1,019) Difference in basis of measurement for financial reporting and income tax purposes (94) (519) (158) Tax in respect of prior years (310) (258) - Non-deductible expenses 102 114 84 --------------- --------------- --------------- Income taxes as reported in the statements of income $ 1,667 $ 1,225 $ 367 =============== =============== ===============
F-27 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 13:- INCOME TAXES (Cont.)
j. Income before income taxes is comprised as follows: Year ended December 31, --------------------------------------------------- 2004 2003 2002 --------------- --------------- --------------- Domestic (Israel) $ 3,880 $ 3,387 $ 2,961 Foreign (United States) 1,526 1,672 995 --------------- --------------- --------------- $ 5,406 $ 5,059 $ 3,956 =============== =============== =============== k. Income taxes included in the statements of income: Current: Domestic (Israel) $ 999 $ 627 $ - Foreign (United States) 500 535 236 --------------- --------------- --------------- 1,499 1,162 236 --------------- --------------- --------------- Deferred: Domestic (Israel) 112 27 - Foreign (United States) 56 36 131 --------------- --------------- --------------- 168 63 131 --------------- --------------- --------------- $ 1,667 $ 1,225 $ 367 =============== =============== ===============
l. Deferred income taxes: Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets are as follows:
December 31 ---------------------------- 2004 2003 ------------- ------------ Deferred tax assets (liabilities): Provisions for employee benefits and other temporary differences $ 559 $ 449 Tax loss carryforwards 100 209 ------------- ------------ Deferred tax assets 659 658 Deferred tax liabilities (616) (447) ------------- ------------ Net deferred tax assets (liabilities) $ 43 $ 211 ============= ============
As of December 31, 2004, the Company and its subsidiary did not provide a valuation allowance in respect of deferred tax assets, since management currently believes that it is more likely than not that the deferred tax asset will be realized in the future. The Company has no present intention of remitting undistributed earnings of a foreign subsidiary aggregating $ 3,288 as of December 31, 2004, and accordingly, no deferred tax liability has been established relative to these earnings. If these amounts were not considered permanently reinvested, a deferred tax liability would have been required. F-28 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 14:- MAJOR CUSTOMER AND GEOGRAPHICAL INFORMATION a. Summary information about geographic areas: The Company and its subsidiary operate in one industry segment. Total revenues are attributed to geographic areas based on the location of the customers. This data is presented in accordance with Statement of Financial Accounting Standard No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"). The following presents total revenues, based on the location of the end customers, for the years ended December 31, 2004, 2003 and 2002 and long-lived assets as of December 31, 2004 and 2003:
2004 2003 2002 --------------------------- -------------------------- ------------- Total Long-lived Total Long-lived Total revenues assets revenues assets revenues ------------- ------------- ------------ ------------ ------------ Israel $ 5,095 $ 4,037 $ 4,796 $ 4,332 $ 4,277 Asia 1,430 - 1,845 - 1,382 United States 17,569 2,418 15,441 2,241 13,531 Europe 8,736 - 8,340 - 6,879 Other 413 - 260 - 211 ------------- ------------- ------------ ------------ ------------ $ 33,243 $ 6,455 $ 30,682 $ 6,573 $ 26,280 ============= ============= ============ ============ ============
b. Major customer data as a percentage of total revenues: Year ended December 31, -------------------------------------------------- 2004 2003 2002 --------------- --------------- -------------- % -------------------------------------------------- Customer A 10.1 15.3 11.9 Customer B 15.4 12.9 12.8 Customer C 9.8 12.1 4.9 Customer D 7.8 5.6 17.3 F-29 TAT TECHNOLOGIES LTD. AND ITS SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- U.S. dollars in thousands NOTE 15:- SELECTED STATEMENTS OF INCOME DATA
Year ended December 31, ------------------------------------ 2004 2003 2002 --------- ----------- ---------- a. Financial income (expenses), net: Financial income: Foreign currency translation adjustments $ 86 $ 49 $ - Interest on cash equivalents, short-term bank deposits and others 147 46 203 --------- ----------- ---------- 233 95 203 --------- ----------- ---------- Financial expenses: Bank charges (68) (47) - Interest on short-term loans (6) (12) (56) Interest on long-term loans (28) (13) (30) Foreign currency translation adjustments (42) (20) (18) Others (2) (28) - --------- ----------- ---------- (146) (120) (104) --------- ----------- ---------- $ 87 $ (25) $ 99 ========= =========== ========== b. Other income (expenses), net: Gain on sale of property and equipment $ 18 $ 63 $ 11 Gain (loss) on sale of marketable securities classified as available-for-sale 36 (39) (3) --------- ----------- ---------- $ 54 $ 24 $ 8 ========= =========== ==========
NOTE 16:- SUBSEQUENT EVENTS On May 16, 2005, the Company entered into an agreement with Piedmont Component Services, LLC ("Piedmont"), according to which the Company will purchase 100% of Piedmont's shares for the aggregate amount of $ 5,500. In addition, at the closing, the Company will repay $ 9,500 of Piedmont's outstanding indebtedness. - - - - - - - - - - - - - - - - - - F-30 [LETTERHEAD OF TULLIUS TAYLOR SARTAIN & SARTAIN LLP] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors of LIMCO-Airepair, Inc. We have audited the accompanying balance sheets of LIMCO-Airepair, Inc. (an Oklahoma corporation) as of December 31, 2004 and 2003, and the related statements of income, retained earnings and cash flows for each of the three years in the period ended Deember 31, 2004. 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 preform an audit of the company's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropiate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of LIMCO-Airepair, Inc. as of December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2004 in conformity with the U.S. generally accepted accounting principles. /s/Tullius Taylor Sartain & Sartain LLP June 27, 2005 F-31 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this annual report on Form 20-F to be signed on its behalf by the undersigned, thereunto duly authorized. TAT TECHNOLOGIES LTD.- By: /s/ Israel Ofen ---------------- Israel Ofen, Executive Vice President and Chief Financial Officer Date: June 30, 2005 71 EX-4.3 2 ex4_3.txt AGREEMENT EXHIBIT 4.3 April 14, 1992 Our Ref: C/1193 To: Galagraph Ltd. P.O. Box 30, Gedera - ------ Dear Sirs, Re: Assignment of TAT - E.T Export Agreement For Heat Exchanger Production Line at Galagraph ----------------------------------------------- Following the transfer of the Heat Exchanger production line from TAT to Galagraph, we hereby express our consent to act for the department at Galagraph, based on the conditions in place at TAT, in accordance with the Supplement to the Agreement dated September 1, 1990. The conditions are as follows: Galagraph shall pay IT Export a 10% handling fee for purchases, provided that the sum of such fee shall under no circumstances be greater than the sum of the fee had it been calculated on the basis of 5% of purchases and 5% of sales. Yours sincerely, (Sgd) E.T Export Services Inc. Y.A. / Y.N. Supplement to Agreement dated July 1, 1992 Between E.T Export Services Inc (hereinafter: "E.T") Of the First Part ----------------- And TAT - Aero Equipment Ltd. (hereinafter: "TAT") Of the Second Part ------------------ Whereas: there is an Agreement between the Parties, which contains various supplements which have been made from time to time (to be known hereinafter as the "Agreement"); and Whereas: the Parties are desirous of updating and amending the fees owing to IT from TAT under the Agreement, all as set out below. Therefore, it is agreed between the Parties as follows: - ------------------------------------------------------- 1. The preamble to this Supplement to the Agreement constitutes an integral part of it. 2. TAT shall pay E.T a handing fee in the sum of 10% for purchases and 3% for sales, provided that the sum of such fee is in no event greater than the sum of the fee had it been calculated in accordance with a rate of 5% on purchases and 5% on sales under the Agreement. 3. This Supplement to the Agreement shall commence on July 1, 1992. 4. Subject to the aforesaid, all the rest of the conditions and definitions of the Agreement shall apply to this Supplement to the Agreement. In witness whereof, the Parties have hereunto set their hands: - -------------------------------------------------------------- - ------------------------ ------------------------- E.T Export Services Inc. TAT - Aero Equipment Ltd. Agreement --------- Made and executed at Tel Aviv on October 1, 1981 Between: TAT - Aero Equipment Ltd. (hereinafter: "TAT") Of the First Part; ------------------ And: E.T Express Services Inc. [sic] (hereinafter: "E.T") Of the Second Part; ------------------- Whereas: TAT manufactures various products to be sold in North America, and is desirous of developing and promoting the marketing of its products there, via a separate company, and not as part of TAT itself; and Whereas: TAT purchases the materials and components that it requires in order to manufacture its products, in North America; and Whereas: E.T has provided marketing promotion services for TAT in North America in respect of TAT's products, and has handled purchasing operations for TAT in North America, and the Parties wish to set out the conditions of the contract between them; Therefore, it is agreed and stipulated between the Parties as follows: 1. The preamble to this Agreement constitutes an integral part of it. 2. IT hereby declares that: (a) It has knowledge of TAT's products, and their nature, quality and utility. (b) It has knowledge of the potential markets in North America for sale of TAT's products. (c) It has knowledge of the various kinds of components and materials required by TAT to manufacture its products. 1 (d) It has knowledge of the manufacturers and resellers in North America from whom it is possible to purchase the materials and components required by TAT to manufacture its products. (e) It is capable and prepared to handle the purchase of such materials and components in North America. 3. (a) It is agreed between the Parties that TAT reserves the right to act alone or as it may see fit in promoting the sale of its products in North America, and in purchasing materials or components for the manufacture of its products in North America, provided that it shall not harm E.T's right to a handling fee as set out below. (b) It is hereby clarified that E.T shall not be liable nor responsible in any way whatsoever for actual payments made by customers, although E.T shall provide TAT with collection services (not including expenses and legal services), and in any event, E.T shall be entitled to the handling fee even if the sums are not in fact collected, and even if TAT has allegations against the customers and/or the suppliers. 4. TAT undertakes: (a) To provide E.T and its employees with all of the information required in order to market its products, including products being developed or in progress. (b) To provide E.T with one or more of its products, as required, at E.T's demand, for the purpose of fulfillment of its undertakings under this Agreement, in order to display such products to potential customers or to advertise same or to promote the marketing of same. (c) To provide E.T and its employees with all of the information required for purchasing the components and materials that it needs to manufacture its products, and that it intends to purchase in North America with the assistance of E.T. (d) In general, to cooperate with E.T and to do any act required for the development and promotion of marketing of TAT's products in North America, and to handle the purchase of materials or components for TAT in North America. 5. TAT Industries agrees that E.T shall present itself as a company operating for the promotion and development of the marketing of TAT's products, and as a company handling the purchase of materials and components for TAT. 6. E.T undertakes: (a) To retain a skilled team for the performance of its undertakings under this Agreement. 2 (b) To invest all time and effort required for the purpose of fulfilling its undertakings under this Agreement. (c) To respond to TAT's demands and to adjust its operations to comply with the marketing and purchasing policy set down by TAT. (d) To report to TAT from time to time, at TAT's demand, of all of its operations regarding promotion and development of marketing, and of all of its operations regarding the purchase of materials and components. (e) Not to represent manufacturers or companies or any legal or private entity, whose products compete with the products of TAT and not to do any act which might constitute competition to and/or harm and/or damage the marketing of TAT's products, or to the purchase of materials for TAT, without the prior written consent of TAT. 7. (a) In consideration for the fulfillment of all of E.T's undertakings regarding the marketing of TAT's products under this Agreement, TAT undertakes to pay E.T a handling fee in the rate of 5% (five percent) of the value of the equipment exported by TAT to North America FOB, except in the case of payment of commissions to agents or other representatives of more than 5%. In the event of such payment (to an agent or other representative) which is less than 5%, E.T shall be entitled to the difference between such payment and the aforesaid 5%. (b) In consideration for the fulfillment of all of E.T's undertakings relating to the handling of purchase of materials or components under this Agreement, TAT undertakes to pay E.T a handling fee in the rate of 5% (five percent) of the value of the materials and components purchased in North America FOB at port of export. (c) The handling fee for purchases and sales as set out in paragraphs (a) and (b) above (hereinafter: the "Handling Fee") shall not include expenses for transportation, insurance, taxes, customs duties, or any other expense whether in Israel or in North America relating to the dispatch and handling of goods, but shall include office expenses (including telephone and telex) and the overheads of E.T (except for special or one-time or exceptional expenses). 8. The Handling Fee shall be paid as follows: (a) In the event of purchase by TAT as aforesaid, TAT shall pay the Handling Fee to E.T no later than the date of payment of the price to the supplier. (b) E.T shall be entitled to set off of the Handling Fee for purchases or sales made up to the date of set-off, against any amount owing to TAT. 3 (c) Accounts shall be settled between the Parties with respect to the Handling Fee owing to E.T for purchases and sales effected during the previous three months, and sums not set off or paid as set out in paragraphs (a) and (b) above shall be paid by TAT to IT within 15 days of the end of such three-month period. (d) It is hereby declared that E.T shall be entitled to demand advance payments from TAT for the Handling Fee, provided that E.T sets out its demands regarding the anticipated scope of operations and results. (e) 30 days after the end of TAT's financial year, the Parties shall effect adjustments and the Party owing, as the case may be, shall pay the Party owed, the sums owing to it in respect of the previous year. 9. This Agreement shall be in force from October 1, 1981 and any Handling Fee in respect of purchases or sales effected (FOB at port) prior to such date shall be in accordance with previous arrangements. In witness whereof, the Parties have hereunto set their hands: - ------------------------ ------------------- TAT- Aero Equipment Ltd. E.T Export Services 4 EX-4.4 3 ex4_4.txt SHARE PURCHASE AGREEMENT DATED 6/15/04 EXHIBIT 4.4 TAT PIPE SHARE PURCHASE AGREEMENT ------------------------ THIS AGREEMENT (the "Agreement") is made as of June 15, 2004 (the "Effective Date"), by and between (i) TAT Technologies Ltd. ("TAT"), an Israeli company whose shares are traded on Nasdaq, and (ii) TA-TOP, Limited Partnership (the "Investor"), a limited partnership wholly owned by (x) TA-TEK Ltd., an Israeli private company, wholly owned by FIMI Opportunity Fund, L.P., a limited partnership formed under the laws of the State of Delaware, and by (y) FIMI Israel Opportunity Fund, Limited Partnership, a limited partnership, registered in Israel. TAT and the Investor each, a "Party" and, collectively, the "Parties". WITNESSETH: WHEREAS, the Investor desires to invest in the share capital of TAT, by purchasing 857,143 Ordinary Shares of TAT, nominal value NIS 0.90 each (the "Shares"), upon the terms and subject to the conditions set forth in this Agreement; and WHEREAS, the Board of Directors of TAT has resolved to enter into this Agreement for the issue and sale of the Shares to the Investor, all upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereto hereby agree as follows: 1.1 Definitions ----------- In this Agreement, each of the following terms shall have the respective meaning appearing next to it, if not inconsistent with the subject or context:
- ---------------------------------------------------------------------------------------- "Agreement"- has the meaning ascribed to such term in the preamble. - ---------------------------------------------------------------------------------------- "Applicable Law"- has the meaning ascribed to such term in Section 3.9. - ---------------------------------------------------------------------------------------- "Closing" and "Closing Date- have the meaning ascribed to such terms in Section 2.1. - ---------------------------------------------------------------------------------------- "Condition Precedent"- has the meaning ascribed to such term in Section 6.1. - ---------------------------------------------------------------------------------------- "Confidential Information"- has the meaning ascribed to such term in Section 5.2. - ---------------------------------------------------------------------------------------- Compliance Certificate"- has the meaning ascribed to such term in Section 2.2.(1)(d). - ---------------------------------------------------------------------------------------- "Credit Line Agreement"- has the meaning ascribed to such term in Section 6.1(d). - ---------------------------------------------------------------------------------------- "Damages"- has the meaning ascribed to such term in Section 7.2. - --------------------------- --------------------------------------------------------------------------------
TAT Technologies PIPE
- ---------------------------------------------------------------------------------------- "Effective Date"- has the meaning ascribed to such term in the preamble. - ---------------------------------------------------------------------------------------- "Encumbrance"- has the meaning ascribed to such term in Section 3.3.(c)(3). - ---------------------------------------------------------------------------------------- "Engagement Agreements"- has the meaning ascribed to such term in Section 2.2.(1)(b). - ---------------------------------------------------------------------------------------- "Environmental Law"- has the meaning ascribed to such term in Section 3.14. - ---------------------------------------------------------------------------------------- "Exchange Act"- has the meaning ascribed to such term in Section 3.6(a). - ---------------------------------------------------------------------------------------- "2000 20-F"- has the meaning ascribed to such term in Section 3.1. - ---------------------------------------------------------------------------------------- "2002-2003 Financial has the meaning ascribed to such term in Section 3.6(b). Statements"- - ---------------------------------------------------------------------------------------- "Governmental Entity"- has the meaning ascribed to such term in Section 3.5. - ---------------------------------------------------------------------------------------- "Investor"- has the meaning ascribed to such term in the preamble. - ---------------------------------------------------------------------------------------- "Investor Conditions"- has the meaning ascribed to such term in Section 6.1. - ---------------------------------------------------------------------------------------- "Knowledge"- has the meaning ascribed to such term in Section 3.10(a). - ---------------------------------------------------------------------------------------- "Management Fee"- has the meaning ascribed to such term in Section 5A. - ---------------------------------------------------------------------------------------- Material Adverse Effect"- has the meaning ascribed to such term in Section 3.1. - ---------------------------------------------------------------------------------------- "Material and "Material have the meaning ascribed to such terms in Section 3.11(a). Agreements"- - ---------------------------------------------------------------------------------------- "Ordinary Shares"- has the meaning ascribed to such term in Section 3.3. - ---------------------------------------------------------------------------------------- "Outstanding Options"- has the meaning ascribed to such term in Section 3.3. - ---------------------------------------------------------------------------------------- "Party" or "Parties"- have the meaning ascribed to such terms in the preamble. - ---------------------------------------------------------------------------------------- "Purchase Price"- has the meaning ascribed to such term in Section 1.2. - ---------------------------------------------------------------------------------------- "SEC"- has the meaning ascribed to such term in Section 3.6(a). - ---------------------------------------------------------------------------------------- "Securities Act"- has the meaning ascribed to such term in Section 3.6.(a). - ---------------------------------------------------------------------------------------- "Services"- has the meaning ascribed to such term in Section 5A. - ---------------------------------------------------------------------------------------- "Shares"- has the meaning ascribed to such term in the preamble. - ---------------------------------------------------------------------------------------- "Shareholders Agreement"- has the meaning ascribed to such term in Section 6.1(d). - ----------------------------------------------------------------------------------------
2 TAT Technologies PIPE
- ---------------------------------------------------------------------------------------- "Subsidiary" or has the meaning ascribed to such term in Section 3.1. "Subsidiaries"- - ---------------------------------------------------------------------------------------- "Registration Rights has the meaning ascribed to such term in Section 6.1(d). Agreement"- - ---------------------------------------------------------------------------------------- "Representations and has the meaning ascribed to such term in Section 7.1. Warranties Period"- - ---------------------------------------------------------------------------------------- "Required Approvals and has the meaning ascribed to it in Section 3.5. Notices"- - ---------------------------------------------------------------------------------------- "TAT"- means TAT Technologies Ltd. - ---------------------------------------------------------------------------------------- "TAT Conditions"- has the meaning ascribed to such term in Section 6.2. - ---------------------------------------------------------------------------------------- "TAT Industries"- means TAT Industries Ltd. - ---------------------------------------------------------------------------------------- "TAT SEC Reports"- has the meaning ascribed to such term in Section 3.6(a). - ---------------------------------------------------------------------------------------- "Trade Secrets"- has the meaning ascribed to such term in Section 3.10(a). - ---------------------------------------------------------------------------------------- "Transaction Documents"- has the meaning ascribed to such term in Section 2.2.(1)(a). - ---------------------------------------------------------------------------------------- "Warrant Agreement"- has the meaning ascribed to such term in Section 6.1(d). - ----------------------------------------------------------------------------------------
1.2. Issue of Shares --------------- Upon the terms and subject to the conditions set forth in this Agreement, at the Closing (as defined in Section 2.1 below) the Investor agrees to purchase, and TAT agrees to issue to the Investor, the Shares, at a price per Share of $7.00, and an aggregate purchase price of $6,000,001 (Six Million and One US Dollars) (the "Purchase Price"). 2. Closing ------- 2.1 The Closing. The Parties shall hold the closing (the "Closing") at the offices of _______________, on the 12th business day following the date on which the last of the Conditions Precedent under Section 6.3 below is fulfilled (provided that all other Closing conditions have been either met or waived, in accordance with the provisions contained herein) or at such other place and later date as the Parties shall agree (the "Closing Date"). 2.2. Actions at the Closing. At the Closing, the following actions shall be carried out, which actions shall be deemed to take place simultaneously and no actions shall be deemed to have been completed or any required document delivered until all such actions have been completed and all required documents delivered: (1) The Investor shall have received from TAT the following documents: (a) True and correct copies of the resolutions of TAT's Board of Directors 3 TAT Technologies PIPE approving (i) the execution of this Agreement and the performance of the transactions contemplated herein, including the issuance, at the Closing, of the Shares to the Investor subject to the provisions contained herein, (ii) the execution of the Warrant Agreement (as defined below) and the grant of the non-assignable Warrant (as such term is defined in the Warrant Agreement) to the Investor, pursuant to the provisions contained therein, which shall become effective upon the Closing, (iii) the execution of the Credit Line Agreement (as defined below), which shall become effective as of the Closing, (iv) the Management Fee arrangement (as more fully set forth below) which shall become effective as of the Closing, and (v) the execution of the Registration Rights Agreement (as defined below) which shall become effective as of the Closing. This Agreement, the Warrant Agreement, the Credit Line Agreement and the Registration Rights Agreement shall be referred to herein, collectively, as the "Transaction Documents". (b) True and correct copies of the resolutions of TAT's shareholders approving (i) the transactions contemplated in the Transaction Documents, (ii) the amendment of the Articles of Association of TAT, in the manner more fully set forth in the amended Articles of Association , (ii) the approval of the Engagement Agreements (the "Engagement Agreements") between TAT and each of Mr. Shlomo Ostersetzer and Mr. Dov Zeelim, and (iv) the election to TAT's Board of Directors of three members designated by the Investor, of which one shall meet the definition of an independent director for the purposes of Nasdaq. The forms of the resolution of TAT's shareholders, the amended Articles of Association and the Engagement Agreements are attached hereto as Exhibit 2.2.1(b); and (c) An opinion of the counsel to TAT, substantially in the form of Exhibit 2.2.1(c) to this Agreement; and (d) A certificate duly executed by an officer of TAT dated as of the Closing Date (the "Compliance Certificate") in the form attached hereto as Schedule 2.2.1(d). (2) TAT shall have obtained, and delivered to the Investor copies of, the Required Approvals and Notices (as defined below). (3) The Investor shall have received a letter from Gal-Tek Ltd., in the form attached hereto as Exhibit 2.2(3), which shall be effective as of the Closing. (4) The Investor shall have provided TAT with an opinion of the counsel to the Investor, substantially in the form of Exhibit 2.2.4 to this Agreement. (5) The Investor shall pay the Purchase Price to TAT by wire transfer of immediately available funds to the following bank account at Union Bank of Israel Ltd. (branch no.: 062 (Diamond Exchange Branch, Ramat-Gan)): Account no. 407000/54 and will obtain confirmation from its bank that the Purchase Price has been transferred in accordance with the wire transfer instructions provided to it (a copy of which will be delivered to TAT at the Closing), against the receipt of the Shares and the Warrant. 3. Representations and Warranties of TAT ------------------------------------- TAT hereby represents and warrants to the Investor, and acknowledges that the Investor 4 TAT Technologies PIPE is entering into the Investment Agreements, in reliance thereon, as follows: 3.1 Organization. TAT is a company duly organized and validly existing under the laws of the State of Israel. TAT is duly qualified to conduct its business, and (with respect to those jurisdictions in which the concept of good standing is relevant) is in good standing, in each jurisdiction where the character of its properties owned, operated or leased or the nature of its activities makes such qualification necessary, except for such failures which would not reasonably be likely to have a Material Adverse Effect (as defined below). TAT has the requisite corporate power and authority and any necessary governmental authority, franchise, license or permit to own, operate, lease and otherwise to hold and operate its assets and properties and to carry on its businesses as now being conducted, except for such failures which would not reasonably be likely to have a Material Adverse Effect. The Annual Report of TAT filed on Form 20-F for the Year 2002 (the "2002 20-F"), a copy of which has been provided to the Investor, accurately sets forth each entity in which TAT owns at least 50% of either the voting shares and/or the equity (each of the aforesaid, a "Subsidiary" and, collectively, the "Subsidiaries") and all other equity or similar interests, or any interest convertible or exchangeable or exercisable for any such equity or similar interest, in any other entities held by TAT or any Subsidiary, excluding any immaterial marketable securities held by TAT or any of its Subsidiaries as part of the investment portfolio in their ordinary course of business. As used herein, the term "Material Adverse Effect" means any material adverse effect on the business, as conducted by, the assets, financial condition, liabilities or operations of TAT and its Subsidiaries taken as a whole. 3.2 Organizational Documents. Set forth in Schedule 3.2 attached hereto is a complete and correct copy of the Memorandum and the Articles of Association of TAT, as amended to date. All of such organizational documents are in full force and effect. 3.3 Capitalization. (a) The registered share capital of TAT as of the date of this Agreement is NIS 6,300,000, divided into 7,000,000 Ordinary Shares, nominal value NIS 0.90 each (the "Ordinary Shares"), of which 4,663,381 Ordinary Shares are issued and outstanding. In addition, TAT has issued options and warrants (including employee and consultant options) to purchase up to 798,635 Ordinary Shares (the "Outstanding Options"). Except for the foregoing and for the transactions contemplated by this Agreement, there are no other shares, convertible securities, outstanding warrants, options, or other rights to subscribe for, purchase, or acquire from TAT any securities of TAT, and there are no contracts or binding commitments providing for the issuance of, or the granting of rights to acquire from TAT, any securities of TAT or under which TAT is, or may become, obligated to issue any of its securities. (b) There are no bonds, debentures, notes or other indebtedness having the right to vote on any matters on which TAT's shareholders may vote issued or outstanding. There are no outstanding contractual obligations of TAT or any of its Subsidiaries to repurchase, redeem or otherwise acquire any of TAT's share capital. All of the issued and outstanding share capital of TAT has been duly authorized and validly issued and is 5 TAT Technologies PIPE fully paid and nonassessable. (c)(1) All of the Shares issuable in accordance with of this Agreement will be, when fully paid up as provided in this Agreement, and so issued, duly authorized, validly issued, fully paid and nonassessable, shall not be subject to call, forfeiture or preemptive rights, shall be delivered free and clear of all Encumbrances (as defined below). (2) The non-assignable Warrant granted in accordance with the provisions of this Agreement and the Warrant Agreement, when granted at the Closing, shall be duly authorized, validly granted, shall not be subject to call, forfeiture or preemptive rights, and shall be delivered free and clear of all Encumbrances. (3) All of the Ordinary Shares, issuable upon the exercise of the Warrant in accordance with the provisions of the Warrant Agreement will be, upon payment of the Exercise Price (as defined in the Warrant Agreement), duly authorized, validly issued, fully paid and nonassessable, shall not be subject to call, forfeiture or preemptive rights and shall be delivered free and clear of all Encumbrances. The term "Encumbrance" means and includes any interest or equity of any person (including any right to acquire, option, or right of preemption) or any mortgage, charge, pledge, lien, or assignment, or any other encumbrance or security interest or arrangement of whatsoever nature over or in the relevant property. 3.4 Authority. Subject to the Conditions Precedent under Section 6 below, TAT has the necessary corporate power and authority to enter into the TAT Transaction Documents and each of the other agreements, certificates or other instruments required to be delivered hereunder at or prior to Closing and to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereby and thereby. The execution and delivery of this Agreement and each of the other Transaction Documents by TAT and the consummation by TAT of the transactions contemplated hereby and thereby shall have been, at the Closing (assuming the satisfaction of the Condition Precedent), duly and validly authorized by all necessary corporate action, and no other corporate proceedings on the part of TAT shall be necessary to authorize this Agreement and each of the other Transaction Documents or to consummate the transactions contemplated hereby and thereby. The Transaction Documents shall be deemed as of the Closing to be duly executed and delivered by TAT and, (assuming the satisfaction of the Condition Precedent) and the due authorization, execution and delivery by the Investor, constitute legal, valid and binding obligations of TAT, enforceable in accordance with their terms, except as such enforceability may be limited by liquidation, insolvency, reorganization, moratorium and other similar laws of general applicability relating to or affecting creditors' rights generally and by the application of general principles of equity. 3.5 No Conflict; Required Filings and Consents. 6 TAT Technologies PIPE Subject to satisfaction of all the Conditions Precedent under Section 6 below: (a) The execution and delivery by TAT of this Agreement and each of the other Transaction Documents and the performance by TAT of its obligations under this Agreement and each of the other Transaction Documents, will not, with or without the giving of notice or the lapse of time or both, (i) conflict with or violate the organizational documents of TAT or any of its Subsidiaries, (ii) subject to obtaining the Required Approvals and Notices (as defined below), conflict with or violate any law, statute, ordinance, rule, regulation, order, judgment or decree applicable to TAT or any Subsidiary or by which any of their respective properties or assets is bound or affected, or (iii) result in any breach of or constitute a default under, or give to others any rights of termination, amendment, acceleration or cancellation of any Material Agreement (as defined below), or result in the creation of any Encumbrance on the properties or assets of TAT pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation to which TAT is a party or by which TAT is bound or affected. (b) The execution and delivery by TAT of this Agreement and the other Transaction Documents does not, and the performance by TAT of its obligations under this Agreement and the other Transaction Documents, will not, require any consent, approval, authorization or permit of or filing with or notification to, any Governmental Entity (as defined below), by or with respect to TAT, except (i) for applicable requirements, if any, of the consents, approvals, authorizations, permits or notification described in Schedule 3.5 (the "Required Approvals and Notices"), and (ii) where failure to obtain the required consents, approvals, authorizations or permits, or to make such filings or notifications, (A) would not prevent or delay consummation of any of the transactions contemplated by this Agreement or any other Transaction Document in any material respect, or otherwise prevent TAT from performing its obligations under this Agreement or any other Transaction Document in any material respect, and (B) would not reasonably be likely to have a Material Adverse Effect. As used herein the term "Governmental Entity" means any Israeli or U.S. entity exercising executive, legislative, judicial, regulatory or administrative function of or pertaining to government. 3.6 SEC Filings; Financial Statements. (a) To TAT's knowledge, based on the advise of its U.S. securities counsel, it has filed all forms, reports, statements and other documents required to be filed with the Securities and Exchange Commission ("SEC") during the three year period immediately prior to the Closing Date, and has heretofore delivered to counsel for the Investor, in the form filed with the SEC since such date, together with any amendments thereto, all (i) Annual Reports on Form 20-F, and (ii) all proxy statements relating to meetings of shareholders (whether annual or special) (collectively, the "TAT SEC Reports"). To TAT's knowledge, based on the advise of its U.S. securities counsel, as of their respective filing or publication dates, the TAT SEC Reports complied as to form in all material respects with the requirements of the United States Securities Exchange Act of 1934 (the "Exchange Act") and the United States Securities Act of 1933, as amended (the "Securities Act"). To TAT's knowledge, based on the advise of its U.S. securities 7 TAT Technologies PIPE counsel, the TAT SEC Reports did not at the time they were filed or published, respectively, contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (b) The audited consolidated financial statements of TAT for the years ended on December 31, 2002 and December 31, 2003 (collectively, the "2002-2003 Financial Statements") comply as to form in all material respects with applicable accounting requirements. The Financial Statements, including all related notes and schedules, present fairly in all material respects the financial position of TAT as at the respective dates thereof and the results of operations and cash flows of TAT for the periods indicated, in accordance with United States GAAP, with respect to TAT's audited consolidated financial statements for the year ended on December 31, 2002 and in accordance with Israeli GAAP, with respect to TAT's audited consolidated financial statements for the year ended on December 31, 2003. 3.7 Operations in the Ordinary Course. Except as set forth in Schedule 3.7 attached hereto, between January 1, 2004 and the date of this Agreement, TAT has operated its business in the ordinary course consistent with past practices and has not suffered any Material Adverse Effect. 3.8 Litigation. Except as set forth in Schedule 3.8 attached hereto, there are no claims, actions or proceedings pending or, to TAT's knowledge, threatened against TAT or any of its Subsidiaries, any of their respective properties or to TAT's knowledge, any of their respective officers or directors before any court, arbitration or mediation or regulatory authority or body, domestic or foreign, that individually or in the aggregate (i) would reasonably be likely to, or if adversely decided may be expected to, have a Material Adverse Effect, or (ii) challenge or seek to prevent, enjoin, alter or materially delay the transactions contemplated by this Agreement. 3.9 Licenses and Permits; Compliance with Laws. To TAT's knowledge, it does not lack permits, licenses, authorizations or approvals, and is not in material violation of Applicable Law or any permits, licenses, authorizations and approvals that have been obtained by it, which the failure to obtain or such violation, as applicable, would reasonably be likely to have a Material Adverse Effect. As used herein, the term "Applicable Law" means any provision of any statute, law, ordinance, rule, regulation, decree, order, grant, permit or license or other governmental authorization or approval applicable to TAT. 3.10 Trade Secrets. (a) To TAT's Knowledge (as defined below), TAT and its Subsidiaries have the right to use all its trade secrets, including know-how, material computer programs, documentation, processes, and technology which can reasonably be anticipated to be material to the conduct of the businesses of TAT and its Subsidiaries, taken as a whole, as conducted by TAT as of the date hereof (all of the foregoing items collectively referred to as the "Trade Secrets"). 8 TAT Technologies PIPE For purposes of this Section 3.10 and Section 3.14 below, "Knowledge" shall be deemed to refer to the knowledge of reasonable managerial staff (which term shall refer to any person who, either formally or in substance, serves as a director, chief executive officer (CEO) or chief operating officer (COO), or any other senior executive who reports directly to the chief executive officer). For these purposes, if such managerial staff has not received any claims with respect to manufacturing processes and know-how that have been utilized consistently, or to products that have been sold, over a reasonably long period of time, such managerial staff shall be deemed to have acted reasonably when making the representations set forth in this Section 3.10 and Section 3.14 below, without conducting any special searches or investigation. (b) (i) no proceedings are pending or, to TAT's Knowledge, threatened, which challenge the use by TAT or any of the Subsidiaries of TAT of the Trade Secrets could have, if resolved unfavorably to TAT, a Material Adverse Effect; (ii) to TAT's Knowledge, no material infringement by TAT of any intellectual property right or other proprietary right of any third party has occurred, or will result in any way from the signing and execution of this Agreement or any of the other Transaction Documents or the consummation of any or all of the transactions contemplated hereby and thereby, and, no claim has been made by any third party based upon an allegation of any such infringement; and (iii) to TAT's Knowledge, there are no restrictions on the direct or indirect transfer of any license, or any interest therein, held by TAT or any Subsidiary in respect of the Trade Secrets. (c) No claim has been made in the last seven years prior to the date hereof by any third party that the use, disclosure or appropriation of Confidential Information not owned by TAT or any Subsidiary has been in material violation of the terms of a written agreement between TAT or such Subsidiary and the owner of such Confidential Information, or is otherwise materially unlawful. 3.11 Material Agreements and Claims TAT has delivered to the Investor a true and full copy of each of the material agreements, in effect on the date hereof, to which TAT or any of its Subsidiaries is a party (including all agreements with TAT Industries and the agreements referred to in TAT's filings) (the "Material Agreements"). For purposes of this Agreement, "Material" shall be determined based on the criteria for inclusion in TAT's 20-F filings. Except as set forth in Schedule 3.11(a) attached hereto, such Material Agreements are valid and in full force and effect on the date hereof, and neither TAT nor, to TAT's knowledge, any other party, has violated any material provision thereof, or committed or failed to perform any material act which with or without notice, lapse of time or both would constitute a fundamental beach under the provisions of, any Material Agreement except for violations or defaults which would not reasonably be likely to have a Material Adverse Effect. The enforceability of any Material Agreement will not be affected in any manner by, the existence of this Agreement and the Transaction Documents, or the consummation of the transactions contemplated hereunder or thereunder. 9 TAT Technologies PIPE 3.12 Employees TAT has delivered to the Investor complete copies of the material employment/engagement agreements currently in force for each of the five most highly paid individuals employed by TAT or any of its Subsidiaries, including TAT's CEO and Chairman of the Board of Directors and the President, both of which shall be amended by the Engagement Agreements, as of the Closing. 3.13 Labor Relations. There is not now or has been threatened any material labor dispute, strike, slow-down, picketing, work-stoppage, or other similar labor activity with respect to the employees of TAT. 3.14 Environmental Matters. Except as set forth in Exhibit 3.14 attached hereto, to TAT's Knowledge, TAT and each of its Subsidiaries, is in material compliance with applicable material environmental laws and regulations ("Environmental Laws") in effect on the date hereof. 3.15 Taxation. To TAT's knowledge and based on the advice of experts (employed by TAT's C.P.A), the Financial Statements as of December 31, 2003 make adequate provisions for taxation for which TAT is liable which has accrued, on or before December 31, 2003; provided, however, that based on prior experience, there may be deficiencies of not more than an aggregate of $100,000 with respect to withholding tax. 3.16 Insurance. To TAT's knowledge, and due to advice of its insurance agent, TAT has the benefit of adequate insurance against such risks as are usually and reasonably insured against by companies carrying on similar business. 3.17 Brokers. Except as set forth in Schedule 3.17, no person or firm has, or will have, as a result of any act or omission by TAT or anyone acting on behalf of TAT, any right, interest or valid claim against TAT or the Investor for any commission, fee or other compensation as a finder or broker or in any similar capacity with respect to the transactions contemplated under this Agreement. 3.18 Representations Complete. None of the representations or warranties made by TAT herein or in any Schedule or Exhibit hereto contain or will contain at the Closing Date (subject to the Compliance Certificate) any untrue statement of a material fact, or omit or will omit at the Closing Date to state any material fact necessary in order to make the statements contained herein or therein, in the light of the circumstances under which they were made, not misleading. 4. Representations and Warranties of the Investor ---------------------------------------------- The Investor hereby represents and warrants to TAT and acknowledges that TAT is entering into the TAT Transaction Documents in reliance thereon, as follows: 4.1 This Agreement and the other Transaction Documents, constitute valid, binding, and enforceable obligations of the Investor. 4.2 The Investor is an entity duly organized and validly existing under the laws of 10 TAT Technologies PIPE the State of Israel, and has all requisite power and authority to carry out the transactions contemplated hereby and under the Transaction Documents, and the execution, delivery and performance of the obligations of the Investor hereunder have been duly authorized by all necessary corporate action. 4.3 The Investor acknowledges that the offering and sale of the Shares is intended to be exempt from registration under the Securities Act by virtue of Section 4(2) of the United States Securities Act and the provisions of Regulation D there under. The Investor is a special purpose vehicle formed for the purpose of effecting the transactions contemplated herein. Each of the entities beneficially owning the Investor (whether directly or indirectly) is an "Accredited Investor", as such term is defined under Regulation D, and that such entity is a sophisticated investor that has experience in business and financial matters and is capable of evaluating the merits and risks relevant to TAT, its business, the markets in which TAT and Limco operate and to the transactions contemplated by this Agreement and the other Transaction Documents. For the purpose of clarity, it is hereby clarified that the Investor is aware of the fact that TAT is engaged in product manufacturing and sales in the aviation field of business and is, therefore, exposed to certain risks which are inherent to companies involved in product manufacturing and sales in such field of business. 4.4 Without derogating from the representations and warranties set forth in Section 3 above, the Investor and its auditors, legal counsels and other representatives have been given access to information regarding TAT and Limco and have utilized that access to their satisfaction in order to receive all such information as they considered necessary, required and advisable for deciding whether to enter into the investment contemplated by this Agreement and the other Transaction Documents, including but not limited to, the subscription for the Shares hereunder. 4.5 The execution and delivery of this Agreement and the other Transaction Documents, and the consummation of the transactions and the Investor's performance of its obligations herein and therein contemplated will not, whether with or without giving notice or the lapse of time or both (i) result in any conflict with, breach of, or default (or give rise to any right of termination, cancellation or acceleration or the loss of any benefit) under any of the terms, conditions or provisions of the Investor's organizational documents or of any material agreement, permit or other instrument or obligation to which the Investor is a party or is bound, or (ii) violate any law or regulation, or any order, injunction, or judgment of any court or any governmental bureau or agency, domestic or foreign applicable to the Investor. No consent or approval by any governmental authority is required in connection with the execution by the Investor of this Agreement and the other Transaction Documents, or the consummation by the Investor of the transactions contemplated hereby and thereby except for such actions, consents or approvals as have been obtained or will be obtained as of the Closing. 4.6 No Finders Fee. Except as set forth in Exhibit 4.6, no person or firm has, or will have, as a result of any act or omission by the Investor or anyone acting on its behalf, any right, interest or valid claim against TAT for any commission, fee or other compensation as a finder or broker or in any similar capacity, with respect to any of the transactions contemplated under this Agreement. 11 TAT Technologies PIPE 5. Confidentiality. --------------- 5.1 Without derogating from the non-disclosure undertaking executed by the Investor on January 19, 2004, the Investor undertakes that any Confidential Information (defined below) obtained or which shall be obtained in connection with the transactions contemplated herein and in the Transaction Documents, including information to be provided to the Investor prior to or following the Closing, will not be disclosed without the prior written consent of TAT. 5.2 For the purposes of this Agreement, "Confidential Information" shall mean all information, including, but not limited to, financial information, business plans, budgets, customer lists, computer software, source codes, plans, drawings, technical specifications, patents, copyrights, and other intellectual property rights, in any form (paper, disk, or other), relating to the business of TAT and its Subsidiaries. However, Confidential Information shall not include information which (a) was in the Investor's possession prior to its disclosure; (b) is or becomes available to the public through no fault of the Investor; (c) is required by law to be disclosed by the Investor, provided that the Investor gives TAT immediate written notice of such requirement prior to such disclosure; or (d) is rightfully received by the Investor from a third party without a duty of confidentiality. 5.A Management Fee. -------------- During the Term (as defined in the Shareholders Agreement), the Investor shall provide the Company with various management and consulting services (the "Services"), as shall be mutually determined by the Company and the Investor from time to time. Without derogating from the generality of the foregoing, the Services shall include service on the Company's Board of Directors of the two directors designated by the Investor, strategic guidance and consulting services to the Company (which, for illustration purposes only, may include introduction to potential customers and investors, consulting services with respect to the business and strategic alliances) as well as guidance and consulting services in connection with the management of the Company's Subsidiaries. The Services shall be provided on an as needed basis, as shall be mutually determined by the Company and the Investor from time to time. For such Services, TAT shall pay the Investor annual management fees (the "Management Fee") in accordance with the provisions contained in this Section 5A. The Management Fees shall be payable immediately following TAT's approval of its quarterly audited or reviewed consolidated financial statements for each of the first three fiscal quarters of the year and shall be equal to 3% of the excess of (w) TAT's operating income ("Revach Tifuli") for the applicable quarter, over (x) US$125,000, supplemented by applicable Value Added Tax ("VAT"); provided, however, that (A) immediately following TAT's approval of the annual consolidated financial statements of TAT for the calendar year (excluding 2004 and the last year of the Term, provided that it is not a full calendar year) then ended (prepared in accordance with U.S. GAAP), the Investor shall promptly receive (a) 3% of the excess of (y) TAT's operating income for the applicable year, over (z) US$500,000, less (b) the aggregate 12 TAT Technologies PIPE amount paid to the Investor in the three preceding fiscal quarters as set forth above (or, in the event that (b) exceeds (a) promptly return the excess amount to TAT); and (B) in any event, the Management Fee shall not exceed an aggregate of US$250,000 per annum (pro rated for parts of a calendar year). 6. Conditions to Closing --------------------- 6.1 Conditions to the Obligation of the Investor to Close. The obligation hereunder of the Investor to purchase the Shares and pay the Purchase Price is subject to the satisfaction of the Conditions Precedent set forth in Section 6.3 below (the "Conditions Precedent") and to the fulfillment at or before the Closing of the following Closing conditions (the "Investor Conditions"), any one or more of the Investor Conditions may be waived in writing, in whole or in part, by the Investor, which waiver shall be at the sole discretion of the Investor. (a) Accuracy of TAT's Representations and Warranties. Each of the representations and warranties of TAT shall be true and correct in all material respects as of the date when made and as of the Closing as though made on that time. (b) Performance by TAT. TAT shall have performed, satisfied and complied in all material respects with all conditions required by this Agreement to be performed (c) All Deliverables Ready. All documents and other items to be delivered to the Investor at the Closing as specified in Section 2.2 above, shall be duly executed, ready for delivery to the Investor, and in form and substance reasonably satisfactory to counsel for Investor (d) The following documents, executed on the Effective Date, shall have come into effect as of the Closing: (i) the Registration Rights Agreement (the "Registration Rights Agreement") attached hereto as Exhibit 6.1(d)(i), (ii) the Warrant Agreement (the "Warrant Agreement"), attached hereto as Exhibit 6.1(d)(ii), (iii) the Credit Line Agreement (the "Credit Line Agreement") attached hereto as Exhibit 6.1(d)(iii), and (iv) the shareholders' agreement (the "Shareholders Agreement") between the Investor and TAT Industries Ltd. (e) Capitalization. Except for any exercise of Outstanding Options, the share capital of TAT at the Closing shall be as described in Section 3.3(a) above. 6.2. Conditions to the Obligation of TAT to Close. The obligations hereunder of TAT to issue and sell the Shares and to grant the Warrant to the Investor are subject to the satisfaction of the Conditions Precedent and the fulfillment at or before the Closing of the following Closing conditions (the "TAT Conditions"), any one or more of the TAT Conditions may be waived in writing, in whole or in part, by TAT, which waiver shall be at the sole discretion of TAT. (a) Accuracy of the Investor Representations and Warranties. Each of the representations and warranties of the Investor shall be true and correct in all material 13 TAT Technologies PIPE respects as of the date when made and as of the Closing, as though made at that time. (b) Performance by the Investor. The Investor shall have performed, satisfied and complied in all material respects with all conditions required by this Agreement to be performed. (c) The Engagement Agreements shall have been executed and duly adopted by TAT and the agreements listed in Section 6(1)(d)(i)-(iv) shall have come into effect. 6.3. The transactions contemplated herein and in the Transaction Documents are subject to the satisfaction and fulfillment of the following Conditions Precedent, which may not be waived in whole or in part by the Parties, unless permitted by applicable law, in which case, such waiver shall require the mutual consent of both Parties, at their sole discretion: (a) The General Meeting of TAT's shareholders shall have approved the resolutions more fully set forth in Section 2.2.1(b) above. (b) The General Meeting of Shareholders of TAT Industries shall have approved (i) the Shareholders Agreement, and (ii) the participation in the General Meeting of Shareholders of TAT and the voting in favor of the resolutions referred to in sub-section (a) above. 6.4. It is hereby underlined that if, for any reason the Conditions Precedent (including the approval of the General Meetings of both TAT and TAT Industries) and the other Closing conditions set forth above (unless expressly waived in accordance with the provisions contained herein) are not met within 60 days from the date hereof, the Conditions Precedent shall be deemed to have not been fulfilled and this Agreement and the Transaction Documents will become null and void and neither Party shall have any claim or demand against the other Party with respect to such termination. 6.5. Notwithstanding anything to the contrary contained herein, in the event that compliance with the Conditions Precedent or any other Required Approval is contingent upon TAT's taking any action of which TAT is unaware on the date hereof and which is likely to adversely affect the commercial terms or the feasibility of the transactions contemplated in the TAT Transaction Documents, then TAT shall not be required to take such action(s), and will not be liable to the Investor, provided that it had promptly provided the Investor with written notice regarding its resolution not to obtain any Required Approval. 7. Survival of Representations and Warranties. ------------------------------------------ 7.1 All representations and warranties made by any Party in this Agreement shall survive the Closing and be in effect until the termination of two (2) years following the Closing Date (the "Representations and Warranties Period"), on which date they shall expire and be of no further force or effect, except that if a claim has been made during such two year period, the subject matter of the claim shall survive until the claim is finally resolved or settled. 14 TAT Technologies PIPE 7.2 Excluding in the case of fraud or intentional misrepresentation, if a claim is brought against TAT by the Investor during the Representations and Warranties Period and results in TAT being obligated to pay the Investor damages (the "Damages") in an aggregate amount - (i) higher than US$200,000 but less than US$1,000,000 - TAT shall promptly reimburse the Investor for such Damages in excess of US$200,000 (unless the court ruling had already taken into account the US$200,000 threshold in the damages it awarded, in which case the entire amount of Damages will become due and payable to the Investor) and such payment will be the sole and exclusive right and remedy available to the Investor with respect to such breach of representations and warranties; and (ii) equal to or higher than US$1,000,000, then TAT shall be entitled, at its sole discretion, (i) to promptly pay to the Investor the entire amount of Damages, or (ii) to cancel this Agreement and all other Transaction Documents by providing the Investor with prompt written notice, upon the receipt of which the Investor shall deliver the Shares and the Warrant (and any Warrant Shares, if the Warrant was exercised prior to such cancellation) to TAT in return for a full refund of the Purchase Price paid for such Shares and Warrant Shares (if applicable), in US dollars (reduced by any dividend distributions received by the Investor from TAT prior to the cancellation of this Agreement). For the avoidance of doubt and without derogating from the above, if the Loan (as defined in the Credit Line Agreement), had already been provided to the Company, then upon the termination of this Agreement and the Credit Line Agreement, all amounts due on account of the Loan shall immediately become due and payable. 7.3 For avoidance of doubt it is hereby clarified that, excluding in the case of fraud or intentional misrepresentation and other than, the above remedies, no adjustment of the Purchase Price or any other change of the terms hereunder or any other relief may be available to the Investor in a court of law as a result of a breach of representations or warranties under this Agreement or under applicable law. 7.4 Claims made hereunder may not be initiated by or on behalf of the Investor in respect of consequential damages or losses. 8. Miscellaneous. ------------- 8.1 Further Assurances. Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected hereby. 8.2 Governing Law; Dispute Resolution. This Agreement shall be governed by and construed according to the laws of the State of Israel, without regard to the conflict of laws provision thereof. Any claim arising under or in connection with this Agreement shall be resolved exclusively in the appropriate court in Tel-Aviv, Israel. Each of the parties hereby irrevocably consents to the exclusive jurisdiction of such courts and waives and agrees not to assert any objection to the jurisdiction or convenience thereof. 15 TAT Technologies PIPE 8.3 Assignment. Neither TAT nor the Investor may sell, assign, transfer, or otherwise convey any of its rights or delegate any of its duties or obligations under this Agreement. Except as otherwise expressly stated to the contrary herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns under law ("Ha'avara Al Pi Din"). 8.4 Entire Agreement; Amendment and Waiver. This Agreement and the Exhibits and Schedules hereto (including all of the TAT Transaction Documents) constitute the full and entire understanding and agreement between the parties with regard to the subject matters hereof. All prior understandings and agreements among the parties are void and of no further effect. Any term of this Agreement may be amended, waived, or discharged (either prospectively or retroactively, and either generally or in a particular instance), by a written instrument signed by all the parties to this Agreement. 8.5 Notices, etc. All notices and other communications required or permitted hereunder to be given to a party to this Agreement shall be in writing and shall be telecopied or mailed by registered or certified mail, postage prepaid, or otherwise delivered by hand or by messenger, addressed to such party's address as set forth below or at such other address as the party shall have furnished to each other party in writing in accordance with this provision: If to the Investor: TA-TOP, Limited Partnership c/o TA-TEK Ltd., its general partner c/o FIMI 2001 Ltd. "Rubinstein House" 37 Petach Tikva Road Tel: 03-5652244 Fax: 03-5652245 With a copy to: Sharon Amir, Adv. Naschitz, Brandes & Co. 5 Tuval Street Tel-Aviv 67897 Israel Facsimile: +972-3-623-5021 If to TAT: TAT Technologies Ltd. Industrial Zone, Yasur, Gedera, 70700 PO Box. 80 (70750) With a copy to: J. Zaltzman, J. Zaltzman & Co. 6 Hahilazon Street, Ramat-Gan 52522 16 TAT Technologies PIPE Facsimile: 03-6111801 Attn: Adv. Yossi Zaltzman or such other address with respect to a party as such party shall notify each other party in writing as above provided. 8.6 Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any other breach or default theretofore or thereafter occurring. Any waiver, permit, consent, or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law, or otherwise afforded to any of the parties, shall be cumulative and not alternative. 8.7 Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by such court of competent jurisdiction. 8.8 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument. 8.9 Heading, Preamble, and Exhibits. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. The Preamble and Exhibits are an integral and inseparable part of this Agreement. 8.10 Expenses. Each party hereto shall pay its own expenses in connection with the negotiation and preparation of this Agreement and the related agreements and the consummation of the transactions contemplated hereby and thereby, except that if the Closing is effected TAT shall pay the Investors' fees of professional advisors for performing accounting and legal due diligence and preparing this Agreement and all other TAT Transaction Documents, in an amount not to exceed $50,000 plus applicable Value Added Tax. 17 TAT Technologies PIPE IN WITNESS WHEREOF the parties have signed this Agreement as of the date first hereinabove set forth. TAT Technologies Ltd. TA-TOP, Limited Partnership c/o TA-TEK Ltd. its general partner By: __________________________ By:________________ Name: Name______________ Title: Title_______________ 18 EX-4.5 4 ex4_5.txt SHAREHOLDERS AGREEMENT DATED 6/15/04 EXHIBIT 4.5 Shareholders Agreement SHAREHOLDERS AGREEMENT THIS SHAREHOLDERS AGREEMENT (the "Agreement") is made and entered into as of this 15th day of June, 2004 (the "Effective Date") by and among (a) TAT Industries Ltd., a public Israeli company whose shares are traded on the Tel-Aviv Stock Exchange ("TAT Industries"), and (b) TA-TOP, Limited Partnership, a limited partnership registered under the laws of the State of Israel ("TATOP"). (Each of TAT Industries and TATOP shall be referred to herein as a "Shareholder" or a "Party" and collectively the "Shareholders" or the "Parties"). WHEREAS, TAT Technologies Ltd. (the "Company"), is an Israeli public company, whose shares are traded on Nasdaq; and WHEREAS, as of the Effective Date, TAT Industries holds [3,113,409] Ordinary Shares nominal value NIS 0.90 each of the Company, which represent [66.7%] of the Company's issued and outstanding share capital as of the date hereof; and WHEREAS, TATOP is a limited partnership wholly owned by (x) TA-TEK Ltd., an Israeli private company ("TA-TEK"), wholly owned by FIMI Opportunity Fund, L.P., a limited partnership formed under the laws of the State of Delaware (the "Delaware Fund"), and by (y) FIMI Israel Opportunity Fund, Limited Partnership, a limited partnership, registered in Israel (the "Israeli Fund" and, collectively with the Delaware Fund, the "Fund"); and WHEREAS, on the date hereof, (a) TATOP and the Company are entering into (i) a Share Purchase Agreement (the "SPA") pursuant to which TATOP will purchase from the Company, at the Closing, 857,143 Ordinary Shares of the Company; (ii) a Credit Line Agreement (the "Credit Line Agreement"), in the form attached to the SPA; and (iii) a Warrant Agreement (the "Warrant Agreement") in the form attached to the SPA; and (b) two Engagement Agreements (the "Engagement Agreements") have been signed between the Company and each of Shlomo Ostersetzer ("Ostersetzer") and Dov Zeelim ("Zeelim"). This Agreement, together with the Credit Line Agreement, the Warrant Agreement and the Engagement Agreements shall be referred to herein as the "Investment Agreements". WHEREAS, the Parties wish to set forth the terms and conditions relating to their relationship as shareholders of the Company, which terms and conditions shall automatically come into effect as of the Closing; and WHEREAS, the Investment Agreements will become effective upon the consummation of the Closing as such term is defined in the SPA. NOW, THEREFORE, in consideration of the mutual promises contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereto agree that during the Term (as defined in Section 12 hereunder) Shareholders Agreement the following provisions will apply: 1. Board of Directors of the Company --------------------------------- The Shareholders shall vote all of the Ordinary Shares of the Company, nominal value NIS 0.90 each (the "Ordinary Shares") now or hereafter owned or controlled by them (including without limitation, Ordinary Shares owned by them upon exercise of any options or warrants to purchase Ordinary Shares or upon conversion of any other convertible securities of the Company), whether beneficially or otherwise held by them, for the election to the Company's Board of Directors (the "Board") of: (i) three members (of whom at least one shall qualify as an "Independent Director" as such term is defined under the rules applicable to companies listed on the Nasdaq) who shall be designated by TATOP and (ii) six members (including the two External Directors, as such term is defined in the Companies Law-1999 (the "Companies Law"), that shall be designated by TAT Industries. The designating Party shall consult the other Party regarding the nomination of any new Director; provided, however, that the final decision with respect to the designation shall be made by the designating party and the other party shall vote for such designee. Subject to applicable law and the Company's Articles of Association, the Party designating a Director shall also be entitled, from time to time, to designate another person to replace such director; provided, however, that TATOP may not replace the Independent Director more frequently than once a year (unless such replacement is due to death or incapacity of the Independent Director). For the avoidance of doubt, no Shareholder, or any officer, director, shareholder or employee of such Shareholder, makes any representation or warranty as to the fitness or competence of the designee to the Board by virtue of its execution of this Agreement or by voting in accordance with the provisions of this Agreement. Each Shareholder (and the directors designated by it) shall be solely responsible for the compliance of its designee(s) with the requirements of applicable law relating to director's competency (including, without limitations, the provisions of Sections 226, 227 and 228 of the Companies Law). It is hereby clarified that the Management Fee payable to TATOP in accordance with the provisions of the SPA shall cover any and all remuneration (excluding out-of-pocket expenses) due to the Directors designated by TATOP to the Board and the boards of directors of the Company's subsidiaries but does not include reimbursement of expenses or remuneration due to the Independent Director appointed by TATOP, who shall be entitled to the same reimbursement of expenses or remuneration as shall be payable to the Company's External Directors. 2. Board of Directors of TAT's Subsidiaries. ----------------------------------------- The Shareholders shall direct the Directors designated by them (to the extent permitted by applicable law) to cause the Board to appoint at least one (1) director designated by TATOP to the board of directors of the Company's US subsidiary, LIMCO Airepair, Inc., and of any other subsidiaries controlled or which shall be controlled by the Company. 2 Shareholders Agreement 3. Chief Executive Officer of the Company ("CEO"); Chairman of the Board. ---------------------------------------------------------------------- The Parties acknowledge that Ostersetzer is currently the Company's Chairman of the Board and CEO and Zeelim is Vice Chairman of the Board and the Company's President and Chief Operating Officer. TATOP's prior written consent (which consent shall not be unreasonably withheld) shall have to be obtained prior to the replacement of any of the above-mentioned positions, provided, however, that such consent shall not be required for the appointment of Zeelim as Chairman of the Board; and, provided, further, that (i) Zeelim may not serve both as the CEO and Chairman of the Board, and (ii) in the event that TATOP rejects the third consecutive CEO candidate proposed by TAT Industries Isaac Forrer of Ernst&Young shall be appointed to determine whether or not TATOP's consent to such candidates and any subsequent candidates was unreasonably withheld. 4. Executive Committee ------------------- The Shareholders shall direct the Directors designated by them (to the extent permitted by applicable law) to cause the Board to form an Executive Committee (the "Executive Committee"), which shall be comprised of four members (of which one member shall be one of the directors designated by TATOP). The Executive Committee shall convene at least twice a month. For the avoidance of doubt it is hereby clarified that the Executive Committee may not bind the Company in any way. 5. Voting Undertaking; Amendment of Interested Party Transactions; Restriction on Sale of Company's Shares; Technology Transfer Agreement. ----------------------------------------------------------- 5.1 5.1.1 To the extent required, TAT Industries hereby irrevocably undertakes to vote in favor of the approval of the SPA and all ancillary agreements attached thereto (including, but not limited to, the Warrant Agreement, the Credit Line Agreement and the Registration Rights Agreement (as such terms are defied therein)) in the General Meeting of Shareholders of the Company. 5.1.2. No amendment to the terms or conditions of the engagement of, or other compensation to, Ostersetzer or Zeelim or any affiliates thereof other than immaterial amendments which are applied "across the board" to all other senior employees of the Company, shall be effected without TATOP's prior written consent. 5.1.3 TAT Industries hereby irrevocably waives, during the Term of this Agreement, any and all rights which it may have to receive payments from the Company in connection with the Know-How arrangement described in footnote 18(9)(3) of TAT Industries' financial statements for the fiscal year 2002. Furthermore, TAT Industries hereby irrevocably undertakes that the amounts due to the Company under the service arrangement between TAT Industries and the Company set forth in the Transfer Agreement between TAT Industries and the 3 Shareholders Agreement Company dated February 10, 2000, and all other terms and conditions of such services arrangement shall remain unchanged. For the avoidance of doubt, TAT Industries hereby irrevocably undertakes not to exercise its right under Section 11.7 of the Transfer Agreement to terminate such services arrangement and TATOP undertakes not to cause the Company to terminate such services arrangement. The foregoing undertakings shall remain in effect until the earlier to occur of (i) the termination of the Term of this Agreement, (ii) the date on which TAT Industries ceases to be a public company (as such term is defined in the Companies Law), or (iii) TAT Industries ceases to be in Control (as such term is defined in the Companies Law) of the Company. 5.2. (i) TATOP shall be prohibited from selling or otherwise transferring (except to its Permitted Transferees (as defined herein)) more than an aggregate of 150,000 Ordinary Shares of the Company during the first two years following the Closing (the "Lock-Up Period"). (ii) TAT Industries shall be prohibited from selling or otherwise transferring (except to its Permitted Transferees (as defined herein)) any Ordinary Shares of the Company during the Lock-Up Period; provided, however, that should Ostersetzer and/or Zeelim transfer to TAT Industries their right to sell shares of the Company (pursuant to that certain letter delivered by them to TATOP on the Effective Date and attached hereto as Exhibit 5.2), then TAT Industries shall be permitted to sell such number of Company shares covered by the transferred right, all upon the terms and conditions more fully set forth in said letter. It is hereby clarified that any permitted sale of Company's Shares according to this section 5.2 shall not be subject to the other Party's rights of First Offer and/or Tag Along under section 7 below. 6. Discussions Prior to Meetings. ------------------------------ Subject to the provisions of applicable law, the Shareholders shall meet regularly and in any event prior to each meeting of the Board of Directors of the Company and General Meeting of Shareholders of the Company and will review, discuss and attempt to reach a unified position with respect to principal issues on the agenda of each such meeting such as approval of TAT's annual budget, any merger or acquisition, sale of all or substantially all of the Company's assets, granting of stock options, creation of any debt (other than in the ordinary course of business), distribution of dividends, etc. 7. Right of First Offer; Tag-Along ------------------------------- (a) Following the termination of the Lock-Up Period under Section 5.2 above, if a Party (the "Selling Party") wishes to sell or otherwise transfer Ordinary Shares of the Company (the "Offered Shares"), it shall be required to first make an offer to the other Party (the "Offeree"), as set forth below. (b) The Selling Party shall send the Offeree a written offer (the "Offer") in which the Selling Party shall specify the following information: (i) the number of Offered Shares that the Selling Party proposes to sell or transfer; (ii) a representation and warranty that the Offered Shares shall be, at the time of their transfer, free and clear of Encumbrances; (iii) the minimum price in United States dollars (the "Minimum Price") that the Selling Party is 4 Shareholders Agreement prepared to receive for the Offered Shares in an immediate cash payment transaction; and (iv) whether the Selling Party intends to sell the Offered Shares by means of a "market trade". The Offer shall constitute an irrevocable offer made by the Selling Party to sell to the Offeree the Offered Shares all upon the terms specified in the Offer (including the Minimum Price and the Payment Term Threshold) or, in the case TATOP is the Offeree, to have such Offeree participate in such sale, all upon the terms applicable to the Selling Party pursuant to the provisions of sub-section (e) below. (c) The Offeree may notify the Selling Party in writing (the "Response") within 14 days of receipt of the Offer that it wishes to purchase all (but not less than all) of the Offered Shares upon the terms specified in the Offer. If the Offeree does not deliver the Response the Offeree shall be deemed to have notified the Selling Party that it does not wish to buy the Offered Shares. (d) If the Offeree delivers a Response in accordance with the above provisions, the Offered Shares shall become the property of the Offeree and shall be delivered to the Offeree against payment of the consideration as specified in the Offer. . The closing of such sale shall take place by no later than 10 business days following the delivery of the Response. If the Offeree does not deliver such Response, then the Selling Party may sell the Offered Shares to any third party, provided that such sale is consummated (i) within a 45 day period, (ii) at a price that is not lower than that the Minimum Price, and (iii) if the Offer provides that the sale shall have to be effected by means of "market trade", the Offered Shares will be sold only via market trade. (e) If TATOP is the Offeree, and it does not deliver a Response, but wishes to sell its Ordinary Shares together with the Offered Shares intended to be sold by T.A.T. Industries, TATOP shall, during such 14 day period, have the right to notify T.A.T. Industries that it is exercising its Tag Along Right pursuant to this sub-section (e) (the "Tag Along Notice"). Following the Tag Along Notice, TATOP shall add to the Ordinary Shares to be sold by T.A.T. Industries to a purchaser (the "Proposed Purchaser") that number of Ordinary Shares which bears the same ratio to the total number of Ordinary Shares held by TATOP, as the ratio that the number of Offered Shares bears to T.A.T. Industries' total number of Ordinary Shares on the date that the Offer Notice is delivered, and upon the same terms and conditions under which T.A.T. Industries' Ordinary Shares shall be sold. In the event that TATOP exercises its rights hereunder, T.A.T. Industries must either (i) add such Ordinary Shares to the Offered Shares being sold by it or (ii) at its sole discretion, reduce the number of Ordinary Shares that it proposes to sell, in which case, T.A.T. Industries and TATOP will contribute the identical portion of Ordinary Shares relative to their total shareholdings in the Company on the date the Offer Notice was delivered. Notwithstanding the foregoing, without derogating from TAT Industries' Right of First Offer, during the first five years following the Closing, TATOP shall give TAT Industries the Tag-Along right described above in the event that TATOP sells the Offered Shares, at a price per share that is greater than US$23.00 (which price shall be subject to adjustment for share splits, issuance of bonus shares or combinations of shares). (f) Notwithstanding the foregoing, the provisions of this Section 7 shall not apply (i) to any transfer of Ordinary Shares by a Shareholder to its Permitted Transferees (as defined below), 5 Shareholders Agreement provided that any such Permitted Transferee shall acknowledge in writing that it agrees to be bound by the provisions of this Agreement, as if it were an original party to this part of the Agreement and, provided, further, that FIMI 2001 Ltd. shall remain the exclusive representative with respect to any Permitted Transferee of TATOP or (ii) to the transfer of Ordinary Shares by a banking institution or holders of debentures that have been issued by a Shareholder to the public or to "institutional bodies" following the realization of a pledge, if any, over Ordinary Shares held by the Shareholder. For purposes of this Agreement, the term "Permitted Transferee" shall mean: (a) with respect to TATOP, (i) its partners, (ii) the shareholders or partners (as applicable) of such partners, (iii) any entity controlled by, controlling, or under common control with TATOP or FIMI 2001 Ltd., or (iv) a banking institution for the benefit of which a pledge was created over the Ordinary Shares of the Company held by TATOP; provided, that in the case of (i), (ii) and (iii) above, such transferees are solely and irrevocably represented by FIMI 2001 Ltd. pursuant to an irrevocable power of attorney for all purposes of this Agreement; and (b) with respect to TAT Industries, (i) to any of Ostersetzer or Zeelim, their holding companies or their immediate family members (i.e. spouses, children and the children's spouses), or (ii) an entity controlled by, or under common control with or controlling TAT Industries; or (iii) to TAT Industries' shareholders, if TAT Industries resolves to distribute its entire holdings in the Company to its shareholders, provided that the controlling holders of TAT Industries' shares shall acknowledge in writing that they agree to be bound by the provisions of this Agreement; or (iv) a banking institution or TAT Industries' security holders (including as a result of a public offering) for the benefit of which a pledge was created over the Ordinary Shares of the Company held by TAT Industries. (c) Notwithstanding the foregoing, except in connection with a transfer to a Permitted Transferee, a transaction or a series of transactions involving the sale of interests in TATOP and/or shares in TA-TEK following which the Fund beneficially holds less than 50% of the aggregate interests in both TATOP and TA-TEK, will be deemed as an offer of all the Ordinary Shares held by TATOP at a Minimum Price equal to the average closing price in NASDAQ during the last 30 trading days prior to the above change of holding. (d) Except with respect to the transfer of Ordinary Shares to Permitted Transferees, and without derogating from the provisions and rights contained herein, the Shareholders' rights under this Agreement may not be assigned to transferees without the consent of the other Shareholder. 8. Drag Along. ---------- Notwithstanding anything to the contrary set forth in this Agreement, in the event that a Shareholder (the "Selling Shareholder") secures a bona fide offer (the "Acquisition Offer") from any third party (the "Drag-Along Acquirer ") to purchase all of the Ordinary Shares held by such Selling Shareholder (and it is hereby clarified that for purposes of this Section 8 it shall also include the holdings of its Permitted Transferees) for immediately available funds, at a price per Ordinary Share of at least US$ 23.00 (the "Drag Along PPS"), and the Drag-Along Acquirer conditions the Acquisition Offer on the acquisition of 6 Shareholders Agreement all the Ordinary Shares held at such time by the other Shareholder (the "Drag-Along Party" which, for purposes of this Section 8 shall include also the holdings of its Permitted Transferees), the Selling Shareholder shall provide the Drag Along Party with written notice together with a copy of the Acquisition Offer (the "Drag Along Notice") and the Drag Along Party will be required to either (i) sell all of the Ordinary Shares then held by it to the Drag-Along Acquirer, at the same price and upon the same terms and conditions as those to which the sale by the Selling Shareholder is subject under the Acquisition Offer, provided that the sale of all the Ordinary Shares of the Selling Shareholder and the Drag Along Party shall be consummated by no later than 90 days following the receipt of the Drag Along Notice and, provided, further, that the Drag Along Party shall not be required to make any representations or warranties, except for customary representations regarding authorization and good and marketable title to the shares being sold; or (ii) provide the Selling Shareholder with written notice (the "Notice Extension") informing the Selling Shareholder that it wishes to receive an Extension (the "Extension"). In the event that an Extension Notice is delivered to the Selling Shareholder, the Drag Along Shareholder shall be required, by no later than three months following the receipt of the Drag Along Notice, to arrange for the sale of all of the Ordinary Shares held by the Selling Shareholder at a price per share that is not lower than the Drag Along PPS, and under terms and conditions that are no less favorable to the Selling Shareholder than those set forth in the Acquisition Offer or (b) acquire, upon the termination of such three month period, the Ordinary Shares then held by the Selling Shareholder, at a price per share equal to the Drag Along PPS and upon terms and conditions no less favorable than those set forth in the Acquisition Offer. The Drag-Along PPS shall be adjusted for share splits, issuance of bonus shares, or combinations of shares. No other adjustments (for dividend distributions, market conditions or for any other reason) shall be made to the Drag Along PPS. 9. Purchase of Additional Company Shares by TATOP ---------------------------------------------- TATOP hereby undertakes that without obtaining TAT Industries' prior written consent, it and the Affiliated Entities (as defined below) shall not, at any time during the term of this Agreement, purchase additional shares of the Company (including by exercise of the Warrant under the Warrant Agreement) such that its total holdings by TATOP and the Affiliated Entities would exceed 35% of TAT's issued and outstanding share capital. This undertaking refers to holdings by the following entities (the "Affiliated Entities"): TA-TEK, the Fund (including, for the purpose of clarity, the Delaware Fund and the Israeli Fund), FIMI 2001 Ltd., the Managing General Partner of the Fund and any non public entity controlled by each of them. For purposes of this Agreement, the terms "holding" and "control" shall have the meaning ascribed to such term in Section 1 of the Companies Law (which refers to the definition set forth in the Israeli Securities Law - 1968). 10. Dividend Distribution. ---------------------- Subject to applicable law, during the term of this Agreement, the Shareholders agree to direct the Directors designated by them (to the extent permitted by applicable law) to cause the Company to distribute annual dividends in an aggregate amount of at least 40% of the Company's profits (as determined under Section 302(b) of the Companies Law) for each 7 Shareholders Agreement relevant year. The Shareholders' internal agreement under this Section 10 shall not be deemed to constitute a dividend policy of the Company. Furthermore, the Shareholders may, by mutual consent, modify the foregoing agreement between the Parties regarding dividend distributions without being obligated to substantiate or explain any such modification to any third party. 11. The Investment Agreements. -------------------------- TAT Industries hereby agrees to vote all of the Ordinary Shares owned or controlled by it, whether beneficially or otherwise held by it, in order to cause the Company to adopt the Investment Agreements (excluding this Agreement, which requires the approval of the General Meeting of TAT Industries' Shareholders under the Israeli law). The Shareholders hereby agree to vote all of the Ordinary Shares owned or controlled by them, whether beneficially or otherwise held by them, in order to comply or, to the extent applicable, to cause the Company to comply, with the provisions and undertakings more fully set forth in the Investment Agreements. 12. Term. ---- This Agreement shall remain in effect until the seventh anniversary of the Closing ("the Term"); provided, however, that during the Term, TAT Industries may terminate this Agreement without liability, by providing TATOP with written notice, at any time following the date on which TATOP (together with its Permitted Transferees) holds less than 500,000 Ordinary Shares and TATOP may terminate this Agreement without liability by providing TAT Industries with written notice, as of the date on which TAT Industries (together with its Permitted Transferees) holds less than 1,500,000 Ordinary Shares. The number of Ordinary Shares set forth in this Section 12 shall be adjusted for any share splits, issuance of bonus shares and combinations of shares. It is hereby clarified that following the expiry of the Term or upon the prior termination of this Agreement, neither Party shall be bound by any of the provisions herein. 13 Miscellaneous. ------------- 13.1. Notices. All notices required or permitted hereunder to be given to a party pursuant to this Agreement shall be in writing and shall be deemed to have been duly given to the addressee thereof (i) if hand delivered, on the day of delivery, (ii) if given by facsimile transmission, on the business day on which such transmission is sent and confirmed, (iii) if given by air courier, five business days following the date it was sent or (iv) if mailed by registered mail, return receipt requested, two business days following the date it was mailed, to such party's address as set forth below or at such other address as such party shall have furnished to each other party in writing in accordance with this provision: If to TAT Industries: TAT Industries Ltd. Industrial Zone, Yasur, Gedera, 70700 8 Shareholders Agreement PO Box. 80 (70750) With a copy to: J. Zaltzman & Co. 6 Hahilazon Street, Ramat-Gan 52522 Facsimile: 03-6111801 Attn: Adv. J. Zaltzman If to TATOP: c/oTA-TEK, its general partner c/o FIMI 2001 Ltd. "Rubinstein House" 37 Petach Tikva Road Tel: 03-5652244 Fax: 03-5652245 With a copy to: Sharon A. Amir Nascitz, Brandes & Co. 5 Tuval Street, Tel-Aviv 67897 Israel Tel:03-6235073/76 Fax:03-6235021 or to such other address as the parties may from time to time designate in writing. 13.2. Waiver. Any waiver hereunder must be in writing, duly authorized and signed by the party to be bound, and shall be effective only in the specific instance and for the purpose for which it was given. No failure or delay on the part of any Shareholder in exercising any right, power or privilege under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. 13.3. Entire Agreement. This Agreement, together with the Investment Agreements (as defined in the TAT Purchase Agreement) and the exhibits and the documents furnished by the parties hereto in connection with the transactions contemplated herein constitute the entire agreement among the parties hereto and supersede any other agreement that may have been made or entered into by any person relating to the transactions contemplated by this Agreement. 13.4. Amendments This Agreement may be amended or modified in whole or in part only by a duly authorized written agreement that refers to this Agreement and is signed by the parties hereto. 13.5. Limitations on Rights of Third Parties. Nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give any person or entity (including the Company and its other shareholders) other than the Shareholders and their Permitted Transferees, any rights or remedies under this Agreement. 9 Shareholders Agreement This Agreement shall not inure to the benefit of, and shall not be enforceable by, any person or entity (including but not limited to the Company) that is not a Party hereto. 13.6. Captions The captions in this Agreement are inserted for convenience of reference only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement. 13.7. Counterparts. This Agreement may be executed in counterparts and by facsimile signature, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 13.8. Governing Law This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of Israel. Any dispute arising under or with respect to this Agreement shall be resolved exclusively in the appropriate court in Tel Aviv, Israel. 13.9. Further Assurances The parties hereto shall execute and deliver such additional documents and shall take such additional actions (including without limitation procuring such resolutions or regulatory approvals) as may be reasonably necessary or appropriate to effect the provisions and purposes of this Agreement and the consummation of the transactions contemplated hereby. 13.10. Severability . If any provision of this Agreement is held by a court of competent jurisdiction to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected, impaired or invalidated thereby. 13.11. Assignment. Except to the extent expressly permitted herein, each Party may not assign any portion of its respective rights, duties or obligations under this Agreement to any other person, without the prior written consent of the other Party. IN WITNESS WHEREOF, the Shareholders shall have each caused this Agreement to be duly executed as of the date first above written. TAT Industries Ltd. By________________________ Name______________________ Title_______________________ TATOP, Limited Partnership By: TA-TEK Ltd., its general partner By:_______________________ Name_____________________ Title______________________ 10 EX-4.6 5 ex4_6.txt REGISTRATION RIGHTS AGREEMENT DATED 4/15/04 EXHIBIT 4.6 REGISTRATION RIGHTS AGREEMENT by and among TAT Technologies Ltd. and TA-TOP, Limited Partnership JUNE 15, 2004 1 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement") is made as of the 15th day of June, 2004, by and among: (i) TAT Technologies Ltd. (the "Company"), an Israeli company whose shares are traded on Nasdaq, and (ii) TA-TOP, Limited Partnership (including its Permitted Traansferees and Assignees (as such terms are defined below), the "Investor"), a limited partnership wholly owned by (x) TA-TEK Ltd., an Israeli private company, wholly owned by FIMI Opportunity Fund, L.P., a limited partnership formed under the laws of the State of Delaware, and by (y) FIMI Israel Opportunity Fund, Limited Partnership, a limited partnership, registered in Israel ("FIMI"). WITNESSETH: WHEREAS, the Investor is the holder of 857,143 Ordinary Shares of the Company, nominal value NIS 0.90 and certain warrants to purchase Ordinary Shares of the Company, nominal value NIS 0.90, constituting an aggregate of approximately 15.5% of the Company's issued share capital. WHEREAS, the Investor and the Company desire to set forth certain matters regarding the registration rights of the shares of the Company held by the Investor. NOW, THEREFORE, in consideration of the mutual promises and covenants set forth herein, the parties hereby agree as follows: 1. DEFINITIONS; EFFECT OF AGREEMENT. Definitions. As used herein, the following terms have the following meanings: "Commission" means the United States Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. "Control" means direct or indirect ownership of more than 50% of the equity or voting capital of an entity, or possession of the right and power to direct the policy and management of such entity. "Form F-3" means Form F-3 under the Securities Act, as in effect on the date hereof or any registration form under the Securities Act subsequently adopted by the Securities and Exchange Commission (the "SEC") which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "Holder" means any holder of Registrable Shares. 2 "Ordinary Shares" means the Ordinary Shares of the Company, par value NIS 0.90, subject to a Reclassification Event. "Permitted Transferee" shall mean a person or entity which receives shares pursuant to the transfer of all or any of the shares held by TA-TOP, Limited Partnership (the "Transferor") to: (i) its partners, (ii) the shareholders or partners (as applicable) of such partners, (iii) any entity controlled by, controlling, or under common control with either such Transferor or FIMI 2001 Ltd., or (iv) a banking institution for the benefit of which a pledge was created over the Ordinary Shares of the Company held by TA-TOP, Limited Partnership; provided, that in the case of (i), (ii) and (iii) above, such transferees are solely represented by FIMI 2001 Ltd. pursuant to an irrevocable power of attorney for all purposes of this Agreement. "Person" means an individual, fund, company, unincorporated association, trust, joint venture, governmental agency, or other entity, whether domestic or foreign. "Reclassification Event" means any share combination or subdivision (split), bonus shares or any other recapitalization of the Company's shares. "Register", "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act and the declaration or ordering by the SEC of effectiveness of such registration statement. "Registrable Shares" means Ordinary Shares held by the Investor and its Permitted Transferees, any bonus shares and share dividends payable with respect to such shares, and Ordinary Shares of the Company which hereafter may be purchased or acquired by the Investor. Notwithstanding the foregoing, Registrable Shares shall not include otherwise Registrable Shares (i) sold to or through a broker or dealer or underwriter in a public distribution or a public securities transaction, or (ii) which could be disposed of, under applicable law, within three (3) months without registration, pursuant to Rule 144. "Rule 144" shall mean Rule 144 under the Securities Act or any successor or similar rule as may be enacted by the Commission from time to time. "Securities Act" means the United States Securities Act of 1933, as amended. 2. INCIDENTAL REGISTRATION. 2.1. If, at any time the Company proposes to register any of its securities for itself (the "Company's Securities") or for any other person, other than (a) in a registration under Section 3 of this Agreement or (b) a registration on Form S-8 or Form F-4, the Company shall give notice to the Investor of such intention, at least 20 days prior to the filing of the registration statement in connection with such registration. Upon the written request of the Investor given within ten (10) 3 days after receipt of any such notice, the Company shall include in such registration (subject to Section 2.2 below) all of the Registrable Shares indicated in such request of the Investor, so as to permit the disposition of the shares so requested. 2.2. Notwithstanding any other provision of this Section 2, if the managing underwriter selected by the Company or the initiating person, if any, advises the Company in writing that in its opinion the number of securities requested to be included in such registration exceeds the number that can be sold in such offering without adversely affecting such underwriter's ability to effect an orderly distribution of such securities or materially affecting the contemplated price of such securities, the Company will include in such registration: (i) first, the Company's Securities; (ii) second, the number of Registrable Shares requested to be included by the Investor, which in the opinion of such underwriter, can be sold. 3. DEMAND REGISTRATION. 3.1. At any time the Investor may request in writing that all or part of its Registrable Shares shall be registered under the Securities Act. Thereafter, the Company shall, as promptly as practicable, and in any event within 3 (three) months of the written request of the Investor, make best reasonable efforts to effect the registration of all Registrable Shares indicated in the written request by the Investor, and any related qualification or compliance, on the form customarily used for such purposes (a "Demand"). 3.2. Following the date hereof, the Investor shall be entitled to an aggregate of two (2) Demands. 3.3. Notwithstanding any other provision of this Section 3, no Demand shall be binding on the Company if: (i) the Company has filed any registration statement for the registration of its equity securities (other than on a form S-8 or similar registration for employee shares) within the previous one hundred and twenty (120) days, or (ii) the anticipated proceeds from the sale of the shares to be included in the Registration is less than Five Million United States Dollars ($5,000,000). In addition, if the Company shall furnish to the Investor a certificate signed by the Chief Executive Officer of the Company stating that, in the good faith judgment of the Board of Directors, it would be detrimental to the Company for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer such filing for a period of not more than one hundred and eighty (180) days after receipt of the request of the Investor (the "Delay Period"). The Company agrees that it shall not file any other registration statement on behalf of itself or any other party during such Delay Period. 4 3.4. Any registration proceeding begun pursuant to Section 3.1 that is subsequently withdrawn at the request of the Investor shall not count toward the quota of Demands set forth in Section 3.2 above, if such withdrawal is based upon material adverse information relating to the Company or its condition, business and prospects which is different from that generally known to the Investor at the time of its request. 3.5. Notwithstanding any other provision of this Section 3, if the Investor advises the Company , in writing, that in the managing underwriter's opinion the number of securities requested to be included in such registration exceeds the number that can be sold in such offering without adversely affecting such underwriter's ability to effect an orderly distribution of such securities or materially affecting the contemplated price of such securities, the Company will include in such registration the number of Registrable Shares requested by the Investor to be included that, in the opinion of such underwriters, can be sold, in the registration. 3.6. F-3 Registration. In any case that the Company shall receive from the Investor a written request or requests that the Company effect a registration on Form F-3 and any related qualification or compliance with respect to Registrable Shares where the aggregate net proceeds from the sale of Registrable Shares equal to at least three million United States Dollars ($3,000,000) and the Company shall be entitled to effect such registration under applicable law, the Company shall effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all such Registrable Shares as are specified in the request; provided, however, that the Company shall not be obligated to effect any such registration, qualification, or compliance, pursuant to this Section 3.6 if the Company has, within the eighteen (18) month period preceding the date of such request, already effected one (1) registration for the Investor pursuant to this Section 3.6. The Company undertakes that it will, once having qualified for registration on Form F-3, use its best efforts to comply with all necessary filings and other requirements so as to maintain such qualification for a period of two (2) years. 3.7. Black Out Periods. At any time when a registration statement effected hereunder relating to Registrable Shares is effective, upon written notice from the Company to the Investor that either: (i) the Board of Directors of the Company, in its reasonable judgment, resolves that the Investor's sale of Registrable Shares pursuant to the registration statement would adversely interfere with any major acquisition, corporate reorganization or other similar transaction involving the Company (a "Transaction Blackout"); or (ii) the Company determines, in the good faith judgment of the general counsel of the Company, that the Investor's sale of Registrable Shares pursuant to the 5 registration statement would require disclosure of material information that the Company has a bona fide business purpose for preserving as confidential or the Company is unable to comply with Commission requirements and that such disclosure will be detrimental to the Company (an "Information Blackout"); then the Investor shall suspend sales of Registrable Shares pursuant to such registration statement until the earlier of: (A) (1) in the case of a Transaction Blackout, the earliest of (a) one month after the completion of such acquisition, corporate reorganization or other similar transaction; (b) promptly after abandonment of such acquisition, corporate reorganization or other similar transaction; and (c) 120 days after the date of the Company's written notice of Transaction Blackout; or (2) in the case of an Information Blackout, the earlier of (a) the date upon which such material information is disclosed to the public or ceases to be material; and (b) 120 days after the Company makes such good faith determination, and (B) such time as the Company notifies the Investor that sale pursuant to such registration statement may be resumed. 4. DESIGNATION OF UNDERWRITER. 4.1. In the case of any registration effected pursuant to Section 3, should the offering be underwritten, the Company and the Investor shall confer as to the selection of a managing underwriter. Should they fail to reach agreement, the selection shall be made by the Investor. 4.2. In the case of any registration initiated by the Company under Section 2, the Company shall have the right to designate the managing underwriter in any underwritten offering. 5. EXPENSES. All expenses incurred in connection with any registration under Sections 2 or 3 shall be borne by the Company; provided, however, that the Investor shall pay its pro rata portion of the discounts or commissions payable to any underwriter and shall bear its own attorney's fees and disbursements. 6. INDEMNIFICATION AND CONTRIBUTION. In the event of any registered offering of Ordinary Shares pursuant to this Agreement: 6.1. The Company will indemnify and hold harmless, to the fullest extent permitted by law, the Investor participating in a registration and any underwriter who participates as an underwriter in such registered offering, and each person, if any, who controls the Investor or such underwriter, from and against any and all losses, damages, claims, liabilities, joint or several, costs and expenses (including any amounts paid in any settlement effected with the Company's 6 prior written consent) to which the Investor or any such underwriter or controlling person may become subject under applicable law or otherwise, insofar as such losses, damages, claims, liabilities (or actions or proceedings in respect thereof), costs or expenses arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the registration statement or included in the prospectus, as amended or supplemented, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they are made, not misleading, and the Company will reimburse the Investor, any underwriter and each such controlling person of the Investor or the underwriter, promptly upon demand, for any reasonable legal or any other expenses incurred by them in connection with investigating, preparing to defend or defending against or appearing as a third-party witness in connection with such loss, claim, damage, liability, action or proceeding; provided, however, that the Company will not be liable towards the Investor, the underwriter or controlling person to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or omission in such registration statement or prospectus so made in conformity with information furnished to the Company in writing by the Investor, such underwriter or such controlling persons specifically for use in such registration statement; provided, further, that this indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; provided, further, that the indemnity agreement contained in this Section 6.1 shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Company, which consent shall not be unreasonably withheld. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of the Investor, the underwriter or any controlling person of the underwriter, and regardless of any sale in connection with such offering by the Investor. Such indemnity shall survive the transfer of securities by a Holder but in no event shall the Company pay more than once in respect of any loss, damage, claim or liability; or (iii) indemnification of the Investor against any violation or alleged violation by the Company of the Securities Act of 1933, Securities Exchange Act of 1934 or the state securities laws of individual U.S. states. 6.2. The Investor participating in a registration will indemnify and hold harmless the Company, any underwriter for the Company, and each person, if any, who controls the Company or such underwriter, from and against any and all losses, damages, claims, liabilities, costs or expenses (including any amounts paid in any settlement effected with the Investor's consent) to which the Company or any such controlling person and/or any such underwriter may become subject under applicable law or otherwise, insofar as such losses, damages, claims, 7 liabilities (or actions or proceedings in respect thereof), costs or expenses arise out of or are based on (i) any untrue statement or alleged untrue statement of any material fact contained in the registration statement or included in the prospectus, as amended or supplemented, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading, and the Investor will reimburse the Company, any underwriter and each such controlling person of the Company or any underwriter, promptly upon demand, for any reasonable legal or other expenses incurred by them in connection with investigating, preparing to defend or defending against or appearing as a third-party witness in connection with such loss, claim, damage, liability, action or proceeding; in each case to the extent; provided, however, that the Investor shall be liable in any such case only to the extent that any such loss, damage, liability, cost or expense arises out of or is based upon an untrue statement or omission in such registration or prospectus made in strict conformity with written information furnished to the Company by the Investor specifically for use in such registration statement; and provided, further, that this indemnity shall not be deemed to relieve any underwriter of any of its due diligence obligations; and provided, further, that the indemnity agreement contained in this Section 6.2 shall not apply to amounts paid in settlement of any such claim, loss, damage, liability or action if such settlement is effected without the consent of the Investor, as the case may be, which consent shall not be unreasonably withheld. In any event, the indemnification obligations under this Section 6.2 shall not exceed the net proceeds received by the Investor pursuant to the public offering. 6.3. Promptly after receipt by an indemnified party pursuant to the provisions of Sections 6.1 or 6.2 of notice of the commencement of any action involving the subject matter of the foregoing indemnity provisions, but in any event no fewer than ten (10) days before the date designated in such notice as the date by which an answer must be served (or such extension thereof, provided that the extension has been granted in writing by the plaintiff and that no admission or consent to jurisdiction or other waiver has been granted or implied by the request for such an extension), such indemnified party will, if a claim thereof is to be made against the indemnifying party pursuant to the provisions of said Sections 6.1 or 6.2, promptly notify the indemnifying party of the commencement thereof. In case such action is brought against any indemnified party and it notifies the indemnifying party of the commencement thereof, the indemnifying party shall have the right to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, that if the defendants in any action include both the indemnified party and the indemnifying party and there is a conflict of interests which would 8 prevent counsel for the indemnifying party from also representing the indemnified party, the indemnified party or parties shall have the right to select one separate counsel to participate in the defense of such action on behalf of such indemnified party or parties. After notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party pursuant to the provisions of said Sections 6.1 or 6.2 for any legal or other expense subsequently incurred by such indemnified party in connection with the defense thereof, unless (i) the indemnified party shall have employed counsel in accordance with the provision of the preceding sentence, (ii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after the notice of the commencement of the action and within 15 days after written notice of the indemnified party's intention to employ separate counsel pursuant to the previous sentence, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party. No indemnifying party will consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect to such claim or litigation. 6.4. Contribution. If for any reason the foregoing indemnity is unavailable, or is insufficient to hold harmless an indemnified party, then the indemnifying party shall contribute to the amount paid or payable by the indemnified party as a result of such losses, claims, damages, liabilities or expenses (i) in such proportion as is appropriate to reflect the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other from the registration or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, or provides a lesser sum to the indemnified party than the amount hereinafter calculated, in such proportion as is appropriate to reflect not only the relative benefits received by the indemnifying party on the one hand and the indemnified party on the other but also the relative fault of the indemnifying party and the indemnified party as well as any other relevant equitable considerations. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 7. OBLIGATIONS OF THE COMPANY. Whenever required under this Agreement to effect the registration of any Registrable Shares, the Company shall, as expeditiously as possible: 9 7.1. (i) prepare and file with the SEC a registration statement with respect to such Registrable Shares and use its best efforts to cause such registration statement to become effective, (ii) upon the request of the Investor , keep a registration statement effective until the earlier of (i) the distribution contemplated in the Registration Statement has been completed, and (ii) the termination of 24 months. 7.2. prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be reasonably necessary to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Shares covered by such registration statement. 7.3. furnish to the Investor a copy of the prospectus, including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as it may reasonably request in order to facilitate the disposition of Registrable Shares owned by it. 7.4. in the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter of such offering. The Investor shall also enter into and perform its obligations under such an agreement. 7.5. notify the Investor holding Registrable Shares covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 7.6. cause all Registrable Shares registered pursuant hereunder to be listed on the securities exchange on which similar securities issued by the Company are then listed. 7.7. provide a transfer agent and registrar for all Registrable Shares registered pursuant hereunder and a CUSIP number for all such Registrable Shares, in each case not later than the effective date of such registration. 7.8. take such action as is required under the securities laws of such states of the United States as the Investor shall reasonably request; provided, however, that the Company shall not be required to qualify to do business as a foreign corporation, or to file any general consent to service of process, in any state. 10 7.9. furnish to the Investor, should the Investor request registration of Registrable Shares pursuant to this Agreement, on the date that such Registrable Shares are delivered to the underwriters for sale in connection with a registration pursuant to this Agreement, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated such date, of the counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Investor and (ii) a letter dated such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering, addressed to the underwriters, if any, and to the Investor. 8. CONDITIONS TO REGISTRATION OBLIGATIONS. The Company shall not be obligated to effect the registration of Registrable Shares pursuant to this Agreement unless the Investor consents to the following conditions: 8.1. conditions requiring the Investor to comply with all applicable laws (including Israeli law, to the extent applicable, the provisions of the Securities Act and the Securities and Exchange Act (including, but not limited to, the prospectus delivery requirements of the Securities Act), and to furnish to the Company information about sales made in such public offering; 8.2. conditions prohibiting the Investor upon receipt of telegraphic or written notice from the Company that it is required by law to correct or update the registration statement or prospectus from effecting sales of the Registrable Shares until the Company has completed the necessary correction or updating; and 8.3. conditions prohibiting the sale of Registrable Shares by the Investor during the process of the registration until the Registration Statement is effective. 9. ASSIGNMENT OF REGISTRATION RIGHTS. The Investor may assign its rights to cause the Company to register pursuant to this Agreement all or part of its Registrable Shares to a purchaser of at least 20% of the Ordinary Shares (each, an "Assignee") held by the Investor (i.e. no more than five Assignees) or to a Permitted Transferee if such person would hold such shares as restricted securities and would not be able to dispose of such shares under Rule 144 within three months from the date of such sale. The transferor shall, within twenty (20) days after such transfer, furnish the Company with written notice of the name and address 11 of such transferee and the securities with respect to which such registration rights are being assigned, and the transferee's written agreement to be bound by this Agreement. 10. LOCK-UP AND OTHER REQUIREMENTS OF THE INVESTOR. In any registration of the Company's shares pursuant to Sections 2 or 3 above, the Investor agrees that any sales of Registrable Shares may be subject to a "lock-up" period restricting such sales for up to one hundred and eighty (180) days, and the Investor will agree to abide by such customary "lock-up" period of up to one hundred and eighty (180) days as is required by the underwriter in such a registration and further agree to execute such further documents as may be required by the underwriters to effectuate such "lock-up". In addition, the Investor may not participate in any underwritten registration hereunder unless such person (i) agrees to sell such person's securities on the basis provided in any customary underwriting arrangements and (ii) provides any relevant information and completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements, and other documents required under the terms of such underwriting arrangements. 11. RULE 144. The Company shall: 11.1. Make and keep available adequate current public information with respect to the Company within the meaning of Rule 144(c) under the Securities Act (or similar rule then in effect); 11.2. Furnish to the Investor forthwith upon request one of the following, at the discretion of the Company (i) a written statement by the Company as to its compliance with the informational requirements of Rule 144(c) (or similar rule then in effect) or (ii) a copy of the most recent annual or quarterly report of the Company; and 11.3. Use its best efforts to comply with all other necessary filings and other requirements so as to enable the Investor and any transferee thereof to sell Registrable Shares under Rule 144 under the Securities Act (or similar rule then in effect). 12 12. OTHER REGISTRATION RIGHTS The Company shall not grant registration rights with respect to any securities of the Company to any Person that are equalor superior to the registration rights granted to the Investor pursuant to this Agreement, except with the written consent of the Investor. 13. MISCELLANEOUS 13.1. Further Assurances. Each of the parties hereto shall perform such further acts and execute such further documents as may reasonably be necessary to carry out and give full effect to the provisions of this Agreement and the intentions of the parties as reflected thereby. 13.2. Governing Law; Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Israel; provided, however, that with respect to maters specifically related to the federal securities laws pf the United States, such laws shall govern. All disputes arising under this Agreement or in connection with the transactions hereunder shall be resolved between the parties in good faith. If the parties hereto fail to agree within twenty (20) days after a party shall have requested such Arbitration, the parties shall select an arbitrator, by mutual agreement. The proceedings will take place in Tel-Aviv, Israel. The arbitrator shall not be bound by any judicial rules of evidence or procedure but shall be bound by the substantive law of the State of Israel and will have to elaborate the grounds of his/her decision. The arbitral award shall be final and binding upon the parties, and judgment upon the award may be entered in any court having jurisdiction, or application may be made to such Court for a judicial acceptance of the award or for an order of enforcement, as the case may be. 13.3. Successors and Assigns; Subject to the provisions contained in this Agreement, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto. None of the rights, privileges, or obligations set forth in, arising under, or created by this Agreement may be assigned or transferred, except as expressly set forth in this Agreement. Without derogating from the provisions of the previous paragraph, no assignment or transfer under this Section 13.3 shall be made unless the transferee agrees to be bound by all agreements binding upon the transferor immediately prior to such transfer. 13.4. Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subject matter hereof. 13 13.5. Amendments. Any term of this Agreement may be amended with the written consent of the Investor and the Company. 13.6. Section Headings; Preamble. All article and section headings are inserted for convenience only and shall not modify or affect the construction or interpretation of any provision of this Agreement. The preamble to this Agreement is incorporated herein and forms an integral part of this Agreement. 13.7. Communications. All notices or other communications hereunder shall be in writing and shall either be given in person, sent by registered mail (registered international air mail if mailed internationally), sent by an overnight courier service which obtains a receipt to evidence delivery, or transmitted by facsimile transmission (provided that written confirmation of receipt is provided), to the last known address of the addressee or to such other address as such party shall notify the others in writing. All notices and other communications delivered in person or by courier service shall be deemed to have been given as of three business days after sending thereof, those given by facsimile transmission shall be deemed given twenty-four hours following transmission, and all notices and other communications sent by registered mail (or air mail if the posting is international) shall be deemed given ten (10) days after posting. 13.8. Delays or Omissions. No delay or omission to exercise any right, power, or remedy accruing to any party upon any breach or default under this Agreement, shall be deemed a waiver of any such breach or default. Any waiver, permit, consent, or approval of any kind or character on the part of any party of any breach or default under this Agreement, or any waiver on the part of any party of any provisions or conditions of this Agreement, must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement or by law or otherwise afforded to any of the parties, shall be cumulative and not alternative. 13.9. Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, then such provision shall be excluded from this Agreement and the remainder of this Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms; provided, however, that in such event this Agreement shall be interpreted so as to give effect, to the greatest extent consistent with and permitted by applicable law, to the meaning and intention of the excluded provision as determined by arbitration. 13.10. Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and enforceable against the parties actually executing such counterpart, and all of which together shall constitute one and the same instrument. 14 IN WITNESS WHEREOF, the parties have signed this Agreement as of the date first hereinabove set forth. TAT TECHNOLOGIES LTD. By____________________ Name Title TA-TOP, Limited Partnership By____________________ Name: Title 15 EX-4.7 6 ex4_7.txt CREDIT LINE AGREEMENT DATED 6/15/04 EXHIBIT 4.7 TAT Credit Line Agreement CREDIT LINE AGREEMENT --------------------- This Credit Line Agreement (the "Agreement") is made as of the 15th day of June, 2004 BY AND BETWEEN (1) TAT Technologies Ltd. (the "Company"), an Israeli public company, whose shares are traded on Nasdaq, having its registered office at the Industrial Zone Yasur, Gedera, Israel; and (2) TA-TOP, Limited Partnership ("TATOP") (Registration Number: 550216964), a limited partnership wholly owned by (x) TA-TEK Ltd., the General Partner of TATOP, an Israeli private company, wholly owned by FIMI Opportunity Fund, L.P., a limited partnership formed under the laws of the State of Delaware, and by (y) FIMI Israel Opportunity Fund, Limited Partnership, a limited partnership, registered in Israel (the "Opportunity Fund"). RECITAL ------- WHEREAS, the Company has requested that TATOP make available to the Company, and TATOP has agreed to make available to the Company, a line of credit (the "Credit Line"), all upon the terms and conditions more fully set forth herein, which Credit Line shall come into effect as of the Closing (as such term is defined in that certain Share Purchase Agreement (the "SPA")) entered into by the Company and TATOP on the date hereof). THEREFORE, in consideration of the foregoing, the parties, intending to be legally bound, agree as follows: 1. CREDIT LINE ----------- Upon the terms and subject to the conditions set forth in this Agreement and on the basis of the representations and warranties set forth in the SPA (which representations and warranties shall survive the Closing and shall remain in effect until the second anniversary of the Closing on which date they shall expire and be of no force and effect for all intents and purposes, including for the purpose of this Agreement. TATOP agrees to make available to the Company, effective as of the Closing Date (as such term us defined in the SPA), the Credit Line, all upon the following terms and conditions: (i) General. The aggregate amount of Credit Line provided by TATOP and available to be drawn upon by the Company shall be US$2 million (the "Credit Amount"). (ii) Single Installment. The Company shall be entitled to draw any amount up to the Credit Amount in a one-time single installment. The amount to be drawn (the "Loan"), shall be in the amount set forth in the Disbursement Request (as defined below) and shall be delivered to TATOP, against the receipt of a non-assignable note (the "Note") executed by the Company to the order of TATOP only, in the form attached hereto as Exhibit A. 2 TAT Credit Line Agreement Notwithstanding anything to the contrary contained herein, no amount may be drawn on the Credit Line if: (a) one or more of the Events of Default described in Section 3(a) below has occurred; or (b) the average closing price of the Company's Ordinary Shares as recorded on the Nasdaq over the 90 consecutive trading days prior to the Request Date (as defined below) is lower than US$5.00, or (c) the closing price of the Company's Ordinary Shares as recorded on the NASDAQ at any time during the 30 consecutive trading days prior to the Request Date is lower than US$2.06. For the avoidance of doubt, it is hereby underlined that this Agreement constitutes a binding and, except as expressly set forth herein, independent obligation (including, but not limited to, the obligation to provide the Loan at the request of the Company in accordance with the terms contained herein) of TATOP enforceable against TATOP, and shall not be affected by whether or not, at any time, TATOP holds any shares of the Company or the circumstances (including in the financial markets) will be changed for any reason. TATOP. may not set off or hold the Credit Amount for any reason. (iii) Disbursement Request. The Loan shall be made available to the Company by no later than 14 business days following the date on which TATOP receives a written disbursement request (the "Disbursement Request") from the Company, which request shall state the amount which the Company elects to borrow from TATOP, provided that such amount shall not be less than US$1,000,000 and shall not exceed the Credit Amount. The date on which such Disbursement Request is delivered to TATOP shall be referred to herein as the "Request Date". The Disbursement Request may be delivered to TATOP by no later than 14 business days prior to the termination of the Availability Period (as defined below). (iv) Credit Line Term. The Credit Line will be made available to the Company as of the Closing and for a period of 54 months following the Closing (the "Availability Period"); provided, however, that upon the making of the Loan in accordance with the Disbursement Request, any balance of the Credit Line remaining and not drawn upon shall be terminated and, provided, further, that the Company may, at any time during the Availability Period, by providing TATOP with a 30-day prior written notice, (a) terminate the Credit Line, or (b) reduce the Credit Line (provided that, unless terminated, the Credit Line shall remain in an amount of at least US$1 million), in which cases, the Credit Line Fee (described below) shall be reduced, effective as of the actual termination of the 30 day period set forth above. (v) Loan Term. The term of the Loan shall commence on the date on which the Loan is actually granted to the Company (the "Loan Date") and shall terminate at the end of the sixty six (66) month period following the date of the Closing. (vi) Interest. The annual rate of interest shall be fixed at 5% and shall be compounded annually on the outstanding principal of the Loan as of the Loan Date and until payment in full of the outstanding principal of the Loan pursuant to the provisions contained herein. Interest on the Loan shall be computed on the basis of a 365-day year. (vii) Payment of Interest. Interest shall be paid on the last day of each quarter, commencing as of the Loan Date, with each payment being supplemented by applicable value added tax against delivery of a tax invoice. 3 TAT Credit Line Agreement (viii) Payment of Principal. Subject to the Event of Default provisions described below, the principal amount of the Loan shall be repaid in four equal installments in equal intervals (subject to the following provisos) over the period commencing on the Loan Date and terminating at the end of the sixty six month period following the date of the Closing; provided that no return of principal shall be due before the termination of 30 months following the Closing; and provided, further, that the first installment shall not become due and payable prior to the first anniversary of the Loan Date and the remaining three installments shall be paid in equal intervals with the last installment being payable upon the termination of the aforementioned sixty six month period. (ix) Prepayment. On each interest payment date, the Company may prepay, without incurring any penalty or charge amounts due on account of the Loan; provided, however, that each prepayment amount shall be in an amount of at least US$100,000, and provided further that the Company has given TATOP an advance written notice of each such prepayment by no later than 30 days prior to such interest payment date. (x) Currency; Manner of Payment. The delivery of the Loan to the Company by TATOP and all payments that are to be paid to TATOP by the Company, pursuant to this Agreement, shall be paid in US Dollars. Payment to be made to TATOP shall be transferred to TATOP's bank account, as shall be designated by TATOP from time to time in a written notice delivered by TATOP to the Company. The Company shall make such payments to such bank account by initiating such payments on a banking day, before 11.00 a.m., Israel time, by bank wire transfer in immediately available funds, marked for attention as indicated. (xi) Credit Line Fee. As of the Closing and for so long as the Credit Line is outstanding, the Company shall pay TATOP a fee equal to 0.5% of the outstanding Credit Amount per annum (subject to reduction during the year in accordance with the provisions of sub-Section (iv) above). The first Credit Line Fee shall be paid at the Closing and shall apply to the first full year following the Closing. Thereafter, upon each anniversary of the Closing, the Credit Line Fee shall be paid in advance with respect to the annual (or, on the fifth anniversary, the semi-annual) period commencing on such date. Notwithstanding the above, should the Company elect to reduce the Credit Line, in accordance with the provisions of sub-Section (iv) above, then TATOP shall promptly reimburse the Company for the surplus Credit Line Fee that had been paid for the period after the reduction becomes effective. 2. FINANCIAL COVENANT OF THE COMPANY FOLLOWING THE CLOSING ------------------------------------------------------- 2.1. Financial Covenant. As of the Closing and for so long as either the Credit Line or the Loan (if provided) is outstanding, the shareholders' equity of the Company (the "Equity") shall not be less than US$25 million and shall not represent less than 50% of the "total assets" of the Company (the "Financial Covenants"); provided, however, that (i) any decrease in the Equity resulting from a one-time deduction or the deduction over a period of time of goodwill (or any different accounting term which may at the time apply to what is currently referred to as "goodwill") following the consummation by the Company or any of its subsidiaries of any investment transaction (involving the acquisition of securities or assets) or other similar transaction approved by 4 TAT Credit Line Agreement one of the directors designated by TATOP to the Board of Directors of the Company (excluding, for the avoidance of doubt, the Independent Director), and (ii) any deduction for accounting purposes resulting from the issuance of the Warrant under the Warrant Agreement (as defined in the SPA) to TATOP, shall correspondingly reduce the number and the percentage set forth in this financial covenant. 2.2. Non-Compliance with Financial Covenant. If, based on the Company's financial statements for the respective year or quarter, as the case may be, the Company does not comply with the Financial Covenants, then unless the Company, within 60 days following the release of the applicable financial statements (and, in the event the Loan is outstanding, during which period, a Default Notice (as defined below) shall have been delivered to the Company in accordance with the provisions of Section 3(c) below) (i) raises sufficient funds from its shareholders or from third parties or takes such other reasonable actions to cure such non-compliance, and (ii) provides TATOP with a letter from the Company's auditors confirming that the actions taken by the Company have cured such non-compliance, the Loan (if previously granted) and all amounts accrued thereon may be declared by a 10 day written notice immediately due and payable and, if not yet cured during such 10 days, will be callable by the Company. 2.3 For the purpose of clarity it is hereby clarified that the Company's non-compliance with the Financial Covenants, which is not be cured by the Company in accordance with the provisions set forth in Section 2.2 above shall not grant TATOP. any right or relief under applicable law or agreement other than the right of acceleration of all amounts due on account of the Loan, as more fully set forth in Section 2.2 above. 2.4. For purposes of this Section 2, the Company's Equity and total assets shall be determined based on the Company's consolidated financial statements which (i) with respect to the Company's annual, audited financial statement, will be prepared in accordance with United States GAAP, and (ii) with respect to the Company's quarterly unaudited but reviewed financial statements, will be prepared in accordance with Israeli GAAP. 3. EVENTS OF DEFAULT AND REMEDIES THEREFOR --------------------------------------- (a) Events of Default. Any one or more of the following shall constitute an "Event of Default" as the term is used herein: (1) Any default in the payment of principal or interest on the Loan when due, which default shall continue for more than 5 days following the delivery of written notice by TATOP to the Company. (2) The Company is generally not paying its debts as they become due, or makes an assignment of its substantial assets for the benefit of creditors, or applies for or consents to the appointment of a trustee or receiver for or over all the assets of the Company 5 TAT Credit Line Agreement or a substantial part thereof. (3) Any representation or warranty made or furnished by the Company in the SPA, including in all Exhibits and schedules thereto and documents referred to in the Exhibits and schedules thereto, is found to be untrue in any material respect (which, for purposes of this Agreement shall be deemed to refer to claims of aggregate damages to TATOP of at least US$500,000) as of the date set forth above and the date of the Closing; provided, however, that as of the second anniversary of the Closing, this Section 3(a)(3) shall be terminated and shall no longer have any force and effect; (4) A Liquidator, trustee or receiver is appointed for or over all of the assets of the Company or a substantial part thereof and is not discharged within 90 days after such appointment; or (5) Liquidation, reorganization, arrangement, insolvency or other similar proceeding under the Companies Law for the relief of debtors, is instituted by or against the Company and, if instituted against the Company, is consented to or is not dismissed within 90 days of such institution. (b) Notice to TATOP. When any Event of Default described in Section 3(a)(other than an Event of Default described in Section 3(a)(1)) has occurred, the Company shall give TATOP a written notice within five business days of its becoming aware such event. (c) Acceleration of Maturities. When any Event of Default described in Sections 3(a)(1) through 3(a)(3), inclusive, of Section 3(a) has happened and is continuing, TATOP may, by notice in writing (which in the case of an Event of Default described in Section 3(a)(3) shall not be less than 14 days) (the "Default Notice") sent to the Company, declare the Loan due and payable, without any additional presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived. When any Event of Default described in 3(a)(4) or 3(a)(5) has occurred, then the Loan shall immediately become due and payable without presentment, demand or notice of any kind, all of which are hereby expressly waived. Upon the Loan becoming due and payable as a result of any Event of Default as aforesaid, the Company will forthwith pay to TATOP all principal of and interest accrued on the Loan, together with applicable value added tax, if any, against delivery of a tax invoice. Such amounts shall be supplemented by additional interest accrued thereon at an annual rate of 3% from the date when the Event of Default has occurred and until the payment date. Neither any course of dealing on the part of TATOP nor any delay or failure on the part of TATOP to exercise any right shall operate as a waiver of such right or otherwise prejudice TATOP' rights, powers and remedies. The Company further 6 TAT Credit Line Agreement agrees, to the extent permitted by law, to pay TATOP all reasonable expenses incurred by it in the implementation of its rights, powers and remedies under this Section 3. 4. MISCELLANEOUS ------------- (a) Exhibits. The Exhibits attached to this Agreement constitute a part of this Agreement. They are incorporated herein by reference and shall have the same force and effect as if set forth in full in the main body of this Agreement. (b) Governing Law; Forum for Dispute Resolution. This Agreement shall be governed by the laws of the State of Israel. Any dispute arising under or with respect to this Agreement shall be resolved exclusively in the appropriate court in Tel Aviv, Israel. (c) Notices. All notices required or permitted hereunder to be given to a party pursuant to this Agreement shall be in writing and shall be deemed to have been duly given to the addressee thereof (i) if hand delivered, on the day of delivery, (ii) if given by facsimile transmission, on the business day on which such transmission is sent and confirmed, (iii) if given by air courier, two business days following the date it was sent or (iv) if mailed by registered mail, return receipt requested, five business days following the date it was mailed, to such party's address as set forth below or at such other address as such party shall have furnished to each other party in writing in accordance with this provision: if to the Company: TAT Technologies Ltd. Yasur Industries Zone , Gedera PO. Box 80 70750 Tel: ____________________ Fax: ____________________ With a copy to: Adv. J. Zaltzman J. Zaltzman & Co. 6 Hahilazon Street, Ramat-Gan 52522 Facsimile: 03-6111801 if to TATOP: c/o Ta-Tek Ltd., as general partner of TATOP c/o FIMI 2001 Ltd. "Rubinstein House" 37 Petach Tikva Road Tel: 03-5652244 Fax: 03-5652245 With a copy to: Sharon Amir, Adv. Naschitz, Brandes & Co. 7 TAT Credit Line Agreement 5 Tuval Street Tel-Aviv 67897 Israel Facsimile: +972-3-623-5021 Each party may from time to time change the address or fax number to which notices to it are to be delivered or mailed hereunder by notice delivered or sent to the other party in accordance herewith; provided, however, that any notice of change of address shall be deemed effective only upon its receipt. (d) Entire Agreement. This Agreement together with all other TAT Transaction Documents (as defined in the SPA) constitute the entire agreement among the parties regarding the transactions contemplated herein, and may not be amended except by written instrument, executed by both parties. (e) Headings. The headings contained in this Agreement are solely for convenience of reference and shall not affect the interpretation of this Agreement. (f) Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) Assignment. Except as set forth below, the parties hereto will not sell, assign, transfer, or otherwise convey any of their rights or delegate any of their duties under this Agreement. TATOP may not assign or otherwise transfer the Note (other than upon the liquidation or dissolution of TATOP) to its Permitted Transferee, provided, however that FIMI 2001 Ltd. shall continue to represent the Permitted Transferees pursuant to an irrevocable power of attorney until all amounts due on account of the Loan are repaid in full. For purposes of this Agreement, and subject to the foregoing provisions, "Permitted Transferees" shall mean (i) TATOP's partners, (ii) the shareholders or partners (as applicable) of such partners, or (ii) any entity controlled by, controlling, or under common control with TA-TEK Ltd., FIMI 2001 Ltd. or Mr. Ishay Davidi (for so long as Mr. Davidi remains the CEO or equivalent position in Opportunity Fund or any successor fund). (h) Delays or Omissions; Waiver. No delay or omission to exercise any right, power, or remedy accruing to either the Company or TATOP upon any breach or default by the other party under this Agreement shall impair any such right or remedy nor shall it be construed to be a waiver of any such breach or default, or any acquiescence therein or in any similar breach or default thereafter occurring. (i) Further Actions. At any time and from time to time, each party agrees, without further consideration, to take such actions and to execute and deliver such documents as may be reasonably necessary to effectuate the purposes of this Agreement. 8 TAT Credit Line Agreement IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TAT Technologies Ltd. By: _______________________ Name: _______________________ Title: _______________________ TA-TOP, Limited Partnership By:__________________________ Name: 9 TAT Credit Line Agreement - ------------------------- To: TAT Technologies Ltd. Re: Irrevocable Undertaking: We, the undersigned, FIMI Israel Opportunity Fund, Limited Partnership and FIMI Opportunity Fund, L.P., hereby undertake, guarantee agree and be responsible for the fulfillment by TATOP of its obligations under this Agreement, including but not limited to, its obligation to make the Credit Line available and to provide the Company with the Loan, if requested by the Company, all in accordance with and subject to the terms and provisions of this Agreement. For avoidance of any doubt it is hereby clarified that this undertaking will survive the liquidation or dissolution of TATOP. for any reason or under any circumstances. FIMI Opportunity Fund, L.P and FIMI Israel Opportunity Fund, Limited Partnership By: FIMI 2001 Ltd. By:_______________________________ Ishay Davidi, CEO EX-4.8 7 ex4_8.txt WARRANT AGREEMENT DATED JUNE 15, 2004 EXHIBIT 4.8 TAT Warrant Agreement WARRANT AGREEMENT THIS WARRANT AGREEMENT (the "Agreement"), is made as of the 15th day of June, 2004 BY AND BETWEEN (1) TAT Technologies Ltd. ("TAT"), an Israeli public company, whose shares are traded on Nasdaq; and (2) TA-TOP, Limited Partnership ("TATOP"), a limited partnership wholly owned by (x) TA-TEK Ltd., an Israeli private company, wholly owned by FIMI Opportunity Fund, L.P., a limited partnership formed under the laws of the State of Delaware, and by (y) FIMI Israel Opportunity Fund Limited Partnership, a limited partnership, registered in Israel (the "Opportunity Fund"). WHEREAS (a) On the date hereof, TAT and TATOP are entering into (i) a Share Purchase Agreement (the "SPA"), pursuant to which TATOP shall purchase from TAT, at the Closing (as defined in the SPA) 857,143 Ordinary Shares of TAT, nominal value NIS 0.90 each, and (ii) a Credit Line Agreement (the "Credit Line Agreement"), pursuant to which TATOP shall make available to TAT a Credit Line (as defined therein), all subject to the terms and conditions more fully set forth therein. (b) In connection with the foregoing, TAT agrees to grant TATOP, at the Closing, a non-assignable Warrant (the "Warrant") to purchase up to 500,000 Ordinary Shares of TAT, nominal value NIS 0.90 per share (the "Warrant Shares"), for an aggregate amount of US$ 4,250,000 (the "Warrant Amount"), all subject to the terms and conditions hereof. Therefore, in consideration of the foregoing, TAT and the TATOP, for value received, hereby agree as follows: 1. Issue of Warrant. 1.1 General. At the Closing (as defined in the SPA), TAT will authorize, issue and deliver to TATOP the Warrant to purchase the Warrant Shares for the Warrant Amount. 1.2 No Rights as Shareholder. Nothing contained in this Agreement or in the Warrant shall, prior to an exercise thereof, as stipulated hereunder, be construed as conferring upon TATOP or its Permitted Transferees (as defined below) any rights as a shareholder of TAT, including (without limitation) the right to vote, receive dividends, consent or receive notices in respect of any meeting of shareholders for the election of directors of TAT or any other matter. For purposes of this Agreement, "Permitted Transferees" shall mean: TATOP's partners or the shareholders or partners (as applicable) of such partners, or any entity solely and irrevocably TAT Warrant Agreement controlled by TA-TEK Ltd., FIMI 2001 Ltd. or by Mr. Ishay Davidi (for so long as Mr. Davidi remains the CEO or equivalent position in Opportunity Fund or any successor fund). 2. Exercise; Exercise Price. (a) The Exercise Price per each Warrant Share shall be US$8.5 (the "Exercise Price"), subject to the adjustments set forth below. (b) TATOP may exercise the Warrant, in whole or in part (provided that each exercise shall be of at least 25,000 Warrant Shares (the "Minimum Quantity")), at any time and from time to time (each, an "Exercise") during the Exercise Period (as defined in Section 3 below) by delivering a written Notice of Exercise (the "Notice of Exercise") to TAT, specifying the number of Warrant Shares underlying the exercised portion of the Warrant, together with the full payment in cash (to a bank account to be designated by TAT) of the Exercise Price due to TAT with respect to such Warrant Shares (the "Exercise Consideration"), and the Warrant Certificate, which in the case of a partial exercise, will be replaced by a new Warrant Certificate, as more fully set forth below. For purposes of this Agreement, the date on which the Notice of Exercise is delivered to TAT shall be referred to as the "Exercise Date". (c) Exercise on a Net-Issuance Basis. In lieu of payment to TAT of the Exercise Consideration as set forth in subsection (a) above, TATOP may inform TAT in the Notice of Exercise that it elects to exercise the Warrant on a net-issuance basis, in which case, the Warrant shall be exercisable, in whole or in part (provided that "Y" below shall not be less than the Minimum Quantity), at any time and from time to time during the Exercise Period, into the number of Warrant Shares calculated pursuant to the formula set forth below. In such notice, TATOP will specify the amount for which TATOP desires to exercise the Warrant. Formula: X = Y x (A - B) ----------- A Where: X = the number of Warrant Shares to be issued to TATOP; Y = the number of Warrant Shares obtainable upon exercise of the relevant portion of the Warrant; A = the average closing price of an Ordinary Share of TAT on Nasdaq over a thirty (30) trading days preceding the exercise date; and B = the Exercise Price of the Warrant Shares, as adjusted pursuant to the provisions contained herein. 2 TAT Warrant Agreement 3. Exercise Period. TATOP may exercise part (but not less than the Minimum Quantity as set forth above) or all of the Warrant, at any time, and from time to time, until the termination of the 66 month period commencing at the Closing. 4. Warrant Shares. 4.1 Reservation of Warrant Shares. TAT represents that it will reserve and at all times keep reserved, so long as any portion of the Warrant remains outstanding, out of its authorized share capital, such number of Ordinary Shares as may be subject to purchase under the outstanding Warrant. 4.2 Issue. By no later than seven (7) business days following the Exercise Date and (unless TATOP elects to exercise the Warrant on a Net-Issuance Basis) payment of the Exercise Consideration as set forth in Section 2 above, TAT shall issue and cause to be delivered to TATOP or, upon the written order of TATOP, to any third party as TATOP may designate, a certificate or certificates (the "Warrant Share Certificate") of the number of full Warrant Shares so purchased, together with cash, as provided in Section 5.6 hereof in respect of any fractional Warrant Shares otherwise issuable upon such surrender. Such Warrant Shares, delivered upon Exercise, shall be duly authorized, validly issued, fully paid and nonassessable, shall not be subject to call, forfeiture or preemptive rights and shall be delivered free and clear of all Encumbrances (as defined below). The term "Encumbrance" means and includes any interest or equity of any person (including any right to acquire, option, or right of preemption) or any mortgage, charge, pledge, lien, or assignment, or any other encumbrance or security interest or arrangement of whatsoever nature over or in the relevant property. Such Warrant Share Certificates shall be deemed to have been issued and any person so designated to be named therein shall be deemed to have become a holder of record of such securities as of the Exercise Date and payment of the Exercise Consideration, to the extent applicable, notwithstanding that the Warrant Share Certificates representing such securities shall not actually have been delivered or that the stock transfer books of TAT shall then be closed. In the event of a partial exercise of the Warrant at any time prior to the expiry of the Exercise Period, a new certificate evidencing the remaining amount applicable to the Warrant will be issued by TAT. 4.3 Payment of Taxes. TAT will pay all stamp duty, if any, attributable to the issuance of the Warrant Shares. 5. Adjustment of Exercise Price and Number of Warrant Shares. The Exercise Price and/or the number and type of securities purchasable upon the exercise of the Warrant shall be subject to adjustment from time to time upon the happening of certain events, as follows: 5.1. Adjustments. 5.1.1 If TAT subdivides or combines its Ordinary Shares, the Exercise Price shall be proportionately reduced or increased, as 3 TAT Warrant Agreement applicable, as at the effective date of such subdivision or combination, or if TAT fixes a record date for the purpose of so subdividing or combination, as at such record date, whichever is earlier. 5.1.2 If TAT at any time (i) makes a distribution of bonus shares or (ii) issues by reclassification of its Ordinary Shares other securities of TAT, then the number of Warrant Shares purchasable upon exercise of the Warrant immediately prior thereto shall be adjusted so that TATOP shall be entitled to receive the kind and number of Warrant Shares or other securities of TAT which it would have owned or would have been entitled to receive immediately after the occurrence of any of the events described above, had the Warrant been exercised immediately prior to the occurrence of such event or any record date with respect thereto. Any adjustment made pursuant to this subsection 5.1.2 shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event. For the avoidance of doubt, if the distribution or reclassification is eventually called-off, the adjustment made pursuant to this Section shall be cancelled as of the announcement of the cancellation of such distribution or reclassification. Whenever the number of Warrant Shares purchasable upon the exercise of the Warrant is adjusted, as herein provided, the Exercise Price payable upon the exercise of such Warrant shall be adjusted by multiplying such Exercise Price immediately prior to such adjustment by a fraction, the numerator of which shall be the number of Warrant Shares purchasable upon the exercise of the Warrant immediately prior to such adjustment, and the denominator of which shall be the number of Warrant Shares so purchasable immediately thereafter. 5.1.3 If at any time TAT shall distribute a dividend in liquidation or partial liquidation or by way of return of capital, or a dividend payable out of earnings or surplus legally available for dividends (each, a "Distribution"), the Exercise Price shall be reduced by an amount equal to the per-share distribution actually paid by TAT as of the date fixed for the purpose of such Distribution; provided, however, that if the Distribution is eventually called off, the adjustment made pursuant to this section shall be cancelled as of such announcement. 5.2. Merger; Consolidation. In the event that TAT consolidates with or merge with or into another corporation or convey all or substantially all of its assets to another corporation or other entity, then, in each such case, TATOP, upon any exercise of this Warrant, at any time after the consummation of such consolidation, merger, or conveyance, shall be entitled to receive, in lieu of the Warrant Shares receivable upon the exercise of the Warrant prior to such consummation, the shares or 4 TAT Warrant Agreement other securities or property to which it would have been entitled upon the consummation of such consolidation, merger or conveyance if it had exercised the Warrant immediately prior thereto, all subject to further adjustment as provided in this Section, and the successor or purchasing corporation or other entity in such consolidation, merger or conveyance (if not TAT) shall duly execute and deliver to TATOP a supplement hereto acknowledging such corporation's or entity's obligations under the Warrant; and in each such case, the terms of the Warrant (including the exercisability and adjustment provisions of the Warrant) shall be applicable to the shares or other securities or property receivable upon the exercise of the Warrant after the consummation of such consolidation, merger or conveyance. 5.3 No Impairment. TAT will not, through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by TAT, but both parties will at all times in good faith assist in the carrying out of all the provisions of this Agreement and in the taking of all such action as may be necessary or appropriate in order to protect the rights hereunder against impairment. 5.4 No Fractional Shares. No fractional shares shall be issued upon exercise of all or any portion of a Warrant, and the number of Warrant Shares to be issued shall be rounded to the nearest whole share (with cash being paid by TAT for any unissued fractional shares). 5.5 Notice of Adjustment. Upon the occurrence of each adjustment or readjustment of the Exercise Price or the number of Warrant Shares pursuant to this Section 5, TAT, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms hereof and prepare and furnish to TATOP a certificate setting forth each adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The certificate shall also set forth (i) the Exercise Price at the time in effect, and (ii) the amount, if any, of other property which at the time would be received upon the conversion of the outstanding Warrant. 5.6 Notices of Record Date or Payment Date. In the event of any taking by TAT of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (including a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of any class or any other securities or property, or to receive any other right, TAT shall mail to TATOP a notice, which shall be sent simultaneously with the notice sent to other shareholders of TAT, specifying the date on which any such record and/or scheduled date of actual payment, if determined, is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right. 6. Miscellaneous. 6.1. Notices. Any notice pursuant to this Agreement by TAT or by TATOP shall be in writing and shall be deemed to have been duly given (i) if given by 5 TAT Warrant Agreement facsimile transmission (to the fax numbers set forth herein) on the business day on which such transmission is sent and confirmed, or (ii) if given by mail (to the addresses set forth herein), two business days following the date it was sent. Each party may from time to time change the address or fax number to which notices to it are to be delivered or mailed hereunder by notice in accordance herewith to the other party. Addresses and Facsimile Numbers: - -------------------------------- TA-TOP, Limited Partnership c/o TA-TEK Ltd., its general partner c/o FIMI 2001 Ltd. "Rubinstein House" 37 Petach Tikva Road Tel: 03-5652244 Fax: 03-5652245 With a copy to: Sharon Amir, Adv. Naschitz, Brandes & Co. 5 Tuval Street Tel-Aviv 67897 Israel Facsimile: +972-3-623-5021 TAT: TAT Technologies Ltd. Industrial Zone, Yasur, Gedera, 70700 PO Box. 80 (70750) Facsimile Number: [ ] With a copy to: J. Zaltzman, J. Zaltzman & Co. 6 Hahilazon Street, Ramat-Gan 52522 Facsimile: 03-6111801 Attn: Adv. Yossi Zaltzman 6.2 Assignment; Successors. Except as set forth below, TATOP may not sell, assign or transfer the Warrant or any portion or right thereof. Nothing contained herein shall be construed as limiting, in any way, the right of TATOP to sell, assign or otherwise transfer the Warrant Shares, subject to the provisions of applicable law. Notwithstanding the above, upon the liquidation or dissolution of TATOP, TATOP may transfer the Warrant to its Permitted Transferees; provided, however that FIMI 2001 Ltd. shall at all time continue to represent the Permitted Transferees (as defined in Section 1.2 above), pursuant to an irrevocable power of attorney, for all purposes of this 6 TAT Warrant Agreement Agreement and the Warrant. 6.3. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Israel. The parties hereto irrevocably submit to the exclusive jurisdiction of the courts of Tel-Aviv in any action connected with this Agreement. 6.4. Benefits of this Agreement. Nothing in this Agreement shall be construed to give to any person or corporation other than TAT and TATOP any legal or equitable right, remedy or claim under this Agreement. This Agreement shall be for the sole and exclusive benefit of TAT and TATOP. 6.5. Form of Warrant. The text of the Non-Assignable Warrant Certificate evidencing the Warrant (the "Warrant Certificate") and of the form of election to purchase Warrant Shares shall be substantially as set forth in Exhibit 1 attached hereto. The Exercise Price and, accordingly, number of Warrant Shares issuable upon exercise of the Warrant is subject to adjustment upon the occurrence of certain events, all as herein provided. 6.6. Warrant Certificate. 6.6.1 Mutilated or Missing Warrant. In case the Warrant Certificate shall be mutilated, lost, stolen or destroyed, TAT shall, at the request of the affected TATOP, issue and deliver in exchange and substitution for and upon cancellation of the mutilated certificate or in lieu of and substitution for the certificate lost, stolen or destroyed, a new non-assignable Warrant Certificate representing an equivalent right or interest, but only upon receipt of evidence reasonably satisfactory to TAT of such loss, theft or destruction of such Warrant Certificate. 6.6.2 Entire Agreement; Amendment and Waiver. This Agreement and the Exhibits and Schedules hereto and thereto constitute the full and entire understanding and agreement between the parties with regard to the subject matters hereof. All prior understandings and agreements among the parties are void and of no further effect. Any term of this Agreement may be amended, waived, or discharged (either prospectively or retroactively, and either generally or in a particular instance), by a written instrument signed by all the parties to this Agreement. 7 TAT Warrant Agreement IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. TAT Technologies Ltd. By: _______________________ Name: _______________________ Title: _______________________ TA-TOP, Limited Partnership. By: TA-TEK Ltd., its general partner Name and Title: 8 TAT Warrant Agreement EXHIBIT 1 Non-Assignable Warrant Certificate No. ________ WARRANT TO PURCHASE ORDINARY SHARES VOID AFTER 5:00 p.m. ISRAEL TIME, ON [ ]. TAT Technologies Ltd. INCORPORATED UNDER THE LAWS OF THE STATE OF ISRAEL This certifies that, for value received, TATOP, Limited Partnership the registered holder hereof ("TATOP"), is entitled to purchase from TAT Technologies Ltd. ("TAT"), at any time during the Exercise Period (as defined in the Warrant Agreement (the "Agreement")) commencing at 9.00 a.m., Israel Time, on the first day of the Exercise Period and ending before 5.00 p.m., Israel Time, on the last day of the Exercise Period, 500,000 Ordinary Shares of TAT (the "Warrant Shares"), at a purchase price per share of US$8.5 (the "Exercise Price"). The number and type of securities purchasable upon exercise of each Warrant evidenced hereby and the Exercise Price shall be subject to adjustment from time to time as set forth in the Agreement. The terms of this Warrant are subject to the terms and provisions contained in the Agreement. The Warrant evidenced hereby may be exercised in whole or in part by presentation of this Warrant Certificate with the Irrevocable Exercise Notice in the form attached hereto, duly executed (with a signature guarantee as provided thereon) and, if not exercised on a Net-Issuance Basis as set forth in Section 2(b) of the Agreement, simultaneous payment of the Exercise Consideration at the principal office of TAT. Payment of such Exercise Consideration shall be made at the option of TATOP in cash or by bank check, in same day funds. Upon any partial exercise of the Warrant evidenced hereby, there shall be signed and issued, to TATOP, a new Warrant Certificate in respect of the balance of the Warrant Shares as to which the Warrant evidenced hereby shall not have been exercised. No fractional Ordinary Shares will be issued upon the exercise of rights to purchase hereunder, but TAT shall pay the cash value of any fraction upon the exercise of one or more Warrant. This Warrant is neither transferable nor assignable. TAT Technologies Ltd.______ ______________________________ ATTEST:_______________________ 9 TAT Warrant Agreement Dated: __________ TAT Technologies Ltd. Industrial Zone Yasur, Gedera, 70780 Via Fax: _______ (POBox 80/70750) and Registered Mail IRREVOCABLE EXERCISE NOTICE TA-TOP, Limited Partnership, hereby irrevocably elects to exercise the right of purchase represented by the Non-Assignable Warrant Certificate with respect to ________ [Note: not less than 25,000] Ordinary Shares (the "Shares"), with cash payment equal to the Exercise Price of US$8.5 per share/on a Net Issuance Basis (Please delete the non-applicable option) and requests that certificates for the Ordinary Shares be issued in the name of: (name and address must be printed or typewritten) _____________________________ TA-TOP, Limited Partnership, _____________________________ Address and, if the Shares shall be less than the total number of Ordinary Shares that TATOP is entitled to purchase pursuant to this Warrant, a new Warrant Certificate shall be registered for the balance of the Ordinary Shares in the name of the undersigned and delivered to the address stated below. Dated: __________________ TA-TOP, Limited Partnership (Please Print) Address:______________________________ ______________________________ Signature: ___________________________ Note: The above signature must correspond with the name as written upon the face of this Warrant Certificate in every particular, without alteration or enlargement or any change whatever. Signature Witnessed: 10 EX-4.9 8 ex4_9.txt LIMCO MMBRSHP INTRST PRCHSE AGRMNT 5/24/05 EXHIBIT 4.9 MEMBERSHIP INTEREST PURCHASE AGREEMENT MEMBERSHIP INTEREST PURCHASE AGREEMENT (the "Agreement ") dated the 24th day of May, 2005 between Limco-Airepair, Inc., an Oklahoma corporation (hereinafter referred to as the "Purchaser"), and Claude L. Buller, Thomas W. Ferrell, Paul R. Hilliard and Jim Taylor (collectively referred to as "Members") and Piedmont Aviation Component Services, L.L.C., a North Carolina limited liability company (hereinafter referred to as "Company", and collectively with the Members referred to as "Seller"). RECITALS A. Members are the owners of all outstanding ownership units evidencing their membership interest in the Company as have been issued by the Company as follows: Units Owned Percentage Claude L. Buller 9,900 33% Paul R. Hilliard 9,900 33% Thomas W. Ferrell 9,900 33% Jim Taylor 300 01% ----- --- TOTAL ISSUED AND OUTSTANDING UNITS 30,000 100% which units of membership interests are fully paid and non assessable by the Company. B. The Company conducts business as an authorized and fully licensed and/or authorized or recommended aviation Repair Station or authority for, among others, Honeywell Aerospace, McCauley and Hartzell Propeller, in the overhaul, repair, maintenance, service and supply of, among other products, Propellers, Landing Gear and APU/LRU units, and products made in its machine shop with metal finishing capability, as well as supplying parts through brokerage some of which products and activities are limited in scope by the United States Department of Transportation, Federal Aviation Administration Air Agency Certificate Nos. QKPR504X (issued August 10, 2004) and QWPR503X (issued September 21, 2004), all of which licenses, certificates and authorities are fully and properly issued and are not now suspended, revoked, or in default or under suspension or revocation proceedings or notifications. (hereinafter referred to as the "Company's Business") C. The Purchaser desires to purchase all units of membership interest from the Members free and clear of any and all liens, judgments, orders, decrees or encumbrances of any kind in order to have 100% ownership of the Company and thus acquire all of the Company's business free an clear of all liens debts, obligations of whatever kind or character except for those obligations specifically assumed by the Purchaser as are hereinafter described in this Agreement (e.g., obligations identified in the audited financial statement of December 31, 2004 and acquired in the normal course of business since that date to date of Closing as is specifically described hereinafter). MEMBERSHIP INTEREST AGREEMENT Page 2 D. Upon execution of this Agreement by the parties hereto, the foregoing recitals A, B, and C shall be deemed to be true and correct and to form a material part of the inducement for Purchaser to enter this Agreement. NOW, THEREFORE, in consideration of the covenants, agreements, representations, and warranties contained in this Agreement, the parties hereto hereby agree as follows: ARTICLE I. PURCHASE AND SALE OF MEMBERSHIP INTERESTS; COMPANY'S BUSINESS; PURCHASE PRICE; CLOSING 1.1 Purchase and Sale of Membership Interests. Subject to the terms and conditions of this Agreement, on the Closing Date (as defined herein) the Members shall sell, transfer, convey, assign, and deliver to the Purchaser, and the Purchaser shall purchase, acquire, and accept from the Members, all of the Member's right, title, and interest in and to the membership interest (also referred to as "ownership units") of the Company (and any evidence of such ownership such as certificates), the purpose being to vest in the Purchaser title to all of the ownership units, right and interest in the Company; the Purchaser thereby becoming the sole member and owner of the Company, and as such indirectly acquiring all of the assets owned and controlled by the Company, inclusive of any and all intellectual property, trade names, patents, copyrights, proprietary information, trade secrets, rolling stock, equipment, inventory, goods, materials of every kind as are used, employed and stored for the purpose of operating the Company's Business. 1.2 Excluded Assets. No assets owned by the Company are excluded from this sale. 1.3 Assumption of Liabilities or Obligations. Notwithstanding anything to the contrary in this Agreement, the Company shall retain and remain obligated for and the Purchaser, as the sole member and owner of the Company, shall assume all liabilities or obligations of the Company accruing, accrued and as are disclosed in the Audited Financials dated December 31, 2004, as well as those debts and obligations entered into or incurred in the normal course of operating the business of the Company from and after December 31, 2004 until Closing, and as are fully set forth on the monthly Financial Statements of the Company since December 31, 2004 (which have been provided to the Purchaser prior to Closing), or as are recorded in Company's normal business records, (e.g., accounts payable, payroll ledger and the like records has have been supplied to the Purchaser prior to Closing) and/or the Disclosure Schedule 1.3 Assumed Debts and Obligations, which is attached and made a part hereof. No other liabilities of the Company are assumed and shall be deemed to be undisclosed liabilities and subject to the indemnity provisions of Article IX of this Agreement in the event of subsequent claims for payment lodged against the Purchaser. (a) At Closing, Purchaser shall pay and satisfy in full all financial obligations of the Company under that Promissory Note executed by the Company and payable to Blue Ridge Investors, II Limited Partnership, dated November 18, 2002, in the original amount of $2,000,000.00, as the same may have been modified or amended from time to time. MEMBERSHIP INTEREST AGREEMENT Page 3 (b) At Closing, Purchaser shall pay in full and satisfy all obligations of the Company under that Credit and Security Agreement executed by the Company, as Borrower, and Whitehall Business Credit Corporation, as Lender, on November 15, 2002, and the documents and instruments pursuant thereto, including that Revolving Credit Note in the original principal amount of $7,500,000.00; that Term Loan Note in the original principal amount of $675,000.00; and that Capital Expenditures Loan Note in the original principal amount of $500,000.00, as the foregoing may have been modified or amended from time to time. At Closing, the aggregate amount of the obligations under the above-described Whitehall loan shall not exceed $7,500,000.00. 1.4 Purchase Price. The aggregate consideration for the Purchase of the Membership Interests and Company's Business transferred to Purchaser ("Transferred Membership Interest") shall be $5,500,000 payable in cash or certified funds at Closing. ARTICLE II. REPRESENTATIONS AND WARRANTIES OF THE SELLER Except as otherwise set forth in the schedules attached to this Agreement by reference to specific sections of this Agreement (hereinafter collectively referred to as the "Disclosure Schedule"), the Seller represents and warrants to the Purchaser as set forth below: 2.1 Organization and Good Standing. The Company is a limited liability company duly organized, validly existing, and in good standing under the laws of the State of North Carolina, and (a) is duly qualified to transact business as a limited liability company and is in good standing in every other jurisdiction within the United States in which the conduct of its business requires it to be so qualified, (b) to the extent it has its EASA Repair Certificate, the Company is duly qualified to transact business as a limited liability company and is in good standing in every European jurisdiction in which the conduct of its business requires it to be so qualified, and (c) to Seller's knowledge, is duly qualified to transact business as a limited liability company and is in good standing in every other jurisdiction outside of the United States and Europe in which the conduct of its business requires it to be so qualified. Copies of the Articles and/or Certificate of Organization or Formation and the Operating Agreement of the Company and all amendments thereto as presently in effect, as well as any minutes of Members' or managers' meetings, and requisite notices and or waivers of notice fully endorsed have been delivered to the Purchaser and are complete and correct as of the date hereof. 2.2 Authorization. Subject to receiving the approval of the Company's managers, the Seller has full power and authority to enter into this Agreement, both individually, and as authorized by the Members and managers of the Company and as is allowable under the Company's Operating Agreement), inclusive of all exhibits and schedules hereto, and all agreements contemplated herein (this Agreement and all such exhibits, schedules, and other agreements being collectively referred to herein as the "Acquisition Documents"), to perform its obligations hereunder and there under, to assign, transfer, sale and convey the units of Membership Interest purchased hereunder, and to carry out the transactions MEMBERSHIP INTEREST AGREEMENT Page 4 contemplated hereby and thereby. The Managers of the Company have taken, or will take before the Closing Date, all actions required by law, its Operating Agreement or otherwise to authorize (i) the execution and delivery of this Agreement and the other Acquisition Documents, and (ii) the performance of its obligations hereunder and there under. This Agreement has been duly executed and delivered by the Seller and upon the execution and delivery of the remaining Acquisition Documents by a duly authorized Members and managers of the Company, the remaining Acquisition Documents will have been duly executed and delivered by the Seller, and this Agreement is and such other Acquisition Documents will be, upon due execution and delivery thereof, the legal, valid, and binding obligations of the Seller enforceable according to their terms 2.3 Title to Ownership Units Transferred. Except as set forth below in this Section 2.3, the Members own and have good and marketable title to all ownership units evidencing their Transferred Membership Interest, free and clear of all Liens. Seller hereby specifically discloses to Buyer (a) that Blue Ridge Investors, II Limited Partnership holds a warrant to acquire additional membership units in the Company, (ii) that there are restrictions on the transfer of the Membership Interest contained in the Company's Operating Agreement, and (iii) that there are rights of first refusal and restrictions on the transfer of the Membership Interest contained in that Loan and Purchase Agreement between the Company and Blue Ridge Investors, II Limited Partnership, dated November 18, 2002, and an option in favor of Member Jim Taylor to obtain up to five percent (5%) of all outstanding Membership Interest. As specified in Section 6.4, it is a condition precedent to Closing this Agreement that (i) the warrant and any other rights or interests in the Company held by Blue Ridge Investments II, Limited Partnership shall be terminated and released and (ii) Jim Taylor terminate and release any and all option rights he may have to acquire additional units of ownership or future Membership Interests. 2.4 Title to Properties; Absence of Liens and Encumbrances. The Company has good and marketable title to or a valid leasehold interest in all of its properties and assets, tangible and intangible, free and clear of all liens, mortgagees and encumbrances except for (i) those set forth in the Disclosure Schedule 2.4, List of Liens, Mortgages and other Encumbrances attached, (ii) liens for current taxes not yet due and payable, and (iii) such other minor imperfections of title and encumbrances, if any, that do not, in the aggregate, have a material adverse effect on the Company's Business, assets, or financial condition of the Company (collectively hereinafter referred to as the "Permitted Liens"). To Seller's knowledge, there is no material asset used or required by the Company in the conduct of Company's Business, which is not owned by the Company or licensed or leased to it pursuant to one of the licenses or leases listed in Disclosure Schedule 2.6, List of Leases and Licenses. 2.5 Owned Real Property. The Company and Sellers own no right, title or interest in or to any real property (other than leasehold interests) nor do they have any options to purchase any real property used by the Company in conjunction with operation and conduct of Company's Business. 2.6 Leases. Disclosure Schedule 2.6, List of Leases and Licenses attached hereto contains a complete list of (i) each lease pursuant to which the Company leases, as lessee, any real property interest and (ii) each lease pursuant to which the Seller leases, as lessee, any MEMBERSHIP INTEREST AGREEMENT Page 5 type of property (real or personal) in which the Purchaser's inability to acquire the Seller's rights there under would have a material adverse effect upon the business assets or financial condition of the Company and in which the rental payments pursuant to such lease exceed $ 10,000 per annum. Each such lease is valid and binding and is in full force and effect, subject only to exceptions based on bankruptcy, insolvency, or similar laws of general application, and there are no existing defaults by any party to any such lease, or any condition, event, or act known to the Seller which, with notice or lapse of time or both, would constitute such a default. Without limiting the foregoing, the Seller is not in default under any of such leases, and the Seller has not received any notice from any person asserting a default by the Seller under any such lease. 2.7 No Violation. Except as set forth on Disclosure Schedule 2.7, none of (i) the execution and delivery of this Agreement or any of the other Acquisition Documents by the Seller, (ii) the performance by the Seller of its obligations hereunder or there under, (iii) the consummation of the transactions contemplated hereby or thereby after the Closing, will (A) violate any provision of the Certificate of Organization or Formation Articles of the Company, or the Operating Agreement under which the Company operates; (B) violate, or be in conflict with, or constitute a default under or breach of, or permit the termination of, or cause the acceleration of the maturity of, any indenture, mortgage, contract, commitment, debt, or obligation of the Seller, which violation, conflict, default, breach, termination, or acceleration, either individually or in the aggregate with all other such violations, conflicts, defaults, breaches, terminations, and accelerations, would have a material adverse effect on the operations, business, assets, or financial condition of the Company or the Transferred Member Interests; (C) except for the consent of Managers, require the consent of any other party to or result in the creation or imposition of any Lien upon any property or assets of the Company or the Transferred Membership Interest under any indenture, mortgage contract, commitment, debt or obligation of or to which the Seller is a party or by which the Seller is bound; (D) violate any statute, law, judgment, decree, order, regulation, or rule of any court or governmental authority to which the Seller or the Transferred Membership Interests are subject; or (E) result in the loss of any material license, privilege, or certificate benefiting the Company. Purchaser acknowledges and agrees that the items listed on Disclosure Schedule 2.7 are agreements and instruments to which the Company is a party (or permits and licenses held by the Company), which may be violated upon transfer of the Transferred Membership Interest by the Members to Purchaser, and for which Purchaser may need to obtain consent, approval, or authorization. As specified in Section 5.4, it is a condition of this Agreement, it is a condition precedent to Closing that Purchaser obtain such consents, approvals, or authorizations. 2.8 Consents and Approvals of Governmental Authorities. Except as set forth on Disclosure Schedule 2.8, no consent, approval, or authorization of, or declaration, filing, or registration with, any governmental or regulatory authority is required to be made or obtained by the Seller in connection with the execution, delivery, and performance of this Agreement or any of the other Acquisition Documents by the Seller. Purchaser acknowledges and agrees that the items listed on Disclosure Schedule 2.8 are permits and licenses held by the Company, for which Purchaser may need to obtain governmental consent, approval, or authorization. As specified in Section 5.4, it is a condition of this Agreement, it is a condition precedent to Closing that Purchaser obtain such consents, approvals, or authorizations. MEMBERSHIP INTEREST AGREEMENT Page 6 2.9 Financial Statements. (a) Delivery. The Seller has delivered to the Purchaser true and complete copies of the Company's audited financial statements including balance sheets, statements of operations and retained earnings, and statements of changes in financial position, as of and for the years ended December 31, 2004 (the "Audited Financials") as well as its un-audited financial statements, including balance sheets, statements of operations and retained earnings, and statements of changes in financial position, as of and for the months and/or quarters from and after December 31, 2004 until the month preceding the month Closing occurs, and thereafter internally generated financial statements up to the date of Closing (such un-audited financial statements (income and expense statement, as well as the balance sheet) of the Company and any notes thereto being hereinafter referred to as the Company's "Financial Statements." (b) Accuracy. The Audited Financials, Financial Statements are materially true and correct and fairly present the financial condition of the Company as of the respective dates thereof and the results of operations of the Company for the periods then ended in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. 2.10 Absence of Certain Changes. Since the most recent period of time for which the Financial Statements apply and until the date of Closing, the Company has not: (a) Suffered any material adverse change in its working capital, condition (financial or otherwise), assets, liabilities, reserves, business operations, or prospects; (b) Suffered any damage, destruction, or loss, whether covered by insurance or not, materially adversely affecting its business operations, or prospects, assets, or condition, financial or otherwise; (c) Permitted or allowed any of its property or assets (real, personal, or mixed, tangible or intangible) to be subjected to any mortgage, pledge, security interest, conditional sale, or other title retention agreement, encumbrance, lien, easement, claim, right of way, warrant, option, or charge of any kind (individually and collectively hereinafter referred to as a "Lien"), except Permitted Liens; (d) Created or incurred any liability (fixed, absolute, accrued, contingent, or otherwise) except for unsecured current liabilities incurred for other than money borrowed, and liabilities under contracts entered into in the ordinary course of business and for amounts and for terms consistent with past practice; (e) Canceled or compromised any debts, or waived or permitted to lapse, any material claims or rights, or sold, transferred, or otherwise disposed of any of its properties or assets (real, personal, or mixed, tangible or intangible), except in the ordinary course of business and consistent with past practice; (f) Transferred or granted any concessions, leases, licenses, or agreements with respect to or disposed of or permitted to lapse any rights to the use of any patent, MEMBERSHIP INTEREST AGREEMENT Page 7 registered trademark, servicemark, trade name, or copyright material to the business of the Company (all of which are listed on Schedule 2.11), or disposed of or disclosed to any person any material, trade secret, formula, process, or know-how not theretofore a matter of public knowledge; (g) Entered into any material commitment or transaction not in the ordinary course of business and consistent with past practice or made any capital expenditures or commitments for any additions to property, plant, or equipment that in the aggregate exceed $5,000; (h) Paid, loaned, or advanced any amount to, or sold, purchased, transferred, or leased any properties or assets (real, personal, or mixed, tangible or intangible) to or from, or entered into any agreement or arrangement with, any of its Company Members, managers, or employees, or any family member of any of its members, managers or employees, or any partnership, company, corporation or other entity controlled by, controlling, or under common control with it, or any partner, officer, director or employee of any such corporation or other entity, or any such individual's family members; (i) Purchased, redeemed, issued, sold, or otherwise acquired or disposed of, directly or indirectly, any membership interests, options, warrants, bonds, notes, or other securities, or rights to purchase or convert into any securities of the Company; (j) Declared or paid, or set aside funds in anticipation of, any dividends or other distributions of Company funds for any Member or Manager of the Company; (k) Made any acquisition or disposition of assets except in the ordinary course of business, consistent with past practice; (l) Introduced any material change with respect to the operation of its business, including, without limitation, its method of accounting; (m) Except for sales of inventories in the ordinary course of business, sold or otherwise disposed of, or entered into or agreed to enter into any agreement or other arrangement to sell or otherwise dispose of, any of its assets, properties, or rights or any agreement or other arrangement which requires the consent of any party to the transfer and assignment of any such assets, properties, or rights; (n) Paid or agreed to pay any bonus or extraordinary payment to any employee or Member (including payment by the Company of attorney fees related to this transaction) or changed or agreed to change in any material respect the compensation of any employee; or (o) Agreed, whether in writing or otherwise, to take any action described in this Section. 2.11 Patents, Trademarks, Trade Names. Except as set forth on Disclosure Schedule 2.11, the Seller owns, is licensed, or otherwise has the full right to use all patents, trademarks, servicemarks, trade names, and copyrights used in the business of the Company as currently MEMBERSHIP INTEREST AGREEMENT Page 8 conducted. Disclosure Schedule 2.11, Intellectual Materials Owned or Controlled by Company, attached hereto contains a complete and accurate list of (i) all patents, trademarks, servicemarks, trade names, copyrights, technology, know-how, recipes, and processes used or proposed to be used by the Seller in operation of the Company's Business, all applications therefore, and all licenses and other agreements relating thereto, and (ii) all agreements relating to technology, know-how, recipes, or processes that the Seller is licensed or authorized to use by others or licenses or authorizes others to use. Except as set forth in any of such licenses or agreements, the Seller has the sole and exclusive right to use its patents, trademarks, servicemarks, trade names, copyrights, technology, know-how, recipes, and processes identified in Disclosure Schedule 2.11 hereto, and no consent of any third party is required for the use thereof by the Company upon completion of the transfer of the Transferred Membership Interest to Purchaser. No claims have been asserted by any person to the use of any such patents, trademarks, servicemarks, trade names, copyrights, technology, know-how, recipes, or processes, or challenging or questioning the validity or effectiveness of any such license or agreement, and the Seller knows of no valid basis for any such claims. The Seller has not received any notice or is aware of any facts or alleged facts indicating that the use of such patents, trademarks, servicemarks, trade names, copyrights, technology, know-how, recipes, or processes by the Company infringes on the rights of any other person. No additional proprietary rights other than those listed on Disclosure Schedule 2.11 hereto are necessary or material to the conduct the Company's Business. 2.12 Litigation. Disclosure Schedule 2.12, Litigation and Potential Claims, which is attached hereto sets forth all actions, claims, proceedings, and investigations ("Actions"), including without limitation Actions for personal injuries, products liability, or breach of warranty arising from products sold by the Company, pending or to Seller's knowledge threatened against the Company, any properties or rights of the Company (including, without limitation, the patents, trademarks, servicemarks, trade names, copyrights, technology, know-how, recipes, or processes listed in Disclosure Schedule 2.11 hereto), or the transactions contemplated by this Agreement or any other Acquisition Document before any court, arbitrator, or administrative or governmental body. To the best knowledge of the Seller, no state of facts exists or has existed that would constitute grounds for the institution of any Action against the Company or against any properties or rights of the Company or the transactions contemplated by this Agreement or any other Acquisition Document. The Seller is not subject to any judgment, order, or decree entered in any lawsuit or proceeding that has materially adversely affected, or that can reasonably be expected to materially adversely affect, the transactions contemplated by this Agreement, the Seller, or the Transferred Membership Interest in the Company, including, without limitation, the Company's Business practices and its ability to acquire any property or conduct business in any way. 2.13 Tax Returns and Payments. All of the tax returns and reports of the Company or respecting the operations of the Company required by law to be filed on or before the date hereof have been duly and timely filed or extended and all taxes shown as due thereon have been either paid or are accrued in liquid form and saved for future payment thereof. There are in effect no waivers of any applicable statute of limitations related to such returns. No liability for any tax will be imposed upon the Transferred Membership Interest in the Company or the Company's Business or its assets with respect to any period before the Closing Date for which there is not an adequate reserve reflected in the balance sheet and MEMBERSHIP INTEREST AGREEMENT Page 9 held in cash form. The provisions of this Section 2.13 shall include, without limiting the generality of this Section, all reports, returns, and payments due under all federal, state, or local laws or regulations relating to income, sales, use and withholding taxes, withholding obligations, unemployment insurance, Social Security, workers' compensation, and other obligations of the same or of a similar nature. The Seller is not subject to any open audit in respect of its taxes, no deficiency assessment or proposed adjustment for taxes is pending, and the Seller has no knowledge of any liability, whether or not proposed, for any tax with respect to any period through the date hereof to be imposed upon any of its properties or assets for which there is not an adequate reserve (in cash) reflected in its respective Audited Financials and Financial Statements. 2.14 Banks. Disclosure Schedule 2.14, Bank Accounts, which is attached lists all the names and locations of all banks, trust companies, savings and loan associations, and other financial institutions at which the Company maintains accounts or lock boxes and the corresponding account numbers, if any, relating to the Company and the names of all persons authorized to draw on such accounts or who have access to such boxes. 2.15 Insurance. Disclosure Schedule 2.15, Insurance Policies, which is attached contains (i) a complete and accurate description of the Company's self-insurance practices and items covered by such self-insurance, if any and (ii) a complete list of all material policies of fire, liability, workers' compensation, products liability and other forms of insurance owned or held by or for the benefit of the Company (collectively, the "Insurance Policies"). The Seller has delivered to the Purchaser true and complete copies of the Insurance Policies, along with copies of all past Insurance Policies reasonably available after due and diligent search. To Seller's knowledge the Company's tangible real and personal property and assets, whether owned or leased, are insured by reputable insurance companies licensed to do business in the state in which such property is located in such amounts customarily carried by comparable businesses, and as is required by any agreements with licensors and/or customers except to the extent that any failures to insure would not, in the event of a loss, have a material adverse effect upon the Company's Business. All such Insurance Policies are and will remain in full force and effect through the Closing Date and, to the best knowledge of the Seller; there is no notice of or basis for any modification, suspension, termination, or cancellation of any Insurance Policy. 2.16 Contracts and Commitments. (a) Disclosure Schedule 2.16, Contract Commitments, which is attached hereto, contains a complete list of each contract and commitment of the Seller that is material to the operations, assets, and business or financial condition of the Company or that by its terms can reasonably be expected to require future payment by or to the Company of $10,000 or more, including but not limited to the following: (i) All employment contracts and commitments between the Company and its employees, other than those terminable by the Company at will and without payment or penalty; (ii) All collective bargaining agreements and union contracts to which the Company is a party; MEMBERSHIP INTEREST AGREEMENT Page 10 (iii) All contracts or commitments, written or oral, with distributors, brokers, manufacturer's representatives, sales representatives, service or warranty representatives, customers, and other persons, firms, or corporations engaged in the sale or distribution of the Company's products or services; (iv) All purchase orders issued by the Company in excess of $20,000, all sales orders received by the Seller in excess of $25,000 and all purchase or sales orders that call for delivery or performance on a date more than one year from the date of this Agreement; (v) All contracts and arrangements between the Company or any person or entity that controls, is controlled by, or is under common control with, the Seller or any family member of any such person (such entity or person, being hereinafter referred to as an "Affiliate"); (vi) All contracts and arrangements, written or oral, under which the Company is either a bailor or bailee including without limitation contracts for the bailment of Aircraft; (vii) All agreements pursuant to which the Company acquired its Trade Name or a substantial portion of its assets; and (viii) All other contracts and commitments of the Company (excluding leases for the purpose of this Section 2.16(a)) and instruments reflecting obligations for borrowed money or for other indebtedness or guarantees thereof. (b) At the Purchaser's request, the Seller shall deliver or cause to be delivered to the Purchaser full and complete copies of the documents identified above and all such other agreements and instruments as the Purchaser may reasonably request. (c) The Seller is not a party to any written agreement that would restrict it from carrying on any line of business anywhere in the world. (d) Each of the contracts listed on Disclosure Schedule 2.16 is valid and binding, and each of the contracts binding on the Company (whether or not listed on Disclosure Schedule 2.16) has been entered into in the ordinary course of business. To Seller's knowledge, neither the Company nor any other party hereto is in default under or in breach or violation of, and neither the Company nor any other party hereto has received notice of any asserted claim of default by any other party under, or a breach or violation of, any of the contracts, agreements, and commitments described in this Section 2.16, including without limitation, any licensing or usage agreements with respect to the technology that the Company now uses or currently intends and plans to use. 2.17 Distributors and Customers. To the Seller's best knowledge, it enjoys good working relationships under all of its distributor, sales representative, and similar agreements necessary to the normal operation of Company's Business. Except as set forth on Disclosure Schedule 2.17, the Seller has no knowledge or basis for knowledge that any customer or group of related customers (i.e., any customers who are directly or indirectly MEMBERSHIP INTEREST AGREEMENT Page 11 through one or more intermediaries under common control), who, for the fiscal year ended 2004 and during each of the two preceding fiscal years accounted for more than 10% in aggregate volume of gross sales of the Company, has terminated or expects to terminate a material portion of its normal business with the Company. 2.18 Fringe Benefit Plans. (a) List of Plans. Disclosure Schedule 2.18, Benefit Plans, which is attached, contains a true and complete list and summary description of, and the Company has delivered to the Purchaser true and complete copies of, each pension, retirement, profit-sharing, stock purchase, stock option, vacation, deferred compensation, bonus or other incentive plan, or other employee benefit program, arrangement, agreement, or understanding, or medical, vision, dental, or other health plan, or life insurance or disability plan, or any other employee benefit plans, including, without limitation, any "employee benefit plan" as defined in section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"'), whether formal or informal, written or oral, to which the Seller contributes, or is a party, or is bound, or under which it may have liability, and under which employees or former employees of the Company (or their beneficiaries) are eligible to participate or derive a benefit. Each employee benefit plan which is a "group health plan" as such term is defined in section 162(i)(2) of the Internal Revenue Code of 1986, as amended (the "Code"), satisfies the applicable requirements of section 4980B of the Code. Except as described on Disclosure Schedule 2.18, the Company does not have the intention or commitment, whether legally binding or not, to create any additional plan, practice, or agreement, or to modify or change any existing plan, practice, or agreement that would affect any employee or terminated employee of the Seller, and benefits under all employee benefit plans are as represented and have not been and will not be increased after the date on which documents have been provided. (b) Representations with Respect to Plans. Except as disclosed on Disclosure Schedule 2.18, the Company does not sponsor, maintain, or contribute to any employee benefit plans within the meaning of section 3(3) of ERISA, which are subject to Title I of ERISA (the "ERISA Plans"). Each pension plan within the meaning of section 3(2) of ERISA ("Pension Plan") is identified on Disclosure Schedule 2.18. The following representations are made with regard to the ERISA Plans or the Pension Plans, if any and so limited: (i) The Company does not contribute to, or have an obligation to contribute to, or has at any time contributed to or had an obligation to contribute to, sponsor, or maintain, or at any time has sponsored or maintained, a multiemployer plan within the meaning of section 3(37) of ERISA and the Company has not incurred any withdrawal liability, or suffered a "complete withdrawal" or a "partial withdrawal" with respect to a multiemployer plan; (ii) The Pension Plans are qualified plans, have remained qualified under the Code since inception and have been determined by the Internal Revenue Service ("IRS") to be so qualified, and the IRS has taken no action to revoke such determination or qualification; MEMBERSHIP INTEREST AGREEMENT Page 12 (iii) The Company has, in all material respects, performed all obligations, whether arising by operation of law, contract, or past custom, required to be performed under or in connection with the ERISA Plans, and the Company does not have any knowledge of any default or violation by any other party with respect to the ERISA Plans; (iv) To Seller's knowledge, the Company has complied in all material respects with ERISA, and, where applicable, the Code, regarding the ERISA Plans; (v) All reports and disclosures relating to the ERISA Plans required to be filed with or furnished to governmental agencies, plan participants, or plan beneficiaries have been or will be filed or furnished in accordance with applicable law in a timely manner; (vi) There are no Actions pending (other than routine claims for benefits) or, to the knowledge of the Seller threatened, against any ERISA Plan or against the assets funding any ERISA Plan; (vii) Full payment has been or will be made, in accordance with section 404(a)(6) of the Code, of all amounts which the Company is required to pay under the terms of the Pension Plans as contributions to the Pension Plans as of the last day of the most recent plan year of the Pension Plans ended before the date of this Agreement, and neither the Pension Plans nor the trusts established there under have incurred any "accumulated funding deficiency" (as defined in section 302 of ERISA and section 412 of the Code), whether or not waived, as of the last day of the most recent plan year of the Pension Plans ended before the date of this Agreement; (viii)The Company maintains adequate accruals on its books to reflect accrued contributions to each of the Pension Plans for the current plan year and to reflect accrued medical and dental claims incurred, but not yet paid, under the terms of any ERISA Plan which is a welfare plan within the meaning of section 3(1) of ERISA (a "Welfare Plan"); (ix) No transaction has occurred with respect to the Pension Plans or the assets thereof which could result in the imposition on the Seller or the administrators or trustees under the Pension Plans, either directly or indirectly, of taxes or penalties imposed under section 4975 of the Code or section 502(i) of ERISA; (x) With respect to the Pension Plans, regardless of whether such plans are subject to Title IV of ERISA, no termination or reportable event, as defined in section 4043(b) of ERISA has occurred or is anticipated to occur; (xi) As of the most recently dated plan statement received by the Company, the fair market value of assets of each Pension Plan which is a "defined benefit plan" as defined in section 3(35) of ERISA ("Defined Benefit Plan") equals or exceeds the aggregate present value of the accrued benefits there under of all participants, computed on a "plan termination basis," based upon actuarial assumptions which are reasonable in the aggregate; MEMBERSHIP INTEREST AGREEMENT Page 13 (xii) Other than applications for determination, no action is pending with respect to the Pension Plans before the IRS, the Department of Labor, the Pension Benefit Guaranty Corporation ("PBGC") or before any state or local governmental agency; (xiii) No act or omission constituting a breach of fiduciary duties has occurred with respect to the ERISA Plans or the assets thereof, which could subject the Seller or the Purchaser, either directly or indirectly, to any liability; (xiv) No liability under Title IV of ERISA has been incurred by the Company which has been satisfied in full and the Company does not know of any facts or circumstances which might give rise to any liability of the Company under Title IV of ERISA which could reasonably be anticipated to result in any claims being made against the Purchaser or the Seller by the PBGC; (xv) The PBGC has not instituted any proceedings to terminate any of the Pension Plans; and (xvi) Each Welfare Plan is intended to meet currently applicable requirements for tax-favored treatment under Subchapter B of Chapter 1 of the Code, is in compliance with such requirements, and if applicable, with the requirements of sections 419 and 419A of the Code, and there is no disqualified benefit (as such term is defined in section 4976(a) of the Code) which would subject the Seller or the Purchaser to a tax under section 4976. (c) Plan Documents. The Seller has delivered to the Purchaser and its counsel true and complete copies, if any, of (i) all documents governing the ERISA Plans, including all amendments thereto which will become effective at a later date, (ii) all agreements and arrangements listed on Disclosure Schedule 2.18, (iii) the latest IRS determination letter obtained with respect to each of the Pension Plans, (iv) Form 5500 for the most recent completed plan year for each of the ERISA Plans, together with all schedules forming a part thereof, (v) the most recent actuarial valuation for any Defined Benefit Plan, (vi) any form, other than Form 5500, required to be filed for the most recently completed plan year for any Defined Benefit Plan with any governmental agency, (vii) all summary plan descriptions relating to the ERISA Plans, (viii) the annuity contracts funding obligations of any Defined Benefit Plan, and (ix) all employment manuals. 2.19 Labor Relations. No employee of the Company is represented by a labor union or under a collective bargaining agreement, except as set forth on Disclosure Schedule 2.19, Collective Bargaining Agreements, if any, and the particular collective bargaining agreement or agreements have been delivered to the Purchaser. No petition has been filed or proceedings instituted by any employee or group of employees with any labor relations board seeking recognition of a bargaining representative. There are no matters pending before the National Labor Relations Board or any similar state or local labor agency, and the Company is neither engaged in nor subject to any penalties or enforcement action in respect of any unfair labor practices, and the Seller believes that it enjoys good labor relations. There are no controversies or disputes pending between the Company and any of its employees, except for such controversies and disputes as do not and will not, individually or in the aggregate, have a material adverse effect on its business, operations, assets, prospects, or condition, financial or otherwise. MEMBERSHIP INTEREST AGREEMENT Page 14 2.20 Environmental Matters. (a) For purposes of this Section 2.20, the property of the Seller shall mean such property whether now or in the past owned or leased by it. Additionally, for purposes of this Section 2.20, "Hazardous Substance" means (i) a hazardous substance as defined in 42 U.S.C. ss.9601(14), as amended from time to time, and all rules, regulations, and orders promulgated there under as in effect from time to time, (ii) "hazardous waste" as defined in 42 U.S.C. ss.6903(5), as amended from time to time, and all rules, regulations, and orders promulgated there under as in effect from time to time, (iii) if not included in (i) or (ii) above, "hazardous waste constituents" as defined in 40 C.F.R. ss.260.10, specifically including Appendix VII and VIII of Subpart D of 40 C.F.R. ss.261, as amended from time to time, and all rules, regulations, and orders promulgated there under as in effect from time to time, and (iv) "source," "special nuclear," or "by-product material" as defined in 42 U.S.C. ss.3011, et seq., as amended from time to time, and all rules, regulations, and orders promulgated there under as in effect from time to time. Further, "Requirements of Law" shall mean all applicable federal, state, local, or foreign laws, statutes, ordinances, rules, regulations, or court or administrative orders or processes, or arbitrator's orders or processes. (b) Except as set forth on Disclosure Schedule 2.20 Hazardous Substances, or as set forth in any and all reports, studies, plans, governmental interventions, indemnity agreements, insurance policies or other documents concerning the Hazardous condition of the property or Company's Business set forth thereon or otherwise delivered to Purchaser, to Seller's knowledge, the Seller is and has been in compliance with all Requirements of Law relating to Hazardous Substances and applicable to any of its properties. Without limiting the foregoing, (i) neither the operations of the Company nor the development, manufacture, or sale of the processes, technology, results, or products of the Company violate or have violated any Requirements of Law relating to air, soil, water, or noise pollution, or the production, storage, processing, utilization, labeling, transportation, disposal, emission, or other disposition of Hazardous Substances, and (ii) to Seller's knowledge, the Company, or any current or former owner, occupant or operator of any property at any time owned, leased, or operated by the Seller for the Company's Business, or any portion thereof, has never utilized any such property or any portion thereof in violation of any environmental Requirements of Law, except those hazards specified in Disclosure Schedule 2.20 Hazardous Substances, which is attached hereto, or as set forth in any and all reports, studies, plans, governmental interventions, indemnity agreements, insurance policies or other documents concerning the Hazardous condition of the property or Company's Business set forth thereon or otherwise delivered to Purchaser. (c) Except as set forth on Disclosure Schedule 2.20 Hazardous Substances, or as set forth in any and all reports, studies, plans, governmental interventions, indemnity agreements, insurance policies or other documents concerning the Hazardous condition of the property or Company's Business set forth thereon or otherwise delivered to Purchaser, to Seller's knowledge, no discharge, release, spillage, uncontrolled loss, seepage, or filtration of any Hazardous Substance or any fuel, gasoline, or other petroleum product or by-product has occurred at, upon, or under any property at any time owned, leased, or operated by the Seller in an amount that violates any Requirements of Law. MEMBERSHIP INTEREST AGREEMENT Page 15 (d) Except as set forth on Disclosure Schedule 2.20 Hazardous Substances, or as set forth in any and all reports, studies, plans, governmental interventions, indemnity agreements, insurance policies or other documents concerning the Hazardous condition of the property or Company's Business set forth thereon or otherwise delivered to Purchaser, the Company does not utilize, store, dispose of, treat, generate, process, transport, release, or own any Hazardous Substance, nor has the Company ever done so. (e) The Seller has in a timely manner obtained all Licenses and filed all reports required to be filed under or pursuant to any applicable environmental Requirements of Law. (f) Except as set forth on Disclosure Schedule 2.20 Hazardous Substances, or as set forth in any and all reports, studies, plans, governmental interventions, indemnity agreements, insurance policies or other documents concerning the Hazardous condition of the property or Company's Business set forth thereon or otherwise delivered to Purchaser, to Seller's knowledge, no property at any time owned, leased, or operated by the Company now contains, or, to the knowledge of the Seller, in the past has contained, any underground or aboveground tanks for the storage of any Hazardous Substance or fuel oil, gasoline, or any other petroleum product or by-product. (g) Except as set forth on Disclosure Schedule 2.20 Hazardous Substances, or as set forth in any and all reports, studies, plans, governmental interventions, indemnity agreements, insurance policies or other documents concerning the Hazardous condition of the property or Company's Business set forth thereon or otherwise delivered to Purchaser, the Seller has not received any notice of writs, injunctions, decrees, orders, or judgments outstanding, or suits, claims, actions, proceedings, or investigations instituted or threatened under any environmental Requirements of Law applicable to any of the properties at any time owned, leased, or operated by the Company, including but not limited to any notice from any governmental authority or private or public entity advising the Seller that it is or is potentially responsible for response costs under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), as amended, with respect to a release or threatened release of Hazardous Substances. (h) Except as set forth on Disclosure Schedule 2.20 Hazardous Substances, or as set forth in any and all reports, studies, plans, governmental interventions, indemnity agreements, insurance policies or other documents concerning the Hazardous condition of the property or Company's Business set forth thereon or otherwise delivered to Purchaser, the Seller has not received notice of any violation of any environmental, zoning, worker safety, or land use Requirements of Law relating to the operation of the Company or to any of the processes used or followed, results obtained, or products developed, made, or sold by the Seller including, without limitation, under CERCLA, the Toxic Substances Control Act of 1976, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Clean Air Act, as amended, the Federal Water Pollution Control Act, as amended, or the Occupational Safety and Health Act of 1970, as amended. 2.21 Compliance with Laws. The Seller has not been charged with any violation of, or, to the best of its knowledge, Seller is not in violation of, and is not under any investigation with respect to any charge concerning any violation of any Requirements of Law, in which MEMBERSHIP INTEREST AGREEMENT Page 16 such violation either singly or in the aggregate with other violations would have a material adverse effect upon the operations, assets, business or financial condition of the Company. The Company is not in default with respect to any order, writ, injunction, or decree of any court, agency, or instrumentality. Without limiting the generality of the foregoing, to Seller's knowledge, the Company is in compliance with all Requirements of Law promulgated by the Occupational Safety and Health Administration. 2.22 Licenses, Permits, and Authorizations. The Seller has all approvals, authorizations, consents, licenses, franchises, orders, and other permits (collectively, "Licenses") of (i) any governmental or regulatory agency, whether federal, state, local or foreign, and (ii) all trade or industry associations, required to permit it to carry on its business as presently conducted, all of which are in full force and effect. Disclosure Schedule 2.22 Operational Licenses hereto sets forth all such Licenses required for the operation of the business of the Company to the extent not previously include in Disclosure Schedule 2.6. 2.23 Inventory. Except as set forth on Disclosure Schedule 2.23, the inventories of the Company reflected on the Balance Sheets of its "Audited Financials" and "Financial Statements" (both terms collectively referred to as "Company Financials"); taken as a whole are substantially in good and merchantable condition and are suitable and usable or saleable in the ordinary course of business for the purposes intended, net of the reserves stated on the Company Financials. The value of the inventory set forth on the Company Financials (net of such reserves) was established in accordance with GAAP and with the Company's inventory valuation and write-down policies so that the net value thereof stated on such Company Financials shall have been determined. The Company has reasonable inventories to conduct its business consistent with past practices. There has been no material adverse change since December 31, 2004 in the amount or condition of the inventories or the reserves with respect thereto. 2.24 Accounts Receivable. All accounts receivable of the Company represent bona fide and valid claims arising in connection with sales of products by the Company and, except to the extent of the reserves stated on the Company Financials, to Seller's knowledge, the Company's accounts receivable are collectible and are not subject to any counterclaim or setoff, except as set forth on Disclosure Schedule 2.24. There has been no material adverse change at the time of Closing in the amount, validity, or collectibility of the accounts receivable of the Company from that stated on the Company's Financials. 2.25 Property of Others. Except as set forth on Schedule 2.25, no shortage exists in (i) any inventory of raw material, work in progress, or finished goods owned by customers or suppliers of the Company and stored upon its premises or otherwise, or (ii) any other item of personal property owned by another for which the Company is accountable to another. Without limiting the foregoing, except as set forth on Schedule 2.25 all items of personal property for which the Company is accountable under any bailment agreement, consignment contract, loan program, or otherwise are fully accounted for with no shortages or missing or lost items, are in workable, usable, and saleable condition, and have suffered no damage or deterioration, ordinary wear and tear excepted. 2.26 Disclosure of Confidential Information. The Seller has fully disclosed, or will disclose to the Purchaser, on or before the Closing Date, all processes, inventions, recipes, methods, MEMBERSHIP INTEREST AGREEMENT Page 17 formulas, plans, drawings, customer lists, secret information, recipes, and know-how (whether secret or not) known to it or in its possession and usable by the Company in connection with its business as now conducted or proposed to be conducted. 2.27 Condition of Tangible Assets. Except as set forth on Schedule 2.27, to Seller's knowledge, all of the facilities of the Company and its equipment and other tangible assets, are in good condition and repair (ordinary wear and tear excepted) and workable, usable, and adequate for the uses to which they have been put by the Company in the ordinary course of business, and none of such facilities and none of such equipment or other tangible assets (exclusive of obsolete items no longer used in the Company's business) is in need of other than routine maintenance or repair. The Company has not received any notice of any violations of any Requirements of Law with respect to the Company's properties or operations that have not been cured. 2.28 Product and Service Warranties. Disclosure Schedule 2.28, Warranties, which is attached hereto, contains a true and complete description of all warranties and terms and conditions of sale to third parties which are not included in the Customer maintenance and service Agreement disclosed in Disclosure Schedule 2.16 with respect to all products overhauled, manufactured, assembled, repaired or sold by the Company that have been in effect at any time over the last five years, except for warranties imposed by law. 2.29 Absence of Undisclosed Liabilities. The Company does not have any material debt, liability, or obligation of any nature, whether known or unknown, or fixed, absolute, accrued, contingent, or otherwise, except those which (i) are accrued or reserved against it in the Company's Financials, (ii) have been disclosed in this Agreement or in any of the Disclosure Schedules hereto, or (iii) have been incurred since May 24,, 2005 in the ordinary course of business in amounts and for terms consistent, individually and in the aggregate, with the Company's past practice. 2.30 Disclosure. No representation or warranty by the Seller in this Agreement or any of the other Acquisition Documents (including, without limitation, the Disclosure Schedule), contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements herein or therein not misleading. There is no fact known to the Seller that materially adversely affects, or that, as of the date of Closing, might in the future materially adversely affect, the operations, business, assets, properties, or condition, financial or otherwise, of the Seller that has not been set forth in this Agreement or the Disclosure Schedule. 2.31 Brokerage. No broker or finder has acted directly or indirectly for the Seller or any of their Affiliates in connection with this Agreement or the transactions contemplated hereby, and no broker or finder is entitled to any brokerage or finder's fee or other commission in respect thereof based in any way on the actions or statements of, or agreements, arrangements, or understandings made with the Seller or any of its Affiliates. 2.32. With respect to any representation or warranty made by Seller herein, the phrases "to Seller's best knowledge" or "to Seller's knowledge" (or similar phrases which limit a representation or warranty to matters within the knowledge or belief of Seller) shall mean that no facts or circumstances are known by or have come to the attention of the MEMBERSHIP INTEREST AGREEMENT Page 18 Members of the Company, which would give any such Members knowledge of the inaccuracy of the substantive facts and circumstances set forth in such representation or warranty, but shall not mean that Seller, the Company or the Members have undertaken investigations or verifications with respect to such matters. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER The Purchaser hereby represents and warrants to the Seller as set forth below: 3.1 Corporate Organization, etc. The Purchaser is on the date hereof, and will be on the Closing Date, a corporation duly organized, validly existing and in good standing under the laws of the State of Oklahoma. 3.2 Authorization, etc. The Purchaser has full corporate power and authority to enter into this Agreement and the other Acquisition Documents to which it is or will be a party, to perform its obligations hereunder and there under, and to carry out the transactions contemplated hereby and thereby. The Boards of Directors of the Purchaser and its Parent corporation, TAT Technologies, Ltd. have taken, or will take before the Closing Date, all actions required by law, its Certificate of Incorporation, its By-Laws or otherwise to authorize (i) the execution and delivery of this Agreement and the other Acquisition Documents and (ii) the performance of its obligations hereunder and there under. This Agreement has been duly executed and delivered by the Purchaser and, upon the execution and delivery of the remaining Acquisition Documents by a duly authorized officer of the Purchaser, the remaining Acquisition Documents will have been duly executed and delivered by the Purchaser, and this Agreement is, and such other Acquisition Documents will be, upon due execution and delivery thereof, the legal, valid, and binding obligations of the Purchaser, enforceable according to their terms. 3.3 No Violation. None of (i) the execution and delivery of this Agreement or any other Acquisition Document by the Purchaser, (ii) the performance by the Purchaser of its obligations hereunder or there under, or (iii) the consummation of the transactions contemplated hereby or thereby will (A) violate any provision of the Certificate of Incorporation or By-Laws of the Purchaser, (B) violate, or be in conflict with, or permit the termination of, or constitute a default under or breach of, or cause the acceleration of the maturity of, any contract, debt, or other obligation of the Purchaser, which violation, conflict, default, breach, termination or acceleration, either individually or in the aggregate with all other such violations, conflicts, defaults, breaches, terminations and accelerations, would have a material adverse effect on the business, assets or financial condition of the Purchaser, (C) except as set forth in Disclosure Schedule 3.3, if any hereof, require the consent of any other party to, or result in the creation or imposition of any Lien upon any property or assets of the Purchaser under any agreement or commitment to which the Purchaser is a party or by which the Purchaser is bound, or (D) to the best knowledge and belief of the Purchaser, violate any statute or law or any judgment, decree, order, regulation, or rule of any court or governmental authority to which the Purchaser is subject. 3.4 Litigation. There is no action pending or, to the best knowledge and belief of the Purchaser, threatened against the Purchaser, or any properties or rights of the Purchaser, MEMBERSHIP INTEREST AGREEMENT Page 19 that questions or challenges the validity of this Agreement or any of the other Acquisition Documents, nor any action taken or to be taken by the Purchaser pursuant hereto or thereto or in connection with the transactions contemplated hereby or thereby and the Purchaser does not know of any such action, proceeding, or investigation that may be asserted. 3.5 Disclosure. No representation or warranty by the Purchaser in this Agreement contains or will contain any untrue statement of a material fact or omits or will omit to state any material fact necessary to make the statements herein not misleading. 3.6 Brokerage. No broker or finder has acted directly or indirectly for the Purchaser or its Affiliates in connection with this Agreement or the transactions contemplated hereby, and no broker or finder is entitled to any brokerage or finder's fee or other commission in respect thereof based in any way on the actions or statements of, or the agreements, arrangements, or understandings made with the Purchaser or its Affiliates. ARTICLE IV OBLIGATIONS OF THE PARTIES The Seller hereby covenants and agrees with the Purchaser and the Purchaser hereby covenants and agrees with the Seller that: 4.1 Reasonable Access. The Seller shall or shall cause its Members and managers, accountants, counsel, and other authorized representatives and affiliated parties to afford the Purchaser and its counsel, accountants, and other authorized representatives reasonable access during normal business hours to its plants, properties, books and records that the Purchaser and its advisors may have the opportunity to make such reasonable investigations as they shall desire to make of the affairs of the Seller; provided, however, except for managers, representatives and employees designated by the managers, the Purchaser shall not contact employees of the Company to discuss the transactions contemplated by this Agreement. The Company shall furnish to the Purchaser any additional financial and operating data and other information as the Purchaser and its counsel, accountants, and other authorized representatives shall from time to time reasonably request. 4.2 Conduct Before Closing Date. Before the Closing Date, except as otherwise contemplated by this Agreement or as permitted by the prior written consent of the Purchaser, but without making any commitment on the Purchaser's behalf, the Company shall: (a) Conduct its business and operations only in the ordinary course, including, without limitation, maintaining inventories , taken as a whole, at levels consistent with past practice; (b) Maintain all of its properties and assets in good condition, working order, and repair (except for ordinary wear and tear); (c) Perform its obligations under all agreements binding upon it and maintain all of its Licenses in good standing; MEMBERSHIP INTEREST AGREEMENT Page 20 (d) Continue in effect the Insurance Policies (or similar coverage) referred to in Section 2.14 hereof; (e) Keep available the services of its current managers and employees; (f) Maintain and preserve the good will of the suppliers, customers, and others having business relations with it; (g) Before the Closing Date, consult with the Purchaser from time to time with respect to any actual or proposed material conduct of its business; (h) Continue all capital expenditure programs in progress before the Closing Date; and (i) Obtain the approval of Purchaser prior to making any extraordinary (not in the ordinary course of business) expenditure in excess of $2,500.00. 4.3 Prohibited Transactions Before Closing Date. Before the Closing Date, except as otherwise contemplated by this Agreement or permitted by the prior written consent of the Purchaser, the Company shall not: (a) Become a party to any agreement, which, if it had existed on the date hereof, would have come within the scope of the Disclosure Schedule pursuant to Section 2.16 hereof; (b) Do any of the things listed in Section 2.10 hereof; (c) Enter into any compromise or settlement of any litigation, proceeding or governmental investigation relating to its properties or Company's Business; or (d) Directly or indirectly, in any way, contact, initiate, enter into, or conduct any discussions or negotiations, or enter into any agreements, whether written or oral, with any person or entity with respect to the sale of any of the Company's assets or units evidencing Membership Interests or a merger or consolidation of the Company with any other entity. 4.4 Further Assurances. Before and after the Closing, each party hereto shall execute and deliver such instruments and take such other actions as any other party may reasonably request for the purpose of carrying out the intent of this Agreement and the other Acquisition Documents. Each party hereto shall use its best efforts to cause the transactions contemplated by this Agreement and the other Acquisition Documents to be consummated, and, without limiting the generality of the foregoing, to obtain all consents and authorizations of government agencies and third parties and to make all filings with and give all notices to government agencies and third parties that may be necessary or reasonably required to effect the transactions contemplated by this Agreement and the other Acquisition Documents. The Seller shall give prompt notice to the Purchaser, after receipt thereof by the Seller, of (i) any notice of, or other communication relating to, any default or event that, with notice or lapse of time or both, would become a default under any MEMBERSHIP INTEREST AGREEMENT Page 21 indenture, instrument, or agreement material to the Company, to which the Company is a party or by which the Company is bound, and (ii) any notice or other communication from any third party alleging that the consent of such third party is or may be required in connection with the transactions contemplated by this Agreement and the other Acquisition Documents. Each corporate party shall deliver to the other at Closing, appropriate evidence of the approval of its respective Managers or Board of Directors and stockholders or Members (if required by law) of this Agreement, the other Acquisition Documents and the transactions contemplated hereby and thereby. 4.5 Confidentiality. Before and after the Closing, each party to this Agreement shall, cause its managers, officers, accountants, counsel, and other authorized representatives and affiliated parties, to hold in strict confidence and not use or disclose to any other party without the prior written consent of the other party, all information obtained from the other parties in connection with the transactions contemplated hereby, except such information may be used or disclosed: (i) as may be necessarily published by Purchaser to any public market, business reporting service, or stock exchange or as may be required by governmental stock exchange regulations or rules, or as required under agreements with customers, vendors, lenders or other third parties, (ii) if required by court order or decree or applicable law, (iii) if it is publicly available other than as a result of a breach of this Agreement, (iv) if it is otherwise contemplated herein. ARTICLE V CONDITIONS TO PURCHASER'S OBLIGATIONS The obligation of the Purchaser under this Agreement to consummate the Closing on the Closing Date shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions: 5.1 Representations and Warranties True. The representations and warranties of the Seller contained herein, in the other Acquisition Documents (including, without limitation, all schedules and exhibits hereto and thereto) and in all certificates and documents delivered by the Seller shall be true and accurate as of the Closing Date, except for changes permitted or contemplated by this Agreement. 5.2 No Material Changes. (a) No portion of the assets material to the operation of the business of the Company shall, after December 31, 2004 until the Closing Date, be damaged, destroyed, or taken by condemnation, whether or not covered by any Insurance Policy; (b) After December 31, 2004 and until the Closing Date, the Company shall not have suffered or become bound by changes of any kind or nature that either individually or in the aggregate have a material adverse effect on its ability to continue its business operations; and, (c) No material adverse change in the business, assets, or financial condition of the Company shall have occurred after December 31, 2004 and be continuing. MEMBERSHIP INTEREST AGREEMENT Page 22 5.3 Performance. The Seller shall have performed and complied in all material respect with all agreements, obligations, and conditions required by this Agreement or the other Acquisition Documents to be performed or complied with by them on or before the Closing Date. 5.4 Consents. All filings with and consents from government agencies and third parties required to consummate the transactions contemplated hereby and by the other Acquisition Documents shall have been made or obtained (including without limitation the consents of the lessors under the leases referred to in Section 2.6 hereof and the consents and approvals specified in Section 2.7 and Section 2.8), except to the extent that making any such filing or obtaining any such consent has been waived in writing by the Purchaser or the failure to obtain any such consent or make any such filing would not have a material adverse effect on the assets, properties, operations, business, or condition, financial or otherwise, of the Company. 5.5 Closing Documents. The Seller shall have delivered, or caused to be delivered to the Purchaser, the documents and instruments described below: (a) The opinion of counsel for the Seller, in form and substance reasonably satisfactory to the Purchaser and its counsel and containing such assumptions and limitations as are customary or reasonable for opinion letters normally provided in similar transactions, covering at least the following: (i) The Company is a North Carolina Limited Liability Company validly existing and in good standing under the laws of its state in which it was chartered; (ii) The execution, delivery, and performance of this Agreement, the other Acquisition Documents to which the Seller is a party, and the other instruments or documents required to be executed by the Seller in connection herewith and therewith have been authorized by all necessary Company and other actions of the Seller and have been duly executed and delivered by the Seller and constitute legal, valid, and binding obligations of such parties enforceable in accordance with their terms to the extent the Purchaser should be able to realize the practical benefits thereof, except as such enforceability may be limited by bankruptcy, reorganization, insolvency, moratorium, or similar laws affecting the enforcement of creditor's rights and except as the availability of suitable remedies may be subject to judicial discretion; (iii) The consummation of the transactions contemplated by this Agreement, the other Acquisition Documents to which the Seller is a party, and all other instruments or documents required to be executed by the Seller in connection herewith and therewith will not violate or result in a breach of or constitute a default under the Articles of Organization or Operating Agreement or other organizational agreements of the Company; (iv) Except for such actions and proceedings as are disclosed to the Purchaser in writing, Seller's counsel does not know of any limitation, governmental investigation, actions, or suits, pending or threatened, against or relating to the transactions contemplated by this Agreement or any other Acquisition Document to which Seller is a party; and MEMBERSHIP INTEREST AGREEMENT Page 23 (v) On best information and belief, the transaction contemplated herein will not violate any securities ("blue sky laws") of the state of North Carolina. (b) Certified copies of the resolutions adopted by the Members and Managers of the Company, or by appropriate committees thereof, authorizing this Agreement and the other Acquisition Documents and the transactions contemplated hereby and thereby. (c) Certificates of the Secretary of State of each of the states in which the Company is qualified to transact business as a foreign corporation, dated no earlier than May 1, 2005, respecting the good standing of the Company in each such jurisdiction the Company is domesticated or qualified by certificate to conduct business. (d) Operating Agreement of the Company certified as of the Closing Date by a manager of the Company. (e) Any and all licenses or renewals, and consents as may be necessary to effect the continuation of the Company's Business by the Purchaser following the Closing of this Agreement. (f) Such other documents, instruments, or certificates as shall be reasonably requested by the Purchaser or its counsel (inclusive of executed conveyances of certificates or units of ownership and or cancelled certificates and other assignments, waivers and necessary releases of liens, mortgages and financial statements and security or UCC filings). 5.6 Environmental Report. If the Purchaser shall choose at its expense to retain an environmental consulting firm to render an environmental audit report respecting the Company and such firm renders a report that details violations of federal, state, or local environmental Requirements of Law, the Seller shall have cured or shall have caused the cure of such violations or the Purchaser shall have waived such compliance with this Section 5.6; provided, however, that the Seller shall not be obligated to cure any such violation. 5.7 Certificates of the Seller. The Seller shall have furnished such certificates of its managers and others as may reasonably be required by the Purchaser to evidence compliance with the conditions set forth in this Article 5. 5.8 Seller's auditors and Purchaser's auditors shall have agreed upon both the method of compilation and accuracy of the financial statements for the Company from January 1, 2005 through the date of Closing. 5.9 Seller and Purchaser shall have agreed upon a baseline environmental audit as provided in Section 9.3 (e). MEMBERSHIP INTEREST AGREEMENT Page 24 ARTICLE VI CONDITIONS TO SELLER'S OBLIGATIONS The obligation of the Seller under this Agreement to consummate the Closing on the Closing Date shall be subject to the satisfaction, on or before the Closing Date, of each of the following conditions. 6.1 Representations and Warranties True. The representations and warranties of the Purchaser contained herein, in the other Acquisition Documents (including, without limitation, all schedules and exhibits hereto and thereto), and in all certificates and documents delivered by the Purchaser, shall be true and accurate as of the Closing Date, except for changes permitted or contemplated by this Agreement. 6.2 Performance. The Purchaser shall have performed and complied in all material respects with all agreements, obligations, and conditions required by this Agreement to be performed or complied with by it on or before the Closing Date. 6.3 Closing Documents. The Purchaser shall have delivered or caused to be delivered to the Seller the documents and instruments described below: .. (a) The cash payment as provided in Article I Section 4 (1.4, above), and payment and satisfaction in full of the Blue Ridge II Limited Partnership loan as provided in Section 1.3 (a) above, and satisfaction of the Whitehall loan as provided in Section 1.3(b) above. (b) A certified copy of the resolutions adopted by the Boards of Directors of the Purchaser and its parent corporation, TAT Technologies, Ltd. authorizing this Agreement and the other Acquisition Documents and the transactions contemplated hereby and thereby. (c) The opinion of counsel for the Purchaser, in form and substance reasonably satisfactory to the Seller and its counsel and containing such assumptions and limitations as are customary or reasonable for opinion letters normally provided in similar transactions, covering at least the following: (i) The Purchaser is a corporation validly existing and in good standing under the laws of the State of Oklahoma; (ii) The execution, delivery, and performance of the Agreement, the other Acquisition Documents to which it is a party and the other instruments or documents required to be executed by the Purchaser in connection herewith and therewith, have been authorized by all necessary corporate and other actions of the Purchaser and have been duly executed and delivered by the Purchaser and constitute the legal, valid, and binding obligations of such parties enforceable in accordance with their terms to the extent the Seller should be able to realize the practical benefits thereof, except as such enforceability may be limited by bankruptcy, reorganization, insolvency, moratorium, or similar laws affecting the enforcement of creditors' rights and except as the availability of suitable remedies may be subject to judicial discretion; MEMBERSHIP INTEREST AGREEMENT Page 25 (iii) The consummation of the transactions contemplated by this Agreement, the other Acquisition Documents to which the Purchaser is a party, and all other instruments or documents required to be executed by the Purchaser in connection herewith and therewith will not violate or result in a breach of or constitute a default under the Articles of Incorporation, By-Laws or other organizational agreements of the Purchaser; and (d) Such other documents, instruments, or certificates as shall be reasonably requested by the Seller or its counsel. 6.4 Seller shall have reached an agreement with Blue Ridge Investments II, Limited Partnership and its parent and affiliated companies, and at or prior to Closing shall have consummated the same, whereby the warrant and other rights and interest of Blue Ridge Investments II, Limited Partnership in the Company shall be released and terminated, and Jim Taylor shall have terminated and released any and all options as are in his favor to acquire additional units of ownership or future Membership Interests in the Company. 6.5 Seller and Buyer shall have agreed upon a baseline environmental audit as provided in Section 9.3 (e). ARTICLE VII CLOSING; CLOSING DATE 7.1 Closing. The closing (the "Closing") will be held in on July 6, 2005 at 9:00 a.m., at the offices of Blancato, Doughton & Hart, Winston-Salem, N.C, or at such other time and place as the parties hereto may mutually agree upon in writing (the "Closing Date"), at which Closing the documents and instruments referred to in Articles V and VI hereof will be delivered by the parties. Notwithstanding Closing Date shall occur later, the effective date of this agreement shall be July 1, 2005. ARTICLE VIII CERTAIN POST-CLOSING COVENANTS 8.1 Access. After the Closing Date, the Purchaser shall, at the Seller's expense, permit the Seller, from time to time, to inspect and copy such books of account and other records of the Seller and to utilize the services of the Purchaser's or the Seller's employees, all as may be necessary or convenient to enable the Seller to prepare and file tax returns. Until the seventh anniversary of the Closing Date, the Purchaser shall not, without the prior written consent of the Seller or its successors in interest, destroy or dispose of any such records. Notwithstanding any of the foregoing, no covenant contained in this Section 8.1 on the part of the Purchaser is intended to, and nothing herein shall be construed to, benefit or confer any rights upon any person, firm, or corporation other than the Seller. 8.2 Non-Competition Requirements. (a) The Purchaser and the Seller agree that the Purchase Price was fixed on the basis that the transfer of the Transferred Membership Interest to the Purchaser would provide the Purchaser with the full benefit and good will of the Company as it existed on the MEMBERSHIP INTEREST AGREEMENT Page 26 Closing Date. The Seller acknowledges that it is proper for the Purchaser to have assurance that the value of the Transferred Membership Interest will not be diminished by acts of the Seller after the Closing Date. (b) Excluding Member Jim Taylor because of his minor ownership interest., the covenant of the other Members of the Company not to compete with the Company following the transfer of their Transferred Membership Interests to the Purchaser at Closing, is a material inducement for the Purchaser to purchase the Company. Purchaser has committed additional consideration by this Agreement to pay (the "Non-Competition Payments") the Members, excluding Jim Taylor, in consideration of the full and faithful performance of the covenant not to compete as is set forth in this Article, collectively the sum of $600,000 payable in 36 future monthly installments of $16,666.65 each (the final installment being $16,666.90) disbursed to Members monthly as and for their respective Covenants Not To Compete as set forth in this Article 8 Section 2 (8.2), the first installment commencing on like date as the date of Closing for each successive month following the date of Closing, for a total of 36 months, payable to Members as follows:
Member Name % Amount Mo. Amount 36th 3 Year Total ----------- --- Installment Installment ------------ ----------- ----------- Claude L. Buller 33 1/3% $5,555.55 $5,555.75 $200,000.00 Paul R. Hilliard 33 1/3% $5,555.55 $5,555.75 $200,000.00 Thomas W. Ferrell 33 1/3% $5,555.55 $5,555.75 $200,000.00 TOTAL 100% $16,666.65 $16,667.25 $600.000.00
(c) In consideration of the foregoing, Claude L. Buller, Paul R. Hilliard and Thomas W. Ferrell covenant and agree that, commencing on the Closing Date and ending on like anniversary date of the month 36 months following the Closing Date ("3 Year Anniversary of Closing Date"), they will not (i) directly or indirectly compete with, or own, manage, operate, or control or participate in the ownership, management, operation or control of, or provide consulting services to, any business, firm, corporation, partnership, person, proprietorship or other entity which is engaged in the Company's Business of APU, propeller or landing gear maintenance, repair and overhaul or parts sales (the "Restricted Business"), (ii) directly or indirectly solicit employment by any person, partnership, corporation or other entity of any of the employees, consultants, agents, or independent contractors of the Company (for this purpose the terms "employees," "consultants," "agents," and "independent contractors" shall include any persons having such status with regard to the Company at any time during the six (6) months preceding any solicitation in question), or (iii) solicit, interfere with, or endeavor to entice away from the Company, on behalf of any person, partnership, corporation, or other entity, any customer of the Restricted Business of the Company. The foregoing provisions shall not apply to investments in shares of stock of a corporation traded on a national securities exchange or on the national over-the-counter market, which shall have an aggregate market value, at the time of acquisition, of less than $100,000 and constitute less than two per cent of the outstanding shares of such stock of such corporation. For purposes of this 8.2(c), parts sales shall be defined as the following: (i) new and repaired or overhauled parts, including cores, for APUs, landing gear and propellers; (ii) parts and logistic support for airline heavy maintenance checks; (iii) consumables to both the airline and military segments; and (iv) the MEMBERSHIP INTEREST AGREEMENT Page 27 following rotable components to both airlines and corporate aviation segments: (a) Honeywell air cycle machines, and (b) Frisby actuators. Anything to the contrary set forth in Section 8.2 notwithstanding, it is understood and agreed that a Member may, without breaching or violating the provisions and covenants contained in this Section 8.2, be employed by or may participate in the ownership, management, operation or control of, or provide consulting services to, any division, subsidiary or affiliated business not engaged in the Restricted Business. Provided, however, Ferrell may seek written approval from Purchaser following Closing to accept employment, consulting assignments or other work from companies, entities or individuals which may be considered as indirect competitors because, for example, such employers have divisions which compete directly with Company, and Purchaser may at its discretion provide written consent for such engagement or employment, which such consent shall not be unreasonably withheld. Purchaser shall provide its response to Ferrell's request in writing within 30 days of receipt of that request or Purchaser shall be deemed to approve. the request. (d) If any of the Members commits a breach, or threatens to commit a breach, of any of the provisions of this Section 8.2, the Purchaser shall have the right and remedy, in addition to any others, to have the provisions of this Section 8.2 specifically enforced by any court having equity jurisdiction, together with an accounting therefore, it being acknowledged and understood by the Seller that any such breach or threatened breach will cause irreparable injury to the Purchaser and that money damages will not provide an adequate remedy therefore. In addition to any remedy Purchaser may have against the Members breaching this covenant not to compete, the Purchaser shall have the right to suspend payments pendent lite, and set off or off set future payments to breaching Member or Members against any judgment, order or decree of a court of competent jurisdiction awarding damages to Purchaser. Anything to the contrary set forth in the Section 8.2 notwithstanding, it is understood and agreed that upon a breach or threatened breach of the covenants set forth this Section 8.2, Purchaser's remedies shall be only against Member or Members committing or threatening to commit such breach, and Purchaser shall have no claim against and no right to suspend payments to the other non-breaching Member or Members. (e) Members agree the territorial limitation under which the covenant not to compete will apply shall be worldwide and that Members do not consider such broad territorial limits to be unreasonable, but in the event any court of competent jurisdiction shall determine the territorial limits of this covenant to be unreasonable, then in that event, the geographical territorial limits shall be fixed by the court to the maximum geographical territory allowed by the law. 8.3 Consulting Services Requirements. During the first three (3) months following the Closing Date and at Purchaser's request, Thomas W. Ferrell, Claude L. Buller and Paul R. Hilliard each agree to provide up to a maximum of 10 hours per month in consulting services at no additional cost to Purchaser. The date, time and location for the provision of such consulting services shall be mutually agreed upon by Purchaser and the Member to perform such consulting services. MEMBERSHIP INTEREST AGREEMENT Page 28 Should Purchaser request consulting services in excess of the 10 hour monthly maximum, neither Ferrell, nor Buller nor Hilliard shall have any obligation to provide such excess services. However, if Ferrell, Buller or Hilliard agree to provide any consulting services in excess of the 10 hour monthly maximum during the three (3) month period of time following Closing, then in that event, they will be paid, for actual hours worked at the same rate of pay received by them from the Company prior to Closing, and payable to them at times they were paid prior to Closing. After conclusion of the third month following the Closing Date, Purchaser and Members may continue the consulting services under terms as may be thereafter agreed by them in writing; however, neither Purchaser nor the Members shall have any obligation to continue such consulting services. ARTICLE IX INDEMNIFICATION 9.1 Survival. Notwithstanding (i) the making of this Agreement, (ii) any examination made by or on behalf of the parties hereto, and (iii) the Closing hereunder, (A) the representations and warranties of the parties contained herein or in any certificate or other document delivered pursuant hereto or in connection herewith shall survive until the 3 Year Anniversary of Closing Date, except for the representations and warranties made in Section 2.13 hereof (Tax Returns and Payments), which shall survive until expiration of the applicable statute of limitations for the underlying cause of action; and (B) the covenants and agreements required to be performed after the Closing pursuant to any provision of this Agreement, including this Article 9, shall survive until fully performed or fulfilled. No action for indemnification pursuant to Sections 9.3 or 9.4 may be brought after the applicable expiration date, provided, however, that if before such date one party hereto has notified in writing the other party hereto of a claim for indemnity hereunder (whether or not formal legal action shall have been commenced based upon such claim), such claim shall continue to be subject to indemnification in accordance herewith. 9.2 Limitations on Member's Indemnity: (a) Purchaser shall not be entitled to any indemnification, whether in the form of payment or offset against the Non-Competition Payments, for any Damages, unless and until the aggregate amount of all Damages suffered or incurred by Purchaser exceeds $100,000.00, in which event such Damages of Purchaser may be claimed only to the extent that such Damages exceed $100,000.00. Provided however, this $100,000.00 minimum shall not apply to Damages based on income taxes of the Company pursuant to Section 9.3(d) or Damages based upon Requirements of Law related to Hazardous Substances or any release, spill or discharge by the Company of any Hazardous Substances onto any property owned, leased or operated by the Company pursuant to Requirements of Law related to Hazardous Substances or any release, spill or discharge by the Company of any Hazardous Substances onto any property owned, leased or operated by the Company pursuant to Section 9.3(e). below. (b) Except only as provided in 9.2(c) below, none of the Members shall have any liability to Purchaser or its successors or assigns (for indemnification, Damages or otherwise) in excess of the unpaid amounts of the Non-Competition Payments pursuant to Section 8.2, and Purchaser's sole recourse for Damages under Section 9.3 or otherwise under this MEMBERSHIP INTEREST AGREEMENT Page 29 Agreement, shall be as an offset against the Non-Competition Payments coming due under Section 8.2 above. (c) Provided, however, the Damages limitation set forth in 9.2(b) above shall not apply to Damages incurred by Purchaser for undisclosed liabilities on account of Seller's actual fraud, intentional deceit or intentional misrepresentation (for example, undisclosed liabilities of which the Members had actual knowledge and intentionally failed to disclose the same or actively and intentionally concealed the same). (d) The amount of any Damages of Purchaser under Section 9.3 shall be reduced by the amount, if any, received by Purchaser from any third person, including, without limitation, any insurance company or other insurance provider (such amount being referred to herein as a "Third Party Reimbursement"), in respect of the Damages suffered thereby. If, after receipt by Purchaser of any indemnification payment or off-set against the Non-Competition Payments, Purchaser receives a Third Party Reimbursement in respect of the same Damages for which indemnification was made and such Third Party Reimbursement was not taken into account in assessing the amount of indemnification, then Purchaser shall turn over all of such Third Party Reimbursement to the Members (other than Jim Taylor) up to the amount of the indemnification paid pursuant hereto. (e) Anything to the contrary contained in this Agreement notwithstanding, the Members shall have no obligation to or liability to indemnify Purchaser for any Damages for undisclosed liabilities or for breach of any representation or warranty where the basis of such liabilities or breach were discovered by or known to Purchaser prior to Closing (the burden of proof being on the Members that the basis of such liabilities were known to or discovered by Purchaser prior to Closing). Further, anything to the contrary contained in this Agreement notwithstanding, the Members shall have no obligation to or liability to indemnify Purchaser for any Damages for undisclosed liabilities or for breach of any representation or warranty where the basis of such liabilities or breach were disclosed to Purchaser in writing (including paper, photocopies, facsimiles, e-mails, electronic, magnetic or digital data contained on a computer readable disk,prior to Closing. (f) Anything to the contrary contained in this Agreement notwithstanding, and except for Seller's post closing covenants set forth in Section 8.2 above, Purchaser's sole remedy for any breach or default under this Agreement (including any breach of representation or warranty), shall be a claim for indemnification pursuant to Section 9.3 below, as limited by the limitations set forth in Section 9.2. (g) At least one printed hard copy of all items contained in Disclosure Schedules shall be maintained by the Company following Closing and for a period of five years following Closing. All other copies of this Agreement provided to Seller and Purchaser shall provide copies of all Disclosure Schedules on magnetic or ditigal data contained on computer readable disk. 9.3 Indemnification by the Seller. Subject to the conditions of Article IX, Section 9 (9.2, above), the Members, except for Jim Taylor, shall indemnify and hold the Purchaser and its successors and assigns harmless in respect of any and all claims, losses, damages, liabilities, and expenses (including, without limitation, settlement costs and legal, accounting, and other MEMBERSHIP INTEREST AGREEMENT Page 30 expenses in connection therewith) (collectively, the "Damages") incurred by the Purchaser and its successors and assigns in connection with each and all of the following. (a) Any claim by any person or other entity for any broker's or finder's fee or similar fee charged for commission that arises from any action, statement, or commitment made by the Seller or its agents or Affiliates. (b) Any breach or other failure to perform any covenant, agreement, or obligation of the Seller contained in this Agreement, any other Acquisition Document or any other instrument, including all certificates, contemplated hereby or thereby. (c) Any breach of any representation or warranty by the Seller contained in this Agreement, any other Acquisition Document or any other instrument, including all certificates, contemplated hereby or thereby. (d) The Company's failure to pay any income taxes it is required to pay prior to Closing. (e) To the extent not otherwise indemnified under that certain Indemnity Agreement in favor of Company and Members by Piedmont Aviation Services, Inc. and Piedmont Hawthorne Aviation, Inc. dated November 18, 2002, which is attached hereto marked Exhibit "A" and made a part hereof ('Hawthorne Indemnity"), Members (excluding Jim Taylor), shall additionally indemnity Purchaser and Company in the same manner and upon the same terms of the Hawthorne Indemnity, (which for purposes of this indemnity, the Members excluding Jim Taylor being identified as "Indemnitor" and the Company and Purchaser as well as their members, managers, officers, directors, shareholders, employees, representative and attorneys being identified as Indemnitees as those terms are defined in the Hawthorne Indemnity.) for Any Damages arising between the dates of November 18, 2002 and the Closing Date which are caused by the Company's failure to comply with any Requirements of Law related to Hazardous Substances or any release, spill or discharge by the Company of any Hazardous Substances onto any property owned, leased or operated by the Company (including, without limitation, costs of response, removal, remediation, investigation, corrective action, property damage, personal injury, economic loss, damage to natural resources, health assessments and health studies, settlement, interest accruing on recoverable amounts, penalties, and attorneys' fees) accruing to the Purchaser or the Company, including (i) remedial work, monitoring, removal or other costs and expenses associated with environmental matters with respect to any Hazardous Substances required by any environmental Requirements of Law, (ii) injury, disease, or death of any person (including any employee, former employee, agent, or representative of any subcontractor of the Company) arising out of any environmental matters, or (iii) any damage to any property. (hereinafter all of the above damages referenced as "Remediation Damages') The standard in determination of contamination levels applicable during the Members operation of the Company upon which claims for contamination may be made by the Indemnitees shall be the difference in contaminate levels disclosed: (i) by the Environmental Site Aassessment results determining maximum soil contaminant concentrations listed on Exhibits A and B of the Hawthorne Indemnity and results determining maximum soil contaminant concentrations listed in the Environmental Site Assessments determining maximum soil contaminant concentrations prepared for the Purchaser prior to Closing which is attached MEMBERSHIP INTEREST AGREEMENT Page 31 hereto as Exhibit "B" and made a part hereof.. Members liability for claims made under this Section shall not exceed the Remediation Damages as are ordered by any governmental; authority having competent jurisdiction over environmental matters. 9.4 Indemnification by the Purchaser. The Purchaser and its successors and assigns shall indemnify, defend and hold harmless the Seller, each of the Members, and their respective successors and assigns in respect of any and all Damages incurred by Seller, each of the Members, and their respective successors and assigns in connection with each and all of the following. (a) The claim by any person for any broker's or finder's fee or similar fee charged for commission that arises from any actions, statements, or commitments made by the Purchaser or its agents or Affiliates. (b) The breach or other failure to perform any covenant, agreement, or obligation of the Purchaser contained in this Agreement or any other Acquisition Document or any other instrument, including all certificates contemplated hereby or thereby, including failure to pay or hold any Member harmless from assumed liabilities and obligations as are identified in Article I section 3 (e.g., 1.3), above. (c) Any breach of any representation or warranty by the Purchaser contained in this Agreement or any other Acquisition Document or any other instrument, including all certificates, contemplated hereby or thereby, including failure to pay or hold any Member harmless from assumed liabilities and obligations as are identified in Article I section 3 (e.g., 1.3), above. 9.5 Notice and Defense of Claim. Whenever any claim shall arise for indemnification hereunder, the party entitled to indemnification (the "Indemnified Party") shall provide written notice to the other party (the "Indemnifying Party") within 60 (sixty) days of becoming aware of the right to indemnification and, as expeditiously as possible thereafter, the facts constituting the basis for such claim. In connection with any claim giving rise to indemnity hereunder, resulting from or arising out of any claim or legal proceeding by a person who is not a party to this Agreement, the Indemnifying Party, at its sole cost and expense and upon written notice to the Indemnified Party, may assume the defense of any such claim or legal proceeding with counsel reasonably satisfactory to the Indemnified Party. The Indemnified Party shall be entitled to participate in the defense of any such action, with its counsel and at its own expense. If the Indemnifying Party does not assume the defense of any such claim or litigation resulting there from, the Indemnified Party may, but shall not be obligated to, defend against such claim or litigation in such manner as it may deem appropriate including, but not limited to, settling such claim or litigation, after giving notice of it to the Indemnifying Party, on such terms as the Indemnified Party may deem appropriate and no action taken by the Indemnified Party in accordance with such defense and settlement shall relieve the Indemnifying Party of its indemnification obligations herein provided with respect to any Damages resulting there from. MEMBERSHIP INTEREST AGREEMENT Page 32 ARTICLE X TERMINATION 10.1 Termination. This Agreement may be terminated at any time before the Closing Date: (a) By mutual consent of the Purchaser and the Seller; (b) By either the Purchaser or the Seller if the Closing has not occurred on or before the Closing Date as may be extended for reasonable cause, provided that this provision shall not be available to the party who fails or refuses to consummate the transactions contemplated herein or to take any other action referred to herein as necessary to consummate the transactions contemplated hereby in breach of such party's obligations contained herein; and (c) By either the Purchaser or the Seller if there has been a material breach on the part of the other party in any material representation, warranty or covenant set forth in this Agreement that is not cured within ten (10) business days after such other party has been notified of the intent to terminate this Agreement pursuant to this clause 10.1 (c). (d) By Purchaser in the event of its inability to meet any of the four (4) contingencies set forth in paragraph 3 of the Letter of Intent from Purchaser to Seller dated March 29, 2005 (the "Contingencies"), these Contingencies, and only the Contingencies, being specifically incorporated herein by reference and made a part hereof as though fully set out in this Agreement 10.2 Effect of Termination. In the event of termination of this Agreement as expressly permitted under Section 10.1 hereof, this Agreement shall forthwith become void and of no force and effect, and there shall be no liability on the part of either the Seller, the Purchaser, or their respective managers, officers, directors, representatives or agents, provided however, if such termination occurs pursuant to Section 10.1(c) and resulted from the material misrepresentation or material breach by a party of the covenants of such party contained in this Agreement, (and the breach remains uncured for more than the 10 day period of time) such breaching party shall be fully liable as a result of the material misrepresentation or breach. In the event of termination hereunder before the Closing, each party shall return promptly to the other Party all documents, work papers, and other material of the other party furnished or made available to such party or its representatives or agents and all copies thereof. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1 Amendment and Modification; Waiver of Compliance. Subject to the applicable law, this Agreement may be amended, modified, and supplemented only by written agreement signed by the Purchaser and the Seller. Any failure by any party to this Agreement to comply with any obligation, covenant, agreement, or condition contained herein may be expressly waived in writing by the other parties hereto, but such waiver or failure to insist upon strict compliance shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any MEMBERSHIP INTEREST AGREEMENT Page 33 party hereto, such consent shall be given in a manner consistent with the requirements for a waiver of compliance as set forth in this Section. 11.2 Fees and Expenses. Except as otherwise provided herein, each of the parties hereto will pay its own fees and expenses (including attorneys' and accountants' fees, legal costs, and expenses) incurred in connection with this Agreement, the other Acquisition Documents and the consummation of the transactions contemplated hereby and thereby. 11.3 Notices. All notices, requests, demands, and other communications required or permitted hereunder shall be in writing and shall be deemed to have been given if delivered by hand, overnight courier, or mailed certified or registered mail with postage prepaid as follows. (a) If to the Purchaser, to: Limco-Airepair, Inc. 5304 South Lawton Ave Tulsa, OK 74107 Attention: Shaul Menachem, President With a copy to: Jack N. Herrold Herrold Herrold & Co., Lawyers, P.C. 300 ONEOK Plaza 100 West Fifth Street Tulsa OK 74103 (b) If to the Seller, to: Claude L. Buller 115 Manchester Place Greensboro, NC 27410 Paul R. Hilliard 2803 Kinsey Ct. Summerfield, NC 27358 Thomas W. Ferrell 315 Beechcliff Ct. Winston-Salem, NC 27104 Jim Taylor 601 Chesham Dr. Kernersville, NC 27284 With Copy to: Andrew D. Hart Blancato Doughton & Hart PLLC 633 W Fourth Street, STE 150 Winston-Salem, N.C. 27101 MEMBERSHIP INTEREST AGREEMENT Page 34 11.4 Assignment. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. 11.5 Governing Law. This Agreement and the legal relations between the parties hereto shall be governed by, and construed in accordance with, the laws of the State of Delaware, without reference to the conflict of laws principles thereof; provided however, Section 8.2 concerning Non-Competition shall be governed by, and construed in accordance with either the laws of the State of North Carolina or the laws of the State of Oklahoma, whichever best allows for enforcement of the covenant not to compete in accordance with the terms of section 8.2. 11.6 Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Faxed signatures shall have the same effect as an original signature. 11.7 Headings. The headings contained in this Agreement are inserted for convenience only and shall not constitute a part hereof. 11.8 Attorney fees in Litigation. The prevailing party in any litigated claim between the parties hereto (including those brought in Arbitration under Section 11.11, below) shall be entitled to recover all costs and attorney fees they have expended as may deemed reasonable by the court of competent jurisdiction in which the controversy or action is pending. 11.9 Entire Agreement. This Agreement, including the Disclosure Schedules, the exhibits hereto and other documents referred to herein which form a part hereof, embody the entire agreement and understanding of the parties hereto in respect of the subject matter contained herein and supersede all prior agreements and understandings between the parties with respect to such subject matter, including, by way of illustration and not by limitation, the Letter of Intent dated March 29, 2005 (except the terms therein contained concerning Purchaser contingencies, which have been incorporated herein by reference). There are no restrictions, promises, warranties, covenants, or undertakings other than those expressly set forth or referred to herein. 11.10 Definitional Provisions. All terms defined in this Agreement shall have such defined meanings when used in any exhibit, schedule, or any certificate or other document made or delivered pursuant hereto or thereto, unless otherwise defined therein. 11.11 Arbitration. Any and all controversies and claims arising out of or relating to this Agreement or any of the Acquisition Documents, or breach thereof, shall be settled by binding private arbitration. The place of arbitration shall be Greensboro, North Carolina. There shall be three arbitrators, who shall be licensed attorneys, chosen as follows: (a) one arbitrator shall be chosen by Purchaser, and (b) one arbitrator shall be chosen by the Members, and (c) the two arbitrators thus named will then be directed to name a third arbitrator. The decisions and determinations by any two of the three arbitrators shall be binding on all parties to the arbitration The arbitration shall be administered in accordance MEMBERSHIP INTEREST AGREEMENT Page 35 with the American Arbitration Association's Commercial Arbitration Rules, except that (i) there shall be no discovery depositions, unless any witness will not personally appear and testify at the arbitration; and (ii) each party agrees to provide any relevant documents requested by the other party, except to the extent such documents are not discoverable under applicable law. Any dispute concerning discovery depositions or the provision of documents shall be decided by the arbitrators. Any award shall be a conclusive determination of the matter, shall be binding upon the parties thereto and shall not be contested by any of them. Judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The parties shall share equally the cost of the arbitrator's fees and expenses and any administrative expenses as they arise. As part of such award, the prevailing party (as determined by the arbitrator) shall be awarded the arbitrator's fees and expenses and any administrative expenses previously paid by such party. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed on the day and year first above stated. "Purchaser" LIMCO-AIREPAIR, INC. --------------------------------- by Shaul Menachem, President "Seller" PIEDMONT AVIATION COMPONENT SERVICE, L.L.C. ---------------------------------- by Claude L. Buller, Authorized Manager "Member and Managers" ----------------------------------- Claude L. Buller, Member and Manger --------------------------------- Paul R. Hilliard, Member and Manager ---------------------------------- Thomas W. Ferrell, Member and Manager ---------------------------------- Jim Taylor, Member and Manager EX-8 9 ex8.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 8 List of Subsidiaries of the Registrant -------------------------------------- 1. Limco-Airepair International, Inc. our 100% owned subsidiary is located in Tulsa, Oklahoma. EX-12.1 10 ex12_1.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CEO Exhibit 12.1 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Shlomo Ostersetzer, certify that: 1. I have reviewed this annual report on Form 20-F of TAT Technologies Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated Subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Reserved] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 30, 2005 /s/ Shlomo Ostersetzer* - ----------------------- Shlomo Ostersetzer Chief Executive Officer * The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. EX-12.2 11 ex12_2.txt RULE 13A-14(A)/15D-14(A) CERTIFICATION OF CFO Exhibit 12.2 CERTIFICATION PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002 I, Israel Ofen, certify that: 1. I have reviewed this annual report on Form 20-F of TAT Technologies Ltd.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e) and 15d-15(e)) for the registrant and have: (a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated Subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Reserved] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 30, 2005* /s/ Israel Ofen - --------------- Israel Ofen Chief Financial Officer * The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. EX-13.1 12 ex13_1.txt SECTION 1350 CERTIFICATION OF CEO Exhibit 13.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of TAT Technologies Ltd. (the "Company") on Form 20-F for the period ending December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Shlomo Ostersetzer, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Shlomo Ostersetzer* - ----------------------- Shlomo Ostersetzer Chief Executive Officer June 30, 2005 * The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. EX-13.2 13 ex13_2.txt SECTION 1350 CERTIFICATION OF CFO Exhibit 13.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of TAT Technologies Ltd. (the "Company") on Form 20-F for the period ending December 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Israel Ofen, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Israel Ofen* - ---------------- Israel Ofen Chief Financial Officer June 30, 2005 * The originally executed copy of this Certification will be maintained at the Company's offices and will be made available for inspection upon request. -----END PRIVACY-ENHANCED MESSAGE-----