arotech10q-2008q1.htm
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UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM 10-Q
T QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED March 31,
2008 .
Commission file number:
0-23336
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AROTECH
CORPORATION
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(Exact
name of registrant as specified in its charter)
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Delaware
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95-4302784
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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1229 Oak Valley Drive, Ann
Arbor, Michigan
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48108
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(Address
of principal executive offices)
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(Zip
Code)
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(800)
281-0356
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(Registrant’s
telephone number, including area
code)
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(Former
address, if changed since last
report)
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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 o
Indicate
by check mark whether the registrant is large accelerated filer, an accelerated
filer, or a non-accelerated filer. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large accelerated
filer: £ Accelerated
filer: £ Non-accelerated
filer: £ Smaller
reporting company: T
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act). Yes o
No
x
APPLICABLE
ONLY TO CORPORATE ISSUERS:
The
number of shares outstanding of the issuer’s common stock as of May 19, 2008 was
13,637,639.
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Potential persons who are to
respond to the collection of
information contained in this
form are not required to respond
unless the form displays a
currently valid OMB control number.
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INDEX
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PART
I - FINANCIAL INFORMATION
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Item 1 – Financial Statements
(Unaudited):
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|
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Condensed
Consolidated Balance Sheets at March 31, 2008 and December 31,
2007
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3 |
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Condensed
Consolidated Statements of Operations for the Three Months Ended March 31,
2008 and 2007
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5 |
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Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2008 and 2007
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6 |
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Notes
to the Interim Condensed Consolidated Financial Statements
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8 |
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Item 2 – Management’s Discussion and Analysis of
Financial Condition and Results of Operations
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14 |
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Item 3 – Quantitative and Qualitative Disclosures
about Market Risk
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21 |
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Item 4T – Controls and
Procedures
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21 |
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PART
II - OTHER INFORMATION
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Item 1 – Legal Proceedings
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23 |
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Item 1A – Risk Factors
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23 |
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Item 2 – Unregistered Sales of Equity Securities
and Use of Proceeds
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23 |
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Item 5 – Other Information
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24 |
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Item 6 – Exhibits
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24 |
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SIGNATURES
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25 |
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ITEM
1.
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FINANCIAL
STATEMENTS (UNAUDITED)
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(U.S.
Dollars)
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March
31, 2008
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December
31, 2007
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ASSETS
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(Unaudited)
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CURRENT
ASSETS:
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|
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Cash
and cash equivalents
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$ |
2,434,738 |
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$ |
3,447,671 |
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Restricted
collateral deposits
|
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|
161,794 |
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|
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320,454 |
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Escrow
receivable
|
|
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3,325,803 |
|
|
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1,479,826 |
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Available-for-sale
marketable securities
|
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51,336 |
|
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|
47,005 |
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Trade
receivables (net of allowance for doubtful accounts in the amount of
$25,000 as of March 31, 2008 and December 31, 2007)
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11,024,420 |
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14,583,213 |
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Unbilled
receivables
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2,821,849 |
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3,271,594 |
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Other
accounts receivable and prepaid expenses
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1,736,621 |
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1,614,614 |
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Inventories
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10,324,993 |
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7,887,820 |
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Total
current assets
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31,881,554 |
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32,652,197 |
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SEVERANCE
PAY FUND
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2,995,153 |
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2,815,040 |
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OTHER
LONG-TERM RECEIVABLES
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342,508 |
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386,899 |
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PROPERTY
AND EQUIPMENT, NET
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5,226,284 |
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5,079,796 |
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INVESTMENT
IN AFFILIATED COMPANY
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236,082 |
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352,168 |
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OTHER
INTANGIBLE ASSETS, NET
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8,410,805 |
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7,837,076 |
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GOODWILL
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32,759,884 |
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31,358,131 |
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$ |
81,852,270 |
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$ |
80,481,307 |
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The
accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
-3-
CONDENSED
CONSOLIDATED BALANCE SHEETS
(U.S.
Dollars, except share data)
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March
31, 2008
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December
31, 2007
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(Unaudited)
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LIABILITIES
AND SHAREHOLDERS’ EQUITY
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CURRENT
LIABILITIES:
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Trade
payables
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$ |
5,741,994 |
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$ |
4,233,288 |
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Other
accounts payable and accrued expenses
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4,143,957 |
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4,889,729 |
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Current
portion of capitalized leases
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87,862 |
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67,543 |
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Current
portion of promissory notes due to purchase of
subsidiaries
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75,725 |
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151,450 |
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Current
portion of long-term debt
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106,182 |
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103,844 |
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Short
term bank credit
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4,557,890 |
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4,557,890 |
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Deferred
revenues
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2,700,952 |
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2,903,166 |
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Total
current liabilities
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17,414,562 |
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16,906,910 |
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Accrued
severance pay
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5,235,573 |
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4,853,231 |
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Long-term
portion of capitalized leases
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|
156,029 |
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86,989 |
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Long-term
portion of long-term debt
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1,075,735 |
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1,088,498 |
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Other
long-term liabilities
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139,211 |
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110,255 |
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Deferred
taxes
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1,020,000 |
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1,020,000 |
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Total
long-term liabilities
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7,626,548 |
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7,158,973 |
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MINORITY
INTEREST
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|
|
– |
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|
83,816 |
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SHAREHOLDERS’
EQUITY:
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|
|
|
|
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Share
capital –
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|
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Common
stock – $0.01 par value each;
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Authorized:
250,000,000 shares as of March 31, 2008 and December 31, 2007; Issued and
outstanding: 13,599,167 and 13,544,819 shares as of March 31, 2008 and
December 31, 2007, respectively
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135,992 |
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|
135,448 |
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Preferred
shares – $0.01 par value each;
|
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|
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Authorized:
1,000,000 shares as of March 31, 2008 and December 31, 2007; No shares
issued and outstanding as of March 31, 2008 and December 31,
2007
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|
– |
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– |
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Additional
paid-in capital
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219,062,434 |
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218,551,110 |
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Accumulated
deficit
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|
(163,493,157 |
) |
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|
(162,522,558 |
) |
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Notes
receivable from shareholders
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|
|
(1,337,777 |
) |
|
|
(1,333,833 |
) |
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Accumulated
other comprehensive loss
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2,443,668 |
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1,501,441 |
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Total
shareholders’ equity
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|
|
56,811,160 |
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|
56,331,608 |
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$ |
81,852,270 |
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|
$ |
80,481,307 |
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The
accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
-4-
(U.S.
Dollars, except share data)
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Three
months ended March 31,
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|
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2008
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|
2007
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Revenues
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$ |
13,250,576 |
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$ |
11,529,162 |
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Cost
of revenues, exclusive of amortization of intangibles
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|
10,004,782 |
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|
|
7,437,080 |
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Research
and development
|
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|
607,094 |
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349,056 |
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Selling
and marketing expenses
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|
1,142,639 |
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|
1,030,768 |
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General
and administrative expenses
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|
3,532,460 |
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|
|
3,724,290 |
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Amortization
of intangible assets
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|
|
492,613 |
|
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|
455,132 |
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Escrow
adjustment – credit
|
|
|
(1,448,074 |
) |
|
|
– |
|
|
Total
operating costs and expenses
|
|
|
14,331,514 |
|
|
|
12,996,326 |
|
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Operating
loss
|
|
|
(1,080,938 |
) |
|
|
(1,467,164 |
) |
|
Other
income
|
|
|
536,372 |
|
|
|
11,944 |
|
|
Financial
expenses, net
|
|
|
(190,013 |
) |
|
|
(124,080 |
) |
|
Loss
before minority interest in earnings of a subsidiary, earnings from
affiliated company and income tax expenses
|
|
|
(734,579 |
) |
|
|
(1,579,300 |
) |
|
Income
taxes
|
|
|
(119,934 |
) |
|
|
(105,907 |
) |
|
Gain
(loss) from affiliated company
|
|
|
(116,086 |
) |
|
|
47,621 |
|
|
Minority
interest in earnings of subsidiaries
|
|
|
– |
|
|
|
(60,656 |
) |
|
Net
loss attributable to common stockholders
|
|
$ |
(970,599 |
) |
|
$ |
(1,698,242 |
) |
|
Basic
and diluted net loss per share
|
|
$ |
(0.08 |
) |
|
$ |
(0.15 |
) |
|
Weighted
average number of shares used in computing basic and diluted net loss per
share
|
|
|
12,578,436 |
|
|
|
11,219,131 |
|
The
accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
-5-
|
|
|
| |
|
Three
months ended March 31,
|
|
| |
|
2008
|
|
|
2007
|
|
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CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(970,599 |
) |
|
$ |
(1,698,242 |
) |
|
Adjustments
required to reconcile net loss to net cash provided by (used
in) operating activities:
|
|
|
|
|
|
|
|
|
|
Minorities
interests in loss of subsidiary
|
|
|
– |
|
|
|
60,656 |
|
|
Loss
(gain) from affiliated company
|
|
|
116,086 |
|
|
|
(47,621 |
) |
|
Depreciation
|
|
|
301,911 |
|
|
|
387,062 |
|
|
Amortization
of intangible assets, capitalized software costs and impairment of
intangible assets
|
|
|
492,613 |
|
|
|
452,132 |
|
|
Increase
in escrow receivable
|
|
|
(1,845,977 |
) |
|
|
– |
|
|
Accrued
severance pay, net
|
|
|
202,230 |
|
|
|
87,145 |
|
|
Compensation
related to shares issued to employees, consultants and
directors
|
|
|
409,555 |
|
|
|
791,996 |
|
|
Amortization
relating to warrants issued to the holders of convertible debentures and
beneficial conversion feature
|
|
|
– |
|
|
|
22,593 |
|
|
Amortization
of deferred charges related to convertible debenture
issuance
|
|
|
– |
|
|
|
17,468 |
|
|
Capital
loss from sale of property and equipment
|
|
|
– |
|
|
|
3,232 |
|
|
Decrease
(increase) in trade receivables
|
|
|
3,558,793 |
|
|
|
(2,238,114 |
) |
|
Decrease
(increase) in other accounts receivable and prepaid
expenses
|
|
|
(179,783 |
) |
|
|
262,556 |
|
|
Decrease
in deferred taxes
|
|
|
77,709 |
|
|
|
13,002 |
|
|
Decrease
(increase) in inventories
|
|
|
(2,437,173 |
) |
|
|
103,701 |
|
|
Decrease
in unbilled receivables
|
|
|
449,745 |
|
|
|
1,934,210 |
|
|
Increase
in deferred revenues
|
|
|
(202,214 |
) |
|
|
(338,840 |
) |
|
Decrease
in trade payables
|
|
|
1,508,706 |
|
|
|
253,983 |
|
|
Increase
in other accounts payable and accrued expenses
|
|
|
(796,823 |
) |
|
|
(1,104,646 |
) |
|
Net
cash provided by (used in) operating activities
|
|
|
684,779 |
|
|
|
(1,037,727 |
) |
| CASH
FLOWS FROM INVESTING ACTIVITIES: |
|
|
(339,374 |
) |
|
|
(194,507 |
) |
|
Purchase
of property and equipment |
|
|
433,389 |
|
|
|
– |
|
|
Net
assets acquired from acquisition of subsidiary |
|
|
(1,275,000 |
) |
|
|
– |
|
|
Acquisition
of subsidiary |
|
|
(661,149 |
) |
|
|
– |
|
|
Acquisition
of minority interest |
|
|
(75,725 |
) |
|
|
– |
|
|
Repayment
of promissory notes related to acquisition of
subsidiaries |
|
|
154,329 |
|
|
|
368,589 |
|
|
Decrease
in restricted cash |
|
|
(1,763,530 |
) |
|
|
174,082 |
|
|
Net
cash provided by (used in) investing activities |
|
$ |
(1,078,751 |
) |
|
$ |
(863,645 |
) |
| FORWARD |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
-6-
CONSOLIDATED
STATEMENT OF CASH FLOWS (UNAUDITED) (U.S. Dollars)
|
|
|
Three
months ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
FORWARD
|
|
$ |
(1,078,751 |
) |
|
$ |
(863,645 |
) |
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from exercise of options
|
|
|
– |
|
|
|
37,642 |
|
|
Repayment
of long-term loans
|
|
|
(10,425 |
) |
|
|
– |
|
|
Decrease
in short term bank credit
|
|
|
– |
|
|
|
(1,432 |
) |
|
Net
cash provided by (used in) financing activities
|
|
|
(10,425 |
) |
|
|
36,210 |
|
|
DECREASE
IN CASH AND CASH EQUIVALENTS
|
|
|
(1,089,176 |
) |
|
|
(827,435 |
) |
|
CASH
ACCRETION (EROSION) DUE TO EXCHANGE RATE DIFFERENCES
|
|
|
76,243 |
|
|
|
(45,613 |
) |
|
CASH
AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD
|
|
|
3,447,671 |
|
|
|
2,368,872 |
|
|
CASH
AND CASH EQUIVALENTS AT THE END OF THE PERIOD
|
|
$ |
2,434,738 |
|
|
$ |
1,495,824 |
|
|
SUPPLEMENTARY
INFORMATION ON NON-CASH TRANSACTIONS:
|
|
|
|
|
|
|
|
|
|
Mortgage
note payable (seller financed) issued for purchase of
building
|
|
$ |
– |
|
|
$ |
1,115,000 |
|
|
Stock
issued for acquisition
|
|
$ |
100,000 |
|
|
$ |
– |
|
|
Assets
recorded for capital lease addition
|
|
$ |
109,025 |
|
|
$ |
– |
|
The
accompanying notes are an integral part of the Condensed Consolidated Financial
Statements.
-7-
NOTE
1: BASIS
OF PRESENTATION
a. Company:
Arotech
Corporation (“Arotech” or the “Company”), and its wholly-owned subsidiaries
provide defense and security products for the military, law enforcement and
homeland security markets, including advanced zinc-air and lithium batteries and
chargers, multimedia interactive simulators/trainers and lightweight vehicle
armoring. The Company is primarily operating through its wholly-owned
subsidiaries FAAC Corporation (“FAAC”), based in Ann Arbor, Michigan, and FAAC’s
subsidiary Realtime Technologies, Inc. (“Realtime”), which is based
in Royal Oak, Michigan; Electric Fuel Battery Corporation (“EFB”), based in
Auburn, Alabama; Electric Fuel Ltd. (“EFL”), based in Beit Shemesh, Israel;
Epsilor Electronic Industries, Ltd. (“Epsilor”), based in Dimona, Israel; MDT
Protective Industries, Ltd. (“MDT”), based in Lod, Israel; MDT Armor Corporation
(“MDT Armor”), based in Auburn, Alabama; and Armour of America, Incorporated
(“AoA”), based in Auburn, Alabama.
b. Basis
of presentation:
The
accompanying interim condensed consolidated financial statements have been
prepared by Arotech Corporation in accordance with generally accepted accounting
principles for interim financial information, with the instructions to Form 10-Q
and with Article 10 of Regulation S-X, and include the accounts of Arotech
Corporation and its subsidiaries. Certain information and footnote disclosures,
normally included in complete financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or omitted. In the
opinion of the Company, the unaudited financial statements reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair presentation of its financial position at March 31, 2008, its operating
results for the three-month periods ended March 31, 2008 and 2007, and its cash
flow for the three-month periods ended March 31, 2008 and 2007.
The
results of operations for the three months ended March 31, 2008 are not
necessarily indicative of results that may be expected for any other interim
period or for the full fiscal year ending December 31, 2008.
The
balance sheet at December 31, 2007 has been derived from the audited financial
statements at that date but does not include all the information and footnotes
required by generally accepted accounting principles for complete financial
statements. These condensed consolidated financial statements should be read in
conjunction with the audited financial statements included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007.
c. Accounting
for stock-based compensation:
For the
three months ended March 31, 2008 and 2007 the compensation expense recorded
related to stock options and restricted shares was $409,555 and $791,996,
respectively, of which $16,429 and $53,812, respectively, was for stock options
and $393,126 and $738,184, respectively, was for restricted shares. The
remaining total compensation cost related to non-vested stock options and
restricted share awards not yet recognized in the income statement as
of March 31, 2008 was $1,748,135, of which $74,028 was for stock options
and $1,674,107 was for restricted shares. The weighted average period over which
this compensation cost is expected to be
recognized is approximately 2 years.
Income tax expense was not impacted since the Company is in a net operating loss
position. There were no new options or restricted stock issued in the
first three months of 2008 and no options were exercised in the first three
months of 2008.
d. Reclassification:
Certain
comparative data in these financial statements have been reclassified to conform
with the current year’s presentation.
e. Anti-dilutive
shares for EPS calculation
All
outstanding stock options, non-vested restricted stock and warrants have been
excluded from the calculation of the diluted net loss per common share because
all such securities are anti-dilutive for the periods presented. The total
weighted average number of shares related to the outstanding options, restricted
stock and warrants excluded from the calculations of diluted net loss per share
was 1,481,463.
NOTE
2: INVENTORIES
Inventories
are stated at the lower of cost or market value. Cost is determined using the
average cost method or the FIFO method. The Company periodically evaluates the
quantities on hand relative to current and historical selling prices and
historical and projected sales volume. Based on these evaluations, provisions
are made in each period to write down inventory to its net realizable value.
Inventory write-offs are provided to cover risks arising from slow-moving items,
technological obsolescence, excess inventories, and for market prices lower than
cost. Inventories are composed of the following:
|
|
|
March
31, 2008
|
|
|
December
31, 2007
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
Raw
and packaging materials
|
|
$ |
7,248,280 |
|
|
$ |
6,043,170 |
|
|
Work-in-progress
|
|
|
2,715,609 |
|
|
|
1,583,790 |
|
|
Finished
goods
|
|
|
361,104 |
|
|
|
260,860 |
|
|
|
|
$ |
10,324,993 |
|
|
$ |
7,887,820 |
|
NOTE
3: IMPACT
OF RECENTLY ISSUED ACCOUNTING STANDARDS
In
December 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141(R), Business Combinations, to
further enhance the accounting and financial reporting related to business
combinations. SFAS No. 141(R) establishes principles and requirements for how
the acquirer in a business combination (1) recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed,
and any noncontrolling interest in the acquiree, (2) recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase,
and (3) determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS No. 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Therefore, the effects
of the Corporation’s adoption of SFAS No. 141(R) will depend upon the extent and
magnitude of acquisitions after December 31, 2008.
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosures about fair value measurements. SFAS No. 157 applies to
other accounting pronouncements that require or permit fair value measurements,
the Board having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. The Statement does not require
any new fair value measurements and was initially effective for the Corporation
beginning January 1, 2008. In February 2008, the FASB issued FASB Staff Position
(FSP) FAS 157-2. FSP FAS 157-2 defers the effective date of SFAS No. 157 until
January 1, 2009 for nonfinancial assets and nonfinancial liabilities except
those items recognized or disclosed at fair value on an annual or more
frequently recurring basis. On January 1, 2008, we adopted the provisions of
SFAS No. 157 for our financial assets and liabilities. The adoption of the
standard did not have a material impact on our financial statements. We elected
to defer the adoption of SFAS No. 157 for our non-financial assets and
liabilities until January 1, 2009. We are currently evaluating the impact that
the deferred provisions of this standard will have on our financial
statements.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities. This Statement permits entities to
choose to measure eligible items at fair value at specified election dates. For
items for which the fair value option has been elected, unrealized gains and
losses are to be reported in earnings at each subsequent reporting date. The
fair value option is irrevocable unless a new election date occurs, may be
applied instrument by instrument, with a few exceptions, and applies only to
entire instruments and not to portions of instruments. SFAS No. 159 provides an
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting. SFAS No. 159 was effective for the Corporation beginning January 1,
2008. The adoption of the standard did not have a material impact on the
Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51, to create
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 establishes
accounting and reporting standards that require (1) the ownership interest in
subsidiaries held by parties other than the parent to be clearly identified and
presented in the consolidated balance sheet within equity, but separate from the
parent’s equity, (2) the amount of consolidated net income attributable to the
parent and the noncontrolling interest to be clearly identified and presented on
the face of the consolidated statement of income, (3) changes in a parent’s
ownership interest while the parent retains its controlling financial interest
in its subsidiary to be accounted for consistently, (4) when a subsidiary is
deconsolidated, any retained noncontrolling equity investment in the former
subsidiary to be initially measured at fair value, and (5) entities to provide
sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the noncontrolling owners. SFAS No.
160 applies to fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008, and prohibits early adoption.
Management has not completed its review of the new guidance; however, the effect
of the Statement’s implementation is not expected to be material to the
Corporation’s results of operations or financial position.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities. SFAS No.161 requires expanded
disclosures regarding the location and amounts of derivative instruments in an
entity’s financial statements, how derivative instruments and related hedged
items are accounted for under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and how derivative instruments and
related hedged items affect an entity’s financial position, operating results
and cash flows. SFAS No. 161 is effective for fiscal years beginning after
November 15, 2008. Since SFAS No. 161 affects only disclosures, it is not
expected to impact the Corporation’s financial position or results of operations
upon adoption.
NOTE
4: SEGMENT
INFORMATION
a. General:
The
Company and its subsidiaries operate primarily in three business segments and
follow the requirements of SFAS No. 131.
The
Company’s reportable operating segments have been determined in accordance with
the Company’s internal management structure, which is organized based on
operating activities. The accounting policies of the operating segments are the
same as those used by the Company in the preparation of its annual financial
statement. The Company evaluates performance based upon two primary factors, one
is the segment’s operating income and the other is the segment’s contribution to
the Company’s future strategic growth.
b. The
following is information about reported segment revenues, income (losses) and
total assets for the three months ended March 31, 2008 and 2007:
|
|
|
Training
and Simulation
|
|
|
Battery
and
Power
Systems
|
|
|
Armor
|
|
|
All
Others
|
|
|
Total
|
|
|
Three
months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from outside customers
|
|
$ |
7,534,597 |
|
|
$ |
3,107,036 |
|
|
$ |
2,608,943 |
|
|
$ |
– |
|
|
$ |
13,250,576 |
|
|
Depreciation,
amortization and impairment expenses (1)
|
|
|
(449,319 |
) |
|
|
(200,862 |
) |
|
|
(29,043 |
) |
|
|
(12,993 |
) |
|
|
(692,217 |
) |
|
Direct
expenses (2)
|
|
|
(6,021,614 |
) |
|
|
(3,331,911 |
) |
|
|
(2,252,041 |
) |
|
|
(1,733,379 |
) |
|
|
(13,338,945 |
) |
|
Segment
income (loss)
|
|
|
1,063,664 |
|
|
|
(425,737 |
) |
|
|
327,859 |
|
|
|
(1,746,372 |
) |
|
|
(780,586 |
) |
|
Financial
expense
|
|
|
(105,664 |
) |
|
|
924 |
|
|
|
(22,194 |
) |
|
|
(63,079 |
) |
|
|
(190,013 |
) |
|
Net
income (loss)
|
|
$ |
958,000 |
|
|
$ |
(424,813 |
) |
|
$ |
305,665 |
|
|
$ |
(1,809,451 |
) |
|
$ |
(970,599 |
) |
|
Segment
assets (3),
(4)
|
|
$ |
41,729,499 |
|
|
$ |
23,458,725 |
|
|
$ |
11,967,659 |
|
|
$ |
4,696,387 |
|
|
$ |
81,852,270 |
|
|
Three
months ended March 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from outside customers
|
|
$ |
4,216,008 |
|
|
$ |
2,539,132 |
|
|
$ |
4,774,022 |
|
|
$ |
– |
|
|
$ |
11,529,162 |
|
|
Depreciation,
amortization and impairment expenses (1)
|
|
|
(398,876 |
) |
|
|
(237,920 |
) |
|
|
(188,960 |
) |
|
|
(59,302 |
) |
|
|
(885,058 |
) |
|
Direct
expenses (2)
|
|
|
(3,210,791 |
) |
|
|
(2,621,243 |
) |
|
|
(3,925,755 |
) |
|
|
(2,460,477 |
) |
|
|
(12,218,266 |
) |
|
Segment
income (loss)
|
|
|
606,341 |
|
|
|
(320,031 |
) |
|
|
659,307 |
|
|
|
(2,519,779 |
) |
|
|
(1,574,162 |
) |
|
Financial
expense
|
|
|
24,793 |
|
|
|
(11,835 |
) |
|
|
15,111 |
|
|
|
(152,149 |
) |
|
|
(124,080 |
) |
|
Net
income (loss)
|
|
$ |
631,134 |
|
|
$ |
(331,866 |
) |
|
$ |
674,418 |
|
|
$ |
(2,671,928 |
) |
|
$ |
(1,698,242 |
) |
|
Segment
assets (3),
(4)
|
|
$ |
42,851,260 |
|
|
$ |
18,369,473 |
|
|
$ |
10,801,573 |
|
|
$ |
2,401,053 |
|
|
$ |
74,423,359 |
|
|
(1)
|
Includes
depreciation of property and equipment, amortization expenses of
intangible assets and impairment of goodwill and other intangible
assets.
|
|
(2)
|
Including,
inter alia, sales
and marketing, general and administrative and tax
expenses.
|
|
(3)
|
Consisting
of all assets.
|
|
(4)
|
Out
of those amounts, goodwill in our Training and Simulation, Battery and
Power Systems and Armor Divisions stood at $24,424,030, $6,437,042 and
$1,898,812, respectively, as of March 31, 2008 and $24,235,419, $5,413,210
and $1,066,596, respectively, as of March 31,
2007.
|
NOTE
5: COMPREHENSIVE
INCOME
Comprehensive
income for the three months ended March 31, 2008 and 2007 is summarized
below:
|
|
|
Three
Months Ended March 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
Net
loss
|
|
$ |
(970,599 |
) |
|
$ |
(1,698,242 |
) |
|
Foreign
currency translation
|
|
|
942,227 |
|
|
|
84,807 |
|
|
Total
comprehensive loss
|
|
$ |
(28,372 |
) |
|
$ |
(1,613,435 |
) |
NOTE
6: ACQUISITIONS
Purchase
of the Minority Interest in MDT Israel and MDT Armor
In
January 2008, the Company purchased the minority shareholder’s 24.5% interest in
MDT Protective Industries Ltd. (“MDT Israel”) and the 12.0% interest in MDT
Armor Corporation (“MDT Armor”), as well as settling all outstanding disputes
regarding severance payments, in exchange for a total of $1.0 million that was
paid in cash. The purchase was treated as a step acquisition using the purchase
method of accounting. The Company evaluated the purchase price and identified
$607,100 in goodwill and workforce intangibles with an indefinite life. The
Company also identified $53,400 as an intangible asset related to its customer
list with a useful life of four years. The purchase price included a payment of
$241,237 to the former president of MDT Israel as compensation for a right
granted to him by MDT Armor that potentially would have given him the right to
receive 5% of MDT Armor’s annual profit. The payment for this right was recorded
as general and administrative expense in the first quarter.
Purchase of
Realtime Technologies, Inc.
In
February 2008 the Company’s FAAC subsidiary acquired all of the outstanding
stock of Realtime Technologies, Inc. (RTI), a privately-owned corporation
headquartered in Royal Oak, Michigan, for a total of $1,375,000, including
$1,250,000 in cash, $100,000 in Company stock (54,348 shares) and approximately
$25,000 in legal fees with a 2008 earnout (maximum of $250,000) based on 2008
net profit. RTI specializes in multi-body vehicle dynamics modeling
and graphical simulation solutions. RTI’s product portfolio provides FAAC with
the opportunity to economically add new features to the driver training products
marketed by FAAC.
RTI’s
operating results will be included in the Company’s Training and Simulation
Division as of January 1, 2008 and the effect on operations is not expected to
be material.
Listed
below is the purchase price allocation:
|
Current
assets acquired, net of liabilities
|
|
$ |
433,389 |
|
|
Technology
and Patents - 7 year life
|
|
|
663,000 |
|
|
Trademark/Trade
Names - 10 year life
|
|
|
28,000 |
|
|
Customer
relationships - 10 year life
|
|
|
62,000 |
|
|
Goodwill
- indefinite life(1)
|
|
|
188,611 |
|
|
Equity
Value
|
|
$ |
1,375,000 |
|
|
(1)
The full amount of the goodwill is expected to be deductible for U.S. tax
purposes.
|
|
NOTE
7: ARBITRATION
In
connection with the Company’s acquisition of AoA, the Company had a contingent
earnout obligation in an amount equal to the revenues AoA realized from certain
specific programs that were identified by the Company and the seller of AoA
(“Seller”) as appropriate targets for revenue increases. As of December 31,
2006, the Company had reduced the $3.0 million escrow held by the Seller by
approximately $1,520,000 for a putative claim against such escrow in respect of
such earnout obligation.
On March
20, 2007, the Company filed a Demand for Arbitration with the American
Arbitration Association against the Seller. In February 2008, the arbitration
panel issued a decision denying the Seller’s counterclaims, granting the
Seller’s counterclaim for $70,000 in compensation, awarding the Company the
entire $3.0 million escrow (less the $70,000 in compensation (with simple
interest but without statutory penalties)), awarding the Company $135,000 in
attorneys’ fees, and interest of approximately $325,000. This award was paid to
the Company in April 2008, and the time for the Seller to move to vacate or
modify this award has now expired. In the first quarter of 2008, the Company
adjusted the escrow receivable to reflect the updated amount of the escrow due
to the arbitration panel’s decision and final resolution of the remaining legal
questions.
|
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
This
report contains forward-looking statements made pursuant to the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. These
statements involve inherent risks and uncertainties. When used in this
discussion, the words “believes,” “anticipated,” “expects,” “estimates” and
similar expressions are intended to identify such forward-looking statements.
Such statements are subject to certain risks and uncertainties. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. We undertake no obligation to publicly release
the result of any revisions to these forward-looking statements that may be made
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors including, but not limited to, those set forth elsewhere in this
report. Please see “Risk Factors,” below, and in our other filings with the
Securities and Exchange Commission.
Arotech™
is a trademark and Electric Fuel® is a
registered trademark of Arotech Corporation. All company and product names
mentioned may be trademarks or registered trademarks of their respective
holders. Unless the context requires otherwise, all references to us refer
collectively to Arotech Corporation and its subsidiaries.
We
make available through our internet website free of charge our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
amendments to such reports and other filings made by us with the SEC, as soon as
practicable after we electronically file such reports and filings with the SEC.
Our website address is www.arotech.com. The information contained in this
website is not incorporated by reference in this report.
The
following discussion and analysis should be read in conjunction with the interim
financial statements and notes thereto appearing elsewhere in this Quarterly
Report. We have rounded amounts reported here to the nearest thousand, unless
such amounts are more than 1.0 million, in which event we have rounded such
amounts to the nearest hundred thousand.
Executive
Summary
Divisions
and Subsidiaries
We are a
defense and security products and services company, engaged in three business
areas: interactive simulation for military, law enforcement and commercial
markets; batteries and charging systems for the military; and high-level
armoring for military, paramilitary and commercial vehicles. We operate in three
business units:
|
|
Ø
|
we
develop, manufacture and market advanced high-tech multimedia and
interactive digital solutions for use-of-force and driving training of
military, law enforcement, security and other personnel (our Training
and Simulation Division);
|
|
|
Ø
|
we
provide aviation armor kits and we utilize sophisticated lightweight
materials and advanced engineering processes to armor vehicles (our Armoring Division);
and
|
|
|
Ø
|
we
develop, manufacture and market primary Zinc-Air batteries, rechargeable
batteries and battery chargers for defense and security products and other
military applications (our Battery and
Power Systems Division).
|
Recent
Developments
Purchase
of the Minority Interest in MDT Israel and MDT Armor
In
January 2008, we purchased the minority shareholder’s 24.5% interest in MDT
Protective Industries, Ltd. (“MDT Israel”) and the 12.0% interest in MDT Armor
Corporation (“MDT Armor”), as well as settling all outstanding disputes
regarding severance payments, in exchange for a total of $1.0 million that was
paid in cash. The purchase was treated as a step acquisition using the purchase
method of accounting. We evaluated the purchase price and identified $607,100 in
goodwill and workforce intangibles with an indefinite life. We also identified
$53,400 as an intangible asset related to our customer list with a useful life
of four years. Additionally, we eliminated the amounts recorded in the December
31, 2007 balance sheet as minority interest along with a loan receivable in the
amount of $102,167. The purchase price included a payment of $241,237 to the
former president of MDT Israel as compensation for a right granted to him by MDT
Armor which potentially would have given him the right to receive 5% of MDT
Israel’s annual profit. The payment for this right was recorded as general and
administrative expense in the first quarter.
Purchase of
Realtime Technologies, Inc.
In
February 2008 our FAAC subsidiary acquired all of the outstanding stock of
Realtime Technologies, Inc. (RTI), a privately-owned corporation headquartered
in Royal Oak, Michigan, for a total of $1,375,000, including $1,250,000 in cash,
$100,000 in our stock (54,348 shares) and approximately $25,000 in legal fees
with a 2008 earnout (maximum of $250,000) based on 2008 net
profit. RTI specializes in multi-body vehicle dynamics modeling and
graphical simulation solutions. RTI’s product portfolio provides FAAC with the
opportunity to economically add new features to the driver training products
marketed by FAAC.
RTI’s
operating results will be included in our Training and Simulation Division as of
January 1, 2008 and the effect on operations is not expected to be
material.
|
Current
assets acquired, net of liabilities
|
|
$ |
433,389 |
|
|
Technology
and Patents - 7 year life
|
|
|
663,000 |
|
|
Trademark/Trade
Names - 10 year life
|
|
|
28,000 |
|
|
Customer
relationships - 10 year life
|
|
|
62,000 |
|
|
Goodwill
- indefinite life(1)
|
|
|
188,611 |
|
|
Equity
Value
|
|
$ |
1,375,000 |
|
|
(1)
The full amount of the goodwill is expected to be deductible for U.S. tax
purposes.
|
|
AoA
Arbitration
In
connection with our acquisition of AoA, we had a contingent earnout obligation
in an amount equal to the revenues AoA realized from certain specific programs
that were identified by us and the seller of AoA (“Seller”) as appropriate
targets for revenue increases. As of December 31, 2006, we had reduced the $3.0
million escrow held by the Seller by $1,520,000 for a putative claim against
such escrow in respect of such earnout obligation.
On March
20, 2007, we filed a Demand for Arbitration with the American Arbitration
Association against the Seller. In our demand, we sought the return of $3.0
million, plus interest, held in escrow by the Seller in connection with his sale
of AoA to us in 2004. The Seller asserted counterclaims against us in the
arbitration, alleging (i) that he is entitled to keep the $3.0 million, (ii)
that he is entitled to an additional $3.0 million in post-sale earnout, and
(iii) that he is entitled to $70,000 in compensation (plus interest and
statutory penalties) wrongfully withheld by us when we constructively terminated
his employment.
In
February 2008, the arbitration panel issued a decision denying the Seller’s
counterclaims (i) and (ii) above, granting the Seller’s counterclaim for $70,000
in compensation, awarding us the entire $3.0 million escrow (less the $70,000 in
compensation (with simple interest but without statutory penalties)), awarding
us $135,000 in attorneys’ fees, and interest of approximately $325,000. This
award was paid to us in April 2008, and the time for the Seller to move to
vacate or modify this award has now expired. In the first quarter of 2008, we
adjusted the escrow receivable to reflect the updated amount of the escrow due
to the arbitration panel’s decision and final resolution of the remaining legal
questions.
Overview
of Results of Operations
We
incurred significant operating losses for the years ended December 31, 2007 and
for the first three months of 2008. While we expect to continue to derive
revenues from the sale of products that our subsidiaries manufacture and the
services that they provide, there can be no assurance that we will be able to
achieve or maintain profitability on a consistent basis.
A portion
of our operating loss during 2007 and the first three months of 2008 arose as a
result of non-cash charges. These charges were primarily related to our
acquisitions, financings and issuances of restricted shares and options to
employees. To the extent that we continue certain of these activities during the
remainder of 2008, we would expect to continue to incur such non-cash charges in
the future.
Acquisitions
In
acquisition of subsidiaries, part of the purchase price is allocated to
intangible assets and goodwill. Amortization of intangible assets related to
acquisition of subsidiaries is recorded based on the estimated expected life of
the assets. Accordingly, for a period of time following an acquisition, we incur
a non-cash charge related to amortization of intangible assets in the amount of
a fraction (based on the useful life of the intangible assets) of the amount
recorded as intangible assets. Such amortization charges continued during 2008.
We are required to review intangible assets for impairment whenever events or
changes in circumstances indicate that carrying
amount of
the assets may not be recoverable. If we determine, through the impairment
review process, that intangible asset has been impaired, we must record the
impairment charge in our statement of operations.
In the
case of goodwill, the assets recorded as goodwill are not amortized; instead, we
are required to perform an annual impairment review. If we determine, through
the impairment review process, that goodwill has been impaired, we must record
the impairment charge in our statement of operations.
As a
result of the application of the above accounting rules, we incurred non-cash
charges for amortization of intangible assets in the amount of $493,000 during
the first three months of 2008.
Financings
and Issuances of Restricted Shares and Options
During
2006 and 2007, we issued options and restricted shares to certain of our
employees along with restricted shares to our directors. These options and
shares were issued as bonuses, and generally vest over a period of two or three
years from the date of issuance. Relevant accounting rules provide that the
aggregate amount of the difference between the purchase price of the restricted
shares (in this case, generally zero) and the market price of the shares on the
date of grant is taken as a general and administrative expense, amortized over
the life of the period of the restriction.
As a
result of the application of the above accounting rules, we incurred, for the
three months ended March 31, 2008 and 2007, compensation
expense related to stock options and restricted shares of
approximately $410,000 and $792,000, respectively, of which $16,000 and $54,000,
respectively, was for stock options and $393,000 and $738,000, respectively, was
for restricted shares.
Overview
of Operating Performance and Backlog
Overall,
our net loss before minority interest earnings, earnings from affiliated company
and tax expenses for the three months ended March 31, 2008 was $735,000 on
revenues of $13.3 million, compared to a net loss of $1.6 million on revenues of
$11.5 million during the three months ended March 31, 2007. As of March 31,
2008, our overall backlog totaled $49.7 million.
In our
Training and Simulation Division, revenues increased from approximately $4.2
million in the first three months of 2007 to $7.5 million in the first three
months of 2008. As of March 31, 2008, our backlog for our Training and
Simulation Division totaled $19.9 million.
In our
Battery and Power Systems Division, revenues increased from approximately $2.5
million in the first three months of 2007 to approximately $3.1 million in the
first three months of 2008. As of March 31, 2008, our backlog for our Battery
and Power Systems Division totaled $12.2 million.
In our
Armor Division, revenues decreased from $4.8 million during the first three
months of 2007 to $2.6 million during the first three months of 2008. As of
March 31, 2008, our backlog for our Armor Division totaled $17.6
million.
Functional
Currency
We
consider the United States dollar to be the currency of the primary economic
environment in which we and our Israeli subsidiary EFL operate and, therefore,
both we and EFL have adopted and are using the United States dollar as our
functional currency. Transactions and balances originally denominated in U.S.
dollars are presented at the original amounts. Gains and losses arising from
non-dollar transactions and balances are included in net income.
The
majority of financial transactions of our Israeli subsidiaries MDT and Epsilor
are in New Israel Shekels (“NIS”) and a substantial portion of MDT’s and
Epsilor’s costs is incurred in NIS. Management believes that the NIS is the
functional currency of MDT and Epsilor. Accordingly, the financial statements of
MDT and Epsilor have been translated into U.S. dollars. All balance sheet
accounts have been translated using the exchange rates in effect at the balance
sheet date. Statement of operations amounts have been translated using the
average exchange rate for the period. The resulting translation adjustments are
reported as a component of accumulated other comprehensive loss in shareholders’
equity.
Results
of Operations
Three
months ended March 31, 2008 compared to the three months ended March 31,
2007.
Revenues. During the three months
ended March 31, 2008, we (through our subsidiaries) recognized revenues as
follows:
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|
Ø
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FAAC
recognized revenues from the sale of multimedia interactive simulators,
interactive use-of-force training systems, and from the provision of
maintenance services in connection with such
systems.
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|
Ø
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MDT,
MDT Armor and AoA recognized revenues from payments under vehicle armoring
contracts, for service and repair of armored vehicles, and on the sale of
armoring products.
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Ø
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EFB
and Epsilor recognized revenues from the sale of batteries, chargers and
adapters to the military, and under certain development contracts with the
U.S. Army.
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|
|
Ø
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EFL
recognized revenues from the sale of water-activated battery (WAB)
lifejacket lights.
|
Revenues
for the three months ended March 31, 2008 totaled $13.3 million, compared to
$11.5 million in the comparable period in 2007, an increase of $1.8 million, or
14.9%. In the first quarter of 2008, revenues were $7.5 million for the Training
and Simulation Division (compared to $4.2 million in the first quarter of
2007, an increase
of $3.3 million, or 78.7%, due primarily to increased sales of military vehicle
simulators and use of force simulators); $3.1 million for the Battery and Power
Systems Division (compared to $2.5 million in the first quarter of 2007, an increase of $568,000,
or 22.4%, due primarily to increased sales of our battery products at Epsilor
and EFB); and $2.6 million for the Armor Division (compared to $4.8 million in
the first quarter of 2007, a decrease of $2.2
million, or 45.4%, due primarily to
decreased revenues from MDT
and MDT
Armor, mostly in respect of the completion of orders for the “David” Armored
Vehicle).
Cost of
revenues. Cost of revenues totaled
$10.0 million during the first quarter of 2008, compared to $7.4 million in the
first quarter of 2007, an increase of $2.6
million, or 34.5%, due primarily to
increased sales in our Training and Simulation and our Battery and Power Systems
divisions along with erosion in margin in our Armor Division.
Direct
expenses for our three divisions during the first quarter of 2008 were $6.0
million for the Training and Simulation Division (compared to $3.2 million in
the first quarter of 2007, an increase of $2.8
million, or 87.5%, due primarily to
increased sales of FAAC); $3.3 million for the Battery and Power Systems
Division (compared to $2.6 million in the first quarter of 2007, an increase of $711,000,
or 27.1%, due primarily to increased revenues); and $2.3 million for the Armor
Division (compared to $3.9 million in the first quarter of 2007, a decrease of $1.6
million, or 42.6%, due primarily to
decreased production of the “David” Armored Vehicle).
Amortization of
intangible assets. Amortization of intangible
assets totaled $493,000 in the first quarter of 2008, compared to $455,000 in
the first quarter of 2007, an increase of $38,000, or 8.2%, due primarily to an
increase in amortization of capitalized technology in our Training and
Simulation Division along with an increase in identified intangibles due to the
acquisition of RTI.
Research and
development expenses. Research and development
expenses for the first quarter of 2008 were $607,000, compared to $349,000
during the first quarter of 2007, an increase of $258,000, or 73.9%. This
increase was primarily attributable to increases in expenses at Epsilor and EFL
for design improvements and at FAAC for expenses associated with the
improvements to the Company’s simulator products.
Selling and
marketing expenses. Selling and marketing
expenses for the first quarter of 2008 were $1.1 million, compared to $1.0
million in the first quarter of 2007, an increase of $112,000, or 10.9%. This
increase was primarily attributable to the overall increase in revenues and
their associated sales and marketing expenses.
General and
administrative expenses. General and administrative
expenses for the first quarter of 2008 were $3.5 million, compared to $3.7
million in the first quarter of 2007, a decrease of $192,000, or 5.2%. This
decrease was primarily attributable to a reduction in corporate stock
compensation expenses compared to the previous year.
Financial
expenses, net.
Financial expenses totaled approximately $190,000 in the first quarter of 2008,
compared to $124,000 in the first quarter of 2007, an increase of $66,000, or
53.1%. The difference was due primarily to increased interest expense as a
result of higher line of credit balances outstanding in 2008 compared to the
previous year.
Income
taxes. We
and certain of our subsidiaries incurred net operating losses during the three
months ended March 31, 2008 and accordingly, no provision for income taxes was
recorded in this quarter. With respect to some of our subsidiaries that operated
at a net profit during 2008, we were able to offset federal taxes against our
accumulated loss carry forward. We recorded a
total of
$120,000 in tax expense in the first quarter of 2008, compared to $106,000 in
tax expense in the first quarter of 2007, an increase of $14,000, or 13.2%,
mainly concerning state and local taxes.
Net loss.
Due to the factors cited above, net loss decreased from $1.7 million in 2007 to
$971,000 in 2008, a decrease of $728,000, or 42.8%.
Liquidity
and Capital Resources
As of
March 31, 2008, we had $2.4 million in cash, $162,000 in restricted collateral
securities and restricted held-to-maturity securities due within one year, $3.3
million in an escrow receivable, and $51,000 in available-for-sale marketable
securities, as compared to December 31, 2007, when we had $3.4 million in cash,
$320,000 in restricted collateral securities, $1.5 million in an escrow
receivable and $47,000 in available-for-sale marketable securities.
We used
available funds in the three months ended March 31, 2008 primarily for sales and
marketing, continued research and development expenditures, and other working
capital needs. We increased our investment in fixed assets during the three
months ended March 31, 2008 by $339,000 over the investment as at December 31,
2007. Our net fixed assets amounted to $5.2 million at quarter end, which
includes a new capital lease in the first quarter in the amount of
$109,000.
Net cash
provided by (used in) operating activities from continuing operations for the
three months ended March 31, 2008 and 2007 was $685,000 and $(1.0) million,
respectively, an increase of $1.7 million. This increase in cash used was
primarily the result of changes in working capital.
Net cash
provided by (used in) investing activities for the three months ended March 31,
2008 and 2007 was $(1.8) million and $174,000, a decrease of $2.0 million. This
increase was primarily the result of the RTI acquisition and the purchase of
minority interest in MDT.
Net cash
provided by (used in) financing activities for the three months ended March 31,
2008 and 2007 was $(10,000) and $36,000, respectively.
As of
March 31, 2008, we have approximately $4.6 million in bank debt
outstanding.
Subject
to all of the reservations regarding “forward-looking statements” set forth
above, we believe that our present cash position, anticipated cash flows from
operations and lines of credit should be sufficient to satisfy our current
estimated cash requirements through the remainder of the year. In this
connection, we note that from time to time our working capital needs are
partially dependent on our subsidiaries’ lines of credit. In the event that we
are unable to continue to make use of our subsidiaries’ lines of credit for
working capital on economically feasible terms, our business, operating results
and financial condition could be adversely affected.
Over the
long term, we need to sustain profitability, at least on a cash-flow basis, to
avoid future capital requirements. Additionally, we would need to raise
additional capital in order to fund any future acquisitions.
|
ITEM
3.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
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Interest
Rate Risk
It is our
policy not to enter into interest rate derivative financial instruments, except
for hedging of foreign currency exposures discussed below. We do not currently
have any significant interest rate exposure.
Foreign
Currency Exchange Rate Risk
Since a
significant part of our sales and expenses are denominated in U.S. dollars, we
have experienced only insignificant foreign exchange gains and losses to date,
and do not expect to incur significant gains and losses in 2008. Certain of our
research, development and production activities are carried out by our Israeli
subsidiary, EFL, at its facility in Beit Shemesh, and accordingly we have sales
and expenses in NIS. Additionally, our MDT and Epsilor subsidiaries operate
primarily in NIS. However, the majority of our sales are made outside Israel in
U.S. dollars, and a substantial portion of our costs are incurred in U.S.
dollars. Therefore, our functional currency is the U.S. dollar.
While we
conduct our business primarily in U.S. dollars, some of our agreements are
denominated in foreign currencies, and we occasionally hedge part of the risk of
a devaluation of the U.S dollar, which could have an adverse effect on the
revenues that we incur in foreign currencies. We do not hold or issue derivative
financial instruments for trading or speculative purposes
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ITEM
4T.
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CONTROLS
AND PROCEDURES.
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Evaluation
of Disclosure Controls and Procedures
As of
March 31, 2008, our management, including the principal executive officer and
principal financial officer, evaluated our disclosure controls and procedures
related to the recording, processing, summarization, and reporting of
information in our periodic reports that we file with the SEC. These disclosure
controls and procedures are intended to ensure that material information
relating to us, including our subsidiaries, is made known to our management,
including these officers, by other of our employees, and that this information
is recorded, processed, summarized, evaluated, and reported, as applicable,
within the time periods specified in the SEC’s rules and forms. Due to the
inherent limitations of control systems, not all misstatements may be detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Any system of controls and procedures, no matter how well
designed and operated, can at best provide only reasonable assurance that the
objective of the system are met and management necessarily is required to apply
its judgment in evaluating the cost benefit relationship of possible controls
and procedures. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Our controls and procedures are intended to provide
only reasonable, not absolute, assurance that the above objectives have been
met.
Based on
their evaluations, our principal executive officer and principal financial
officer were able to conclude that our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
of 1934) were effective as of March 31, 2008 to ensure that the information
required to be disclosed by us in the reports that we file or submit under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms.
Changes
in Internal Controls Over Financial Reporting
There
have been no changes in our internal control over financial reporting that
occurred during our last fiscal quarter to which this Quarterly Report on Form
10-Q relates that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART
II
Class
Action Litigation
In May
2007, two purported class action complaints (the “Complaint”) were filed in the
United States District Court for the Eastern District of New York against us and
certain of our officers and directors. These two cases were consolidated in June
2007. A similar case filed in the United States District Court for the Eastern
District of Michigan in March 2007 was withdrawn by the plaintiff in June 2007.
The Complaint seeks class status on behalf of all persons who purchased our
securities between November 9, 2004 and November 14, 2005 (the “Period”) and
alleges violations by us and certain of our officers and directors of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder, primarily related to our acquisition of Armour of America in 2005
and certain public statements made by us with respect to our business and
prospects during the Period. The Complaint also alleges that we did not have
adequate systems of internal operational or financial controls, and that our
financial statements and reports were not prepared in accordance with GAAP and
SEC rules. The Complaint seeks an unspecified amount of damages. A lead
plaintiff has been named, and the plaintiff’s consolidated amended complaint was
filed in September 2007. Our motion to dismiss was filed in November 2007, but a
decision on our motion is not expected until mid-2008.
Although
the ultimate outcome of this matter cannot be determined with certainty, we
believe that the allegations stated in the Complaint are without merit and we
and our officers and directors named in the Complaint intend to defend ourselves
vigorously against such allegations.
NAVAIR
Litigation
In
December 2004, AoA filed an action in the United States Court of Federal Claims
against the United States Naval Air Systems Command (NAVAIR), seeking
approximately $2.2 million in damages for NAVAIR’s alleged improper termination
of a contract for the design, test and manufacture of a lightweight armor
replacement system for the United States Marine Corps CH-46E rotor helicopter.
NAVAIR, in its answer, counterclaimed for approximately $2.1 million in alleged
reprocurement and administrative costs. Trial in this matter has concluded, but
no decision has yet been rendered.
For
information regarding our risk factors, please refer to Item 1A in our
Annual Report on Form 10-K for the year ended December 31, 2007. We do not
believe that there been any material changes in the risk factors disclosed in
the Annual Report on Form 10-K.
On
February 12, 2008, in connection with our acquisition of Realtime Technologies,
Inc. (RTI), a privately-owned corporation headquartered in Royal Oak, Michigan,
we issued to the seller of RTI, as part of the purchase price for RTI, a total
of 54,348 shares of our common stock.
We issued
the above securities in reliance on the exemption from registration provided by
Section 4(2) of the Securities Act as transactions by an issuer not involving a
public offering. The issuance of these securities was without the use of an
underwriter, and the shares of common stock were issued with restrictive legends
permitting transfer thereof only upon registration or an exemption under the
Act.
Annual
Shareholders Meeting
We held
our 2007 annual meeting of shareholders on October 15, 2007. Our 2008 Annual
Meeting of Stockholders will be held on Wednesday, August 13, 2008 commencing at
10:00 a.m., local time, at the offices of Lowenstein Sandler P.C., 1251 Avenue
of the Americas, 18th Floor, New York, New York.
In light
of the foregoing and in accordance with Rules 14a-5(f) and 14a-8(e)(2) under the
Securities Exchange Act of 1934, as amended, we will consider stockholder
proposals submitted in connection with our 2008 Annual Meeting to have been
submitted in a timely fashion if such proposals are received by us at our
principal offices no later than May 31, 2008. If a proposal is received after
May 31, 2008, the proxies designated by the Board of Directors of the Company
will have discretionary authority to vote on the proposal under circumstances
consistent with the proxy rules of the Securities and Exchange
Commission.
We expect
to mail our Notice of Internet Availability of Proxy Materials and Notice of the
2008 Annual Meeting on or about June 30, 2008, at which date our Proxy Statement
and Annual Report will be available on an Internet site to be designated in the
Notice of Internet Availability of Proxy Materials. Stockholders will also be
given instructions on how to elect to receive printed proxy materials by
mail.
The
following documents are filed as exhibits to this report:
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Exhibit
Number
|
Description
|
|
31.1
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Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
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31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: May
20, 2008
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|
AROTECH
CORPORATION
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By:
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/s/
Robert S. Ehrlich
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|
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Name:
|
Robert
S. Ehrlich
|
|
|
|
Title:
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Chairman
and CEO
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|
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|
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(Principal
Executive Officer)
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|
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By:
|
/s/
Thomas J. Paup
|
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Name:
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Thomas
J. Paup
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|
|
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Title:
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Vice
President – Finance and CFO
|
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|
|
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(Principal
Financial Officer)
|
|
Exhibit
Number
|
Description
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|