| P R O S P E C T U S |
Filed
pursuant to Rule 424(b)(1)
|
|
Registration
File No.
333-129713
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Corporation
28,000,000
Shares
Common
Stock
This
prospectus relates to the offer and sale of up to 28,000,000 shares of the
common stock of Arotech Corporation from time to time by our certain of our
stockholders listed in this prospectus.
Our
common stock is listed on the Nasdaq National Market under the symbol “ARTX.”
The last reported sale price for our common stock on November 23, 2005 as quoted
on the Nasdaq National Market was $0.39 per share. See “Risk Factors -
Market-Related Risks - If
our
shares were to be delisted, our stock price might decline further and we might
be unable to raise additional capital,” on page 17.
Investing
in our common stock involves a high degree of risk. See
“Risk Factors” on page 9 for various risks that you should consider before you
purchase any shares of our common stock.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is November 25, 2005
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Table
of Contents
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Page
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Summary
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3
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Risk
Factors
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9
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Information
Regarding Forward-Looking Statements
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21
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About
the Offering
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21
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Use
of Proceeds
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22
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Selling
Stockholders
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22
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Plan
of Distribution
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24
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Description
of Capital Stock
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27
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Description
of Common Stock Warrants
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28
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Legal
Matters
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28
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Experts
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28
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Where
You Can Find Additional Information
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29
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Incorporation
of Documents by Reference
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29
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Unless
the context otherwise requires, references to us refer to Arotech Corporation
and its subsidiaries.
2
SUMMARY
The
following summary highlights some information from this prospectus. It is
not
complete and does not contain all of the information that you should consider
before making an investment decision. You should read this entire prospectus,
including the “Risk Factors” section, the financial statements and related notes
and the other more detailed information appearing elsewhere or incorporated
by
reference in this prospectus. Unless otherwise indicated, “we,”“us,”“our” and
similar terms refer to Arotech Corporation and its subsidiaries and not to
the
Selling Stockholders.
Arotech™
is a trademark, and Electric Fuel®
is a
registered trademark, that belongs to us. All company and product names
mentioned may be trademarks or registered trademarks of their respective
holders.
About
Us
We
are a
defense and security products and services company, engaged in three business
areas: high-level armoring for military, paramilitary and commercial air
and
ground vehicles; interactive simulation for military, law enforcement and
commercial markets; and batteries and charging systems for the military.
We
operate primarily as a holding company, through our various subsidiaries,
which
we have organized into three divisions. Our divisions and subsidiaries (all
100%
owned by us, unless otherwise noted) are as follows:
| Ø |
We
develop, manufacture and market advanced hi-tech multimedia and
interactive digital solutions for use-of-force and driving training
of
military, law enforcement, security and other personnel through
our
Simulation
and Security Division:
|
| · |
We
provide simulators, systems engineering and software products to
the
United States military, government and private industry through
our
subsidiary FAAC Incorporated, located in Ann Arbor, Michigan (“FAAC”);
and
|
| · |
We
provide specialized “use of force” training for police, security personnel
and the military through our subsidiary IES Interactive Training,
Inc.,
located in Littleton, Colorado
(“IES”).
|
| Ø |
We
manufacture aviation armor and we utilize sophisticated lightweight
materials and advanced engineering processes to armor vehicles
through our
Armor
Division:
|
| · |
We
manufacturer ballistic and fragmentation armor kits for rotary
and fixed
wing aircraft, marine armor, personnel armor, military vehicles
and
architectural applications, including both the LEGUARD Tactical
Leg Armor
and the Armourfloat Ballistic Floatation Device, which is a unique
vest
that is certified by the U.S. Coast Guard, through our subsidiary
Armour
of America, located in Los Angeles, California, (“AoA”);
and
|
| · |
We
use state-of-the-art lightweight ceramic materials, special ballistic
glass and advanced engineering processes to fully armor vans and
SUVs,
through
our subsidiaries MDT Protective Industries, Ltd., located in Lod,
Israel
(“MDT”), of which we own 75.5%, and MDT
Armor Corporation, located in Auburn, Alabama (“MDT Armor”),
of which we own 88%.
|
| Ø |
We
manufacture and sell lithium and Zinc-Air batteries for defense
and
security products and other military applications and we pioneer
advancements in Zinc-Air technology for electric vehicles through
our
Battery
and Power Systems
Division
|
| · |
We
develop and sell rechargeable and primary lithium batteries and
smart
chargers to the military and to private industry in the Middle
East,
Europe and Asia through our subsidiary Epsilor Electronic Industries,
Ltd., located in Dimona, Israel (in Israel’s Negev desert area)
(“Epsilor”);
|
| · |
We
manufacture and sell Zinc-Air fuel cells, batteries and chargers
for the
military, focusing on applications that demand high energy and
light
weight, through our subsidiary Electric Fuel Battery Corporation,
located
in Auburn, Alabama (“EFB”); and
|
3
| · |
We
produce water-activated lifejacket lights for commercial aviation
and
marine applications, and we conduct our Electric Vehicle effort,
through
our subsidiary Electric Fuel (E.F.L.) Ltd., located in Beit Shemesh,
Israel (“EFL”).
|
Simulation
and Security Division
We
develop, manufacture and market advanced hi-tech multimedia and interactive
digital solutions for use-of-force and driving training of military, law
enforcement, security and other personnel through our Simulation and Security
Division, the largest of our three divisions. During
2004, 2003 and 2002 revenues from our Simulation and Security Division were
approximately $21.5 million, $8.0 million and $2.0 million, respectively
(on a
pro forma basis, assuming we had owned all components of our Simulation and
Security Division since January 1, 2002, revenues in 2004, 2003 and 2002
would
have been approximately $21.5 million, $17.9 million and $20.3 million,
respectively).
VEHICLE
SIMULATORS
We
provide simulators,
systems engineering and software products to the United States military,
government and private industry through
our wholly-owned subsidiary, FAAC Corporation,
based
in Ann Arbor, Michigan.
Our
fully
interactive driver-training systems feature state-of-the-art vehicle simulator
technology enabling training in situation awareness, risk analysis and decision
making, emergency reaction and avoidance procedures, and conscientious equipment
operation. We have an installed base of over 220 simulators that have
successfully trained over 100,000 drivers. Our customer base includes all
branches of the U.S. Department of Defense, state and local governments,
and
commercial entities.
In
the
area of Military Operations, we are a premier developer of validated, high
fidelity analytical models and simulations of tactical air and land warfare
for
all branches of the Department of Defense and its related industrial
contractors. Our simulations are found in systems ranging from instrumented
air
combat and maneuver ranges (such as Top Gun) to full task training devices
such
as the F-18 Weapon Tactics Trainer. We are also the leading supplier of wheeled
vehicle simulators to the U.S. Armed Forces for mission-critical vehicle
training.
We
supply
on-board software to support weapon launch decisions for the F-15, F-18,
and
Joint Strike Fighter (JSF) fighter aircraft. Pilots benefit by having highly
accurate presentations of their weapon’s capabilities, including susceptibility
to target defensive reactions. We designed and developed an instructor operator
station, mission operator station and real-time, database driven electronic
combat environment for the special operational forces aircrew training system.
The special operational forces aircrew training system provides a full range
of
aircrew training, including initial qualification, mission qualification,
continuation, and upgrade training, as well as combat mission
rehearsal.
USE-OF-FORCE
TRAINING
We
are a
leading provider of interactive, multimedia, fully digital training simulators
for law enforcement, security, military and similar applications. With a
customer base of over 700 customers in over twenty countries around the world,
we are a leader in the supply of simulation training products to military,
law
enforcement and corporate client communities. We believe, based on our general
knowledge of the size of the interactive use-of-force market, our specific
knowledge of the extent of our sales, and discussions we have held with
customers at trade shows, etc., that we provide more than 35% of the world-wide
market for government and military judgment training simulators. We conduct
our
interactive training activities through our subsidiary IES Interactive Training,
Inc. (“IES”), a Delaware corporation based in Littleton, Colorado.
We
offer
consumers the following interactive training products and services:
| Ø |
Range
3000
-
providing use-of-force simulation for military and law enforcement.
We
believe that the Range 3000 is the most technologically advanced
judgment
training simulator in the world.
|
| Ø |
A2Z
Classroom Trainer
-
a state-of-the-art computer based training (CBT) system that allows
students to interact with realistic interactive scenarios projected
life-size in the classroom.
|
| Ø |
Range
FDU (Firearms Diagnostic Unit)
-
a unique combination of training and interactive technologies that
give
instructors a first-person perspective of what trainees are seeing
and
doing when firing a weapon.
|
4
| Ø |
Milo
(Multiple Interactive Learning/training Objectives)
-
a simulator designed with “plug in” modules to customize the training
system to meet end user needs.
|
| Ø |
Summit
Training International
-
providing relevant, cost-effective professional training services
and
interactive courseware for law enforcement, corrections and corporate
clients.
|
| Ø |
IES
Studio Productions
-
providing cutting edge multimedia video services for law enforcement,
military and security agencies, utilizing the newest equipment
to create
the training services required by the most demanding authorities.
|
Most
of
the customers for our IES products are law enforcement agencies, both in
the
United States (federal, state and local) and worldwide. Purchasers of IES
products have included (in the United States) the FBI, the Secret Service,
the
Bureau of Alcohol, Tobacco and Firearms, the Customs Service, the Federal
Protective Service, the Border Patrol, the Bureau of Engraving and Printing,
the
Coast Guard, the Federal Law Enforcement Training Centers, the Department
of
Health and Human Services, the California Department of Corrections, NASA,
police departments in Texas (Houston), Michigan (Detroit), D.C., California
(Fresno and the California Highway Patrol), Massachusetts (Brookline), Virginia
(Newport News and the State Police Academy), Arizona (Maricopa County),
universities and nuclear power plants, as well as international users such
as
the Israeli Defense Forces, the German National Police, the Royal Thailand
Army,
the Hong Kong Police, the Russian Security Police, users in Mexico and the
United Kingdom, and over 700 other training departments worldwide.
Armor
Division
We
manufacture aviation and other armor and we armor vehicles
through
our Armor Division. During
2004, 2003 and 2002 revenues from our Armor Division were approximately $18.0
million, $3.4 million and $2.7 million, respectively (on a pro forma basis,
assuming we had owned all components of our Armor Division since January
1,
2002, revenues in 2004, 2003 and 2002 would have been approximately $29.2
million, $10.9 million and $13.3 million, respectively).
AIRCRAFT
ARMORING
We
are an
innovative manufacturer of lightweight personal, vehicle, aviation,
architectural and marine ballistic armoring. Our Armor Division has years
of
battlefield and commercial protection experience and has provided life saving
protection under the most extreme conditions. Through our subsidiary Armour
of
America, located in Los Angeles, California, we manufacturer ballistic and
fragmentation armor kits for rotary and fixed wing aircraft, marine armor,
personnel armor, military vehicles, architectural applications, including
both
the LEGUARD Tactical Leg Armor and the Armourfloat Ballistic Floatation Device,
which is a unique armored floatation vest that is certified by the U.S. Coast
Guard.
We
produce two kinds of armor, soft armor and hard armor, to support customer
armor
requirements. Soft armor, which is capable of protecting against all handguns
and 9mm sub guns, is used in our ballistic and fragmentation vest, military
vehicle, marine, architectural and special application armor lines. Hard
armor,
which is capable of protecting against rifle fire up to 50cal/12.7mm API,
is
used in our ballistic chest plate, aircraft, military vehicle, marine and
architectural armor lines. Within these two basic kinds of armor, we offer
the
product lines listed below.
Fixed
and Rotary Wing Aircraft Armor Systems
We
design
and manufacture ballistic armor systems for a wide variety of fixed and rotary
wing aircraft. These systems are in the form of kits, with individual contoured
panels which cover the entire aircraft’s floor, walls, seats, bulkheads, walls,
oxygen containers, avionics and doors. All of our ballistic armor kits include
a
complete installation hardware kit containing all items required for
installation. The supplied hardware is designed for each individual application
in accordance with the installation hardware certification, which has been
provided by Lockheed-Martin. Additionally, the fixed and rotary wing aircraft
kits have been certified, by an independent test facility that is approved
by
the FAA, to meet flammability requirements of FAA/FAR 25.853, 12 Second Vertical
Test and MIL-STD-810 Environmental Testing.
Military
Vehicles Armor Kits
For
the
military vehicle market, we provide ballistic armor kits to protect against
fragmentation and rifle fire, up to 50cal API for Humvees, 2½- and 5-ton trucks,
HEMTT wreckers and various construction vehicles. These kits offer varying
levels of protection for doors, floors, fuel tanks, air bottles, cargo beds,
troop seat backs, critical components and glass. To date, we have protected
vehicles deployed in Iraq, Afghanistan, and Kuwait. All of the provided kits
are
designed for easy field level installation and include required hardware
and
instructions.
5
Marine
Armor Kits
For
the
marine market, we manufacture armor kits for the gun mounts on naval ships
and
riverine patrol boats. During Operation Desert Storm, we designed and
manufactured .50 cal AP ballistic panels and deck mount brackets for the
U.S.
Navy. Since then, we have designed and manufactured armor to fit both the
.50
cal and 25mm gun mounts on frigates, destroyers, cruisers and aircraft carriers.
The result of this effort is that we have delivered armor systems to individual
ships in the class and currently are pursuing armoring additional classes
of
ships throughout the Navy Command.
Ballistic
Vests and Plates and Body Armor
We
manufacture a complete line of personal body armor, including concealable,
external and special application armor. The concealable armor vest offers
complete front, side and back protection using soft, lightweight, high strength
proprietary woven ballistic fabrics.
Our
external vest line includes assault, tactical, riot, stab and T-panel designs.
Each of these designs can be modified to meet the individual wearer of
customer’s requirements. Special application vests include the Armourfloat,
which to our knowledge is currently the only ballistic/floatation vest approved
by the U.S. Coast Guard; the Zip Out armor jacket, which offers covert
protection in both a lightweight jacket or vest design; and our helicopter
vest,
which incorporates a unique protection/comfort design.
We
offer
a complete line of personal body armor including concealable ballistic vests,
military vests and external tactical vests as well as a line of products
specially designed for U.S. Navy Seal Teams and various law enforcement agencies
in the United States and overseas. Our hard ballistic armor, designed to
stop
military rifle fire up to and including .50 caliber and European 12.7 mm
Armor
Piercing Incendiary (API) rounds, is used primarily on fixed and rotary wing
aircraft, military ships and military vehicles, as well as in architectural
applications.
We
have
designed and manufactured special operations personal armor including ballistic
hand held shields and the LEGUARD® Tactical Leg Armor, which offers complete
front protection for the lower thigh, knee, shin and instep.
Other
Armor for Specialty Applications
In
addition to aircraft, marine, vehicle and vest armor, we also manufacture
ballistic and fragmentation blankets and curtains for numerous specialty
applications. These applications include operator protection around test
equipment; rupture protection of pressure vessels, mechanical failure of
production machinery and high pressure piping. Additionally, we have supplied
armor for office use in protection of occupants from blast and glass fragments
of windows and isolation of security rooms from surrounding
environments.
VEHICLE
ARMORING
Through
our majority-owned MDT Protective Industries Ltd. and MDT Armor Corporation
subsidiaries, we specialize in using state-of-the-art lightweight ceramic
materials, special ballistic glass and advanced engineering processes to
fully
armor vans and cars. MDT is a leading supplier to the Israeli military, Israeli
special forces and special services. MDT’s products are proven in intensive
battlefield situations and under actual terrorist attack conditions, and
are
designed to meet the demanding requirements of governmental and private sector
customers worldwide.
Battery
and Power Systems Division
We
manufacture and sell lithium and Zinc-Air batteries for defense and security
products and other military applications
and we pioneer advancements in Zinc-Air technology for electric vehicles
through
our Battery and Power Systems Division.
During
2004, 2003 and 2002 revenues from our Battery and Power Systems Division
were
approximately $10.5 million, $5.9 million and $1.7 million, respectively
(on a
pro forma basis, assuming we had owned all components of our Battery and
Power
Systems Division since January 1, 2002, revenues in 2004, 2003 and 2002 would
have been approximately $10.5 million, $10.8 million and $6.5 million,
respectively).
6
LITHIUM
BATTERIES AND CHARGING SYSTEMS FOR THE MILITARY
We
sell
lithium batteries and charging systems to the military through our subsidiary
Epsilor Electronic Industries, Ltd., an Israeli corporation established in
1985
that we purchased early in 2004.
We
specialize in the design and manufacture of primary and rechargeable batteries,
related electronic circuits and associated chargers for military applications.
We have experience in working with government agencies, the military and
large
corporations. Our technical team has significant expertise in the fields
of
electrochemistry, electronics, software and battery design, production,
packaging and testing.
ZINC-AIR
FUEL CELLS, BATTERIES AND CHARGERS FOR THE MILITARY
We
base
our strategy in the field of Zinc-Air military batteries on the development
and
commercialization of our Zinc-Air fuel cell technology, as applied in the
batteries we produce for the U.S. Army’s Communications and Electronics Command
(CECOM) through our subsidiary Electric Fuel Battery Corporation. We will
continue to seek new applications for our technology in defense projects,
wherever synergistic technology and business benefits may exist. We intend
to
continue to develop our battery products for defense agencies, and plan to
sell
our products either directly to such agencies or through prime contractors.
We
will also look to extend our reach to military markets outside the United
States.
Since
1998 we have received and performed a series of contracts from CECOM to develop
and evaluate advanced primary Zinc-Air fuel cell packs. Pursuant to these
contracts, we developed and began selling in 2002 a 12/24 volt, 800 watt-hour
battery pack for battlefield power, which is based on our Zinc-Air fuel cell
technology, weighs only six pounds and has approximately twice the energy
capacity per pound of the U.S. Army’s standard lithium-sulfur dioxide battery
packs - the BA-8180/U battery.
In
the
second half of 2002, our five-year program with CECOM to develop a Zinc-Air
battery for battlefield power culminated in the assignment of a National
Stock
Number and a $2.5 million delivery order for the newly designated BA-8180/U
battery. Subsequent to this initial $2.5 million delivery order, we received
additional follow-on orders from the Army.
Our
batteries have been used in both Afghanistan (Operation Enduring Freedom)
and in
Iraq (Operation Iraqi Freedom). In June of 2004, our BA-8180 Zinc-Air battery
was recognized by the U.S Army Research, Development and Engineering Command
as
one of the top ten inventions of 2003.
Our
Zinc-Air fuel cells, batteries and chargers for the military are manufactured
through our Electric Fuel Battery Corporation subsidiary. In 2003, our EFB
facilities were granted ISO 9001 “Top Quality Standard”
certification.
ELECTRIC
VEHICLE
We
believe that electric buses represent a particularly important market for
electric vehicles in the United States. An all-electric, full-size bus powered
by the Electric Fuel system can provide to transit authorities a full day’s
operating range for both heavy duty city and suburban routes in all weather
conditions. We conduct our electric
vehicle activities through our subsidiary Electric Fuel Ltd.
LIFEJACKET
LIGHTS
In
1996,
we began to produce and market lifejacket lights built with our patented
magnesium-cuprous chloride batteries, which are activated by immersion in
water
(water-activated batteries), for the aviation and marine safety and emergency
markets. Additionally, in 2004 we added two new models to our line of lifejacket
light, based on lithium batteries.
At
present we have a product line consisting of seven lifejacket light models,
five
for use with marine life jackets and two for use with aviation life vests,
all
of which work in both freshwater and seawater. Each of our lifejacket lights
is
certified for use by relevant governmental agencies under various U.S. and
international regulations. We manufacture, assemble and package all our
lifejacket lights through EFL in our factory in Beit Shemesh,
Israel.
7
Recent
Financing
In
September 2005, we raised gross proceeds of $17.5 million in a private placement
with five institutional investors.
In
connection with the private placement, we issued and sold an
aggregate of $17.5 million principal amount of senior secured notes and
one
year
warrants, which are not exercisable for the six month period following closing,
to purchase up to 5,250,000 shares of common stock (30% warrant coverage)
at an
exercise price of $1.10 per share.
The
notes
are convertible at the holder’s option at a fixed conversion price of $1.00. The
notes have a final maturity date of March 31, 2008 and bear interest at a
rate
equal to six month LIBOR plus 6% per annum, subject to a floor of 10% and
a cap
of 12.5%. We will repay the principal amount of the notes over the next two
and
one-half years, with the principal amount being amortized in twelve payments
payable at our option in cash and/or stock, provided certain conditions are
met.
In the event we elect to make such payments in stock, the price used to
determine the number of shares to be issued will be calculated using an 8%
discount to the average trading price of our common stock during 17 of the
20
consecutive trading days ending two days before the payment date; we will,
as
required under Nasdaq rules, solicit the approval of our stockholders to
such
stock payments at a special meeting of its stockholders to be held before
the
end of 2005. We also committed ourselves to certain affirmative and negative
covenants customary in agreements of this kind.
We
used
$2.6 million of the proceeds to
purchase a letter of credit securing our obligation for future interest payments
on the notes, and we used approximately
$5.4 million of the net proceeds of the financing to complete the outstanding
earnout payment for the acquisition of our FAAC subsidiary. The balance of
the
proceeds after expenses (including a 5% placement fee) will be used to restore
cash used during the year, part of which was invested in our Armour of America
(AoA) subsidiary, and to increase working capital.
Under
the
terms of notes, we have granted the holders (i) a second position security
interest in the stock of MDT Armor Corporation, IES Interactive Training,
Inc.
and M.D.T. Protective Industries, Ltd. and in the assets of IES Interactive
Training, Inc. (junior to the security interest of the holders of our 8%
secured
convertible debentures due September 30, 2006 and in any assets that we acquire
in future Acquisitions (as defined in the purchase agreement entered into
in the
transaction) and a second position security interest in the assets of FAAC
Corporation and (ii) a first position security interest in the assets of
all of
our other active United States subsidiaries, all pursuant to the terms of
separate security agreements filed herewith. Our active United States
subsidiaries are also acting as guarantors of our obligations under the notes.
We
are
required to register the resale of the shares of common stock underlying
the
notes and the warrants.
Facilities
Our
principal executive offices are located at
354
Industry Drive, Auburn, Alabama 36830,
and our
telephone number at our executive offices is (334) 502-9001. Our
corporate website is www.arotech.com.
Our
periodic reports to the Securities Exchange Commission, as well as recent
filings relating to transactions in our securities by our executive officers
and
directors, that have been filed with the Securities and Exchange Commission
in
EDGAR format are made available through hyperlinks located on the investor
relations page of our website, at http://www.arotech.com/compro/investor.html,
as soon
as reasonably practicable after such material is electronically filed with
or
furnished to the SEC. Reference to our websites does not constitute
incorporation of any of the information thereon or linked thereto into this
prospectus.
The
offices and facilities of three of our principal subsidiaries, EFL, MDT and
Epsilor, are located in Israel (in Beit Shemesh, Lod and Dimona, respectively,
all of which are within Israel’s pre-1967 borders). Most of the members of our
senior management work extensively out of EFL’s facilities. IES’s offices and
facilities are located in Littleton, Colorado,
FAAC’s home offices and facilities are located in Ann Arbor, Michigan, AoA’s
offices and facilities are located in Los Angeles, California, and the offices
and facilities of EFB and MDT Armor are located in Auburn,
Alabama.
8
RISK
FACTORS
An
investment in our common stock involves a high degree of risk. You should
carefully consider
the
following risk factors and other information in this prospectus in addition
to
our financial
statements
before investing in our common stock. In addition to the following risks, there
may
also
be risks that we do not yet know of or that we currently think are immaterial
that may
also
impair our business operations. The trading price of our common stock
could
decline
due to any of these risks, and you may lose all or part of your
investment.
Business-Related
Risks
We
have had a history of losses and may incur future
losses.
We
were
incorporated in 1990 and began our operations in 1991. We have funded our
operations principally from funds raised in each of the initial public offering
of our common stock in February 1994; through subsequent public and private
offerings of our common stock and equity and debt securities convertible or
exercisable into shares of our common stock; research contracts and supply
contracts; funds received under research and development grants from the
Government of Israel; and sales of products that we and our subsidiaries
manufacture. We have incurred significant net losses since our inception.
Additionally, as of September 30, 2005, we had an accumulated deficit of
approximately $140.5 million. In an effort to reduce operating expenses and
maximize available resources, we intend to consolidate certain of our
subsidiaries, shift personnel and reassign responsibilities. We have also
substantially reduced senior employee salaries, cut directors’ fees, and taken a
variety of other measures to limit spending and will continue to assess our
internal processes to seek additional cost-structure improvements. Although
we
believe that such steps will help to reduce our operating expenses and maximize
our available resources, there can be no assurance that we will ever be able
to
achieve or maintain profitability consistently or that our business will
continue to exist.
Our
existing indebtedness may adversely affect our ability to obtain additional
funds and may increase our vulnerability to economic or business
downturns.
Our
bank
and certificated indebtedness (short and long term) aggregated approximately
$24.7 million as of September 30, 2005 (not including trade payables, other
account payables and accrued severance pay). In addition, we may incur
additional indebtedness in the future. Accordingly, we are subject to the risks
associated with indebtedness, including:
| · |
we
must dedicate a portion of our cash flows from operations to pay
debt
service costs and, as a result, we have less funds available for
operations, future acquisitions of consumer receivable portfolios,
and
other purposes;
|
| · |
it
may be more difficult and expensive to obtain additional funds through
financings, if available at all;
|
| · |
we
are more vulnerable to economic downturns and fluctuations in interest
rates, less able to withstand competitive pressures and less flexible
in
reacting to changes in our industry and general economic conditions;
and
|
| · |
if
we default under any of our existing debt instruments or if our creditors
demand payment of a portion or all of our indebtedness, we may not
have
sufficient funds to make such
payments.
|
The
occurrence of any of these events could materially adversely affect our results
of operations and financial condition and adversely affect our stock
price.
The
agreements governing the terms of our debentures and notes contain numerous
affirmative and negative covenants that limit the discretion of our management
with respect to certain business matters and place restrictions on us, including
obligations on our part to preserve and maintain our assets and restrictions
on
our ability to incur or guarantee debt, to merge with or sell our assets to
another company, and to make significant capital expenditures without the
consent of the debenture holders. Our ability to comply with these and other
provisions of such agreements may be affected by changes in economic or business
conditions or other events beyond our control.
9
Failure
to comply with the terms of our indebtedness could result in a default that
could have material adverse consequences for us.
A
failure
to comply with the obligations contained in the agreements governing our
indebtedness could result in an event of default under such agreements which
could result in an acceleration of the debentures and notes and the acceleration
of debt under other instruments evidencing indebtedness that may contain
cross-acceleration or cross-default provisions. If the indebtedness under the
debentures, notes or other indebtedness were to be accelerated, there can be
no
assurance that our future cash flow or assets would be sufficient to repay
in
full such indebtedness.
We
may not generate sufficient cash flow to service all of our debt
obligations.
Our
ability to make payments on and to refinance our indebtedness and to fund our
operations depends on our ability to generate cash in the future. Our future
operating performance is subject to market conditions and business factors
that
are beyond our control. Consequently, we cannot assure you that we will generate
sufficient cash flow to pay the principal and interest on our debt. If our
cash
flows and capital resources are insufficient to allow us to make scheduled
payments on our debt, we may have to reduce or delay capital expenditures,
sell
assets, seek additional capital or restructure or refinance our debt. We cannot
assure you that the terms of our debt will allow for these alternative measures
or that such measures would satisfy our scheduled debt service obligations.
In
addition, in the event that we are required to dispose of material assets or
restructure or refinance our debt to meet our debt obligations, we cannot assure
you as to the terms of any such transaction or how quickly such transaction
could be completed. Our ability to refinance our indebtedness or obtain
additional financing will depend on, among other things:
| · |
our
financial condition at the time;
|
| · |
restrictions
in the agreements governing our other indebtedness;
and
|
| · |
other
factors, including the condition of the financial markets and our
industry.
|
We
need significant amounts of capital to operate and grow our business and to
pay
our debt.
We
require substantial funds to operate our business, including to market our
products and develop and market new products and to pay our outstanding debt
as
it comes due. To the extent that we are unable to fully fund our operations,
including repaying our outstanding debt, through profitable sales of our
products and services,
we
will
need to seek additional funding, including through the issuance of equity or
debt securities. In addition, based on our internal forecasts and the
assumptions described under “Liquidity and Capital Resources” in our
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, we believe that our present cash position and anticipated cash
flows
from operations should be sufficient to satisfy our current estimated cash
requirements through the next twelve months. However, in the event our internal
forecasts and other assumptions prove to be incorrect, we may need to seek
additional funding. There can be no assurance that we will obtain any such
additional financing in a timely manner, on acceptable terms, or at all.
Moreover, the issuance by us of additional debt or equity is severely restricted
by the terms of our existing indebtedness. If additional funds are raised by
issuing equity securities or convertible debt securities, stockholders may
incur
further dilution. If we incur additional indebtedness, we may be subject to
affirmative and negative covenants that may restrict our ability to operate
or
finance our business. If additional funding is not secured, we will have to
modify, reduce, defer or eliminate parts of our present and anticipated future
commitments and/or programs.
10
The
payment by us of our secured convertible notes in stock or the conversion of
such notes by the holders could result in substantial numbers of additional
shares being issued, with the number of such shares increasing if and to the
extent our market price declines, diluting the ownership percentage of our
existing stockholders.
In
September 2005, we issued $17.5 million in secured convertible notes due March
31, 2008. The Notes are convertible at the option of the holders at a fixed
conversion price of $1.00. We will repay the principal amount of the notes
over
the next two and one-half years, with the principal amount being amortized
in
twelve payments payable at our option in cash and/or stock, provided certain
conditions are met; the failure to meet such conditions could make us unable
to
pay our notes, causing us to default. If the price of our common stock is above
$1.00, the holders of our notes will presumably convert their notes to stock
when payments are due, or before, resulting in the issuance of up to an
additional 17.5 million shares of common stock.
In
the
event we elect to make payments of principal on our convertible notes in stock,
either because our cash position at the time makes it necessary or we otherwise
deem it advisable, the price used to determine the number of shares to be issued
will be calculated using an 8% discount to the average trading price of our
common stock during 17 of the 20 consecutive trading days ending two days before
the payment date. Accordingly, the lower the market price of our common stock
at
the time at which we make payments of principal in stock, the greater the number
of shares we will be obliged to issue and the greater the dilution to our
existing stockholders.
In
either
case, the issuance of the additional shares of our common stock could adversely
affect the market price of our common stock.
We
have pledged a substantial portion of our assets to secure our borrowings.
Our
debentures and notes are secured by a substantial portion of our assets. If
we
default under the indebtedness secured by our assets, those assets would be
available to the secured creditors to satisfy our obligations to the secured
creditors, which could materially adversely affect our results of operations
and
financial condition and adversely affect our stock price.
Any
inability to continue to make use from time to time of our subsidiaries’ current
working capital lines of credit could have an adverse effect on our ability
to
do business.
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.
We
may not be successful in operating new businesses.
Prior
to
the acquisitions of IES and MDT in 2002 and the acquisitions of FAAC and Epsilor
in January 2004 and AoA in August 2004, our primary business was the marketing
and sale of products based on primary and refuelable Zinc-Air fuel cell
technology and advancements in battery technology for defense and security
products and other military applications, electric vehicles and consumer
electronics. As a result of our acquisitions, a substantial component of our
business is the marketing and sale of hi-tech multimedia and interactive
training solutions and sophisticated
lightweight materials and advanced engineering processes used to armor vehicles.
These are relatively new businesses for us and our management group has limited
experience operating these types of businesses. Although we have retained our
acquired companies’ management personnel, we cannot assure that such personnel
will continue to work for us or that we will be successful in managing these
new
businesses. If we are unable to successfully operate these new businesses,
our
business, financial condition and results of operations could be materially
impaired.
Our
earnings will decline if we write off additional goodwill and other intangible
assets.
As
of
December 31, 2004, we have recorded goodwill of $39.7 million. On January 1,
2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No.
142 requires goodwill to be tested for impairment on adoption of the Statement,
at least annually thereafter, and between annual tests in certain circumstances,
and written down when impaired, rather than being amortized as previous
accounting standards required. Goodwill is tested for impairment by comparing
the fair value of our reportable units with their carrying value. Fair value
is
determined using discounted cash flows. Significant estimates used in the
methodologies include estimates of future cash flows, future short-term and
long-term growth rates, weighted average cost of capital and estimates of market
multiples for the reportable units. We performed the required annual impairment
test of goodwill, based on our projections and using expected future discounted
operating cash flows. As of September 30, 2005, we identified in AoA an
impairment of goodwill in the amount of $11.6 million.
11
Our
and
our subsidiaries’ long-lived assets and certain identifiable intangibles are
reviewed for impairment in accordance with Statement of Financial Accounting
Standard No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets,” whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of the carrying amount
of assets to be held and used is measured by a comparison of the carrying amount
of the assets to the future undiscounted cash flows expected to be generated
by
the assets. If such assets are considered to be impaired, the impairment to
be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. As of September 30, 2005, we identified
an
impairment of backlog previously identified with the AoA acquisition and as
a
result we recorded an impairment loss in the amount of $346,000.
We
will
continue to assess the fair value of our goodwill annually or earlier if events
occur or circumstances change that would more likely than not reduce the fair
value of our goodwill below its carrying value. These events or circumstances
would include a significant change in business climate, including a significant,
sustained decline in an entity's market value, legal factors, operating
performance indicators, competition, sale or disposition of a significant
portion of the business, or other factors. If we determine that significant
impairment
has
occurred, we would be required to write off the impaired portion of goodwill.
Impairment
charges
could have a material adverse effect on our financial condition and results
We
may consider acquisitions in the future to grow our business, and such activity
could subject us to various risks.
We
may
consider acquiring companies that will complement our existing operations or
provide us with an entry into markets we do not currently serve. Growth through
acquisitions involves substantial risks, including the risk of improper
valuation of the acquired business and the risk of inadequate integration.
There
can be no assurance that suitable acquisition candidates will be available,
that
we will be able to acquire or manage profitably such additional companies or
that future acquisitions will produce returns that justify our investments
in
such companies. In addition, we may compete for acquisition and expansion
opportunities with companies that have significantly greater resources than
we
do. Furthermore, acquisitions could disrupt our ongoing business, distract
the
attention of our senior officers, increase our expenses, make it difficult
to
maintain our operational standards, controls and procedures and subject us
to
contingent and latent risks that are different, in nature and magnitude, than
the risks we currently face.
We
may
finance future acquisitions with cash from operations or additional debt or
equity financings. There can be no assurance that we will be able to generate
internal cash or obtain financing from external sources or that, if available,
such financing will be on terms acceptable to us. The issuance of additional
common stock to finance acquisitions may result in substantial dilution to
our
stockholders. Any debt financing may significantly increase our leverage and
may
involve restrictive covenants which limit our operations.
We
may not successfully integrate our prior
acquisitions.
In
light
of our acquisitions of IES, MDT, FAAC, Epsilor and AoA, our success will depend
in part on our ability to manage the combined operations of these companies
and
to integrate the operations and personnel of these companies along with our
other subsidiaries and divisions into a single organizational structure. There
can be no assurance that we will be able to effectively integrate the operations
of our subsidiaries and divisions and our acquired businesses into a single
organizational structure. Integration of these operations could also place
additional pressures on our management as well as on our key technical
resources. The failure to successfully manage this integration could have an
adverse material effect on us.
12
If
we are
successful in acquiring additional businesses, we may experience a period of
rapid growth that could place significant additional demands on, and require
us
to expand, our management, resources and management information systems. Our
failure to manage any such rapid growth effectively could have a material
adverse effect on our financial condition, results of operations and cash
flows.
If
we are unable to manage our growth, our operating results will be
impaired.
As
a
result of our acquisitions, we are currently experiencing a period of
significant growth and development activity which has placed a significant
strain on our personnel and resources. Our activity has resulted in increased
levels of responsibility for both existing and new management personnel. Many
of
our management personnel have had limited or no experience in managing growing
companies. We have sought to manage our current and anticipated growth through
the recruitment of additional management and technical personnel and the
implementation of internal systems and controls. However, our failure to manage
growth effectively could adversely affect our results of
operations.
A
significant portion of our business is dependent on government contracts and
reduction or reallocation of defense or law enforcement spending could reduce
our revenues.
Many
of
the customers of IES, FAAC and AoA to date have been in the public sector of
the
U.S., including the federal, state and local governments, and in the public
sectors of a number of other countries, and most of MDT’s customers have been in
the public sector in Israel, in particular the Ministry of Defense.
Additionally, all of EFB’s sales to date of battery products for the military
and defense sectors have been in the public sector in the United States. A
significant decrease in the overall level or allocation of defense or law
enforcement spending in the U.S. or other countries could reduce our revenues
and have a material adverse effect on our future results of operations and
financial condition. MDT has already experienced a slowdown in orders from
the
Ministry of Defense due to budget constraints and a requirement of U.S. aid
to
Israel that a substantial proportion of such aid be spent in the U.S., where
MDT
has only recently opened a factory.
Sales
to
public sector customers are subject to a multiplicity of detailed regulatory
requirements and public policies as well as to changes in training and
purchasing priorities. Contracts with public sector customers may be conditioned
upon the continuing availability of public funds, which in turn depends upon
lengthy and complex budgetary procedures, and may be subject to certain pricing
constraints. Moreover, U.S. government contracts and those of many international
government customers may generally be terminated for a variety of factors when
it is in the best interests of the government and contractors may be suspended
or debarred for misconduct at the discretion of the government. There can be
no
assurance that these factors or others unique to government contracts or the
loss or suspension of necessary regulatory licenses will not reduce our revenues
and have a material adverse effect on our future results of operations and
financial condition.
Our
U.S. government contracts may be terminated at any time and may contain other
unfavorable provisions.
The
U.S.
government typically can terminate or modify any of its contracts with us either
for its convenience or if we default by failing to perform under the terms
of
the applicable contract. A termination arising out of our default could expose
us to liability and have a material adverse effect on our ability to re-compete
for future contracts and orders. Our U.S. government contracts contain
provisions that allow the U.S. government to unilaterally suspend us from
receiving new contracts pending resolution of alleged violations of procurement
laws or regulations, reduce the value of existing contracts, issue modifications
to a contract and control and potentially prohibit the export of our products,
services and associated materials.
13
Government
agencies routinely audit government contracts. These agencies review a
contractor's performance on its contract, pricing practices, cost structure
and
compliance with applicable laws, regulations and standards. If we are
audited, we will not be reimbursed for any costs found to be improperly
allocated to a specific contract, while we would be required to refund any
improper costs for which we had already been reimbursed. Therefore, an audit
could result in a substantial adjustment to our revenues. If a government
audit
uncovers improper or illegal activities, we may be subject to civil and criminal
penalties and administrative sanctions, including termination of contracts,
forfeitures of profits, suspension of payments, fines and suspension or
debarment from doing business with United States government agencies. We
could
suffer serious reputational harm if allegations of impropriety were made
against
us. A governmental determination of impropriety or illegality, or an allegation
of impropriety, could have a material adverse effect on our business, financial
condition or results of operations.
We
may be liable for penalties under a variety of procurement rules and
regulations, and changes in government regulations could adversely impact our
revenues, operating expenses and profitability.
Our
defense and commercial businesses must comply with and are affected by various
government regulations that impact our operating costs, profit margins and
our
internal organization and operation of our businesses. Among the most
significant regulations are the following:
| · |
the
U.S. Federal Acquisition Regulations, which regulate the formation,
administration and performance of government contracts;
|
| · |
the
U.S. Truth in Negotiations Act, which requires certification and
disclosure of all cost and pricing data in connection with contract
negotiations; and
|
| · |
the
U.S. Cost Accounting Standards, which impose accounting requirements
that
govern our right to reimbursement under certain cost-based government
contracts.
|
These
regulations affect how we and our customers do business and, in some instances,
impose added costs on our businesses. Any changes in applicable laws could
adversely affect the financial performance of the business affected by the
changed regulations. With respect to U.S. government contracts, any failure
to
comply with applicable laws could result in contract termination, price or
fee
reductions or suspension or debarment from contracting with the U.S.
government.
Our
operating margins may decline under our fixed-price contracts if we fail to
estimate accurately the time and resources necessary to satisfy our
obligations.
Some
of
our contracts are fixed-price contracts under which we bear the risk of any
cost
overruns. Our profits are adversely affected if our costs under these contracts
exceed the assumptions that we used in bidding for the contract. Often, we
are
required to fix the price for a contract before we finalize the project
specifications, which increases the risk that we will mis-price these contracts.
The complexity of many of our engagements makes accurately estimating our time
and resources more difficult. In the event we fail to estimate our time and
resources accurately, our expenses will increase and our profitability, if
any,
under such contracts will decrease.
If
we are unable to retain our contracts with the U.S. government and subcontracts
under U.S. government prime contracts in the competitive rebidding process,
our
revenues may suffer.
Upon
expiration of a U.S. government contract or subcontract under a U.S. government
prime contract, if the government customer requires further services of the
type
provided in the contract, there is frequently a competitive rebidding process.
We cannot guarantee that we, or if we are a subcontractor that the prime
contractor, will win any particular bid, or that we will be able to replace
business lost upon expiration or completion of a contract. Further, all U.S.
government contracts are subject to protest by competitors. The termination
of
several of our significant contracts or nonrenewal of several of our significant
contracts, could result in significant revenue shortfalls.
The
loss of, or a significant reduction in, U.S. military business would have a
material adverse effect on us.
U.S.
military contracts account for a significant portion of our business. The U.S.
military funds these contracts in annual increments. These contracts require
subsequent authorization and appropriation that may not occur or that may be
greater than or less than the total amount of the contract. Changes in the
U.S.
military’s budget, spending allocations and the timing of such spending could
adversely affect our ability to receive future contracts. None of our contracts
with the U.S. military has a minimum purchase commitment, and the U.S. military
generally has the right to cancel its contracts unilaterally without prior
notice. We manufacture for the U.S. aircraft and land vehicle armor systems,
protective equipment for military personnel and other technologies used to
protect soldiers in a variety of life-threatening or catastrophic situations,
and batteries for communications devices. The loss of, or a significant
reduction in, U.S. military business for our aircraft and land vehicle armor
systems, other protective equipment, or batteries could have a material adverse
effect on our business, financial condition, results of operations and
liquidity.
14
A
reduction of U.S. force levels in Iraq may affect our results of operations.
Since
the
invasion of Iraq by the U.S. and other forces in March 2003, we have received
steadily increasing orders from the U.S. military for armoring of vehicles
and
military batteries. These orders are the result, in substantial part, from
the
particular combat situations encountered by the U.S. military in Iraq. We cannot
be certain to what degree the U.S. military would continue placing orders for
our products if the U.S. military were to reduce its force levels or withdraw
completely from Iraq. A significant reduction in orders from the U.S. military
could have a material adverse effect on our business, financial condition,
results of operations and liquidity.
There
are limited sources for some of our raw materials, which may significantly
curtail our manufacturing operations.
The
raw
materials that we use in manufacturing our armor products include
Kevlar®,
a
patented product of E.I. du Pont de Nemours Co., Inc. We purchase Kevlar in
the
form of woven cloth from various independent weaving companies. In the event
Du
Pont and/or these independent weaving companies were to cease, for any reason,
to produce or sell Kevlar to us, we might be unable to replace it with a
material of like weight and strength, or at all. Thus, if our supply of Kevlar
were materially reduced or cut off or if there were a material increase in
the
price of Kevlar, our manufacturing operations could be adversely affected and
our costs increased, and our business, financial condition and results of
operations could be materially adversely affected.
Some
of the components of our products pose potential safety risks which could create
potential liability exposure for us.
Some
of
the components of our products contain elements that are known to pose potential
safety risks. In addition to these risks, there can be no assurance that
accidents in our facilities will not occur. Any accident, whether occasioned
by
the use of all or any part of our products or technology or by our manufacturing
operations, could adversely affect commercial acceptance of our products and
could result in significant production delays or claims for damages resulting
from injuries. Any of these occurrences would materially adversely affect our
operations and financial condition. In the event that our products, including
the products manufactured by MDT and AoA, fail to perform as specified, users
of
these products may assert claims for substantial amounts. These claims could
have a materially adverse effect on our financial condition and results of
operations. There is no assurance that the amount of the general product
liability insurance that we maintain will be sufficient to cover potential
claims or that the present amount of insurance can be maintained at the present
level of cost, or at all.
Our
fields of business are highly competitive.
The
competition to develop defense and security products and electric vehicle
battery systems, and to obtain funding for the development of these products,
is, and is expected to remain, intense.
Our
defense and security products compete with other manufacturers of specialized
training systems, including Firearms Training Systems, Inc., a producer of
interactive simulation systems designed to provide training in the handling
and
use of small and supporting arms. In addition, we compete with manufacturers
and
developers of armor for cars and vans, including O’Gara-Hess & Eisenhardt, a
division of Armor Holdings, Inc.
15
Our
battery technology competes with other battery technologies, as well as other
Zinc-Air technologies. The competition in this area of our business consists
of
development stage companies, major international companies and consortia of
such
companies, including battery manufacturers, automobile manufacturers, energy
production and transportation companies, consumer goods companies and defense
contractors.
Various
battery technologies are being considered for use in electric vehicles and
defense and safety products by other manufacturers and developers, including
the
following: lead-acid, nickel-cadmium, nickel-iron, nickel-zinc, nickel-metal
hydride, sodium-sulfur, sodium-nickel chloride, zinc-bromine, lithium-ion,
lithium-polymer, lithium-iron sulfide, primary lithium, rechargeable alkaline
and Zinc-Air.
Many
of
our competitors have financial, technical, marketing, sales, manufacturing,
distribution and other resources significantly greater than ours. If we are
unable to compete successfully in each of our operating areas, especially in
the
defense and security products area of our business, our business and results
of
operations could be materially adversely affected.
Our
business is dependent on proprietary rights that may be difficult to protect
and
could affect our ability to compete effectively.
Our
ability to compete effectively will depend on our ability to maintain the
proprietary nature of our technology and manufacturing processes through a
combination of patent and trade secret protection, non-disclosure agreements
and
licensing arrangements.
Litigation,
or participation in administrative proceedings, may be necessary to protect
our
proprietary rights. This type of litigation can be costly and time consuming
and
could divert company resources and management attention to defend our rights,
and this could harm us even if we were to be successful in the litigation.
In
the absence of patent protection, and despite our reliance upon our proprietary
confidential information, our competitors may be able to use innovations similar
to those used by us to design and manufacture products directly competitive
with
our products. In addition, no assurance can be given that others will not obtain
patents that we will need to license or design around. To the extent any of
our
products are covered by third-party patents, we could need to acquire a license
under such patents to develop and market our products.
Despite
our efforts to safeguard and maintain our proprietary rights, we may not be
successful in doing so. In addition, competition is intense, and there can
be no
assurance that our competitors will not independently develop or patent
technologies that are substantially equivalent or superior to our technology.
In
the event of patent litigation, we cannot assure you that a court would
determine that we were the first creator of inventions covered by our issued
patents or pending patent applications or that we were the first to file patent
applications for those inventions. If existing or future third-party patents
containing broad claims were upheld by the courts or if we were found to
infringe third-party patents, we may not be able to obtain the required licenses
from the holders of such patents on acceptable terms, if at all. Failure to
obtain these licenses could cause delays in the introduction of our products
or
necessitate costly attempts to design around such patents, or could foreclose
the development, manufacture or sale of our products. We could also incur
substantial costs in defending ourselves in patent infringement suits brought
by
others and in prosecuting patent infringement suits against
infringers.
We
also
rely on trade secrets and proprietary know-how that we seek to protect, in
part,
through non-disclosure and confidentiality agreements with our customers,
employees, consultants, and entities with which we maintain strategic
relationships. We cannot assure you that these agreements will not be breached,
that we would have adequate remedies for any breach or that our trade secrets
will not otherwise become known or be independently developed by
competitors.
We
are dependent on key personnel and our business would suffer if we fail to
retain them.
We
are
highly dependent on the presidents of our IES, FAAC and AoA subsidiaries and
the
general managers of our MDT and Epsilor subsidiaries, and the loss of the
services of one or more of these persons could adversely affect us. We are
especially dependent on the services of our Chairman, President and Chief
Executive Officer, Robert S. Ehrlich. The loss of Mr. Ehrlich could have a
material adverse effect on us. We are party to an employment agreement with
Mr.
Ehrlich, which agreement expires at the end of 2007. We do not have key-man
life
insurance on Mr. Ehrlich.
16
There
are risks involved with the international nature of our
business.
A
significant portion of our sales are made to customers located outside the
U.S.,
primarily in Europe and Asia. In 2004, 2003 and 2002, without taking account
of
revenues derived from discontinued operations, 19%, 42% and 56%, respectively,
of our revenues, were derived from sales to customers located outside the U.S.
We expect that our international customers will continue to account for a
substantial portion of our revenues in the near future. Sales to international
customers may be subject to political and economic risks, including political
instability, currency controls, exchange rate fluctuations, foreign taxes,
longer payment cycles and changes in import/export regulations and tariff rates.
In addition, various forms of protectionist trade legislation have been and
in
the future may be proposed in the U.S. and certain other countries. Any
resulting changes in current tariff structures or other trade and monetary
policies could adversely affect our sales to international
customers.
Investors
should not purchase our common stock with the expectation of receiving cash
dividends.
We
currently intend to retain any future earnings for funding growth and, as a
result, do not expect to pay any cash dividends in the foreseeable
future.
Market-Related
Risks
The
price of our common stock is volatile.
The
market price of our common stock has been volatile in the past and may change
rapidly in the future. The following factors, among others, may cause
significant volatility in our stock price:
| · |
announcements
by us, our competitors or our
customers;
|
| · |
the
introduction of new or enhanced products and services by us or our
competitors;
|
| · |
changes
in the perceived ability to commercialize our technology compared
to that
of our competitors;
|
| · |
rumors
relating to our competitors or us;
|
| · |
actual
or anticipated fluctuations in our operating results;
|
| · |
the
issuance of our securities, including warrants, in connection with
financings and acquisitions; and
|
| · |
general
market or economic conditions.
|
One
of
the continued listing standards for our stock on the Nasdaq Stock Market (both
the Nasdaq National Market, on which our stock is currently listed, and the
Nasdaq Capital Market (formerly known as the Nasdaq SmallCap Market)) is the
maintenance of a $1.00 bid price. Our stock price is currently below $1.00,
and
has been so since August 15, 2005. On September 27, 2005), we received a notice
from Nasdaq to
the
effect that our common stock does not satisfy the minimum bid price rule
(Nasdaq
Marketplace Rule 4350(a)(5)),
and
that in accordance
with the rules of the Nasdaq National Market, we will be provided 180 calendar
days, or until March 27, 2006, to regain compliance with the Nasdaq’s
minimum
bid price
rule or
be delisted from the Nasdaq National Market.
If
our
common stock were to be delisted from the Nasdaq National Market, we might
apply
to be listed on the Nasdaq Capital Market if we then met the initial listing
standards of the Nasdaq Capital Market (other than the $1.00 minimum bid
standard). If we were to move to the Nasdaq Capital Market, current Nasdaq
regulations would give us the opportunity to obtain an additional 180-day grace
period (until September 23, 2006) if we meet certain net income, stockholders’
equity or market capitalization criteria; if at the end of that period we had
not yet achieved compliance with the minimum bid price rule, we would be subject
to delisting from the Nasdaq Capital Market. Although we would have the
opportunity to appeal any potential delisting, there can be no assurances that
this appeal would be resolved favorably. As a result, there can be no assurance
that our common stock will remain listed on the Nasdaq Stock
Market.
17
While
our
stock would continue to trade on the over-the-counter bulletin board following
any delisting from the Nasdaq, any such delisting of our common stock could
have
an adverse effect on the market price of, and the efficiency of the trading
market for, our common stock. Trading volume of over-the-counter bulletin board
stocks has been historically lower and more volatile than stocks traded on
an
exchange or the Nasdaq Stock Market. As a result, holders of our securities
could find it more difficult to sell their securities. Also, if in the future
we
were to determine that we need to seek additional equity capital, it could
have
an adverse effect on our ability to raise capital in the public equity
markets.
In
addition, if we fail to maintain Nasdaq listing for our securities, and no
other
exclusion from the definition of a “penny stock” under the Securities Exchange
Act of 1934, as amended, is available, then any broker engaging in a transaction
in our securities would be required to provide any customer with a risk
disclosure document, disclosure of market quotations, if any, disclosure of
the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market values of our securities held
in
the customer’s account. The bid and offer quotation and compensation information
must be provided prior to effecting the transaction and must be contained on
the
customer’s confirmation. If brokers become subject to the “penny stock” rules
when engaging in transactions in our securities, they would become less willing
to engage in transactions, thereby making it more difficult for our stockholders
to dispose of their shares.
Additionally,
delisting from the Nasdaq Stock Market would constitute an event of default
under certain of our debt instruments.
Our
management has determined that we have material weaknesses in our internal
controls. If we fail to achieve and maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act, we may not be
able
to accurately report our financial results.
We
have,
with our auditors’ concurrence, identified significant deficiencies that
constitute material weaknesses under standards established by the Public Company
Accounting Oversight Board (PCAOB). A material weakness is a condition in which
the design or operation of one or more of the internal control components does
not reduce to a relatively low level the risk that misstatements caused by
error
or fraud in amounts that would be material in relation to the financial
statements being audited may occur and not be detected within a timely period
by
employees in the normal course of performing their assigned functions. Our
auditors have reported to us that at December 31, 2004, we had material
weaknesses for inadequate controls related to the financial statement close
process, convertible debentures and share capital processes as it applies to
non-routine and highly complex financial transactions. The material weaknesses
arise from insufficient staff with technical accounting expertise to
independently apply our accounting policies, as they relate to non-routine
and
highly complex transactions, in accordance with U.S. generally accepted
accounting principles.
As
a
public company, we will have significant requirements for enhanced financial
reporting and internal controls. The process of designing and implementing
effective internal controls is a continuous effort that requires us to
anticipate and react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a system of
internal controls that is adequate to satisfy our reporting obligations as
a
public company. We cannot assure you that the measures we have taken or will
take to remediate any material weaknesses or that we will implement and maintain
adequate controls over our financial processes and reporting in the future
as we
continue our rapid growth. If we are unable to establish appropriate internal
financial reporting controls and procedures, it could cause us to fail to meet
our reporting obligations, result in material mis-statements in our financial
statements, harm our operating results, cause investors to lose confidence
in
our reported financial information and have a negative effect on the market
price for shares of our common stock.
18
A
substantial number of our shares are available for sale in the public market
and
sales of those shares could adversely affect our stock
price.
Sales
of
a substantial number of shares of common stock into the public market, or the
perception that those sales could occur, could adversely affect our stock price
or could impair our ability to obtain capital through an offering of equity
securities. As of October 31, 2005, we had 90,204,708
shares
of common stock issued and outstanding (prior to cancellation of 3,479,464
shares returned to us in connection with the FAAC earnout). Of these shares,
most are freely transferable without restriction under the Securities Act of
1933 or pursuant to effective resale registration statements, and a substantial
portion of the remaining shares may be sold subject to the volume restrictions,
manner-of-sale provisions and other conditions of Rule 144 under the Securities
Act of 1933.
Exercise
of our warrants, options and convertible debt could adversely affect our stock
price and will be dilutive.
As
of
October 31, 2005, there were outstanding warrants to purchase a total of
22,211,463 shares of our common stock at a weighted average exercise price
of
$1.44 per share, options to purchase a total of 9,661,647 shares of our common
stock at a weighted average exercise price of $1.32 per share, of which
7,707,830 were vested, at a weighted average exercise price of $1.33 per share,
and outstanding debentures and notes convertible into a total of 20,656,298
shares of our common stock at a weighted average conversion price of $1.07
per
share. Holders of our options, warrants and convertible debt will probably
exercise or convert them only at a time when the price of our common stock
is
higher than their respective exercise or conversion prices. Accordingly, we
may
be required to issue shares of our common stock at a price substantially lower
than the market price of our stock. This could adversely affect our stock price.
In addition, if and when these shares are issued, the percentage of our common
stock that existing stockholders own will be diluted.
Our
certificate of incorporation and bylaws and Delaware law contain provisions
that
could discourage a takeover.
Provisions
of our amended and restated certificate of incorporation may have the effect
of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of us. These provisions could
limit the price that certain investors might be willing to pay in the future
for
shares of our common stock. These provisions:
| · |
divide
our board of directors into three classes serving staggered three-year
terms;
|
| · |
only
permit removal of directors by stockholders “for cause,” and require the
affirmative vote of at least 85% of the outstanding common stock
to so
remove; and
|
| · |
allow
us to issue preferred stock without any vote or further action by
the
stockholders.
|
The
classification system of electing directors and the removal provision may tend
to discourage a third-party from making a tender offer or otherwise attempting
to obtain control of us and may maintain the incumbency of our board of
directors, as the classification of the board of directors increases the
difficulty of replacing a majority of the directors. These provisions may have
the effect of deferring hostile takeovers, delaying changes in our control
or
management, or may make it more difficult for stockholders to take certain
corporate actions. The amendment of any of these provisions would require
approval by holders of at least 85% of the outstanding common
stock.
19
Israel-Related
Risks
A
significant portion of our operations takes place in Israel, and we could be
adversely affected by the economic, political and military conditions in that
region.
The
offices and facilities of three of our subsidiaries, EFL, MDT and Epsilor,
are
located in Israel (in Beit Shemesh, Lod and Dimona, respectively, all of which
are within Israel’s pre-1967 borders). Most of our senior management is located
at EFL’s facilities. Although we expect that most of our sales will be made to
customers outside Israel, we are nonetheless directly affected by economic,
political and military conditions in that country. Accordingly, any major
hostilities involving Israel or the interruption or curtailment of trade between
Israel and its present trading partners could have a material adverse effect
on
our operations. 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 in degree and intensity, has led to security and
economic problems for Israel.
Historically,
Arab states have boycotted any direct trade with Israel and to varying degrees
have imposed a secondary boycott on any company carrying on trade with or doing
business in Israel. Although in October 1994, the states comprising the Gulf
Cooperation Council (Saudi Arabia, the United Arab Emirates, Kuwait, Dubai,
Bahrain and Oman) announced that they would no longer adhere to the secondary
boycott against Israel, and Israel has entered into certain agreements with
Egypt, Jordan, the Palestine Liberation Organization and the Palestinian
Authority, Israel has not entered into any peace arrangement with Syria or
Lebanon. Moreover, since September 2000, there has been a significant
deterioration in Israel’s relationship with the Palestinian Authority, and a
significant increase in terror and violence. Efforts to resolve the problem
have
failed to result in an agreeable solution. Continued hostilities between the
Palestinian community and Israel and any failure to settle the conflict may
have
a material adverse effect on our business and us. Moreover, the current
political and security situation in the region has already had an adverse effect
on the economy of Israel, which in turn may have an adverse effect on
us.
Service
of process and enforcement of civil liabilities on us and our officers may
be
difficult to obtain.
We
are
organized under the laws of the State of Delaware and will be subject to service
of process in the United States. However, approximately 22% of our assets are
located outside the United States. In addition, two of our directors and most
of
our executive officers are residents of Israel and a portion of the assets
of
such directors and executive officers are located outside the United
States.
There
is
doubt as to the enforceability of civil liabilities under the Securities Act
of
1933, as amended, and the Securities Exchange Act of 1934, as amended, in
original actions instituted in Israel. As a result, it may not be possible
for
investors to enforce or effect service of process upon these directors and
executive officers or to judgments of U.S. courts predicated upon the civil
liability provisions of U.S. laws against our assets, as well as the assets
of
these directors and executive officers. In addition, awards of punitive damages
in actions brought in the U.S. or elsewhere may be unenforceable in
Israel.
Exchange
rate fluctuations between the U.S. dollar and the Israeli NIS may negatively
affect our earnings.
Although
a substantial majority of our revenues and a substantial portion of our expenses
are denominated in U.S. dollars, a portion of our costs, including personnel
and
facilities-related expenses, is incurred in New Israeli Shekels (NIS). Inflation
in Israel will have the effect of increasing the dollar cost of our operations
in Israel, unless it is offset on a timely basis by a devaluation of the NIS
relative to the dollar. In
2005,
the inflation adjusted NIS depreciated against the dollar.
Some
of our agreements are governed by Israeli law.
Israeli
law governs some of our agreements, such as our lease agreements on our
subsidiaries’ premises in Israel, and the agreements pursuant to which we
purchased IES, MDT and Epsilor. While Israeli law differs in certain respects
from American law, we do not believe that these differences materially adversely
affect our rights or remedies under these agreements.
20
INFORMATION
REGARDING
FORWARD-LOOKING STATEMENTS
When
used
in this prospectus, the words “expects,”“anticipates,”“estimates” and similar
expressions identify forward-looking statements. These statements are
“forward-looking” statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. These statements, which include
statements under the caption “Risk Factors” and elsewhere in this prospectus,
refer to product
and technology development; the uncertainty of the market for our products;
changing economic conditions; delay, cancellation or non-renewal, in whole
or in
part, of contracts or of purchase orders; our ability to remain listed on the
Nasdaq Stock Market in accordance with the Nasdaq’s $1.00 minimum bid price and
other continued listing standards; dilution resulting from issuances of our
common stock upon conversion or payment of our outstanding convertible debt,
which would be increasingly dilutive if and to the extent that the market price
of our stock decreases.
The
forward-looking statements also include our expectations concerning factors
affecting the markets for our products.
These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from the results that we anticipate.
These risks and uncertainties include, but are not limited to, those risks
discussed in this prospectus and in the documents incorporated by reference
in
this prospectus.
All
such
forward-looking statements are current only as of the date on which such
statements were made. We assume no obligation to update these forward-looking
statements or to update the reasons actual results could differ materially
from
the results anticipated in the forward-looking statements.
You
should rely only on the information in this prospectus and the additional
information described under the heading “Where You Can Find Additional
Information.” We have not authorized any other person to provide you with
different information. If anyone provides you with different or inconsistent
information, you should not rely upon it. You should assume that the information
in this prospectus was accurate on the date of the front cover of this
prospectus only. Our business, financial condition, results of operations and
prospects may have changed since that date.
On
September 29, 2005, we entered into a Securities Purchase Agreement with the
Selling Stockholders pursuant to which we raised an aggregate of $17,500,000
before issuance and related costs, and issued senior secured
convertible notes in the aggregate principal amount of $17,500,000 and warrants
to purchase up to 5,250,000 shares of our common stock at an exercise price
of
$1.10 per share.
The
notes
are convertible at any time at the option of the investors into shares of our
common stock at a conversion price of $1.00 per share. The last installment
of
principal is due on March 31, 2008. The notes bear interest at a rate of the
applicable six-month LIBOR rate plus 6% per annum, subject to periodic
adjustment, provided that the interest rate shall not be less than 10% per
annum
or greater than 12.5% per annum other than upon an event of default as provided
in the notes. The first interest payment on the notes is due on December 31,
2005, and thereafter accrued interest is payable quarterly in arrears. From
the
proceeds of the notes, we purchased a $2,625,000 letter of credit to secure
our
interest payments and certain other obligations under the notes.
The
notes
have a term of two and one-half years, and one-twelfth of the principal amount
is payable on each of January 31, 2006, March 31, 2006, May 31, 2006, July
31,
2006, September 30, 2006, November 30, 2006, May 31, 2007, July 31, 2007,
September 30, 2007, November 30, 2007, January 31, 2008, and March 31, 2008.
We
have the option to pay principal in cash or, subject to the satisfaction of
the
“Equity Conditions” described below, shares of our common stock or a combination
thereof. In the event we elect to make such payments in stock, the price used
to
determine the number of shares to be issued will be based on 92% of the
arithmetic average trading price of our common stock during 17 of the 20
consecutive trading days ending two days before the payment date. In order
to
have a sufficient number of registered common stock to facilitate payments
of
principal installments in shares of our common stock, we are registering 130%
of
the number of shares issuable upon conversion of the notes.
21
The
“Equity Conditions” require that, during the period beginning 15 trading days
before the date we are required to provide notice of our election until the
date
of the applicable principal payment, interest payment or mandatory conversion,
(1) this registration statement must be effective or all shares of our common
stock must be eligible for sale without restriction and without the need for
registration, (2) our common stock must be designated for quotation on an
“Eligible Market” (which term includes the Nasdaq National Market, the Nasdaq
Capital Market and the OTC Bulletin Board) and shall not have been suspended
from trading nor shall suspension have been threatened or pending (other than
in
connection with failure to satisfy Nasdaq’s $1.00 minimum bid price listing
standard), (3) we must have delivered shares to the holders on a timely basis
in
connection with any conversion of the notes or any exercise of the warrants,
(4)
we must be able to issue the applicable shares in full without exceeding the
volume limitations set forth in the notes and the warrants, (5) we must have
timely made any payments that became due and payable under the notes, (6) there
must not have been a public announcement of a pending or intended fundamental
transaction which has not been abandoned, (7) there must not have occurred
an
event of default or an event that could constitute an event of default under
the
notes, (8) we must not have knowledge of any fact that would cause the shares
not to be eligible for resale, and (9) we must not be in breach of any
provision, covenant, representation or warranty of any agreement executed in
connection with the transaction to the extent that such breach would have a
material adverse effect.
Under
the
terms of the Securities Purchase Agreement, we have granted the investors (i)
a
second position security interest in the stock of MDT Armor Corporation, IES
Interactive Training, Inc. and M.D.T. Protective Industries, Ltd. (junior to
the
security interest of the holders of our 8% secured convertible debentures due
September 30, 2006) and in the assets of FAAC Incorporated (junior to the
security interest of a bank that extends to FAAC Corporation a $5 million line
of credit) and in any stock that we acquire in future Acquisitions (as defined
in the Securities Purchase Agreement) and (ii) a first position security
interest in the assets of all of our other active United States subsidiaries,
all pursuant to the terms of separate security agreements. Our active United
States subsidiaries are also acting as guarantors of our obligations under
the
notes.
The
warrants to purchase up to 5,250,000 shares of our common stock are exercisable
at $1.10 per share beginning March 30, 2006 through the date that is one year
from the date of this prospectus.
The
Selling Stockholders and the specific number of shares that they may resell
through this prospectus are listed on page 23.
USE
OF
PROCEEDS
All
net
proceeds from the sale of the shares of common stock will go to the stockholder
who offers and sells them. We will not receive any proceeds from this offering.
However, we would receive proceeds of approximately $5,775,000 if all of the
warrants issued to the selling stockholders and outstanding as of the date
of
this prospectus are exercised
for cash. Any such funds would be used for general corporate
purposes.
The
shares of common stock being offered by the selling shareholders are issuable
upon conversion of the convertible notes or exercise of the warrants. For
additional information regarding the issuance of those convertible notes and
warrants, see “About the Offering,” above. We are registering the shares of
common stock in order to permit
the
selling shareholders to offer the shares for resale from time to time. Except
for the ownership of the (i) convertible notes and warrants issued pursuant
to
the Securities Purchase Agreement, (ii) shares of common stock issued pursuant
to the Securities Purchase Agreements dated July 15, 2004 and warrants issued
in
connection therewith, and (iii) convertible debentures and warrants issued
pursuant to the Securities Purchase Agreement dated September 30, 2003, the
selling shareholders have not had any material relationship with us within
the
past three years.
The
table
below lists the selling shareholders and other information regarding the
beneficial ownership of the shares of common stock by each of the selling
shareholders. The second column lists the number of shares of common stock
beneficially owned by each selling shareholder, based on its ownership of the
convertible notes and warrants, as of October 15, 2005, assuming conversion
of
all convertible notes and exercise of all warrants held by the selling
shareholders on that date, without regard to any limitations on conversions
or
exercise.
22
The
third
column lists the shares of common stock being offered by this prospectus by
the
selling shareholders.
In
accordance with the terms of registration rights agreements with the selling
shareholders, this prospectus generally covers the resale of at least 130%
of
the number of shares of common stock issuable upon conversion of the convertible
notes and 100% of the number of shares of common stock issuable upon exercise
of
the warrants, as of the trading day immediately preceding the date the
registration statement is initially filed with the SEC. Because the number
of
shares issuable by us if we elect to make principal payments in shares of our
common stock will be based on the market price of our stock at the time of
such
election, , the number of shares that will actually be issued may be more or
less than the number of shares being offered by this prospectus. The fourth
column assumes the sale of all of the shares offered by the selling shareholders
pursuant to this prospectus.
Under
the
terms of the convertible notes and warrants, a selling shareholder may not
convert the convertible notes or exercise the warrants to the extent such
conversion or exercise would cause such selling shareholder, together with
its
affiliates, to beneficially own a number of shares of common stock which would
exceed 4.99% of our then outstanding shares of common stock following such
conversion or exercise, excluding for purposes of such determination shares
of
common stock issuable upon conversion of the convertible notes which have not
been converted or upon exercise of the warrants which have not been exercised.
The number of shares in the second column does not reflect this limitation.
The
selling shareholders may sell all, some or none of their shares in this
offering. See “Plan of Distribution.”
Beneficial
ownership is determined in accordance with Rule 13d-3 promulgated by the
Securities and Exchange Commission, and generally includes voting or investment
power with respect to securities. Except as indicated in the footnotes to the
table, we believe each holder possesses sole voting and investment power with
respect to all of the shares of common stock owned by that holder. In computing
the number of shares beneficially owned by a holder and the percentage ownership
of that holder, shares of common stock subject to options or warrants or
underlying debentures held by that holder that are currently exercisable or
convertible or are exercisable or convertible within 60 days after the date
of
the table are deemed outstanding. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person.
|
|
|
Shares
Beneficially Owned
After
Offering(2)
|
|||||||||||||||||||||
|
|
|
Number
of Shares Beneficially Owned Prior to Offering
(1)
|
Maximum
Number
of
Shares
to be Sold
Pursuant
to
this
Prospectus
|
Number
|
Percent
|
||||||||||||||||||
|
Smithfield
Fiduciary LLC (3)
|
20,407,822(4
|
)
|
12,800,000
|
7,607,822
|
7.9
|
%
|
|||||||||||||||||
|
Omicron
Master Trust (3)
|
8,837,433(5
|
)
|
5,600,000
|
3,237,433
|
3.5
|
%
|
|||||||||||||||||
|
Portside
Growth and Opportunity Fund (3)
|
6,065,219(6
|
)
|
4,000,000
|
2,065,219
|
2.2
|
%
|
|||||||||||||||||
|
Iroquois
Master Fund Ltd. (3)
|
2,600,000(7
|
)
|
2,600,000
|
0
|
-
|
||||||||||||||||||
|
(1)
|
Assumes
that the selling stockholders acquire no additional shares of common
stock
before completion of this offering.
|
|
|
(2)
|
Assumes
that all of the shares offered by the selling stockholders under
this
prospectus are sold.
Percentage ownership is computed in
accordance with Rule 13d-3 promulgated by the Securities and Exchange
Commission, and is based on 90,204,708 shares issued and outstanding
as of
October 15, 2005.
|
|
| (3) | The terms of the notes and warrants whose underlying shares of common stock are included for resale under this prospectus prohibit exercise of the notes and warrants to the extent that exercise of the notes and warrants would result in the holder, together with its affiliates, beneficially owning in excess of 4.999% of our outstanding shares of common stock. | |
23
|
(4)
|
Consists
of (i) 10,400,000 shares of common stock, which is 130% of
the 8,000,000
shares issuable upon conversion of notes issued in September
2005, (ii)
2,400,000 shares of common stock issuable upon exercise of
the warrants
issued in connection with the notes, (iii) 4,514,367 shares
of common
stock issuable upon exercise of warrants issued in July 2004,
(iv) 363,300
shares of common stock issuable upon exercise of other warrants,
(v)
1,448.276 shares of common stock issuable upon conversion
of certain
convertible debentures, and (vi) 785,308 shares of common
stock.
Highbridge Capital Management, LLC (“Highbridge”) is the trading manager
of Smithfield Fiduciary LLC (“Smithfield”) and consequently has voting
control and investment discretion over the securities held
by Smithfield.
Messrs. Glenn Dubin and Henry Swieca control Highbridge.
Each of
Highbridge and Messrs. Dubin and Swieca disclaims beneficial
ownership of
the securities held by Smithfield.
|
|
|
(5)
|
Consists
of (i) 4,550,000 shares of common stock, which is 130% of
the 3,500,000
shares issuable upon conversion of notes issued in September
2005, (ii)
1,050,000 shares of common stock issuable upon exercise of
the warrants
issued in connection with the notes, (iii) 1,213,829 shares
of common
stock issuable upon exercise of warrants issued in July 2004,
(iv) 228,800
shares of common stock issuable upon exercise of other warrants,
(v)
163,793 shares of common stock issuable upon conversion of
certain
convertible debentures, and (vi) 1,631,011 shares of common
stock.
Omicron
Capital, L.P., a Delaware limited partnership (“Omicron Capital”), serves
as investment manager to Omicron Master Trust, a trust formed
under the
laws of Bermuda (“Omicron”), Omicron Capital, Inc., a Delaware corporation
(“OCI”), serves as general partner of Omicron Capital, and Winchester
Global Trust Company Limited (“Winchester”) serves as the trustee of
Omicron. By reason of such relationships, Omicron Capital
and OCI may be
deemed to share dispositive power over the securities
owned by Omicron, and Winchester may be deemed to share voting
and
dispositive power over the securities
owned by Omicron. Omicron Capital, OCI and Winchester disclaim
beneficial
ownership of such securities.
Omicron Capital has delegated authority from the board of
directors of
Winchester regarding the portfolio management decisions with
respect to
the securities
owned by Omicron and, as of April
21, 2003, Mr. Olivier H. Morali and Mr. Bruce T. Bernstein,
officers of
OCI, have delegated authority from the board of directors
of OCI regarding
the portfolio management decisions of Omicron Capital with
respect to the
securities
owned by Omicron. By reason of such delegated authority,
Messrs. Morali
and Bernstein may be deemed to share dispositive power over
the
securities
owned by Omicron. Messrs. Morali and Bernstein disclaim beneficial
ownership of such securities
and neither of such persons has any legal right to maintain
such delegated
authority. No other person has sole or shared voting or dispositive
power
with respect to the securities
being offered by Omicron, as those terms are used for purposes
under
Regulation 13D-G of the Securities Exchange Act of 1934,
as amended.
Omicron
and Winchester are not “affiliates” of one another, as that term is used
for purposes of the Securities Exchange Act of 1934, as amended,
or of any
other person named in this prospectus as a selling
stockholder. No
person or “group” (as that term is used in Section 13(d) of the Securities
Exchange Act of 1934, as amended, or the SEC’s Regulation 13D-G) controls
Omicron and Winchester.
|
|
|
(6)
|
Consists
of (i) 3,250,000 shares of common stock, which is 130% of
the 2,500,000
shares issuable upon conversion of notes issued in September
2005, (ii)
750,000 shares of common stock issuable upon exercise of
the warrants
issued in connection with the notes, (iii)1,288,829
shares of common stock issuable upon exercise of warrants
issued in July
2004, (iv) 155,700 shares of common stock issuable upon exercise
of other
warrants, and (v) 620,290 shares of common stock issuable
upon conversion
of certain convertible debentures. Ramius
Capital Group, LLC is the investment adviser of Portside
Growth and
Opportunity Fund and consequently has voting control and
investment
discretion over securities held by Portside. Ramius Capital
disclaims
beneficial ownership of the securities held by Portside.
Peter A. Cohen,
Morgan B. Stark, Thomas W. Strauss and Jeffrey M. Solomon
are the sole
managing members of C4S & Co., LLC, the sole managing member of Ramius
Capital. As a result, Messrs. Cohen, Stark, Strauss and Solomon
may be
considered beneficial owners of any securities deemed to
be beneficially
owned by Ramius Capital. Each of Messrs. Cohen, Stark, Strauss
and Solomon
disclaims beneficial ownership of the securities held by
Portside.
|
|
|
(7)
|
Consists
of (i) 2,600,000 shares of common stock, which is 130% of
the 2,000,000
shares issuable upon conversion of notes, and (ii) 600,000
shares of
common stock issuable upon exercise of the warrants issued
in connection
with the notes. Joshua
Silverman has voting control and investment discretion over
the
securities
held by this selling stockholder. Mr. Silverman disclaims
beneficial
ownership of the securities held by Iroquois Master Fund
Ltd.
|
|
We
are
registering the shares of common stock issuable upon conversion of the
convertible notes and exercise
of
the warrants to permit the resale of these shares of common stock by the holders
of the convertible notes and warrants from time to time after the date of this
prospectus. We will not receive any of the proceeds from the sale by the selling
shareholders of the shares of common stock. We will bear all fees and expenses
incident to our obligation to register the shares of common stock.
24
The
selling shareholders may sell all or a portion of the shares of common stock
beneficially owned by them and offered hereby from time to time directly or
through one or more underwriters, broker-dealers or agents. If the shares of
common stock are sold through underwriters or broker-dealers, the selling
shareholders will be responsible for underwriting discounts or commissions
or
agent’s commissions. The shares of common stock may be sold in one or more
transactions at fixed prices, at prevailing market prices at the time of the
sale, at varying prices determined at the time of sale, or at negotiated prices.
These sales may be effected in transactions, which may involve crosses or block
transactions,
| Ø |
on
any national securities exchange or quotation service on which the
securities may be listed or quoted at the time of sale;
|
| Ø |
in
the over-the-counter market;
|
| Ø |
in
transactions otherwise than on these exchanges or systems or in the
over-the-counter market;
|
| Ø |
through
the writing of options, whether such options are listed on an options
exchange or otherwise;
|
| Ø |
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
| Ø |
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
| Ø |
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
|
| Ø |
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
| Ø |
privately
negotiated transactions;
|
| Ø |
short
sales;
|
| Ø |
sales
pursuant to Rule 144;
|
| Ø |
broker-dealers
may agree with the selling securityholders to sell a specified number
of
such shares at a stipulated price per share;
|
| Ø |
a
combination of any such methods of sale;
and
|
| Ø |
any
other method permitted pursuant to applicable law.
|
If
the
selling shareholders effect such transactions by selling shares of common stock
to or through underwriters,
broker-dealers or agents, such underwriters, broker-dealers or agents may
receive commissions in the form of discounts, concessions or commissions from
the selling shareholders or commissions from purchasers of the shares of common
stock for whom they may act as agent or to whom they may sell as principal
(which discounts, concessions or commissions as to particular underwriters,
broker-dealers or agents may be in excess of those customary in the types of
transactions involved). In connection with sales of the shares of common stock
or otherwise, the selling shareholders may enter into hedging transactions
with
broker-dealers or other financial institutions, which may in turn engage in
short sales of the shares of common stock in the course of hedging in positions
they assume. The selling shareholders may also sell shares of common stock
short
and deliver shares of common stock covered by this prospectus to close out
short
positions and to return borrowed shares in connection with such short sales.
The
selling shareholders may also loan or pledge shares of common stock to
broker-dealers that in turn may sell such shares.
The
selling shareholders may, from time to time, pledge or grant a security interest
in some or all of the convertible notes or shares of common stock owned by
them
and, if they default in the performance of their secured obligations, the
pledgees or secured parties may offer and sell the shares of common stock from
time to time pursuant to this prospectus or any amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of
1933, as amended, amending, if necessary, the list of selling shareholders
to
include the pledgee, transferee or other successors in interest as selling
shareholders under this prospectus. The selling shareholders also may transfer
and donate the shares of common stock in other circumstances in which case
the
transferees, donees, pledgees or other successors in interest will be the
selling beneficial owners for purposes of this prospectus. The selling
shareholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
25
The
selling shareholders and any broker-dealer participating in the distribution
of
the shares of common stock may be deemed to be “underwriters” within the meaning
of the Securities Act, and any commission paid, or any discounts or concessions
allowed to, any such broker-dealer may be deemed to be underwriting commissions
or discounts under the Securities Act. At the time a particular offering of
the
shares of common stock is made, a prospectus supplement, if required, will
be
distributed which will set forth the aggregate amount of shares of common stock
being offered and the terms of the offering, including the name or names of
any
broker-dealers or agents, any discounts, commissions and other terms
constituting compensation from the selling shareholders and any discounts,
commissions or concessions allowed or reallowed or paid to
broker-dealers.
Under
the
securities laws of some states, the shares of common stock may be sold in such
states only through registered or licensed brokers or dealers. In addition,
in
some states the shares of common stock may not be sold unless such shares have
been registered or qualified for sale in such state or an exemption from
registration or qualification is available and is complied with.
There
can
be no assurance that any selling shareholder will sell any or all of the shares
of common stock registered pursuant to the shelf registration statement, of
which this prospectus forms a part.
The
selling shareholders and any other person participating in such distribution
may
be subject to applicable provisions of the Securities Exchange Act of 1934,
as
amended, and the rules and regulations thereunder, including, without
limitation, Regulation M of the Exchange Act, which may limit the timing of
purchases and sales of any of the shares of common stock by the selling
shareholders and any other participating person. Regulation M may also restrict
the ability of any person engaged in the distribution of the shares of common
stock to engage in market-making activities with respect to the shares of common
stock. All of the foregoing may affect the marketability of the shares of common
stock and the ability of any person or entity to engage in market-making
activities with respect to the shares of common stock.
We
will
pay all expenses of the registration of the shares of common stock pursuant
to
the registration rights agreement, estimated to be $16,500 in total, including,
without limitation, Securities and Exchange Commission filing fees and expenses
of compliance with state securities or “blue sky” laws; provided, however, that
a selling shareholder will pay all underwriting discounts and selling
commissions, if any. We will indemnify the selling shareholders against
liabilities, including some liabilities under the Securities Act, in accordance
with the registration rights agreements, or the selling shareholders will be
entitled to contribution. We may be indemnified by the selling shareholders
against civil liabilities, including liabilities under the Securities Act,
that
may arise from any written information furnished to us by the selling
shareholder specifically for use in this prospectus, in accordance with the
related registration rights agreements, or we may be entitled to
contribution.
Once
sold
under the shelf registration statement, of which this prospectus forms a part,
the shares of common stock will be freely tradable in the hands of persons
other
than our affiliates.
Our
common stock is currently traded on the Nasdaq National Market under the symbol
“ARTX.”
26
DESCRIPTION
OF
CAPITAL STOCK
General
Our
authorized capital stock consists of 250,000,000 shares of common stock par
value $0.01 per share, and 1,000,000 shares of preferred stock, par value $0.01
per share. As of October 31, 2005, 90,204,708
shares
of
common stock were issued and outstanding (prior to cancellation of 3,479,464
shares returned to us in connection with the FAAC earnout), 555,333 shares
of
common stock were held as treasury shares, and no shares of preferred stock
were
issued and outstanding.
The
additional shares of our authorized stock available for issuance might be issued
at times and under circumstances so as to have a dilutive effect on earnings
per
share and on the equity ownership of the holders of our common stock. The
ability of our board of directors to issue additional shares of stock could
enhance the board’s ability to negotiate on behalf of the stockholders in a
takeover situation but could also be used by the board to make a
change-in-control more difficult, thereby denying stockholders the potential
to
sell their shares at a premium and entrenching current management. The following
description is a summary of the material provisions of our capital stock. You
should refer to our amended and restated certificate of incorporation, as
amended, and bylaws for additional information.
Common
Stock
The
holders of common stock are entitled to one vote for each share held of record
on all matters submitted to a vote of stockholders. Except as required under
Delaware law or the rules of the Nasdaq National Market, the rights of
stockholders may not be modified otherwise than by a vote of a majority or
more
of the shares outstanding. Subject to preferences that may be applicable to
any
outstanding shares of preferred stock, the holders of common stock are entitled
to receive ratably any dividends as may be declared by the board of directors
out of funds legally available for the payment of dividends. In the event of
our
liquidation, dissolution or winding up, the holders of common stock are entitled
to share ratably in all assets, subject to prior distribution rights of the
preferred stock, if any, then outstanding. Holders of common stock have no
preemptive rights or rights to convert their common stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the
common stock. All outstanding shares of common stock are fully paid and
non-assessable.
Preferred
Stock
Our
board
of directors has the authority, within the limitations and restrictions stated
in our amended and restated certificate of incorporation and without stockholder
approval, to provide by resolution for the issuance of shares of preferred
stock, and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preference and the number of shares constituting any
series of the designation of such series. The issuance of preferred stock could
have the effect of decreasing the market price of the common stock, impeding
or
delaying a possible takeover and adversely affecting the voting and other rights
of the holders of our common stock. At present, we have no plans to issue
preferred stock.
Certain
Charter Provisions
Provisions
of our amended and restated certificate of incorporation may have the effect
of
making it more difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of us. These provisions could
limit the price that certain investors might be willing to pay in the future
for
shares of our common stock. These provisions:
| · |
divide
our board of directors into three classes serving staggered three-year
terms;
|
| · |
only
permit removal of directors by stockholders “for cause,” and require the
affirmative vote of at least 85% of the outstanding common stock
to so
remove; and
|
27
| · |
allow
us to issue preferred stock without any vote or further action by
the
stockholders.
|
The
classification system of electing directors and the removal provision may tend
to discourage a third-party from making a tender offer or otherwise attempting
to obtain control of us and may maintain the incumbency of our board of
directors, as the classification of the board of directors increases the
difficulty of replacing a majority of the directors. These provisions may have
the effect of deferring hostile takeovers, delaying changes in our control
or
management, or may make it more difficult for stockholders to take certain
corporate actions. The amendment of any of these provisions would require
approval by holders of at least 85% of the outstanding common
stock.
Each
warrant entitles the holder to purchase, at an exercise price $1.10 per share,
one share of our common stock. Subject
to the provision contained in the warrant restricting exercise of the warrant
and described under “Selling Stockholders,”the
warrant is exercisable by the holder at any time after March 30, 2006 and will
expire on one year anniversary of the date of this prospectus.
The
warrants are generally exercisable by the holder, in whole or in part, by
surrender to us of the warrant, together with a completed exercise agreement,
and payment by the holder of the aggregate exercise price in cash, or, in
limited circumstances, by effecting a cashless exercise. Upon any exercise
of
the warrant, we will forward to the holder, as soon as practicable, but not
exceeding three business days after proper exercise, a certificate representing
the number of shares of common stock purchased upon such exercise. If less
than
all of the shares represented by the warrant are purchased, we will also deliver
to the holder a new warrant representing the right to purchase the remaining
shares. The shares of common stock purchased by the holder upon exercise of
the
warrant will be deemed to have been issued as of the close of business on the
date the warrant is surrendered to us as described above.
The
exercise price payable and number of shares purchasable upon exercise of a
warrant will generally be adjusted to prevent the dilution of the holder’s
beneficial interest in the common stock in the event we:
| Ø |
declare
or pay a dividend in shares of common stock or make a distribution
of
shares of common stock to holders of our outstanding common
stock;
|
| Ø |
subdivide
or combine our common stock; or
|
| Ø |
issue
shares of our capital stock in any reclassification of our common
stock.
|
Except
as
described above, a holder of a warrant will not have any of the rights of a
holder of common stock before the common stock is purchased upon exercise of
the
warrant. Therefore, before a warrant is exercised, the holder of the warrant
will not be entitled to receive any dividend payments or exercise any voting
or
other rights associated with the shares of common stock which may be purchased
when the warrant is exercised.
LEGAL
MATTERS
Lowenstein
Sandler PC, Roseland, New Jersey will pass upon the validity of the shares
of
common stock offered by this prospectus for us.
Our
consolidated financial statements (and schedule) appearing in our Annual Report
(Form 10-K) for the year ended December 31, 2004, and our management’s
assessment of the effectiveness of internal control over financial reporting
as
of December 31, 2004 included in our Form 10-K/A (which did not include an
evaluation of the internal control over financial reporting of Armour of
America, Incorporated), have been audited by Kost, Forer, Gabbay & Kasierer,
a member of Ernst & Young Global, independent registered public accounting
firm, as set forth in its reports thereon, which at to the report on internal
control over financial reporting contains an explanatory paragraph describing
the above-referenced exclusion of Armour of America, Incorporated from the
scope
of management’s assessment (which conclude, among other things, that we did not
maintain effective internal control over financial reporting as of December
31,
2004, based on Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission, because of the effects
of the material weaknesses described therein), included therein and incorporated
herein by reference. Such financial statements and management’s assessment have
been incorporated herein by reference in reliance upon such reports given on
the
authority of such firm as experts in accounting and auditing.
28
The
financial statements of Armour of America, Incorporated referred to in our
Annual Report (Form 10-K) for the year ended December 31, 2004 have been audited
by Stark Winter Schenkein & Co., LLP, independent registered public
accounting firm, to the extent and for the periods noted in our annual report,
in reliance upon such report given upon the authority of said firm as experts
in
auditing and accounting.
We
file
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission. You can read and copy any materials
we file with the Securities and Exchange Commission at its Public Reference
Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 and at its regional offices
located at The Woolworth Building, 233 Broadway, New York, New York 10279 and
at
175 West Jackson Boulevard, Suite 900, Chicago, Illinois 60604. You can obtain
information about the operations of the Securities and Exchange Commission
Public Reference Room by calling the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission also maintains a Website
that contains information we file electronically with the Securities and
Exchange Commission, which you can access over the Internet at http://www.sec.gov.
This
prospectus is part of a Form S-3 registration statement that we have filed
with
the Securities and Exchange Commission relating to the shares of our common
stock being offered hereby. This prospectus does not contain all of the
information in the Registration Statement and its exhibits. The Registration
Statement, its exhibits and the documents incorporated by reference in this
prospectus and their exhibits, all contain information that is material to
the
offering of the common stock. Whenever a reference is made in this prospectus
to
any of our contracts or other documents, the reference may not be complete.
You
should refer to the exhibits that are a part of the Registration Statement
in
order to review a copy of the contract or documents. The registration statement
and the exhibits are available at the Securities and Exchange Commission’s
Public Reference Room or through its Website.
INCORPORATION
OF
DOCUMENTS BY REFERENCE
The
Securities and Exchange Commission allows us to “incorporate by reference” the
information we file with it, which means that we can disclose important
information to you by referring you to those documents. The information we
incorporate by reference is an important part of this prospectus, and later
information that we file with the Securities and Exchange Commission will
automatically update and supersede some of this information. The documents
we
incorporate by reference are:
| · |
the
description of our common stock contained in our registration statement
on
Form 8-A, Commission File No. 0-23336, as filed with the Securities
and
Exchange Commission on February 2, 1994;
|
| · |
our
Annual Report on Form 10-K for the year ended December 31, 2004,
as filed
with the Securities and Exchange Commission on March 31, 2005, as
amended
by our amended Annual Reports on Form 10-K/A for the year ended December
31, 2004, as filed with the Securities and Exchange Commission on
May 2,
2005 and August 15, 2005;
|
| · |
our
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2005,
June
30, 2005 and September 30, 2005, as filed with the Securities and
Exchange
Commission on May 16, 2005, August 15, 2005 and November 14, 2005,
respectively;
|
29
| · |
our
current reports on Form 8-K filed with the Securities and Exchange
Commission on May 17, 2005, May 23, 2005 and September 30, 2005;
and
|
| · |
our
definitive proxy statements on Schedule 14A, as filed with the Securities
and Exchange Commission on June 7, 2005 and November 9,
2005.
|
All
reports and other documents that we file with the Commission under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this prospectus
but before the termination of the offering of the common stock hereunder will
also be considered to be incorporated by reference into this prospectus from
the
date of the filing of these reports and documents, and will supersede the
information herein; provided, however, that all reports that we “furnish” to the
Commission will not be considered incorporated by reference into this
prospectus. We undertake to provide without charge to each person who receives
a
copy of this prospectus, upon written or oral request, a copy of all of the
preceding documents that are incorporated by reference (other than exhibits,
unless the exhibits are specifically incorporated by reference into these
documents). You may request a copy of these materials, at no cost, by
telephoning us at the following address:
Arotech
Corporation
354
Industry Drive
Auburn,
Alabama 36832
Attention:
General Counsel and Secretary
(334)
502-9001
You
should rely only on the information in this prospectus and the additional
information described under the heading “Where You Can Find More Information.”
We have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent information,
you should not rely upon it. Neither we nor the Selling Stockholders are making
an offer to sell these securities in any jurisdiction where the offer or sale
is
not permitted. You should assume that the information in this prospectus was
accurate on the date of the front cover of this prospectus only. Our business,
financial condition, results of operations and prospects may have changed since
that date.
30
28,000,000
Shares
Common
Stock
PROSPECTUS
November
25, 2005