Filed pursuant to Rule 424(b)(1)
PROSPECTUS Registration File No. 333-112611
AROTECH
CORPORATION
19,495,686 SHARES
COMMON STOCK
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This prospectus relates to the offer and sale of up to 19,495,686 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 ticker
symbol "ARTX." The last reported sale price for our common stock on April 20,
2004 as quoted on the Nasdaq National Market was $3.06 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGE 7 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.
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The date of this prospectus is April 21, 2004
TABLE OF CONTENTS
PAGE
Summary............................................................. 3
Risk Factors........................................................ 7
Information Regarding Forward-Looking Statements.................... 16
About the Offering.................................................. 17
Use of Proceeds..................................................... 17
Selling Stockholders................................................ 17
Plan of Distribution................................................ 23
Description of Capital Stock........................................ 25
Description of Common Stock Warrants................................ 26
Legal Matters....................................................... 27
Experts............................................................. 27
Where You Can Find Additional Information........................... 27
Incorporation of Documents by Reference............................. 27
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Unless the context otherwise requires, references to us refer to Arotech
Corporation (formerly known as Electric Fuel Corporation) and its subsidiaries.
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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(TM) is a trademark, and Electric Fuel(R) 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: interactive simulation for military, law enforcement and
commercial markets; batteries and charging systems for the military; and
high-level armoring for military, paramilitary and commercial vehicles. Until
September 17, 2003, we were known as Electric Fuel Corporation. We operate
primarily as a holding company, through our various subsidiaries, which are
organized into three divisions. Our divisions and subsidiaries are as follows:
o We develop, manufacture and market advanced hi-tech multimedia and
interactive digital solutions for use-of-force and driving training
of military, law enforcement and security personnel, as well as
offering security consulting and other services (our SIMULATION,
TRAINING AND CONSULTING DIVISION), consisting of:
o IES Interactive Training, Inc., located in Littleton,
Colorado, which provides specialized "use of force" training
for police, security personnel and the military ("IES");
o FAAC Incorporated, located in Ann Arbor, Michigan, which
provides simulators, systems engineering and software products
to the United States military, government and private industry
("FAAC"); and
o Arocon Security Corporation, located in New York, New York,
which provides security consulting and other services,
focusing on protecting life, assets and operations with
minimum hindrance to personal freedom and daily activities
("Arocon").
o We manufacture and sell Zinc-Air and lithium batteries for defense
and security products and other military applications and we pioneer
advancements in Zinc-Air technology for electric vehicles (our
BATTERY AND POWER SYSTEMS DIVISION), consisting of:
o Electric Fuel Battery Corporation, located in Auburn, Alabama,
which manufactures and sells Zinc-Air fuel cells, batteries
and chargers for the military, focusing on applications that
demand high energy and light weight ("EFB");
o Epsilor Electronic Industries, Ltd., located in Dimona, Israel
(in Israel's Negev desert area), which develops and sells
rechargeable and primary lithium batteries and smart chargers
to the military and to private industry in the Middle East,
Europe and Asia ("Epsilor"); and
o Electric Fuel (E.F.L.) Ltd., located in Beit Shemesh, Israel,
which produces water-activated lifejacket lights for
commercial aviation and marine applica-
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tions, and which conducts our Electric Vehicle effort,
focusing on obtaining and implementing demonstration projects
in the U.S. and Europe, and on building broad industry
partnerships that can lead to eventual commercialization of
our Zinc-Air energy system for electric vehicles ("EFL").
o We utilize sophisticated lightweight materials and advanced
engineering processes to armor vehicles (our ARMORED VEHICLE
DIVISION), consisting of:
o MDT Protective Industries, Ltd., located in Lod, Israel, which
specialize in using state-of-the-art lightweight ceramic
materials, special ballistic glass and advanced engineering
processes to fully armor vans and cars, and is a leading
supplier to the Israeli military, Israeli special forces and
special services ("MDT"), of which we own 75.5%; and
o MDT Armor Corporation, located in Auburn, Alabama, which
conducts MDT's United States activities ("MDT Armor"), of
which we own 88%.
We acquired FAAC and Epsilor in early 2004. Prior to the acquisition of
FAAC and Epsilor, we were organized into two divisions: Defense and Security
Products (consisting of IES, MDT, MDT Armor and Arocon), and Electric Fuel
Batteries (consisting of EFL and EFB). We have reported our results of
operations for 2003 and 2002 in accordance with these earlier divisions, and our
financial results for 2003 and 2002 do not include the activities of FAAC or
Epsilor.
SIMULATION, TRAINING AND CONSULTING DIVISION
USE-OF-FORCE TRAINING
Through our wholly-owned subsidiary, IES Interactive Training, Inc., we
provide specialized "use of force" training for police, security personnel and
the military. We offer products and services that allow organizations to train
their personnel in safe, productive, and realistic environments. We believe that
our training systems offer more functionality, greater flexibility,
unprecedented realism and a wider variety of user interface options than
competing products. Our systems are sold to corporations, government agencies,
military and law enforcement professionals around the world. The simulators are
currently used by some of the worlds leading training academies and law
enforcement agencies, including (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, and over 500 other training departments worldwide.
Our interactive training systems vary from the powerful Range 3000
use-of-force simulator system to the multi-faceted A2Z Classroom Training
system. The Range 3000 line of simulators addresses the entire use of force
training continuum in law enforcement, allowing the trainee to use posture,
verbalization, soft hand skills, impact weapons, chemical spray, low-light
electronic weapons and lethal force in a scenario based classroom environment.
The A2Z Classroom Trainer provides the trainer with real time electronic
feedback from every student through wireless handheld keypads. The combination
of interactivity and instant response assures that learning takes place in less
time with higher retention.
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VEHICLE SIMULATORS
Through our wholly-owned subsidiary, FAAC Corporation, we provide
simulators, systems engineering and software products to the United States
military, government and private industry. FAAC's 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. FAAC has an installed base of 179 simulators that have successfully
trained over 80,000 drivers. FAAC's customer base includes all branches of the
Department of Defense, state and local governments, and commercial entities.
We believe that FAAC is the 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.
Simulations developed by FAAC 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.
FAAC supplies on-board software to support weapon launch decisions for the
F-15, F-18, and Joint Strike Fighter fighter aircraft. Pilots benefit by having
highly accurate presentations of their weapon's capabilities, including
susceptibility to target defensive reactions. FAAC 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.
SECURITY CONSULTING
Arocon Security Corporation focuses on protecting life, assets and
operations with minimum hindrance to personal freedom and daily activities.
Arocon Security, which provides security consulting and other services, has
signed an agreement with Rafael Armament Development Authority Ltd., Israel's
leading defense research and development company, to market and implement
certain of Rafael's security products and technology in the United States.
BATTERY AND POWER SYSTEMS DIVISION
ZINC-AIR FUEL CELLS, BATTERIES AND CHARGERS FOR THE MILITARY
We have been engaged in research and development in the field of Zinc-Air
electrochemistry and battery design for over ten years, as a result of which we
have developed our current Zinc-Air technology and its applications. We have
successfully applied our technology to our high-energy battery packs for
military and security applications. We have also applied our technology to the
development of a refuelable Zinc-Air fuel cell for powering zero-emission
electric vehicles. Through these efforts, we have sought to position ourselves
as a world leader in the application of Zinc-Air technology to innovative
primary and refuelable power sources.
Our primary existing battery product for the military and defense sectors
is 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, which offer
extended-use portable power using our commercial Zinc-Air cell technology. Our
BA-8180/U battery has received a National Stock Number (a Department of Defense
catalog number assigned to products authorized for use by the U.S. military),
making our batteries available for purchase by all units of the U.S. Armed
Forces.
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We believe that our Zinc-Air batteries provide the highest energy and
power density combination available today in the defense market, making them
particularly appropriate where long missions are required and low weight is
important.
LITHIUM BATTERIES AND CHARGING SYSTEMS FOR THE MILITARY
Recent developments and improvements in lithium rechargeable batteries
have caused the US military, as well as armies worldwide, to shift many
battery-operated devices to cost-effective rechargeable batteries.
Non-rechargeable batteries continue to be the leading source of energy in war
and during limited conflicts. For more than ten years, our wholly-owned
subsidiary Epsilor Electronic Industries, Ltd. has developed and sold
rechargeable and primary lithium batteries and smart chargers to the military,
and to private industry in the Middle East, Europe and Asia.
ELECTRIC VEHICLE
Our electric vehicle effort, conducted through our subsidiary Electric
Fuel Battery Corporation, continues to focus on finding a strategic partner that
can lead the way to eventual commercialization of the Zinc-Air energy system.
Our all-electric bus, powered by our Zinc-Air fuel cell technology, has
demonstrated a world-record 127-mile range under rigorous urban conditions.
LIFEJACKET LIGHTS
We produce water-activated lifejacket lights for commercial aviation and
marine applications based on our patented water-activated magnesium-cuprous
chloride battery technology. We intend to continue to work with original
equipment manufacturers (OEMs), distributors and end-user companies to expand
our market share in the aviation and marine segments. We presently sell five
products in the safety products group, three for use with marine life jackets
and two for use with aviation life vests. All five products are certified under
applicable international marine and aviation safety regulations.
ARMORED VEHICLE DIVISION
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.
FACILITIES
Our principal executive offices are located at 250 West 57th Street, Suite
310, New York, New York 10107, and our telephone number is (212) 258-3222. 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 annual report.
The offices and facilities of our 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 our
senior management is located at EFL's facilities. IES's offices and facilities
are located in Littleton, Colorado, FAAC's offices and facilities are located in
Ann Arbor, Michigan, and the offices and facilities of EFB and MDT Armor are
located in Auburn, Alabama.
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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 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 operating losses since our inception.
Additionally, as of December 31, 2003, we had an accumulated deficit of
approximately $110.0 million. There can be no assurance that we will ever be
able to 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 indebtedness aggregated approximately $8.7 million as of December 31,
2003. Accordingly, we are subject to the risks associated with indebtedness,
including:
o 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;
o it may be more difficult and expensive to obtain additional
funds through financings, if available at all;
o 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
o 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 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.
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FAILURE TO COMPLY WITH THE TERMS OF OUR DEBENTURES COULD RESULT IN A
DEFAULT THAT COULD HAVE MATERIAL ADVERSE CONSEQUENCES FOR US.
A failure to comply with the obligations contained in our debenture
agreements could result in an event of default under such agreements which could
result in an acceleration of the debentures 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 or other
indebtedness were to be accelerated, there can be no assurance that our assets
would be sufficient to repay in full such indebtedness.
WE HAVE PLEDGED A SUBSTANTIAL PORTION OF OUR ASSETS TO SECURE OUR
BORROWINGS.
Our debentures 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.
WE NEED SIGNIFICANT AMOUNTS OF CAPITAL TO OPERATE AND GROW OUR BUSINESS.
We require substantial funds to market our products and develop and
market new products. To the extent that we are unable to fully fund our
operations through profitable sales of our products and services, we may
continue to seek additional funding, including through the issuance of equity or
debt securities. However, there can be no assurance that we will obtain any such
additional financing in a timely manner or on acceptable terms. If additional
funds are raised by issuing equity securities, stockholders may incur further
dilution. If additional funding is not secured, we will have to modify, reduce,
defer or eliminate parts of our anticipated future commitments and/or programs.
WE MAY NOT BE SUCCESSFUL IN OPERATING A NEW BUSINESS.
Prior to the acquisitions of IES and MDT in 2002 and the
acquisitions of FAAC and Epsilor early in 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 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 this new business. If we are unable to
successfully operate these new businesses, our business, financial condition and
results of operations could be materially impaired.
OUR ACQUISITION STRATEGY INVOLVES VARIOUS RISKS.
Part of our strategy is to grow through the acquisition of 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 therein. 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 managers, 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
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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 NEW ACQUISITIONS.
In light of our recent acquisitions of IES, MDT, FAAC and Epsilor,
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
newly-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.
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.
We are currently experiencing a period of growth and development
activity which could place 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.
Many of the customers of IES and FAAC 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
spending or law enforcement in the U.S. or other countries could 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 in operation.
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 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
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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.
A negative audit by the U.S. government could adversely affect our
business, and we might not be reimbursed by the government for costs that we
have expended on our contracts.
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:
o the U.S. Federal Acquisition Regulations, which regulate
the formation, administration and performance of
government contracts;
o the U.S. Truth in Negotiations Act, which requires
certification and disclosure of all cost and pricing
data in connection with contract negotiations; and
o 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. In 2003, approximately 36% of our revenues were derived from
fixed-price contracts for both defense and non-defense related government
contracts. 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.
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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.
WE CANNOT ASSURE YOU OF MARKET ACCEPTANCE OF OUR ELECTRIC VEHICLE
TECHNOLOGY.
Our batteries for the defense industry and a signal light powered by
water-activated batteries for use in life jackets and other rescue apparatus are
the only commercial Zinc-Air battery products we currently have available for
sale. Significant resources will be required to develop and produce additional
products utilizing this technology on a commercial scale. Additional development
will be necessary in order to commercialize our technology and each of the
components of the Electric Fuel System for electric vehicles. We cannot assure
you that we will be able to successfully develop, engineer or commercialize our
Zinc-Air energy system. The likelihood of our future success must be considered
in light of the risks, expenses, difficulties and delays frequently encountered
in connection with the operation and development of a relatively early stage
business and with development activities generally.
We believe that public pressure and government initiatives are
important factors in creating an electric vehicle market. However, there can be
no assurance that there will be sufficient public pressure or that further
legislation or other governmental initiatives will be enacted, or that current
legislation will not be repealed, amended, or have its implementation delayed.
In addition, we are subject to the risk that even if an electric fuel vehicle
market develops, a different form of zero emission or low emission vehicle will
dominate the market. In addition, we cannot assure you that other solutions to
the problem of containing emissions created by internal combustion engines will
not be invented, developed and produced. Any other solution could achieve
greater market acceptance than electric vehicles. The failure of a significant
market for electric vehicles to develop would have a material adverse effect on
our ability to commercialize this aspect of our technology. Even if a
significant market for electric vehicles develops, there can be no assurance
that our technology will be commercially competitive within that market.
SOME OF THE COMPONENTS OF OUR ELECTRIC VEHICLE TECHNOLOGY AND OUR PRODUCTS
POSE POTENTIAL SAFETY RISKS WHICH COULD CREATE POTENTIAL LIABILITY EXPOSURE FOR
US.
Some of the components of our electric vehicle technology and our
products contain elements that are known to pose potential safety risks. Also,
because electric vehicle batteries contain large amounts of electrical energy,
they may cause injuries if not handled properly. In addition to these risks, and
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.
WE MAY FACE PRODUCT LIABILITY CLAIMS.
In the event that our products, including the products manufactured
by MDT, 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.
11
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.
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. Many of our competitors have financial,
technical, marketing, sales, manufacturing, distribution and other resources
significantly greater than ours.
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.
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. Moreover, 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.
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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 and FAAC
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 2005. We do not have key-man life
insurance on Mr. Ehrlich.
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 2003, 2002 and 2001, without
taking account of revenues derived from discontinued operations, 42%, 56% and
49%, 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:
o Announcements by us, our competitors or our customers;
o The introduction of new or enhanced products and
services by us or our competitors;
o Changes in the perceived ability to commercialize our
technology compared to that of our competitors;
o Rumors relating to our competitors or us;
o Actual or anticipated fluctuations in our operating
results; and
o General market or economic conditions.
IF OUR SHARES WERE TO BE DELISTED, OUR STOCK PRICE MIGHT DECLINE FURTHER
AND WE MIGHT BE UNABLE TO RAISE ADDITIONAL CAPITAL.
One of the continued listing standards for our stock on the Nasdaq
National Market is the maintenance of a $1.00 bid price. Our stock price has
periodically traded below $1.00 in the recent past. If our bid price were to go
and remain below $1.00 for 30 consecutive business days, Nasdaq could notify us
of our failure to meet the continued listing standards, after which we would
have 180 calendar days to correct such failure or be delisted from the Nasdaq
National 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 National Market. If our common stock were to be
delisted from the Nasdaq National Market, we might apply to be listed on the
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Nasdaq SmallCap market; however, there can be no assurance that we would be
approved for listing on the Nasdaq SmallCap market, which has the same $1.00
minimum bid and other similar requirements as the Nasdaq National Market. If we
were to move to the Nasdaq SmallCap market, current Nasdaq regulations would
give us the opportunity to obtain an additional 180-day grace period and an
additional 90-day grace period after that if we meet certain net income,
stockholders' equity or market capitalization criteria. 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. 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.
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 April 16, 2004, we had 63,656,843 shares of
common stock issued and outstanding. Of these shares, most are freely
transferable without restriction under the Securities Act of 1933, 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.
In connection with a stock purchase agreement dated September 30,
1996 between Leon S. Gross and us, we also entered into a registration rights
agreement with Mr. Gross dated September 30, 1996, providing registration rights
with respect to the shares of common stock issued to Mr. Gross in connection
with the offering. These rights include the right to make two demands for the
registration of the shares of our common stock owned by Mr. Gross. In addition,
Mr. Gross was granted unlimited rights to "piggyback" on registration statements
that we file for the sale of our common stock. Mr. Gross presently owns
3,482,534 shares, of which 1,538,462 have never been registered.
EXERCISE OF OUR WARRANTS, OPTIONS AND CONVERTIBLE DEBT COULD ADVERSELY
AFFECT OUR STOCK PRICE AND WILL BE DILUTIVE.
As of April 16, 2004, there were outstanding warrants to purchase a
total of 18,720,040 shares of our common stock at a weighted average exercise
price of $1.84 per share, options to purchase a total of 7,576,041 shares of our
common stock at a weighted average exercise price of $1.52 per share, of which
5,733,441 were vested, at a weighted average exercise price of $1.72 per share,
and outstanding debentures convertible into a total of 4,898,801 shares of our
common stock at a weighted average conversion price of $1.40 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.
14
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:
o divide our board of directors into three classes serving
staggered three-year terms;
o 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
o 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.
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.
Some of our employees are currently obligated to perform annual
reserve duty in the Israel Defense Forces and are subject to being called for
active military duty at any time. No assessment can be made of the full impact
of such requirements on us in the future, particularly if emergency
circumstances occur, and no prediction can be made as to the effect on us of any
expansion of these obligations. However, further deterioration of hostilities
15
with the Palestinian community into a full-scale conflict might require more
widespread military reserve service by some of our employees, which could have a
material adverse effect on our business.
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 35%
of our assets are located outside the United States. In addition, two of our
directors and all 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 2003, the inflation adjusted
NIS appreciated against the dollar, which raised the dollar cost of our Israeli
operations.
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.
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 the stage of development of our products, the uncertainty
of the market for disposable cell phone batteries, significant future capital
requirements and our plans to implement our growth strategy, continue our
research and development, expand our manufacturing capacity, develop strategic
relationships for marketing and other purposes and carefully manage our growth.
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
16
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.
ABOUT THE OFFERING
We are registering the resale of our common stock by the selling
stockholders. The selling stockholders and the specific number of shares that
they each may resell through this prospectus are listed on page 20. The shares
offered for resale by this prospectus include the following:
o 508,286 shares of common stock outstanding, of which 175,000
shares are owned by Yehuda Harats, our former CEO, and 333,286
are owned by Capital Ventures International;
o 4,137,932 shares of common stock that may be acquired upon the
conversion of currently outstanding debentures; and
o 14,849,468 shares of common stock that may be acquired upon
the exercise of currently outstanding warrants. USE OF
PROCEEDS
All net proceeds from the sale of the shares of common stock offered
hereunder by the selling stockholders will go to the stockholder who offers and
sells them. We will not receive any of the proceeds from the offering of shares
of our common stock by the selling stockholders. Certain of the shares covered
hereby are issuable upon the exercise of warrants. If these warrants are fully
exercised, we will receive gross proceeds of $27,997,346. Such proceeds would be
added to working capital and used for general corporate purposes.
SELLING STOCKHOLDERS
SHARES OWNED BY OUR FORMER CEO
Pursuant to the terms of a registration rights agreement with Yehuda
Harats, our former CEO, we are registering a total of 175,000 shares owned by
him.
SHARES ISSUABLE IN CONNECTION WITH OUR SALE OF CONVERTIBLE DEBENTURES
Pursuant to the terms of a Securities Purchase Agreement dated
September 30, 2003 (the "Purchase Agreement") by and between Arotech Corporation
and six institutional investors (the "Investors"), we issued and sold to the
Investors (i) an aggregate principal amount of $5,000,000 in 8% secured
convertible debentures due September 30, 2006 (the "Initial Debentures"),
convertible into shares of our common stock at a conversion price of $1.15 per
share, and (ii) three-year warrants to purchase up to an aggregate of 1,250,000
shares of our common stock (the "Initial Warrants") at an exercise price of
$1.4375 per share. The Debentures earn interest at a rate of 8% per annum,
payable in cash or stock quarterly. We are not presently registering any shares
for use in connection with interest payments. We completed the process of
registering the shares issuable in connection with the Initial Debentures and
the Initial Warrants on December 5, 2003.
The Investors also have the right, at their option, to purchase up
to an additional $6,000,000 in debentures (the "Additional Debentures" and,
together with the Initial Debentures, the "Debentures") convertible into shares
of our common stock at a conversion price of $1.45 per share, and to receive
warrants to purchase up to an aggregate of 1,500,000 shares of our common stock
(the "Additional Warrants") at an exercise price of $1.8125 per share. The
Investors exercised this option in December 2003, pursuant to an Amendment and
Exercise Agreement dated December 10, 2003 that also granted to the Investors
incentive warrants to purchase up to an aggregate of 1,038,000 shares of our
common stock (the "Incentive Warrants" and, together with the Initial Warrants
and the Additional Warrants, the "Warrants") at an exercise price of $2.20 per
share. We are presently registering the shares issuable in connection with the
Additional Debentures, the Additional Warrants and the Incentive Warrants.
17
Under the terms of the Purchase Agreement, we have granted the
Investors a first position security interest in the stock of MDT Armor
Corporation, the assets of our IES Interactive Training, Inc. subsidiary, the
stock of our subsidiaries, and in any stock that we acquire in future
Acquisitions (as defined in the Purchase Agreement), all pursuant to the terms
of separate security agreements filed as exhibits to the Form 8-K that we filed
with the Securities and Exchange Commission on October 3, 2003. We also
committed ourselves to certain affirmative and negative covenants customary in
agreements of this kind.
We entered into a Registration Rights Agreement with such selling
stockholders under the Securities Purchase Agreement pursuant to which we agreed
to register our shares of common stock issuable to the debenture holders. We are
bearing the expenses of this registration.
The terms of the debentures and the warrants whose underlying shares
of common stock are included for resale under this prospectus prohibit
conversion of the debentures or exercise of the warrants to the extent that
conversion of the debentures or exercise of the warrants would result in the
holder, together with its affiliates, beneficially owning in excess of 4.999% of
our outstanding shares of common stock, and to the extent that exercise of the
warrants would result in the holder, together with its affiliates, beneficially
owning in excess of 4.999% of our outstanding shares of common stock. These
limitations do not preclude a holder from converting or exercising a debenture
or warrant, respectively, and selling shares underlying the debenture or warrant
in stages over time where each stage does not cause the holder and its
affiliates to beneficially own shares in excess of the limitation amounts. The
footnotes to the table describe beneficial ownership adjustments required by
these limitations, if any.
In addition to the above restrictions, the outstanding debentures
and warrants each contain a provision which precluded us from issuing, in
connection with the transactions described below, and at prices less than the
greater of book or market value of our common stock, a number of shares of our
common stock which, in the aggregate for such transactions, would exceed in
excess of 19.99% of our common stock outstanding as of the date we consummated
such transactions. The foregoing limitation will cease to apply in the event
that we obtain, prior to any such prohibited issuance, approval of our
stockholders under applicable Nasdaq Marketplace Rules to issue in connection
with these transactions an aggregate number of shares equal to or in excess of
20% or outstanding shares of common stock.
Pursuant to our obligations under the Purchase Agreement, we will
solicit the approval of our shareholders regarding the issuance of the
Debentures and the Warrants, as may be required under Nasdaq Marketplace Rules,
at our next annual meeting of stockholders (the "Meeting"), to be called and
held no later than June 19, 2004. In this connection, and as required under the
terms of the Purchase Agreement, certain of our shareholders have agreed to vote
their shares in favor of the approval of the transactions contemplated by the
Purchase Agreement at the Meeting, pursuant to separate voting agreements.
The debentures and warrants issued to the Investors were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
SHARES ISSUED AND ISSUABLE IN CONNECTION WITH OUTSTANDING WARRANTS HELD BY
INVESTORS IN OUR MAY 2001 OFFERING
We issued warrants to certain investors in May 2001 ("May 2001
Warrants") to purchase 2,696,971 shares of our common stock at a purchase price
of $3.22 per share. In June 2003, in order to improve our cash situation and our
shareholders' equity, we adjusted the purchase price of 1,357,677 of the May
2001 Warrants to $0.82 per share in exchange for immediate exercise of these
warrants, and issued to the holders of these exercised warrants new warrants to
purchase a total of 905,052 shares of our common stock at a purchase price of
$1.45 per share (the "June 2003 Warrants"). The June 2003 Warrants were
originally exercisable at any time from and after December 31, 2003 to June 30,
2008; however, in September 2003, the exercise period of 638,385 of these June
2003 Warrants was adjusted to make them exercisable at any time from and after
December 31, 2004 to June 30, 2009.
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In addition, with respect to an additional 387,879 May 2001
Warrants, in December 2003, we adjusted the purchase price to $1.60 per share in
exchange for immediate exercise of these warrants, and issued to the holders of
these exercised warrants new warrants to purchase a total of 193,940 shares of
our common stock at a purchase price of $2.25 per share (the "December 2003
Warrants").
Additionally, in October 2003 we granted to three of these investors
additional new warrants to purchase a total of 150,000 shares of our common
stock at a purchase price of $1.20 per share (the "Supplementary Warrants").
In connection with the May 2001 offering, we granted warrants to
purchase 250,000 shares of our common stock at a purchase price of $3.08 per
share, subject to anti-dilution adjustment, to one of the selling stockholders,
as partial consideration for its consent to, and waiver of certain provisions
contained in a securities purchase agreement dated as of November 17, 2000 by
and between us and the selling stockholder, related to our sale of certain of
our securities in May 2001. In April 2004, as part of a negotiation on the
number of shares such selling stockholder was entitled to pursuant to
anti-dilution provisions contained in the warrants held by them and in exchange
for immediate exercise of the 333,286 warrants (after operation of the
antidilution provision), we issued a new warrant to such selling stockholder to
purchase a total of 1,222,050 shares of our common stock at a purchase price of
$2.10 per share. These warrants are exercisable at any time until the 180th day
after the date of this prospectus.
We are now registering the shares underlying all of these warrants
and the 333,286 shares of common stock previously issued upon exercise of
warrants.
We are bearing the expenses of this registration.
The above warrants were issued in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act as transactions by
an issuer not involving a public offering.
SHARES ISSUABLE IN CONNECTION WITH OUTSTANDING WARRANTS HELD BY INVESTORS
IN OUR JANUARY 2004 OFFERING
Pursuant to the terms of a Securities Purchase Agreement dated
January 7, 2004 (the "SPA") by and between Arotech Corporation and eight
institutional investors (the "2004 Investors"), we issued and sold to the 2004
Investors (i) an aggregate of 9,840,426 shares of our common stock (off of a
shelf registration statement that was declared effective on December 5, 2003),
and (ii) three-year warrants to purchase up to an aggregate of 9,840,426 shares
of our common stock (the "2004 Warrants") at an exercise price of $1.88 per
share. A copy of the SPA was filed as an exhibit to the Form 8-K that we filed
with the Securities and Exchange Commission on January 9, 2004.
We also entered into a Registration Rights Agreement with the 2004
Investors under the SPA pursuant to which we agreed to register our shares of
common stock issuable to upon exercise of the 2004 Warrants. We are bearing the
expenses of this registration.
The terms of the 2004 Warrants whose underlying shares of common
stock are included for resale under this prospectus prohibit exercise of the
2004 Warrants to the extent that exercise of the 2004 Warrants would result in
the holder, together with its affiliates, beneficially owning in excess of
4.999% of our outstanding shares of common stock. These limitations do not
preclude a holder from exercising a warrant and selling shares underlying the
warrant in stages over time where each stage does not cause the holder and its
affiliates to beneficially own shares in excess of the limitation amounts. The
footnotes to the table describe beneficial ownership adjustments required by
these limitations, if any.
The 2004 Warrants issued to the 2004 Investors were issued in
reliance upon the exemption from registration provided by Section 4(2) of the
Securities Act as transactions by an issuer not involving a public offering.
19
SELLING STOCKHOLDER TABLE
The following table identifies the selling stockholders and
indicates (i) the nature of any position, office or other material relationship
that each selling stockholder has had with us during the past three years (or
any of our predecessors or affiliates) and (ii) the number of shares of our
common stock owned by the selling stockholder prior to the offering, the number
of shares to be offered for the selling stockholder's account and the number of
shares and percentage of outstanding shares to be owned by the selling
stockholder after completion of the offering, all as of April 16, 2004.
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 or group.
NUMBER OF
SHARES SHARES BENEFICIALLY OWNED
BENEFICIALLY AFTER OFFERING(2)
OWNED PRIOR SHARES BEING ----------------------------
NAME OF SELLING STOCKHOLDER TO OFFERING(1) OFFERED NUMBER PERCENT
------------------------------ --------------- --------------- ------------- -------------
Smithfield Fiduciary LLC (3) ...................... 6,325,943 6,325,943 0 0%
Omicron Master Trust (3) .......................... 1,856,422 1,731,422 125,000 *
Portside Growth and Opportunity Fund (3) .......... 2,065,219 2,065,219 0 0%
Mainfield Enterprises Inc. (3) .................... 2,195,654 2,065,219 130,435 *
Cranshire Capital L.P. (3) ........................ 2,413,315 2,138,567 274,748 *
Cleveland Overseas Ltd. (3) ....................... 936,593 667,593 269,000 *
Vertical Ventures LLC (3) ......................... 531,914 531,914 0 0%
PEAK6 Capital Management LLC (3) ..................... (11) 531,914 0 0%
ZLP Master Opportunity Fund, Ltd. (3) ............. 3,838,226 797,872 3,040,354 4.8%
First Investors Holding Co., Inc. ................. 349,285 349,285 0 0%
Montrose Investments Ltd. ......................... 99,795 99,795 0 0%
Special Situations Technology Fund, L.P. .......... 13,897 13,897 0 0%
Special Situations Technology Fund II, L.P. ....... 70,951 70,951 0 0%
Special Situations Fund III, L.P. ................. 190,742 190,742 0 0%
Special Situations Cayman Fund, L.P. .............. 67,006 67,006 0 0%
Special Situations Private Equity Fund, L.P. ...... 118,011 118,011 0 0%
Yehuda Harats ..................................... 855,824 175,000 680,824 1.1%
Capital Ventures International .................... 1,555,336 1,555,336 0 0%
----------------------------------
* Less than 1%.
(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.
(3) The terms of the debentures and the related warrants whose underlying
shares of common stock are included for resale under this prospectus
prohibit conversion of the debentures or exercise of the warrants to the
extent that conversion of the debentures would result in the holder,
together with its affiliates, beneficially owning in excess of 4.999% of
our outstanding shares of common stock, and to the extent that exercise of
the warrants would result in the holder, together with its affiliates,
beneficially owning in excess of 4.999% of our outstanding shares of
common stock. In addition to the above restrictions, the outstanding
debentures and warrants each contain a provision which precluded us from
issuing, in connection with the transactions described below, and at
prices less than the greater of book or market value of our common stock,
a number of shares of our common stock which, in the aggregate for such
transactions, would exceed in excess of 19.99% of our common stock
outstanding as of the date we consummated such transactions. The foregoing
limitation will cease to apply in the event that we obtain, prior to any
such prohibited issuance, approval of our stockholders under applicable
20
Nasdaq Marketplace Rules to issue in connection with these transactions an
aggregate number of shares equal to or in excess of 20% or outstanding
shares of common stock.
(4) Includes (i) 1,448,276 shares of common stock issuable at a conversion
price of $1.45 per share upon conversion of 8% secured convertible
debentures ("Additional Debentures") that were issued in connection with
an Amendment and Exercise Agreement dated December 10, 2003 (the "SPA
Amendment") amending a securities purchase agreement dated September 30,
2003 (the "SPA"), (ii) 525,000 shares of common stock issuable at an
exercise price of $1.8125 per share upon exercise of warrants that were
issued in December 2003 in connection with the SPA Amendment ("Additional
Warrants"), (iii) 363,300 shares of common stock issuable at an exercise
price of $2.20 per share upon exercise of incentive warrants that were
issued in December 2003 in connection with the SPA Amendment ("Incentive
Warrants"), and (iv) 3,989,367 shares of common stock issuable at an
exercise price of $1.88 per share upon exercise of a 2004 Warrant.
Highbridge Capital Management, LLC ("Highbridge") is the trading manager
of Smithfield Fiduciary LLC ("Smithfield") and consequently has voting
control and investment discretion over the shares of common stock held by
Smithfield. Messrs. Glenn Dubin and Henry Swieca control Highbridge. Each
of Highbridge and Messrs. Dubin and Swieca disclaims beneficial ownership
of the shares held by Smithfield.
(5) Includes (i) 413,793 shares of common stock issuable at a conversion price
of $1.45 per share upon conversion of an Additional Debenture, (ii)
150,000 shares of common stock issuable at an exercise price of $1.8125
per share upon exercise of Additional Warrants, (iii) 103,800 shares of
common stock issuable at an exercise price of $2.20 per share upon
exercise of Incentive Warrants, and (iv) 1,063,829 shares of common stock
issuable at an exercise price of $1.88 per share upon exercise of a 2004
Warrant. Also includes 125,000 previously-registered shares of common
stock issuable at an exercise price of $1.4375 per share upon exercise of
warrants that were issued in connection with the SPA. 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 shares of our common stock
owned by Omicron, and Winchester may be deemed to share voting and
dispositive power over the shares of our common stock owned by Omicron.
Omicron Capital, OCI and Winchester disclaim beneficial ownership of such
shares of our common stock. Omicron Capital has delegated authority from
the board of directors of Winchester regarding the portfolio management
decisions with respect to the shares of common stock 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 shares of common stock owned by Omicron. By reason of such
delegated authority, Messrs. Morali and Bernstein may be deemed to share
dispositive power over the shares of our common stock owned by Omicron.
Messrs. Morali and Bernstein disclaim beneficial ownership of such shares
of our common stock 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 shares of our common stock
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) Includes (i) 620,690 shares of common stock issuable at a conversion price
of $1.45 per share upon conversion of an Additional Debenture, (ii)
225,000 shares of common stock issuable at an exercise price of $1.8125
per share upon exercise of Additional Warrants, (iii) 155,700 shares of
common stock issuable at an exercise price of $2.20 per share upon
exercise of Incentive Warrants, and (iv) 1,063,829 shares of common stock
issuable at an exercise price of $1.88 per share upon exercise of a 2004
Warrant. 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) Includes (i) 620,690 shares of common stock issuable at a conversion price
of $1.45 per share upon conversion of an Additional Debenture, (ii)
225,000 shares of common stock issuable at an exercise price of $1.8125
per share upon exercise of Additional Warrants, (iii) 155,700 shares of
common stock issuable at an exercise price of $2.20 per share upon
exercise of Incentive Warrants, and (iv) 1,063,829 shares of common stock
issuable at an exercise price of $1.88 per share upon exercise of a 2004
Warrant. Also includes 130,435 previously-registered shares of common
stock issuable at a conversion price of $1.15 per share upon conversion of
8% secured convertible debentures that were issued in September 2003 in
21
connection with the SPA. Mor Sagi, has voting and dispositive control over
the shares owned by Mainfield Enterprises Inc.
(8) Includes (i) 620,690 shares of common stock issuable at a conversion price
of $1.45 per share upon conversion of an Additional Debenture, (ii)
225,000 shares of common stock issuable at an exercise price of $1.8125
per share upon exercise of Additional Warrants, (iii) 155,700 shares of
common stock issuable at an exercise price of $2.20 per share upon
exercise of Incentive Warrants, (iv) 64,557 shares of common stock
issuable at an exercise price of $1.20 upon exercise of warrants issued in
October 2003, and (v) 797,872 shares of common stock issuable at an
exercise price of $1.88 per share upon exercise of a 2004 Warrant. Also
includes 274,748 shares of common stock being registered in this
registration statement that are issuable at an exercise price of $1.45
upon exercise of warrants issued in June 2003. Mitchell P. Kopin,
President of Downsview Capital Inc., the General Partner of Cranshire
Capital L.P., has the right to vote and/or dispose of the shares held by
this selling shareholder.
(9) Includes (i) 413,793 shares of common stock issuable at a conversion price
of $1.45 per share upon conversion of an Additional Debenture, (ii)
150,000 shares of common stock issuable at an exercise price of $1.8125
per share upon exercise of Additional Warrants, and (iii) 103,800 shares
of common stock issuable at an exercise price of $2.20 per share upon
exercise of Incentive Warrants. Also includes (i) 119,000 unregistered
shares of common stock issuable at an exercise price of $2.25 per share
upon exercise of certain unrelated warrants, and (ii) 150,000 unregistered
shares of common stock issuable at an exercise price of $1.68 per share
upon exercise of certain unrelated warrants. Mr. Ewald Vogt, the Director
of GTF Global Trade & Finance S.A., the Manager of Cleveland Overseas
Limited, has sole voting control and investment discretion over securities
held by Cleveland Overseas Limited. Each of Mr. Ewald Vogt and GTF Global
Trade and Finance S.A. disclaims beneficial ownership of the shares held
by Cleveland Overseas Limited.
(10) Consists of 531,914 shares of common stock issuable at an exercise price
of $1.88 per share upon exercise of a 2004 Warrant. Joshua Silverman has
voting control and investment discretion over the shares of common stock
held by this selling stockholder. Mr. Silverman disclaims beneficial
ownership of the shares held by Vertical Ventures LLC.
(11) Consists of 531,914 shares of common stock issuable at an exercise price
of $1.88 per share upon exercise of a 2004 Warrant. Matt Hulsizer and
Jenny Just have voting control and investment discretion over the shares
of common stock held by this selling stockholder.
(12) Includes (i) 797,872 shares of common stock issuable at an exercise price
of $1.88 per share upon exercise of a 2004 Warrant, (ii) 2,000,058 shares
of common stock issuable at an exercise price of $0.64 per share upon
exercise of a warrant issued by us in December 2002, and (iii) 424,242
shares of common stock issuable at an exercise price of $3.22 per share
upon exercise of a May 2001 Warrant. Stuart J. Zimmer has voting control
and investment discretion over the shares of common stock held by this
selling stockholder.
(13) Includes (i) 282,829 shares of common stock issuable at an exercise price
of $1.45 upon exercise of warrants issued in June 2003 and (ii) 66,456
shares of common stock issuable at an exercise price of $1.20 upon
exercise of warrants issued in October 2003. Avi Vigder has voting and
dispostive control over the shares owned by First Investors Holding
Company, Inc.
(14) Includes (i) 80,808 shares of common stock issuable at an exercise price
of $1.45 upon exercise of warrants issued in June 2003 and (ii) 18,987
shares of common stock issuable at an exercise price of $1.20 upon
exercise of warrants issued in October 2003. HBK Investments L.P. may be
deemed to have sole voting power and sole dispositive power over the
shares held by Montrose Investments Ltd. pursuant to an Investment
Management Agreement between HBK Investments L.P. and Montrose Investments
Ltd. The following individuals have control over HBK Investments L.P.:
Kenneth M. Hirsh, Laurence H. Lebowitz, William E. Rose, Richard L. Booth,
David C. Haley and Jamiel A. Akhtar.
(15) Consists of (i) 7,980 shares of common stock issuable at an exercise price
of $1.45 upon exercise of warrants issued in June 2003 and (ii) 5,917
shares of common stock issuable at an exercise price of $2.25 upon
exercise of warrants issued in December 2003. MGP Advisors Limited ("MPG")
is the general partner of Special Situations Fund III, L.P. AWM Investment
Company, Inc. ("AWM") is the general partner of MGP and the general
partner of and investment adviser to Special Situations Cayman Fund, L.P.
SST Advisers, L.L.C. ("SSTA") is the general partner of and investment
adviser to Special Situations Technology Fund, L.P. and the Special
Situations Technology Fund II, L.P. MG Advisers, L.L.C. ("MG") is the
general partner of and investment adviser to Special Situations Private
Equity Fund, L.P. Austin W. Marxe and David M. Greenhouse are the
principal owners of MGP, AWM, MG and SSTA and are principally responsible
for the selection, acquisition and disposition of the portfolio securities
by each investment adviser on behalf of its fund.
22
(16) Consists of (i) 40,500 shares of common stock issuable at an exercise
price of $1.45 upon exercise of warrants issued in June 2003 and (ii)
30,451 shares of common stock issuable at an exercise price of $2.25 upon
exercise of warrants issued in December 2003. A description of the persons
who have the right to vote and/or dispose of the shares held by this
selling shareholder appears in footnote (15) above.
(17) Consists of (i) 132,667 shares of common stock issuable at an exercise
price of $1.45 upon exercise of warrants issued in June 2003 and (ii)
58,075 shares of common stock issuable at an exercise price of $2.25 upon
exercise of warrants issued in December 2003. A description of the persons
who have the right to vote and/or dispose of the shares held by this
selling shareholder appears in footnote (15) above.
(18) Consists of (i) 49,840 shares of common stock issuable at an exercise
price of $1.45 upon exercise of warrants issued in June 2003 and (ii)
17,166 shares of common stock issuable at an exercise price of $2.25 upon
exercise of warrants issued in December 2003. A description of the persons
who have the right to vote and/or dispose of the shares held by this
selling shareholder appears in footnote (15) above.
(19) Consists of (i) 35,680 shares of common stock issuable at an exercise
price of $1.45 upon exercise of warrants issued in June 2003 and (ii)
82,331 shares of common stock issuable at an exercise price of $2.25 upon
exercise of warrants issued in December 2003. A description of the persons
who have the right to vote and/or dispose of the shares held by this
selling shareholder appears in footnote (15) above.
(20) Includes 516,500 shares issuable upon exercise of options exercisable
within 60 days.
(21) Includes 1,222,050 shares of common stock issuable at an exercise price of
$2.10 upon exercise of warrants issued in April 2004. Pursuant to a
management agreement, Heights Capital Management, Inc., serves as an
investment advisor to Capital Ventures International. Martin Kobinger is
an investment manager of Heights Capital Management, Inc. and, as such,
may exercise dispositive and voting power with respect to the shares owned
by Capital Ventures International. Heights Capital Management, Inc. and
Mr. Kobinger each disclaim beneficial ownership of the shares owned by
Capital Ventures International
PLAN OF DISTRIBUTION
The selling stockholders, which as used herein includes donees, pledgees,
assignees and successors-in-interest selling shares of common stock or interests
in shares of common stock received after the date of this prospectus from a
selling stockholder as a gift, pledge, partnership distribution or other
transfer, may, from time to time, sell any or all of their shares of common
stock or interests in shares of common stock on any stock exchange, market or
trading facility on which the shares are traded or in private transactions.
These sales may be at fixed or negotiated prices. The selling stockholders may
use any one or more of the following methods when selling shares:
o ordinary brokerage transactions and transactions in which the
broker-dealer solicits purchasers;
o 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;
o purchases by a broker-dealer as principal and resale by the
broker-dealer for its account;
o an exchange distribution in accordance with the rules of the
applicable exchange;
o privately negotiated transactions;
o short sales;
o through the writing or settlement of option or other hedging
transactions, whether through an options exchange or
otherwise;
o broker-dealers may agree with the selling stockholders to sell
a specified number of such shares at a stipulated price per
share;
o a combination of any such methods of sale; and
o any other method permitted pursuant to applicable law.
23
The selling shareholders may enter into hedging transactions with third
parties, which may in turn engage in short sales of the common stock into which
the debentures are convertible or warrants are exercisable in the course of
hedging the positions they assume. The selling shareholders may also enter into
short positions or options or other derivative transactions relating to the
common stock into which the debentures are convertible or warrants are
exercisable, or interests in the common stock, and deliver the common stock, or
interests in the common stock, to close out their short, option or other
positions or otherwise settle short sales or options or other derivative
transactions, or loan or pledge the common stock into which the debentures are
convertible or warrants are exercisable, or interests in the common stock, to
third parties that in turn may dispose of these securities.
The selling stockholders may also sell shares under Rule 144 under the
Securities Act, if available, rather than under this prospectus.
Broker-dealers engaged by the selling stockholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. These commissions and discounts may exceed what is customary in the
types of transactions involved.
The selling stockholders may from time to time pledge or grant a security
interest in some or all of the shares of our common stock or warrants 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 under this prospectus, or under an amendment to this prospectus
under Rule 424(b)(3) or other applicable provision of the Securities Act of 1933
amending the list of selling stockholders to include the pledgee, transferee or
other successors in interest as selling stockholders under this prospectus.
The selling stockholders also may transfer the shares of common stock in
other circumstances, in which case the transferees, pledgees or other successors
in interest will be the selling beneficial owners for purposes of this
prospectus.
The selling stockholders and any broker-dealers or agents that are
involved in selling the shares may be deemed to be "underwriters" within the
meaning of the Securities Act in connection with such sales. In such event, any
commissions received by such broker-dealers or agents and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. The selling stockholders have
advised us that they have acquired their securities in the ordinary course of
business and they have not entered into any agreements, understandings or
arrangements with any underwriters or broker-dealers regarding the sale of their
shares of common stock, nor is there an underwriter or coordinating broker
acting in connection with a proposed sale of shares of common stock by any
selling stockholder.
We are required to pay all fees and expenses incident to the registration
of the shares and up to $10,000 of the fees and disbursements of special counsel
to certain of the selling stockholders. We have agreed to indemnify the selling
stockholders against certain losses, claims, damages and liabilities, including
liabilities under the Securities Act.
The selling stockholders are subject to applicable provisions of the
Exchange Act and the Commission's rules and regulations, including Regulation M,
which provisions may limit the timing of purchases and sales of the shares by
the selling stockholders. We will make copies of this prospectus available to
the selling stockholders and have informed them of the need to deliver copies of
this prospectus to purchasers at or prior to the time of any sale of the shares.
In order to comply with certain states' securities laws, if applicable,
the selling stockholders may sell the shares in those jurisdictions only through
registered or licensed brokers or dealers. In certain states the selling
stockholders may not sell the shares unless the shares have been registered or
qualified for sale in such state, or unless an exemption from registration or
qualification is available and is obtained.
24
Our common stock is currently traded on the Nasdaq National Market under
the symbol "ARTX."
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 100,000,000 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 April 16, 2004, 63,656,843 shares of common stock
were issued and outstanding, 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 shareholder 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.
STOCK OPTIONS
As of April 16, 2004, options to purchase a total of 7,576,041 shares of
common stock at a weighted average exercise price of $1.52 per share were
outstanding, 5,733,441 of which were vested and exercisable within 60 days of
the date of this prospectus, at a weighted average exercise price of $1.72 per
share.
WARRANTS
As of April 16, 2004, there were outstanding warrants to purchase a total
of 18,720,040 shares of common stock at a weighted average exercise price of
$1.84 per share.
25
DEBENTURES
As of April 16, 2004, there were outstanding debentures convertible into a
total of 4,898,801 shares of common stock at a weighted average conversion price
of $1.40 per share.
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:
o divide our board of directors into three classes serving
staggered three-year terms;
o 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
o 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.
DESCRIPTION OF COMMON STOCK WARRANTS
Each warrant entitles the holder to purchase, at an exercise price
specified in the warrant, one share of our common stock. The warrant is
exercisable by the holder at any time and will expire on the expiration dates
set forth in the respective warrants and described under "Selling Stockholders,"
above.
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 with respect to certain of the warrants, 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:
o 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;
o subdivide or combine our common stock; or
o issue shares of our capital stock in any reclassification of
our common stock.
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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.
EXPERTS
The consolidated financial statements of Arotech Corporation (formerly
Electric Fuel Corporation) included in Arotech Corporation's Annual Report (Form
10-K) for the year ended December 31, 2003, have been audited by Kost, Forer,
Gabbay & Kassierer, a member of Ernst & Young Global, independent auditors, as
set forth in their report thereon included therein and incorporated herein by
reference in reliance upon such report. Such consolidated financial statements
have incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
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:
o 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;
o our Annual Report on Form 10-K for the year ended December 31,
2003, filed with the Securities and Exchange Commission on
March 30, 2004; and
27
o our Current Reports on Form 8-K filed with the Securities and
Exchange Commission on January 9, 2004, and February 4, 2004,
and our Current Reports on Form 8-K/A filed with the
Securities and Exchange Commission on March 9, 2004, and March
26, 2004.
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
250 West 57th Street, Suite 310
New York, New York 10107
Attention: Chief Executive Officer
(212) 258-3222
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 stockholder
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.
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19,495,686 SHARES
COMMON STOCK
[GRAPHIC OMITTED]
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PROSPECTUS
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APRIL 21, 2004
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