OMB
APPROVAL
|
OMB
Number:
3235-0063
|
Expires:
January
31, 2008
|
Estimated
average burden
|
hours
per
response
2,196.00
|
Delaware
(State
or other jurisdiction of incorporation or
organization)
|
95-4302784
(I.R.S.
Employer Identification
No.)
|
1229
Oak Valley Drive, Ann Arbor, Michigan
(Address
of principal executive offices)
|
48108
(Zip
Code)
|
(800)
281-0356
(Registrant’s
telephone number, including area
code)
|
Title
of each class
None
|
Name
of each exchange on which registered
Not
applicable
|
Large
accelerated filer: o
|
Accelerated
filer: x
|
Non-accelerated
filer: o
|
· |
the
report on internal control over financial reporting from Kost,
Forer,
Gabbay & Kasierer, a member of Ernst & Young Global, Independent
Registered Public Accounting
Firm.
|
· |
the
report of Kost, Forer, Gabbay & Kasierer, a member of Ernst &
Young Global, Independent Registered Public Accounting
Firm;
|
· |
the
report of Stark Winter Schenkein & Co., LLP, Independent Registered
Public Accounting Firm; and
|
· |
Arotech
Corporation’s financial statements for the year ended December 31,
2005.
|
· |
Providing
additional Consents of Kost, Forer, Gabbay & Kasierer, a member of
Ernst & Young Global, and Stark Winter Schenkein & Co., LLP,
Independent Registered Public Accounting Firms;
and
|
· |
Replacing
the Section 302 and Section 906 certifications from the Chairman
and Chief
Executive Officer and the Vice President –
Finance and
Chief Financial Officer.
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY
DATA
|
Page
|
|
Consolidated
Financial Statements
|
|
Reports
of Independent Registered Public Accounting Firms
|
F-1
|
Consolidated
Balance Sheets
|
F-8
|
Consolidated
Statements of Operations
|
F-10
|
Statements
of Changes in Shareholders’ Equity
|
F-11
|
Consolidated
Statements of Cash Flows
|
F-14
|
Notes
to Consolidated Financial Statements
|
F-17
|
Supplementary
Financial Data
|
|
Quarterly
Financial Data (unaudited) forthe two years ended December 31,
2005
|
F-64
|
Financial
Statement Schedule
|
|
Schedule
II – Valuation and Qualifying Accounts
|
F-65
|
n
Kost
Forer Gabbay
& Kasierer
3
Aminadav St.
Tel-Aviv
67067, Israel
|
n
Phone:
972-3-6232525
Fax:
972-3-5622555
|
/s/
Kost, Forer, Gabbay & Kasierer
|
||
Tel
Aviv, Israel
March
30, 2006,
except
for the final paragraph above,
as
to which the date is June 15, 2006
and for Note 13.h., as to which the date is July 24, 2006 |
KOST,
FORER, GABBAY & KASIERER
A
Member of Ernst & Young Global
|
n
Kost
Forer Gabbay
& Kasierer
3
Aminadav St.
Tel-Aviv
67067, Israel
|
n
Phone:
972-3-6232525
Fax:
972-3-5622555
|
/s/
Kost, Forer, Gabbay & Kasierer
|
||
Tel
Aviv, Israel
June
15, 2006
|
KOST,
FORER, GABBAY & KASIERER
A
Member of Ernst & Young
Global
|
December
31,
|
|||||||
2005
|
2004
|
||||||
ASSETS
|
|||||||
CURRENT
ASSETS:
|
|||||||
Cash
and cash equivalents
|
$
|
6,150,652
|
$
|
6,734,512
|
|||
Restricted
collateral deposits and restricted held-to-maturity
securities
|
3,897,113
|
6,962,110
|
|||||
Available
for sale marketable securities
|
35,984
|
135,568
|
|||||
Trade
receivables (net of allowance for doubtful accounts in the amounts
of
$176,180 and $55,394 as of December 31, 2005 and 2004, respectively)
|
11,747,876
|
8,266,880
|
|||||
Unbilled
receivables
|
5,228,504
|
2,881,468
|
|||||
Other
accounts receivable and prepaid expenses
|
2,264,331
|
1,339,393
|
|||||
Inventories
|
7,815,806
|
7,277,301
|
|||||
Total
current assets
|
37,140,266
|
33,597,232
|
|||||
SEVERANCE
PAY FUND
|
2,072,034
|
1,980,047
|
|||||
RESTRICTED
DEPOSITS
|
779,286
|
4,000,000
|
|||||
PROPERTY
AND EQUIPMENT, NET
|
4,252,931
|
4,600,691
|
|||||
INVESTMENT
IN AFFILIATED COMPANY
|
37,500
|
—
|
|||||
OTHER
INTANGIBLE ASSETS, NET
|
11,027,499
|
14,368,701
|
|||||
GOODWILL
|
29,559,157
|
39,745,516
|
|||||
$
|
84,868,673
|
$
|
98,292,187
|
December
31,
|
|||||||
2005
|
2004
|
||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|||||||
CURRENT
LIABILITIES:
|
|||||||
Trade
payables
|
$
|
5,830,820
|
$
|
6,177,546
|
|||
Other
accounts payable and accrued expenses
|
5,630,108
|
5,818,188
|
|||||
Current
portion of promissory notes due to purchase of subsidiaries
|
603,764
|
13,585,325
|
|||||
Short
term bank credit and current portion of long term loans
|
2,036,977
|
181,352
|
|||||
Deferred
revenues
|
603,022
|
618,229
|
|||||
Convertible
debenture
|
11,492,238
|
—
|
|||||
Liabilities
of discontinued operations
|
120,000
|
—
|
|||||
Total
current liabilities
|
26,316,929
|
26,380,640
|
|||||
LONG
TERM LIABILITIES
|
|||||||
Accrued
severance pay
|
3,657,328
|
3,422,951
|
|||||
Convertible
debenture
|
8,590,233
|
1,754,803
|
|||||
Deferred
revenues
|
—
|
163,781
|
|||||
Long
term loan
|
—
|
20,891
|
|||||
Long-term
portion of promissory note due to purchase of subsidiaries
|
—
|
980,296
|
|||||
Total
long-term liabilities
|
12,247,561
|
6,342,722
|
|||||
COMMITMENTS
AND CONTINGENT LIABILITIES (Note 11)
|
|||||||
MINORITY
INTEREST
|
38,927
|
95,842
|
|||||
STOCKHOLDERS’
EQUITY:
|
|||||||
Share
capital -
|
|||||||
Common
stock - $0.01 par value each;
|
|||||||
Authorized:
250,000,000 shares as of December 31, 2004 and 2003; Issued: 6,221,194
shares and 5,759,786 shares as of December 31, 2005 and 2004,
respectively; Outstanding - 6,181,527 shares and 5,720,119 shares
as of
December 31, 2005 and 2004, respectively
|
870,969
|
806,370
|
|||||
Preferred
shares - $0.01 par value each;
|
|||||||
Authorized:
1,000,000 shares as of December 31, 2005 and 2004; No shares issued
and
outstanding as of December 31, 2005 and 2004
|
—
|
—
|
|||||
Additional
paid-in capital
|
193,949,882
|
189,266,103
|
|||||
Accumulated
deficit
|
(142,996,964
|
)
|
(118,953,553
|
)
|
|||
Deferred
stock compensation
|
(389,303
|
)
|
(1,258,295
|
)
|
|||
Treasury
stock, at cost (common stock - 39,667 shares as of December 31, 2005
and
2004)
|
(3,537,106
|
)
|
(3,537,106
|
)
|
|||
Notes
receivable from stockholders
|
(1,256,777
|
)
|
(1,222,871
|
)
|
|||
Accumulated
other comprehensive income
|
(375,445
|
)
|
372,335
|
||||
Total
stockholders’ equity
|
46,265,256
|
65,472,983
|
|||||
$
|
84,868,673
|
$
|
98,292,187
|
Year
ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Revenues
|
$
|
49,044,595
|
$
|
49,953,846
|
$
|
17,326,641
|
||||
Cost
of revenues
|
34,383,736
|
34,011,094
|
11,087,840
|
|||||||
Gross
profit
|
14,660,859
|
15,942,752
|
6,238,801
|
|||||||
Operating
expenses:
|
||||||||||
Research
and development, net
|
1,300,429
|
1,731,379
|
1,053,408
|
|||||||
Selling
and marketing expenses
|
4,471,590
|
4,922,217
|
3,532,636
|
|||||||
General
and administrative expenses
|
14,862,435
|
10,656,866
|
5,857,876
|
|||||||
Amortization
of intangible assets
|
3,070,748
|
2,494,556
|
864,910
|
|||||||
Impairment
of goodwill and other intangible assets
|
12,256,756
|
320,279
|
—
|
|||||||
Total
operating costs and expenses
|
35,961,958
|
20,125,297
|
11,308,830
|
|||||||
Operating
loss
|
(21,301,099
|
)
|
(4,182,545
|
)
|
(5,070,029
|
)
|
||||
Other
income
|
338,900
|
—
|
—
|
|||||||
Financial
income (expenses), net
|
(2,705,689
|
)
|
(4,228,965
|
)
|
(4,038,709
|
)
|
||||
Loss
before minorities interests in loss (earnings) of a subsidiaries
and tax
expenses
|
(23,667,888
|
)
|
(8,411,510
|
)
|
(9,108,738
|
)
|
||||
Income
taxes
|
(237,672
|
)
|
(586,109
|
)
|
(396,193
|
)
|
||||
Loss
from affiliated company
|
(75,000
|
)
|
—
|
—
|
||||||
Minorities
interests in loss (earnings) of a subsidiaries
|
57,149
|
(44,694
|
)
|
156,900
|
||||||
Loss
from continuing operations
|
(23,923,411
|
)
|
(9,042,313
|
)
|
(9,348,031
|
)
|
||||
Income
(loss) from discontinued operations
|
(120,000
|
)
|
—
|
110,410
|
||||||
Net
loss
|
$
|
(24,043,411
|
)
|
$
|
(9,042,313
|
)
|
$
|
(9,237,621
|
)
|
|
Deemed
dividend to certain stockholders
|
$
|
—
|
$
|
(3,328,952
|
)
|
$
|
(350,000
|
)
|
||
Net
loss attributable to common stockholders
|
$
|
(24,043,411
|
)
|
$
|
(12,371,265
|
)
|
$
|
(9,587,621
|
)
|
|
Basic
and diluted net loss per share from continuing operations
|
$
|
(4.07
|
)
|
$
|
(1.81
|
)
|
$
|
(3.37
|
)
|
|
Basic
and diluted net loss per share from discontinued
operations
|
$
|
(0.02
|
)
|
$
|
0.00
|
$
|
(0.04
|
)
|
||
Basic
and diluted net loss per share
|
$
|
(4.09
|
)
|
$
|
(2.48
|
)
|
$
|
(3.45
|
)
|
|
Weighted
average number of shares used in computing basic and diluted net
loss per
share
|
5,872,093
|
4,995,218
|
2,777,870
|
Common
stock
|
|||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
paid-in
capital
|
Accumulated
deficit
|
Deferred
stock
compensation
|
Treasury
stock
|
Notes
receivable
from
stockholders
|
Accumulated
other
comprehensive
loss
|
Total
comprehensive
income
(loss)
|
Total
stockholders’
equity
|
|||||||||||||||||||||
Balance
as of January 1, 2003
|
2,550,115
|
$
|
357,017
|
$
|
114,082,584
|
$
|
(100,673,619
|
)
|
$
|
(12,000
|
)
|
$
|
(3,537,106
|
)
|
$
|
(1,177,589
|
)
|
$
|
(1,786
|
)
|
$
|
9,037,501
|
|||||||||
Compensation
related to warrants issued to the holders of convertible
debentures
|
5,157,500
|
5,157,500
|
|||||||||||||||||||||||||||||
Compensation
related to beneficial conversion feature of convertible
debentures
|
5,695,543
|
5,695,543
|
|||||||||||||||||||||||||||||
Issuance
of shares on conversion of convertible debentures
|
497,829
|
69,696
|
6,064,981
|
(9,677
|
)
|
6,125,000
|
|||||||||||||||||||||||||
Issuance
of shares on exercise of warrants
|
263,071
|
36,831
|
3,259,422
|
3,296,253
|
|||||||||||||||||||||||||||
Issuance
of shares to consultants
|
15,971
|
2,236
|
159,711
|
161,947
|
|||||||||||||||||||||||||||
Compensation
related to grant and reprcing of warrants and options issued to
consultants
|
229,259
|
229,259
|
|||||||||||||||||||||||||||||
Compensation
related to non-recourse loan granted to shareholder
|
38,500
|
38,500
|
|||||||||||||||||||||||||||||
Deferred
stock compensation
|
4,750
|
(4,750
|
)
|
—
|
|||||||||||||||||||||||||||
Amortization
of deferred stock compensation
|
8,286
|
8,286
|
|||||||||||||||||||||||||||||
Exercise
of options by employees
|
49,260
|
6,896
|
426,668
|
433,564
|
|||||||||||||||||||||||||||
Exercise
of options by consultants
|
1,071
|
150
|
7,200
|
7,350
|
|||||||||||||||||||||||||||
Conversion
of convertible promissory note
|
40,284
|
5,640
|
438,720
|
444,360
|
|||||||||||||||||||||||||||
Increase
in investment in subsidiary against common stock issuance
|
9,000
|
1,260
|
120,960
|
122,220
|
|||||||||||||||||||||||||||
Accrued
interest on notes receivable from stockholders
|
16,615
|
(16,615
|
)
|
—
|
|||||||||||||||||||||||||||
Other
comprehensive income - foreign currency translation
adjustment
|
106,215
|
$
|
106,215
|
106,215
|
|||||||||||||||||||||||||||
Net
loss
|
(9,237,621
|
)
|
(9,237,621
|
)
|
(9,237,621
|
)
|
|||||||||||||||||||||||||
|
$
|
(9,131,406
|
)
|
||||||||||||||||||||||||||||
Balance
as of December 31, 2003
|
3,426,601
|
$
|
479,726
|
$
|
135,702,413
|
$
|
(109,911,240
|
)
|
$
|
(8,464
|
)
|
$
|
(3,537,106
|
)
|
$
|
(1,203,881
|
)
|
$
|
104,429
|
$
|
21,625,877
|
Common
stock
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Additional
paid-in
capital
|
Accumulated
deficit
|
Deferred
stock
compensation
|
Treasury
stock
|
Notes
receivable
from
stockholders
|
Accumulated
other
comprehensive
loss
|
Total
comprehensive
income
|
Total
stockholders’
equity
|
||||||||||||||||||||||
Balance
as of January 1, 2004
|
3,426,601
|
$
|
479,726
|
$
|
135,702,413
|
$
|
(109,911,240
|
)
|
$
|
(8,464
|
)
|
$
|
(3,537,106
|
)
|
$
|
(1,203,881
|
)
|
$
|
104,429
|
$
|
21,625,877
|
||||||||||
Issuance
of shares, net
|
1,009,892
|
141,384
|
24,252,939
|
24,394,323
|
|||||||||||||||||||||||||||
Issuance
of shares and warrants due to settlement of litigation
|
32,143
|
4,500
|
1,244,328
|
1,248,828
|
|||||||||||||||||||||||||||
Issuance
of shares to employees
|
2,857
|
400
|
92,800
|
93,200
|
|||||||||||||||||||||||||||
Conversion
of convertible debentures
|
274,552
|
38,437
|
3,754,279
|
3,792,716
|
|||||||||||||||||||||||||||
Exercise
of warrants by investors and others
|
811,667
|
113,633
|
19,119,638
|
19,233,271
|
|||||||||||||||||||||||||||
Issuance
of shares to consultants
|
6,444
|
902
|
198,489
|
199,391
|
|||||||||||||||||||||||||||
Reclassification
to liability in connection with warrants granted
|
(10,841,020
|
)
|
(10,841,020
|
)
|
|||||||||||||||||||||||||||
Reclassification
of liability to equity related to the fair value of
warrants
|
10,514,181
|
10,514,181
|
|||||||||||||||||||||||||||||
Compensation
related to non-recourse loan granted to shareholder
|
(10,000
|
)
|
(10,000
|
)
|
|||||||||||||||||||||||||||
Deferred
stock compensation related to options and restricted stock
|
52,857
|
7,400
|
2,074,057
|
(2,081,457
|
)
|
—
|
|||||||||||||||||||||||||
Amortization
of deferred stock compensation
|
831,626
|
831,626
|
|||||||||||||||||||||||||||||
Exercise
of options by employees
|
64,089
|
8,972
|
1,101,172
|
1,110,144
|
|||||||||||||||||||||||||||
Exercise
of options by consultants
|
2,687
|
376
|
50,799
|
51,175
|
|||||||||||||||||||||||||||
Issuance
of shares in respect of FAAC acquisition
|
71,704
|
10,039
|
1,993,639
|
2,003,678
|
|||||||||||||||||||||||||||
Accrued
interest on notes receivable from stockholders
|
18,990
|
(18,990
|
)
|
—
|
|||||||||||||||||||||||||||
Other
comprehensive income - foreign currency translation
adjustment
|
263,404
|
$
|
263,404
|
263,404
|
|||||||||||||||||||||||||||
Other
comprehensive income
-
realized gain on available for sale marketable securities
|
4,502
|
4,502
|
4,502
|
||||||||||||||||||||||||||||
Net
loss
|
(9,042,313
|
)
|
(9,042,313
|
)
|
(9,042,313
|
)
|
|||||||||||||||||||||||||
$
|
(8,774,407
|
)
|
|||||||||||||||||||||||||||||
Balance
as of December 31, 2004
|
5,755,493
|
$
|
805,769
|
$
|
189,266,704
|
$
|
(118,953,553
|
)
|
$
|
(1,258,295
|
)
|
$
|
(3,537,106
|
)
|
$
|
(1,222,871
|
)
|
$
|
372,335
|
$
|
65,472,983
|
Common
stock
|
|||||||||||||||||||||||||||||||
Shares
|
Amount
|
Additional
paid-in
capital
|
Accumulated
deficit
|
Deferred
stock
compensation
|
Treasury
stock
|
Notes
receivable
from
stockholders
|
Accumulated
other
comprehensive
income
(loss)
|
Total
comprehensive
income
(loss)
|
Total
stockholders’
equity
|
||||||||||||||||||||||
Balance
as of January 1, 2005
|
5,759,786
|
$
|
806,370
|
$
|
189,266,103
|
$
|
(118,953,553
|
)
|
$
|
(1,258,295
|
)
|
$
|
(3,537,106
|
)
|
$
|
(1,222,871
|
)
|
$
|
372,335
|
$
|
$65,472,983
|
||||||||||
Issuance
of shares, net
|
339,640
|
47,551
|
3,898,185
|
3,945,736
|
|||||||||||||||||||||||||||
Shares
issued to convertible debenture holders
|
82,976
|
11,617
|
441,434
|
453,051
|
|||||||||||||||||||||||||||
Shares
issued to consultant
|
36,232
|
5,073
|
516,200
|
521,273
|
|||||||||||||||||||||||||||
Compensation
related to non-recourse loan granted to shareholder
|
(28,500
|
)
|
(28,500
|
)
|
|||||||||||||||||||||||||||
Employee
options exercise
|
1,132
|
158
|
17,034
|
17,192
|
|||||||||||||||||||||||||||
Shares
issued to employees
|
714
|
100
|
(100
|
)
|
—
|
||||||||||||||||||||||||||
Deferred
stock compensation related to options and restricted stock
|
3,571
|
500
|
50,500
|
(51,000
|
)
|
—
|
|||||||||||||||||||||||||
Amortization
of deferred stock compensation
|
674,712
|
674,712
|
|||||||||||||||||||||||||||||
Cancellation
of deferred stock compensation as a result of forfeitures
|
(2,857
|
)
|
(400
|
)
|
(244,880
|
)
|
245,280
|
—
|
|||||||||||||||||||||||
Interest
accrued on notes receivable from shareholders
|
33,906
|
(33,906
|
)
|
—
|
|||||||||||||||||||||||||||
Other
comprehensive loss - foreign currency translation
adjustment
|
(746,016
|
)
|
(746,016
|
)
|
(746,016
|
)
|
|||||||||||||||||||||||||
Other
comprehensive loss - unrealized gain on available for sale
marketable
securities
|
(1,764
|
)
|
(1,764
|
)
|
(1,764
|
)
|
|||||||||||||||||||||||||
Net
loss
|
(24,043,411
|
)
|
(24,043,411
|
)
|
(24,043,411
|
)
|
|||||||||||||||||||||||||
Total
comprehensive loss
|
$
|
(24,791,191
|
)
|
||||||||||||||||||||||||||||
Balance
as of December 31, 2005
|
6,221,194
|
$
|
870,969
|
$
|
193,949,882
|
$
|
(142,996,964
|
)
|
$
|
(389,303
|
)
|
$
|
(3,537,106
|
)
|
$
|
(1,256,777
|
)
|
$
|
(375,445
|
)
|
$
|
46,265,256
|
Year
ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Cash
flows from operating activities:
|
||||||||||
Net
loss
|
$
|
(24,043,411
|
)
|
$
|
(9,042,313
|
)
|
$
|
(9,237,621
|
)
|
|
Less
loss (profit) for the period from discontinued operations
|
120,000
|
—
|
(110,410
|
)
|
||||||
Adjustments
required to reconcile net loss to net cash used in operating
activities:
|
||||||||||
Minorities
interests in earnings (loss) of subsidiary
|
(57,149
|
)
|
44,694
|
(156,900
|
)
|
|||||
Loss
from affiliated company
|
75,000
|
—
|
—
|
|||||||
Depreciation
|
1,373,580
|
1,199,465
|
730,159
|
|||||||
Amortization
of intangible assets, capitalized software costs and impairment
of
intangible assets
|
15,453,584
|
2,888,226
|
879,311
|
|||||||
Remeasurement
of liability in connection to warrants granted
|
(377,803
|
)
|
(326,839
|
)
|
—
|
|||||
Accrued
severance pay, net
|
68,839
|
(441,610
|
)
|
3,693
|
||||||
Amortization
of deferred stock compensation and compensation related to shares
issued
to employees
|
674,713
|
884,826
|
8,286
|
|||||||
Mark
up of loans to stockholders
|
—
|
(32,397
|
)
|
(12,519
|
)
|
|||||
Write-off
of inventories
|
1,062,336
|
121,322
|
96,350
|
|||||||
Impairment
of property and equipment
|
34,243
|
—
|
68,945
|
|||||||
Amortization
of compensation related to warrants issued to the holders of convertible
debentures and beneficial conversion feature
|
1,702,753
|
4,142,109
|
3,928,237
|
|||||||
Amortization
of deferred charges related to convertible debentures
issuance
|
329,152
|
222,732
|
483,713
|
|||||||
Amortization
of prepaid financial expenses
|
—
|
—
|
236,250
|
|||||||
Stock-based
compensation related to grant of new warrants and repricing of
warrants
granted to consultants
|
—
|
—
|
229,259
|
|||||||
Stock-based
compensation related to shares issued and to be issued to consultants
and
shares granted as a donation
|
538,058
|
89,078
|
161,947
|
|||||||
Stock-based
compensation related to non-recourse note granted to
stockholder
|
(28,500
|
)
|
(10,000
|
)
|
38,500
|
|||||
Interest
accrued or paid on promissory notes due to acquisition
|
19,704
|
39,311
|
(66,793
|
)
|
||||||
Interest
accrued on restricted collateral deposits
|
—
|
(267,179
|
)
|
—
|
||||||
Capital
loss (gain) from sale of marketable securities
|
2,695
|
(4,247
|
)
|
—
|
||||||
Amortization
of premium related to restricted held to maturity
securities
|
42,234
|
202,467
|
—
|
|||||||
Capital
loss (gain) from sale of property and equipment
|
3,172
|
(16,479
|
)
|
(11,504
|
)
|
|||||
Decrease
(increase) in trade receivables
|
(3,608,950
|
)
|
732,828
|
(820,137
|
)
|
|||||
Decrease
(increase) in other accounts receivable and prepaid
expenses
|
(75,982
|
)
|
(49,513
|
)
|
40,520
|
|||||
Decrease
(increase) in deferred tax assets
|
65,376
|
(89,823
|
)
|
—
|
||||||
Increase
in inventories
|
(1,710,528
|
)
|
(2,040,854
|
)
|
(193,222
|
)
|
||||
Increase
in unbilled revenues
|
(2,347,036
|
)
|
(1,581,080
|
)
|
—
|
|||||
Decrease
in deferred revenues
|
(178,988
|
)
|
(91,271
|
)
|
—
|
|||||
Increase
(decrease) in trade payables
|
(224,987
|
)
|
2,913,623
|
(986,022
|
)
|
|||||
Increase
(decrease) in other accounts payable and accrued expenses
|
32,269
|
(125,231
|
)
|
1,677,668
|
||||||
Net
cash used in operating activities from continuing operations
|
(11,055,626
|
)
|
(638,155
|
)
|
(3,012,290
|
)
|
||||
Net
cash used in operating activities from discontinued
operations
|
—
|
(214,041
|
)
|
(313,454
|
)
|
|||||
Net
cash used in operating activities
|
$
|
(11,055,626
|
)
|
$
|
(852,196
|
)
|
$
|
(3,325,744
|
)
|
|
Year
ended December 31,
|
|||||||||
2005
|
|
2004
|
|
2003
|
||||||
Cash
flows from investing activities:
|
||||||||||
Purchase
of property and equipment
|
(1,224,752
|
)
|
(1,659,688
|
)
|
(580,949
|
)
|
||||
Increase
in capitalized software costs
|
(651,611
|
)
|
(365,350
|
)
|
(209,616
|
)
|
||||
Loans
granted to stockholders
|
—
|
(1,036
|
)
|
(13,737
|
)
|
|||||
Repayment
of loans granted to stockholders
|
—
|
32,397
|
9,280
|
|||||||
Proceeds
from sale of property and equipment
|
104,175
|
114,275
|
16,753
|
|||||||
Proceeds
from sale of marketable securities
|
91,936
|
90,016
|
—
|
|||||||
Investment
in marketable securities
|
—
|
(89,204
|
)
|
—
|
||||||
Investment
in affiliated company
|
(112,500
|
)
|
—
|
—
|
||||||
Payment
of transaction expenses in relation to previous year investment in
subsidiary
|
(12,945
|
)
|
—
|
—
|
||||||
Acquisition
of Epsilor (1)
|
—
|
(7,190,777
|
)
|
—
|
||||||
Acquisition
of FAAC (2)
|
—
|
(12,129,103
|
)
|
—
|
||||||
Acquisition
of AoA (3)
|
—
|
(17,339,522
|
)
|
—
|
||||||
Repayment
of promissory notes related to acquisition of subsidiaries
(1)(2)
|
(14,588,298
|
)
|
(2,000,000
|
)
|
(750,000
|
)
|
||||
Purchase
of certain tangible and intangible assets
|
(150,000
|
)
|
(150,000
|
)
|
(196,331
|
)
|
||||
Increase
in restricted cash and held to maturity securities
|
4,748,178
|
(9,809,091
|
)
|
(72,840
|
)
|
|||||
Net
cash used in investing activities
|
(11,795,817
|
)
|
(50,497,083
|
)
|
(1,797,440
|
)
|
||||
Cash
flows from financing activities:
|
||||||||||
Proceeds
from issuance of shares, net
|
3,945,736
|
24,361,750
|
(6,900
|
)
|
||||||
Proceeds
from exercise of options to employees and consultants
|
17,192
|
1,148,819
|
440,914
|
|||||||
Proceeds
from exercise of warrants
|
—
|
19,233,271
|
3,296,254
|
|||||||
Proceeds
from issuance of convertible debentures, net of issuance
expenses
|
16,430,767
|
—
|
13,708,662
|
|||||||
Long
term loan received
|
—
|
69,638
|
—
|
|||||||
Repayment
of long term loan
|
(71,238
|
)
|
(65,674
|
)
|
—
|
|||||
Increase
(decrease) in short term bank credit
|
1,914,892
|
(376,783
|
)
|
(74,158
|
)
|
|||||
Payment
on capital lease obligation
|
—
|
(4,145
|
)
|
(4,427
|
)
|
|||||
Net
cash provided by financing activities
|
22,237,349
|
44,366,876
|
17,360,345
|
|||||||
Increase
(decrease) in cash and cash equivalents
|
(614,094
|
)
|
(6,982,403
|
)
|
12,237,161
|
|||||
Cash
erosion due to exchange rate differences
|
30,234
|
31,790
|
(9,562
|
)
|
||||||
Cash
and cash equivalents at the beginning of the year
|
6,734,512
|
13,685,125
|
1,457,526
|
|||||||
Cash
and cash equivalents at the end of the year
|
$
|
6,150,652
|
$
|
6,734,512
|
$
|
13,685,125
|
||||
Supplementary
information on non-cash transactions:
|
||||||||||
Issuance
of shares and warrants against accrued expenses and restricted
deposit
|
$
|
56,577
|
$
|
1,310,394
|
$
|
—
|
||||
Purchase
of intangible assets against note receivable
|
$
|
—
|
$
|
—
|
$
|
300,000
|
||||
Increase
of investment in subsidiary against issuance of shares of common
stock
|
$
|
—
|
$
|
—
|
$
|
123,480
|
||||
Conversion
of promissory note to shares of common stock
|
$
|
—
|
$
|
—
|
$
|
450,000
|
||||
Payment
of principle installment of convertible debenture in
shares
|
$
|
453,051
|
$
|
—
|
$
|
—
|
||||
Liability
in connection to warrants granted
|
$
|
44,231
|
$
|
—
|
$
|
—
|
||||
Conversion
of convertible debenture to shares of common stock
|
$
|
—
|
$
|
3,837,500
|
$
|
6,125,000
|
||||
Benefit
due to convertible debentures and warrants
|
$
|
—
|
$
|
—
|
$
|
10,853,043
|
||||
Accrual
for earn out in regard to subsidiary acquisition
|
$
|
603,764
|
$
|
13,435,325
|
$
|
—
|
||||
Supplemental
disclosure of cash flows activities:
|
||||||||||
Cash
paid during the year for:
|
||||||||||
Interest
|
$
|
1,401,681
|
$
|
532,750
|
$
|
39,412
|
||||
Taxes
on income
|
$
|
737,080
|
$
|
969,009
|
$
|
527,053
|
(1)
|
In
January 2004, the Company acquired substantially all of the outstanding
ordinary shares of Epsilor Electronic Industries, Ltd. (“Epsilor”). The
net fair value of the assets acquired and the liabilities assumed,
at the
date of acquisition, was as
follows:
|
Working
capital, excluding cash and cash equivalents
|
$
|
(849,992
|
)
|
|
Property
and equipment
|
709,847
|
|||
Intangible
assets and goodwill
|
10,284,407
|
|||
10,144,262
|
||||
Issuance
of shares in respect to transaction costs
|
(12,500
|
)
|
||
Issuance
of promissory note *)
|
(2,940,985
|
)
|
||
$
|
7,190,777
|
*) |
During
2005 and 2004 amounts of $1,000,000 and $2,000,000, respectively,
were
repaid to the former shareholders of
Epsilor.
|
(2)
|
In
January 2004, the Company acquired all of the outstanding common
stock of
FAAC Incorporated (“FAAC”). The net fair value of the assets acquired and
the liabilities assumed at the date of acquisition was as
follows:
|
Working
capital, excluding cash and cash equivalents
|
$
|
1,796,791
|
||
Property
and equipment
|
263,669
|
|||
Intangible
assets and goodwill
|
12,072,321
|
|||
14,132,781
|
||||
Issuance
of shares, net
|
(2,003,678
|
)
|
||
$
|
12,129,103
|
*) |
During
2005, an additional amount of $13,588,298 was paid to the former
shareholders of FAAC in respect of the earnout provisions of the
acquisition agreement. The additional amount was charged to
goodwill.
|
(3)
|
In
August 2004, the Company acquired all of the outstanding common stock
of
Armour of America, Incorporated (“AoA”). The net fair value of the assets
acquired and the liabilities assumed at the date of acquisition was
as
follows:
|
Working
capital, excluding cash and cash equivalents
|
$
|
3,219,728
|
||
Property
and equipment
|
997,148
|
|||
Intangible
assets and goodwill
|
13,122,646
|
|||
$
|
17,339,522
|
Tangible
assets acquired
|
$
|
2,239,848
|
||
Intangible
assets
|
||||
Customer
list
|
5,092,395
|
|||
Goodwill
|
5,192,012
|
|||
Liabilities
assumed
|
(2,379,993
|
)
|
||
Total
consideration
|
$
|
10,144,262
|
1.
|
To
determine the estimated market value of Epsilor’s net current assets,
property and equipment, and net liabilities, the “Cost Approach” was used.
According to the valuation made, the book values for the current
assets
and liabilities were reasonable proxies for their market
values.
|
2.
|
The
customer list is the asset that generates most of the Company’s sales.
Hence, the “Income Approach” was used to estimate its value, resulting in
a value of $5,092,395.
|
Tangible
assets acquired
|
$
|
4,833,553
|
||
Intangible
assets
|
||||
Technology
|
4,610,000
|
|||
Backlog
|
636,000
|
|||
Customer
list
|
1,125,000
|
|||
Trademarks
|
374,000
|
|||
Goodwill
|
19,522,343
|
|||
Liabilities
assumed
|
(2,770,843
|
)
|
||
Total
consideration
|
$
|
28,330,053
|
1.
|
To
determine the estimated fair value of FAAC’s net current assets, property
and equipment, and net liabilities, the “Cost Approach” was used.
According to the valuation made, the book values for the current
assets
and liabilities were reasonable proxies for their market
values.
|
2.
|
The
amount of the cost attributable to technology of the software,
documentation and know-how that drives the vehicle simulators and
the
high-speed missile fly-out simulators is $4,610,000 and was determined
using the “Income Approach.”
|
3.
|
FAAC’s
sales are all made on a contractual basis, most of which are over
a
relatively long period of time. At the date of the purchase FAAC
had
several signed contracts at various stages of completion. The value
of the
existing contracts was determined using the Income approach and resulting
in a value of $636,000.
|
4.
|
FAAC’s
customer list includes various branches of the U.S. military, major
defense contractors, various city and country governments and others.
Since customer relationship represent one of the most important revenue
generating assets for FAAC, its value was estimated using the Income
Approach, resulting in a value of
$1,125,000.
|
5.
|
FAAC’s
trade name value represents the name recognition value of the FAAC
brand
name as a result of advertising spending by the company. The Cost
Approach
was used to determine the value of FAAC’s trade name in the amount of
$374,000.
|
Tangible
assets acquired
|
6,346,316
|
|||
Intangible
assets
|
||||
Certifications
|
246,969
|
|||
Backlog
|
1,512,000
|
|||
Customer
relationships
|
490,000
|
|||
Tradename
/Trademark
|
70,000
|
|||
Covenants
not to compete
|
260,000
|
|||
Goodwill
|
11,757,812
|
|||
Liabilities
assumed
|
(347,770
|
)
|
||
Total
consideration
|
$
|
20,335,327
|
Year
Ended December 31,
|
|||||||
2004
|
2003
|
||||||
(Unaudited)
|
|||||||
Total
revenues
|
$
|
61,086,697
|
$
|
39,680,394
|
|||
Gross
profit
|
22,528,254
|
17,214,249
|
|||||
Net
loss
|
(5,810,114
|
)
|
(6,959,174
|
)
|
|||
Deemed
dividend of common stock attributable to certain
stockholders
|
(3,328,952
|
)
|
(350,000
|
)
|
|||
Net
loss attributable to stockholders of common stock
|
$
|
(9,139,066
|
)
|
$
|
(7,309,174
|
)
|
|
Basic
and diluted net loss per share
|
$
|
(1.83
|
)
|
$
|
(1.93
|
)
|
|
Weighted
average number of shares used in computing basic net loss per
share
|
4,995,218
|
3,783,309
|
%
|
||
Computers
and related equipment
|
33
|
|
Motor
vehicles
|
15
|
|
Office
furniture and equipment
|
6
-
10
|
|
Machinery
and equipment
|
10
- 25 (mainly 10)
|
|
Leasehold
improvements
|
By
the shorter of the term of the lease and the life of the
asset
|
Year
ended December 31,
|
||||||||||
2005
|
|
2004
|
|
2003
|
||||||
Net
loss as reported
|
$
|
(24,043,411
|
)
|
$
|
(9,042,313
|
)
|
$
|
(9,237,621
|
)
|
|
Add:
Stock-based compensation expenses included in reported net
loss
|
674,712
|
831,626
|
8,286
|
|||||||
Deduct:
Stock-based compensation expenses determined under fair value method
for
all awards
|
(2,461,787
|
)
|
(2,741,463
|
)
|
(1,237,558
|
)
|
||||
$
|
(25,830,486
|
)
|
$
|
(10,952,150
|
)
|
$
|
(10,466,893
|
)
|
||
Loss
per share:
|
||||||||||
Basic
and diluted, as reported
|
$
|
(4.09
|
)
|
$
|
(2.48
|
)
|
$
|
(3.45
|
)
|
|
Diluted,
pro forma
|
$
|
(4.40
|
)
|
$
|
(2.19
|
)
|
$
|
(3.77
|
)
|
December
31,
|
|||||||
2005
|
2004
|
||||||
Short-term:
|
|||||||
Restricted,
held to maturity, bonds in connection with FAAC earn out (Note
1.c.)(1)
|
$
|
—
|
$
|
5,969,413
|
|||
AoA
earnout (Note 1.d.)
|
1,795,850
|
—
|
|||||
Deposits
in connection with FAAC projects
|
548,973
|
650,989
|
|||||
Restricted
cash in connection with interest payment to convertible debenture
holders.
|
1,395,079
|
—
|
|||||
Other
|
157,211
|
341,708
|
|||||
Total
short-term
|
3,897,113
|
6,962,110
|
Long-term:
|
|||||||
Restricted
cash in connection with interest payment to convertible debenture
holders.
|
779,286
|
—
|
|||||
Restricted
cash in connection with AoA earn out (Note 1.d.)
|
—
|
3,000,000
|
|||||
Restricted
deposit in connection with Epsilor acquisition (Note 1.b.)
|
—
|
1,000,000
|
|||||
Total
long-term
|
779,286
|
4,000,000
|
|||||
$
|
4,676,399
|
$
|
10,962,110
|
Amortized
cost
|
Unrealized
losses
|
Estimated
fair value
|
|||||||||||||||||
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
||||||||||||||
Obligations
of States and political subdivisions
|
$
|
—
|
$
|
1,012,787
|
$
|
—
|
$
|
(1,870
|
)
|
$
|
—
|
$
|
1,010,917
|
||||||
Corporate
obligations
|
—
|
4,956,626
|
—
|
(11,966
|
)
|
—
|
4,944,660
|
||||||||||||
|
$ | — |
$
|
5,969,413
|
$
|
—
|
$
|
(13,836
|
)
|
$
|
—
|
$
|
5,955,577
|
Cost
|
Unrealized
gains
|
Estimated
fair value
|
|||||||||||||||||
2005
|
2004
|
2005
|
2004
|
2005
|
2004
|
||||||||||||||
Available
for sale marketable securities
|
$
|
32,558
|
$
|
130,061
|
$
|
3,426
|
$
|
5,507
|
$
|
35,984
|
$
|
135,568
|
December
31,
|
|||||||
2005
|
2004
|
||||||
Government
authorities
|
$
|
460,265
|
$
|
433,427
|
|||
Employees
|
65,735
|
217,948
|
|||||
Prepaid
expenses
|
1,360,589
|
490,357
|
|||||
Deferred
taxes
|
64,820
|
135,482
|
|||||
Other
|
312,922
|
62,179
|
|||||
$
|
2,264,331
|
$
|
1,339,393
|
December
31,
|
|||||||
2005
|
2004
|
||||||
Raw
and packaging materials
|
$
|
3,296,453
|
$
|
3,969,400
|
|||
Work
in progress
|
3,697,361
|
1,996,139
|
|||||
Finished
products
|
821,992
|
1,311,762
|
|||||
$
|
7,815,806
|
$
|
7,277,301
|
December
31,
|
|||||||
2005
|
2004
|
||||||
Cost:
|
|||||||
Computers
and related equipment
|
$
|
3,081,029
|
$
|
2,788,398
|
|||
Motor
vehicles
|
704,718
|
620,001
|
|||||
Office
furniture and equipment
|
786,958
|
830,621
|
|||||
Machinery,
equipment and installations
|
7,716,598
|
7,464,470
|
|||||
Leasehold
improvements
|
1,399,683
|
1,321,025
|
|||||
Demo
inventory
|
369,995
|
141,961
|
|||||
$
|
14,058,981
|
$
|
13,166,476
|
||||
Accumulated
depreciation:
|
|||||||
Computers
and related equipment
|
2,328,549
|
1,995,392
|
|||||
Motor
vehicles
|
233,745
|
163,817
|
|||||
Office
furniture and equipment
|
474,127
|
451,998
|
|||||
Machinery,
equipment and installations
|
5,729,563
|
5,143,186
|
|||||
Leasehold
improvements
|
974,666
|
811,392
|
|||||
Demo
inventory
|
65,400
|
—
|
|||||
9,806,050
|
8,565,785
|
||||||
Depreciated
cost
|
$
|
4,252,931
|
$
|
4,600,691
|
Year
ended December 31,
|
|||||||
2005
|
2004
|
||||||
Cost:
|
|||||||
Technology
|
$
|
6,841,746
|
$
|
6,841,746
|
|||
Capitalized
software costs
|
1,226,579
|
574,967
|
|||||
Backlog
|
2,194,000
|
2,194,000
|
|||||
Covenants
not to compete
|
359,000
|
359,000
|
|||||
Customer
list
|
7,548,645
|
7,548,645
|
|||||
Certification
|
246,969
|
246,969
|
|||||
18,416,939
|
17,765,327
|
||||||
Exchange
differences
|
(171,587
|
)
|
125,455
|
||||
Less
- accumulated amortization
|
(7,267,630
|
)
|
(4,070,802
|
)
|
|||
Less
- impairment
|
(819,223
|
)
|
(320,279
|
)
|
|||
Amortized
cost
|
10,158,499
|
13,499,701
|
|||||
Trademarks
|
869,000
|
869,000
|
|||||
$
|
11,027,499
|
$
|
14,368,701
|
Year
ended December 31,
|
||||
2006
|
$
|
1,825,331
|
||
2007
|
1,381,883
|
|||
2008
|
1,276,075
|
|||
2009
|
1,235,632
|
|||
2010
and forward
|
3,467,873
|
|||
$
|
9,186,794
|
December
31,
|
|||||||
2005
|
2004
|
||||||
Employees
and payroll accruals
|
$
|
1,443,154
|
$
|
1,534,295
|
|||
Accrual
for expected loss
|
485,877
|
—
|
|||||
Accrued
vacation pay
|
504,342
|
469,527
|
|||||
Accrued
expenses
|
1,788,558
|
1,770,348
|
|||||
Minority
balance
|
172,871
|
243,116
|
|||||
Government
authorities
|
439,975
|
1,036,669
|
|||||
Advances
from customers
|
795,331
|
746,819
|
|||||
Other
|
—
|
17,414
|
|||||
$
|
5,630,108
|
$
|
5,818,188
|
Year
ended December 31
|
||||
2006
|
$
|
826,367
|
||
2007
|
$
|
685,552
|
||
2008
|
$
|
213,909
|
||
2009
|
$
|
103,715
|
||
2010
|
$
|
96,840
|
2005
|
2004
|
2003
|
|||||||||||||||||
Amount
|
Weighted
average
exercise
price
|
Amount
|
Weighted
average
exercise
price
|
Amount
|
Weighted
average
exercise
price
|
||||||||||||||
$
|
$
|
$
|
|||||||||||||||||
Options
outstanding at be-ginning of year
|
703,912
|
$
|
16.66
|
644,166
|
$
|
19.18
|
375,741
|
$
|
31.64
|
||||||||||
Changes
during year:
|
|||||||||||||||||||
Granted
(1) (2) (3)
|
121,096
|
$
|
7.70
|
160,606
|
$
|
14.84
|
376,019
|
$
|
9.94
|
||||||||||
Exercised
|
(1,130
|
)
|
$
|
15.26
|
(64,089
|
)
|
$
|
17.36
|
(49,260
|
)
|
$
|
8.96
|
|||||||
Forfeited
(3)
|
(163,524
|
)
|
$
|
26.46
|
(36,771
|
)
|
$
|
52.78
|
(58,334
|
)
|
$
|
49.14
|
|||||||
Repriced
(3)
|
|||||||||||||||||||
Old
exercise price
|
(207,980
|
)
|
$
|
15.40
|
—
|
—
|
—
|
—
|
|||||||||||
New
exercise price
|
207,980
|
$
|
5.46
|
—
|
—
|
—
|
—
|
||||||||||||
Options
outstanding at end of year
|
660,354
|
$
|
9.38
|
703,912
|
$
|
16.66
|
644,166
|
$
|
19.18
|
||||||||||
Options
exercisable at end of year
|
583,070
|
$
|
9.80
|
461,808
|
$
|
18.48
|
416,181
|
$
|
23.80
|
Total
options outstanding
|
Exercisable
options outstanding(1)
|
|||||||||||||||
Range
of
exercise
prices
|
Amount
outstanding
at
December
31,
2005
|
Weighted
average
remaining
contractual
life
|
Weighted
average
exercise
price
|
Amount
exercisable
at
December
31, 2005
|
Weighted
average
exercise
price
|
|||||||||||
$
|
Years
|
$
|
$
|
|||||||||||||
0.01–2.00
|
630,954
|
5.10
|
7.42
|
562,003
|
7.98
|
|||||||||||
2.01–4.00
|
16,186
|
3.43
|
34.30
|
7,853
|
35.00
|
|||||||||||
4.01–6.00
|
12,143
|
4.05
|
69.02
|
12,143
|
69.02
|
|||||||||||
6.01–8.00
|
357
|
1.86
|
91.00
|
357
|
91.00
|
|||||||||||
8.01
|
714
|
1.75
|
126.84
|
714
|
126.84
|
|||||||||||
660,354
|
5.04
|
9.38
|
583,070
|
9.80
|
Equals
market price
|
Less
than market price
|
||||||||||||||||||
Year
ended December 31,
|
Year
ended December 31,
|
||||||||||||||||||
2005
|
2004
|
2003
|
2005
|
2004
|
2003
|
||||||||||||||
Weighted
average exercise prices
|
$
|
7.00
|
$
|
20.916
|
$
|
13.30
|
$
|
—
|
$
|
23.408
|
$
|
—
|
|||||||
Weighted
average fair value on grant date
|
$
|
3.64
|
$
|
14.028
|
$
|
10.22
|
$
|
—
|
$
|
24.206
|
$
|
—
|
2005
|
2004
|
2003
|
|||||||||||||||||
Amount
|
Weighted
average exercise price
|
Amount
|
Weighted
average exercise price
|
Amount
|
Weighted
average exercise price
|
||||||||||||||
$
|
$
|
$
|
|||||||||||||||||
Options
outstanding at beginning of year
|
11,878
|
$
|
53.20
|
22,422
|
$
|
64.26
|
17,556
|
$
|
77.70
|
||||||||||
Changes
during year:
|
|||||||||||||||||||
Granted
|
—
|
$
|
—
|
714
|
$
|
—
|
5,937
|
$
|
13.86
|
||||||||||
Exercised
|
—
|
$
|
—
|
(2,687
|
)
|
$
|
14.42
|
(1,071
|
)
|
$
|
6.86
|
||||||||
Forfeited
or cancelled
|
—
|
$
|
—
|
(8,571
|
)
|
$
|
89.60
|
—
|
$
|
—
|
|||||||||
Options
outstanding at end of year
|
11,878
|
$
|
53.20
|
11,878
|
$
|
53.20
|
22,422
|
$
|
64.26
|
||||||||||
Options
exercisable at end of year
|
11,878
|
$
|
53.20
|
11,878
|
$
|
53.20
|
13,850
|
$
|
48.44
|
2005
|
2004
|
2003
|
||||||||
Dividend
yield
|
—
|
0
|
%
|
0
|
%
|
|||||
Expected
volatility
|
—
|
81
|
%
|
78
|
%
|
|||||
Risk-free
interest
|
—
|
3.4
|
%
|
2.3
|
%
|
|||||
Contractual
life of up to
|
—
|
5
years
|
10
years
|
December
31,
|
|||||||
2005
|
2004
|
||||||
Operating
loss carryforward (1)
|
$
|
32,326,283
|
$
|
32,532,998
|
|||
Reserve
and allowance
|
2,222,333
|
1,328,479
|
|||||
Net
deferred tax asset before valuation allowance
|
34,548,616
|
33,861,477
|
|||||
Valuation
allowance
|
(34,483,796
|
)
|
(33,725,995
|
)
|
|||
Total
deferred tax asset
|
$
|
64,820
|
$
|
135,482
|
|||
Deferred
tax liability
|
$
|
-
|
$
|
51,366
|
December
31,
|
|||||||
2005
|
2004
|
||||||
Domestic
|
$
|
8,981,133
|
$
|
7,703,459
|
|||
Foreign
|
23,345,150
|
24,829,539
|
|||||
$
|
32,326,283
|
$
|
32,532,998
|
Year
ended December 31
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Domestic
|
$
|
21,473,366
|
$
|
8,006,205
|
$
|
7,411,121
|
||||
Foreign
|
2,269,522
|
405,305
|
1,697,617
|
|||||||
$
|
23,742,888
|
$
|
8,411,510
|
$
|
9,108,738
|
Year
ended December 31
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Current
state and local taxes
|
$
|
83,365
|
$
|
539,674
|
$
|
44,102
|
||||
Deferred
taxes
|
14,345
|
(37,857
|
)
|
—
|
||||||
Taxes
in respect of prior years
|
139,962
|
84,292
|
352,091
|
|||||||
$
|
237,672
|
$
|
586,109
|
$
|
396,193
|
|||||
Domestic
|
$
|
153,950
|
$
|
163,087
|
$
|
33,020
|
||||
Foreign
|
83,722
|
423,022
|
363,173
|
|||||||
$
|
237,672
|
$
|
586,109
|
$
|
396,193
|
Year
ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Loss
from continuing operations before taxes, as reported in the consolidated
statements of income
|
$
|
(23,742,888
|
)
|
$
|
(8,411,510
|
)
|
$
|
(9,108,738
|
)
|
|
Statutory
tax rate
|
34
|
%
|
34
|
%
|
34
|
%
|
||||
Theoretical
income tax on the above amount at the U.S. statutory tax
rate
|
$
|
(8,072,582
|
)
|
$
|
(2,859,914
|
)
|
$
|
(3,096,971
|
)
|
|
Deferred
taxes on losses for which valuation allowance was provided
|
1,611,971
|
556,692
|
1,146,754
|
|||||||
Non-deductible
expenses
|
5,669,144
|
1,629,874
|
1,873,129
|
|||||||
State
taxes
|
67,470
|
168,081
|
33,020
|
|||||||
Accrual
for deferred taxes on undistributed earnings
|
(49,328
|
)
|
49,416
|
—
|
||||||
Foreign
income in tax rates other then U.S rate
|
897,617
|
919,895
|
86,954
|
|||||||
Taxes
in respect of prior years
|
139,963
|
84,292
|
352,091
|
|||||||
Others
|
(26,583
|
)
|
37,773
|
1,216
|
||||||
Actual
tax expense
|
$
|
237,672
|
$
|
586,109
|
$
|
396,193
|
Year
ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Financial
expenses:
|
||||||||||
Interest,
bank charges and fees
|
$
|
(1,473,799
|
)
|
$
|
(622,638
|
)
|
$
|
(355,111
|
)
|
|
Amortization
of compensation related to warrants issued to the holders of convertible
debentures and beneficial conversion feature
|
(1,702,753
|
)
|
(4,142,109
|
)
|
(3,928,237
|
)
|
||||
Bonds
premium amortization
|
(47,734
|
)
|
(202,467
|
)
|
—
|
|||||
Foreign
currency translation differences
|
(54,840
|
)
|
(71,891
|
)
|
115,538
|
|||||
(3,279,126
|
)
|
(5,039,105
|
)
|
(4,167,810
|
)
|
|||||
Financial
income:
|
||||||||||
Interest
|
192,771
|
443,182
|
129,101
|
|||||||
Realized
gain from marketable securities sale
|
2,863
|
40,119
|
—
|
|||||||
Financial
income in connection with warrants granted (Note 12.d. and
13.f.3.)
|
377,803
|
326,839
|
—
|
|||||||
Total
|
$
|
(2,705,689
|
)
|
$
|
(4,228,965
|
)
|
$
|
(4,038,709
|
)
|
Simulation
and Training
|
Armor
|
Battery
and
Power
Systems
|
All
Others(4)
|
Total
|
||||||||||||
2005
|
||||||||||||||||
Revenues
from outside customers
|
$
|
26,805,772
|
$
|
12,322,678
|
$
|
9,916,145
|
$
|
—
|
$
|
49,044,595
|
||||||
Depreciation
, amortization and impairment expenses (1)
|
(1,645,057
|
)
|
(14,043,019
|
)
|
(909,463
|
)
|
(229,626
|
)
|
(16,827,165
|
)
|
||||||
Direct
expenses (2)
|
(21,967,755
|
)
|
(13,955,199
|
)
|
(9,757,402
|
)
|
(7,752,865
|
)
|
(53,433,221
|
)
|
||||||
Segment
net income (loss)
|
$
|
3,192,960
|
$
|
(15,675,540
|
)
|
$
|
(750,720
|
)
|
$
|
(7,982,491
|
)
|
(21,215,791
|
)
|
|||
Financial
expenses (after deduction of minority interest)
|
(2,707,620
|
)
|
||||||||||||||
Net
loss from continuing operations
|
$
|
(23,923,411
|
)
|
|||||||||||||
Segment
assets (3)
(4)
|
$
|
32,741,946
|
$
|
7,185,010
|
$
|
12,040,415
|
$
|
688,023
|
$
|
52,655,394
|
||||||
2004
|
||||||||||||||||
Revenues
from outside customers
|
$
|
21,464,406
|
$
|
17,988,687
|
$
|
10,500,753
|
$
|
—
|
$
|
49,953,846
|
||||||
Depreciation
, amortization and impairment expenses (1)
|
(1,983,822
|
)
|
(1,755,847
|
)
|
(1,132,953
|
)
|
(135,613
|
)
|
(5,008,235
|
)
|
||||||
Direct
expenses (2)
|
(17,910,967
|
)
|
(16,444,476
|
)
|
(9,974,544
|
)
|
(5,431,627
|
)
|
(49,761,614
|
)
|
||||||
Segment
net income (loss)
|
$
|
1,569,617
|
$
|
(211,636
|
)
|
$
|
(606,744
|
)
|
$
|
(5,567,240
|
)
|
(4,816,003
|
)
|
|||
Financial
expenses (after deduction of minority interest)
|
(4,226,310
|
)
|
||||||||||||||
Net
loss from continuing operations
|
$
|
(9,042,313
|
)
|
|||||||||||||
Segment
assets (3)
|
$
|
1,872,943
|
$
|
5,819,266
|
$
|
3,455,188
|
$
|
730,595
|
$
|
11,877,992
|
||||||
2003
|
||||||||||||||||
Revenues
from outside customers
|
$
|
8,022,026
|
$
|
3,435,716
|
$
|
5,868,899
|
$
|
—
|
$
|
17,326,641
|
||||||
Depreciation
expenses and amortization
|
(757,997
|
)
|
(169,668
|
)
|
(527,775
|
)
|
(139,630
|
)
|
(1,595,070
|
)
|
||||||
Direct
expenses (2)
|
(7,308,649
|
)
|
(3,584,284
|
)
|
(5,945,948
|
)
|
(4,200,770
|
)
|
(21,039,651
|
)
|
||||||
Segment
net income (loss)
|
$
|
(44,620
|
)
|
$
|
(318,236
|
)
|
$
|
(604,824
|
)
|
$
|
(4,340,400
|
)
|
(5,308,080
|
)
|
||
Financial
expenses (after deduction of minority interest)
|
(4,039,951
|
)
|
||||||||||||||
Net
loss from continuing operations
|
$
|
(9,348,031
|
)
|
|||||||||||||
Segment
assets (3)
|
$
|
898,271
|
$
|
730,291
|
$
|
2,128,062
|
$
|
450,864
|
$
|
4,207,488
|
(1) |
Includes
depreciation of property and equipment, amortization expenses of
intangible assets and impairment of goodwill and other intangible
assets
in the amount of $12,256,756 and $320,279 in the years 2005 and 2004,
respectively.
|
(2) |
Including,
inter
alia,
sales and marketing, general and administrative and tax
expenses.
|
(3) |
Consisting
of property and equipment, inventory and intangible
assets.
|
(4) |
Out
of those amounts, goodwill in the Company’s Simulation and Training,
Battery and Power Systems and Armor Divisions stood at $23,605,069,
$4,968,675 and $985,413 as of December 31, 2005, respectively, and
$22,845,372, $5,308,917 and $11,591,227 as of December 31, 2004,
respectively.
|
2005
|
2004
|
2003
|
|||||||||||||||||
Total
revenues
|
Long-lived
assets
|
Total
revenues
|
Long-lived
assets
|
Total
revenues
|
Long-lived
assets
|
||||||||||||||
U.S.
dollars
|
|||||||||||||||||||
U.S.A.
|
$
|
38,953,462
|
$
|
32,840,172
|
$
|
40,656,729
|
$
|
45,154,086
|
$
|
10,099,652
|
$
|
6,778,050
|
|||||||
Germany
|
188,635
|
—
|
319,110
|
—
|
2,836,725
|
—
|
|||||||||||||
England
|
931,008
|
—
|
344,261
|
—
|
29,095
|
—
|
|||||||||||||
Thailand
|
—
|
—
|
—
|
—
|
95,434
|
—
|
|||||||||||||
India
|
1,723,031
|
—
|
3,061,705
|
—
|
—
|
—
|
|||||||||||||
Israel
|
5,700,267
|
11,999,415
|
4,212,408
|
13,560,822
|
3,576,139
|
2,954,441
|
|||||||||||||
Other
|
1,548,192
|
—
|
1,359,633
|
—
|
689,596
|
—
|
|||||||||||||
$
|
49,044,595
|
$
|
44,839,587
|
$
|
49,953,846
|
$
|
58,714,908
|
$
|
17,326,641
|
$
|
9,732,491
|
Year
ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
%
|
||||||||||
Batteries
and power systems:
|
||||||||||
Customer
A
|
7
|
%
|
8
|
%
|
27
|
%
|
||||
Armor:
|
||||||||||
Customer
B
|
5
|
%
|
4
|
%
|
17
|
%
|
||||
Customer
C
|
9
|
%
|
24
|
%
|
—
|
|||||
Simulation
and Training:
|
||||||||||
Customer
D
|
24
|
%
|
13
|
%
|
—
|
|||||
Customer
E
|
—
|
1
|
%
|
16
|
%
|
Year
ended December 31,
|
||||||||||
2005
|
2004
|
2003
|
||||||||
Electric
vehicle
|
$
|
205,485
|
$
|
232,394
|
$
|
408,161
|
||||
Water
activated batteries
|
1,181,114
|
921,533
|
703,084
|
|||||||
Military
batteries
|
8,515,329
|
9,324,247
|
4,757,116
|
|||||||
Car
and aircraft armoring
|
12,322,679
|
17,988,686
|
3,435,715
|
|||||||
Simulators
|
26,785,772
|
21,414,968
|
7,961,302
|
|||||||
Other
|
34,216
|
72,018
|
61,263
|
|||||||
Total
|
$
|
49,044,595
|
$
|
49,953,846
|
$
|
17,326,641
|
Quarter
Ended*
|
|||||||||||||
2005
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||
Net
revenue
|
$
|
10,387,445
|
$
|
12,236,910
|
$
|
11,189,675
|
$
|
15,230,565
|
|||||
Gross
profit
|
$
|
4,015,570
|
$
|
3,627,634
|
$
|
2,756,392
|
$
|
4,261,263
|
|||||
Net
profit (loss) from continuing operations
|
$
|
(2,456,500
|
)
|
$
|
(5,422,514
|
)
|
$
|
(12,708,932
|
)
|
$
|
(3,335,465
|
)
|
|
Net
profit (loss) from discontinued operations
|
$
|
—
|
$
|
(200,000
|
)
|
$
|
—
|
$
|
80,000
|
||||
Net
profit (loss) for the period
|
$
|
(2,456,500
|
)
|
$
|
(5,622,514
|
)
|
$
|
(12,708,932
|
)
|
$
|
(3,255,465
|
)
|
|
Deemed
dividend to certain stockholders of common stock
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Net
loss attributable to common stockholders
|
$
|
(2,456,500
|
)
|
$
|
(5,622,514
|
)
|
$
|
(12,708,932
|
)
|
$
|
(3,255,465
|
)
|
|
Net
profit (loss) per share - basic and diluted
|
$
|
(0.43
|
)
|
$
|
(0.97
|
)
|
$
|
(2.16
|
)
|
$
|
(0.53
|
)
|
|
Shares
used in per share calculation
|
5,721,578
|
5,770,011
|
5,891,127
|
6,103,348
|
Quarter
Ended
|
|||||||||||||
2004
|
March
31
|
June
30
|
September
30
|
December
31
|
|||||||||
Net
revenue
|
$
|
7,182,254
|
$
|
9,928,248
|
$
|
16,272,521
|
$
|
16,570,823
|
|||||
Gross
profit
|
$
|
2,625,034
|
$
|
3,353,501
|
$
|
4,723,573
|
$
|
5,240,644
|
|||||
Net
profit (loss) from continuing operations
|
$
|
(2,517,889
|
)
|
$
|
(4,396,123
|
)
|
$
|
1,126,845
|
$
|
(3,255,146
|
)
|
||
Net
loss from discontinued operations
|
$
|
—
|
$
|
—
|
$
|
—
|
$
|
—
|
|||||
Net
profit (loss) for the period
|
$
|
(2,517,889
|
)
|
$
|
(4,396,123
|
)
|
$
|
1,126,845
|
$
|
(3,255,146
|
)
|
||
Deemed
dividend to certain stockholders of common stock
|
$
|
(1,163,000
|
)
|
$
|
—
|
$
|
(2,165,952
|
)
|
$
|
—
|
|||
Net
loss attributable to common stockholders
|
$
|
(3,680,889
|
)
|
$
|
(4,396,123
|
)
|
$
|
(1,039,107
|
)
|
$
|
(3,255,146
|
)
|
|
Net
profit (loss) per share - basic and diluted
|
$
|
(0.87
|
)
|
$
|
(0.95
|
)
|
$
|
(0.19
|
)
|
$
|
(0.58
|
)
|
|
Shares
used in per share calculation
|
4,243,319
|
4,607,078
|
5,481,732
|
5,648,227
|
Description
|
Balance
at
beginning
of
period
|
Additions
charged
to costs
and
expenses
|
Balance
at
end
of period
|
|||||||
Year
ended December 31, 2005
|
||||||||||
Allowance
for doubtful accounts
|
$
|
55,394
|
$
|
120,786
|
$
|
176,180
|
||||
Allowance
for slow moving inventory
|
217,672
|
1,062,336
|
1,280,008
|
|||||||
Valuation
allowance for deferred taxes
|
33,725,995
|
757,801
|
34,483,796
|
|||||||
Totals
|
$
|
33,999,061
|
$
|
1,940,923
|
$
|
35,939,984
|
||||
Year
ended December 31, 2004
|
||||||||||
Allowance
for doubtful accounts
|
$
|
61,282
|
$
|
(5,888
|
)
|
$
|
55,394
|
|||
Allowance
for slow moving inventory
|
96,350
|
121,322
|
217,672
|
|||||||
Valuation
allowance for deferred taxes
|
34,801,887
|
(1,075,892
|
)
|
33,725,995
|
||||||
Totals
|
$
|
34,959,519
|
$
|
(960,458
|
)
|
$
|
33,999,061
|
|||
Year
ended December 31, 2003
|
||||||||||
Allowance
for doubtful accounts
|
$
|
40,636
|
$
|
20,646
|
$
|
61,282
|
||||
Allowance
for slow moving inventory
|
—
|
96,350
|
96,350
|
|||||||
Valuation
allowance for deferred taxes
|
29,560,322
|
5,241,565
|
34,801,887
|
|||||||
Totals
|
$
|
29,600,958
|
$
|
5,358,561
|
$
|
34,959,519
|
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT
SCHEDULES
|
(1)
|
Financial
Statements - See Index to Financial Statements on page 2
above.
|
(2)
|
Financial
Statements Schedules - Schedule II - Valuation and Qualifying Accounts.
All schedules other than those listed above are omitted because of
the
absence of conditions under which they are required or because the
required information is presented in the financial statements or
related
notes thereto.
|
(3)
|
Exhibits
- The following Exhibits are filed
herewith:
|
Exhibit
No.
|
Description
|
|
23.1
|
Consent
of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young
Global
|
|
23.2
|
Consent
of Stark Winter Schenkein & Co., LLP
|
|
31.1
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
AROTECH CORPORATION | ||
|
|
|
By: | /s/ Robert S. Ehrlich | |
Name: Robert S. Ehrlich |
||
Title: Chairman and Chief Executive Officer |
Signature
|
Title
|
Date
|
||
/s/
Robert S. Ehrlich
|
Chairman
Chief Executive Officer and Director
|
July
24, 2006
|
||
Robert
S. Ehrlich
|
(Principal
Executive Officer)
|
|||
/s/
Thomas J. Paup
|
Vice
President - Finance
|
July
24, 2006
|
||
Thomas
J. Paup
|
(Principal
Financial Officer)
|
|
||
July
24, 2006
|
||||
/s/
Danny Waldner
|
Controller
|
|||
Danny
Waldner
|
(Principal
Accounting Officer)
|
|||
/s/
Steven Esses
|
President,
Chief Operating Officer
|
July
24, 2006
|
||
Steven
Esses
|
and
Director
|
|||
/s/
Jay M. Eastman
|
Director
|
July
24, 2006
|
||
Dr.
Jay M. Eastman
|
||||
/s/
Lawrence M. Miller
|
Director
|
July
24, 2006
|
||
Lawrence
M. Miller
|
||||
/s/
Jack E. Rosenfeld
|
Director
|
July
24, 2006
|
||
Jack
E. Rosenfeld
|
||||
/s/
Edward J. Borey
|
Director
|
July
24, 2006
|
||
Edward
J. Borey
|
||||
/s/
Seymour Jones
|
Director
|
July
24, 2006
|
||
Seymour
Jones
|
Exhibit
Number
|
Description
|
|
23.1
|
Consent
of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young
Global
|
|
23.2
|
Consent
of Stark Winter Schenkein & Co., LLP
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Principal Executive Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of Principal Financial Officer pursuant to 18 U.S.C. Section 1350,
as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|