OMB
APPROVAL
|
|
OMB
Number: 3235-0070
Expires:
January
31, 2008
Estimated
average burden
hours
per response....192.00
|
x |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March
31, 2006.
|
AROTECH
CORPORATION
|
(Exact
name of registrant as specified in its
charter)
|
Delaware
|
95-4302784
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
1229
Oak Valley Drive, Ann Arbor, Michigan
|
48108
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(800)
281-0356
|
(Registrant’s
telephone number, including area
code)
|
354
Industry Drive, Auburn, Alabama 36830
|
(Former
address, if changed since last
report)
|
Large
accelerated filer: £
|
Accelerated
filer: T
|
Non-accelerated
filer: £
|
PART I - FINANCIAL INFORMATION | |||
Item
1 -Financial Statements:
|
|||
Consolidated
Balance Sheets at March 31, 2006 and December 31, 2005
|
3
|
||
Consolidated
Statements of Operations for the Three Months Ended March 31, 2006
and
2005
|
5
|
||
Consolidated
Statements of Changes in Stockholders’ Equity during the Three-Month
Period Ended March 31, 2006
|
6
|
||
Consolidated
Statements of Cash Flows for the Three Months Ended March 31, 2006
and
2005
|
7
|
||
Note
to the Interim Consolidated Financial Statements
|
9
|
||
PART II - OTHER INFORMATION | |||
Item
6 - Exhibits
|
20
|
||
SIGNATURES |
21
|
March
31, 2006
|
December
31, 2005
|
||||||
ASSETS
|
(Unaudited)
|
||||||
CURRENT
ASSETS:
|
|||||||
Cash
and cash equivalents
|
$
|
5,311,913
|
$
|
6,150,652
|
|||
Restricted
collateral deposits
|
6,809,420
|
3,897,113
|
|||||
Available-for-sale
marketable securities
|
35,899
|
35,984
|
|||||
Trade
receivables (net of allowance for doubtful accounts in the amount
of
$158,142 and $176,180 as of March 31, 2006 and December 31, 2005,
respectively)
|
7,757,463
|
11,747,876
|
|||||
Unbilled
receivables
|
5,316,019
|
5,228,504
|
|||||
Other
accounts receivable and prepaid expenses
|
1,949,638
|
2,114,331
|
|||||
Inventories
|
7,580,417
|
7,815,806
|
|||||
Total
current assets
|
34,760,769
|
36,990,266
|
|||||
SEVERANCE
PAY FUND
|
2,134,487
|
2,072,034
|
|||||
RESTRICTED
DEPOSITS
|
525,245
|
779,286
|
|||||
PROPERTY
AND EQUIPMENT, NET
|
3,990,190
|
4,252,931
|
|||||
INVESTMENT
IN AFFILIATED COMPANY
|
75,972
|
37,500
|
|||||
OTHER
INTANGIBLE ASSETS, NET
|
10,641,740
|
11,027,499
|
|||||
GOODWILL
|
29,481,061
|
29,559,157
|
|||||
$
|
81,609,464
|
$
|
84,718,673
|
March
31, 2006
|
December
31, 2005
|
||||||
(Unaudited)
|
|||||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|||||||
CURRENT
LIABILITIES:
|
|||||||
Trade
payables
|
$
|
2,917,518
|
$
|
5,830,820
|
|||
Other
accounts payable and accrued expenses
|
4,905,004
|
5,586,061
|
|||||
Current
portion of promissory notes due to purchase of
subsidiaries
|
453,764
|
453,764
|
|||||
Short-term
bank loans and current portion of long-term loans
|
1,892,771
|
2,036,977
|
|||||
Deferred
revenues
|
1,122,440
|
603,022
|
|||||
Convertible
debenture
|
9,512,011
|
11,492,238
|
|||||
Liability
in connection with warrants issuance
|
784,266
|
44,047
|
|||||
Liabilities
of discontinued operation
|
—
|
120,000
|
|||||
Total
current liabilities
|
21,587,774
|
26,166,929
|
|||||
LONG
TERM LIABILITIES
|
|||||||
Accrued
severance pay
|
3,860,040
|
3,657,328
|
|||||
Convertible
debenture
|
8,590,454
|
8,590,233
|
|||||
Total
long-term liabilities
|
12,450,494
|
12,247,561
|
|||||
MINORITY
INTEREST
|
16,754
|
38,927
|
|||||
SHAREHOLDERS’
EQUITY:
|
|||||||
Share
capital -
|
|||||||
Common
stock - $0.01 par value each;
|
|||||||
Authorized:
250,000,000 shares as of March 31, 2006 and December 31, 2005; Issued:
7,307,566 shares as of March 31, 2006 and 6,221,193
shares as of December 31, 2005; Outstanding - 7,267,900
shares
as of March 31, 2006 and 6,181,527
shares
as of December 31, 2005
|
1,023,062
|
870,969
|
|||||
Preferred
shares - $0.01 par value each;
|
|||||||
Authorized:
1,000,000 shares as of March
31, 2006
and December 31, 2005; No shares issued and outstanding as of March
31, 2006
and December 31, 2005
|
—
|
—
|
|||||
Additional
paid-in capital
|
199,618,737
|
193,560,579
|
|||||
Accumulated
deficit
|
(147,210,412
|
)
|
(142,996,964
|
)
|
|||
Treasury
stock, at cost (common stock - 39,666 shares as of March
31, 2006
and December 31, 2005)
|
(3,537,106
|
)
|
(3,537,106
|
)
|
|||
Notes
receivable from stockholders
|
(1,845,047
|
)
|
(1,256,777
|
)
|
|||
Accumulated
other comprehensive loss
|
(494,792
|
)
|
(375,445
|
)
|
|||
Total
shareholders’ equity
|
47,554,442
|
46,265,256
|
|||||
$
|
81,609,464
|
$
|
84,718,673
|
Three
months ended March 31,
|
|||||||
2006
|
2005
|
||||||
Revenues
|
$
|
8,896,412
|
$
|
10,387,445
|
|||
Cost
of revenues
|
6,652,752
|
6,371,874
|
|||||
Gross
profit
|
2,243,660
|
4,015,571
|
|||||
Operating
expenses:
|
|||||||
Research
and development
|
304,612
|
414,678
|
|||||
Selling
and marketing
|
899,268
|
1,158,820
|
|||||
General
and administrative
|
3,102,536
|
3,356,412
|
|||||
Amortization
of intangible assets
|
510,692
|
823,088
|
|||||
Impairment
of intangible assets
|
204,059
|
—
|
|||||
Total
operating costs and expenses
|
5,021,167
|
5,752,998
|
|||||
Operating
loss
|
(2,777,507
|
)
|
(1,737,427
|
)
|
|||
Other
income
|
17,506
|
—
|
|||||
Financial
expenses, net
|
(1,461,136
|
)
|
(468,855
|
)
|
|||
Loss
before minority interest in loss (earnings) of subsidiaries, earnings
from
affiliated company and tax expenses
|
(4,221,137
|
)
|
(2,206,282
|
)
|
|||
Income
taxes
|
(39,972
|
)
|
(217,264
|
)
|
|||
Earnings
from affiliated company
|
38,472
|
—
|
|||||
Minority
interest in loss (earnings) of subsidiaries
|
9,189
|
(32,954
|
)
|
||||
Net
loss
|
$
|
(4,213,448
|
)
|
$
|
(2,456,500
|
)
|
|
Deemed
dividend to certain stockholders
|
$
|
(317,207
|
)
|
$
|
—
|
||
Net
loss attributable to common stockholders
|
$
|
(4,530,655
|
)
|
$
|
(2,456,500
|
)
|
|
Basic
and diluted net loss per share from continuing operations
|
$
|
(0.70
|
)
|
$
|
(0.43
|
)
|
|
Basic
and diluted net loss per share
|
$
|
(0.70
|
)
|
$
|
(0.43
|
)
|
|
Weighted
average number of shares used in computing basic net loss per
share
|
6,480,162
|
5,721,578
|
Common
Stock
|
||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Additional
paid-in
capital
|
Accumulated
deficit
|
Treasury
stock
|
Notes
receivable
from
shareholders
|
Accumulated
other
comprehensive
income
(loss)
|
Total
comprehensive
loss
|
Total
|
|||||||||||||||||||
BALANCE
AT JANUARY 1, 2006 - NOTE 1
|
6,221,193
|
$
|
870,969
|
$
|
193,560,579
|
$
|
(142,996,964
|
)
|
$
|
(3,537,106
|
)
|
$
|
(1,256,777
|
)
|
$
|
(375,445
|
)
|
$
|
–
|
$
|
46,265,256
|
|||||||
CHANGES
DURING THE THREE-MONTH
PERIOD ENDED MARCH 31, 2006
|
||||||||||||||||||||||||||||
Principal
installment of convertible debenture payment in shares
|
444,005
|
62,161
|
2,908,414
|
–
|
–
|
–
|
–
|
–
|
2,970,575
|
|||||||||||||||||||
Warrants
exercise, net
|
642,368
|
89,932
|
2,907,585
|
–
|
–
|
(577,051
|
)
|
–
|
–
|
2,420,466
|
||||||||||||||||||
Amortization
of deferred stock compensation
|
–
|
–
|
230,940
|
–
|
–
|
–
|
–
|
–
|
230,940
|
|||||||||||||||||||
Interest
accrued on notes receivable from shareholders
|
–
|
–
|
11,219
|
–
|
–
|
(11,219
|
)
|
–
|
–
|
–
|
||||||||||||||||||
Other
comprehensive loss – foreign currency translation
adjustment
|
–
|
–
|
–
|
–
|
–
|
–
|
(119,740
|
)
|
(119,740
|
)
|
(119,740
|
)
|
||||||||||||||||
Other
comprehensive loss – unrealized gain on available for sale marketable
securities
|
–
|
–
|
–
|
–
|
–
|
–
|
393
|
393
|
393
|
|||||||||||||||||||
Net
loss
|
–
|
–
|
–
|
(4,213,448
|
)
|
–
|
–
|
–
|
(4,213,448
|
)
|
(4,213,448
|
)
|
||||||||||||||||
Total
comprehensive loss
|
–
|
–
|
–
|
–
|
–
|
–
|
–
|
$
|
(4,332,795
|
)
|
–
|
|||||||||||||||||
BALANCE
AT MARCH
31, 2006–
UNAUDITED
|
7,307,566
|
$
|
1,023,062
|
$
|
199,618,737
|
$
|
(147,210,412
|
)
|
$
|
(3,537,106
|
)
|
$
|
(1,845,047
|
)
|
$
|
(494,792
|
)
|
$
|
47,554,442
|
Three
months ended March 31,
|
|||||||
2006
|
2005
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
Net
loss for the period before deemed dividend to certain stockholders
of
common stock
|
$
|
(4,213,448
|
)
|
$
|
(2,456,500
|
)
|
|
Adjustments
required to reconcile net loss to net cash used in operating
activities:
|
|||||||
Depreciation
|
380,078
|
298,110
|
|||||
Amortization
of intangible assets, capitalized software costs and impairment
of
intangible assets
|
745,528
|
853,798
|
|||||
Amortization
of compensation related to warrants issued to the holders of
convertible
debentures and beneficial conversion feature
|
483,609
|
392,543
|
|||||
Financial
expenses in connection with convertible debenture principal
repayment
|
506,960
|
–
|
|||||
Amortization
of deferred expenses related to convertible debenture
issuance
|
242,846
|
12,128
|
|||||
Remeasurement
of liability in connection with warrants granted
|
(35,270
|
)
|
–
|
||||
Stock-based
compensation due to shares granted and to be granted to consultants
and
shares granted as a donation
|
–
|
58,560
|
|||||
Stock
based compensation due to options and shares granted to
employees
|
230,941
|
232,739
|
|||||
Adjustment
of stock based compensation related to non-recourse note granted
to
stockholder
|
–
|
(11,500
|
)
|
||||
Earnings
(loss) to minority
|
(9,189
|
)
|
32,954
|
||||
Share
in earnings of affiliated company
|
(38,472
|
)
|
–
|
||||
Interest
expenses accrued on promissory notes issued to purchase of
subsidiary
|
–
|
2,442
|
|||||
Interest
accrued on certificates of deposit due within one year
|
–
|
(58,188
|
)
|
||||
Amortization
of premium related to restricted securities
|
–
|
38,794
|
|||||
Liability
for employee rights upon retirement, net
|
115,997
|
57,666
|
|||||
Write-off
of inventory
|
70,577
|
–
|
|||||
Decrease
in deferred tax assets
|
7,564
|
72,624
|
|||||
Changes
in operating asset and liability items:
|
|||||||
Decrease
in trade receivables and notes receivable
|
3,967,096
|
1,822,948
|
|||||
Increase
in unbilled receivables
|
(87,515
|
)
|
(349,083
|
)
|
|||
Increase
in other accounts receivable and prepaid expenses
|
(91,927
|
)
|
(194,297
|
)
|
|||
Decrease
(increase) in inventories
|
146,995
|
(1,447,620
|
)
|
||||
Decrease
in trade payables
|
(2,893,400
|
)
|
(2,130,990
|
)
|
|||
Increase
in deferred revenues
|
519,418
|
75,700
|
|||||
Decrease
in accounts payable and accruals
|
(639,714
|
)
|
(754,834
|
)
|
|||
Net
cash used in operating activities from continuing
operations
|
(591,326
|
)
|
(3,452,006
|
)
|
|||
Net
cash used in operating activities from discontinuing
operations
|
(120,000
|
)
|
–
|
||||
Net
cash used in operating activities
|
(711,326
|
)
|
(3,452,006
|
)
|
|||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
Repayment
of promissory note related to purchase of subsidiary
|
–
|
(75,000
|
)
|
||||
Purchase
of property and equipment
|
(128,132
|
)
|
(342,248
|
)
|
|||
Increase
in capitalized research and development projects
|
(202,607
|
)
|
(37,293
|
)
|
|||
Increase
in restricted securities and deposits, net
|
(2,864,139
|
)
|
(50,141
|
)
|
|||
Net
cash used in investing activities
|
(3,194,878
|
)
|
(504,682
|
)
|
|||
FORWARD
|
$
|
(3,906,204
|
)
|
$
|
(3,956,688
|
)
|
Three
months ended March 31,
|
|||||||
2006
|
2005
|
||||||
FORWARD
|
$
|
(3,906,204
|
)
|
$
|
(3,956,688
|
)
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
Decrease
in short-term credit from banks
|
(133,747
|
)
|
(99,156
|
)
|
|||
Proceeds
from exercise of options
|
–
|
15,000
|
|||||
Proceeds
from exercise of warrants
|
3,195,772
|
–
|
|||||
Repayment
of long-term loans
|
(9,906
|
)
|
(22,226
|
)
|
|||
Net
cash provided by (used in) financing
activities
|
3,052,119
|
(106,382
|
)
|
||||
DECREASE
IN CASH AND CASH EQUIVALENTS
|
(854,085
|
)
|
(4,063,070
|
)
|
|||
CASH
EROSION DUE TO EXCHANGE RATE DIFFERENCES
|
15,347
|
698
|
|||||
BALANCE
OF CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE
PERIOD
|
6,150,651
|
6,734,512
|
|||||
BALANCE
OF CASH AND CASH EQUIVALENTS AT THE END OF THE
PERIOD
|
$
|
5,311,913
|
$
|
2,672,140
|
|||
SUPPLEMENTARY
INFORMATION ON NON-CASH TRANSACTIONS:
|
|||||||
Payment
of principal installment of convertible debenture in
shares
|
$
|
2,463,615
|
$
|
–
|
|||
Warrants
exercise against note receivable from shareholder
|
$
|
577,051
|
$
|
–
|
|||
Liability
in connection with warrants issuance
|
$
|
775,305
|
$
|
–
|
Three
months ended March 31,
2005
|
||||
Unaudited
(U.S.
Dollars, except per share data)
|
||||
Net
loss as reported
|
$
|
(2,456,500
|
)
|
|
Add –
stock-based
compensation expense determined under APB 25
|
232,739
|
|||
Deduct –
stock based compensation expense determined under fair value method
for
all awards
|
(449,592
|
)
|
||
Pro
forma net loss
|
$
|
(2,673,353
|
)
|
|
Loss
per share:
|
||||
Basic
and diluted, as reported
|
$
|
(0.43
|
)
|
|
Pro
forma basic and diluted
|
$
|
(0.43
|
)
|
2006
|
|||||||
Amount
|
Weighted
average
exercise
price
|
||||||
$
|
|||||||
Options
outstanding at be-ginning of quarter
|
660,353
|
$
|
9.38
|
||||
Changes
during quarter:
|
|||||||
Granted
|
—
|
—
|
|||||
Exercised
|
—
|
—
|
|||||
Forfeited
|
(2,071
|
)
|
9.38
|
||||
Options
outstanding at March 31, 2006
|
658,282
|
$
|
9.38
|
||||
Options
exercisable at end of quarter
|
581,063
|
$
|
9.80
|
March
31, 2006
|
December
31, 2005
|
||||||
(Unaudited)
|
|||||||
Raw
and packaging materials
|
$
|
3,051,044
|
$
|
3,296,453
|
|||
Work-in-progress
|
3,248,502
|
3,697,361
|
|||||
Finished
goods
|
1,280,871
|
821,992
|
|||||
$
|
7,580,417
|
$
|
7,815,806
|
Simulation
and Training
|
Battery
and
Power
Systems
|
Armor
|
All
Others
|
Total
|
||||||||||||
Three
months ended March
31, 2006
|
||||||||||||||||
Revenues
from outside customers
|
$
|
4,936,565
|
$
|
2,041,942
|
$
|
1,917,905
|
$
|
—
|
$
|
8,896,412
|
||||||
Depreciation,
amortization and impairment expenses (1)
|
(433,709
|
)
|
(232,197
|
)
|
(399,874
|
)
|
(59,826
|
)
|
(1,125,606
|
)
|
||||||
Direct
expenses (2)
|
(4,195,347
|
)
|
(2,151,262
|
)
|
(2,356,205
|
)
|
(1,820,304
|
)
|
(10,523,118
|
)
|
||||||
Segment
income (loss)
|
$
|
307,509
|
$
|
(341,517
|
)
|
$
|
(838,174
|
)
|
$
|
(1,880,130
|
)
|
(2,752,312
|
)
|
|||
Financial
income (after deduction of minority interest)
|
(1,461,136
|
)
|
||||||||||||||
Loss
from continuing operations
|
$
|
(4,213,448
|
)
|
|||||||||||||
Segment
assets
(3), (4)
|
$
|
32,615,793
|
$
|
12,012,941
|
$
|
6,421,605
|
$
|
643,069
|
$
|
51,693,408
|
||||||
Three
months ended March
31, 2005
|
||||||||||||||||
Revenues
from outside customers
|
$
|
4,115,651
|
$
|
3,006,138
|
$
|
3,265,656
|
$
|
—
|
$
|
10,387,445
|
||||||
Depreciation
expenses and amortization (1)
|
(402,660
|
)
|
(222,699
|
)
|
(491,548
|
)
|
(35,000
|
)
|
(1,151,907
|
)
|
||||||
Direct
expenses (2)
|
(3,508,124
|
)
|
(2,756,990
|
)
|
(3,316,049
|
)
|
(1,641,897
|
)
|
(11,223,060
|
)
|
||||||
Segment
income (loss)
|
$
|
204,867
|
$
|
26,449
|
$
|
(541,941
|
)
|
$
|
(1,676,897
|
)
|
(1,987,522
|
)
|
||||
Financial
income (after deduction of minority interest)
|
(468,978
|
)
|
||||||||||||||
Loss
from continuing operations
|
$
|
(2,456,500
|
)
|
|||||||||||||
Segment
assets
(3)
|
$
|
31,783,459
|
$
|
13,265,919
|
$
|
20,816,358
|
$
|
759,121
|
$
|
66,624,857
|
(1)
|
Includes
depreciation of property and equipment, amortization expenses of
intangible assets and impairment of goodwill and other intangible
assets.
|
(2) |
Including,
inter
alia,
sales and marketing, general and administrative and tax
expenses.
|
(3) |
Consisting
of property and equipment, inventory and intangible
assets.
|
(4) |
Out
of those amounts, goodwill in our Simulation and Training, Battery
and
Power Systems and Armor Divisions stood at $23,605,069, $4,902,639
and
$973,352, respectively, as of March 31, 2006 and $22,845,372, $5,244,396
and $11,579,443, respectively, as of March 31, 2005.
|
Exhibit
Number
|
Description
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
AROTECH
CORPORATION
|
||
|
|
|
By: | /s/ Robert S. Ehrlich | |
Name:
Robert
S. Ehrlich
|
||
Title: Chairman and CEO | ||
(Principal Executive Officer)
|
|
|
|
By: | /s/ Thomas J. Paup | |
Name:
Thomas
J. Paup
|
||
Title: Vice President – Finance and CFO | ||
(Principal
Financial Officer)
|
Exhibit
Number
|
Description
|
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
|
32.2
|
Certification
of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|