Arotech Preliminary 14A -- for meeting date 2006-06-19
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed
by
the Registrant T
Filed
by
a Party other than the Registrant
o
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appropriate box:
T Preliminary
Proxy Statement o Confidential,
for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
o Definitive
Proxy Statement
o Definitive
Additional Materials
o Soliciting
Material under Rule 14a-12
AROTECH
CORPORATION
|
(Exact
Name of Registrant as Specified in Charter)
|
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of Filing Fee (Check the appropriate box):
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0-11.
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(2) Aggregate
number of securities to which transaction applies:
(3)
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Exchange Act Rule 0-11 (Set forth the amount on which the filing
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Party:
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***PRELIMINARY
COPY***
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Arotech
Corporation
1229
Oak
Valley Drive
Ann
Arbor,
Michigan 48108
Tel:
(800)
281-0356 Fax: (734) 761-5368
http://www.arotech.com
Nasdaq:
ARTX
|
Robert
S. Ehrlich
Chairman
and Chief Executive
Officer
|
May
10,
2006
Dear
Stockholder:
It
is our
pleasure to invite you to the 2006 Annual Meeting of Stockholders of Arotech
Corporation, a Delaware corporation, to be held on Monday, June 19, 2006 at
10:00 a.m. local time in
the
Lexington Room of the Shelburne Murray Hill Hotel, 303 Lexington Avenue, New
York, New York.
Whether
or not you plan to attend and regardless of the number of shares you own, it
is
important that your shares be represented at the meeting. You are accordingly
urged to carefully review the enclosed proxy materials and to mark, date, sign
and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope provided, or vote electronically through the Internet
(at <http://www.voteproxy.com>)
or
by telephone if you hold your shares in your own name, to ensure your
representation and the presence of a quorum at the annual meeting. If you submit
your proxy and then decide to attend the annual meeting to vote your shares
in
person, you may still do so. Your proxy is revocable in accordance with the
procedures set forth in the Proxy Statement.
Sincerely,
Robert
S.
Ehrlich
Chairman
of the Board of Directors
***PRELIMINARY
COPY***
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1229
Oak Valley Drive
Ann
Arbor, Michigan 48108
|
NOTICE
OF
ANNUAL MEETING OF STOCKHOLDERS
TO
BE HELD ON JUNE 19, 2006
To
our
Stockholders:
Our
Annual Meeting of Stockholders will be held in
the
Lexington Room of the Shelburne Murray Hill Hotel, 303 Lexington Avenue, New
York, New York,
on
Monday, June 19, 2006 at 10:00 a.m. local time, and thereafter as it may be
postponed or adjourned from time to time, for the following
purposes:
1. To
fix
the number of Class I directors at two and to elect two Class I directors for
a
three-year term ending in 2009 and continuing until their successors are duly
elected and qualified (beginning on page 2).
2. To
consider and act upon a proposal to ratify, for purposes of NASD Marketplace
Rule 4350(i)(1)(C)(ii), the issuance in February, March and April of 2006 of
warrants expiring March 31, 2008 to purchase up to 3,925,071 shares of our
common stock at a price of $0.594 per share (beginning on page 4);
3. To
consider and act upon a proposal to amend our Amended and Restated Certificate
of Incorporation in order to effect a one-for-eight reverse
stock split (beginning on page 7);
and.
4. To
act
upon all other business that may properly come before the meeting or any
postponements or adjournments thereof.
Our
Board
of Directors has fixed the close of business on April 21, 2006 as the record
date for determining which stockholders are entitled to notice of the meeting
and to vote at the meeting and any postponements or adjournments thereof. If
you
are unable to be present at the meeting personally, please mark, date, sign
and
return the enclosed proxy card as promptly as possible in the postage-prepaid
envelope provided, or vote electronically through the Internet (at
<http://www.voteproxy.com>)
or
by telephone if you hold your shares in your own name. Any stockholder who
grants a proxy may revoke it at any time prior to its exercise. Also, whether
or
not you grant a proxy, you may vote in person if you attend the meeting and
you
hold your shares in your own name; shares
held beneficially in street name may be voted in person by you only if you
obtain a signed proxy from the record holder giving you the right to vote the
shares.
By
Order of the Board of Directors,
Yaakov
Har-Oz
Senior
Vice President, General Counsel and Secretary
Ann
Arbor, Michigan
May
10,
2006
YOUR
VOTE IS IMPORTANT! PLEASE SIGN, DATE AND RETURN
YOUR
PROXY FORM IN THE ENCLOSED STAMPED, SELF-
ADDRESSED
ENVELOPE AS SOON AS
POSSIBLE.
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QUESTIONS
AND ANSWERS
Although
we encourage you to read the proxy statement in its entirety, we include these
Questions and Answers to provide background information and brief answers to
several questions that you may have about the Annual Meeting.
Q. What
is the purpose of the Annual Meeting?
At
our
Annual Meeting, stockholders will act upon the matters outlined in the
accompanying Notice of Annual Meeting, including the following
proposals:
1. To
fix
the number of Class I directors at two and to elect two Class I directors for
a
three-year term ending in 2009 and continuing until their successors are duly
elected and qualified (beginning on page 2).
2. To
consider and act upon a proposal to ratify, for purposes of NASD Marketplace
Rule 4350(i)(1)(C)(ii), the issuance in February, March and April of 2006 of
warrants expiring March 31, 2008 to purchase up to 3,925,071 shares of our
common stock at a price of $0.594 per share (beginning on page 4);
3. To
consider and act upon a proposal to amend our Amended and Restated Certificate
of Incorporation in order to effect a one-for-eight reverse
stock split (beginning on page 7);
and.
4. To
act
upon all other business that may properly come before the meeting or any
postponements or adjournments thereof.
Q. Why
is Arotech seeking stockholder approval for the first proposal?
A. Our
by-laws provide for a Board of one or more directors. The number of directors
is
currently seven. Our Board is composed of three classes of similar size. The
members of each class are elected in different years, so that only one-third
of
the Board is elected in any single year.
Under
Delaware law, directors of a corporation are elected by the stockholders, so
we
are presenting the Board of Directors’ slate of Class I directors for election
by the stockholders.
Q. Why
is Arotech seeking stockholder approval for the second proposal?
A. As
a
Nasdaq-listed company, we are subject to the Marketplace Rules of the National
Association of Securities Dealers. NASD
Marketplace Rule 4350(i)(1)(C)(ii) requires stockholder approval for the
issuance of securities representing more than 20% of a listed company’s
outstanding securities in connection with an acquisition. In February, March
and
April 2006, we amended certain of our existing warrants to lower the exercise
price in exchange for immediate exercise and the granting of a lower number
of
new warrants (3,925,071, which was 40% of the number of warrants that were
exercised) at $0.594 per share, which was a 10% premium to the market price
of
our stock of February 14, 2006, at the time of the first warrant amendment
and
issuance. Because Nasdaq could contend that the issuance of the new warrants
should be combined with the financings to which the repriced and exercised
original warrants related, and because these financings arguably related to
acquisitions since some of the funds from the financings were used for that
purpose, we have decided to obtain stockholder ratification of the issuance
of
the new warrants to purchase 3,925,071 shares of our common stock issued by
us
in February, March and April 2006.
It
is
important in this connection to note that we do not believe that our issuing
these new warrants violated any NASD rules. However, to avoid any doubt we
want
the issuance of the warrants to be ratified by our stockholders before the
warrants may be exercised.
Q. Why
is Arotech seeking stockholder approval for the third proposal?
A. Our
board
of directors believes that we should implement a reverse stock split to reduce
the number of issued and outstanding shares, which are a result, in part, of
the
Company’s past acquisitions and financings. In addition, our board of directors
believes that a reverse stock split will facilitate the continued listing of
our
common stock on the Nasdaq National Market and may enhance the desirability
and
marketability of our common stock to the financial community and the investing
public.
Our
common stock is quoted on the Nasdaq Stock Market. To be quoted on the Nasdaq
Stock Market, among other things, a company’s common stock must maintain a
minimum bid price of $1.00 per share. On
September 27, 2005, the Nasdaq Stock Market, Inc. notified us that our stock
had
traded for more than 30 consecutive trading days below the $1.00 minimum bid
price, and that we had 180 days following our receipt of this notice from the
Nasdaq Stock Market to trade
above $1.00 for ten (10) consecutive trading days, or we would face delisting
from the Nasdaq Stock Market. The bid price of our stock remained below $1.00
during this entire 180-day period, and accordingly, on
March
27, 2006, we received notification from the Nasdaq National Market that we
were
not in compliance with this minimum bid price rule and that we would be
delisted. We have appealed this decision, and the Nasdaq Stock Market stayed
our
delisting pending our appeal. If our appeal is not successful, we will submit
an
application to list our stock with the Nasdaq Capital Market. The Nasdaq Capital
Market has the same $1.00 minimum bid price rule as the Nasdaq National Market;
however, under the rules of the Nasdaq Capital Market we have an additional
180
days, or until September 23, 2006, in order to regain compliance with the $1.00
minimum bid price rule. If we do not regain compliance, and our common stock
is
delisted from the Nasdaq Stock Market, trading in our common stock, if any,
would have to be conducted on the OTC Bulletin Board or in the over-the-counter
(or “pink sheet”) market. This would likely significantly decrease the liquidity
of our common stock. We
believe that by reducing the number of shares of our common stock outstanding
through a reverse stock split, the bid price of our stock may increase
proportionally and we may be able to meet the Nasdaq's minimum bid price
requirement, although there is no assurance that this will occur.
Additionally,
if we effect the reverse stock split, our board of directors believes that
the
resulting reduction in the number of our outstanding shares of our common stock
will better reflect the current market environment, will be more consistent
with
comparable companies and may encourage greater interest in our common stock
by
the investment community. Our board of directors believes that the current
market price of our common stock may impair its acceptability to institutional
investors, professional investors and other members of the investing public.
Many institutional investors have policies prohibiting them from holding
lower-priced stocks in their own portfolios, which reduces the number of
potential buyers of our common stock. In addition, analysts at many leading
brokerage firms are reluctant to recommend lower-priced stocks to their clients
or monitor the activity of lower-priced stocks. A variety of brokerage house
policies and practices also tend to discourage individual brokers within those
firms from dealing in lower-priced stocks. Some of those policies and practices
pertain to the payment of brokers’ commissions and to time-consuming procedures
that make the handling of lower-priced stocks financially unattractive to
brokers. Our board of directors believes that if the reverse stock split raises
the trading price of our common stock, our common stock may be more attractive
to the investment community, which may increase the liquidity of our common
stock.
Q. What
shares can I vote?
A. All
shares of our common stock owned by you as of the close of business on the
record date, April 21, 2006, may be voted by you. These shares include (i)
shares held directly in your name as the stockholder of record, and (ii) shares
held for you as the beneficial owner through a stockbroker, bank or other
nominee. Each share of common stock owned by you entitles you to cast one vote
on each matter to be voted upon.
Q. What
is the difference between holding shares as a stockholder of record and as
a
beneficial owner?
A. Most
of
our stockholders hold their shares through a stockbroker, bank or other nominee
rather than directly in their own name. As summarized below, there are some
distinctions between shares held of record and those owned
beneficially.
Stockholder
of Record
If
your
shares are registered directly in your name with our transfer agent, American
Stock Transfer & Trust Company, you are considered, with respect to those
shares, the stockholder of record, and these proxy materials are being sent
directly to you by us. As the stockholder of record, you have the right to
grant
your voting proxy directly to us or to vote in person at the Annual Meeting.
We
have enclosed or sent a proxy card for you to use.
Beneficial
Owner
If
your
shares are held in a stock brokerage account or by a bank or other nominee,
you
are considered the beneficial owner of shares held in street name, and these
proxy materials are being forwarded to you by your broker, bank or nominee
which
is considered, with respect to those shares, the stockholder of record. As
the
beneficial owner, you have the right to direct your broker as to how to vote
and
are also invited to attend the Annual Meeting. However, because you are not
the
stockholder of record, you may not vote these shares in person at the Annual
Meeting unless you obtain a signed proxy from the record holder giving you
the
right to vote the shares. Your broker, bank or nominee has enclosed or provided
a voting instruction card for you to use in directing the broker or nominee
how
to vote your shares. If you do not provide the stockholder of record with voting
instructions, your shares may constitute broker non-votes. The effect of broker
non-votes is more specifically described in “What vote is required to approve
each proposal?” below.
Q. How
can I vote my shares in person at the Annual Meeting?
A. Shares
held directly in your name as the stockholder of record may be voted in person
at the Annual Meeting. If you choose to do so, please bring the enclosed proxy
card or proof of identification.
Even
if you currently plan to attend the Annual Meeting, we recommend that you also
submit your proxy as described below so that your vote will be counted if you
later decide not to attend the meeting. Shares held beneficially in street
name
may be voted in person by you at the Annual Meeting only if you obtain a signed
proxy from the record holder giving you the right to vote the
shares.
Q. What
vote is required to approve each proposal?
A. Holders
of a majority of the outstanding shares entitled to vote must be present, in
person or by proxy, at the Annual Meeting in order to have the required quorum
for the transaction of business.
With
respect to the first proposal (election of directors), directors are elected
by
a plurality of the votes present in person or represented by proxy and entitled
to vote, and the director nominees who receive the greatest number of votes
at
the Annual Meeting (up to the total number of directors to be elected) will
be
elected. As a result, abstentions and “broker non-votes” (see below), if any,
will not affect the outcome of the vote on this proposal.
With
respect to the second proposal (ratification of the issuance of certain new
warrants), pursuant to our by-laws the affirmative vote of a majority of the
total votes cast on this proposal, in
person
or
by proxy, is required to approve the proposal. As a result, abstentions will
have the same practical effect as a negative vote on this proposal, and “broker
non-votes” (see below), if any, will not affect the outcome of the vote on this
proposal.
With
respect to the third proposal (effecting a reverse split of our common stock),
the affirmative vote of a majority of all
outstanding shares of our common stock entitled to vote on this
proposal
is
required to approve the proposal. As a result, abstentions and “broker
non-votes” (see below) will have the same practical effect as a negative vote on
this proposal.
Q. What
are “broker non-votes”?
A. Broker
non-votes occur when nominees, such as banks and brokers holding shares on
behalf of beneficial owners, do not receive voting instructions from the
beneficial holders at least ten days before the meeting. If that happens, the
nominees may vote those shares only on matters deemed “routine” by the New York
Stock Exchange, such as the election of directors and the adoption of the
increase in authorized shares of common stock. Nominees cannot vote on
non-routine matters unless they receive voting instructions from beneficial
holders, resulting in so-called “broker non-votes.” The effect of broker
non-votes on each of the three proposals that will be considered at the Annual
Meeting is described above and in our proxy statement.
We
believe that the proposals for the election of directors and to effect a reverse
split of our common stock are considered to be “routine” matters, and hence we
do not expect that there will not be a significant number of broker non-votes
on
these proposals. We believe that the proposal to ratify the issuance of certain
new warrants is not a “routine” matter, and hence there may be a significant
number of broker non-votes on this proposal.
Q. Where
can I find the voting results of the meeting?
A. We
will
announce preliminary voting results at the meeting and publish final results
in
a Current Report on Form 8-K to be filed by us with the SEC by Friday, June
23,
2006, by 5:30 p.m. e.d.t.
Q. Who
will count the votes?
A. A
representative of American Stock Transfer & Trust Company will tabulate the
votes and act as the inspector of election.
Q. Who
will bear the costs of this solicitation?
A. Our
Board
of Directors is making this solicitation, and we will pay the entire cost of
preparing, assembling, printing, mailing and distributing these proxy materials.
If you choose to access the proxy materials over the Internet, however, you
are
responsible for Internet access charges you may incur. In addition to the
mailing of these proxy materials, we have hired The Altman Group to
assist
in the solicitation of proxies at a cost of $5,000
plus
reasonable out-of-pocket and other expenses.
The
solicitation of proxies or votes may also be made in person, by telephone or
by
electronic communication by our directors, officers and employees, who will
not
receive any additional compensation for such solicitation activities. We also
have hired ADP, Inc. to assist us in the distribution of proxy materials. We
will also reimburse brokerage houses and other custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy
and
solicitation materials to stockholders.
Q. What
should I do now?
A. You
should read this proxy statement carefully and promptly submit your proxy card
or vote by telephone or the Internet as provided on the proxy card to ensure
that your vote is counted at the Annual Meeting.
Q. How
do I vote if I hold shares directly?
A. You
may
vote your shares by attending the Annual Meeting in person and completing a
ballot or returning your validly executed proxy card at the meeting. The Annual
Meeting will begin promptly at 10:00 a.m. local time on Monday, June 19,
2006 in
the
Lexington Room of the Shelburne Murray Hill Hotel, 303 Lexington Avenue, New
York, New York.
Attendance at the Annual Meeting will not, by itself, result in the revocation
of a previously submitted proxy. Even if you are planning to attend the Annual
Meeting, we encourage you to submit your proxy in advance to ensure the
representation of your shares at the Annual Meeting.
If
you do
not want to attend the Annual Meeting and you hold your shares directly, you
may
vote by granting a proxy. To grant a proxy, mail your signed proxy card in
the
enclosed return envelope or vote by telephone or the Internet as provided on
the
proxy card as soon as possible so that your shares may be represented at the
Annual Meeting.
Q. How
do I vote if I hold shares in street name?
A. If
you do
not want to attend the Annual Meeting and hold your shares in a stock brokerage
account or if your shares are held by a bank or nominee (i.e.,
in
“street name”), you must provide your broker with directions on how to vote your
shares. Your broker will provide you with instructions regarding how to direct
your broker to vote your shares. It is important to follow these instructions
carefully to ensure your shares are represented at the Annual Meeting. If you
do
not provide directions to your broker, your shares will not be voted at the
Annual Meeting.
If
you
want to attend the Annual Meeting and hold your shares in street name, you
must
obtain a signed proxy card from your broker, bank or other nominee acting as
record holder that gives you the right to vote the shares. Your broker will
provide you with instructions regarding how to obtain a signed proxy card from
the bank or other nominee acting as record holder in order to enable you to
vote
your shares in person at the Annual Meeting.
Q. What
does it mean if I receive more than one proxy or voting instruction
card?
A. It
means
your shares are registered differently or are in more than one account. Please
provide voting instructions for all proxy and voting instruction cards you
receive.
Q. How
can I change my vote after I have mailed my proxy card?
A. If
you
are a holder of record, you may generally change your vote by delivering a
later-dated proxy or written notice of revocation to our Corporate Secretary
before the Annual Meeting, or by attending the Annual Meeting and voting in
person. If your shares are held in “street name” by your broker, you must follow
the instructions received from your broker regarding how to change your
vote.
***PRELIMINARY
COPY***
|
1229
Oak Valley Drive
Ann
Arbor, Michigan
48108
|
ANNUAL
MEETING OF THE STOCKHOLDERS
OF
AROTECH CORPORATION
TO
BE HELD ON JUNE 19, 2006
The
accompanying proxy is solicited by and on behalf of the Board of Directors
of
Arotech Corporation, for use at our Annual Meeting of Stockholders and any
postponements and adjournments thereof. The meeting is to be held in
the
Lexington Room of the Shelburne Murray Hill Hotel, 303 Lexington Avenue, New
York, New York,
on
Monday, June 19, 2006 at 10:00 a.m. local time, and thereafter as it may be
postponed or adjourned from time to time, for the purposes described in the
accompanying Notice of Annual Meeting of Stockholders.
Stockholders
of record at the close of business on April 21, 2006 will be entitled to vote
at
the annual meeting. As of April 21, 2006, there were 113,805,241 shares
of
our common stock outstanding held of record by 322
stockholders. Each holder of common stock is entitled to one vote per share
on
each matter that comes before the annual meeting.
This
proxy statement and the enclosed form of proxy will be mailed commencing on
or
about May 10, 2006. We are also mailing our annual report for the fiscal year
ended December 31, 2005 to our stockholders along with this proxy
statement.
Voting
Procedures and Vote Required
Proxies
that are properly marked, dated, and signed, or submitted electronically via
the
Internet or by telephone by following the instructions on the proxy card, and
not revoked will be voted at the annual meeting in accordance with any indicated
directions. If no direction is indicated, proxies will be voted FOR
the
fixing of the number of Class I directors at two and the election of the
nominees for director set forth below, FOR
the
proposal to ratify the issuance in February, March and April of 2006 of warrants
expiring March 31, 2008 to purchase up to 3,925,071 shares of our common stock
at a price of $0.594 per share, FOR
amending
our Amended and Restated Certificate of Incorporation in order to effect a
one-for-eight reverse
stock split, and
IN
THE DISCRETION OF THE HOLDERS OF THE PROXIES
with
respect to any other business that properly comes before the annual meeting
and
all matters relating to the conduct of the annual meeting. If a broker indicates
on the enclosed proxy or its substitute that it does not have discretionary
authority as to certain shares to vote on a particular matter (“broker
non-votes”), those shares will not be considered as voting with respect to that
matter. We believe that the tabulation procedures to be followed by the
Inspector of Elections are consistent with the general requirements of Delaware
law concerning voting of shares and determination of a quorum.
You
may
revoke your proxy at any time before it is voted by delivering to the Secretary
of our company a written revocation or a duly executed proxy bearing a later
date than the date of the proxy being revoked (including a proxy voted over
the
Internet or by telephone). Any record
stockholder
attending the annual meeting in person may revoke his or her proxy and vote
his
or her shares at the annual meeting.
Votes
cast by proxy or in person at the annual meeting will be tabulated by the
Inspector of Elections, with the assistance of our transfer agent. The Inspector
of Elections will also determine whether or not a quorum is present at the
annual meeting. The presence of a quorum is required to transact the business
proposed to be transacted at the annual meeting. The presence in person or
by
proxy of holders of a majority of the outstanding shares of our common stock
entitled to vote will constitute a quorum for the transaction of business at
the
annual meeting. Abstentions and broker non-votes (as defined above) will be
counted for purposes of determining the presence or absence of a quorum.
With
respect to the first proposal, directors will be elected by a plurality of
the
votes cast by the holders of our common stock voting in person or by proxy
at
the annual meeting. Abstentions and broker non-votes will have no effect on
the
vote for election of directors.
With
respect to the second proposal, pursuant to our by-laws ratifying the issuance
of these new warrants will require the affirmative vote of a majority of the
total votes cast on this proposal, in person or by proxy. Abstentions and broker
non-votes will each be counted as present for purposes of determining the
presence of a quorum; abstentions will have the same practical effect as a
negative vote on this proposal, and broker non-votes will not have any effect
on
the outcome of this proposal.
With
respect to the third proposal, amending our Amended and Restated Certificate
of
Incorporation in order to effect a one-for-eight reverse
stock split
will
require the affirmative vote of a majority of all
outstanding shares of our common stock entitled to vote on this
proposal.
As a
result, abstentions and broker non-votes will have the same practical effect
as
a negative vote on this proposal.
The
solicitation of proxies will be conducted by mail and we will bear all attendant
costs. These costs will include the expense of preparing and mailing proxy
solicitation materials for the annual meeting and reimbursements paid to
brokerage firms and others for their expenses incurred in forwarding
solicitation materials regarding the annual meeting to beneficial owners of
our
common stock. We have hired The Altman Group to
assist
in the solicitation of proxies at a cost of $5,000
plus
reasonable out-of-pocket and other expenses. We
also
have hired ADP, Inc. to assist us in the distribution of proxy materials. We
will also reimburse brokerage houses and other custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses for forwarding proxy
and
solicitation materials to stockholders. We may conduct further solicitation
personally, telephonically or by facsimile through our officers, directors
and
employees, none of whom will receive additional compensation for assisting
with
the solicitation.
We
are
not aware of any matters other than those described in this proxy statement
that
will be acted upon at the annual meeting. In the event that any other matters
do
come before the annual meeting for a stockholder vote, the persons named as
proxies in the form of proxy being delivered to you along with this proxy
statement will vote in accordance with their best judgment on those
matters.
At
least
ten days before the annual meeting, we will make a complete list of the
stockholders entitled to vote at the meeting open to the examination of any
stockholder for any purpose germane to the annual meeting. The list will be
open
for inspection during ordinary business hours at our principal executive
offices, which are located at 1229 Oak Valley Drive, Ann Arbor, Michigan 48108,
and will also be made available to stockholders present at the annual
meeting.
ELECTION
OF DIRECTORS
At
the
annual meeting, we will consider the election of two Class I directors for
three-year terms that expire in 2009. Our five other directors have terms that
end in either 2007 or 2008, as indicated below. Unless instructions are given
to
the contrary, each of the persons named as proxies will vote the shares to
which
each proxy relates FOR
the
election of each of the nominees listed below for a term of three years expiring
at the annual meeting of stockholders to be held in 2009, and until the
nominee’s successor is duly elected and qualified or until the nominee’s earlier
death, removal or resignation. The two nominees named below are presently
serving as directors and both of them are anticipated to be available for
election and able to a serve. However, if they should become unavailable, the
proxy will be voted for substitute nominee(s) designated by the Board. The
two
nominees who receive the greatest number of votes properly cast for the election
of directors will be elected.
Our
by-laws provide for a Board of one or more directors. The number of directors
is
currently seven. Our Board is composed of three classes of similar size. The
members of each class are elected in different years, so that only approximately
one-third of the Board is elected in any single year.
Dr.
Eastman and Mr. Esses are designated as Class I directors. Their term expires
in
2006. Messrs. Ehrlich and Borey are designated as Class III directors. Their
term expires in 2007. Messrs. Rosenfeld and Miller and Prof. Jones are
designated as Class II directors. Their term expires in 2008.
Dr.
Eastman and Mr. Esses are nominees for Class I directors, with a term expiring
in 2009.
The
following table contains information concerning the nominees for Class I
directors and the other incumbent directors:
Name
|
Age
|
Position
with Arotech
|
Class
|
Director
Since
|
Dr.
Jay M. Eastman(2)(4)
|
57
|
Director
|
I
|
October
1993
|
Steven
Esses(3)
|
42
|
President,
Chief Operating Officer and Director
|
I
|
July
2002
|
Jack
E. Rosenfeld(1)(2)(4)
|
67
|
Director
|
II
|
October
1993
|
Lawrence
M. Miller(1)(3)(4)
|
59
|
Director
|
II
|
November
1996
|
Seymour
Jones
|
74
|
Director
|
II
|
July
2005
|
Robert
S. Ehrlich
(3) |
68
|
Chairman
of the Board and Chief Executive Officer
|
III
|
May
1991
|
Edward
J. Borey(2)(3) |
55
|
Director
|
III
|
December
2003
|
|
(1)
|
Member
of the Audit Committee.
|
(2)
|
Member
of the Compensation Committee.
|
(3)
|
Member
of the Executive and Finance Committee.
|
(4)
|
Member
of the Nominating Committee.
|
Nominees
for Election as Class I Directors
Dr.
Jay M. Eastman
has been
one of our directors since October 1993. Since November 1991, Dr. Eastman has
served as President and Chief Executive Officer of Lucid, Inc., which is
developing laser technology applications for medical diagnosis and treatment.
Dr. Eastman served as Senior Vice President of Strategic Planning of PSC Inc.
(“PSCX”), a manufacturer and marketer of laser diode bar code scanners, from
December 1995 through October 1997. Dr. Eastman is also a director of Dimension
Technologies, Inc., a developer and manufacturer of 3D displays for computer
and
video displays. From 1981 until January 1983, Dr. Eastman was Director of the
University of Rochester’s Laboratory for Laser Energetics, where he was a member
of the staff from September 1975 to 1981. Dr. Eastman holds a B.S. and a Ph.D.
in Optics from the University of Rochester in New York.
Steven
Esses
has been
a director since July 2002, our Executive Vice President from January 2003
until
December 2005, our Chief Operating Officer since February 2003 and since
December 2005 has been our President and Chief Operating Officer. From 2000
until 2002, Mr. Esses was a principal with Stillwater Capital Partners, Inc.,
a
New York-based investment research and advisory company (hedge fund)
specializing in alternative investment strategies. During this time, Mr. Esses
also acted as an independent consultant to new and existing businesses in the
areas of finance and business development. From 1995 to 2000, Mr. Esses founded
Dunkin’ Donuts in Israel and held the position of Managing Director and CEO.
Prior thereto, he was Director of Retail Jewelry Franchises with Hamilton
Jewelry, and before that he served as Executive Director of Operations for
the
Conway Organization, a major off-price retailer with 17 locations.
Class
II Directors
Jack
E. Rosenfeld
has been
one of our directors since October 1993. Mr. Rosenfeld was President and Chief
Executive Officer of Potpourri Group Inc. (“Potpourri”), a specialty catalog
direct marketer, from April 1998 until June 2003; from June 2003 until February
2005, Mr. Rosenfeld served as Chairman of Potpourri’s Board of Directors and as
its CEO, and since February 2005, Mr. Rosenfeld has been Executive Chairman
of
the Potpourri Board of Directors. Mr. Rosenfeld was President and Chief
Executive Officer of Hanover Direct, Inc., formerly Horn & Hardart Co.,
which operates a direct mail marketing business, from September 1990 until
December 1995, and had been President and Chief Executive Officer of its direct
marketing subsidiary, from May 1988 until September 1990. Mr. Rosenfeld holds
a
B.A. from Cornell University in Ithaca, New York and an LL.B. from Harvard
University in Cambridge, Massachusetts.
Lawrence
M. Miller was
elected to the Board of Directors in November 1996. Mr. Miller has been a senior
partner in the Washington D.C. law firm of Schwartz, Woods and Miller since
1990. He served from August 1993 through May 1996 as a member of the Board
of
Directors of The Phoenix Resource Companies, Inc., a publicly traded energy
exploration and production company, and as a member of the Audit and
Compensation Committee of that board. That company was merged into Apache
Corporation in May 1996. Mr. Miller holds a B.A. from Dickinson College in
Carlisle, Pennsylvania and a J.D. with honors from George Washington University
in Washington, D.C. He is a member of the District of Columbia bar.
Seymour
Jones was
elected to the Board of Directors in July 2005. Mr. Jones is a clinical
professor of accounting at New York University Stern School of Business.
Professor Jones teaches courses in auditing, tax and legal aspects of
entrepreneurism. He is also the Associate Director of Ross Institute of
Accounting Research at Stern School of Business. Professor Jones has been with
NYU Stern for ten years. His primary research areas include audit committees,
auditing, entrepreneurship, financial reporting, and fraud. Professor Jones
has
been principal author of numerous books including Conflict
of Interest,
The
Cooper & Lybrand Guide to Growing Your Business,
The
Emerging Business and
The
Bankers Guide to Audit Reports and Financial Statements.
Before
joining NYU Stern, Professor Jones was senior partner at Coopers & Lybrand
and S.D. Leidesdorf & Co. Professor Jones is a certified public accountant
in New York State. Professor Jones received a B.A. in economics from City
College, City University of New York, and an M.B.A. from NYU Stern.
Class
III Directors
Robert
S. Ehrlich has
been
our Chairman of the Board since January 1993 and our Chief Executive Officer
since October 2002. From May 1991 until January 1993, Mr. Ehrlich was our
Vice
Chairman of the Board, from May 1991 until October 2002 he was our Chief
Financial Officer, and
from
October 2002 until December 2005 Mr. Ehrlich also held the title of President.
Mr. Ehrlich was a director of Eldat, Ltd., an Israeli manufacturer of electronic
shelf labels, from June 1999 to July 2003. From 1987 to June 2003, Mr. Ehrlich
served as a director of PSCX and, between April 1997 and June 2003, Mr. Ehrlich
was the chairman of the board of PSCX. PSCX filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in November 2002. Mr. Ehrlich
received a B.S. and J.D. from Columbia University in New York, New
York.
Edward
J. Borey
has
served as a director since December 2003. Mr. Borey has been Chairman and Chief
Executive Officer of WatchGuard Technologies, Inc., a leading provider of
network security solutions (NasdaqNM: WGRD), since July 2004. From December
2000
to September 2003, Mr. Borey served as President, Chief Executive Officer and
a
director of PSCX. PSCX filed a voluntary petition for relief under Chapter
11 of
the Bankruptcy Code in November 2002. Prior to joining PSCX, Mr. Borey was
President and CEO of TranSenda (May 2000 to December 2000).
Previously, Mr. Borey held senior positions in the automated data
collection industry. At Intermec Technologies Corporation (1995-1999), he was
Executive Vice President and Chief Operating Officer and also Senior Vice
President/General Manager of the Intermec Media subsidiary. Currently,
Mr. Borey serves as a Board member at Mbrane (formerly known as Centura
Software), and he is on the Advisory Board of TranSenda Software and NextRx.
Mr. Borey holds a B.S. in Economics from the State University of New York,
College of Oswego; an M.A. in Public Administration from the University of
Oklahoma; and an M.B.A. in Finance from Santa Clara University.
Vote
Required
Directors
will be elected by a plurality of the votes cast by the holders of our common
stock voting in person or by proxy at the annual meeting. Abstentions and broker
non-votes will each be counted as present for purposes of determining the
presence of a quorum, but will have no effect on the vote for election of
directors.
The
Board of Directors Recommends a Vote FOR Fixing the
Number
of Class I Directors at Two and FOR Election
of
the Class I Nominees Described Above
RATIFICATION
OF WARRANT ISSUANCE
Reasons
for Seeking Stockholder Approval
As
a
Nasdaq-listed company, we are subject to the Marketplace Rules of the National
Association of Securities Dealers. NASD Marketplace Rule 4350(i)(1)(C)(ii)
requires stockholder approval for the issuance of securities representing more
than 20% of a listed company’s outstanding securities in connection with an
acquisition. In February, March and April 2006, we amended certain of our
existing warrants to lower the exercise price in exchange for immediate exercise
and the granting of a lower number of new warrants (3,925,071, which was 40%
of
the number of warrants that were exercised) at $0.594 per share, which was
a 10%
premium to the market price of our stock on February 14, 2006, at the time
of
the first warrant amendment and issuance. Because Nasdaq could contend that
the
issuance of the new warrants should be combined with the financings to which
the
repriced and exercised original warrants related, and because these financings
arguably related to acquisitions since some of the funds from the financings
were used for that purpose, we have decided to obtain stockholder ratification
of the issuance of the new warrants to purchase 3,925,071 shares of our common
stock issued by us in February, March and April 2006.
It
is
important in this connection to note that we do not believe that our issuing
these new warrants violated any NASD rules. However, to avoid any doubt we
want
the issuance of the warrants to be ratified by our stockholders before the
warrants may be exercised.
Board
Recommendation
Our
Board
of Directors has determined that is in the best interests of the Company and
our
stockholders to approve the proposal ratifying the issuance of the warrants.
Accordingly, our Board of Directors unanimously recommends that you vote
“FOR”
the
proposal.
Description
of the Warrants
The
following description of the warrants that we issued in February, March and
April 2006 is qualified in its entirety by reference to the warrants themselves,
the form of which is attached as Appendix A to this proxy statement and
incorporated by reference herein.
Each
warrant entitles the holder to purchase, at an exercise price of $0.594, one
share of our common stock. Each warrant is exercisable by the holder at any
time
and will expire on March 31, 2008.
The
warrants are generally exercisable by the holder, in whole or in part, by
surrender to us of the warrant, together with a completed exercise agreement,
and payment by the holder of the aggregate exercise price in cash, or, in
limited circumstances, by effecting a cashless exercise. Upon any exercise
of
the warrant, we will forward to the holder, as soon as practicable, but not
more
than three business days after proper exercise, a certificate representing
the
number of shares of common stock purchased upon 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
terms
of the warrants prohibit exercise of the warrants 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 warrants each contain a provision which
precludes us from issuing, in connection with the transactions described below,
and at prices less than the greater of the 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 19.99% of the number of shares of our common stock
outstanding on 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% of our outstanding shares of
common stock.
In
the
event that we are prohibited from issuing any warrant shares for which an
exercise notice has been received as a result of the operation of the foregoing
provision, we must pay the holder of
the
warrant, in cash, an amount per warrant share equal to the difference between
the closing sale price of our common stock on the date of the attempted exercise
and the exercise price of the warrant ($0.594), since we would be unable to
issue them the shares of common stock to which they would be otherwise entitled
under the terms of the warrants, in exchange for cancellation of the
warrant.
The
exercise price payable and number of shares purchasable upon exercise of a
warrant will generally be adjusted to prevent the dilution of the holder’s
beneficial interest in the common stock in the event we:
|
Ø
|
declare
or pay a dividend in shares of common stock or make a distribution
of
shares of common stock to holders of our outstanding common
stock;
|
|
Ø
|
subdivide
or combine our common stock; or
|
|
Ø
|
issue
shares of our capital stock in any reclassification of our common
stock.
|
Except
as
described above, a holder of a warrant will not have any of the rights of a
holder of common stock before the common stock is purchased upon exercise of
the
warrant. Therefore, before a warrant is exercised, the holder of the warrant
will not be entitled to receive any dividend payments or exercise any voting
or
other rights associated with the shares of common stock which may be purchased
when the warrant is exercised.
Vote
Required
Pursuant
to our by-laws, the affirmative vote of a majority of the votes cast at the
meeting at which a quorum representing a majority of all outstanding shares
of
our common stock is present and voting, either in person or by proxy, is
required for approval of this proposal. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum;
abstentions will have the same practical effect as a negative vote on this
proposal, and broker non-votes will not have any effect on the outcome of this
proposal.
Effect
of a Stockholder Approval
If
the
proposal is approved, the holders of the warrants will be entitled to exercise
the warrants at any time following the Annual Meeting through March 31, 2008,
when the warrants expire.
Effect
of a Failure to Obtain Stockholder Approval
If
the
proposal is not approved, we would, under the terms of our warrants, be liable
to pay the holders of the warrants, in cash, the difference between the market
price of our stock at the time they demand exercise of the warrants and the
exercise price of the warrant ($0.594 per share), since we would be unable
to
issue to them the shares of common stock to which they would be otherwise
entitled under the terms of the warrants. Accordingly, if this proposal were
to
be rejected and our stock price subsequently rises, we could be obligated to
pay
a substantial cash payment that could seriously strain or exceed our financial
resources.
Additionally,
our current capital resources are limited. If we were required to pay the
difference between the per share warrant exercise price of $0.594 and the per
share market price of our stock at the time a holder demands payment, then
depending upon the price of our stock at such time we might have insufficient
cash to make this payment and we would accordingly be required to obtain
alternative sources of financing. Alternative sources of financing may not
be
available to us on favorable terms, or at all.
For
the Reasons Set Forth Above,
The
Board of Directors Unanimously Recommends
a
Vote FOR Ratification of the Issuance of the 2006
Warrants.
APPROVAL
OF AN AMENDMENT TO OUR
AMENDED AND RESTATED
CERTIFICATE
OF INCORPORATION TO EFFECT A REVERSE
STOCK
SPLIT AT A RATIO OF ONE-FOR-EIGHT
General
The
Board
of Directors has unanimously adopted a resolution seeking stockholder approval
to amend our Amended and Restated Certificate of Incorporation to effect a
reverse stock split of our common stock at a ratio of one-for-eight. If the
stockholders approve the reverse stock split proposal, we intend to implement
the reverse stock split as soon as possible thereafter. Notwithstanding approval
of this proposal by the stockholders, the Board of Directors may, in its sole
discretion, determine not to effect, and abandon, the reverse stock split
without further action by our stockholders.
Background
We
became
a public company and were listed on the Nasdaq Stock Market beginning on
February 24, 1994. We currently have approximately 114
million
shares of our common stock outstanding. On a fully-diluted basis, however,
including all shares issuable upon exercise of currently outstanding options
and
warrants and upon conversion of currently outstanding convertible debt, we
would
have over 150
million
shares outstanding. Our Board of Directors believes that this creates
significant burden of inertia on our stock price, making it difficult for our
stock price to rise due to the presence of so many shares.
Our
common stock is quoted on the Nasdaq Stock Market. To be quoted on the Nasdaq
Stock Market, among other things, a company’s common stock must exceed the
Nasdaq Stock Market’s minimum bid price of $1.00 per share. On September 27,
2005, the Nasdaq Stock Market, Inc. notified us that the per share bid price
of
our stock had been below the $1.00 minimum bid price for more than 30
consecutive trading days, and that we had 180 days following our receipt of
this
notice from the Nasdaq Stock Market for the per share bid price of our common
stock to exceed $1.00 for ten (10) consecutive trading days, or our common
stock
would face delisting from the Nasdaq Stock Market. The bid price per share
of
our common stock remained below $1.00 during this entire 180-day period, and
accordingly, on March 27, 2006, we received notification from the Nasdaq
National Market that we were not in compliance with its minimum bid price rule
and that our common stock would be delisted. We have appealed this decision,
and
the Nasdaq Stock Market stayed our delisting pending our appeal. If our appeal
is not successful, we will submit an application to list our common stock with
the Nasdaq Capital Market. The Nasdaq Capital Market has the same $1.00 minimum
bid price rule as the Nasdaq National Market; however, under the rules of the
Nasdaq Capital Market we have an additional 180 days, or until September 23,
2006, to regain compliance with the $1.00 minimum bid price rule. If we do
not
regain compliance, and our common stock is delisted from the Nasdaq Stock
Market, trading in our common stock, if any, would have to be conducted on
the
OTC Bulletin Board or in the over-the-counter (or “pink sheet”) market. This
would likely significantly decrease the liquidity of our common stock. We
believe that by reducing the number of shares of our common stock outstanding
through a reverse stock split, the price of our stock may increase
proportionally, and we may be able to meet the Nasdaq's minimum bid price
requirement.
Additionally,
if
we effect the reverse stock split, our board of directors believes that the
resulting reduction in the number of our outstanding shares of our common stock
will better reflect the current market environment, will be more consistent
with
comparable companies and may encourage greater interest in our common stock
by
the investment community. Our board of directors believes that
the
current market price of our common stock may impair its acceptability to
institutional investors, professional investors and other members of the
investing public. Many institutional investors have policies prohibiting them
from holding lower-priced stocks in their own portfolios, which reduces the
number of potential buyers of our common stock. In addition, analysts at many
leading brokerage firms are reluctant to recommend lower-priced stocks to their
clients or monitor the activity of lower-priced stocks. A variety of brokerage
house policies and practices also tend to discourage individual brokers within
those firms from dealing in lower-priced stocks. Some of those policies and
practices pertain to the payment of brokers’ commissions and to time-consuming
procedures that make the handling of lower-priced stocks financially
unattractive to brokers. Our board of directors believes that if the reverse
stock split raises the trading price of our common stock, our common stock
may
be more attractive to the investment community, which may increase the liquidity
of our common stock.
If
the
stockholders approve the reverse stock split proposal, we intend to implement
the reverse stock split as soon as possible thereafter. Notwithstanding approval
of this proposal by the stockholders, the Board of Directors may, in its sole
discretion, determine not to effect, and abandon, the reverse stock split
without further action by our stockholders. No further action on the part of
stockholders will be required to either implement or abandon the reverse stock
split.
The
reverse stock split will be effected simultaneously for all of our shares of
common stock and the exchange ratio will be the same for all of our shares
of
common stock. The reverse stock split will affect all of our stockholders
uniformly and will not affect any stockholder’s percentage ownership interests
in Arotech, except to the extent that the reverse stock split results in any
of
our stockholders owning a fractional share. As described below, stockholders
holding fractional shares will be entitled to cash payments in lieu of such
fractional shares. Such cash payments will reduce the number of post-split
stockholders to the extent there are stockholders presently holding fewer than
10 shares. This, however, is not the purpose of the reverse stock split. We
will
continue to be subject to the periodic reporting requirements of the Securities
Exchange Act of 1934, as amended, following the reverse stock
split.
Certain
Risk Factors Associated with the Reverse Stock Split
There
is no assurance that the total market capitalization of our common stock
(determined by multiplying the aggregate number of shares of our common stock
then outstanding by the then-current market price) after the proposed reverse
stock split will equal or exceed the total market capitalization of our common
stock before the proposed reverse stock split or that the per share market
price
of our common stock following the reverse stock split will equal or exceed
the
current per share market price of our common stock.
There
is
no assurance that the market price per share of our common stock after the
reverse stock split will increase in proportion to the magnitude of the
reduction in the number of shares of our common stock outstanding before the
reverse stock split, or at all. For example, based on the market price of our
common stock on April 21, 2006 of $0.45 per share and a reverse stock split
ratio of one-for-eight, there is no assurance that the post-split market price
of our common stock would be $3.60 per share or greater.
Accordingly,
the total market capitalization of our common stock after the reverse stock
split may be lower than the total market capitalization before the reverse
stock
split and, in the future, the market price per share of our common stock
following the reverse stock split may not exceed or remain higher than the
market price per share of our common stock prior to the reverse stock split.
The
resulting per share market price after the reverse stock split may not attract
institutional investors or investment funds and may not satisfy the investing
guidelines of such investors and, consequently, the trading liquidity of our
common stock may not improve.
While
the
Board of Directors believes that a higher stock price may help generate investor
interest in our common stock, there is no assurance that completing the reverse
stock split will result in a per share stock price that will attract
institutional investors or investment funds or that such share price will
satisfy the investing guidelines of institutional investors or investment funds.
As a result, the trading liquidity of our common stock may not necessarily
improve following the reverse stock split.
A
decline in the market price of our common stock after the reverse stock split
may result in a greater percentage decline than would occur in the absence
of a
reverse stock split, and the liquidity of our common stock could be adversely
affected following such a reverse stock split.
If
the
proposed reverse stock split is effected and the market price of our common
stock declines, the percentage decline may be greater than that which would
occur in the absence of a reverse stock split. Furthermore, the liquidity of
our
common stock could be adversely affected by the reduced number of shares that
would be outstanding after the reverse stock split. The market price of our
common stock will, however, also be based on our performance and other factors,
which are unrelated to the number of shares outstanding.
Material
Effects of the Proposed Reverse Stock Split
If
approved and effected, the proposed reverse stock split will be realized
simultaneously for all of our shares of common stock and the exchange ratio
will
be the same for all of our shares of common stock. The reverse stock split
will
affect all of our stockholders uniformly and will not affect any stockholder’s
percentage ownership interests in us, except to the extent that the reverse
stock split would otherwise result in any of our stockholders owning a
fractional share or option. As described below, stockholders otherwise entitled
to fractional shares as a result of the reverse stock split will be entitled
to
cash payments in lieu of such fractional shares. The reverse stock split will
not affect any stockholder’s percentage ownership or proportionate voting power
(subject to the treatment of fractional shares). However, because the number
of
authorized shares of our common stock will not be reduced, the reverse stock
split will increase the ability of the Board of Directors to issue authorized
and unissued shares without further stockholder action.
The
principal effect of the reverse stock split will be that:
|
Ø
|
the
number of shares of our common stock issued and outstanding will
be
reduced from approximately 114
million shares as of April 21, 2006 to approximately 14.25
million shares, based upon a reverse stock split ratio of one-for-eight;
|
|
Ø
|
the
number of shares that may be issued upon the exercise of conversion
rights
by holders of securities convertible into our common stock will be
reduced
to 12.5% of the original number;
|
|
Ø
|
based
on a reverse stock split ratio of one-for-eight, proportionate adjustments
will be made to the per share exercise price and the number of shares
issuable upon the exercise of all outstanding options and warrants
entitling the holders to acquire shares of our common stock and the
conversion price of all outstanding convertible debt, which will result
in
approximately the |
same
aggregate price being required to be paid for such options and warrants upon
exercise, and approximately the same amount of convertible debt to be retired
upon conversion, as was the case immediately preceding the reverse stock split;
and
|
Ø
|
the
number of shares reserved for issuance under our various stock option
plans will be reduced to 12.5% of the original number.
|
In
addition, the reverse stock split will increase the number of stockholders
who
own odd lots (less than 100 shares). Stockholders who hold odd lots typically
may experience an increase in the cost of selling their shares, and may have
greater difficulty in effecting sales.
Effect
on Fractional Stockholders
You
will
not receive any fractional shares of common stock as a result of the reverse
stock split. Instead, the transfer agent will aggregate all fractional shares
and sell them as soon as practicable after the effective date at the then
prevailing prices on the open market, on behalf of those holders who would
otherwise be entitled to receive a fractional share. We expect that the transfer
agent will conduct the sale in an orderly fashion at a reasonable pace and
that
it may take several days to sell all of the aggregated fractional shares of
common stock. After completing the sale, you will receive a cash payment from
the transfer agent in an amount equal to your pro
rata
share of
the total net proceeds of that sale. No transaction costs will be assessed
on
this sale; however, the proceeds will be subject to federal income tax. In
addition, you will not be entitled to receive interest for the period of time
between the effective date of the reverse stock split and the date you receive
your payment for the cashed-out shares. The payment amount will be paid to
the
holder in the form of a check in accordance with the procedures outlined below.
After
the
reverse stock split, you will have no further interest in us with respect to
your cashed-out shares. A person otherwise entitled to a fractional interest
will not have any voting, dividend or other rights except the right to receive
payment as described above.
You
should be aware that, under the escheat laws of the various jurisdictions where
our stockholders reside, where we are domiciled and where the funds will be
deposited, sums due for fractional interests that are not timely claimed after
the effective time may be required to be paid to the designated agent for each
such jurisdiction. Thereafter, stockholders otherwise entitled to receive such
funds may have to obtain them directly from the state to which they were paid.
Effect
on our Employees and Directors and Other Holders of our
Options
If
you
are a current or former Arotech employee or director, the number of shares
reserved for issuance under our existing stock option plans will be reduced
to
12.5% of the original number. In addition, the number of shares issuable upon
the exercise of outstanding options will be reduced to 12.5% of the original
number, and the exercise price for such options will be increased to eight
times
the original exercise price. The aggregate exercise price for your options
will
remain unchanged.
Effect
on Holders of our Warrants and Debentures
If
you
are a holder of warrants to purchase shares of our common stock or of our 8%
Secured Convertible Debentures due September 30, 2006 or our Senior Secured
Convertible Notes due March 31, 2008, the number of shares of our common stock
into which each security is exercisable or convertible and the exercise or
conversion price for such securities will be adjusted proportionately based
on a
reverse stock split ratio of one-for-eight.
Effect
on Registered and Beneficial Stockholders
Upon
a
reverse stock split, we intend to treat stockholders holding our common stock
in
“street name,” through a bank, broker or other nominee, in the same manner as
registered stockholders whose shares are registered in their names. Banks,
brokers or other nominees will be instructed to effect the reverse stock split
for their beneficial holders holding our common stock in “street name.” However,
such banks, brokers or other nominees may have different procedures than
registered stockholders for processing the reverse stock split. If you hold
your
shares with such a bank, broker or other nominee and if you have any questions
in this regard, we encourage you to contact your nominee.
Effect
on Registered “Book-entry” Stockholders
Our
registered stockholders may hold some or all of their shares electronically
in
book-entry form under the direct registration system for securities. These
stockholders will not have stock certificates evidencing their ownership of
our
common stock. They are, however, provided with a statement reflecting the number
of shares registered in their accounts.
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Ø
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if
you hold registered shares in a book-entry form, you do not need
to take
any action to receive your post-reverse stock split shares or your
cash
payment in lieu of any fractional share interest, if applicable.
If you
are entitled to post-reverse stock split shares, a transaction statement
will automatically be sent to your address of record indicating the
number
of shares you hold.
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Ø if
you
are entitled to a payment in lieu of any fractional share interest, a check
will
be mailed to you at your registered address as soon as practicable after the
effective date. By signing and cashing this check, you will warrant that you
owned the shares for which you received a cash payment. Such cash payment is
subject to applicable federal income tax and state abandoned property laws.
In
addition, you will not be entitled to receive interest for the period of time
between the effective date of the reverse stock split and the date you receive
your payment.
Effect
on Registered Certificated Shares
Some
of
our registered stockholders hold all their shares in certificate form or a
combination of certificate and book-entry form. If any of your shares are held
in certificate form, you will receive a transmittal letter from our transfer
agent, American Stock Transfer and Trust Company, as soon as practicable after
the effective date of the reverse stock split. The letter of transmittal will
contain instructions on how to surrender your certificate(s) representing your
pre-reverse stock split shares to the transfer agent. Upon receipt of your
stock
certificate you will be issued the appropriate number of shares electronically
in book-entry form under the direct registration system.
No
new
shares in book-entry form will be issued to you until you surrender your
outstanding certificate(s), together with the properly completed and executed
letter of transmittal, to the transfer agent.
If
you
are entitled to a payment in lieu of any fractional share interest, such payment
will be made as described above under “Effect on Fractional Stockholders.”
At
any
time after receipt of your direct registration system statement, you may request
a stock certificate representing your ownership interest.
STOCKHOLDERS
SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY
CERTIFICATE(S) UNTIL REQUESTED TO DO SO.
Authorized
Shares
The
reverse stock split would affect all issued and outstanding shares of our common
stock and outstanding rights to acquire our common stock. Upon the effectiveness
of the reverse stock split, the number of authorized shares of our common stock
that are not issued or outstanding would increase due to the reduction in the
number of shares of our common stock issued and outstanding based on the reverse
stock split ratio selected by the Board of Directors. As of April 21, 2006,
we
had 250 million shares of authorized common stock and 113,805,241
shares
of
common stock issued and outstanding. We also have 1,000,000 authorized shares
of
preferred stock, none of which has been issued. Authorized but unissued shares
will be available for issuance, and we may issue such shares in the future.
If
we issue additional shares, the ownership interest of holders of our common
stock will be diluted.
Accounting
Matters
The
reverse stock split will not affect the par value of our common stock. As a
result, as of the effective time of the reverse stock split, the stated capital
attributable to our common stock on our balance sheet will be reduced
proportionately based on the reverse stock split ratio of one-for-eight, and
the
additional paid-in capital account will be credited with the amount by which
the
stated capital is reduced. The per share net income or loss and net book value
of our common stock will be restated because there will be fewer shares of
our
common stock outstanding.
Potential
Anti-Takeover Effect
Although
the increased proportion of unissued authorized shares to issued shares could,
under certain circumstances, have an anti-takeover effect (for example, by
permitting issuances that would dilute the stock ownership of a person seeking
to effect a change in the composition of the Board of Directors or contemplating
a tender offer or other transaction for the combination of Arotech with another
company), the reverse stock split proposal is not being proposed in response
to
any effort of which we are aware to accumulate our shares of common stock or
obtain control of Arotech, nor is it part of a plan by management to recommend
to the Board and stockholders a series of amendments to our Amended and Restated
Certificate of Incorporation. Other than the reverse stock split proposal,
the
Board of Directors does not currently contemplate recommending the adoption
of
any other amendments to our Amended and Restated Certificate of Incorporation
that could be construed to affect the ability of third parties to take over
or
change the control of Arotech.
No
Appraisal Rights
Under
the
General Corporation Law of the state of Delaware, our stockholders are not
entitled to appraisal rights with respect to the reverse stock split, and we
will not independently provide stockholders with any such right.
Federal
Income Tax Consequences of the Reverse Stock Split
The
following is a discussion of the material federal income tax consequences of
the
reverse stock split. This discussion is based on currently existing provisions
of the Internal Revenue Code of 1986, as amended, its legislative history,
existing and proposed federal income tax regulations, and administrative and
judicial interpretations of the Internal Revenue Code and those regulations,
all
as in effect as of the date of this proxy statement and prospectus and all
of
which are subject to change,
possibly
with retroactive effect. This discussion does not address all aspects of United
States federal income taxation that may be applicable to holders in light of
their particular circumstances or to holders subject to special treatment under
United States federal income tax law, including, without limitation,
partnerships and other pass-through entities, foreign persons (including both
entities and nonresident alien individuals), banks and other financial
institutions, insurance companies, tax-exempt entities, and dealers in
securities or foreign currencies.
Furthermore,
this discussion does not address any aspect of state, local, or foreign
taxation, or any aspect of United States federal tax laws other than the United
States federal income tax. Because
this discussion does not address tax consequences which may vary with your
individual circumstances, we strongly urge you to consult your own tax advisor
as to the specific United States federal, state, local, or foreign income or
other tax consequences of the reverse stock split to you.
This
discussion is limited to holders who hold their pre-reverse stock split shares
as capital assets. A stockholder generally holds stock as a capital asset unless
that stockholder holds the stock as stock in trade or other property of a kind
which would be included in the stockholder’s inventory if on hand at the close
of the taxable year, or primarily for sale to customers in the ordinary course
of the stockholder’s trade or business.
Other
than the cash payments for fractional shares, no gain or loss should be
recognized by a stockholder upon such stockholder’s exchange of pre-reverse
stock split shares for post-reverse stock split shares pursuant to the reverse
stock split. In general, stockholders who receive cash in exchange for their
fractional share interests in the post-reverse stock split shares as a result
of
the reverse stock split will recognize gain or loss based upon the difference
between the amount of cash received by such holder and the adjusted tax basis
in
the fractional shares as set forth below, as if such fractional shares were
distributed as part of the reverse stock split and then redeemed, subject to
the
provisions and limitations of section 302 of the Internal Revenue Code
(including, without limitation, certain attribution rules that could result
in
the cash payment being treated as a dividend). The gain or loss will constitute
a capital gain or loss and will constitute long-term capital gain or loss if
the
holder’s holding period is greater than one year as of the effective time. The
aggregate tax basis of the post-reverse stock split shares received in the
reverse stock split (including any fraction of a post-reverse stock split share
deemed to have been received, as described above) will be the same as the
stockholder’s aggregate tax basis in the pre-reverse stock split shares
exchanged therefor. The stockholder’s holding period for the post-reverse stock
split shares will include the period during which the stockholder held the
pre-reverse stock split shares surrendered in the reverse stock split.
Procedure
for Effecting Reverse Stock Split and Text of Amendment
If
the
stockholders approve the reverse stock split proposal, we intend to implement
the reverse stock split as soon as possible thereafter. The reverse stock
split
would be implemented by filing a certificate of amendment to our Amended
and
Restated Certificate of Incorporation with the Secretary of State of the
State
of Delaware. The reverse stock split will become effective at the time specified
in the certificate of amendment, which will most likely be immediately after
the
filing of the certificate of amendment and which we refer to as the “effective
time.” Beginning at the effective time, each certificate representing shares of
our common stock before the reverse stock split will automatically be deemed
for
all corporate purposes to evidence ownership of one-eighth of one share of
our
common stock after the reverse stock split. All shares issuable upon exercise
or
conversion of outstanding options, warrants or other securities will
automatically be adjusted. The text of the Certificate of Amendment is set
forth
below. The text of the Certificate of Amendment is subject to
modification
to include such changes as may be required by the office of the Secretary of
State of the State of Delaware and as the Board of Directors deems necessary
and
advisable to effect the reverse stock split.
If
this
proposal is adopted, the following new Sections 2, 3, 4 and 5 would be added
to
Article FOUR
of our
Amended and Restated Certificate of Incorporation:
“2. Conversion
of Common Stock.
At the
time of the filing of this amendment to our Amended and Restated Certificate
of
Incorporation with the Secretary of State of the State of Delaware, (a) each
eight (8) shares of issued and outstanding common stock shall automatically,
without the necessity of any further action on the part of the holder thereof,
be changed and reclassified into one (1) share of common stock. Upon the
occurrence of the reclassification effected by this Article Four, Section 2
(the
“Conversion”), each certificate for outstanding shares of common stock dated
prior to the effective date of the Conversion (“Old Common Stock”) shall
evidence, and be deemed to evidence, the number of shares of common stock into
which the shares previously evidenced by such certificate shall have been
reclassified in accordance with this Article Four, Section 2, and the Conversion
shall become effective in accordance with the terms hereof, whether or not
any
or all of the certificates evidencing Old Common Stock shall have been
surrendered or new certificates evidencing the number of shares of common stock
into which such shares have been reclassified have been issued in accordance
with Article Four, Section 3 hereof.
“3. Subsequent
Reissuance of Certificates.
Following the occurrence of the Conversion, each holder of shares of Old Common
Stock shall be sent a letter of transmittal from the Corporation’s transfer
agent and shall either (a) surrender each certificate evidencing any such shares
pursuant to the instructions in such letter of transmittal or (b) notify the
Corporation that such certificate has been lost, stolen or destroyed and execute
an agreement satisfactory to the Corporation and its transfer agent to indemnify
the Corporation and its transfer agent from any loss incurred by it in
connection with the reissuance of such lost, stolen or destroyed certificate.
The Corporation shall thereupon issue and deliver or cause to be issued and
delivered to such holder a certificate or certificates, in the name shown on
such certificate evidencing Old Common Stock, for the number of whole shares
of
common stock into which the shares of Old Common Stock evidenced by the
surrendered (or lost, stolen or destroyed) certificate have been reclassified,
dated as of the date on which the Conversion become effective. The Corporation
shall not be obligated to issue any certificate evidencing shares of common
stock in connection with the Conversion except in accordance with this Article
Four, Section 3.
“4. Fractional
Shares.
Notwithstanding the foregoing, no fraction of a share of common stock shall
be
issued by virtue of the Conversion, but in lieu thereof, each holder of shares
of Old Common Stock who would otherwise be entitled to a fraction of a share
of
common stock (after aggregating all fractional shares of Common Stock to
be
received by such holder) shall receive from the Corporation the number of
shares
of common stock the holder would otherwise be entitled to, rounded down to
the
next number of whole shares of common stock.
“5. Par
Value of Common Stock.
The par
value of the Common Stock as set forth in Article Four, Section 1A hereof shall
remain unchanged by the Conversion.”
Vote
Required
The
affirmative vote of the holders of a majority of the outstanding shares of
our
common stock entitled to vote on this proposal will be required for approval
of
this proposal. As a result, abstentions and broker non-votes will have the
effect of votes against the proposal.
The
Board of Directors Recommends a Vote FOR Approval of the
Amendment
to
our Amended and Restated Certificate of Incorporation
to
Effect a Reverse Stock Split at a Ratio of One-for-Eight
CORPORATE
GOVERNANCE
We
operate within a corporate governance plan for the purpose of defining
responsibilities, setting high standards of professional and personal conduct,
and assuring compliance with such responsibilities and standards. We monitor
developments in the area of corporate governance. The Board has initiated
actions consistent with the Sarbanes-Oxley Act of 2002, the Securities and
Exchange Commission and The Nasdaq Stock Market.
In
the
fiscal year ending December 31, 2005, the Board held ten meetings. All directors
except for Prof. Seymour Jones attended at least 75% of the aggregate number
of
meetings of the Board and meetings of the committees of the Board on which
such
director serves.
As
of
January 1, 2006, members of the Board of Directors satisfy the applicable
independent director requirements of both the Securities and Exchange Commission
and Rule 4200 of The Nasdaq Stock Market. Our non-management directors meet
regularly in executive session separate from management.
It
is our
policy that each of our directors is invited and encouraged to attend our annual
meeting of stockholders. All of our directors attended our 2005 annual meeting
of stockholders.
Our
Board
of Directors has an Audit Committee, a Compensation Committee, a Nominating
Committee and an Executive and Finance Committee. The composition of the various
committees of the Board of Directors is as follows (the name of the chairman
of
each committee appears in italics):
Audit
Committee
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Compensation
Committee
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Nominating
Committee
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Executive
and Finance Committee
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Seymour
Jones
Lawrence
M. Miller
Jack
E. Rosenfeld
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Jay
M. Eastman
Jack
E. Rosenfeld
Edward
J. Borey
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Jack
E. Rosenfeld
Lawrence
M. Miller
Jay
M. Eastman
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Robert
S. Ehrlich
Steven
Esses
Lawrence
M. Miller
Edward
J. Borey
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Executive
and Finance Committee
The
Executive and Finance Committee, created in July 2001, exercises the powers
of
the Board during the intervals between meetings of the Board, in the management
of our property, business and affairs (except with respect to certain
extraordinary transactions).
The
Executive and Finance Committee consists of Messrs. Ehrlich (Chair), Esses,
Miller and Borey.
The
Executive and Finance Committee held three meetings during the fiscal year
ending December 31, 2005.
Audit
Committee
Created
in December 1993, the purpose of the Audit Committee is to review with
management and our independent auditors the scope and results of the annual
audit, the nature of any other services provided by the independent auditors,
changes in the accounting principles applied to the presentation of our
financial statements, and any comments by the independent auditors on our
policies and procedures with respect to internal accounting, auditing and
financial controls. The Audit Committee was established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. In
addition, the Audit Committee is charged with the responsibility for making
decisions on the engagement, compensation, retention and oversight of the work
of our independent auditors.
The
Audit
Committee consists of Prof. Jones (Chair) and Messrs. Miller and Rosenfeld.
Each
member of the Audit Committee is an “independent director,” as that term is
defined in Rule 4200(a)(14) of the listing standards of the National
Association of Securities Dealers (NASD) and under Item 7(d)(3)(iv) of Schedule
14A of the proxy rules under the Exchange Act. All Audit Committee members
possess the required level of financial literacy. Mr. Wasserman has been
designated as the “Audit Committee’s Financial Expert.” The Audit Committee
operates under a formal charter that governs its duties, which charter is
publicly available through a hyperlink located on the investor relations page
of
our website, at http://www.arotech.com/compro/investor.html.
Additionally, in compliance with SEC rules we are required to append a copy
of
the Audit Committee Charter to our proxy statement at least once every three
years. We last sent a copy of our charter to our stockholders in our 2003 proxy
statement. We have accordingly attached a copy of our Audit Committee Charter
as
Appendix B hereto.
The
Audit
Committee held six meetings during the fiscal year ending December 31,
2005.
Compensation
Committee
The
Compensation Committee was established in December 1993. The duties of the
Compensation Committee are to recommend compensation arrangements for our
executive officers and review annual compensation arrangements for all other
officers and significant employees.
The
Compensation Committee consists of Dr. Eastman (Chair) and Messrs. Rosenfeld
and
Borey. Each member of the Compensation Committee is an independent director
as
that term is defined in the NASD listing standards.
The
Compensation Committee held five meetings
during the fiscal year ending December 31, 2005.
Nominating
Committee
The
Nominating Committee, created in February 2003, identifies and proposes
candidates to serve as members of the Board of Directors. Proposed nominees
for
membership on the Board of Directors submitted in writing by stockholders to
Arotech’s Secretary will be brought to the attention of the Nominating
Committee.
The
Nominating Committee held one meeting during the fiscal year ending December
31,
2005.
The
Nominating Committee consists of Mr. Rosenfeld (Chair), Mr. Miller and Dr.
Eastman. Each member of the Nominating Committee is an independent director
as
that term is defined in the NASD listing standards. The Nominating Committee
makes recommendations to the Board of Directors regarding new directors to
be
selected for membership on the Board of Directors and its various committees.
The Nominating Committee operates under a formal charter that governs its
duties. The Nominating Committee’s charter is
publicly available through a hyperlink located on the investor relations page
of
our website, at http://www.arotech.com/compro/investor.html.
Policies
Regarding Director Qualifications
The
Board
has adopted policies regarding director qualifications. To be considered for
nomination as a director, any candidate must meet the following minimum
criteria:
a. Ability
and willingness to undertake a strategic governance role, clear and distinct
from the operating role of management.
b. High-level
leadership experience in business, government, or other major complex
professional or non-profit organizations that would have exposed the individual
to the challenges of leadership and governance in a dynamic and highly
competitive marketplace.
c. Highly
accomplished in their respective field, with superior credentials and
recognition.
d. Demonstrated
understanding of the elements and issues relevant to the success of a large
publicly-traded company in the current volatile business, legal and governance
environment.
e. Demonstrated
business acumen and creative/strategic thinking ability.
f. Personal
Characteristics:
Ø Ability
and willingness to contribute special competencies to the Board in a
collaborative manner. The areas of expertise required at any point in time
may
vary, based on the existing composition of the Board. They may include, but
would not be limited to, capabilities honed as a CEO or a senior functional
leader in operations, finance, information technology, marketing, organizational
development, and experience making step change to transform a
business.
Ø Personal
integrity and highest ethical character. Absence of any conflicts of interest,
either real or perceived.
Ø Willingness
to apply sound and independent business judgment, enriching management and
Board
proposals or challenging them constructively as appropriate.
Ø Willing
to exert influence through strong influence skills and constructive teamwork.
This is essential to effective collaboration with other directors as well as
providing constructive counsel to the CEO.
Ø Understanding
of and full commitment to our governance principles and the obligation of each
director to contribute to good governance, corporate citizenship, and corporate
image for Arotech.
Ø Willingness
to devote the time necessary to assume broad fiduciary responsibility and to
participate fully in Arotech governance requirements with appropriate due
diligence and attention.
In
this
regard, each nominee will be asked to disclose the boards of directors on which
he or she currently sits, and each current director will be asked to inform
the
Nominating Committee of additional corporate board nominations (both for-profit
and non-profit). This notification is to ensure appropriate dialogue about
the
impact of the added responsibilities on the individual’s availability to perform
thoroughly his or her duties as an Arotech director.
The
Board
of Directors will consist of a majority of people who are active, primarily
in
business roles, and selected retired individuals. Those active in the business
community will bring the most current business thinking, and retirees will
bring
their long experience and seasoned business judgment. Every effort will be
made
to achieve diversity in the Board’s membership.
From
time
to time, the particular capabilities needed to round out the total Board’s
portfolio of competencies may vary. The Nominating Committee is empowered to
consider the demographics of the total Board as it considers the requirements
for each Board vacancy and to identify particular unique capabilities needed
at
that point in time.
Policies
Regarding Director Nominations
The
Board’s Nominating Committee is responsible for the Board of Director’s
nomination process. New candidates for the Board of Directors may be identified
by existing directors, a third party search firm (paid for its professional
services) or may be recommended by stockholders. In considering new candidates
submitted by stockholders, the Nominating Committee will take into consideration
the needs of the Board of Directors and the qualifications of the candidate.
However, all director nominees will be evaluated against the same standards
and
in the same objective manner, based on competencies and personal characteristics
listed above, regardless of how they were identified. To have a candidate
considered by the Nominating Committee, a stockholder must submit the
recommendation in writing and must include the following information:
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The
name of the stockholder and evidence of the person’s ownership of our
stock, including the number of shares owned and the length of time
of
ownership; and
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The
name of the candidate, the candidate’s resume or a listing of his or her
qualifications to be a director of Arotech and the person’s consent to be
named as a director if selected by the Nominating Committee and
nominated
by the Board of Directors.
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The
stockholder recommendation and information described above must be sent to
Arotech’s Secretary at 1229 Oak Valley Drive, Ann Arbor, Michigan 48108, and
must be received by Arotech’s Secretary not less than 120 days prior to the
anniversary date of our most recent annual meeting of
stockholders.
Once
a
person has been identified by the Nominating Committee as a potential candidate,
the Committee may collect and review publicly available information regarding
the person to assess whether the person should be considered further. If the
Nominating Committee determines that the candidate warrants further
consideration, the Chairman or another member of the Committee will contact
the
person. Generally, if the person expresses a willingness to be considered and
to
serve on the Board of Directors, the Nominating Committee will request
information from the candidate, review the person’s accomplishments and
qualifications, including in light of any other candidates that the Committee
might be considering, and conduct one or more interviews with the candidate.
In
certain instances, Committee members may contact one or more references provided
by the candidate or may contact other members of the business community or
other
persons that may have greater first-hand knowledge of the candidate’s
accomplishments. The Committee’s evaluation process does not vary based on
whether or not a candidate is recommended by a stockholder, although, the Board
of Directors may take into consideration the number of shares held by the
recommending stockholder and the length of time that such shares have been
held.
Codes
of Ethics
We
have
adopted a Code of Ethics, as required by Nasdaq listing standards and the rules
of the SEC, that applies to our principal executive officer, our principal
financial officer, and our principal accounting officer, as well as a more
general code of conduct that applies to our other directors, officers and
employees. The Code of Ethics is publicly available through a hyperlink located
on the investor relations page of our website, at http://www.arotech.com/compro/investor.html.
If we
make substantive amendments to the Code of Ethics or grant any waiver, including
any implicit waiver, that applies to anyone subject to the Code of Ethics,
we
will disclose the nature of such amendment or waiver on the website or in a
report on Form 8-K in accordance with applicable Nasdaq and SEC
rules.
COMPENSATION
AND OTHER MATTERS
Director
Compensation
Non-employee
members of our Board of Directors are paid $2,500 (plus expenses) for each
Board
of Directors meeting attended, $2,000 (plus expenses) for each meeting of the
Audit Committee of the Board of Directors attended, and $1,000 (plus expenses)
for each meeting of all other committees of the Board of Directors attended.
In
addition, we have adopted a Non-Employee Director Stock Option Plan pursuant
to
which non-employee directors receive an initial grant of options to purchase
50,000 shares of our common stock upon the effective date of such plan or upon
the date of his or her election as a director. Thereafter, non-employee
directors will receive, on June 1 of each year, options to purchase 35,000
shares of our common stock for each year of service on the Board. All such
options are granted at fair market value on the date of grant and vest over
three years from the date of the grant in equal annual installments. During
2005, our directors agreed to an interim reduction in their fees of 25% as
part
of our overall cost-cutting strategy.
Executive
Officer Compensation
General
Our
Chief
Executive Officer and the other highest paid executive officers (of which there
were two) who were compensated at a rate of more than $100,000 in salary and
bonuses during the year ended December 31, 2005 (collectively, the “Named
Executive Officers”) are Israeli residents, and thus certain elements of the
compensation that we pay them are structured as is customary in
Israel.
During
2005, 2004 and 2003, compensation to our Named Executive Officers took several
forms:
Ø cash
salary;
Ø bonus,
some of which was paid in cash in the year in which it was earned and some
of
which was accrued in the year in which it was earned but paid in cash in a
subsequent year;
Ø cash
reimbursement for taxes paid by the Named Executive Officer and reimbursed
by us
in accordance with Israeli tax regulations;
Ø accruals
(but not cash payments) in respect of contractual termination compensation
in
excess of the Israeli statutory minimum;
Ø accruals
(but not cash payments) in respect of pension plans, which consist of a savings
plan, life insurance and statutory severance pay benefits, and a continuing
education fund (as is customary in Israel);
Ø stock
options;
Ø grants
of
restricted stock, where the sale of such stock is prohibited for a period of
two
years and such stock is forfeit to us should the Named Executive Officer’s
employment be terminated for cause, as defined in such Executive’s employment
agreement (e.g.,
fraud,
reckless or willful misconduct, etc.); and
Ø other
benefits, primarily consisting of annual statutory holiday pay and redemption
of
unused vacation days and sick days.
The
specific amounts of each form of compensation paid to each Named Executive
Officer appear in the summary compensation table and the notes thereto appearing
under “Summary Compensation Table,” below.
Summary
Compensation Table
The
following table, which should be read in conjunction with the explanations
provided above, shows the compensation that we paid (or accrued), in connection
with services rendered for 2005, 2004 and 2003, to our Named Executive
Officers.
SUMMARY
COMPENSATION TABLE(1)
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Long
Term Compensation
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Name
and Principal Position
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Year
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Salary
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Bonus
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Tax
Reimbursement
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Restricted
Stock
Awards(2)
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Securities
Underlying
Options
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Changes
in
Accruals
for
Sick
Days,
Vacation
Days,
and
Termination
Compensation
|
|
|
Payment
to
Pension
and
Education
Funds
|
|
|
Others
|
|
Robert
S. Ehrlich
Chairman
of the Board, Chief Executive Officer and director*
|
|
|
2005
|
|
$ |
275,362
|
|
$
|
49,875
|
|
$
|
26,340
|
|
|
$ |
0
|
|
|
0
|
(3)
|
|
$ |
(51,363)
|
(4)
|
$
|
45,362
|
|
$
|
112,413
|
(5)
|
|
|
|
2004
|
|
$ |
275,907
|
|
$
|
175,000
|
|
$
|
29,103
|
|
|
$ |
626,350
|
|
|
50,000
|
|
|
$ |
133,898
|
(6)
|
$
|
548,477
|
(7) |
$
|
19,893
|
|
|
|
|
2003
|
|
$ |
259,989
|
|
$
|
180,000
|
(8)
|
$
|
27,211
|
|
|
$ |
0
|
|
|
2,035,000
|
|
|
$ |
80,713
|
(9)
|
$
|
48,228
|
|
$
|
678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
Esses
President,
Chief Operating Officer and director**
|
|
|
2005
|
|
$ |
56,722
|
(10) |
$
|
112,000
|
(11) |
$
|
22,666
|
|
|
$ |
0
|
|
|
114,860
|
(12) |
|
$ |
228,403
|
(13)
|
$
|
12,466
|
|
$
|
13,607
|
|
|
|
|
2004
|
|
$ |
65,506
|
(14) |
$
|
106,000
|
(15) |
$
|
25,273
|
|
|
$ |
221,100
|
|
|
0
|
|
|
$ |
3,759
|
(16)
|
$
|
12,116
|
|
$
|
12,940
|
|
|
|
|
2003
|
|
$ |
0
|
|
$
|
0
|
|
$
|
0
|
|
|
$ |
0
|
|
|
1,035,000
|
|
|
$ |
0
|
|
$
|
0
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
and Principal Position
|
|
|
Year
|
|
|
Salary
|
|
|
Bonus
|
|
|
Tax
Reimbursement
|
|
|
|
Restricted
Stock
Awards(2)
|
|
|
Securities
Underlying
Options
|
|
|
|
Changes
in
Accruals
for
Sick
Days,
Vacation
Days,
and
Termination
Compensation
|
|
|
Payment
to
Pension
and
Education
Funds
|
|
|
Others
|
|
Avihai
Shen
Vice
President - Finance and Chief
Financial Officer***
|
|
|
2005
|
|
$ |
157,013
|
|
$
|
0
|
|
$
|
7,889
|
|
|
$ |
0
|
|
|
0
|
|
|
$ |
70,479
|
(17)
|
$
|
23,121
|
|
$
|
39,476
|
(18)
|
|
|
|
2004
|
|
$ |
155,845
|
|
$
|
97,000
|
|
$
|
6,407
|
|
|
$ |
54,900
|
|
|
18,750
|
|
|
$ |
34,972
|
|
$
|
26,889
|
|
$
|
476
|
|
|
|
|
2003
|
|
$ |
123,988
|
|
$
|
0
|
|
$
|
8,653
|
|
|
$ |
0
|
|
|
608,750
|
|
|
$ |
6,471
|
(20)
|
$
|
23,133
|
|
$
|
463
|
|
|
*
|
Mr.
Ehrlich ceased to hold the title of President in December
2005.
|
**
|
Mr.
Esses became an executive officer in January 2003. His compensation
as an
officer during 2003 consisted solely of stock options. In December
2005,
Mr. Esses became our President; prior thereto, he held the title
of
Executive Vice President.
|
***
|
Mr.
Shen ceased to act as our Chief Financial Officer in February 2006,
and
his employment with us terminated on March 31, 2006.
|
(1)
|
We
paid the amounts reported for each named executive officer in U.S.
dollars
and/or New Israeli Shekels (NIS). We have translated amounts paid
in NIS
into U.S. dollars at the exchange rate of NIS into U.S. dollars at
the
time of payment or accrual.
|
(2)
|
Based
on the closing market price of our stock on the Nasdaq Stock Exchange
on
the date of grant multiplied by the number of shares awarded. As
of
December 31, 2004, our Named Executive Officers held 635,000 restricted
shares. Of these shares, the restrictions on 530,000 shares are scheduled
to expire on August 4, 2006, and the restrictions on 105,000 are
scheduled
to expire on December 8, 2006. The value of the restricted shares
held by
our Named Executive Officers on December 31, 2004, based on the closing
price of our stock on the Nasdaq Stock Exchange on that date, was
$902,350.
|
(3)
|
During
2005, no new options were granted to Mr. Ehrlich; however, 600,000
of Mr.
Ehrlich’s options were repriced in 2005 from an average exercise price of
$1.19 to a new exercise price of $0.39. See “Report on Repricing of
Options,” below. Additionally, 784,167 of Mr. Ehrlich’s options expired or
were cancelled during 2005.
|
(4)
|
Of
this amount, $67,024 represents our accrual for severance pay that
will be
payable to Mr. Ehrlich upon his leaving our employ other than if
he is
terminated for cause, such as a breach of trust; $(51,928) represents
the
decrease of the accrual for vacation days redeemable by Mr. Ehrlich;
$(40,483) represents the decrease of the accrual for sick days redeemable
by Mr. Ehrlich; and $(25,976) represents the decrease of our accrual
for
severance pay that would be payable to Mr. Ehrlich under the laws
of the
State of Israel if we were to terminate his employment.
|
(5)
|
Of
this amount, $61,195 represents payment for redemption of accrued
but
unused vacation days, and $33,394 represents payment for redemption
of
accrued but unused sick days.
|
(6)
|
Of
this amount, $76,766 represents our accrual for severance pay that
would
be payable to Mr. Ehrlich upon a “change of control” or upon the
occurrence of certain other events; $28,603 represents the increase
of the
accrual for vacation days redeemable by Mr. Ehrlich; and $28,529
represents the increase of our accrual for severance pay that would
be
payable to Mr. Ehrlich under the laws of the State of Israel if we
were to
terminate his employment.
|
(7)
|
Of
this amount, $500,000 was deposited
by us in a Rabbi Trust for Mr. Ehrlich’s benefit. Pursuant to the terms of
the Rabbi Trust, funds in the Rabbi Trust continue to be owned by
us, and
benefit from all gains and bear the risk of all losses resulting
from
investments of Rabbi Trust funds. See “Employment Contracts - Robert S.
Ehrlich,” below.
|
(8)
|
We
paid Mr. Ehrlich $180,000 during 2004 in satisfaction of his bonus
from
2003 to which he was entitled according to his contract. Of this
amount,
we accrued $99,750 for Mr. Ehrlich in satisfaction of the 2003 bonus
to
which he was entitled according to his contract; the remainder was
the
result of the approval in 2004 by the Compensation Committee of a
higher
bonus for 2003 than Mr. Ehrlich’s contractual minimum.
|
(9)
|
Of
this amount, $92,075 represents our accrual for severance pay that
would
be payable to Mr. Ehrlich upon a “change of control” or upon the
occurrence of certain other events; $3,451 represents the increase
of the
accrual for sick leave and vacation days redeemable by Mr. Ehrlich;
and
$(14,813) represents the decrease of our accrual for severance pay
that
would be payable to Mr. Ehrlich under the laws of the State of Israel
if
we were to terminate his employment.
|
(10)
|
Does
not include $178,176 that we paid in consulting fees to Sampen
Corporation, a
New York corporation owned by members of Steven Esses’s immediate family,
from which Mr. Esses receives a salary. See “Certain Relationships and
Related Transactions - Consulting Agreement with Sampen Corporation,”
below.
|
(11)
|
Includes
a $100,000 signing bonus that was paid to Mr. Esses in 2005 and the
$12,000 minimum bonus to which Mr. Esses is entitled pursuant to
the terms
of his employment contract. Does not include
$30,720 that we paid as a bonus to Sampen Corporation, a
New York corporation owned by members of Steven Esses’s immediate family,
from which Mr. Esses receives a salary. See “Certain Relationships and
Related Transactions - Consulting Agreement with Sampen Corporation,”
below..
|
(12)
|
In
addition to the grant of 114,860 new options during 2005, 885,140
of Mr.
Esses’s options were repriced in 2005 from an average exercise price of
$0.80 to a new exercise price of $0.39. See “Report on Repricing of
Options,” below.
|
(13)
|
Of
this amount, $186,707 represents the increase of our accrual for
severance
pay that would be payable to Mr. Esses if we were to terminate his
employment; and $41,369 represents the increase of the accrual for
sick
leave and vacation days redeemable by Mr. Esses.
|
(14)
|
Does
not include $208,100 that we paid in consulting fees to Sampen
Corporation, a
New York corporation owned by members of Steven Esses’s immediate family,
from which Mr. Esses receives a salary. See “Certain Relationships and
Related Transactions - Consulting Agreement with Sampen Corporation,”
below.
|
(15)
|
Does
not include $110,000 that we paid as a bonus to Sampen Corporation,
a
New York corporation owned by members of Steven Esses’s immediate family,
from which Mr. Esses receives a salary. See “Certain Relationships and
Related Transactions - Consulting Agreement with Sampen Corporation,”
below.
|
(16)
|
Represents
the increase of the accrual for vacation days redeemable by Mr.
Esses.
|
(17)
|
Of
this amount, $104,602 represents the increase of our accrual for
severance
pay that would be payable to Mr. Shen if we were to terminate his
employment; $(28,597) represents the decrease of the accrual for
sick
leave and vacation days redeemable by Mr. Shen; and $(5,526) represents
the decrease in our accrual for severance pay that would be payable
to Mr.
Shen under the laws of the State of Israel if we were to terminate
his
employment.
Mr. Shen left our employ effective March 31, 2006, and these amounts
were
accordingly paid to him.
|
(18)
|
Of
this amount, $35,131 represents payment to Mr. Shen for redemption
of
accrued but unused vacation days.
|
(19)
|
Of
this amount, $21,568 represents the increase in our accrual for vacation
days redeemable by Mr. Shen; and $13,404 represents the increase
of our
accrual for severance pay that would be payable to Mr. Shen under
the laws
of the State of Israel if we were to terminate his
employment.
|
(20)
|
Of
this amount, $8,369 represents the increase of the accrual for vacation
days redeemable by Mr. Shen; and $(1,628) represents the decrease
of our
accrual for severance pay that would be payable to Mr. Shen under
the laws
of the State of Israel if we were to terminate his
employment.
|
Executive
Loans
In
1999,
2000 and 2002, we extended certain loans to our Named Executive Officers. These
loans are summarized in the following table, and are further described under
“Certain
Relationships and Related Transactions - Officer Loans,” below.
Name
of Borrower
|
|
Date
of Loan
|
|
Original
Principal
Amount
of Loan
|
|
Amount
Outstanding
as
of 12/31/05
|
|
Terms
of Loan
|
Robert
S. Ehrlich
|
|
12/28/99
|
|
$
|
167,975
|
|
$
|
201,570
|
|
Ten-year
non-recourse loan to purchase our stock, secured by the shares of
stock
purchased.
|
Robert
S. Ehrlich
|
|
02/09/00
|
|
$
|
789,991
|
|
$
|
692,102
|
|
Twenty-five-year
non-recourse loan to purchase our stock, secured by the shares of
stock
purchased.
|
Robert
S. Ehrlich
|
|
06/10/02
|
|
$
|
36,500
|
|
$
|
40,343
|
|
Twenty-five-year
non-recourse loan to purchase our stock, secured by the shares of
stock
purchased.
|
Stock
Options
The
table
below sets forth information with respect to stock options granted to the Named
Executive Officers for the fiscal year 2005.
Option
Grants in Last Fiscal Year
|
|
|
|
|
|
|
|
Potential
Realizable Value
at
Assumed Annual Rates
of
Stock Price Appreciation
for
Option Term(1)
|
Name
|
|
Number
of Securities Underlying Options Granted
|
|
%
of Total Options granted to Employees in Fiscal
Year
|
|
Exercise
or Base Price ($/Sh)
|
|
Expiration
Date
|
|
|
|
10%
($)
|
Steven
Esses |
|
114,860
|
|
6.8%
|
|
$
0.39
|
|
12/29/10
|
|
$
27,348
|
|
$27,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
The
potential realizable value illustrates the value that might be
realized
upon exercise of the options immediately prior to the expiration
of their
terms, assuming the specified compounded rates of appreciation
of the
market price per share from the date of grant to the end of the
option
term. Actual gains, if any, on stock option exercise are dependent
upon a
number of factors, including the future performance of the common
stock
and the timing of option exercises, as well as the executive officer’s
continued employment through the vesting period. The gains shown
are net
of the option exercise price, but do not include deductions for
taxes and
other expenses payable upon the exercise of the option or for sale
of the
underlying shares of common stock. The 5% and 10% rates of appreciation
are mandated by the rules of the Securities and Exchange Commission
and do
not represent our estimate or projection of future increases in
the price
of our stock. There can be no assurance that the amounts reflected
in this
table will be achieved, and unless the market price of our common
stock
appreciates over the option term, no value will be realized from
the
option grants made to the executive
officers.
|
The
table
below sets forth information for the Named Executive Officers with respect
to
aggregated option exercises during fiscal 2005 and fiscal 2005 year-end option
values.
Aggregated
Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
|
|
|
|
|
|
|
|
Number
of Securities Underlying
Unexercised Options at Fiscal Year
End
|
|
Value of Unexercised In-the-Money Options
at Fiscal
Year-End(1)
|
Name
|
|
Shares
Acquired
on Exercise
|
|
|
Value
Realized
|
|
|
Exercisable
|
|
Unexercisable
|
|
Exercisable
|
|
Unexercisable
|
Robert
S. Ehrlich
|
|
-
|
|
$
|
-
|
|
|
2,100,000
|
|
0
|
|
$
|
0
|
|
$
|
0
|
Steven
Esses |
|
- |
|
$ |
-
|
|
|
1,035,000
|
|
0 |
|
$ |
0 |
|
$
|
0 |
Avihai
Shen |
|
-
|
|
$
|
-
|
|
|
619,653
|
|
0 |
|
$ |
0 |
|
$
|
0 |
(1)
|
Options
that are “in-the-money” are options for which the fair market value of the
underlying securities on December 31, 2005 ($0.37) exceeds the exercise
or
base price of the option.
|
REPORT
OF THE COMPENSATION COMMITTEE ON OPTIONS REPRICING
During
2005, we approved the repricing of 600,000 of Mr. Ehrlich’s stock options from
exercise prices ranging between $0.61 and $1.43 to a new exercise price of
$0.39, and 885,140 of Mr. Esses’s stock options from exercise prices ranging
between $0.43 and $1.28 to a new exercise price of $0.39. The closing market
price of our common stock on the date of the repricing was $0.39. This repricing
was implemented to address the substantial loss in value of the outstanding
stock options held by Messrs. Ehrlich and Esses and the increasing inability
of
those options to serve as a meaningful performance incentive for them.
Additionally, we accelerated vesting of 557,340 of our outstanding unvested
stock options to make such options immediately vested and
exercisable. The
decision to accelerate the vesting of those options and to grant fully vested
options was based primarily upon the issuance of SFAS No. 123R, which will
require us to treat all unvested stock options as
compensation
expense effective January 1, 2006. We believe that the acceleration of vesting
of those options will enable us to avoid recognizing stock-based compensation
expense associated with these options in future periods. Additional purposes
of
reasons for the fully vested grant and for the acceleration were to make the
options more attractive to the recipients, and to avoid discrimination between
groups of option holders, respectively.
Submitted
by the Compensation Committee
Dr.
Jay
M. Eastman
Jack
E.
Rosenfeld
Edward
J.
Borey
Report
on Repricing of Options
The
table
below sets forth information for all Executive Officers with respect to
repricing of options for the ten years preceding December 31, 2005.
Ten-Year
Option Repricings
|
Name
and Principle Position
|
|
Date
|
Number
of
Securities
Underlying
Options
Repriced
or
Amended
|
|
Market
Price
of
Stock
at
Time
of
Repricing
or
Amendment
($)
|
|
Exercise
Price
at
Time
of
Repricing
or
Amendment
($)
|
|
New
Exercise
Price
($)
|
|
Length
of
Original
Option
Term
Remaining
at
Date of
Repricing
or
Amendment
(Years)
|
Robert
S. Ehrlich
Chairman,
Chief Executive Officer and director
|
12/29/05
|
28,500
|
|
$0.39
|
|
$1.375
|
|
$0.39
|
|
3.84
|
12/29/05
|
48,000
|
|
$0.39
|
|
$1.430
|
|
$0.39
|
|
5.81
|
12/29/05
|
166,000
|
|
$0.39
|
|
$1.430
|
|
$0.39
|
|
5.65
|
12/29/05
|
72,500
|
|
$0.39
|
|
$1.300
|
|
$0.39
|
|
5.83
|
12/29/05
|
65,625
|
|
$0.39
|
|
$1.420
|
|
$0.39
|
|
2.00
|
12/29/05
|
15,625
|
|
$0.39
|
|
$0.730
|
|
$0.39
|
|
2.00
|
12/29/05
|
65,625
|
|
$0.39
|
|
$0.850
|
|
$0.39
|
|
2.00
|
12/29/05
|
88,125
|
|
$0.39
|
|
$0.610
|
|
$0.39
|
|
2.00
|
12/29/05
|
50,000
|
|
$0.39
|
|
$1.200
|
|
$0.39
|
|
3.61
|
|
|
|
|
|
|
|
|
|
|
|
Steven
Esses
President,
Chief Operating Officer and director
|
12/29/05
|
450,140
|
|
$0.39
|
|
$0.430
|
|
$0.39
|
|
2.07
|
12/29/05
|
100,000
|
|
$0.39
|
|
$0.850
|
|
$0.39
|
|
7.53
|
12/29/05
|
300,000
|
|
$0.39
|
|
$1.280
|
|
$0.39
|
|
7.79
|
12/29/05
|
35,000
|
|
$0.39
|
|
$1.280
|
|
$0.39
|
|
7.79
|
Employment
Contracts
Robert
S. Ehrlich
Mr.
Ehrlich is party to an employment agreement with us executed in May 2005,
effective as of January 1, 2005. The term of this employment agreement expires
on December 31, 2007, and is extended automatically for additional terms of
one
year each unless either Mr. Ehrlich or we terminate the agreement
sooner.
The
employment agreement provides for a base salary of $23,750 per month in 2005,
$25,000 per month in 2006, and $26,500 per month in 2007, as adjusted annually
for Israeli inflation and devaluation of the Israeli shekel against the U.S.
dollar, if any. Additionally, the board may at its discretion raise Mr.
Ehrlich’s base salary.
The
employment agreement provides that we will pay a bonus, on a sliding scale,
in
an amount equal to a minimum of 35% of Mr. Ehrlich’s annual base salary then in
effect, up to a maximum of 90% of his annual base salary then in effect if
the
results we actually attain for the year in question are 120% or more of the
amount we budgeted at the beginning of the year.
The
employment agreement also contains various benefits customary in Israel for
senior executives, tax and financial planning expenses and an automobile, and
contains confidentiality and non-competition covenants. Pursuant to the
employment agreement, we granted Mr. Ehrlich demand and “piggyback” registration
rights covering shares of our common stock held by him.
We
can
terminate Mr. Ehrlich’s employment agreement in the event of death or disability
or for “Cause” (defined as conviction of certain crimes, willful failure to
carry out directives of our board of directors or gross negligence or willful
misconduct). Mr. Ehrlich has the right to terminate his employment upon a change
in our control or for “Good Reason,” which is defined to include adverse changes
in employment status or compensation, our insolvency, material breaches and
certain other events. Additionally, Mr. Ehrlich may terminate his agreement
for
any reason upon 120 days’ notice. Upon termination of employment, the employment
agreement provides for payment of all accrued and unpaid compensation, and
(unless we have terminated the agreement for Cause or Mr. Ehrlich has terminated
the agreement without Good Reason and without giving us 120 days’ notice of
termination) bonuses due for the year in which employment is terminated (in
an
amount of not less than 35% of base salary) and severance pay in the amount
of
$1,625,400 and bonus at the minimum rate, except that in the event of
termination of the agreement following a change of control, the amount payable
is doubled. Furthermore, certain benefits will continue and all outstanding
options will be fully vested.
Pursuant
to the terms of our employment agreement Mr. Ehrlich, funds to secure payment
of
Mr. Ehrlich’s contractual severance are to be deposited in a Rabbi Trust for his
benefit, with payments to the Rabbi Trust to be made pursuant to an agreed-upon
schedule. As of December 31, 2005, a total of $454,859 had been deposited in
this Rabbi Trust. Pursuant to the terms of the Rabbi Trust, funds in the Rabbi
Trust continue to be owned by us, and benefit from all gains and bear the risk
of all losses resulting from investments of Rabbi Trust funds.
Steven
Esses
Mr.
Esses
is party to an employment agreement with us executed in May 2005, effective
as
of January 1, 2005. The term of this employment agreement expires on December
31, 2006, and is extended automatically for additional terms of two years each
unless either Mr. Esses or we terminate the agreement sooner.
The
employment agreement provides for a base salary of $5,000 per month, as adjusted
annually for Israeli inflation and devaluation of the Israeli shekel against
the
U.S. dollar, if any. Additionally, the board may at its discretion raise Mr.
Esses’s base salary.
The
employment agreement provides that if the results we actually attain in a given
year are at least 90% of the amount we budgeted at the beginning of the year,
we
will pay a bonus, on a sliding scale, in an amount equal to a minimum of 25%
of
Mr. Esses’s annual base salary then in effect, up to a maximum of 75% of his
annual base salary then in effect if the results we actually attain for the
year
in question are 120% or more of the amount we budgeted at the beginning of
the
year.
The
employment agreement also contains various benefits customary in Israel for
senior executives, tax and financial planning expenses and an automobile,
and
contains confidentiality and non-competition covenants. Pursuant to the
employment agreement, we granted Mr. Esses demand and “piggyback” registration
rights covering shares of our common stock held by him.
We
can
terminate Mr. Esses’s employment agreement in the event of death or disability
or for “Cause” (defined as conviction of certain crimes, willful failure to
carry out directives of our board of directors or gross negligence or willful
misconduct). Mr. Esses has the right to terminate his employment upon a change
in our control or for “Good Reason,” which is defined to include adverse changes
in employment status or compensation, our insolvency, material breaches and
certain other events. Additionally, Mr. Esses may retire (after age 65),
retire
early (after age 55) or terminate his agreement for any reason upon 150 days’
notice. Upon termination of employment, the employment agreement provides
for
payment of all accrued and unpaid compensation, and (unless we have terminated
the agreement for Cause or Mr. Esses has terminated the agreement without
Good
Reason and without giving us 150 days’ notice of termination) bonuses due for
the year in which employment is terminated (in an amount of not less than
20% of
base salary) and severance pay in the amount of $330,000, except that in
the
event of termination of the agreement following a change of control, the
amount
payable is doubled. Furthermore, certain benefits will continue (for a shorter
period, in the event of early retirement) and all outstanding options will
be
fully vested.
Pursuant
to the terms of our employment agreement Mr. Esses, funds to secure payment
of
Mr. Esses’s contractual severance are to be deposited in a Rabbi Trust for his
benefit, with payments to the Rabbi Trust to be made pursuant to an agreed-upon
schedule. As of December 31, 2005, no funds had been deposited in this Rabbi
Trust. Pursuant to the terms of the Rabbi Trust, funds in the Rabbi
Trust continue to be owned by us, and benefit from all gains and bear the
risk
of all losses resulting from investments of Rabbi Trust
funds.
See
also
“Certain Relationships and Related Transactions - Consulting Agreement with
Sampen Corporation,” below.
Thomas
J. Paup
Mr.
Paup,
our Vice President - Finance and Chief Financial Officer, is party to an
employment agreement with us dated December 30, 2005. Under the terms of his
employment agreement, Mr. Paup is entitled to receive a base salary of $135,000
per annum, and will be eligible for a bonus with a target equal to between
20%
and 50% of the base salary. The actual bonus payout shall be determined based
upon the Company’s achievement level against financial and performance
objectives determined by the Compensation Committee of our Board of
Directors.
Other
employees have entered into individual employment agreements with us. These
agreements govern the basic terms of the individual’s employment, such as
salary, vacation, overtime pay, severance arrangements and pension plans.
Subject to Israeli law, which restricts a company’s right to relocate an
employee to a work site farther than sixty kilometers from his or her regular
work site, we have retained the right to transfer certain employees to other
locations and/or positions provided that such transfers do not result in a
decrease in salary or benefits. All of these agreements also contain provisions
governing the confidentiality of information and ownership of intellectual
property learned or created during the course of the employee’s tenure with us.
Under the terms of these provisions, employees must keep confidential all
information regarding our operations (other than information which is already
publicly available) received or learned by the employee during the course of
employment. This provision remains in force for five years after the employee
has left our service. Further, intellectual property created during the course
of the employment relationship belongs to us.
A
number
of the individual employment agreements, but not all, contain non-competition
provisions which restrict the employee’s rights to compete against us or work
for an enterprise which competes against us. Such provisions remain in force
for
a period of two years after the employee has left our service.
Under
the
laws of Israel, an employee of ours who has been dismissed from service,
died in
service, retired from service upon attaining retirement age, or left due
to poor
health, maternity or certain other reasons, is entitled to severance pay
at the
rate of one month’s salary for each year of service, pro
rata
for
partial years of service. We currently fund this obligation by making monthly
payments to approved private provident funds and by our accrual for severance
pay in the consolidated financial statements.
Compensation
Committee Interlocks and Insider Participation
The
Compensation Committee of our board of directors for the 2005 fiscal year
consisted of Dr. Jay M. Eastman, Jack E. Rosenfeld and Edward J. Borey. None
of
the members has served as on of our officers or employees.
REPORT
OF THE COMPENSATION COMMITTEE
Notwithstanding
anything to the contrary set forth in any of our previous filings under the
Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act
which might incorporate future filings, including this Proxy Statement, in
whole
or in part, the following report and the Performance Graph on page 29,
shall not be incorporated by reference into any such
filings.
Objectives
and Philosophy
We
maintain compensation and incentive programs designed to motivate, retain and
attract management and utilize various combinations of base salary, bonuses
payable upon the achievement of specified goals, discretionary bonuses and
stock
options. Our Chief Executive Officer, Robert S. Ehrlich, our Chief Operating
Officer, Mr. Steven Esses, and our Chief Financial Officer, Mr. Thomas J. Paup,
are all parties to employment agreements with us.
Executive
Officer Compensation
The
employment agreement with Mr. Ehrlich provides that if the results we actually
attain in a given year are at least 80% of the amount we budgeted at the
beginning of the year, we will pay a bonus to Mr. Ehrlich, on a sliding scale,
in an amount equal to a minimum of 35% of his annual base salary then in
effect,
up to a maximum of 90% of his annual base salary then in effect if the results
we actually attain for the year in question are 120% or more of the amount
we
budgeted at the beginning of the year. We paid Mr. Ehrlich nothing during
2005
in satisfaction of the 2005 bonus to which he was entitled according to his
contract.
The
employment agreement with Mr. Esses provides that if the results we actually
attain in a given year are at least 90% of the amount we budgeted at the
beginning of the year, we will pay a bonus to Mr. Esses, on a sliding scale,
in
an amount equal to a minimum of 25% of his annual base salary then in effect,
up
to a maximum of 75% of his annual base salary then in effect if the results
we
actually attain for the year in question are 120% or more of the amount we
budgeted at the beginning of the year. We paid Mr. Esses $12,000 during 2005
in
satisfaction of the 2005 bonus to which he was entitled according to his
contract (not including a $100,000 signing bonus that he was paid upon signing
his employment agreement), which amount does not include $30,720 that we
paid as
a bonus to Sampen Corporation, a New York corporation owned by members of
Steven
Esses’s immediate family from which Mr. Esses receives a salary. See also
“Certain Relationships and Related Transactions - Consulting Agreement with
Sam-pen Corporation,” below.
The
employment agreement with Mr. Paup provides that if the results we actually
attain in a given year are at least 90% of the amount we budgeted at the
beginning of the year, we will pay a bonus to Mr. Paup, on a sliding scale,
in
an amount equal to a minimum of 20% of his annual base salary then in effect,
up
to a maximum of 50% of his annual base salary then in effect if the results
we
actually attain for the year in question are 120% or more of the amount we
budgeted at the beginning of the year. Mr. Paup’s entitlement to a bonus begins
only in 2006, since he was employed by us for only two days in
2005.
As
of
December 31, 2005, Messrs. Ehrlich’s, Esses’s and Paup’s total options and
restricted stock represented approximately 29.9%, 14.1% and 0.6%, respectively,
of our outstanding stock options, which the Compensation Committee believes
is
an appropriate level of options for them considering their positions with
Arotech.
Compensation
of Other Employees
With
respect to employees other than the Named Executive Officers, compensation
is
determined not by formula, but based on the achievement of qualitative and/or
quantitative objectives established in advance of each year by the Chief
Executive Officer and Chief Operating Officer, who then, pursuant to authority
delegated by the Compensation Committee, determine remuneration of our employees
based on such objectives.
We
seek
to promote, including through our compensation plans, an environment that
encourages employees to focus on our continuing long-term growth. Employee
compensation is generally comprised of a combination of cash compensation and
grants of options under our stock option plans. Stock options are awarded
annually in connection with annual bonuses and, occasionally, during the year
on
a discretionary basis. Stock options are intended to offer an incentive for
superior performance while basing employee compensation on the achievement
of
higher share value, and to foster the retention of key personnel through the
use
of schedules which vest options over time if the person remains employed by
us.
There is no set formula for the award of options to individual employees.
Factors considered in making option awards to the employees other than the
Named
Executive Officers in 2005 included prior grants to the employees, the
importance of retaining the employees services, the amount of cash bonuses
received by the employees, the employees potential to contribute to our success
and the employees’ past contributions to us.
Policy
on Deductibility of Compensation
Changes
made to the Internal Revenue Code of 1986, as amended (the “Code”) in 1993 limit
our ability to deduct, for Federal income tax purposes, certain compensation
in
excess of $1,000,000 per year paid to individuals named in the Summary
Compensation Table. This limitation was effective beginning in 1994. Based
on
its review of the facts and circumstances, the Committee has considered the
provisions of Section 162(m) of the Code which, except in the case of
“performance-based compensation” and certain other types of compensation
(including compensation received under a stock option plan approved in
accordance with Section 162(m) of the Code), limits to $1,000,000 the
amount of Arotech’s federal income tax deduction for the compensation paid to
any of the chief executive officer and the other four most highly paid executive
officers. The Committee believes that our current compensation arrangements,
which are primarily based on performance measures expected to be reflected
in
increasing stockholder value over time, are appropriate and in the best
interests of Arotech and its stockholders, without regard to tax considerations.
Thus, in the event of changes in the tax laws or their interpretation or other
circumstances which might render some portion of the executive compensation
paid
by us non-deductible for federal tax purposes, the Committee would not
anticipate making significant changes in the basic philosophy and practices
reflected in our executive compensation program.
Submitted
by the Compensation Committee
Dr.
Jay
M. Eastman
Jack
E.
Rosenfeld
Edward
J.
Borey
Performance
Graph
The
following graph compares the yearly percentage change in our cumulative total
stockholder return on our common stock with the cumulative total return on
the
Nasdaq Market Index (Broad Market Index) and a self-constructed peer group
index
(the “Peer Group Index”) over the past five years, from December 31, 2000
through December 31, 2005.
The
cumulative total stockholder return is based on $100 invested in our common
stock and in the respective indices on December 31, 2000. The stock prices
on
the performance graph are not necessarily indicative of future price
performance.
AROTECH
CORPORATION, NASDAQ
MARKET INDEX,
AND
PEER GROUP INDEX
|
|
12/31/00
|
|
12/31/01
|
|
12/31/02
|
|
12/31/03
|
|
12/31/04
|
|
12/31/05
|
AROTECH
|
|
100.00
|
|
35.39
|
|
13.65
|
|
38.81
|
|
34.54
|
|
7.89
|
PEER
GROUP(1)
|
|
100.00
|
|
138.18
|
|
142.28
|
|
123.06
|
|
276.78
|
|
169.45
|
BROAD
MARKET
|
|
100.00
|
|
78.95
|
|
54.06
|
|
81.09
|
|
88.06
|
|
89.27
|
(1) The
Peer
Group Index is comprised of the following companies: Bio-Key International,
Inc., Command Security Corporation, Firearms Training Systems, Inc., Guardian
International, Inc. and ICTS International N.V. The returns of each company
have
been weighted according to their respective stock market capitalization for
purposes of arriving at a peer group average.
REPORT
OF THE AUDIT COMMITTEE
The
Audit
Committee of the Board of Directors (the “Audit Committee”) consists of three
non-employee directors, Prof. Seymour Jones, Lawrence M. Miller, and Jack E.
Rosenfeld, each of whom has been determined to be independent as defined by
the
Nasdaq rules and SEC regulations. The Audit Committee operates under a written
charter adopted by the Board of Directors.
Management
is responsible for Arotech’s internal controls and the financial reporting
process. The independent accountants are responsible for performing an
independent audit of Arotech’s consolidated financial statements in accordance
with generally accepted accounting principles and to issue a report thereon.
The
Audit Committee’s responsibility is to monitor and oversee these
processes.
In
this
context the Audit Committee has met and held discussions with management and
the
independent accountants. Management represented to the Audit Committee that
Arotech’s audited consolidated financial statements were prepared in accordance
with generally accepted accounting principles, and the Audit Committee has
reviewed and discussed the audited consolidated financial statements with
management and the independent accountants. The Audit Committee discussed with
the independent accountants matters required to be discussed by Statement on
Auditing Standards No. 61.
Arotech’s
independent accountants also provided to the Audit Committee the written
disclosure required by Independence Standards Board Standard No. 1,
“Independence Discussions with Audit Committees.” The Committee discussed with
the independent accountants that firm’s independence and considered whether the
non-audit services provided by the independent accountants are compatible with
maintaining its independence.
Based
on
the Audit Committee’s discussions with management and the independent
accountants, and the Audit Committee’s review of the representation of
management and the report of the independent accountants to the Audit Committee,
the Audit Committee recommended that the Board of Directors include the audited
consolidated financial statements in Arotech’s Annual Report on Form 10-K for
the year ended December 31, 2005 filed with the Securities and Exchange
Commission.
Submitted
by the Audit Committee
Bert
W.
Wasserman
Lawrence
M. Miller
Jack
E.
Rosenfeld
FEES
BILLED FOR SERVICES RENDERED BY PRINCIPAL ACCOUNTANT
In
accordance with the requirements of the Sarbanes-Oxley Act of 2002 and the
Audit
Committee’s charter, all audit and audit-related work and all non-audit work
performed by our independent accountants, Kost, Forer, Gabbay & Kasierer, is
approved in advance by the Audit Committee, including the proposed fees for
such
work. The Audit Committee is informed of each service actually
rendered.
Ø Audit
Fees. Audit
fees billed or expected to be billed to us by Kost, Forer, Gabbay & Kasierer
for the audit of the financial statements included in our Annual Report on
Form
10-K, and reviews of the financial statements included in our Quarterly Reports
on Form 10-Q, for the years ended December 31, 2005 and 2004 totaled
approximately $530,000 and $594,924, respectively.
Ø Audit-Related
Fees.
Kost,
Forer, Gabbay & Kasierer billed us $40,764 and $214,659 for the fiscal years
ended December 31, 2005 and 2004, respectively, for assurance and related
services that are reasonably related to the performance of the audit or review
of our financial statements and are not reported under the caption “Audit Fees,”
above.
Ø Tax
Fees.
Kost,
Forer, Gabbay & Kasierer billed us an aggregate of $10,000 and $9,491 for
the fiscal years ended December 31, 2005 and 2004, respectively, for tax
services, principally advice regarding the preparation of income tax returns.
Ø All
Other Fees. The Audit Committee of the Board of Directors has considered
whether the provision of the Audit-Related Fees, Tax Fees and all other fees
are
compatible with maintaining the independence of our principal accountant.
Applicable
law and regulations provide an exemption that permits certain services to be
provided by our outside auditors even if they are not pre-approved. We have
not
relied on this exemption at any time since the Sarbanes-Oxley Act was
enacted.
Representatives
of Kost, Forer, Gabbay & Kasierer are not expected to be present at the
meeting.
INFORMATION
REGARDING BENEFICIAL OWNERSHIP OF COMMON STOCK
The
following table sets forth information regarding the ownership of our common
stock, as of April 21, 2006, of those persons owning of record or known by
us to
own beneficially more than 5% of our common stock and of each of our Named
Executive Officers and directors, and the shares of common stock held by all
of
our directors and executive officers as a group.
Name
and Address of Beneficial
Owner(1)
|
|
Shares
Beneficially
Owned(2)(3)
|
|
Percentage
of Total Shares
Outstanding(3)
|
Robert
S. Ehrlich
|
|
2,932,546(4)
|
|
3.0%
|
Steven
Esses
|
|
1,200,000(5)
|
|
1.2%
|
Avihai
Shen**
|
|
630,153(6)
|
|
*
|
Thomas
J. Paup
|
|
50,000(7)
|
|
*
|
Dr.
Jay M. Eastman
|
|
98,334(8)
|
|
*
|
Jack
E. Rosenfeld
|
|
100,334(9)
|
|
*
|
Lawrence
M. Miller
|
|
496,813(10)
|
|
*
|
Edward
J. Borey
|
|
51,000(11)
|
|
*
|
Prof.
Seymour Jones
|
|
0
|
|
*
|
All
of our directors and executive officers as a group (9
persons)
|
|
5,559,180(12)
|
|
5.6%
|
**
|
Mr.
Shen ceased to act as our Chief Financial Officer in February 2006,
and
his employment with us terminated on March 31, 2006.
|
(1)
|
The
address of each named beneficial owner is in care of Arotech Corporation,
1229 Oak Valley Drive, Ann Arbor, Michigan 48108.
|
(2)
|
Unless
otherwise indicated in these footnotes, each of the persons or entities
named in the table has sole voting and sole investment power with
respect
to all shares shown as beneficially owned by that person, subject
to
applicable community property laws.
|
(3)
|
Based
on 95,490,846
shares of common stock outstanding as of March 15, 2006. For purposes
of
determining beneficial ownership of our common stock, owners of options
exercisable within sixty days are considered to be the beneficial
owners
of the shares of common stock for which such securities are exercisable.
The percentage ownership of the outstanding common stock reported
herein
is based on the assumption (expressly required by the applicable
rules of
the Securities and Exchange Commission) that only the person whose
ownership is being reported has exercised his options for shares of
common stock.
|
(4)
|
Consists
of 618,165 shares held directly by Mr. Ehrlich, 50,000 shares held
by Mr.
Ehrlich’s wife (in which shares Mr. Ehrlich disclaims beneficial
ownership), 161,381 shares held in Mr. Ehrlich’s pension plan, 3,000
shares held by children sharing the same household (in which shares
Mr.
Ehrlich disclaims beneficial ownership), and 2,100,000 shares issuable
upon exercise of options exercisable within 60 days of March 15,
2006.
|
(5)
|
Consists
of 165,000 shares held directly by Mr. Esses and 1,035,000 shares
issuable
upon exercise of options exercisable within 60 days of March 15,
2006.
|
(6)
|
Consists
of 40,500 shares owned directly by Mr. Shen and 584,403 shares issuable
upon exercise of options exercisable within 60 days of March 15,
2006.
|
(7)
|
Consists
of 50,000 shares issuable upon exercise of options exercisable within
60
days of March 15, 2006.
|
(8)
|
Consists
of 98,334 shares issuable upon exercise of options exercisable within
60
days of March 15, 2006.
|
(9)
|
Consists
of 2,000 shares owned directly by Mr. Rosenfeld and 98,334 shares
issuable
upon exercise of options exercisable within 60 days of March 15,
2006.
|
(10)
|
Consists
of 11,914 shares held directly by Mr. Miller, 376,565 shares held
by Leon
S. Gross and Lawrence M. Miller as co-trustees of the Rose Gross
Charitable Foundation, and 108,334 shares issuable upon exercise
of
options exercisable within 60 days of March 15, 2006.
|
(11)
|
Consists
of 16,000 shares owned directly by Mr. Borey and 43,334 shares issuable
upon exercise of options exercisable within 60 days of March 15,
2006.
|
(12)
|
Includes
4,117,739 shares issuable upon exercise of options exercisable within
60
days of March 15, 2006.
|
SECTION
16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under
the
securities laws of the United States, our directors, certain of our officers
and
any persons beneficially owning more than ten percent of our common stock are
required to report their ownership of our common stock and any changes in that
ownership to the Securities and Exchange Commission. Specific due dates for
these reports have been established and we are required to report any failure
to
file by these dates during 2005. Based solely on our review of such reports
furnished to us, we are not aware of any instances during 2005, not previously
disclosed by us, where such “reporting persons” failed to file the required
reports on or before the specified dates, except as follows:
|
(i)
|
Mr.
Ehrlich was required to file a Form 4 on or prior to December 31,
2004 in
connection with (i) the repricing of 600,000 of his existing stock
options
and the accelerated vesting of 33,333 of those options, (ii) his
abandonment of 227,000 of his existing stock options, and (iii) his
receipt of 1,500,000 new stock options. He reported these transactions
in
a Form 5 filed on February 14,
2006.
|
|
(ii)
|
Mr.
Esses was required to file a Form 4 on or prior to December 31, 2004
in
connection with (i) the repricing of 885,140 of his existing stock
options
and the accelerated vesting of 50,000 of those options, and (ii)
his
receipt of 114,860 new stock options. He reported these transactions
in a
Form 5 filed on February 14, 2006.
|
|
(iii)
|
Prof.
Jones was required to file a Form 3 on or prior to July 21, 2005
in
connection with his becoming a director. He filed this Form 3 on
February
15, 2006. Additionally, as a result of technical problems with his
EDGAR
filing codes, his Form 5 that was supposed to be filed on or prior
to
February 14, 2006 was filed on February 15,
2006.
|
|
(iv)
|
Mr.
Shen was required to file a Form 5 on or prior to February 14, 2006.
He
filed this Form 5 on February 17,
2006.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Officer
Loans
On
December 3, 1999, Robert S. Ehrlich purchased 125,000 shares of our common
stock
out of our treasury at the closing price of the common stock on December 2,
1999. Payment was rendered by Mr. Ehrlich in the form of non-recourse promissory
notes due in 2009 in the amount of $167,975, bearing simple annual interest
at a
rate of 2%, secured by the shares of common stock purchased and other shares
of
common stock previously held by him. As of December 31, 2005, the aggregate
amount outstanding pursuant to this promissory note was $201,570.
On
February 9, 2000, Mr. Ehrlich exercised 131,665 stock options. Mr. Ehrlich
paid
the exercise price of the stock options and certain taxes that we paid on his
behalf by giving us a non-recourse promissory note due in 2025 in the amount
of
$789,991, bearing annual interest (i) as to $329,163, at 1% over the
then-current federal funds rate announced from time to time by the Wall
Street Journal,
and
(ii) as to $460,828, at 4% over the then-current percentage increase in the
Israeli consumer price index between the date of the loan and the date of the
annual interest calculation, secured by the shares of our common stock acquired
through the exercise of the options and certain compensation due to Mr. Ehrlich
upon termination. As of December 31, 2005, the aggregate amount outstanding
pursuant to this promissory note was $692,102.
On
June
10, 2002, Mr. Ehrlich exercised 50,000 stock options. Mr. Ehrlich paid the
exercise price of the stock options by giving us a non-recourse promissory
note
due in 2012 in the amount of $36,500, bearing simple annual interest at a rate
equal to the lesser of (i) 5.75%, and (ii) 1% over the then-current federal
funds rate announced from time to time, secured by the shares of our common
stock acquired through the exercise of the options. As of December 31, 2005,
the
aggregate amount outstanding pursuant to this promissory note was
$40,343.
Director
Consulting Agreements
In
January 2004, Mr. Edward J. Borey, who became one of our directors in December
2003, entered into a consulting agreement with us pursuant to which he had
agreed to aid us in identifying potential acquisition candidates in exchange
for
transaction fees in respect of acquisitions in which he plays a “critical role”
(as determined by us in our sole and absolute discretion) in identifying and/or
initiating
and/or negotiating the transaction in the amount of (i) 1.5% of the value of
the
transaction up to $10,000,000, plus (ii) 1.0% of the value of the transaction
in
excess of $10,000,000 and up to $50,000,000, plus (iii) 0.5% of the value of
the
transaction in excess of $50,000,000. We also had agreed to issue to Mr. Borey,
at par value, a total of 32,000 shares of our common stock, the value of which
was to be deducted from any transaction fees paid. 16,000 of these shares were
earned and issued prior to termination of this agreement in August
2004.
Consulting
Agreement with Sampen Corporation
We
have a
consulting agreement with Sampen Corporation that we executed in March 2005,
effective as of January 1, 2005. Sampen is a New York corporation owned by
members of Steven Esses’s immediate family, and Mr. Esses is an employee of
Sampen. The term of this consulting agreement expires on December 31, 2006,
and
is extended automatically for additional terms of two years each unless either
Sampen or we terminate the agreement sooner.
Pursuant
to the terms of our agreement with Sampen, Sampen provides one of its employees
to us for such employee to serve as our Executive Vice President and Chief
Operating Officer. We pay
Sampen $12,800 per month, plus an annual bonus, on a sliding scale, in an amount
equal to a minimum of 20% of Sampen’s annual base compensation then in effect,
up to a maximum of 75% of its annual base compensation then in effect if the
results we actually attain for the year in question are 120% or more of the
amount we budgeted at the beginning of the year. We also pay Sampen, to cover
the cost of our use of Sampen’s offices as an ancillary New York office and the
attendant expenses and insurance costs, an amount equal to 16% of each monthly
payment of base compensation.
STOCKHOLDER
COMMUNICATIONS AND PROPOSALS
Stockholder
Communications with the Board of Directors
The
Board
has established a process to receive communications from stockholders.
Stockholders may contact any member (or all members) of the Board at
<directors@arotech.com>.
Non-management directors may be contacted as a group at <nonmanagement-directors@arotech.com>.
Any
Board committee or any chair of any such committee may be contacted as follows:
<audit-chair@arotech.com>,
<compensation-chair@arotech.com>,
or
<nominating-chair@arotech.com>.
If
you cannot send an electronic message, you may contact Board members by mail
at:
Arotech Board Members, 1229 Oak Valley Drive, Ann Arbor, Michigan 48108.
The
Arotech Corporation Investor Relations Department is responsible for
forwarding all such communications to the Board of Directors, and where
appropriate, to management. Communications are screened to exclude certain
items
that are unrelated to the duties and responsibilities of the Board, such as
spam, junk mail and mass mailings, product complaints, product inquiries, new
product suggestions, job inquiries, surveys, business solicitations or
advertisements, and material that is unduly hostile, threatening, illegal or
similarly unsuitable. Communications that are filtered out are made available
to
any director upon request. The Board may involve management in preparing its
responses to stockholder communications.
Stockholder
Proposals
Pursuant
to the rules of the Securities and Exchange Commission, stockholder proposals
made in accordance with Rule 14a-8 under the Exchange Act intended to be
included in our proxy material for the next annual meeting must be received
by
us on or before January 15, 2007. Any proposals must be received at our
principal executive offices, 1229 Oak Valley Drive, Ann Arbor, Michigan 48108,
Attention: Corporate Secretary by the applicable date.
Stockholder
proposals submitted outside the processes of Rule 14a-8 must be received by
our Corporate Secretary in a timely fashion. To be timely, such notice and
information regarding the proposal and the stockholder must be delivered to
or
mailed and received by our Corporate Secretary at our principal executive
offices, 1229 Oak Valley Drive, Ann Arbor, Michigan 48108, not less than
45 days nor more than 60 days prior to the annual meeting; provided,
however, that in the event that less than 60 days’ notice or prior public
disclosure of the date of the annual meeting is given or made to stockholders,
notice by the stockholder to be timely must be received not later than the
close
of business on the 7th
day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made.
ANNUAL
REPORT
Copies
of our Annual Report on Form 10-K (including audited financial statements)
filed
with the Securities and Exchange Commission may be obtained without charge
by
writing to Stockholder Relations, Arotech Corporation, 1229 Oak Valley Drive,
Ann Arbor, Michigan 48108.
A
request for a copy of our Annual Report on Form 10-K must set forth a good-faith
representation that the requesting party was either a holder of record or a
beneficial owner of our common stock on April 21, 2006. Exhibits to the Form
10-K will be mailed upon similar request and payment of specified fees to cover
the costs of copying and mailing such materials.
Our
audited financial statements for the fiscal year ended December 31, 2005 and
certain other related financial and business information are contained in our
2005 Annual Report to Stockholders, which is being furnished to our stockholders
along with this proxy statement, but which is not deemed a part of the proxy
soliciting material.
OTHER
MATTERS
We
are
not aware of any other matter that may come before the annual meeting of
stockholders and we do not currently intend to present any such other matter.
However, if any such other matters properly come before the meeting or any
adjournment thereof, the persons named as proxies will have discretionary
authority to vote the shares represented by the accompanying proxy in accordance
with their own judgment.
By
Order of the Board of Directors,
Yaakov
Har-Oz
Senior
Vice President, General Counsel and Secretary
Ann
Arbor, Michigan
May
10,
2006
[FORM
OF WARRANT]
NEITHER
THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR
THE
SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED
(I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL,
IN A
GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT
OR
(II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT.
NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION
WITH
A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY
THE
SECURITIES.
.
AROTECH
CORPORATION
Warrant
To Purchase Common Stock
Warrant
No.:
Number
of
Shares of Common Stock:_____________
Date
of
Issuance: [February/March/April] [ ], 2006 (“Issuance
Date”)
AROTECH
CORPORATION, a Delaware corporation (the “Company”),
hereby certifies that, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, ____________________________,
the
registered holder hereof (the “Investor”)
or its
permitted assigns (the “Holder”),
is
entitled, subject to the terms set forth below, to purchase from the Company,
at
the Exercise Price (as defined below) then in effect, at any time or times
on or
after the date hereof, (the “Exercise
Date”),
but
not after 11:59 p.m., New York Time, on the Expiration Date (as defined below),
______________ (_____________)1
fully
paid nonassessable shares of Common Stock (as defined below) (the
“Warrant
Shares”).
Except as otherwise defined herein, capitalized terms in this Warrant shall
have
the meanings set forth in Section 15. This Warrant (including all Warrants
issued in exchange, transfer or replacement hereof, the “Warrants”)
is one
of the Warrants to purchase Common Stock (the “Amendment
Warrants”)
issued
or that may be issued pursuant to one or more amendment agreements
(collectively, the “Amendment
Agreements”)
entered into or that may be entered into between the Company and the Buyers
(collectively, the “Buyers”)
under
that certain Securities Purchase Agreement dated as of September 29, 2005,
including an amendment agreement with the Holder, dated as of
[February/March/April] [ ], 2006 (the “Subscription
Date”).
1.EXERCISE
OF WARRANT.
(a) Mechanics
of Exercise.
Subject
to the terms and conditions hereof (including, without limitation, the
limitations set forth in Section 1(g)), this Warrant may be exercised
_______________
1 Insert
number equal to 40% of the shares exercisable under the Existing
Warrants.
by
the
Holder on any day from and after the Initial Exercise Date, in whole or in
part,
by (i) delivery of a written notice, in the form attached hereto as
Exhibit
I
(the
“Exercise
Notice”),
of
the Holder’s election to exercise this Warrant and (ii) (A) payment to the
Company of an amount equal to the applicable Exercise Price multiplied by the
number of Warrant Shares as to which this Warrant is being exercised (the
“Aggregate
Exercise Price”)
in
cash or wire transfer of immediately available funds or (B) by notifying the
Company that this Warrant is being exercised pursuant to a Cashless Exercise
(as
defined in Section 1(d)) by delivery of a written notice, in the form attached
hereto as Exhibit
II.
The
date the Exercise Notice and the Aggregate Exercise Price (or notice of a
Cashless Exercise) are delivered to the Company (as determined in accordance
with the notice provisions hereof) is an “Exercise
Date”.
The
Holder shall not be required to deliver the original Warrant in order to effect
an exercise hereunder. Execution and delivery of the Exercise Notice with
respect to less than all of the Warrant Shares shall have the same effect as
cancellation of the original Warrant and issuance of a new Warrant evidencing
the right to purchase the remaining number of Warrant Shares. On or before
the
first Business Day following the Exercise Date, the Company shall transmit
by
facsimile an acknowledgment of confirmation of receipt of the Exercise Notice
and the Aggregate Exercise Price to the Holder and the Company’s transfer agent
(the “Transfer
Agent”).
On or
before the third Business Day following the Exercise Date, the Company shall
direct the Transfer Agent to credit through The Depository Trust Company
(“DTC”)
Fast
Automated Securities Transfer Program, such aggregate number of shares of Common
Stock to which the Holder is entitled pursuant to such exercise to the Holder’s
or its designee’s balance account with DTC through its Deposit Withdrawal Agent
Commission system. On the Exercise Date, the Holder shall be deemed for all
corporate purposes to have become the holder of record of the Warrant Shares
with respect to which this Warrant has been exercised, irrespective of the
date
of delivery of the certificates evidencing such Warrant Shares. Upon surrender
of this Warrant to the Company following one or more partial exercises, the
Company shall as soon as practicable and in no event later than three Business
Days after receipt of the Warrant and at its own expense, issue a new Warrant
(in accordance with Section 7(d)) representing the right to purchase the number
of Warrant Shares purchasable immediately prior to such exercise under this
Warrant, less the number of Warrant Shares with respect to which this Warrant
is
exercised. No fractional shares of Common Stock are to be issued upon the
exercise of this Warrant, but rather the number of shares of Common Stock to
be
issued shall be rounded up to the nearest whole number. The Company shall pay
any and all taxes which may be payable with respect to the issuance and delivery
of Warrant Shares upon exercise of this Warrant. In the event that the Company
is unable to electronically deliver the Warrant Shares because of applicable
securities laws, then the Company shall issue and deliver to the address as
specified in the Exercise Notice a certificate, registered in the name of the
Holder or its designee, for the number of shares of Common Stock to which the
holder of this Warrant is entitled pursuant to such exercise.
(b) Exercise
Price.
For
purposes of this Warrant, “Exercise
Price”
means
$0.594, subject to adjustment as provided herein.
(c) Company’s
Failure to Timely Deliver Shares.
Subject
to Section 1(g), if the Company shall fail for any reason or for no reason
within three Business Days of the Exercise Date to credit the Holder’s balance
account with DTC for such number of shares of Common Stock to which the Holder
is entitled upon the Holder’s exercise of this Warrant, and if after such third
Business Day the Holder purchases (in an open market transaction or otherwise)
shares of Common Stock to deliver in satisfaction of a sale by the Holder of
the
Warrant Shares that the Holder anticipated receiving from the Company (a
“Buy-In”),
then
the Company shall, within three Business Days after the Holder’s request and in
the Holder’s discretion, either (i) pay cash to the Holder in an amount equal to
the Holder’s total purchase price (including brokerage commissions, if any) for
the shares of Common Stock so purchased (the “Buy-In
Price”),
at
which point the Company’s obliga-
tion
to
issue such shares of Common Stock shall terminate, or (ii) promptly honor its
obligation to credit to the Holder such shares of Common Stock and pay cash
to
the Holder in an amount equal to the excess (if any) of the Buy-In Price over
the product of (A) such number of shares of Common Stock, times (B) the Closing
Sale Price on the date of the event giving rise to the Company’s obligation to
deliver such certificate. Subject to Section 1(g), if the Company shall fail
for
any reason or for no reason within three Business Days of the Exercise Date
to
credit the Holder’s balance account with DTC for such number of shares of Common
Stock to which the Holder is entitled upon the Holder’s exercise of this
Warrant, then the Holder will have the right to rescind such exercise.
(d)Cashless
Exercise.
Notwithstanding anything contained herein to the contrary, if at any time during
the period commencing ten (10) Business Days prior to the Holder’s delivery of
an Exercise Notice and ending on the day of delivery of the Exercise Notice,
the
Registration Statement (as defined in the Registration Rights Agreement)
covering the Warrant Shares that are the subject of the Exercise Notice (the
“Unavailable
Warrant Shares”)
is not
available for the resale of such Unavailable Warrant Shares, the Holder may,
in
its sole discretion, exercise this Warrant in whole or in part and, in lieu
of
making the cash payment otherwise contemplated to be made to the Company upon
such exercise in payment of the Aggregate Exercise Price, elect instead to
receive upon such exercise the “Net
Number”
of
shares of Common Stock determined according to the following formula (a
“Cashless
Exercise”):
Net
Number = (A
x
B) - (A x C)
B
For
purposes of the foregoing formula:
A=
the
total number of shares with respect to which this Warrant is then being
exercised.
B=
the
Closing Sale Price of the shares of Common Stock (as reported by Bloomberg)
on
the date immediately preceding the date of the Exercise Notice.
C=
the
Exercise Price then in effect for the applicable Warrant Shares at the time
of
such exercise.
(e)Absolute
and Unconditional Obligation.
The
Company’s obligations to issue and deliver Warrant Shares in accordance with the
terms hereof are absolute and unconditional, irrespective of any action or
inaction by the Holder to enforce the same, the recovery of any judgment against
any Person or any action to enforce the same, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by the
Holder or any other Person of any obligation to the Company or any violation
or
alleged violation of law by the Holder or any other Person. Nothing herein
shall
limit the Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity, including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Company’s failure to
timely deliver certificates representing Warrant Shares upon exercise of the
Warrant as required pursuant to the terms hereof.
(f)Disputes.
In the
case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall promptly issue
to the Holder the number of Warrant Shares that are not disputed and resolve
such dispute in accordance with Section 12.
(g)Limitations
on Exercises
(i) Beneficial
Ownership.
The
Company shall not effect the exercise of this Warrant, and the Holder shall
not
have the right to exercise this Warrant, to the extent that after giving effect
to such exercise, such Person (together with such Person’s affiliates) would
beneficially own in excess of 4.99% of the shares of Common Stock outstanding
immediately after giving effect to such exercise. For purposes of the foregoing
sentence, the aggregate number of shares of Common Stock beneficially owned
by
such Person and its affiliates shall include the number of shares of Common
Stock issuable upon exercise of this Warrant with respect to which the
determination of such sentence is being made, but shall exclude shares of Common
Stock which would be issuable upon (i) exercise of the remaining, unexercised
portion of this Warrant beneficially owned by such Person and its affiliates
and
(ii) exercise or conversion of the unexercised or unconverted portion of any
other securities of the Company beneficially owned by such Person and its
affiliates (including, without limitation, any convertible notes, convertible
debentures, convertible preferred stock or warrants) subject to a limitation
on
conversion or exercise analogous to the limitation contained herein. Except
as
set forth in the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended. For purposes of this Warrant, in determining
the number of outstanding shares of Common Stock, the Holder may rely on the
number of outstanding shares of Common Stock as reflected in (1) the Company’s
most recent Form 10-K, Form 10-Q, Current Report on Form 8-K or other public
filing with the Securities and Exchange Commission, as the case may be, (2)
a
more recent public announcement by the Company or (3) any other notice by the
Company or the Transfer Agent setting forth the number of shares of Common
Stock
outstanding. For any reason at any time, upon the written or oral request of
the
Holder, the Company shall within two Business Days confirm orally and in writing
to the Holder the number of shares of Common Stock then outstanding. In any
case, the number of outstanding shares of Common Stock shall be determined
after
giving effect to the conversion or exercise of securities of the Company,
including the Amendment Warrants, by the Holder and its affiliates since the
date as of which such number of outstanding shares of Common Stock was
reported.
(ii) Principal
Market Regulation.
The
Company shall not be obligated to issue any shares of Common Stock upon exercise
of this Warrant if the issuance of such shares of Common Stock would exceed
that
number of shares of Common Stock which the Company may issue upon exercise
of
this Warrant without breaching the Company’s obligations under the rules or
regulations of the Principal Market (the “Exchange
Cap”),
except that such limitation shall not apply in the event that the Company
obtains the approval of its stockholders as required by the applicable rules
of
the Principal Market for issuances of shares of Common Stock in excess of such
amount. Until such approval is obtained, no Buyer shall be issued, upon exercise
or conversion, as applicable, of any Amendment Warrants, shares of Common Stock
in an amount greater than the product of the Exchange Cap multiplied by a
fraction, the numerator of which is the total number of shares of Common Stock
underlying the Amendment Warrants issued to such Buyer pursuant to the Amendment
Agreements on the Subscription Date and the denominator of which is the
aggregate number of shares of Common Stock underlying all the Warrants issued
to
the Buyers pursuant to the Amendment Agreements on the Subscription Date (with
respect to each Buyer, the “Exchange
Cap Allocation”).
In
the event that any Buyer shall sell or otherwise transfer any of such Buyer’s
Amendment Warrants, the transferee shall be allocated a pro rata portion of
such
Buyer’s Exchange Cap Allocation, and the restrictions of the prior sentence
shall apply to such transferee with respect to the portion of the Exchange
Cap
Allocation allocated to such transferee. In the event that any holder of
Amendment Warrants shall exercise all of such holder’s Amendment Warrants into a
number of shares of Common Stock which, in the aggregate, is less than such
holder’s Exchange Cap Allocation, then the
difference
between such holder’s Exchange Cap Allocation and the number of shares of Common
Stock actually issued to such holder shall be allocated to the respective
Exchange Cap Allocations of the remaining holders of Amendment Warrants on
a pro
rata basis in proportion to the shares of Common Stock underlying the Amendment
Warrants then held by each such holder. In the event that the Company is
prohibited from issuing any Warrant Shares for which an Exercise Notice has
been
received as a result of the operation of this Section 1(f)(ii), the Company
shall pay cash in exchange for cancellation of such Warrant Shares, at a price
per Warrant Share equal to the difference between the Closing Sale Price and
the
Exercise Price as of the date of the attempted exercise.
2. ADJUSTMENT
UPON SUBDIVISION OR COMBINATION OF SHARES OF COMMON STOCK.
If the
Company at any time on or after the Subscription Date subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of
its
outstanding shares of Common Stock into a greater number of shares, the Exercise
Price in effect immediately prior to such subdivision will be proportionately
reduced and the number of Warrant Shares will be proportionately increased.
If
the Company at any time on or after the Subscription Date combines (by
combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Exercise
Price in effect immediately prior to such combination will be proportionately
increased and the number of Warrant Shares will be proportionately decreased.
Any adjustment under this Section 2(a) shall become effective at the close
of
business on the date the subdivision or combination becomes
effective.
3. RIGHTS
UPON DISTRIBUTION OF ASSETS.
If the
Company shall declare or make any dividend or other distribution of its assets
(or rights to acquire its assets) to holders of shares of Common Stock, by
way
of return of capital or otherwise (including, without limitation, any
distribution of cash, stock or other securities, property or options by way
of a
dividend, spin off, reclassification, corporate rearrangement or other similar
transaction) (a “Distribution”),
at
any time after the issuance of this Warrant, then, in each such case:
(a)any
Exercise Price in effect immediately prior to the close of business on the
record date fixed for the determination of holders of shares of Common Stock
entitled to receive the Distribution shall be reduced, effective as of the
close
of business on such record date, to a price determined by multiplying such
Exercise Price by a fraction of which (i) the numerator shall be the Closing
Bid
Price of the shares of Common Stock on the trading day immediately preceding
such record date minus the value of the Distribution (as determined in good
faith by the Company’s Board of Directors) applicable to one share of Common
Stock, and (ii) the denominator shall be the Closing Bid Price of the shares
of
Common Stock on the trading day immediately preceding such record date;
and
(b)the
number of Warrant Shares shall be increased to a number of shares equal to
the
number of shares of Common Stock obtainable immediately prior to the close
of
business on the record date fixed for the determination of holders of shares
of
Common Stock entitled to receive the Distribution multiplied by the reciprocal
of the fraction set forth in the immediately preceding paragraph (a); provided
that in the event that the Distribution is of shares of Common Stock (or common
stock) (“Other
Shares of Common Stock”)
of a
company whose common shares are traded on a national securities exchange or
a
national automated quotation system, then the Holder may elect to receive a
warrant to purchase Other Shares of Common Stock in lieu of an increase in
the
number of Warrant Shares, the terms of which shall be identical to those of
this
Warrant, except that such warrant shall be exercisable into the number of shares
of Other Shares of Common Stock that would have been payable to the Holder
pursuant to the Distribution had the Holder exercised this Warrant
immediately
prior to such record date and with an aggregate exercise price equal to the
product of the amount by which the exercise price of this Warrant was decreased
with respect to the Distribution pursuant to the terms of the immediately
preceding paragraph (a) and the number of Warrant Shares calculated in
accordance with the first part of this paragraph (b).
4. PURCHASE
RIGHTS; FUNDAMENTAL TRANSACTIONS.
(a)Purchase
Rights.
In
addition to any adjustments pursuant to Section 2 above, if at any time the
Company grants, issues or sells any Options, Convertible Securities or rights
to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of shares of Common Stock (the “Purchase
Rights”),
then
the Holder will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which the Holder could have
acquired if the Holder had held the number of shares of Common Stock acquirable
upon complete exercise of this Warrant (without regard to any limitations on
the
exercise of this Warrant) immediately before the date on which a record is
taken
for the grant, issuance or sale of such Purchase Rights, or, if no such record
is taken, the date as of which the record holders of shares of Common Stock
are
to be determined for the grant, issue or sale of such Purchase Rights.
(b)Fundamental
Transactions.
The
Company shall not enter into or be party to a Fundamental Transaction unless
(i) the Successor Entity assumes in writing all of the obligations of the
Company under this Warrant and the other Transaction Documents in accordance
with the provisions of this Section (4)(b) pursuant to written agreements in
form and substance reasonably satisfactory to the Required Holders, including
agreements to deliver to each holder of Warrants in exchange for such Warrants
a
security of the Successor Entity evidenced by a written instrument substantially
similar in form and substance to this Warrant, including, without limitation,
an
adjusted exercise price equal to the value for the shares of Common Stock
reflected by the terms of such Fundamental Transaction, and exercisable for
a
corresponding number of shares of capital stock equivalent to the shares of
Common Stock acquirable and receivable upon exercise of this Warrant (without
regard to any limitations on the exercise of this Warrant) prior to such
Fundamental Transaction, and satisfactory to the Required Holders and
(ii) the Successor Entity (including its Parent Entity) is a publicly
traded corporation whose common stock is quoted on or listed for trading on
an
Eligible Market. Upon the occurrence of any Fundamental Transaction, the
Successor Entity shall succeed to, and be substituted for (so that from and
after the date of such Fundamental Transaction, the provisions of this Warrant
referring to the “Company” shall refer instead to the Successor Entity), and may
exercise every right and power of the Company and shall assume all of the
obligations of the Company under this Warrant with the same effect as if such
Successor Entity had been named as the Company herein. Upon consummation of
the
Fundamental Transaction, the Successor Entity shall deliver to the Holder
confirmation that there shall be issued upon exercise of this Warrant
at
any
time after the consummation of the Fundamental Transaction, in lieu of the
shares of the Common Stock (or
other
securities, cash, assets or other property) purchasable
upon the exercise of the Warrant
prior
to
such Fundamental Transaction,
such
shares of the publicly traded common stock (or its equivalent) of the Successor
Entity (including its Parent Entity), as adjusted in accordance with the
provisions of this Warrant.
In
addition to and not in substitution for any other rights hereunder, prior to
the
consummation of any Fundamental Transaction pursuant to which holders of shares
of Common Stock are entitled to receive securities or other assets with respect
to or in exchange for shares of Common Stock (a “Corporate
Event”),
the
Company shall make appropriate provision to insure that the Holder will
thereafter have the right to receive upon an exercise of this Warrant
at
any
time after the consummation of the Fundamental Transaction but
prior
to the Expiration Date,
in lieu
of the shares of the Common Stock (or
other
securities, cash, assets or other property) purchasable
upon the exercise of the Warrant prior to such Fundamental
Transaction,
such
shares of stock, securities, cash, as-
sets
or
any other property whatsoever (including warrants or other purchase or
subscription rights) which the Holder would have been entitled to receive upon
the happening of such Fundamental Transaction had the Warrant been exercised
immediately prior to such Fundamental Transaction. Provision
made pursuant to the preceding sentence shall be in a form and substance
reasonably satisfactory to the Required Holders. The provisions of this Section
shall apply similarly and equally to successive Fundamental Transactions and
Corporate Events and shall be applied without regard to any limitations on
the
exercise of this Warrant.
5. NONCIRCUMVENTION.
The
Company hereby covenants and agrees that the Company will not, by amendment
of
its Certificate of Incorporation, Bylaws or through any reorganization, transfer
of assets, consolidation, merger, scheme of arrangement, dissolution, issue
or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant, and will at
all
times in good faith carry out all the provisions of this Warrant and take all
action as may be required to protect the rights of the Holder. Without limiting
the generality of the foregoing, the Company (i) shall not increase the par
value of any shares of Common Stock receivable upon the exercise of this Warrant
above the Exercise Price then in effect, (ii) shall take all such actions
as may be necessary or appropriate in order that the Company may validly and
legally issue fully paid and nonassessable shares of Common Stock upon the
exercise of this Warrant, and (iii) shall, so long as any of the Amendment
Warrants are outstanding, take all action necessary to reserve and keep
available out of its authorized and unissued shares of Common Stock, solely
for
the purpose of effecting the exercise of the Amendment Warrants, 100% of the
number of shares of Common Stock as shall from time to time be necessary to
effect the exercise of the Amendment Warrants then outstanding (without regard
to any limitations on exercise).
6.WARRANT
HOLDER NOT DEEMED A STOCKHOLDER.
Except
as otherwise specifically provided herein, the Holder, solely in such Person’s
capacity as a holder of this Warrant, shall not be entitled to vote or receive
dividends or be deemed the holder of share capital of the Company for any
purpose, nor shall anything contained in this Warrant be construed to confer
upon the Holder, solely in such Person’s capacity as the Holder of this Warrant,
any of the rights of a stockholder of the Company or any right to vote, give
or
withhold consent to any corporate action (whether any reorganization, issue
of
stock, reclassification of stock, consolidation, merger, conveyance or
otherwise), receive notice of meetings, receive dividends or subscription
rights, or otherwise, prior to the issuance to the Holder of the Warrant Shares
which such Person is then entitled to receive upon the due exercise of this
Warrant. In addition, nothing contained in this Warrant shall be construed
as
imposing any liabilities on the Holder to purchase any securities (upon exercise
of this Warrant or otherwise) or as a stockholder of the Company, whether such
liabilities are asserted by the Company or by creditors of the Company.
Notwithstanding this Section 6, the Company shall provide the Holder with copies
of the same notices and other information given to the stockholders of the
Company generally, contemporaneously with the giving thereof to the
stockholders.
7.REISSUANCE
OF WARRANTS.
(a)Transfer
of Warrant.
If this
Warrant is to be transferred, the Holder shall surrender this Warrant to the
Company, whereupon the Company will forthwith issue and deliver upon the order
of the Holder a new Warrant (in accordance with Section 7(d)), registered as
the
Holder may request, representing the right to purchase the number of Warrant
Shares being transferred by the Holder and, if less then the total number of
Warrant Shares then underlying this Warrant is being transferred, a new Warrant
(in accordance with Section 7(d)) to the Holder representing the right to
purchase the number of Warrant Shares not being transferred.
(b)Lost,
Stolen or Mutilated Warrant.
Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the
loss, theft, destruction or mutilation of this Warrant, and, in the case of
loss, theft or destruction, of any indemnification undertaking by the Holder
to
the Company in customary form and, in the case of mutilation, upon surrender
and
cancellation of this Warrant, the Company shall execute and deliver to the
Holder a new Warrant (in accordance with Section 7(d)) representing the right
to
purchase the Warrant Shares then underlying this Warrant.
(c)Exchangeable
for Multiple Warrants.
This
Warrant is exchangeable, upon the surrender hereof by the Holder at the
principal office of the Company, for a new Warrant or Warrants (in accordance
with Section 7(d)) representing in the aggregate the right to purchase the
number of Warrant Shares then underlying this Warrant, and each such new Warrant
will represent the right to purchase such portion of such Warrant Shares as
is
designated by the Holder at the time of such surrender; provided, however,
that
no Warrants for fractional shares of Common Stock shall be given.
(d)Issuance
of New Warrants.
Whenever the Company is required to issue a new Warrant pursuant to the terms
of
this Warrant, such new Warrant (i) shall be of like tenor with this Warrant,
(ii) shall represent, as indicated on the face of such new Warrant, the right
to
purchase the Warrant Shares then underlying this Warrant (or in the case of
a
new Warrant being issued pursuant to Section 7(a) or Section 7(c), the Warrant
Shares designated by the Holder which, when added to the number of shares of
Common Stock underlying the other new Warrants issued in connection with such
issuance, does not exceed the number of Warrant Shares then underlying this
Warrant), (iii) shall have an issuance date, as indicated on the face of such
new Warrant which is the same as the Issuance Date, and (iv) shall have the
same
rights and conditions as this Warrant.
8. NOTICES.
Whenever notice is required to be given under this Warrant, unless otherwise
provided herein, such notice shall be given in accordance with Section 9(f)
of
the Securities Purchase Agreement. The Company shall provide the Holder with
prompt written notice of all actions taken pursuant to this Warrant, including
in reasonable detail a description of such action and the reason therefore.
Without limiting the generality of the foregoing, the Company will give written
notice to the Holder (i) immediately upon any adjustment of the Exercise Price,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment and (ii) promptly after the date on which the Company establishes
a
record date (A) with respect to any dividend or distribution upon the shares
of
Common Stock, (B) with respect to any grants, issuances or sales of any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property to holders of shares of Common Stock or (C) for determining
rights to vote with respect to any Fundamental Transaction, dissolution or
liquidation, provided in each case that such information shall be made known
to
the public prior to or in conjunction with such notice being provided to the
Holder.
9. AMENDMENT
AND WAIVER.
Except
as otherwise provided herein, the provisions of this Warrant may be amended
and
the Company may take any action herein prohibited, or omit to perform any act
herein required to be performed by it, only if the Company has obtained the
written consent of the Required Holders; provided that no such action may
increase the exercise price of any Amendment Warrant or decrease the number
of
shares or class of stock obtainable upon exercise of any Amendment Warrant
without the written consent of the Holder. No such amendment shall be effective
to the extent that it applies to less than all of the holders of the Amendment
Warrants then outstanding.
10. GOVERNING
LAW.
This
Warrant shall be governed by and construed and enforced in accordance with,
and
all questions concerning the construction, validity, interpretation
and
performance of this Warrant shall be governed by, the internal laws of the
State
of New York, without giving effect to any choice of law or conflict of law
provision or rule (whether of the State of New York or any other jurisdictions)
that would cause the application of the laws of any jurisdictions other than
the
State of New York.
11. CONSTRUCTION;
HEADINGS.
This
Warrant shall be deemed to be jointly drafted by the Company and the Investor
and shall not be construed against any person as the drafter hereof. The
headings of this Warrant are for convenience of reference and shall not form
part of, or affect the interpretation of, this Warrant.
12. DISPUTE
RESOLUTION.
In the
case of a dispute as to the determination of the Exercise Price or the
arithmetic calculation of the Warrant Shares, the Company shall submit the
disputed determinations or arithmetic calculations via facsimile within two
Business Days of receipt of the Exercise Notice giving rise to such dispute,
as
the case may be, to the Holder. If the Holder and the Company are unable to
agree upon such determination or calculation of the Exercise Price or the
Warrant Shares within three Business Days of such disputed determination or
arithmetic calculation being submitted to the Holder, then the Company shall,
within two Business Days submit via facsimile (a) the disputed determination
of
the Exercise Price to an independent, reputable investment bank selected by
the
Company and approved by the Holder or (b) the disputed arithmetic calculation
of
the Warrant Shares to the Company’s independent, outside accountant. The Company
shall cause at its expense the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the Company
and
the Holder of the results no later than ten Business Days from the time it
receives the disputed determinations or calculations. Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent demonstrable error.
13. REMEDIES,
OTHER OBLIGATIONS, BREACHES AND INJUNCTIVE RELIEF.
The
remedies provided in this Warrant shall be cumulative and in addition to all
other remedies available under this Warrant and the other Transaction Documents,
at law or in equity (including a decree of specific performance and/or other
injunctive relief), and nothing herein shall limit the right of the Holder
right
to pursue actual damages for any failure by the Company to comply with the
terms
of this Warrant. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Holder and that the remedy at
law
for any such breach may be inadequate. The Company therefore agrees that, in
the
event of any such breach or threatened breach, the holder of this Warrant shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
14. TRANSFER.
(a) This
Warrant may be offered for sale, sold, transferred or assigned in compliance
with the Federal and state securities laws without the consent of the
Company.
(b) Except
as
provided in Section 2(f) of the Securities Purchase Agreement, the Company
may
cause the legend set forth on the first page of this Warrant to be set forth
on
each Warrant, and a similar legend on any security issued or issuable upon
exercise of this Warrant, unless counsel for the Company is of the opinion
as to
any such security that such legend is unnecessary.
15. PAYMENT
OF TAXES.
The
Company will pay any documentary stamp taxes attributable to the initial
issuance of Warrant Shares issuable upon the exercise of the
Warrant;
provided,
however, that the Company shall not be required to pay any tax or taxes which
may be payable in respect of any transfer involved in the issuance or delivery
of any certificates for Warrant Shares in a name other than that of the Holder
in respect of which such shares are issued, and in such case, the Company shall
not be required to issue or deliver any certificate for Warrant Shares or any
Warrant until the person requesting the same has paid to the Company the amount
of such tax or has established to the Company’s reasonable satisfaction that
such tax has been paid. The Holder shall be responsible for income taxes due
under federal, state or other law, if any such tax is due.
16. CERTAIN
DEFINITIONS.
For
purposes of this Warrant, the following terms shall have the following
meanings:
(a) “Bloomberg”
means
Bloomberg Financial Markets.
(b) “Business
Day”
means
any day other than Saturday, Sunday or other day on which commercial banks
in
The City of New York are authorized or required by law to remain
closed.
(c) “Closing
Bid Price”
and
“Closing
Sale Price”
means,
for any security as of any date, the last closing bid price and last closing
trade price, respectively, for such security on the Principal Market, as
reported by Bloomberg, or, if the Principal Market begins to operate on an
extended hours basis and does not designate the closing bid price or the closing
trade price, as the case may be, then the last bid price or last trade price,
respectively, of such security prior to 4:00:00 p.m., New York Time, as reported
by Bloomberg, or, if the Principal Market is not the principal securities
exchange or trading market for such security, the last closing bid price or
last
trade price, respectively, of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid price or
last
trade price, respectively, of such security in the over-the-counter market
on
the electronic bulletin board for such security as reported by Bloomberg, or,
if
no closing bid price or last trade price, respectively, is reported for such
security by Bloomberg, the average of the bid prices, or the ask prices,
respectively, of any market makers for such security as reported in the “pink
sheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). If
the Closing Bid Price or the Closing Sale Price cannot be calculated for a
security on a particular date on any of the foregoing bases, the Closing Bid
Price or the Closing Sale Price, as the case may be, of such security on such
date shall be the fair market value as mutually determined by the Company and
the Holder. If the Company and the Holder are unable to agree upon the fair
market value of such security, then such dispute shall be resolved pursuant
to
Section 12. All such determinations to be appropriately adjusted for any stock
dividend, stock split, stock combination or other similar transaction during
the
applicable calculation period.
(d) “Common
Stock”
means
(i) the Company’s shares of Common Stock, $0.01 par value per share, and
(ii) any share capital into which such Common Stock shall have been changed
or any share capital resulting from a reclassification of such Common
Stock.
(e) “Convertible
Securities”
means
any stock or securities (other than Options) directly or indirectly convertible
into or exercisable or exchangeable for shares of Common Stock.
(f) “Eligible
Market”
means
the Principal Market, the American Stock Exchange, The New York Stock Exchange,
Inc., The Nasdaq SmallCap Market or the OTC Bulletin Board.
(g) “Expiration
Date”
means
March 31, 2008; provided that if the Stockholder Approval (as such term is
defined is the Amendment Agreement) is not obtained on or prior to June 30,
2006, the Expiration Date shall be extended for each day after June 30, 2006
that the Stockholder Approval is not obtained or, if such date falls on a day
other than a Business Day or on which trading does not take place on the
Principal Market (a “Holiday”),
the
next date that is not a Holiday.
(h) “Fundamental
Transaction”
means
that the Company shall, directly or indirectly, in one or more related
transactions, (i) consolidate or merge with or into (whether or not the Company
is the surviving corporation) another Person, or (ii) sell, assign, transfer,
convey or otherwise dispose of all or substantially all of the properties or
assets of the Company to another Person, or (iii) allow another Person to make
a
purchase, tender or exchange offer that is accepted by the holders of more
than
the 50% of either the outstanding shares of Common Stock (not including any
shares of Common Stock held by the Person or Persons making or party to, or
associated or affiliated with the Persons making or party to, such purchase,
tender or exchange offer), or (iv) consummate a stock purchase agreement or
other business combination (including, without limitation, a reorganization,
recapitalization, spin-off or scheme of arrangement) with another Person whereby
such other Person acquires more than the 50% of the outstanding shares of Common
Stock (not including any shares of Common Stock held by the other Person or
other Persons making or party to, or associated or affiliated with the other
Persons making or party to, such stock purchase agreement or other business
combination), or (v) reorganize, recapitalize or reclassify its Common
Stock.
(i) “Options”
means
any rights, warrants or options to subscribe for or purchase shares of Common
Stock or Convertible Securities.
(j) “Parent
Entity”
of
a
Person means an entity that, directly or indirectly, controls the applicable
Person and whose common stock or equivalent equity security is quoted or listed
on an Eligible Market, or, if there is more than one such Person or Parent
Entity, the Person or Parent Entity with the largest public market
capitalization as of the date of consummation of the Fundamental
Transaction.
(k) “Person”
means
an individual, a limited liability company, a partnership, a joint venture,
a
corporation, a trust, an unincorporated organization, any other entity and
a
government or any department or agency thereof.
(l) “Principal
Market”
means
the Nasdaq National Market.
(m) “Registration
Rights Agreement”
means
that certain registration rights agreement as defined in the Amendment Agreement
between the Company and the Investor.
(n) “Required
Holders”
means
the holders of the Amendment Warrants representing at least a majority of shares
of Common Stock underlying the Amendment Warrants then outstanding.
(o) “Successor
Entity”
means
the Person, which may be the Company, formed by, resulting from or surviving
any
Fundamental Transaction or the Person with which such Fundamental Transaction
shall have been made, provided that if such Person is not a publicly traded
ntity whose common stock or equivalent equity security is quoted or listed
for
trading on an Eligible Market, Successor Entity shall mean such Person’s Parent
Entity.
[Signature
Page Follows]
.
IN
WITNESS WHEREOF, the Company has caused this Warrant to Purchase Common
Stock to be duly executed as of the Issuance Date set out above
AROTECH
CORPORATION
By:
Name: Robert
S.
Ehrlich
Title: Chief
Executive Officer
EXHIBIT
I
EXERCISE
NOTICE
TO
BE EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS
WARRANT
TO PURCHASE COMMON STOCK
AROTECH
CORPORATION
The
undersigned holder hereby exercises the right to purchase _________________
of
the shares of Common Stock (“Warrant
Shares”)
of
Arotech Corporation, a Delaware corporation (the “Company”),
evidenced by the attached Warrant to Purchase Common Stock (the “Warrant”),
and
tenders herewith payment to the Company of the aggregate exercise price in
full,
equal to $_____________________, together with all applicable transfer taxes,
if
any.
Please
issue the Warrant Shares in the following name and to the following
address:
Issue
to:
Facsimile
Number:
Authorization:
Account
Number:
(if
electronic book entry transfer)
Transaction
Code Number:
(if
electronic book entry transfer)
To
the
extent the foregoing exercise is for less than the full number of Warrant Shares
issuable pursuant to the Warrant, a replacement Warrant representing the
remainder of the Warrant Shares issuable (and otherwise of like form, tenor
and
effect) shall be delivered to holder.
The
undersigned confirms the continuing validity of, and reaffirms as of the date
hereof, the representations and warranties set forth in Section 2(b) of the
Amendment Agreement, dated as of [February/March/April] [ ], 2006, between
the
Company and the Investor.
The
undersigned agrees to comply with the prospectus delivery requirements (to
the
extent applicable) under the applicable securities laws in connection with
any
transfer of the aforesaid Warrant Shares.
Date:
_______________ __, ______
Name
of
Registered Holder
By:
Name:
Title:
EXHIBIT
II
EXERCISE
NOTICE
TO
BE
EXECUTED BY THE REGISTERED HOLDER TO EXERCISE THIS WARRANT TO PURCHASE COMMON
STOCK PURSUANT TO CASHLESS EXERCISE PROVISIONS
AROTECH
CORPORATION
Gentlemen:
The
undersigned, registered holder of the Warrant to Purchase Common Stock delivered
herewith, hereby irrevocably exercises such Warrant for, and purchases
thereunder, shares of the Common Stock (“Warrant
Shares”)
of
Arotech Corporation, a Delaware corporation, as provided below. Capitalized
terms used herein, unless otherwise defined herein, shall have the meanings
given in the Warrant. The portion of the Exercise Price to be applied toward
the
purchase of the Warrant Shares pursuant to this Exercise Notice is $_______.
Such exercise shall be pursuant to the cashless exercise provisions of
Section 1(d) of the Warrant; therefore, holder makes no payment with
respect to this Exercise Notice. The number of shares to be issued pursuant
to
this exercise shall be determined by reference to the formula in
Section 1(d) of the Warrant which, by reference to Section 1(d),
requires the use of the Closing Price of the Company’s Common Stock on the day
immediately preceding the date of this Exercise Notice, which is
$______.
Please
issue the Warrant Shares in the following name and to the following
address:
Issue
to:
Facsimile
Number:
Authorization:
Account
Number:
(if
electronic book entry transfer)
Transaction
Code Number:
(if
electronic book entry transfer)
To
the
extent the foregoing exercise is for less than the full number of Warrant Shares
issuable pursuant to the Warrant, a replacement Warrant representing the
remainder of the Warrant Shares issuable (and otherwise of like form, tenor
and
effect) shall be delivered to holder.
The
undersigned confirms the continuing validity of, and reaffirms as of the date
hereof, the representations and warranties set forth in Section 2(b) through
(j)
of the Amendment Agreement, dated as of [February/March/April] [ ], 2006,
between the Company and the Investor.
The
undersigned agrees to comply with the prospectus delivery requirements (to
the
extent applicable) under the applicable securities laws in connection with
any
transfer of the aforesaid Warrant Shares.
Date:
_______________ __, ______
Name
of
Registered Holder
By:
Name:
Title:
ACKNOWLEDGMENT
The
Company hereby acknowledges this Exercise Notice and hereby directs American
Stock Transfer & Trust Co. to issue the above indicated number of shares of
Common Stock in accordance with the Transfer Agent Instructions dated February
[
], 2006 from the Company and acknowledged and agreed to by American Stock
Transfer & Trust Co.
AROTECH
CORPORATION
By:
Name:
Title:
FORM
OF
ASSIGNMENT
[To
be
completed and signed only upon transfer of Warrant]
FOR
VALUE
RECEIVED, the undersigned hereby sells, assigns and transfers unto
________________________________ the right represented by the within Warrant
to
purchase ____________ shares of Common Stock of Arotech Corporation to which
the
within Warrant relates and appoints ________________ attorney to transfer said
right on the books of Arotech Corporation with full power of substitution in
the
premises.
Dated:
,
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(Signature
must conform in all respects to name of Holder as specified on the
face of
the Warrant)
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Address
of Transferee
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In
the presence of:
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Appendix
B
Arotech
Corporation
AUDIT
COMMITTEE CHARTER
I. STATEMENT
OF POLICY
The
Audit
Committee shall assist the Board of Directors (the “Board”) of Arotech
Corporation (“Arotech”) in fulfilling its oversight responsibility by reviewing
the accounting and financial reporting processes of Arotech and its subsidiaries
(collectively, the “Company”), the Company’s system of internal controls
regarding finance, accounting, legal compliance and ethics, and the audits
of
the Company’s financial statements. In so doing, it is the responsibility of the
Audit Committee to maintain free and open means of communications among the
Company’s Board of Directors, outside auditors and senior management. The Audit
Committee’s primary responsibilities and duties are:
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·
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Serve
as an independent and objective party to monitor the Company’s financial
reporting process, internal control system and disclosure control
system.
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·
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Review
and appraise the audit efforts of the Company’s independent
accountants.
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·
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Assume
direct responsibility for the appointment, compensation, retention
and
oversight of the work of the outside auditors and for the resolution
of
disputes between the outside auditors and the Company’s management
regarding financial reporting
issues.
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·
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Provide
an open avenue of communication among the independent accountants,
financial and senior management and the
Board.
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The
Audit
Committee will primarily fulfill these responsibilities by carrying out the
activities identified in Section IV of this Charter.
The
Company shall be responsible for the providing the Audit Committee with
appropriate funding, as determined by the Audit Committee, in order to
compensate the outside auditors and advisors engaged by or employed by the
Audit
Committee.
II. COMPOSITION
OF THE AUDIT COMMITTEE
The
Audit
Committee shall consist of at least three “independent” Directors of Arotech and
shall serve at the pleasure of the Board. An “independent” Director is defined
as an individual who (a) is not an officer or salaried employee or an affiliate
of the Company, (b) does not have any relationship that, in the opinion of
the
Board, would interfere with his or her exercise of independent judgment as
an
Audit Committee member, (c) meets the independence requirements of the
Securities and Exchange Commission (the “SEC”) and the Nasdaq Stock Market or
such other securities exchange or market on which Arotech’s securities are
traded and (d) except as permitted by the SEC and the Nasdaq Stock Market or
such other securities exchange or market on which Arotech’s securities are
traded, does not accept any consulting, advisory or other compensatory fee
from
the Company.
At
least
one member of the Audit Committee shall be a “financial expert” as defined by
the SEC and the Nasdaq Stock Market or such other securities exchange or market
on which Arotech’s securities are traded. Each Audit Committee member must be
able to read and understand financial statements, including a balance sheet,
income statement, and cash flow statement.
The
members of the Audit Committee shall be designated by the full Board from time
to time. The Board shall designate one member of the Audit Committee to serve
as
chairperson of the committee.
III. MEETINGS
AND MINUTES
The
Audit
Committee shall meet at least quarterly, with additional meetings if
circumstances require, for the purpose of satisfying its responsibilities.
The
Audit Committee shall maintain minutes of each meeting of the Audit Committee
and shall report the actions of the Audit Committee to the Board, with such
recommendations as the Audit Committee deems appropriate.
IV. RESPONSIBILITIES
AND DUTIES OF THE AUDIT COMMITTEE
The
Audit
Committee shall oversee and monitor the Company’s accounting and financial
reporting process, internal control system and disclosure control system, review
the audits of the Company’s financial statements and review and evaluate the
performance of the Company’s outside auditors. In fulfilling these duties and
responsibilities, the Audit Committee shall take the following actions, in
addition to performing such functions as may be assigned by law, the Company’s
certificate of incorporation, the Company’s bylaws or the Board.
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1.
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The
Audit Committee shall assume direct responsibility for the appointment,
retention and oversight of the work of the outside auditors and,
when
appropriate, the replacement of the outside auditors. As part of
the audit
process, the Audit Committee shall meet with the outside auditors
to
discuss and decide the audit’s scope. The Audit Committee shall determine
that the outside audit team engaged to perform the external audit
consists
of competent, experienced, auditing professionals. The Audit Committee
shall also review and approve the compensation to be paid to the
outside
auditors and shall be authorized to compensate the outside
auditors.
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2.
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The
Audit Committee shall take, or recommend that the full Board take,
appropriate action to ensure the independence of the outside auditors.
The
Audit Committee shall require the outside auditors to advise the
Company
of any fact or circumstances that might adversely affect the outside
auditors’ independence or judgment with respect to the Company under
applicable auditing standards. The Audit Committee shall require
the
outside auditors to submit, on an annual basis, a formal written
statement
setting forth all relationships between the outside auditors and
the
Company that may affect the objectivity and independence of the outside
auditors. Such statement shall confirm that the outside auditors
are not
aware of any conflict of interest prohibited by Section 10A(l) of
the
Securities Exchange Act of 1934 (the “Exchange Act”). The Audit Committee
shall actively engage in a dialogue with the outside auditors with
respect
to any disclosed relationships or services that may impact the objectivity
and independence of the outside auditors.
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3.
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The
Audit Committee shall require the outside auditors to advise the
Audit
Committee in advance in the event that the outside auditors intend
to
provide any professional services to the Company other than services
provided in connection with an audit or a review of the
Com-
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pany’s
financial statements (“non-audit services”); provided that such non-audit
services are not listed in Section 10A(g) of the Exchange Act (“prohibited
services”). The Audit Committee shall approve, in advance, any non-audit
services to be provided to the Company by the Company’s outside auditing
firm
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4.
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The
Audit Committee shall obtain confirmations from time to time from
the
Company’s outside auditing firm that such firm is not providing to the
Company (i) any prohibited services, or (ii) any other non-audit
service
or any auditing service that has not been approved in advance by
the Audit
Committee. The Audit Committee shall have the authority to approve
the
provision of non-audit services that have not been pre-approved by
the
Audit Committee, but only to the extent that such non-audit services
qualify under the de
minimus
exception set forth in Section 10A(i)(1)(B) of the Exchange Act.
The Audit
Committee shall record in its minutes and report to the Board all
approvals of non-audit services granted by the Audit
Committee.
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5
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The
Audit Committee shall meet with the outside auditors, with no management
in attendance, to openly discuss the quality of the Company’s accounting
principles as applied in its financial reporting, including issues
such as
(a) the appropriateness, not just the acceptability, of the accounting
principles and financial disclosure practices used or proposed to
be used
by the Company, (b) the clarity of the Company’s financial disclosures and
(c) the degree of aggressiveness or conservatism that exists in the
Company’s accounting principles and underlying estimates and other
significant decisions made by the Company’s management in preparing the
Company’s financial disclosures. The Audit Committee shall then meet,
without operating management or the outside auditors being present,
to
discuss the information presented to
it.
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6
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The
Audit Committee shall meet with the outside auditors and management
to
review the Company’s quarterly reports on Form 10-Q and annual report on
Form 10-K and discuss any significant adjustments, management judgments
and accounting estimates and any significant new accounting policies
before such forms are filed with the SEC. The Audit Committee shall
require the outside auditors to report to the Audit Committee all
critical
accounting policies and practices to be used, all alternative treatments
of financial information within generally accepted accounting principles
that have been discussed with the Company’s management, ramifications of
the use of such alternative disclosures and treatments, the treatments
preferred by the outside auditors and other material written
communications between the outside auditors and the Company’s management,
including management’s letters and schedules of unadjusted
differences.
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7
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Upon
the completion of the annual audit, the Audit Committee shall review
the
audit findings reported to it by the outside auditors, including
any
comments or recommendations of the outside auditors, with the entire
Board.
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8
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The
Audit Committee shall review all reports received from the federal
and
state regulatory authorities and assure that the Board is aware of
the
findings and results. In addition, it will meet with the appropriate
members of senior management designated by the Audit Committee to
review
the responses to the respective regulatory
reports.
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9
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The
Audit Committee shall consider and review with management: (a)
significant
findings during the year and management’s responses thereto, including the
status of previous audit ecommendations and (b) any difficulties
encountered in the course of their audits, including any restrictions
on
the scope of activities or access to required
information.
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10
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The
Audit Committee shall consider and approve, if appropriate, changes
to the
Company’s auditing and accounting principles and practices, as suggested
by the outside auditors or management, and the Audit Committee shall
review with the outside auditors and management the extent to which
such
changes have been implemented (to be done at an appropriate amount
of time
prior to the implementation of such changes as decided by the Audit
Committee).
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11
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The
Audit Committee shall prepare a letter for inclusion in the Company’s
proxy statement describing the discharge of the Audit Committee’s
responsibilities.
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12
|
The
Audit Committee will review and update this Charter periodically,
at least
annually, and as conditions may dictate. The Audit Committee Charter
shall
be presented to the full Board for its approval of any
changes.
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13
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Commencing
on such date as Section 102(a) of the Sarbanes-Oxley Act of 2002
(the
“Act”) becomes effective, the Audit Committee shall obtain confirmation
from the outside auditors at the commencement of each audit that
such firm
is a “registered public accounting firm” as such term is defined under the
Act.
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14
|
The
Audit Committee shall have the authority to engage independent counsel
and
other advisers as it determines necessary to perform its
duties.
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15
|
The
Audit Committee shall establish procedures for (i) the receipt, retention
and treatment of complaints received by the Company regarding accounting,
internal accounting controls or auditing matters and (ii) the
confidential, anonymous submission by employees of the Company of
concerns
regarding questionable accounting or auditing
matters.
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16
|
The
Audit Committee shall investigate or consider such other matters
within
the scope of its responsibilities and duties as the Audit Committee
may,
in its discretion, determine to be
advisable.
|
ANNUAL
MEETING OF STOCKHOLDERS OF
AROTECH
CORPORATION
June
19,
2006
Please
date, sign
and mail
your
proxy card in
the
envelope
provided
as soon
as
possible
Please
detach along
perforated line and mail in the envelope provided.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF
DIRECTORS.
PLEASE
SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE
MARK YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE
|
1.
To
fix the number of Class I directors at two and to elect two Class
I
directors for a three-year term ending in 2009 and continuing
until their
successors are duly elected and qualified:
|
|
FOR
|
AGAINST
|
ABSTAIN
|
2. To
ratify, for purposes of NASD Marketplace Rule 4350(i)(1)(C)(ii),
the
issuance in February, March and April of 2006 of warrants expiring
March
31, 2008 to purchase up to 3,925,071 shares of our common stock
at a price
of $0.594 per share
3.
To
amend our Amended and Restated Certificate of Incorporation in
order to
effect a one-for-eight reverse stock split
|
o
o
|
o
o
|
o
o
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|
|
|
|
|
|
|
|
|
|
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|
o
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FOR
ALL NOMINEES |
o
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WITHHOLD
AUTHORITY FOR ALL NOMINEES
|
m Dr.
Jay M.
Eastman |
|
|
|
|
o
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FOR
ALL EXCEPT
(See
instructions below)
|
m Steven
Esses |
|
|
|
|
|
PLEASE
SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING
THE
ENCLOSED
ENVELOPE.
|
INSTRUCTION: To
withhold authority to vote for any individual nominee(s), mark
“FOR ALL
EXCEPT” and
fill in the circle next to each nominee you wish to withhold, as
shown
here: ˜
|
|
|
The
undersigned acknowledges receipt of the Notice of Annual Meeting
of
Stockholders and Proxy Statement of Arotech Corporation dated May
10, 2006
and of Arotech Corporation’s Annual Report for the fiscal year ended
December 31, 2005.
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|
|
|
|
|
|
|
|
To
change the
address on your account, please check the box at right and indicate
your
new address in the address space above. Please note that changes
to the
registered name(s) on the account may not be submitted via this
method.
|
|
Mark
here if
you plan to attend the meeting: o
|
Signature
of Stockholder
|
|
Date:
|
|
Signature
of Stockholder
|
|
Date:
|
|
Note: Please
sign exactly as name appears on this Proxy. When shares are held by joint
tenants, both should sign. If signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If
you
are signing for a corporation, please sign in the full corporate name by
President or other authorized officer. If you are signing for a partnership,
please sign in the partnership name by authorized person.
PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
AROTECH
CORPORATION
FOR
ANNUAL
MEETING OF STOCKHOLDERS TO BE HELD JUNE 19, 2006
The
undersigned,
having received the Notice of the Annual Meeting of Stockholders and the Proxy
Statement on behalf of the Board of Directors of Arotech Corporation (the
“Company”), hereby appoint(s) Robert S. Ehrlich and Yaakov Har-Oz, and each of
them, proxies of the undersigned (with full power of substitution) to attend
the
Annual Meeting of the Company to be held on Monday, June 19, 2006 at 10:00
a.m.
local time in the Lexington Room of the Shelburne Murray Hill Hotel, 303
Lexington Avenue, New York, New York, and all postponements and adjournments
thereof (the “Meeting”), and there to vote all shares of common stock of the
Company that the undersigned would be entitled to vote, if personally present,
in regard to all matters that may come before the Meeting, and without limiting
the general authorization hereby given, the undersigned directs that his or
her
vote be cast as specified in this Proxy.
This
Proxy,
when properly executed, will be voted in the manner specified herein. If no
specification is made, the proxies intend to vote FOR the nominees and FOR
the
other proposals set forth herein and described in the Board of Directors’ Proxy
Statement. If any of the nominees is not available to serve, this Proxy may
be
voted for a substitute. This Proxy delegates discretionary authority with
respect to matters not known or determined at the time of solicitation of this
Proxy. The undersigned hereby revokes any other proxy previously granted to
vote
the same shares of stock for said Meeting.
SEE
REVERSE SIDE.
If you wish to vote in accordance with the recommendations of the Board of
Directors, just sign on the reverse side. You need not mark any
boxes.
(Continued
and to be signed on the reverse side)
ANNUAL
MEETING OF STOCKHOLDERS OF
AROTECH
CORPORATION
June
19,
2006
PROXY
VOTING INSTRUCTIONS
|
MAIL
- Date, sign and mail your proxy card in the envelope provided
as
soon as possible.
-
OR -
|
COMPANY
NUMBER
|
|
TELEPHONE
- Call toll-free 1-800-PROXIES (1-800-776-9437)
from any touch-tone telephone and follow the instructions. Have your
proxy
card available when you call.
-
OR -
|
ACCOUNT
NUMBER
|
|
INTERNET
- Access “www.voteproxy.com” and follow the
on-screen instructions. Have your proxy card available when you access
the
web page.
|
|
|
Please
detach along
perforated line and mail in the envelope provided IF you are not voting via
telephone or the Internet.
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF
DIRECTORS.
PLEASE
SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK
YOUR
VOTE IN BLUE OR BLACK INK AS SHOWN HERE
|
1.
To
fix the number of Class I directors at two and to elect two Class
I
directors for a three-year term ending in 2009 and continuing until
their
successors are duly elected and qualified:
|
|
FOR
|
AGAINST
|
ABSTAIN
|
2. To
ratify, for purposes of NASD Marketplace Rule 4350(i)(1)(C)(ii),
the
issuance in February, March and April of 2006 of warrants expiring
March
31, 2008 to purchase up to 3,925,071 shares of our common stock at
a price
of $0.594 per share
3.
To
amend our Amended and Restated Certificate of Incorporation in
order to
effect a one-for-eight reverse stock split
|
o
o
|
o
o
|
o
o
|
|
|
|
|
|
|
|
|
|
|
|
|
|
o
|
FOR
ALL NOMINEES |
o
|
WITHHOLD
AUTHORITY FOR ALL NOMINEES
|
m Dr.
Jay M.
Eastman |
|
|
|
|
o
|
FOR
ALL EXCEPT
(See
instructions below)
|
m Steven
Esses |
|
|
|
|
|
PLEASE
SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING
THE
ENCLOSED
ENVELOPE.
|
INSTRUCTION: To
withhold authority to vote for any individual nominee(s), mark “FOR ALL
EXCEPT” and
fill in the circle next to each nominee you wish to withhold, as
shown
here: ˜
|
|
|
The
undersigned acknowledges receipt of the Notice of Annual Meeting
of
Stockholders and Proxy Statement of Arotech Corporation dated May
10, 2006
and of Arotech Corporation’s Annual Report for the fiscal year ended
December 31, 2005.
|
|
|
|
|
|
|
|
|
To
change the
address on your account, please check the box at right and indicate
your
new address in the address space above. Please note that changes
to the
registered name(s) on the account may not be submitted via this
method.
|
|
Mark
here if
you plan to attend the meeting: o
|
Signature
of Stockholder
|
|
Date:
|
|
Signature
of Stockholder
|
|
Date:
|
|
Note: Please
sign exactly as name appears on this Proxy. When shares are held by joint
tenants, both should sign. If signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If
you
are signing for a corporation, please sign in the full corporate name by
President or other authorized officer. If you are signing for a partnership,
please sign in the partnership name by authorized person.