================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 7, 2004
AROTECH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-23336 95-4302784
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
632 BROADWAY, SUITE 1200, NEW YORK, NEW YORK 10012
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (646) 654-2107
(Former name or former address, if changed since last report)
================================================================================
On January 9, 2004, Arotech Corporation (the "Registrant") filed a
Current Report on Form 8-K relating to, inter alia, its acquisition of FAAC
Incorporated, in which the Registrant indicated its intention to submit the
financial statements and pro forma financial information prescribed by Rule 3-05
of Regulation S-X and Article 11 of Regulation S-X, respectively, not later than
60 days from the date thereof in accordance with Subsection (a)(4) of Item 7 of
the General Instructions for the Current Report on Form 8-K. This Amendment to
that Current Report is being filed to provide that financial information.
The Registrant hereby amends its Current Report on Form 8-K filed with
the SEC on January 9, 2004 by deleting Item 7 in its entirety, and substituting
in place and stead thereof a new Item 7, as follows:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of Businesses Acquired
(i) Balance sheet of FAAC Incorporated as of December 31, 2003 and
December 31, 2002 and the related statements of profit, changes in
shareholders' equity and cash flows for the years ended December 31,
2003 and December 31, 2002
(b) Pro Forma Condensed Combined Financial Information
(i) Unaudited pro forma condensed combined balance sheets as of December
31, 2003
(ii) Unaudited pro forma condensed combined statement of operation for the
year ended December 31, 2003
(c) Exhibits - The following documents are filed as exhibits to this report:
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1* Stock Purchase and Sale Agreement dated January 7, 2004
4.1* Securities Purchase Agreement dated January 7, 2004
4.2* Registration Rights Agreement dated January 7, 2004
4.3* Form of Warrant
5.1* Legal Opinion of Lowenstein Sandler PC
23.1 Consent of Plante & Moran, PLLC
99.1* Press release dated January 8, 2004
99.2* Press release dated January 8, 2004
-----------------------
*Previously filed
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this amended report to be signed on its behalf by
the undersigned hereunto duly authorized.
AROTECH CORPORATION
(REGISTRANT)
By: /s/ Robert S. Ehrlich
-----------------------------------
Name: Robert S. Ehrlich
Title: Chairman, President and CEO
Dated: March 9, 2004
3
EXHIBIT INDEX
The following exhibits are filed with the Current Report on Form 8-K/A.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of Plante & Moran, PLLC
4
ITEM 7(a)(i)
FAAC INCORPORATED
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FINANCIAL REPORT
DECEMBER 31, 2003
FAAC INCORPORATED
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CONTENTS
REPORT LETTER 1
FINANCIAL STATEMENTS
Balance Sheet 2
Statement of Income 3
Statement of Changes in Stockholders' Equity 4
Statement of Cash Flows 5
Notes to Financial Statements 6-13
PLANTS & MORAN, PLLC
Suite 200
350 S. Main St.
[PLANT MORAN LOGO] Ann Arbor, MI 48104
Tel: 734.655.0664
Fax: 734.665.0664
plantemoran.com
Independent Auditor's Report
To the Directors and Stockholders
FAAC Incorporated
We have audited the accompanying balance sheet of FAAC Incorporated as of
December 31, 2003 and 2002 and the related statements of income, changes in
stockholders' equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FAAC Incorporated at December
31, 2003 and 2002 and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States of America.
/s/ Plante & Moran, PLLC
February 6, 2004
FAAC INCORPORATED
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BALANCE SHEET
December 31
---------------------------
2003 2002
---------- ----------
ASSETS
Current Assets
Cash $ 2,250 $ 1,844
Restricted cash equivalent (Note 11) -- 153,241
Advances to stockholders 177,550 --
Accounts receivable - Trade 2,156,615 2,418,415
Costs and estimated earnings in excess of billings on uncompleted
contracts (Note 2) 1,300,388 692,313
Current portion of note receivable (Note 8) 108,040 126,896
Current portion of net investment in sales-type leases (Note 3) 198,076 146,446
Inventory 347,479 188,703
Prepaid expenses 48,632 13,973
Other current assets 14,347 34,942
---------- ----------
TOTAL CURRENT ASSETS 4,353,377 3,776,773
PROPERTY AND EQUIPMENT - Net (Note 5) 263,669 405,909
NET RECEIVABLE - Net of current portion (Note 8) 394,541 24,962
NET INVESTMENT IN SALES-TYPE LEASES - Net of current portion (Note 3) 401,666 --
DEPOSITS 271,330 --
---------- ----------
TOTAL ASSETS $5,684,583 $4,207,644
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Checks written in advance of deposits $ 25,971 $ --
Note payable - Bank (Note 4) 383,000 --
Accounts payable 617,380 452,090
Billings in excess of costs and estimated earnings on uncompleted
contracts (Note 2) 612,202 172,944
Warranty reserve 403,692 423,208
Accrued payroll and payroll taxes 216,466 334,227
Accrued vacation pay 63,080 68,984
Accrued stockholder distributions 400,000 --
Other accrued expenses 49,052 134,824
---------- ----------
Total current liabilities 2,770,843 1,586,277
Stockholders' Equity
Common stock - $.01 par value
Authorized - 10,000 shares
Issued and outstanding - 667 shares 7 7
Additional paid-in-capital 85,403 85,403
Retained earnings 2,828,330 2,535,957
---------- ----------
Total stockholders' equity 2,913,740 2,621,367
---------- ----------
Total liabilities and stockholders' equity $5,684,583 $4,207,644
========== ==========
See notes to Financial statements 2
FAAC INCORPORATED
--------------------------------------------------------------------------------
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31
----------------------------
2003 2002
------------ ------------
Sales $ 9,885,627 $ 15,179,529
Cost of Sales 6,347,425 8,899,920
------------ ------------
Gross Profit 3,538,202 6,279,609
Operating Expenses
Research and development 453,542 236,122
Selling and marketing 1,175,393 1,265,740
General and administrative 245,659 1,746,082
Bad debt expense -- 1,094,025
------------ ------------
Total operating expenses 1,874,594 4,341,969
------------ ------------
Operating Income 1,663,608 1,937,640
Other Expenses - Net (51,235) (99,376)
------------ ------------
Net Income $ 1,612,373 $ 1,838,264
============ ============
See notes to Financial statements 3
FAAC INCORPORATED
-------------------------------------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Additional Total
Paid-in Retained Stockholders'
Common Stock Capital Earnings Equity
-------------- --------------- ----------------- ----------------
BALANCE - January 1, 2002 (unaudited) $ 7 $ 85,403 $1,538,693 $1,624,103
Net income -- -- 1,838,264 1,838,264
Distribution to shareholders -- -- (841,000) (841,000)
-------------- --------------- ----------------- ----------------
BALANCE - December 31, 2002 7 85,403 2,535,957 2,621,367
Net Income -- -- 1,612,373 1,612,373
Distribution to stockholders -- -- (1,320,000) (1,320,000)
-------------- --------------- ----------------- ----------------
BALANCE - December 31, 2003 $ 7 $ 85,403 $ 2,828,330 $ 2,913,740
============== =============== ================= ================
See notes to Financial statements 4
FAAC INCORPORATED
--------------------------------------------------------------------------------------------------------------------------
STATEMENT OF CASH FLOWS
Year Ended December 31
2003 2002
--------------- --------------
Cash Flows from Operating Activities
Net Income $ 1,612,373 $ 1,838,264
Adjustments to reconcile net income to net cash from operating activities:
Depreciation 176,390 259,001
Inventory sold on installment note receivable (472,500) --
Inventory sold under sales-type leases (465,382) (196,446)
Payments received on inventory sold under sales-type leases 12,086 50,000
Bad debt expense -- 1,094,025
(Increase) decrease in assets:
Accounts receivable - Trade 261,800 (496,368)
Costs and estimated earnings in excess of billings on uncompleted contracts (608,075) 724,301
Inventory (36,999) 227,654
Prepaid expenses (34,659) (2,768)
Other current assets 20,595 54,781
Deposits (271,330) --
Increase (decrease) in liabilities:
Accounts payable 165,290 (576,781)
Billings in excess of costs and estimated earnings on uncompleted contracts 439,258 (1,662,622)
Accrued liabilities (228,953) 152,211
--------------- --------------
Net cash provided by operating activities 569,894 1,465,252
Cash Flows from Investing Activities
Issuance of notes receivable -- (177,207)
Payments on notes receivable -- 43,142
Advances to stockholders (177,550) --
Redemption (purchase) of restricted cash equivalent 153,241 (153,241)
Purchase of property and equipment (116,831) (177,599)
Proceeds from sale of property and equipment 82,681 122,465
--------------- --------------
Net cash used in investing activities (58,459) (342,440)
Cash Flows from Financing Activities
Checks written in advance of deposits 25,971 --
Net proceeds from (payments on) note payable - Bank 383,000 (300,000)
Distribution to stockholders (920,000) (841,000)
--------------- --------------
Net cash used in financing activities (511,029) (1,141,000)
--------------- --------------
Net Increase (Decrease) in Cash 406 (18,188)
Cash - beginning of year 1,844 20,032
--------------- --------------
Cash - End of year $ 2,250 $ 1,844
=============== ==============
Supplemental Cash Flow Information - Cash paid for interest $ 4,260 $ 41,505
=============== ==============
See notes to Financial statements 5
FAAC INCORPORATED
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
FAAC Incorporated (the "Company") provides contract research and
development services for the development of computerized simulation
systems primarily for weapons employment and training applications.
Substantially all of these sales are to the United States government
or their prime contractors. A significant portion of the Company's
sales is also derived from the manufacture of modularly designed
driver training simulators for sale to government or commercial
customers.
REVENUE FROM CONTRACTS - Revenue from major development contracts and
from modularly designed driver training simulators is recorded on the
basis of the Company's estimates of the percentage of completion of
individual contracts. That portion of the total contract price is
accrued as earned revenue, which, on the basis of the Company's
estimates, bears the same ratio as the ratio of costs incurred bears
to estimated total costs to be incurred. Revenue from minor contracts
and repair and maintenance work is recognized upon completion. Due to
uncertainties inherent in the estimation process, it is at least
reasonably possible that, in the near term, actual completion costs
will materially differ from the estimated completion costs.
At the time a loss on a contract becomes known, the entire amount of
the estimated ultimate loss is accrued and charged to cost of sales.
TRADE ACCOUNTS RECEIVABLE - Trade accounts receivable are stated at
net invoice amounts. An allowance for doubtful accounts is established
based on a specific assessment of all invoices that remain unpaid
following normal customer payment periods. All amounts deemed to be
uncollectible are charged against the allowance for doubtful accounts
in the period that determination is made. As of December 31, 2003 and
2002, the Company has not recorded an allowance for doubtful accounts
because it is the opinion of management that all receivables are
collectible in full. Substantially all of the Company's accounts
receivable are due from the United States government and other local
government agencies.
INVENTORIES - Inventories consist of materials inventory and are
stated at the lower of cost, determined by the first-in, first-out
method, or market.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
The Company primarily uses the straight-line method of depreciation
over the estimated useful life of the asset. Costs of maintenance and
repairs are charged to expense when incurred.
6
FAAC INCORPORATED
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES - The Company has elected to have its income taxed
directly to its stockholders in accordance with provisions of the
Internal Revenue Code of 1986, as amended (S Corporations).
Accordingly, no federal income tax expense has been recorded for the
years ended December 31, 2003 and 2002.
LEASING ARRANGEMENTS - The Company's leasing operations consist of
leasing equipment under sales-type leases expiring in 2007 and 2008.
WARRANTIES - The Company provides unconditional repair and replacement
warranties on its products. The Company recognizes warranty
obligations at the time products are sold based on historical rates of
warranty claims and estimated current costs of repair or replacement.
The financial statements include liabilities of $403,692 and $423,208
as of December 31, 2003, 2002, respectively, for estimated warranty
obligations. Following is a reconciliation of the Company's aggregate
warranty obligation as of December 31:
Balance - January 1, 2002 (unaudited) $83,381
Warranty claims during 2002 (519,873)
Warranty obligations recognized during 2002 859,700
---------------
Balance - January 1, 2003 423,208
Warranty claims during 2003 (386,294)
Warranty obligations recognized during 2003 366,778
---------------
Balance - December 31, 2003 $ 403,692
===============
INVESTMENTS - Investments in companies in which the Company has a 20
percent to 50 percent interest are carried at cost, adjusted for the
Company's proportionate share of their undistributed earnings or
losses.
7
FAAC INCORPORATED
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NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CHECKS WRITTEN IN ADVANCE OF DEPOSITS - The Company issued checks in
excess of the recorded bank balance as a method of cash management. As
a result, the recorded book balance reflects a negative cash balance
although the bank balance remains positive.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to the
2002 financial statements to conform to those classifications used in
2003. These reclassifications had no effect on net income or working
capital as previously reported.
NOTE 2 - REVENUE FROM CONTRACTS
Information with respect to uncompleted major development contracts as
of December 31 is as follows:
2003 2002
------------------- ---------------------
Costs incurred on uncompleted contracts $ 5,630,285 $ 3,600,231
Estimated profits thereon 642,378 341,977
------------------- ---------------------
Total earned revenue 6,272,663 3,942,208
Less partial billings applicable (5,584,477) (3,422,839)
------------------- ---------------------
Net costs and estimated earnings in excess of billings on
billings on uncompleted contacts $ 688,186 $ 519,369
------------------- ---------------------
Balance sheet classification:
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 1,300,388 $ 692,313
Billings in excess of costs and estimated earnings on uncompleted
contracts (612,202) (172,944)
------------------- ---------------------
Net costs and estimated earnings in excess of billings on uncompleted
contracts $ 688,186 $ 519,369
=================== =====================
8
FAAC INCORPORATED
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 3 - NET INVESTMENT IN SALES-TYPE LEASES
The following lists the components of the net investment in sales-type
leases as of December 31:
2003 2002
------------------ -------------------
Total minimum lease payments to be received $ 634,856 $ 434,375
Less allowance for uncollectibles -- (229,677)
Less unearned income (35,114) (58,252)
------------------ -------------------
Net investment in sales-type leases $ 599,742 $ 146,446
================== ===================
Minimum lease payments do not include contingent rentals that may be
received because of use of the equipment in excess of specified
amounts. There were no contingent rentals received during 2003 or
2002.
Future minimum lease payments to be received are as follows:
Years Ending December 31 Amount
--------------------------------------------------------------------------------------------
2004 $ 198,076
2005 131,875
2006 131,875
2007 107,916
2008 30,000
----------------------------------
$ 599,742
==================================
NOTE 4 - NOTE PAYABLE - BANK
The Company has available a $3,000,000 line of credit with a bank,
bearing interest at .25 percent above the bank's prime rate (4.25
percent at December 31, 2003) December 31, 2003, and collateralized by
substantially all assets of the Company. There was an outstanding
balance of $383,000 due on this line of credit as of December 31,
2003. There was no outstanding balance due on this line of credit as
of December 31, 2002.
The Company is subject to various affirmative and reporting covenants
with respect to this line of credit.
Interest expense totaled approximately $3,200 and $33,500 for the
years ended December 31, 2003 and 2002, respectively.
9
FAAC INCORPORATED
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 5 - PROPERTY AND EQUIPMENT
The asset groups as of December 31 are as follows:
2003 2002
---------------- ----------------
Furniture and fixtures $ 204,275 $ 203,067
Computer equipment 1,714,940 1,705,438
Leasehold improvements 79,461 79,461
---------------- ----------------
Total Cost 1,998,676 1,987,966
Less accumulated depreciation 1,735,007 1,582,057
---------------- ----------------
Net carrying amount $263,669 $405,909
================ ================
Depreciation expense totaled $176,390 and $259,001 for the years ended
December 31, 2003 and 2002, respectively.
NOTE 6 - LEASE AGREEMENT
The Company leases its facility under an operating lease. The lease
agreement, which expires in January 2005, calls for monthly rental
payments of $23,617.
The future minimum annual lease payments are as follows:
Years Ending December 31 Amount
-----------------------------------------------------------------
2004 $ 283,404
2005 23,617
---------------------------
Total $ 307,021
===========================
Lease expense totaled approximately $258,000 and $277,000 for the
years ended December 31, 2003 and 2002, respectively.
10
FAAC INCORPORATED
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 7 - 401(K) DEFERRED COMPENSATION PLAN
The Company has a 401(k) deferred compensation plan covering
substantially all of its employees. Employees are eligible for the
plan after providing one year of service. The Company matches 50 cents
for each dollar contributed, limited to contributions by the
participant of 6 percent of eligible compensation. The Company may
also elect to make a discretionary profit-sharing contribution to the
401(k) plan. Contributions under the plan totaled approximately
$89,000 and $85,000 00 for the years ended December 31, 2003 and 2002,
respectively.
NOTE 8 - NOTES RECEIVABLE
Notes receivable at December 31 consist of the following:
2003 2002
----------- ----------
Note receivable from a company related to the
Company through common ownership, bearing
interest at a bank's prime rate plus 1
percent, payable in 48 monthly installments
of $10,881, including interest, commencing
February 2004, collateralized by specific
equipment $ 472,500 $ --
Note receivable from a limited liability
company, bearing interest at a bank's prime
rate plus 1 percent, payable in 48 monthly
installments of $779, including interest, due
July 2007, collateralized by specific
equipment 30,081 224,858
Note receivable from a limited liability
company, bearing interest at 5.25 percent,
payable in 108 monthly installments ranging
from $800 to $7,772, including interest, due
August 2012 320,000 --
Note receivable from a limited liability
company, non interest-bearing, discounted at
5 percent, payable in a $300,000 installment
due February 2003, with the remaining balance
payable in 36 monthly installments -- 432,194
----------- ----------
Total 822,581 657,052
Less allowance for doubtful accounts 320,000 505,194
----------- ----------
Net notes receivable 502,581 151,858
Less current portion 108,040 126,896
----------- ----------
Long-term portion $ 394,541 $ 24,962
=========== ==========
11
FAAC INCORPORATED
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 8 - NOTES RECEIVABLE (CONTINUED)
During the year ended December 31, 2002, approximately $505,000 of the
balance due under the original notes receivable from the limited
liability company was determined to be uncollectible and was reserved.
In July 2003, the Company agreed to modify the terms of the two notes
from the limited liability company. Under the modified terms, the
Company has agreed to accept back equipment that had been sold under a
note receivable as partial settlement for one note for approximately
$121,000, and has reduced the amount of the second note to $320,000
and extended the maturity of this note to August 2012. In addition,
the limited liability company has agreed to pay the Company royalties
ranging from 0 percent to 4 percent of the limited liability company's
revenue through August 2012. Once total payments to the Company under
the note receivable and royalty agreement equal $620,000, both the
note and royalty agreement will be cancelled. In conjunction with
these modifications, the stockholders of the Company agreed to rescind
their ownership interest in this limited liability company. Given the
uncertainty of collection under the modified agreement, the Company
has maintained a bad debt reserve as of December 31, 2003. No interest
income was recorded on the notes from the limited liability company
during 2003 and 2002.
During the year ended December 31, 2003, there were no payments
received under the royalty agreement with the limited liability
company.
NOTE 9 - INVESTMENTS IN SUBSIDIARIES
During 2003, the Company sold equipment to the Center for
Transportation Safety, Inc. (CTS) in exchange for a note receivable
(see Note 8) and a 49 percent equity interest in CTS. As of the time
of the transaction, the 49 percent equity interest was deemed to have
no value; accordingly, no proceeds from the sale were allocated to the
investment. As the Company is not obligated to advance any additional
funds to CTS, the Company has suspended the equity method of
accounting for this investment and additional losses incurred by CTS
have not been recorded by the Company. As of December 31, 2003, there
is no investment recorded for the Company's ownership in this company.
12
FAAC INCORPORATED
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003 AND 2002
NOTE 10 - CASH FLOWS
During 2002, the Company sold equipment for $233,000, which was
settled by the issuance of a note receivable.
NOTE 11 - RESTRICTED CASH EQUIVALENT
The restricted cash equivalent at December 31, 2002 represents a
certificate of deposit that had been pledged as collateral against a
$151,143 standby letter of credit with a bank. This standby letter of
credit and the related restriction expired in 2003 and the Company
received the proceeds from this certificate of deposit. There were no
standby letters of credit or restricted cash equivalents as of
December 31, 2003.
NOTE 12 - RELATED PARTY TRANSACTIONS
During the years ended December 31, 2003 and 2002, the Company
recorded sales to companies related through common ownership totaling
approximately $510,000 and $152,000, respectively. In addition, as of
December 31, 2003 and 2002, the Company had notes receivable due from
companies related through common ownership (see Note 8).
NOTE 13 - SUBSEQUENT EVENT
Subsequent to December 31, 2003, 100 percent of the outstanding stock
of the Company was acquired by an unrelated party. In conjunction with
this transaction, the Company entered into employment contracts with
various officers of the Company providing for a minimum annual salary
and benefits.
13
ITEM 7(b)(i) AND (ii)
AROTECH CORPORATION
AND FAAC INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
have been prepared to give effect to the January 12, 2004 acquisition by Arotech
Corporation of substantially all the assets of FAAC Incorporated under the
purchase method of accounting after giving effect to the pro forma adjustments
described in the accompanying notes.
The following unaudited pro forma condensed combined balance sheet as of
December 31, 2003 gives effect to the acquisition of substantially all the
assets of FAAC Incorporated as if it had occurred on such date, and reflects the
allocation of the purchase price to the FAAC Incorporated assets acquired based
on their estimated fair values at the date of acquisition. The excess of the
consideration paid by Arotech in the acquisition over the fair value of FAAC
Incorporated identifiable assets and liabilities has been recorded as goodwill.
The following unaudited pro forma condensed combined statements of
operations combine the historical statements of operations of Arotech and FAAC
Incorporated. The unaudited pro forma condensed combined statements of
operations for the year ended December 31, 2003, give effect to the acquisition
as if it had occurred on January 1, 2003 and combine the historical unaudited
statements of operations of Arotech and FAAC Incorporated for such period.
Integration costs are not included in the accompanying unaudited pro forma
condensed combined financial statements.
Unaudited pro forma condensed combined financial information is presented
for illustrative purposes only and is not necessarily indicative of the
financial position or results of operations that would have actually been
reported had the acquisition occurred at the beginning of the periods presented,
nor is it necessarily indicative of future financial position or results of
operations. These unaudited pro forma condensed combined financial statements
are based upon the respective historical financial statements of Arotech and
FAAC Incorporated and do not incorporate, nor do they assume, any benefits from
cost savings or synergies of the combined company. The pro forma adjustments are
based on available financial information and certain estimates and assumptions
that Arotech believes are reasonable and that are set forth in the notes to the
unaudited pro forma condensed combined financial statements.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
AROTECH CORPORATION AND FAAC INCORPORATED
PRO FORMA CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003
PRO FORMA PRO FORMA
AROTECH FAAC ADJUSTMENT REFERENCES COMBINED
------------- ------------ ------------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalent $13,685,125 $2,250 $(12,000,000) a $1,687,375
Certificates of deposit due within one year 706,180 -- -- 706,180
Trade receivables 4,706,423 2,156,615 -- 6,863,038
Costs and estimated earnings in excess of billing -- 1,300,388 -- 1,300,388
Other receivables 1,187,371 546,645 -- 1,734,016
Inventory 1,914,748 347,479 -- 2,262,227
Assets of discontinued operations 66,068 -- -- 66,068
------------- ------------ ------------- ------------
Total current assets 22,265,915 4,353,377 (12,000,000) 14,619,292
------------- ------------ ------------- ------------
SEVERANCE PAY FUND 1,023,342 -- -- 1,023,342
------------- ------------ ------------- ------------
PROPERTY AND EQUIPMENT, NET 2,292,741 263,669 -- 2,556,410
------------- ------------ ------------- ------------
NOTES RECEIVABLES -- 394,541 -- 394,541
------------- ------------ ------------- ------------
NET INVESTMENT IN SALES TYPE LEASE -- 401,666 -- 401,666
------------- ------------ ------------- ------------
DEPOSITS -- 271,330 -- 271,330
------------- ------------ ------------- ------------
OTHER ASSETS:
Intangible assets, net 2,375,195 -- 6,745,000 c 9,120,195
Goodwill 5,064,555 -- 4,344,558 d 9,409,113
------------- ------------ ------------- ------------
Total assets 33,021,748 5,684,583 (910,442) 37,795,889
============= ============ ============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of promissory note 150,000 -- -- 150,000
Short term loans 40,849 383,000 -- 423,849
Billing in excess of costs and estimated earnings -- 612,202 (196,702) e 415,500
Deferred warranty reserve -- 403,692 403,692
Accounts payable and accrued expenses 6,325,882 1,371,949 200,000 b 7,897,831
Liabilities of discontinued operation 380,108 -- -- 380,108
------------- ------------ ------------- ------------
Total current liabilities 6,896,839 2,770,843 3,298 9,670,980
------------- ------------ ------------- ------------
LONG-TERM LIABILITIES:
Long-term capital lease obligation, net of current portion
Accrued severance pay 2,997,548 -- -- 2,997,548
Convertible debenture 881,944 -- -- 881,944
Promissory note 150,000 150,000
------------- ------------ ------------- ------------
Total long-term liabilities 4,029,492 -- -- 4,029,492
------------- ------------ ------------- ------------
MINORITY RIGHTS 51,290 -- -- 51,290
------------- ------------ ------------- ------------
SHAREHOLDERS' EQUITY:
Common stock 479,726 7 10,688 f, g 490,421
Additional paid-in capital 135,891,316 85,403 1,903,902 f, h 137,880,621
Deferred compensation (8,464) -- -- (8,464)
Accumulated deficit (109,681,893) 2,828,330 (2,828,330) i (109,681,893)
Treasury stock (3,537,106) -- -- (3,537,106)
Notes receivable from stockholders (1,203,881) -- -- (1,203,881)
Accumulated other comprehensive loss 104,429 -- -- 104,429
------------- ------------ ------------- ------------
Total shareholders' equity 22,044,127 2,913,740 (913,740) 24,044,127
------------- ------------ ------------- ------------
Total liabilities and shareholders' equity $33,021,748 $5,684,583 $ (910,442) $37,795,889
============= ============ ============= ============
-2-
UNAUDITED PRO FORMA FINANCIAL INFORMATION
AROTECH CORPORATION AND FAAC INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003
PRO FORMA PRO FORMA
AROTECH FAAC ADJUSTMENTS REFERENCE COMBINED
--------------- --------------- ---------------- -------------- ---------------
STATEMENT OF OPERATIONS DATA:
Revenue 17,326,641 9,885,627 -- 27,212,268
Cost of revenue 11,087,840 6,347,425 -- 17,435,265
--------------- --------------- ---------------- ---------------
Gross profit (loss) 6,238,801 3,538,202 -- 9,777,003
OPERATING EXPENSES:
Research and development, net 1,053,408 453,542 -- 1,506,950
Sales and marketing 3,532,636 1,175,393 -- 4,708,029
General and administrative 6,196,779 245,659 -- 6,442,438
Amortization of purchased intangible assets 864,910 -- 903,550 k 1,768,460
--------------- --------------- ---------------- ---------------
11,647,733 1,874,594 903,550 14,425,877
Income (loss) from operations (5,408,932) 1,663,608 (903,550) (4,648,874)
Other income (expenses),net -- (51,235) (51,235)
Financial income (expenses), net (3,470,459) -- 180,000 j (3,290,459)
--------------- --------------- ---------------- ---------------
Income (loss) before taxes (8,879,391) 1,612,373 (723,550) (7,990,568)
Tax expense (396,193) (396,193)
--------------- --------------- ---------------- ---------------
Income (loss) before minority interest in
loss of a subsidiary (9,275,584) 1,612,373 (723,550) (8,386,761)
Minority interest on loss 156,900 -- 156,900
--------------- --------------- ---------------- ---------------
Net Loss (9,118,684) 1,612,373 (723,550) (8,229,861)
Basic and diluted net loss per share ($0.23) ($0.21)
=============== ===============
Weighted average number of shares of
Common Stock used in computation of
basic net loss per share 38,890,174 39,959,693
=============== ===============
-3-
AROTECH CORPORATION AND FAAC INCORPORATED
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
U.S. DOLLARS
NOTE 1: -
The unaudited pro forma condensed combined financial statements reflect
the purchase of substantially all of the assets and liabilities of FAAC
Incorporated. The total purchase price consisted of $12,000,000 in cash, and
$2,000,000 in shares, which represented the market value of 1,069,519 shares of
Arotech's common stock at the date of the closing date. The purchase price also
included $200,000 of transaction costs. The transaction has been accounted for
using the purchase method of accounting, and accordingly, the purchase price has
been allocated to the assets acquired and liabilities assumed based upon their
fair values at the date the acquisition was completed.
The purchase consideration was estimated as follows:
Common Stock (1) $2,000,000
Cash consideration 12,000,000
Estimated transaction expenses 200,000
---------------
Total consideration (2) $14,200,000
===============
(1) The value of the 1,069,519 shares of Arotech's common stock issued upon
the consummation of the acquisition.
(2) Based upon a preliminary estimate of the fair value of the tangible and
intangible assets acquired, Arotech has allocated the total cost of the
acquisition to FAAC 's assets as follows. (This allocation is for pro forma
purposes only. Final fair values will be based on a valuation of the net assets
purchased as of December 31, 2003. The unaudited pro forma consolidated
financial information reflects Arotech's best estimates; however, the allocation
of the purchase price may differ from the pro forma amounts):
DECEMBER 31,
2003
--------------------
Tangible assets acquired $5,684,583
Intangible assets
Technology 4,610,000
Existing contracts 636,000
Website 14,000
Customer list 1,125,000
Trademarks 360,000
Goodwill 4,344,558
Liabilities assumed (2,574,141)
--------------------
Total consideration $14,200,000
====================
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill arising from acquisitions will not be amortized. In lieu of
amortization, Arotech is required to perform an annual and interim impairment
review. If Arotech determines, through the impairment review process, that
goodwill has been impaired, it will record the impairment charge in its
statement of operations. Arotech will also assess the impairment of goodwill
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable.
AROTECH CORPORATION AND FAAC INCORPORATED
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
U.S. DOLLARS
NOTE 2: -
The unaudited pro forma condensed combined balance sheet includes the
adjustments necessary to give effect to the acquisition as if it had occurred on
December 31, 2003 and to reflect the allocation of the acquisition cost to the
fair value of tangible and intangible assets acquired as noted above, including
the elimination of FAAC's shareholders' equity.
Adjustments included in the pro forma condensed combined balance sheet are
summarized as follows:
a) Cash consideration paid for FAAC Incorporated at the amount of $12
million.
b) Accrued transaction costs at the amount of $200,000.
c) Valuation of FAAC's intangible assets allocated to technology,
customer list, existing contracts, trademarks and website $6,745,000.
d) Valuation of FAAC' intangible assets allocated to goodwill of
$4,344,558.
e) Fair value adjustment to FAAC billing in excess of costs and estimated
earnings on uncompleted contracts in the amount of $196,702.
f) Issuance of 1,069,519 shares of Common Stock with fair market value of
$2,000,000, $10,695 out of which is allocated to Common Stock and the
remaining amount of $1,989,305 to Additional paid-in-capital.
g) Elimination of the FAAC Common Stock at the amount of $7.
h) Elimination of the FAAC Additional paid-in-capital at the amount of
$85,403.
i) Elimination of the FAAC Retained Earnings at the amount of $2,828,330.
j) Interest expenses related to the $12 million acquisition cost amounted
of $180,000 for the twelve-month period ended December 31, 2003.
k) Amortization of intangible assets of $903,550 for the twelve-month
period ended December 31, 2003.
Pro forma weighted average number of shares used in computing basic and diluted
net loss per share excludes employee stock options outstanding in each period
because they are anti-dilutive.
AROTECH CORPORATION AND FAAC INCORPORATED
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
U.S. DOLLARS
NOTE 3
Amortization of acquired intangible assets is calculated using the
following estimated useful lives:
YEARS
----------------------
Technology 8
Existing contracts 3
Customer list 10
Trademarks and trade names Indefinite
Website 5
Goodwill Not amortized
- - - - - - - - -