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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): FEBRUARY 4, 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)
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On January 27, 2004, Arotech Corporation (the "Registrant") completed the
consummation of an agreement (the "Agreement") to purchase all of the
outstanding stock of Epsilor Electronic Industries, Ltd., an Israeli corporation
("Epsilor"), from Epsilor's existing shareholders.
On February 4, 2004, the Registrant filed a Current Report on Form 8-K
relating to its acquisition of Epsilor, 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 February 4, 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 Epsilor Electronic Industries, Ltd. as of December
31, 2003 and December 31, 2002 and the related statements of income,
changes in shareholders' equity (deficiency) 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*....Share Purchase Agreement
2.2*....Management Agreement
23.1.....Consent of Kost, Forer, Gabbay & Kassierer, Member of Ernst & Young
Global
99.1*....Press release
- ------------------------------
*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 26, 2004
3
ITEM 7(B)(I)
------------
EPSILOR ELECTRONIC INDUSTRIES LTD.
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2003
NEW ISRAELI SHEKELS (NIS) IN THOUSANDS
INDEX
PAGE
----
REPORT OF INDEPENDENT AUDITORS 6
BALANCE SHEETS 7
STATEMENTS OF INCOME 8
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY) 9
STATEMENTS OF CASH FLOWS 10
NOTES TO FINANCIAL STATEMENTS 11-22
- - - - - - - - - - - -
4
[ERNST & YOUNG LOGO]
REPORT OF INDEPENDENT AUDITORS
TO THE SHAREHOLDERS OF
EPSILOR ELECTRONIC INDUSTRIES LTD.
We have audited the accompanying balance sheets of Epsilor Electronic
Industries Ltd. ("the Company") as of December 31, 2003 and 2002, and the
related statements of operations, changes in shareholders' equity (deficiency)
and cash flows for the years then ended December 31, 2003. 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. Those standards require that we plan and perform
the audit 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 the 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 the Company as of December
31, 2003 and 2002 and the related results of its operations and cash flows for
the years then ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States.
/s/ Kost, Forer, Gabbay & Kassierer
-----------------------------------
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 10, 2004 A Member of Ernst & Young Global
5
EPSILOR ELECTRONIC INDUSTRIES LTD.
- --------------------------------------------------------------------------------
BALANCE SHEETS
NIS IN THOUSANDS, EXCEPT SHARE DATA
DECEMBER 31,
-----------------------------
2003 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents -- 847
Available-for-sale marketable securities 550 1,207
Trade receivables 2,197 1,111
Other accounts receivable and prepaid expenses 315 219
Inventories 4,059 2,965
------------ ------------
Total current assets 7,121 6,349
------------ ------------
PROPERTY AND EQUIPMENT, NET 3,127 2,412
------------ ------------
DEFERRED TAX ASSETS 151 121
------------ ------------
SEVERANCE PAY FUND 472 402
------------ ------------
Total assets 10,871 9,284
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Short-term bank credit 345 728
Current maturities of long-term loans 177 890
Trade payables 1,472 2,159
Other accounts payable and accrued expenses 6,929 4,737
------------ ------------
Total current liabilities 8,923 8,514
------------ ------------
LONG-TERM LIABILITIES
Accrued severance pay 1,046 852
Long-term loans 128 --
------------ ------------
Total long-term liabilities 1,174 852
------------ ------------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Share capital -
Ordinary shares of NIS 1 par value:
Authorized: 3,998,671 shares as of December 31, 2003 and 2002;
Issued and outstanding: 2,168,897 and 2,043,687 shares as of
December 31, 2003 and 2002, respectively 2,169 2,044
Management shares of NIS 1 par value -
Authorized, issued and outstanding: 100 shares as of December 31,
2003 and 2002 *) - *) -
Accumulated other comprehensive income 126 140
Accumulated deficit (1,521) (2,266)
------------ ------------
774 (82)
------------ ------------
10,871 9,284
============ ============
*) Represents an amount lower than NIS 1.
The accompanying notes are an integral part of the financial statements.
6
EPSILOR ELECTRONIC INDUSTRIES LTD.
STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
YEAR ENDED DECEMBER 31,
----------------------------
2003 2002
------------ ------------
Revenues 22,193 22,866
Cost of revenues 8,527 12,471
------------ ------------
Gross profit 13,666 10,395
------------ ------------
Research and development expenses 1,517 1,518
Selling and marketing expenses 1,583 858
General and administrative expenses 1,237 1,112
------------ ------------
Total operating expenses 4,337 3,488
------------ ------------
Operating income 9,329 6,907
Financial expenses, net 613 497
Other income 49 --
------------ ------------
Income before taxes on income 8,765 6,410
Taxes on income 2,320 1,552
------------ ------------
Net income 6,445 4,858
============ ============
The accompanying notes are an integral part of the financial statements.
7
EPSILOR ELECTRONIC INDUSTRIES LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
- --------------------------------------------------------------------------------
NIS IN THOUSANDS, EXCEPT SHARE DATA
ACCUMULATED TOTAL
ORDINARY SHARES MANAGEMENT SHARES OTHER TOTAL SHAREHOLDERS'
---------------------- ------------------- COMPREHENSIVE ACCUMULATED COMPREHENSIVE EQUITY
NUMBER AMOUNT NUMBER AMOUNT INCOME DEFICIT INCOME (LOSS) (DEFICIENCY)
---------- -------- -------- -------- -------- -------- ------------- ------------
Balance as of January 1, 2002 1,863,787 1,864 100 *)- 76 (2,124) (184)
Issuance of Ordinary shares
of NIS 1 per share 180,000 180 -- -- -- -- 180
Net income -- -- -- -- -- 4,858 4,858 4,858
Dividend -- -- -- -- -- (5,000) (5,000)
Unrealized gains on
available-for-sale
marketable securities -- -- -- -- 64 -- 64 64
---------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive loss 4,922
========
Balance as of December 31,
2002 2,043,787 2,044 100 *)- 140 (2,266) (82)
Issuance of Ordinary shares
of NIS 1 per share 124,710 125 -- -- -- -- 125
Net income 6,445 6,445 6,445
Dividend -- -- -- -- -- (5,700) (5,700)
Unrealized losses on
available-for-sale
marketable securities -- -- -- -- (14) -- (14) (14)
---------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive income 6,431
========
Balance as of December 31,
2003 2,168,497 2,169 100 *)- 126 (1,521) 774
========== ======== ======== ======== ======== ======== ========
*) Represent an amount lower than NIS 1.
The accompanying notes are an integral part of the financial statements.
8
EPSILOR ELECTRONIC INDUSTRIES LTD.
STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
YEAR ENDED DECEMBER 31,
----------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
- -------------------------------------
Net income 6,445 4,858
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 605 500
Gain on sale of property and equipment (49) --
Gain on sale of available-for-sale marketable securities -- (19)
Linkage differentials in respect of long-term loans -- 75
Interest on long-term loans (234) (499)
Decrease (increase) in trade receivables (1,086) 825
Increase in deferred taxes (30) (121)
Increase in other accounts receivable and prepaid expenses (97) (35)
Increase (decrease) in trade payables (687) 1,055
Increase in other accounts payable and accrued expenses 2,192 935
Increase (decrease) in accrued severance pay, net 124 (26)
Decrease (increase) in inventories (1,094) 97
------------ ------------
Net cash provided by operating activities 6,089 7,645
------------ ------------
Cash flows from investing activities:
- -------------------------------------
Purchase of property and equipment (1,459) (721)
Proceeds from sale of available-for-sale marketable securities 1,119 938
Purchase of available-for-sale marketable securities (475) (767)
Grants received in connection with "Approved Enterprise" 138 109
Proceeds from sale of property and equipment 51 --
------------ ------------
Net cash used in investing activities (626) (441)
------------ ------------
Cash flows from financing activities:
- -------------------------------------
Short-term bank credit (383) (435)
Repayment of long-term loan (352) (1,113)
Issuance of share capital 125 180
Dividend (5,700) (5,000)
------------ ------------
Net cash used in financing activities (6,310) (6,368)
------------ ------------
Increase (decrease) in cash and cash equivalents (847) 836
Cash and cash equivalents at the beginning of the year 847 11
------------ ------------
Cash and cash equivalents at the end of the year -- 847
============ ============
Supplemental disclosure of cash flows activities:
- -------------------------------------------------
Cash paid during the years for:
Interest 234 17
============ ============
Income taxes 864 1,190
============ ============
The accompanying notes are an integral part of the financial statements.
9
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 1:- GENERAL
Epsilor Electronic Industries Ltd. ("the Company") is a privately owned
Israeli corporation. The Company develops and sells rechargeable and
primary lithium batteries and smart chargers to the military and to private
industry.
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States ("U.S. GAAP").
a. 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 amounts reported in the financial
statements and accompanying notes. Actual results could differ from
those estimates.
b. Cash and cash equivalents:
The Company considers short-term highly liquid investments that are
readily convertible into cash with maturities of three months or less
at the date acquired, to be cash equivalents.
c. Marketable securities
The Company accounts for investments in debt and mutual fund in
accordance with Statement of Financial Accounting Standard Board
("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities."
Management determines the proper classification of investments in
obligations with fixed maturities and marketable equity securities at
the time of purchase and reevaluates such designations as of each
balance sheet date. At December 31, 2003, all securities covered by
SFAS No. 115 were designated as available-for-sale. Accordingly, the
available-for-sale securities are stated at fair value, with
unrealized gains and losses reported in a separate component of
shareholders' equity (deficiency), accumulated other comprehensive
income (loss). Realized gains and losses on sales of investments, as
determined on a specific identification basis, are included in the
statement of income in financial expenses, net.
d. Inventories:
Inventories are stated at the lower of cost or market value. Cost is
determined as follows:
Raw materials - using the average cost method.
Work-in-progress -- represents the cost of raw materials and
manufacturing.
10
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Finished products - recorded on the basis of direct manufacturing
costs with the addition of allocable indirect manufacturing costs.
e. Property and equipment:
Property and equipment are stated at cost, net of accumulated
depreciation and net of grants received from the Company's "Approved
Enterprise" status.
Depreciation is calculated by the straight-line method over the
estimated useful lives of the assets at the following annual rates:
%
--------------------
Machinery and equipment 10 - 15
Office furniture and equipment 6 - 20
Motor vehicles 15
Leasehold improvements Over the term of the
lease
Work stations 15
f. Impairment of long-lived assets:
The Company's long-lived assets are reviewed for impairment in
accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long- Lived Assets," whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the assets. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of
the assets exceeds the fair value of the assets.
As of December 31, 2003, no impairment losses have been identified.
g. Revenue recognition:
The Company generates its revenues from the sale of products. The
Company sells its products through a direct sales force.
Revenues from product sales are recognized in accordance with Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," when
persuasive evidence of an agreement exists, delivery of the product
has occurred, the fee is fixed or determinable, no further obligation
exists and collectibility is probable. The Company does not grant a
right of return to its customers.
h. Research and development cost:
Research and development costs, are charged to the statement of income
as incurred.
11
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
i. Concentrations of credit risk:
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, available-for-sale marketable securities and trade
receivables.
Cash, cash equivalents and available-for-sale marketable securities
are invested in major banks in Israel. Management believes that the
financial institutions that hold the Company's investments are
financially sound and, accordingly, minimal credit risk exists with
respect to these investments.
The Company's trade receivables are mainly derived from sales to
customers located in Israel and India. The Company performs periodic
credit evaluations of its customers' financial condition and generally
does not require collateral. No allowance for doubtful accounts was
determined with respect to those accounts. In certain circumstances,
the Company may require letters of credit, other collateral or
additional guarantees.
The Company's marketable securities include investments in bonds of
the Government of Israel and Israeli mutual fund. Management believes
that those corporations are financially sound, the portfolio is well
diversified, and accordingly, minimal credit risk exists with respect
to these marketable securities.
The Company has no off-balance-sheet concentration of credit risk such
as foreign exchange contracts, option contracts or other foreign
hedging arrangements.
j. Income taxes:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS No. 109 prescribes the use of the
liability method whereby deferred tax asset and liability account
balances are determined based on differences between financial
reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The Company provides a valuation
allowance, if necessary, to reduce deferred tax assets to its
estimated realizable value.
k. Severance pay:
The Company's liability for severance pay is calculated pursuant to
the Severance Pay Law based on the most recent salary of the employees
multiplied by the number of years of employment, as of the balance
sheet date. Employees are entitled to one month's salary for each year
of employment or a portion thereof. The Company's liability for all of
its employees is fully provided by monthly deposits with insurance
policies and by an accrual. The value of these policies is recorded as
an asset in the Company's balance sheet.
The deposited funds include profits accumulated up to the balance
sheet date. The deposited funds may be withdrawn only upon the
fulfillment of the obligation pursuant to Israel's Severance Pay Law
or labor agreements. The value of the deposited funds is based on the
cash surrendered value of these policies, and includes immaterial
profits.
12
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Severance expenses for the years ended December 31, 2003 and 2002
amounted to NIS 200 and NIS 194, respectively
l. Fair value of financial instruments:
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
1. The carrying amounts of cash and cash equivalents, trade
receivables, short-term bank credit and trade payables
approximate their fair value due to the short-term maturity of
such instruments.
2. The fair value of available-for-sale marketable securities is
based on the quoted market prices (see Note 3).
3. The carrying amount of the Company's long-term loans approximates
their fair value. The fair value was estimated using discounted
cash flow analysis, based on the Company's incremental loan rate
for similar types of loan agreements.
NOTE 3:- MARKETABLE SECURITIES
The following is a summary of available-for-sale securities:
DECEMBER 31, 2003
-----------------------------------------------------
ESTIMATED
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------- ------------ ------------
Mutual fund 564 -- (14) 550
============ ============= ============ ============
DECEMBER 31, 2002
-----------------------------------------------------
ESTIMATED
GROSS GROSS FAIR
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------- ------------ ------------
Government of Israel bonds 220 11 -- 231
Mutual fund 923 53 -- 976
------------ ------------- ------------ ------------
1,143 64 -- 1,207
============ ============= ============ ============
The unrealized holding gains (losses) on available-for-sale securities
included as a separate component of shareholders' equity (deficiency),
other comprehensive income, totaled NIS 64 and NIS (14) in 2003 and 2002,
respectively.
13
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 4:- INVENTORIES
Inventories are composed of the following:
DECEMBER 31,
------------------------
2003 2002
---------- ----------
Raw materials 3,178 2,462
Work-in-progress 655 146
Finished products 226 357
---------- ----------
4,059 2,965
========== ==========
NOTE 5:- PROPERTY AND EQUIPMENT
DECEMBER 31,
------------------------
2003 2002
---------- ----------
Cost:
Machinery and equipment 4,148 3,860
Office furniture and equipment 525 520
Motor vehicles 888 614
Leasehold improvements 333 333
Work stations 524 --
---------- ----------
6,418 5,327
---------- ----------
Accumulated depreciation:
Machinery and equipment 2,560 2,136
Office furniture and equipment 338 312
Motor vehicles 268 415
Leasehold improvements 85 52
Work stations 40 --
---------- ----------
3,291 2,915
---------- ----------
Depreciated cost 3,127 2,412
========== ==========
Depreciation expenses for the years ended December 31, 2003 and 2002 were
NIS 605 and NIS 500, respectively.
NOTE 6:- SHORT-TERM BANK CREDIT
The Company has an available NIS 750 line of credit with a bank, bearing
average interest at 2% above the bank's prime rate (6.7% at December 31,
2003), and is collateralized by substantially all assets of the Company.
There was an outstanding balance of NIS 345 and NIS 728 due on this line of
credit as of December 31, 2003 and 2002, respectively.
The Company is subject to various affirmative and reporting covenants with
respect to this line of credit.
Interest expense totaled NIS 165 and NIS 142 for the years ended December
31, 2003 and 2002, respectively.
14
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 7:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
DECEMBER 31,
------------------------
2003 2002
---------- ----------
Employees and payroll accruals 685 666
Income taxes payable 4,120 2,570
Accrued expenses 1,640 1,069
Customer advances 396 --
Related party *) 38 432
Other 50 --
---------- ----------
6,929 4,737
========== ==========
*) Linked to the CPI and bears interest at the rate of 4%.
NOTE 8:- LONG-TERM LOANS
a. The total amount of loans classified by currency linkage terms and
interest rates is as follows:
INTEREST RATE AMOUNT
----------------------- -----------------------
DECEMBER 31, DECEMBER 31,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
In NIS 9.50% 8.54% 305 521
In U.S. dollars -- 8.56% -- 369
---------- ----------
305 890
========== ==========
b. The loans mature as follows:
DECEMBER 31,
------------
2004 177
2005 128
----------
305
==========
c. As for liabilities collateralized by pledges of assets, see Note 10.
15
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 9:- TAXES ON INCOME
a. Tax benefits under the Law for the Encouragement of Capital
Investments, 1959 (the "Law"):
Four expansion programs of the Company have been granted "Approved
Enterprise" status, under the Law. For these expansion programs, the
Company has elected alternative benefits, waiving grants in return for
tax exemptions. Pursuant thereto, the income of the Company derived
from the following "Approved Enterprise" expansion programs is
tax-exempt for the periods stated below and will be eligible for
reduced tax rates thereafter (such reduced tax rates are dependent on
the level of non-Israeli investments in the Company), as described
below.
1. Income derived from the first program was tax-exempt for the
10-year period that started in 1994 and ended in 2003.
2. Income derived from the second program was subject to a
reduced tax rate of 10%-25% (according to the percentage of foreign
investment) for seven years that started in 1996 and ended in 2002,
and is entitled to an investment grant at a rate of 38% of the value
of the approved investment.
3. Income derived from the third program was subject to a reduced
tax rate of 10%-25% (according to the percentage of foreign
investment) for seven years that started in 1999 and ends in 2005. In
addition, the Company is entitled to a tax exemption for the two-year
period from the first year the Company has taxable income, and an
investment grant at the rate of 24% of the value of the approved
investment.
4. The fourth program entitles the Company to a tax exemption for
the two-year period from the first year in which the Company has
taxable income, and was subject to a reduced tax rate of 10%-25%
(according to the percentage of foreign investment) for an additional
five-years and is entitled to an investment grant at a rate of 24% of
the value of the approved investment. The program has not yet been
approved.
The benefits available to an Approved Enterprise are conditional upon
the fulfillment of conditions stipulated in the Law and its
regulations, and the criteria set forth in the specific letter of
approval. In the event that the Company does not meet these
conditions, it would be required to refund the amount of tax benefits,
with the addition of the CPI linkage adjustment and interest. In the
opinion of the Company's management, the Company has been in full
compliance with the conditions of the above programs through December
31, 2003, and with respect to the first three programs, has received
written confirmation to this effect from the Investment Center.
If a dividend were to be distributed out of tax-exempt income deriving
from an expansion program, the Company would be liable for corporate
tax at a rate of 25%.
Income from sources other than the "Approved Enterprise" during the
benefit period will be subject to tax at the regular corporate tax
rate of 36%.
16
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 9:- TAXES ON INCOME (CONT.)
b. Tax benefits under the Law for the Encouragement of Industry (Taxes),
1969 ("the Encouragement Law"):
The Company is an "industrial company," as defined by the
Encouragement Law and, as such, is entitled to certain tax benefits,
mainly accelerated depreciation of property and equipment, as
prescribed by regulations published under the Inflationary Adjustments
Law, the right to deduct public issuance expenses and patents and
other intangible property rights for tax purposes, and the right to
file, under specified conditions, a consolidated tax return with
additional related Israeli "industrial companies."
c. Measurement of taxable income under the Income Tax (Inflationary
Adjustments) Law, 1985:
Results for tax purposes are measured and reflected in real terms in
accordance with the change in Israel's Consumer Price Index ("CPI").
As explained in Note 2b, the consolidated financial statements are
presented in U.S. dollars. The differences between the change in
Israel's CPI and in the NIS/U.S. dollar exchange rate causes a
difference between taxable income or loss and the income or loss
before taxes reflected in the consolidated financial statements. In
accordance with paragraph 9(f) of Statement of Financial Accounting
Standard No. 109 "Accounting for Income Taxes" ("SFAS No. 109"), the
Company has not provided deferred income taxes on this difference
between the reporting currency and the tax bases of assets and
liabilities.
d. On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No. 132), 2002, known as the tax reform, became effective.
The tax reform changed the Israeli tax system from a territorial tax
method into a personal tax method on a global basis.
e. Taxes on income is comprised as follows:
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
---------- ----------
Current taxes 2,350 1,673
Deferred income benefit (30) (121)
---------- ----------
2,320 1,552
========== ==========
17
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 9:- TAXES ON INCOME (CONT.)
f. Deferred taxes on income:
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows:
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
---------- ----------
Deferred tax assets:
Reserves and allowances 151 121
========== ==========
g. A reconciliation between the theoretical tax expense, assuming all
income is taxed at the statutory tax rate applicable to income of the
Company, and the actual tax expense as reported in the statement of
income, is as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2003 2002
---------- ----------
Income before taxes, as reported in the
consolidated statements of income 8,765 6,410
========== ==========
Statutory tax rate 36% 36%
========== ==========
Theoretical tax expenses on the above amount
at the Israeli statutory tax rate 3,155 2,308
Decrease in taxes resulting from "Approved
Enterprise" benefits (964) (705)
Non-deductible expenses 58 29
Other 71 (80)
---------- ----------
Actual tax expense 2,320 1,552
========== ==========
18
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES
a. Lease agreements:
The Company rents its facilities under an oral operating lease
agreement, which does not have an expiration date.
Rent expenses for the years ended December 31, 2003 and 2002 were NIS
609 and NIS 511, respectively.
b. Royalty commitments to third party:
The Company signed two agreements with one of its customers ("the
customer") according to which the Company is obligated to pay to the
customer royalties for every sale of certain products. According to
these agreements, the Company paid the customer amounts of NIS 856 and
NIS 1,583 for the years ended December 31, 2003 and 2002,
respectively. These amounts were recorded as selling and marketing
expenses.
c. Guarantees:
The Company obtained bank guarantees in the amount of NIS 177 in order
to secure advance received from one of its customers.
d. Pledges and charges:
The Company has recorded a floating charge on all of its assets
(including goodwill and share capital) in favor of a bank. In
addition, the Company has a specific pledge on assets in respect of
which Government guaranteed loans were given.
NOTE 11:- SHAREHOLDERS' EQUITY
a. Ordinary shares:
Ordinary shares confer upon their holders voting rights, the right to
receive cash dividends and the right to share in excess assets upon
liquidation of the Company.
b. Management shares:
Management shares confer upon their holders the same rights as
Ordinary shares.
19
EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NIS IN THOUSANDS
NOTE 11:- SHAREHOLDERS' EQUITY (CONT.)
c. Issuance of Ordinary shares:
During 2002 and 2003, the Company issued 180,000 and 124,710 Ordinary
shares of NIS 1 par value, respectively. The aggregate consideration
for such shares was NIS 180 and NIS 124, respectively.
d. Dividend:
Dividends, if any, are declared and paid in NIS. The Company has
determined that it will not distribute dividends out of tax-exempt
profits.
NOTE 12:- FINANCIAL EXPENSES
YEAR ENDED DECEMBER 31,
------------------------
2003 2002
---------- ----------
Financial expenses:
Interest, bank charges and fees (142) (165)
Interest on long-term loans (234) (499)
Interest to tax authorities (246) (17)
Exchange differentials (57) (64)
---------- ----------
(679) (745)
---------- ----------
Financial income:
Gains on sales of available-for-sale
marketable securities -- 19
Interest income 66 229
---------- ----------
66 248
---------- ----------
(613) (497)
========== ==========
NOTE 13:- SUBSEQUENT EVENTS (UNAUDITED)
In January 2004, Arotech Corporation, a NASDAQ listed company, purchased
all of the outstanding stock of the Company from the Company's existing
shareholders. The assets acquired through the purchase of all the Company's
outstanding stock consisted of all of the Company's assets, including the
Company's current assets, property and equipment, and other assets
(including intangible assets such as goodwill, intellectual property and
contractual rights). The consideration for the assets purchased consisted
of (i) cash in the amount of $7,000,000, and (ii) a series of three
$1,000,000 promissory notes, due on the first, second and third
anniversaries of the agreement.
- - - - - - - - -
ITEM 7(B)(I), (II) AND (III)
----------------------------
- - - - - - - - -
AROTECH CORPORATION
AND EPSILOR ELECTRONIC INDUSTRIES LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
have been prepared to give effect to the acquisition by Arotech Corporation
("Arotech") of substantially all the assets of Epsilor Electronic Industries
Ltd. ("Epsilor") 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 Epsilor as if it had occurred on such date, and reflects the
allocation of the purchase price to the Epsilor 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 Epsilor
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
Epsilor. 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 Epsilor for such period. Integration costs are not
included in the accompanying unaudited pro forma condensed combined financial
statements. This pro forma information should be read in conjunction with the
respective consolidated historical financial statements (including notes
thereto) of Arotech and Epsilor for the year ended December 31, 2003, appearing
elsewhere herein.
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
Epsilor 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.
PRO FORMA FINANCIAL INFORMATION
AROTECH CORPORATION AND EPSILOR ELECTRONIC INDUSTRIES LTD.
PRO FORMA CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2003
U.S. DOLLARS (000'S)
AROTECH EPSILOR PRO FORMA REFERENCES COMBINED
---------- ---------- ---------- ---------- ----------
CURRENT ASSETS:
Cash and cash equivalent $ 13,685 -- $ (7,000) A $ 6,685
Certificates of deposit due within one year 706 -- -- 706
Available for sale marketable securities -- 126 -- 126
Trade Receivables 4,706 502 -- 5,208
Other receivables 1,188 106 -- 1,294
Inventories 1,915 927 -- 2,842
Assets of discontinued operations 66 -- -- 66
---------- ---------- ---------- ----------
Total current assets 22,266 1,661 (7,000) 16,927
---------- ---------- ---------- ----------
SEVERANCE PAY FUND 1,023 108 -- 1,131
---------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT, NET 2,293 714 -- 3,007
---------- ---------- ---------- ----------
GOODWILL 5,065 -- 1,775 D 6,840
---------- ---------- ---------- ----------
OTHER INTANGIBLE ASSETS 2,375 -- 5,298 C 7,673
---------- ---------- ---------- ----------
Total assets $ 33,022 $ 2,483 $ 73 $ 35,578
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and accrued expenses $ 6,289 $ 1,919 250 B $ 8,458
Current portion of Promissory note 150 40 -- 190
Short term loans 41 79 -- 120
Liabilities on discontinued operation 380 -- -- 380
---------- ---------- ---------- ----------
Total current liabilities 6,860 2,038 250 9,148
---------- ---------- ---------- ----------
LONG-TERM LIABILITIES:
Accrued severance pay 2,815 239 -- 3,054
Convertible debenture 882 -- -- 882
Deferred warranty revenue less current portion 220 -- -- 220
Promissory notes and long term loans 150 29 -- 179
---------- ---------- ---------- ----------
Total long-term liabilities 4,067 268 -- 4,335
---------- ---------- ---------- ----------
MINORITY RIGHTS 51 -- -- 51
---------- ---------- ---------- ----------
SHAREHOLDERS' EQUITY:
Common stock 480 -- -- E 480
Additional paid-in capital 135,891 495 (495) F 135,891
Deferred stock compensation (8) -- -- (8)
Accumulative deficit (109,682) (347) 347 G (109,682)
Treasury stock (3,537) -- -- (3,537)
Notes receivable from stockholders (1,204) -- -- (1,204)
Accumulated other comprehensive Income 104 29 (29) H 104
---------- ---------- ---------- ----------
Total shareholders' equity 22,044 177 (177) 22,044
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 33,022 $ 2,483 $ 73 $ 35,578
========== ========== ========== ==========
-2-
PRO FORMA FINANCIAL INFORMATION
AROTECH CORPORATION AND EPSILOR ELECTRONIC INDUSTRIES LTD.
UNAUDITED PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003
U.S. DOLLARS (000'S)
PRO FORMA PRO FORMA
AROTECH EPSILOR ADJUSTMENT REFERENCE COMBINED
---------- ---------- ---------- --------- ----------
STATEMENT OF OPERATIONS DATA:
Revenue $ 17,327 $ 5,068 -- $ 22,395
Cost of revenue 11,088 1,947 -- 13,035
---------- ---------- ---------- ----------
Gross profit 6,239 3,121 -- 9,360
OPERATING EXPENSES:
Research and development 1,053 347 -- 1,400
Sales and marketing 3,533 361 -- 3,894
General and administrative 6,197 282 -- 6,479
Amortization of purchased intangible assets 865 -- 530 J 1,395
---------- ---------- ---------- ----------
11,648 990 530 13,168
Income (loss) from operations (5,409) 2,131 (530) (3,808)
Other income (expenses), net -- 11 11
Financial income (expenses), net (3,470) (140) 105 I (3,505)
---------- ---------- ---------- ----------
Income (loss) before taxes (8,879) 2,002 (425) (7,302)
Tax expense (396) (530) -- (926)
---------- ---------- ---------- ----------
Income (loss) before minority (9,275) 1,472 (425) (8,228)
interest in earnings of a subsidiary
Loss to minority 157 -- -- 157
---------- ---------- ---------- ----------
Net loss from continuing operations (9,118) 1,472 (425) (8,071)
Basic and diluted net loss per share ($0.23) ($0.21)
========== ==========
Weighted average number of shares of
Common Stock used in computation of
basic and diluted net loss per share 38,890,174 38,890,174
========== ==========
-3-
AROTECH CORPORATION AND EPSILOR ELECTRONIC INDUSTRIES LTD.
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 assets and liabilities of Epsilor. The total purchase price was a
total of $10,000,000, consisting of (i) $7,000,000 in cash, and (ii) a series of
three $1,000,000 installment payments secured by bank guarantees, due on the
first, second and third anniversaries of the closing of the transaction, which
are contingent upon terms determined in the purchase agreement. The purchase
price also included $250,000 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:
Cash consideration $ 7,000,000
Estimated transaction expenses 250,000
------------
Total consideration (1) $ 7,250,000
============
(1) Based upon a preliminary valuation of the estimated fair value of
the tangible and intangible assets acquired, Arotech has allocated the total
cost of the acquisition to Epsilor's assets as of December 31, 2003 as follows.
(This allocation is for pro forma purposes only. Final fair values will be based
on the fair value 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 $ 2,483,000
Intangible assets
Technology 160,000
Customer list 5,138,000
Goodwill 1,775,000
Liabilities assumed (2,306,000)
------------
Total consideration $ 7,250,000
============
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.
-4-
AROTECH CORPORATION AND EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
U.S. DOLLARS
NOTE 2: -
The 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 Epsilor's equity account.
Adjustments included in the pro forma condensed combined balance sheet are
summarized as follows:
a) Cash consideration paid for Epsilor at the amount of $7,000,000.
b) Accrued transaction costs at the amount of $250,000.
c) Valuation of Epsilor's intangible assets allocated to technology and
customer list $5,298,000.
d) Valuation of Epsilor's intangible assets allocated to goodwill of
$1,775,000.
e) Elimination of the Epsilor Common Stock at the amount of $0.
f) Elimination of the Epsilor Additional paid-in-capital at the amount of
$495,000.
g) Elimination of the Epsilor Accumulated deficit at the amount of
$347,000.
h) Elimination of Epsilor Accumulated other comprehensive Income at the
amount of $29,000.
i) Interest expenses related to the $7,000,000 acquisition cost amounted
of $105,000 for the twelve-month period ended December 31, 2003.
j) Amortization of intangible assets of $530,000 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.
-5-
AROTECH CORPORATION AND EPSILOR ELECTRONIC INDUSTRIES LTD.
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 3: -
Amortization of acquired intangible assets is calculated using the
following estimated useful lives:
YEARS
-------------
Technology 10
Customer list 10
Goodwill Not amortized
- - - - - - - - -
-6-