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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004.
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______.
Commission File Number: 0-23336
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AROTECH CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 95-4302784
- -------------------------------------------------------------------------- -----------------------------------
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
354 Industry Drive, Auburn, Alabama 36830
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(Address of principal executive offices) (Zip Code)
(334) 502-9001
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
----------------------- -----------------------------------------
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes |X| No |_|
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant as of June 30, 2004 was approximately
$128,605,410 (based on the last sale price of such stock on such date as
reported by The Nasdaq National Market and assuming, for the purpose of this
calculation only, that all of the registrant's directors and executive officers
are affiliates).
(Applicable only to corporate registrants) Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date: 80,103,668 as of 3/31/05
Documents incorporated by reference: None
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EXPLANATORY NOTE
Arotech Corporation is filing this Amendment No. 1 to its Annual Report on
Form 10-K for the year ended December 31, 2004, as filed with the Securities and
Exchange Commission on March 31, 2005. This amendment reports the following
changes resulting from Arotech's and Arotech's Independent Registered Public
Accounting Firm's completed analysis of internal control over financial
reporting as required under Section 404 of the Sarbanes-Oxley Act of 2002:
>> Replaces Item 9A, "Controls and Procedures";
>> Adds the report on internal control over financial reporting
from Kost, Forer, Gabbay & Kassierer, a member of Ernst &
Young Global, Independent Registered Public Accounting Firm;
>> Provides an additional Consent of Kost, Forer, Gabbay &
Kassierer, a member of Ernst & Young Global, Independent
Registered Public Accounting Firm; and
>> Replaces the Section 302 certifications from the Chairman,
President and Chief Executive Officer and the Vice President -
Finance and Chief Financial Officer.
This amendment does not reflect the restatement of any previously reported
financial statements, results of operations or any other related financial
disclosures.
PART II
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2004, our management, including the principal executive
officer and principal financial officer, evaluated our disclosure controls and
procedures related to the recording, processing, summarization, and reporting of
information in our periodic reports that we file with the SEC. These disclosure
controls and procedures are intended to ensure that material information
relating to us, including our subsidiaries, is made known to our management,
including these officers, by other of our employees, and that this information
is recorded, processed, summarized, evaluated, and reported, as applicable,
within the time periods specified in the SEC's rules and forms. Due to the
inherent limitations of control systems, not all misstatements may be detected.
These inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple
error or mistake. Any system of controls and procedures, no matter how well
designed and operated, can at best provide only reasonable assurance that the
objective of the system are met and management necessarily is required to apply
its judgment in evaluating the cost benefit relationship of possible controls
and procedures. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. Our controls and procedures are intended to provide
only reasonable, not absolute, assurance that the above objectives have been
met.
Based on their evaluation as of December 31, 2004, except as otherwise
described herein and below, our principal executive officer and principal
financial officer were able to conclude that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) were effective to ensure that the information required to
be disclosed by us in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in SEC rules and forms.
In light of the material weakness described below, our management
performed additional analyses and other post-closing procedures to ensure our
consolidated financial statements are prepared in accordance with generally
accepted accounting principles in the United States (U.S. GAAP). Accordingly,
management believes that the consolidated financial statements included in this
report fairly present in all material respects our financial position, results
of operations and cash flows for the periods presented.
Management's Report on Internal Control Over Financial Reporting
Our management, including our principal executive and financial officers,
is responsible for establishing and maintaining adequate internal control over
our financial reporting. Our management has evaluated the effectiveness of our
internal controls, pursuant to the requirements of Sarbanes-Oxley Section 404,
as of the end of the period covered by this Annual Report on Form 10-K for
December 31, 2004. In making our assessment of internal control over financial
reporting, management used the criteria set forth by the Committee of Sponsoring
Organizations ("COSO") of the Treadway Commission in Internal Control -
Integrated Framework. In accordance with the rules of the SEC, we did not assess
the internal control over financial reporting of Armour of America,
Incorporated, which we acquired in August 2004, financial statements of which
reflect total assets of 4% of our consolidated assets as of December 31, 2004,
and total revenues of 5% of our consolidated revenues for the year then ended.
In our Annual Report on Form 10-K for the year ending December 31, 2005, we will
be required to provide an assessment of our compliance that takes into account
an assessment of Armour of America, Incorporated and all of our other currently
existing subsidiaries as of December 31, 2005.
For the reasons described below, we have concluded that there were
material weaknesses in our internal controls at December 31, 2004. We note in
this connection that our Independent Registered Public Accounting Firm audited,
in accordance with the standards of the Public Company Accounting Oversight
Board (United States), our consolidated financial statements and financial
statement schedule as of and for the year ended December 31, 2004, and their
report dated March 24, 2005 expressed an unqualified opinion with respect
thereto.
On November 22, 2004, the Audit Committee of our Board of Directors, on
the recommendation of our management and after discussion with our Independent
Registered Public Accounting Firm, made an internal determination and concluded
that our Annual Report on Form 10-K for the year ended December 31, 2003,
including the financial statements that our Independent Registered Public
Accounting Firm had previously audited that are contained therein, contained
certain errors related to the re-pricing of warrants and grant of additional
warrants to certain of our investors and others and the amortization of debt
discount arising from the allocation of the debt discount between the
convertible debentures and their detachable warrants. The net effect of these
errors, which generally related to the timing and characterization of certain
non-cash expenses, was (i) to increase our net loss attributable to common
stockholders for 2003 by approximately $579,000 and to decrease our net loss for
the first half of 2004 by approximately $608,000, and (ii) to decrease our net
loss attributable to common stockholders for the nine and three months ended
September 30, 2004 by approximately $1,583,778 and $976,129, respectively. The
Audit Committee of our Board of Directors therefore concluded to restate certain
previously issued financial statements contained in our Annual Report on Form
10-K for the year ended December 31, 2003. The decision to restate these
financial statements was made by our Audit Committee, upon the recommendation of
our management and with the concurrence of our Independent Registered Public
Accounting Firm.
As a result of the restatement referred to in the preceding paragraph, we
have identified material weaknesses for inadequate controls related to the
financial statement close process, convertible debentures and share capital
processes as it applies to non-routine and highly complex financial
transactions. A material weakness is a control deficiency (within the meaning of
the Public Company Accounting Oversight Board ("PCAOB") Auditing Standard No.
2), or combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The material weaknesses arise from
insufficient staff with technical accounting expertise to independently apply
our accounting policies, as they relate to non-routine and highly complex
transactions, in accordance with U.S. generally accepted accounting principles.
Management has identified that due to the reasons described above, we did not
consistently follow established internal control over financial reporting
procedures related to the analysis, documentation and review of selection of the
appropriate accounting treatment for non-routine and highly complex
transactions. Because of these material weaknesses, we have concluded that we
did not maintain effective internal control over financial reporting as of
December 31, 2004, based on the criteria in Internal Control-Integrated
Framework.
-2-
The foregoing management assessment of the effectiveness of our internal
control over financial reporting as of December 31, 2004, has been audited by
Kost, Forer, Gabbay and Kassierer, a member of Ernst & Young Global, the
registered public accounting firm that audited the financial statements included
in our annual report, as stated in their report which is included below.
Management's Response to the Material Weaknesses
In response to the material weaknesses described above, we have undertaken
to take the following initiatives with respect to our internal controls and
procedures that we believe are reasonably likely to improve and materially
affect our internal control over financial reporting. We anticipate that
remediation will be continuing throughout fiscal 2005, during which we expect to
continue pursuing appropriate corrective actions, including the following:
>> Preparing appropriate written documentation of our financial
control procedures;
>> Adding additional qualified staff to our finance department;
>> Scheduling training for accounting staff to heighten awareness
of generally accepted accounting principles applicable to
complex transactions;
>> Strengthening our internal review procedures in conjunction
with our ongoing work to enhance our internal controls so as
to enable us to identify and adjust items proactively;
>> Engaging an outside accounting firm to support our
Sarbanes-Oxley Section 404 compliance activities and to
provide technical expertise in the selection and application
of generally accepted accounting principles related to complex
transactions to identify areas that require control or process
improvements and to consult with us on the appropriate
accounting treatment applicable to complex transactions; and
>> Implementing the recommendations of our outside accounting
consultants.
Our management and Audit Committee will monitor closely the implementation
of our remediation plan. The effectiveness of the steps we intend to implement
is subject to continued management review, as well as Audit Committee oversight,
and we may make additional changes to our internal control over financial
reporting.
We cannot assure you that we will not in the future identify further
material weaknesses in our internal control over financial reporting. We
currently are unable to determine when the above-mentioned material weaknesses
will be fully remediated. However, because remediation will not be completed
until we have added finance staff and strengthened pertinent controls, we
presently anticipate that we will report in our Quarterly Report on Form 10-Q
for the first quarter of fiscal 2005 that material weaknesses continue to exist.
-3-
Changes in Internal Controls Over Financial Reporting
Except as noted above, there have been no changes in our internal control
over financial reporting that occurred during our last fiscal quarter to which
this Annual Report on Form 10-K relates that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
-4-
[LOGO] ERNST & YOUNG Phone: 972-3-6232525
Fax: 972-3-5622555
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
AROTECH CORPORATION
We have audited management's assessment, included in the accompanying "Report of
Management on Internal Control Over Financial Reporting," that Arotech
Corporation did not maintain effective internal control over financial reporting
as of December 31, 2004, because of the effect of material weaknesses in
internal controls related to the financial statement close process, the
convertible debentures and share capital processes as it applies to non-routine
and highly complex financial transactions, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Arotech
Corporation's management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is to express an
opinion on management's assessment and an opinion on the effectiveness of the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weaknesses have been identified and included
in management's assessment. Management identified material weaknesses for
inadequate controls related to the financial statement close process,
convertible debentures and share capital processes as it applies to non-routine
and highly complex financial transactions. The material weaknesses arise from
insufficient staff with technical accounting expertise to independently apply
the Company's accounting policies, as they relate to non-routine and highly
complex transactions, in accordance with U.S. generally accepted accounting
principles ("GAAP"). Management has identified that due to the reasons described
above, the Company did not consistently follow established internal control over
financial reporting procedures related to the analysis, documentation and review
of selection of the appropriate accounting treatment for non-routine and highly
complex transactions. These material weaknesses resulted in a restatement of the
2003 consolidated financial statements and quarterly unaudited consolidated
financial statements for each of the quarters through September 30, 2004 and
related to the errors in the appropriate accounting treatment to be applied to
(i) re-pricing of warrants and grant of additional warrants to certain investors
and others, and (ii) amortization of debt discount arising from the allocation
of the debt discount between the convertible debentures and their detachable
warrants. The net effect of these errors, which generally related to the timing
and characterization of certain non-cash expenses, was (i) to increase net loss
attributable to common stockholders for 2003 by approximately $579,000 and to
decrease net loss for the first half of 2004 by approximately $608,000, and (ii)
to decrease net loss attributable to common stockholders for the nine and three
months ended September 30, 2004 by approximately $1,583,778 and $976,129,
respectively. The above material weaknesses resulted in the material
misstatement of amount of convertible debentures, finance expenses related to
convertible debentures and stockholders' equity.
These material weaknesses were considered in determining the nature, timing, and
extent of audit tests applied in our audit of the December 31, 2004 consolidated
financial statements, and this report does not affect our report dated March 24,
2005 on those consolidated financial statements.
As indicated in the accompanying "Report of Management on Internal Control Over
Financial Reporting," management's assessment of and conclusion on the
effectiveness of internal control over financial reporting did not include the
internal controls of Armour of America Inc., a wholly-owned subsidiary whose
total assets and total revenues represent 4% and 5%, respectively, of the
related consolidated financial statement amounts as of and for the year ended
December 31, 2004, which was acquired by the Company in a purchase business
combination during 2004. Our audit of internal control over financial reporting
of Arotech Corporation also did not include an evaluation of the internal
control over financial reporting of Armour of America Inc.
-2-
In our opinion, management's assessment that Arotech Corporation did not
maintain effective internal control over financial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the COSO control
criteria. Also, in our opinion, because of the effect of the material weakness
described above on the achievement of the objectives of the control criteria,
Arotech Corporation has not maintained effective internal control over financial
reporting as of December 31, 2004, based on the COSO control criteria.
Tel-Aviv, Israel KOST, FORER, GABBAY & KASIERER
April 21, 2005 A Member of Ernst & Young Global
-3-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this amended report:
(3) Exhibits - The following Exhibits are either filed herewith or have
previously been filed with the Securities and Exchange Commission
and are referred to and incorporated herein by reference to such
filings:
Exhibit No. Description
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*23.1.......Consent of Kost, Forer, Gabbay & Kassierer, a member of Ernst
& Young Global
*31.1.......Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
*31.2.......Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
- ---------------------------
*Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amended report to be
signed on its behalf by the undersigned, thereunto duly authorized, on May 2,
2005.
AROTECH CORPORATION
By: /s/ Robert S. Ehrlich
--------------------------------
Name: Robert S. Ehrlich
Title: Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amended report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Robert S. Ehrlich Chairman, President, Chief Executive Officer
- ------------------------------------- and Director
Robert S. Ehrlich (Principal Executive Officer) May 2, 2005
/s/ Avihai Shen
- ------------------------------------- Vice President - Finance May 2, 2005
Avihai Shen (Principal Financial Officer)
/s/ Danny Waldner
- ------------------------------------- Controller May 2, 2005
Danny Waldner (Principal Accounting Officer)
/s/ Steven Esses
- ------------------------------------- Executive Vice President, Chief Operating May 2, 2005
Steven Esses Officer and Director
- ------------------------------------- Director May __, 2005
Dr. Jay M. Eastman
/s/ Lawrence M. Miller
- ------------------------------------- Director May 2, 2005
Lawrence M. Miller
/s/ Jack E. Rosenfeld
- ------------------------------------- Director May 2, 2005
Jack E. Rosenfeld
- ------------------------------------- Director May __, 2005
Bert W. Wasserman
/s/ Edward J. Borey
- ------------------------------------- Director May 2, 2005
Edward J. Borey
EXHIBIT INDEX
Exhibit
Number Description
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23.1 ......Consent of Kost, Forer, Gabbay & Kassierer, a member of Ernst
& Young Global
31.1 ......Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 ......Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002