SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted
[X] Definitive Proxy Statement by Rule 14a-6(e)(2))
[_] Definitive Additional Materials
[_] Soliciting Material under Rule 14a-12
AROTECH CORPORATION
----------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies: __________
__________________________________________________________________________
(2) Aggregate number of securities to which transaction applies: _____________
__________________________________________________________________________
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined): _____________________________
__________________________________________________________________________
(4) Proposed maximum aggregate value of transaction: _________________________
(5) Total fee paid: __________________________________________________________
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ____________________________________________________
(2) Form, Schedule or Registration Statement No. _______________________________
(3) Filing Party: ______________________________________________________________
(4) Date Filed: ________________________________________________________________
[AROTECH LOGO] Arotech Corporation
354 Industry Drive
Auburn, Alabama 36830
Tel: (334) 502-9001 Fax: (334) 502-3008
http://www.arotech.com
Nasdaq National Market: ARTX
Robert S. Ehrlich
Chairman, President and Chief Executive Officer
June 6, 2005
Dear Stockholder:
It is our pleasure to invite you to the 2005 Annual Meeting of
Stockholders of Arotech Corporation, a Delaware corporation, to be held on
Monday, July 11, 2005 at 10:00 a.m. local time in the Ballroom of the Shelburne
Murray Hill Hotel, 303 Lexington Avenue, New York, New York.
Whether or not you plan to attend and regardless of the number of
shares you own, it is important that your shares be represented at the meeting.
You are accordingly urged to carefully review the enclosed proxy materials and
to mark, date, sign and return the enclosed proxy card as promptly as possible
in the postage-prepaid envelope provided, or vote electronically through the
Internet (at http://www.voteproxy.com) or by telephone if you hold your shares
in your own name, to ensure your representation and the presence of a quorum at
the annual meeting. If you submit your proxy and then decide to attend the
annual meeting to vote your shares in person, you may still do so. Your proxy is
revocable in accordance with the procedures set forth in the Proxy Statement.
Sincerely,
/s/ Robert S. Ehrlich
Robert S. Ehrlich
Chairman of the Board of Directors
[AROTECH LOGO]
354 Industry Drive
Auburn, Alabama 36830
--------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 11, 2005
--------------------------------------------------------------------------------
To our Stockholders:
Our Annual Meeting of Stockholders will be held in the Ballroom of the
Shelburne Murray Hill Hotel, 303 Lexington Avenue, New York, New York, on
Monday, July 11, 2005 at 10:00 a.m. local time, and thereafter as it may be
postponed or adjourned from time to time, for the following purposes:
1. To fix the number of Class II directors at three and to elect
three Class II directors for a three-year term ending in 2008 and
continuing until their successors are duly elected and qualified
(beginning on page 2).
2. To act upon all other business that may properly come before the
meeting or any postponements or adjournments thereof.
Our Board of Directors has fixed the close of business on May 16, 2005
as the record date for determining which stockholders are entitled to notice of
the meeting and to vote at the meeting and any postponements or adjournments
thereof. If you are unable to be present at the meeting personally, please mark,
date, sign and return the enclosed proxy card as promptly as possible in the
postage-prepaid envelope provided, or vote electronically through the Internet
(at http://www.voteproxy.com) or by telephone if you hold your shares in your
own name. Any stockholder who grants a proxy may revoke it at any time prior to
its exercise. Also, whether or not you grant a proxy, you may vote in person if
you attend the meeting.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Yaakov Har-Oz
Yaakov Har-Oz
Auburn, Alabama Vice President, General Counsel and Secretary
June 6, 2005
================================================================================
YOUR VOTE IS IMPORTANT! PLEASE SIGN, DATE AND RETURN
YOUR PROXY FORM IN THE ENCLOSED STAMPED, SELF-
ADDRESSED ENVELOPE AS SOON AS POSSIBLE.
================================================================================
QUESTIONS AND ANSWERS
Although we encourage you to read the proxy statement in its entirety,
we include these Questions and Answers to provide background information and
brief answers to several questions that you may have about the Annual Meeting.
Q. What is the purpose of the Annual Meeting?
At our Annual Meeting, stockholders will act upon the matters outlined in
the accompanying Notice of Annual Meeting, including the following
proposals:
1. To fix the number of Class II directors at three and to elect three
Class II directors for a three-year term ending in 2008 and
continuing until their successors are duly elected and qualified
(beginning on page 2).
2. To act upon all other business that may properly come before the
meeting or any postponements or adjournments thereof.
Q. What shares can I vote?
A. All shares of our common stock owned by you as of the close of business on
the record date, May 16, 2005, may be voted by you. These shares include
(i) shares held directly in your name as the stockholder of record, and
(ii) shares held for you as the beneficial owner through a stockbroker,
bank or other nominee. Each share of common stock owned by you entitles
you to cast one vote on each matter to be voted upon.
Q. What is the difference between holding shares as a stockholder of record
and as a beneficial owner?
A. Most of our stockholders hold their shares through a stockbroker, bank or
other nominee rather than directly in their own name. As summarized below,
there are some distinctions between shares held of record and those owned
beneficially.
Stockholder of Record
If your shares are registered directly in your name with our
transfer agent, American Stock Transfer and Trust Company, you are
considered, with respect to those shares, the stockholder of record,
and these proxy materials are being sent directly to you by us. As
the stockholder of record, you have the right to grant your voting
proxy directly to us or to vote in person at the meeting. We have
enclosed or sent a proxy card for you to use.
Beneficial Owner
If your shares are held in a stock brokerage account or by a
bank or other nominee, you are considered the beneficial owner of
shares held in street name, and these proxy materials are being
forwarded to you by your broker, bank or nominee which is
considered, with respect to those shares, the stockholder of record.
As the beneficial owner, you have the right to direct your broker on
how to vote and are also invited to attend the meeting. However,
because you are not the stockholder of record, you may not vote
these shares in person at the meeting unless you obtain a signed
proxy from the record holder giving you the right to vote the
shares. Your broker, bank or nominee has enclosed or provided a
voting instruction card for you to use in directing the broker or
nominee how to vote your shares. If you do not provide the
stockholder of record with voting instructions, your shares may
constitute broker non-votes. The effect of broker non-votes is more
specifically described in "What vote is required to approve each
item?" below.
Q&A-1
Q. How can I vote my shares in person at the meeting?
A. Shares held directly in your name as the stockholder of record may be
voted in person at the Annual Meeting. If you choose to do so, please
bring the enclosed proxy card or proof of identification.
Even if you currently plan to attend the Annual Meeting, we recommend that
you also submit your proxy as described below so that your vote will be
counted if you later decide not to attend the meeting. Shares held
beneficially in street name may be voted in person by you only if you
obtain a signed proxy from the record holder giving you the right to vote
the shares.
Q. What vote is required to approve each proposal?
A. Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote, and the director nominees who
receive the greatest number of votes at the Annual Meeting (up to the
number of directors to be elected) will be elected. Abstentions and broker
non-votes, if any, will not affect the outcome of the vote on the election
of directors.
Q. Where can I find the voting results of the meeting?
A. We will announce preliminary voting results at the meeting and publish
final results in our Quarterly Report on Form 10-Q for the quarter ending
September 30, 2005.
Q. Who will count the votes?
A. A representative of American Stock Transfer and Trust Company will
tabulate the votes and act as the inspector of election.
Q. Who will bear the costs of this solicitation?
A. We are making this solicitation and will pay the entire cost of preparing,
assembling, printing, mailing and distributing these proxy materials. If
you choose to access the proxy materials and/or vote over the Internet,
however, you are responsible for Internet access charges you may incur. In
addition to the mailing of these proxy materials, the solicitation of
proxies or votes may be made in person, by telephone or by electronic
communication by our directors, officers and employees, who will not
receive any additional compensation for such solicitation activities. We
also have hired ADP, Inc. to assist us in the distribution of proxy
materials. We will also reimburse brokerage houses and other custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses for
forwarding proxy and solicitation materials to stockholders.
Q. What should I do now?
A. You should read this proxy statement carefully and promptly submit your
proxy card or vote by telephone as provided on the proxy card to ensure
that your vote is counted at the Annual Meeting.
Q. How do I vote if I hold shares directly?
A. You may vote your shares by attending the Annual Meeting in person and
completing a ballot or returning your validly executed proxy card at the
meeting. The Annual Meeting will begin promptly at 10:00 a.m. local time
on Monday, July 11, 2005 in the Ballroom of the Shelburne Murray Hill
Hotel, 303 Lexington Avenue, New York, New York. Attendance at the Annual
Meeting will not, by itself, result in the revocation of a previously
submitted proxy. Even if you are planning to attend the Annual Meeting, we
encourage you to submit your proxy in advance to ensure the representation
of your shares at the Annual Meeting.
Q&A-2
If you do not want to attend the Annual Meeting and you hold your shares
directly, you may vote by granting a proxy. To grant a proxy, mail your
signed proxy card in the enclosed return envelope or vote by telephone as
provided on the proxy card as soon as possible so that your shares may be
represented at the Annual Meeting.
Q. How do I vote if I hold shares in street name?
A. If you do not want to attend the Annual Meeting and hold your shares in a
stock brokerage account or if your shares are held by a bank or nominee
(i.e., in "street name"), you must provide your broker with directions on
how to vote your shares. Your broker will provide you with instructions
regarding how to direct your broker to vote your shares. It is important
to follow these instructions carefully to ensure your shares are
represented at the Annual Meeting. If you do not provide directions to
your broker, your shares will not be voted at the Annual Meeting.
If you want to attend the Annual Meeting and hold your shares in street
name, you must obtain a signed proxy card from your broker, bank or other
nominee acting as record holder that gives you the right to vote the
shares. Your broker will provide you with instructions regarding how to
obtain a signed proxy card from the bank or other nominee acting as record
holder in order to enable you to vote your shares in person at the Annual
Meeting.
Q. What does it mean if I receive more than one proxy or voting instruction
card?
A. It means your shares are registered differently or are in more than one
account. Please provide voting instructions for all proxy and voting
instruction cards you receive.
Q. How can I change my vote after I have mailed my proxy card?
A. If you are a holder of record, you may generally change your vote by
delivering a later-dated proxy or written notice of revocation to our
Corporate Secretary before the Annual Meeting, or by attending the Annual
Meeting and voting in person. If your shares are held in "street name" by
your broker, you must follow the instructions received from your broker
regarding how to change your vote.
Q&A-3
[AROTECH LOGO]
354 Industry Drive
Auburn, Alabama 36830
ANNUAL MEETING OF THE STOCKHOLDERS
OF AROTECH CORPORATION
TO BE HELD ON JULY 11, 2005
---------------
PROXY STATEMENT
---------------
The accompanying proxy is solicited by and on behalf of the Board of
Directors of Arotech Corporation, for use at our Annual Meeting of Stockholders
and any postponements and adjournments thereof. The meeting is currently planned
to be held in the Ballroom of the Shelburne Murray Hill Hotel, 303 Lexington
Avenue, New York, New York, on Monday, July 11, 2005 at 10:00 a.m. local time,
and thereafter as it may be postponed or adjourned from time to time, for the
purposes described in the accompanying Notice of Annual Meeting of Stockholders.
Stockholders of record at the close of business on May 16, 2005 will be
entitled to vote at the annual meeting. As of May 16, 2005, there were
80,180,147 shares of our common stock outstanding held of record by 321
stockholders. Each holder of common stock is entitled to one vote per share on
each matter that comes before the annual meeting.
This proxy statement and the enclosed form of proxy to stockholders
will be mailed commencing on or about June 6, 2005. We are also mailing our
annual report for the fiscal year ended December 31, 2004 to our stockholders
along with this proxy statement.
Voting Procedures and Vote Required
Proxies that are properly marked, dated, and signed, or submitted
electronically via the Internet or by telephone by following the instructions on
the proxy card, and not revoked will be voted at the annual meeting in
accordance with any indicated directions. If no direction is indicated, proxies
will be voted FOR the fixing of the number of Class II directors at three and
the election of the nominees for director set forth below, and IN THE DISCRETION
OF THE HOLDERS OF THE PROXIES with respect to any other business that properly
comes before the annual meeting and all matters relating to the conduct of the
annual meeting. If a broker indicates on the enclosed proxy or its substitute
that it does not have discretionary authority as to certain shares to vote on a
particular matter ("broker non-votes"), those shares will not be considered as
voting with respect to that matter. We believe that the tabulation procedures to
be followed by the Inspector of Elections are consistent with the general
requirements of Delaware law concerning voting of shares and determination of a
quorum.
You may revoke your proxy at any time before it is voted by delivering
to the Secretary of our company a written revocation or a duly executed proxy
bearing a later date than the date of the proxy being revoked (including a proxy
voted over the Internet or by telephone). Any record stockholder attending the
annual meeting in person may revoke his or her proxy and vote his or her shares
at the annual meeting.
Votes cast by proxy or in person at the annual meeting will be
tabulated by the Inspector of Elections, with the assistance of our transfer
agent. The Inspector of Elections will also determine whether or not a quorum is
present at the annual meeting. The presence of a quorum is required to transact
the business proposed to be transacted at the annual meeting. The presence in
person or by proxy of holders of a majority of the outstanding shares of our
common stock entitled to vote will constitute a quorum for the transaction of
business at the annual meeting. Abstentions and broker non-votes (as defined
above) will be counted for purposes of determining the presence or absence of a
quorum.
Directors will be elected by a plurality of the votes cast by the
holders of our common stock voting in person or by proxy at the annual meeting.
Abstentions and broker non-votes will have no effect on the vote for election of
directors.
The adoption of all other proposals will require the affirmative vote
of a majority of the shares present, either in person or by proxy, and entitled
to vote with respect to such proposals. Abstentions and broker non-votes will
each be counted as present for purposes of determining the presence of a quorum;
abstentions will have the same practical effect as a negative vote on these
proposals, and broker non-votes will not have any effect on the outcome of these
proposals.
The solicitation of proxies will be conducted by mail and we will bear
all attendant costs. These costs will include the expense of preparing and
mailing proxy solicitation materials for the annual meeting and reimbursements
paid to brokerage firms and others for their expenses incurred in forwarding
solicitation materials regarding the annual meeting to beneficial owners of our
common stock. We may conduct further solicitation personally, telephonically or
by facsimile through our officers, directors and employees, none of whom will
receive additional compensation for assisting with the solicitation.
We are not aware of any matters other than those described in this
proxy statement that will be acted upon at the annual meeting. In the event that
any other matters do come before the annual meeting for a stockholder vote, the
persons named as proxies in the form of proxy being delivered to you along with
this proxy statement will vote in accordance with their best judgment on those
matters.
At least ten days before the annual meeting, we will make a complete
list of the stockholders entitled to vote at the meeting open to the examination
of any stockholder for any purpose germane to the annual meeting. The list will
be open for inspection during ordinary business hours at our offices at 354
Industry Drive, Auburn, Alabama 36830, and will also be made available to
stockholders present at the annual meeting.
PROPOSAL NUMBER 1
ELECTION OF DIRECTORS
At the annual meeting, we will consider the election of three Class II
directors for three-year terms that expire in 2008. Our five other directors
have terms that end in either 2006 or 2007, as indicated below. Unless
instructions are given to the contrary, each of the persons named as proxies
will vote the shares to which each proxy relates FOR the election of each of the
nominees listed below for a term of three years expiring at the annual meeting
of stockholders to be held in 2008, and until the nominee's successor is duly
elected and qualified or until the nominee's earlier death, removal or
resignation. Two of the nominees named below are presently serving as directors,
and all three of them are anticipated to be available for election and able to a
serve. However, if they should become unavailable, the proxy will be voted for
substitute nominee(s) designated by the Board. The three nominees who receive
the greatest number of votes properly cast for the election of directors will be
elected.
2
Our by-laws provide for a Board of one or more directors. The number of
directors is currently seven, but our Board of Directors has voted to expand the
size of the Board to eight directors. Our Board is composed of three classes of
similar size. The members of each class are elected in different years, so that
only one-third of the Board is elected in any single year.
Messrs. Rosenfeld and Miller are designated as Class II directors.
Their term expires in 2005. Dr. Eastman and Mr. Esses are designated as Class I
directors. Their term expires in 2006. Mr. Ehrlich, Mr. Wasserman and Mr. Borey
are designated as Class III directors. Their term expires in 2007. Mr. Jones is
not currently a director.
Messrs. Rosenfeld, Miller and Jones are nominees for Class II
directors, with a term expiring in 2008.
The following table contains information concerning the nominees for
Class II directors and the other incumbent directors:
Name Age Position with Arotech Class Director Since
---- --- --------------------- ----- --------------
Dr. Jay M. Eastman(2)(4) 56 Director I October 1993
Steven Esses(3) 41 Executive Vice President,
Chief Operating Officer and I July 2002
Director
Jack E. Rosenfeld(1)(2)(4) 66 Director II October 1993
Lawrence M. Miller(1)(3)(4) 58 Director II November 1996
Seymour Jones 74 None II --
Robert S. Ehrlich (3) 67 Chairman of the Board, President
and Chief Executive Officer III May 1991
Bert W. Wasserman(1) 72 Director III February 2003
Edward J. Borey(2)(3) 54 Director III December 2003
----------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive and Finance Committee.
(4) Member of the Nominating Committee.
Nominees for Election as Class II Directors
Jack E. Rosenfeld has been one of our directors since October 1993. Mr.
Rosenfeld was President and Chief Executive Officer of Potpourri Group Inc.
("Potpourri"), a specialty catalog direct marketer, from April 1998 until June
2003; from June 2003 until February 2005, Mr. Rosenfeld served as Chairman of
Potpourri's Board of Directors and as its CEO, and since February 2005, Mr.
Rosenfeld has been Executive Chairman of the Potpourri Board of Directors. Mr.
Rosenfeld was President and Chief Executive Officer of Hanover Direct, Inc.,
formerly Horn & Hardart Co., which operates a direct mail marketing business,
from September 1990 until December 1995, and had been President and Chief
Executive Officer of its direct marketing subsidiary, from May 1988 until
September 1990. Mr. Rosenfeld holds a B.A. from Cornell University in Ithaca,
New York and an LL.B. from Harvard University in Cambridge, Massachusetts.
Lawrence M. Miller was elected to the Board of Directors in November
1996. Mr. Miller has been a senior partner in the Washington D.C. law firm of
Schwartz, Woods and Miller since 1990. He served from August 1993 through May
1996 as a member of the Board of Directors of The Phoenix Resource Companies,
Inc., a publicly traded energy exploration and production company, and as a
member of the Audit and Compensation Committee of that board. That company was
merged into Apache Corporation in May 1996. Mr. Miller holds a B.A. from
Dickinson College in Carlisle, Pennsylvania and a J.D. with honors from George
Washington University in Washington, D.C. He is a member of the District of
Columbia bar.
3
Seymour Jones is a nominee for a position as a Class II director. Mr.
Jones is a clinical professor of accounting at New York University Stern School
of Business. Professor Jones teaches courses in auditing, tax and legal aspects
of entrepreneurism. He is also the Associate Director of Ross Institute of
Accounting Research at Stern School of Business. Professor Jones has been with
NYU Stern for ten years. His primary research areas include audit committees,
auditing, entrepreneurship, financial reporting, and fraud. Professor Jones has
been principal author of numerous books including Conflict of Interest, The
Cooper & Lybrand Guide to Growing Your Business, The Emerging Business and The
Bankers Guide to Audit Reports and Financial Statements. Before joining NYU
Stern, Professor Jones was senior partner at Coopers & Lybrand and S.D.
Leidesdorf & Co. Professor Jones is a certified public accountant in New York
State. Professor Jones received a B.A. in economics from City College, City
University of New York, and an M.B.A. from NYU Stern.
Class I Directors
Dr. Jay M. Eastman has been one of our directors since October 1993.
Since November 1991, Dr. Eastman has served as President and Chief Executive
Officer of Lucid, Inc., which is developing laser technology applications for
medical diagnosis and treatment. Dr. Eastman served as Senior Vice President of
Strategic Planning of PSC Inc. ("PSCX"), a manufacturer and marketer of laser
diode bar code scanners, from December 1995 through October 1997. Dr. Eastman is
also a director of Dimension Technologies, Inc., a developer and manufacturer of
3D displays for computer and video displays. From 1981 until January 1983, Dr.
Eastman was Director of the University of Rochester's Laboratory for Laser
Energetics, where he was a member of the staff from September 1975 to 1981. Dr.
Eastman holds a B.S. and a Ph.D. in Optics from the University of Rochester in
New York.
Steven Esses has been a director since July 2002 and our Executive Vice
President since January 2003 and Chief Operating Officer since February 2003.
From 2000 until 2002, Mr. Esses was a principal with Stillwater Capital
Partners, Inc., a New York-based investment research and advisory company (hedge
fund) specializing in alternative investment strategies. During this time, Mr.
Esses also acted as an independent consultant to new and existing businesses in
the areas of finance and business development. From 1995 to 2000, Mr. Esses
founded Dunkin' Donuts in Israel and held the position of Managing Director and
CEO. Prior thereto, he was Director of Retail Jewelry Franchises with Hamilton
Jewelry, and before that he served as Executive Director of Operations for the
Conway Organization, a major off-price retailer with 17 locations.
Class III Directors
Robert S. Ehrlich has been our Chairman of the Board since January 1993
and our President and Chief Executive Officer since October 2002. From May 1991
until January 1993, Mr. Ehrlich was our Vice Chairman of the Board, and from May
1991 until October 2002 he was our Chief Financial Officer. Mr. Ehrlich was a
director of Eldat, Ltd., an Israeli manufacturer of electronic shelf labels,
from June 1999 to July 2003. From 1987 to June 2003, Mr. Ehrlich served as a
director of PSCX and, between April 1997 and June 2003, Mr. Ehrlich was the
chairman of the board of PSCX. PSCX filed a voluntary petition for relief under
Chapter 11 of the Bankruptcy Code in November 2002. Mr. Ehrlich received a B.S.
and J.D. from Columbia University in New York, New York.
Bert W. Wasserman has served as a director since February 2003. Mr.
Wasserman served as Executive Vice President and Chief Financial Officer of Time
Warner, Inc. from 1990 until his retirement in 1995 and served on the Board of
Directors of Time Warner, Inc. and its predecessor company, Warner
Communications, Inc. from 1981 to 1995. He joined Warner Communications, Inc. in
1966 and had been an officer of that company since 1970. Mr. Wasserman is
director of several investment companies in the Dreyfus Family of Funds. He is
also a director of Malibu Entertainment, Inc., Lillian Vernon Corporation and
InforMedix, Inc. Mr. Wasserman is a certified public accountant; he holds a B.A.
from Baruch College in New York City, of whose Board of Trustees he has served
as Vice President and President, and an LL.B from Brooklyn Law School.
4
Edward J. Borey has served as a director since December 2003. Mr. Borey
has been Chairman and Chief Executive Officer of WatchGuard Technologies, Inc.,
a leading provider of network security solutions (NasdaqNM: WGRD), since July
2004. From December 2000 to September 2003, Mr. Borey served as President, Chief
Executive Officer and a director of PSCX. PSCX filed a voluntary petition for
relief under Chapter 11 of the Bankruptcy Code in November 2002. Prior to
joining PSCX, Mr. Borey was President and CEO of TranSenda (May 2000 to December
2000). Previously, Mr. Borey held senior positions in the automated data
collection industry. At Intermec Technologies Corporation (1995-1999), he was
Executive Vice President and Chief Operating Officer and also Senior Vice
President/General Manager of the Intermec Media subsidiary. Currently, Mr. Borey
serves as a Board member at Mbrane (formerly known as Centura Software), and he
is on the Advisory Board of TranSenda Software and NextRx. Mr. Borey holds a
B.S. in Economics from the State University of New York, College of Oswego; an
M.A. in Public Administration from the University of Oklahoma; and an M.B.A. in
Finance from Santa Clara University.
Vote Required
Directors will be elected by a plurality of the votes cast by the
holders of our common stock voting in person or by proxy at the annual meeting.
Abstentions and broker non-votes will each be counted as present for purposes of
determining the presence of a quorum, but will have no effect on the vote for
election of directors.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR FIXING THE
NUMBER OF CLASS II DIRECTORS AT THREE AND FOR ELECTION
OF THE CLASS II NOMINEES DESCRIBED ABOVE
CORPORATE GOVERNANCE
We operate within a corporate governance plan for the purpose of
defining responsibilities, setting high standards of professional and personal
conduct, and assuring compliance with such responsibilities and standards. We
monitor developments in the area of corporate governance. The Board has
initiated actions consistent with the Sarbanes-Oxley Act of 2002, the Securities
and Exchange Commission and The Nasdaq Stock Market.
In the fiscal year ending December 31, 2004, the Board held nine
meetings. All directors attended at least 75% of the aggregate number of
meetings of the Board and meetings of the committees of the Board on which such
director serves.
As of January 1, 2005, members of the Board of Directors satisfy the
applicable independent director requirements of both the Securities and Exchange
Commission and Rule 4200 of The Nasdaq Stock Market. Our non-management
directors meet regularly in executive session separate from management.
It is our policy that each of our directors is invited and encouraged
to attend our annual meeting of stockholders. All of our directors attended our
2004 annual meeting of stockholders.
Our Board of Directors has an Audit Committee, a Compensation
Committee, a Nominating Committee and an Executive and Finance Committee. The
composition of the various committees of the Board of Directors is as follows
(the name of the chairman of each committee appears in italics):
Audit Committee Compensation Committee Nominating Committee Executive and Finance Committee
--------------- ---------------------- -------------------- -------------------------------
Bert W. Wasserman Jay M. Eastman Jack E. Rosenfeld Robert S. Ehrlich
Lawrence M. Miller Jack E. Rosenfeld Lawrence M. Miller Steven Esses
Jack E. Rosenfeld Edward J. Borey Jay M. Eastman Lawrence M. Miller
Edward J. Borey
5
Executive and Finance Committee
The Executive and Finance Committee, created in July 2001, exercises
the powers of the Board during the intervals between meetings of the Board, in
the management of our property, business and affairs (except with respect to
certain extraordinary transactions).
The Executive and Finance Committee consists of Messrs. Ehrlich
(Chair), Esses, Miller and Borey.
The Executive and Finance Committee held three meetings during the
fiscal year ending December 31, 2004.
Audit Committee
Created in December 1993, the purpose of the Audit Committee is to
review with management and our independent auditors the scope and results of the
annual audit, the nature of any other services provided by the independent
auditors, changes in the accounting principles applied to the presentation of
our financial statements, and any comments by the independent auditors on our
policies and procedures with respect to internal accounting, auditing and
financial controls. The Audit Committee was established in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. In
addition, the Audit Committee is charged with the responsibility for making
decisions on the engagement, compensation, retention and oversight of the work
of our independent auditors.
The Audit Committee consists of Messrs. Wasserman (Chair), Miller and
Rosenfeld. Each member of the Audit Committee is an "independent director," as
that term is defined in Rule 4200(a)(14) of the listing standards of the
National Association of Securities Dealers (NASD) and under Item 7(d)(3)(iv) of
Schedule 14A of the proxy rules under the Exchange Act. All Audit Committee
members possess the required level of financial literacy. Mr. Wasserman has been
designated as the "Audit Committee's Financial Expert." The Audit Committee
operates under a formal charter that governs its duties, which charter is
publicly available through a hyperlink located on the investor relations page of
our website, at http://www.arotech.com/compro/investor.html.
The Audit Committee held six meetings during the fiscal year ending
December 31, 2004.
Compensation Committee
The Compensation Committee was established in December 1993. The duties
of the Compensation Committee are to recommend compensation arrangements for our
executive officers and review annual compensation arrangements for all other
officers and significant employees.
The Compensation Committee consists of Dr. Eastman (Chair) and Messrs.
Rosenfeld and Borey. Each member of the Compensation Committee is an independent
director as that term is defined in the NASD listing standards.
The Compensation Committee held seven meetings during the fiscal year
ending December 31, 2004.
Nominating Committee
The Nominating Committee, created in February 2003, identifies and
proposes candidates to serve as members of the Board of Directors. Proposed
nominees for membership on the Board of Directors submitted in writing by
stockholders to Arotech's Secretary will be brought to the attention of the
Nominating Committee.
6
The Nominating Committee held no meetings during the fiscal year ending
December 31, 2004.
The Nominating Committee consists of Mr. Rosenfeld (Chair), Mr. Miller
and Dr. Eastman. Each member of the Nominating Committee is an independent
director as that term is defined in the NASD listing standards. The Nominating
Committee makes recommendations to the Board of Directors regarding new
directors to be selected for membership on the Board of Directors and its
various committees. The Nominating Committee operates under a formal charter
that governs its duties. The Nominating Committee's charter is publicly
available through a hyperlink located on the investor relations page of our
website, at http://www.arotech.com/compro/investor.html.
Policies Regarding Director Qualifications
The Board has adopted policies regarding director qualifications. To be
considered for nomination as a director, any candidate must meet the following
minimum criteria:
a. Ability and willingness to undertake a strategic governance role,
clear and distinct from the operating role of management.
b. High-level leadership experience in business, government, or
other major complex professional or non-profit organizations that would
have exposed the individual to the challenges of leadership and governance
in a dynamic and highly competitive marketplace.
c. Highly accomplished in their respective field, with superior
credentials and recognition.
d. Demonstrated understanding of the elements and issues relevant to
the success of a large publicly-traded company in the current volatile
business, legal and governance environment.
e. Demonstrated business acumen and creative/strategic thinking
ability.
f. Personal Characteristics:
o Ability and willingness to contribute special competencies
to the Board in a collaborative manner. The areas of
expertise required at any point in time may vary, based on
the existing composition of the Board. They may include, but
would not be limited to, capabilities honed as a CEO or a
senior functional leader in operations, finance, information
technology, marketing, organizational development, and
experience making step change to transform a business.
o Personal integrity and highest ethical character. Absence of
any conflicts of interest, either real or perceived.
o Willingness to apply sound and independent business
judgment, enriching management and Board proposals or
challenging them constructively as appropriate.
o Willing to exert influence through strong influence skills
and constructive teamwork. This is essential to effective
collaboration with other directors as well as providing
constructive counsel to the CEO.
7
o Understanding of and full commitment to our governance
principles and the obligation of each director to contribute
to good governance, corporate citizenship, and corporate
image for Arotech.
o Willingness to devote the time necessary to assume broad
fiduciary responsibility and to participate fully in Arotech
governance requirements with appropriate due diligence and
attention.
In this regard, each nominee will be asked to disclose the boards of
directors on which he or she currently sits, and each current director will be
asked to inform the Nominating Committee of additional corporate board
nominations (both for-profit and non-profit). This notification is to ensure
appropriate dialogue about the impact of the added responsibilities on the
individual's availability to perform thoroughly his or her duties as an Arotech
director.
The Board of Directors will consist of a majority of people who are
active, primarily in business roles, and selected retired individuals. Those
active in the business community will bring the most current business thinking,
and retirees will bring their long experience and seasoned business judgment.
Every effort will be made to achieve diversity in the Board's membership.
From time to time, the particular capabilities needed to round out the
total Board's portfolio of competencies may vary. The Nominating Committee is
empowered to consider the demographics of the total Board as it considers the
requirements for each Board vacancy and to identify particular unique
capabilities needed at that point in time.
Policies Regarding Director Nominations
The Board's Nominating Committee is responsible for the Board of
Director's nomination process. New candidates for the Board of Directors may be
sourced by existing directors, a third party search firm (paid for its
professional services) or may be recommended by stockholders. In considering new
candidates submitted by stockholders, the Nominating Committee will take into
consideration the needs of the Board of Directors and the qualifications of the
candidate. However, all director nominees will be evaluated against the same
standards and in the same objective manner, based on competencies and personal
characteristics listed above, regardless of how they were sourced. To have a
candidate considered by the Nominating Committee, a stockholder must submit the
recommendation in writing and must include the following information:
o The name of the stockholder and evidence of the person's
ownership of our stock, including the number of shares owned
and the length of time of ownership; and
o The name of the candidate, the candidate's resume or a listing
of his or her qualifications to be a director of Arotech and
the person's consent to be named as a director if selected by
the Nominating Committee and nominated by the Board of
Directors.
The stockholder recommendation and information described above must be
sent to Arotech's Secretary at 354 Industry Drive, Auburn, Alabama 36830, and
must be received by Arotech's Secretary not less than 120 days prior to the
anniversary date of our most recent annual meeting of stockholders.
8
Once a person has been identified by the Nominating Committee as a
potential candidate, the Committee may collect and review publicly available
information regarding the person to assess whether the person should be
considered further. If the Nominating Committee determines that the candidate
warrants further consideration, the Chairman or another member of the Committee
will contact the person. Generally, if the person expresses a willingness to be
considered and to serve on the Board of Directors, the Nominating Committee will
request information from the candidate, review the person's accomplishments and
qualifications, including in light of any other candidates that the Committee
might be considering, and conduct one or more interviews with the candidate. In
certain instances, Committee members may contact one or more references provided
by the candidate or may contact other members of the business community or other
persons that may have greater first-hand knowledge of the candidate's
accomplishments. The Committee's evaluation process does not vary based on
whether or not a candidate is recommended by a stockholder, although, the Board
of Directors may take into consideration the number of shares held by the
recommending stockholder and the length of time that such shares have been held.
Codes of Ethics
We have adopted a Code of Ethics, as required by Nasdaq listing
standards and the rules of the SEC, that applies to our principal executive
officer, our principal financial officer, and our principal accounting officer,
as well as a more general code of conduct that applies to our other directors,
officers and employees. The Code of Ethics is publicly available through a
hyperlink located on the investor relations page of our website, at
http://www.arotech.com/compro/investor.html. If we make substantive amendments
to the Code of Ethics or grant any waiver, including any implicit waiver, that
applies to anyone subject to the Code of Ethics, we will disclose the nature of
such amendment or waiver on the website or in a report on Form 8-K in accordance
with applicable Nasdaq and SEC rules.
COMPENSATION AND OTHER MATTERS
Director Compensation
Non-employee members of our Board of Directors are paid $2,500 (plus
expenses) for each Board of Directors meeting attended, $2,000 (plus expenses)
for each meeting of the Audit Committee of the Board of Directors attended, and
$1,000 (plus expenses) for each meeting of all other committees of the Board of
Directors attended. In addition, we have adopted a Non-Employee Director Stock
Option Plan pursuant to which non-employee directors receive an initial grant of
options to purchase 50,000 shares of our common stock upon the effective date of
such plan or upon the date of his or her election as a director. Thereafter,
non-employee directors will receive options to purchase 35,000 shares of our
common stock for each year of service on the Board. All such options are granted
at fair market value and vest ratably over three years from the date of the
grant.
Executive Officer Compensation
General
Our Chief Executive Officer and the other highest paid executive
officers (of which there were two) who were compensated at a rate of more than
$100,000 in salary and bonuses during the year ended December 31, 2004
(collectively, the "Named Executive Officers") are Israeli residents, and thus
certain elements of the compensation that we pay them is structured as is
customary in Israel.
During 2004, 2003 and 2002, compensation to our Named Executive
Officers took several forms:
o cash salary;
o bonus, some of which was paid in cash in the year in which it
was earned and some of which was accrued in the year in which
it was earned but paid in cash in a subsequent year;
9
o cash reimbursement for taxes paid by the Named Executive
Officer and reimbursed by us in accordance with Israeli tax
regulations;
o accruals (but not cash payments) in respect of contractual
termination compensation in excess of the Israeli statutory
minimum;
o accruals (but not cash payments) in respect of pension plans,
which consist of a savings plan, life insurance and statutory
severance pay benefits, and a continuing education fund (as is
customary in Israel);
o stock options, including (in the case of 2002) options issued
in exchange for a waiver of salary under the
"options-for-salary" program discussed in more detail below
o grants of restricted stock, where the sale of such stock is
prohibited for a period of two years and such stock is forfeit
to us should the Named Executive Officer's employment be
terminated for cause, as defined in such Executive's
employment agreement (e.g., fraud, reckless or willful
misconduct, etc.); and
o other benefits, primarily consisting of annual statutory
holiday pay.
The specific amounts of each form of compensation paid to each Named
Executive Officer appear in the summary compensation table and the notes thereto
appearing under "Summary Compensation Table," below.
Summary Compensation Table
The following table, which should be read in conjunction with the explanations
provided above, shows the compensation that we paid (or accrued), in connection
with services rendered for 2004, 2003 and 2002, to our Named Executive Officers.
SUMMARY COMPENSATION TABLE(1)
Annual Compensation
---------------------------------------------------
Tax
Name and Principal Position Year Salary Bonus Reimbursement
--------------------------- ---- ---------- ---------- -------------
Robert S. Ehrlich
Chairman of the Board, President,
Chief Executive Officer and director 2004 $ 275,907 $ 175,000 $ 29,103
2003 $ 259,989 $ 180,000(4) $ 27,211
2002 $ 202,962 $ 99,750 $ 15,232
Steven Esses
Executive Vice President, Chief
Operating Officer and director* 2004 $ 65,506(8) $ 106,000(9) $ 25,273
2003 $ 0 $ 0 $ 0
2002 $ 0 $ 0 $ 0
Avihai Shen
Vice President - Finance and
Chief Financial Officer 2004 $ 155,845 $ 97,000 $ 6,407
2003 $ 123,988 $ 0 $ 8,653
2002 $ 93,641 $ 0 $ 18,857
Long Term Compensation All Other Compensation
------------------------------- ------------------------------------------------
Changes in
Accruals for
Sick Days, Payment to
Securities Restricted Vacation Days, Pension and
Underlying Stock and Termination Education
Name and Principal Position Options Awards(2) Compensation Funds Others
--------------------------- ----------- ----------- ------------ ----------- ----------
Robert S. Ehrlich
Chairman of the Board, President,
Chief Executive Officer and director 50,000 $ 626,350 $ 133,898(3) $ 48,477 $ 19,893
2,035,000 $ 0 $ 80,713(5) $ 48,228 $ 678
262,500(6) $ 0 $ 170,691(7) $ 22,256 $ 654
Steven Esses
Executive Vice President, Chief
Operating Officer and director* 0 $ 221,100 $ 3,759(10) $ 12,116 $ 12,940
1,035,000 $ 0 $ 0 $ 0 $ 0
0 $ 0 $ 0 $ 0 $ 120,480(11)
Avihai Shen
Vice President - Finance and
Chief Financial Officer 18,750 $ 54,900 $ 34,972(12) $ 26,889 $ 476
608,750 $ 0 $ 6,471(13) $ 23,133 $ 463
48,935 $ 0 $ 9,847(14) $ 20,394 $ 6,894(15)
----------
* Mr. Esses became an executive officer in January 2003. His compensation as
an officer during 2003 consisted solely of stock options. Prior to January
2003, Mr. Esses was a director (from July 2002), in which position he
received certain compensation as a consultant, in addition to the stock
options and per-meeting fees payable to directors generally (which is not
reflected above).
(1) We paid the amounts reported for each named executive officer in U.S.
dollars and/or New Israeli Shekels (NIS). We have translated amounts paid
in NIS into U.S. dollars at the exchange rate of NIS into U.S. dollars at
the time of payment or accrual.
10
(2) Based on the closing market price of our stock on the Nasdaq National
Market on the date of grant multiplied by the number of shares awarded. As
of December 31, 2004, our Named Executive Officers held 635,000 restricted
shares. Of these shares, the restrictions on 530,000 shares are scheduled
to expire on August 4, 2006, and the restrictions on 105,000 are scheduled
to expire on December 8, 2006. The value of the restricted shares held by
our Named Executive Officers on December 31, 2004, based on the closing
price of our stock on the Nasdaq National Market on that date was
$902,350.
(3) Of this amount, $76,766 represents our accrual for severance pay that
would be payable to Mr. Ehrlich upon a "change of control" or upon the
occurrence of certain other events; $28,603 represents the increase of the
accrual for vacation redeemable by Mr. Ehrlich; and $28,529 represents the
increase of our accrual for severance pay that would be payable to Mr.
Ehrlich under the laws of the State of Israel if we were to terminate his
employment.
(4) We paid Mr. Ehrlich $180,000 during 2004 in satisfaction of his bonus from
2003 to which he was entitled according to his contract. Of this amount,
we accrued $99,750 for Mr. Ehrlich in satisfaction of the 2003 bonus to
which he was entitled according to his contract; the remainder was the
result of the approval in 2004 by the Compensation Committee of a higher
bonus for 2003 than Mr. Ehrlich's contractual minimum.
(5) Of this amount, $92,075 represents our accrual for severance pay that
would be payable to Mr. Ehrlich upon a "change of control" or upon the
occurrence of certain other events; $3,451 represents the increase of the
accrual for sick leave and vacation redeemable by Mr. Ehrlich; and
$(14,813) represents the decrease of our accrual for severance pay that
would be payable to Mr. Ehrlich under the laws of the State of Israel if
we were to terminate his employment.
(6) Of this amount, 262,500 options were in exchange for a total of $105,000
in salary waived by Mr. Ehrlich during 2002 pursuant to the
options-for-salary program instituted by us beginning in May 2001. See
"Options-for-Salary Program," below.
(7) Of this amount, $109,935 represents our accrual for severance pay that
would be payable to Mr. Ehrlich upon a "change of control" or upon the
occurrence of certain other events; $17,571 represents the increase of the
accrual for sick leave and vacation redeemable by Mr. Ehrlich; and $43,725
represents the increase of our accrual for severance pay that would be
payable to Mr. Ehrlich under the laws of the State of Israel if we were to
terminate his employment.
(8) Does not include $208,100 that we paid in consulting fees to Sampen
Corporation, a New York corporation owned by members of Steven Esses's
immediate family from which Mr. Esses receives a salary. See "Certain
Relationships and Related Transactions - Consulting Agreement with Sampen
Corporation," below.
(9) Does not include $110,000 that we paid as a bonus to Sampen Corporation, a
New York corporation owned by members of Steven Esses's immediate family
from which Mr. Esses receives a salary. See "Certain Relationships and
Related Transactions - Consulting Agreement with Sampen Corporation,"
below.
(10) Represents the increase of the accrual for vacation redeemable by Mr.
Esses.
(11) Represents consulting fees paid in 2002.
(12) Of this amount, $21,568 represents the increase in our accrual for
vacation redeemable by Mr. Shen; and $13,404 represents the increase of
our accrual for severance pay that would be payable to Mr. Shen under the
laws of the State of Israel if we were to terminate his employment.
(13) Of this amount, $8,369 represents the increase of the accrual for vacation
redeemable by Mr. Shen; and $(1,628) represents the decrease of our
accrual for severance pay that would be payable to Mr. Shen under the laws
of the State of Israel if we were to terminate his employment.
(14) Of this amount, $1,062 represents the increase of the accrual for vacation
redeemable by Mr. Shen; and $8,785 represents the increase of our accrual
for severance pay that would be payable to Mr. Shen under the laws of the
State of Israel if we were to terminate his employment.
(15) Of this amount, $6,500 represents the value of shares issued to Mr. Shen
as a stock bonus and $394 represents other benefits that we paid to Mr.
Shen in 2002.
Executive Loans
In 1999, 2000 and 2002, we extended certain loans to our Named
Executive Officers. These loans are summarized in the following table, and are
further described under "Certain Relationships and Related Transactions -
Officer Loans," below.
11
Original Amount
Principal Outstanding
Name of Borrower Date of Loan Amount of Loan as of 12/31/04 Terms of Loan
---------------- ------------ -------------- -------------- -------------
Robert S. Ehrlich 12/28/99 $167,975 $201,570 Ten-year non-recourse loan to purchase our
stock, secured by the shares of stock
purchased.
Robert S. Ehrlich 02/09/00 $789,991 $684,006 Twenty-five-year non-recourse loan to
purchase our stock, secured by the
shares of stock purchased.
Robert S. Ehrlich 06/10/02 $ 36,500 $ 38,719 Twenty-five-year non-recourse loan to
purchase our stock, secured by the
shares of stock purchased.
Options-for-Salary Program
Between May 2001 and December 2002, we conducted an options-for-salary
program designed to conserve our cash and to offer incentives to employees to
remain with us despite lower cash compensation. Under this program, most of our
salaried employees permanently waived a portion of their salaries in exchange
for options to purchase shares of our common stock, at a ratio of options to
purchase 2.5 shares of our stock for each dollar in salary waived. Social
benefits (such as pension) and contractual bonuses for such employees continued
to be calculated based on their salaries prior to reduction. The
options-for-salary program was ended on December 31, 2002.
During 2002, options were accrued quarterly in advance for the Named
Executive Officers, and annually in advance for other employees.
During 2002, in exchange for waiver of $364,209 in salary, our
employees other than the Named Executive Officers received a total of 910,522
options, which options were granted based on the lowest closing price of our
common stock during the month of December 2002 ($0.61). Named Executive
Officers, in exchange for waiver of $119,774 in salary, received a total of
299,435 options during 2002, which options were granted based on the lowest
closing prices of our common stock during each quarter of 2002, as set forth in
the table below.
Following is a table setting forth the number of options that we issued
to each of our Named Executive Officers under the options-for-salary program
during each fiscal quarter in 2002, and the range of trading prices for our
common stock during each such fiscal quarter:
Low Trading Closing
Fiscal Amount of Number of Number of Average Price High Trading Price
Quarter Salary Options Options Exercise During Price During on Last Day
Named Executive Officer Ended Waived Accrued Issued Price Quarter Quarter of Quarter
----------------------- ----- ------ ------- ------ ----- ------- ------- ----------
Robert S. Ehrlich 03/31/02 $ 26,250 65,625 65,625 $1.42 $1.35 $2.41 $1.55
06/30/02 $ 26,250 65,625 65,625 $0.73 $0.73 $1.79 $0.91
09/30/02 $ 26,250 65,625 65,625 $0.85 $0.79 $1.70 $1.05
12/31/02 $ 26,250 65,625 65,625 $0.61 $0.61 $1.17 $0.64
Avihai Shen 03/31/02 $ 3,262 8,153 8,153 $1.42 $1.35 $2.41 $1.55
06/30/02 $ 3,262 8,153 8,153 $0.73 $0.73 $1.79 $0.91
09/30/02 $ 3,262 12,476 12,476 $0.85 $0.79 $1.70 $1.05
12/31/02 $ 3,262 8,153 8,153 $0.61 $0.61 $1.17 $0.64
Stock Options
The table below sets forth information with respect to stock options
granted to the Named Executive Officers for the fiscal year 2004.
12
Option Grants in Last Fiscal Year
Individual Grants
----------------------------- Potential Realizable Value
Number of % of Total of Assumed Annual Rates
Securities Options of Stock Price Appreciation
Underlying granted to Exercise or for Option Term(1)
Options Employees in Base Price Expiration -----------------------------
Name Granted Fiscal Year ($/Sh) Date 5% ($) 10% ($)
---- ---------- ------------- ------------ ----------- ---------- -------
Robert S. Ehrlich 50,000 3.3% $1.20 08/09/09 $16,577 $36,631
Avihai Shen 18,750 1.2% $1.20 08/09/09 $6,216 $13,736
----------
(1) The potential realizable value illustrates value that might be realized
upon exercise of the options immediately prior to the expiration of their
terms, assuming the specified compounded rates of appreciation of the
market price per share from the date of grant to the end of the option
term. Actual gains, if any, on stock option exercise are dependent upon a
number of factors, including the future performance of the common stock
and the timing of option exercises, as well as the executive officer's
continued employment through the vesting period. The gains shown are net
of the option exercise price, but do not include deductions for taxes and
other expenses payable upon the exercise of the option or for sale of
underlying shares of common stock. The 5% and 10% rates of appreciation
are mandated by the rules of the Securities and Exchange Commission and do
not represent our estimate or projection of future increases in the price
of our stock. There can be no assurance that the amounts reflected in this
table will be achieved, and unless the market price of our common stock
appreciates over the option term, no value will be realized from the
option grants made to the executive officers.
The table below sets forth information for the Named Executive Officers
with respect to aggregated option exercises during fiscal 2004 and fiscal 2004
year-end option values.
Aggregated Option Exercises and Fiscal Year-End Option Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at Fiscal Year End at Fiscal-Year-End(1)
Acquired on Value ----------------------------- --------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
------------------ ---------- ---------- ----------- ------------- ----------- -------------
Robert S. Ehrlich 19,000 $ (665) 2,384,166 500,000 $2,062,541 $426,000
Steven Esses 50,000 $128,500 641,808 178,333 $ 457,134 $299,282
Avihai Shen -- $ -- 309,653 310,000 $ 280,438 $ 0
----------
(1) Options that are "in-the-money" are options for which the fair market
value of the underlying securities on December 31, 2004 ($1.62) exceeds
the exercise or base price of the option.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information, as of December 31,
2004, with respect to our 1991, 1993, 1995, 1998 and 2004 stock option plans, as
well as any other stock options and warrants previously issued by us (including
individual compensation arrangements) as compensation for goods and services:
13
Equity Compensation Plan Information
Number of securities
remaining available
Number of securities for future issuance
to be issued upon Weighted-average under equity
exercise of exercise price of compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
-------------------------------- ----------------------- ----------------------- ------------------------
Equity compensation plans 6,715,343 $1.19 5,523,931
approved by security
holders
Equity compensation plans
not approved by security
holders(1) 2,399,417 $1.54 291
--------- ----- ---------
Total 9,114,760 $1.28 5,524,222
========= ===== =========
----------
(1) In October 1998, the Board of Directors adopted the 1998 Non-Executive
Stock Option and Restricted Stock Purchase Plan, which under Delaware law
did not require stockholder approval since directors and executive
officers were ineligible to participate in it. Participation in the 1998
Plan is limited to those of our employees and consultants who are neither
executive officers nor otherwise subject to Section 16 of the Securities
Exchange Act of 1934, as amended, or Section 162(m) of the Internal
Revenue Code of 1986, as amended. The 1998 Plan is administered by the
Compensation Committee of our Board of Directors, which determined the
conditions of grant. Options issued under the 1998 Plan generally expire
no more than ten years from the date of grant, and incentive options
issued under the 1998 Plan may be granted only at exercise prices equal to
the fair market value of our common stock on the date the option is
granted.
Employment Contracts
Robert S. Ehrlich
Mr. Ehrlich is party to an employment agreement with us executed in May
2005, effective as of January 1, 2005. The term of this employment agreement
expires on December 31, 2007, and is extended automatically for additional terms
of one year each unless either Mr. Ehrlich or we terminate the agreement sooner.
The employment agreement provides for a base salary of $23,750 per
month in 2005, $25,000 per month in 2006, and $26,500 per month in 2007, as
adjusted annually for Israeli inflation and devaluation of the Israeli shekel
against the U.S. dollar, if any. Additionally, the board may at its discretion
raise Mr. Ehrlich's base salary.
The employment agreement provides that we will pay a bonus, on a
sliding scale, in an amount equal to a minimum of 35% of Mr. Ehrlich's annual
base salary then in effect, up to a maximum of 90% of his annual base salary
then in effect if the results we actually attain for the year in question are
120% or more of the amount we budgeted at the beginning of the year.
The employment agreement also contains various benefits customary in
Israel for senior executives, tax and financial planning expenses and an
automobile, and contain confidentiality and non-competition covenants. Pursuant
to the employment agreements, we granted Mr. Ehrlich demand and "piggyback"
registration rights covering shares of our common stock held by him.
14
We can terminate Mr. Ehrlich's employment agreement in the event of
death or disability or for "Cause" (defined as conviction of certain crimes,
willful failure to carry out directives of our Board of Directors or gross
negligence or willful misconduct). Mr. Ehrlich has the right to terminate his
employment upon a change in our control or for "Good Reason," which is defined
to include adverse changes in employment status or compensation, our insolvency,
material breaches and certain other events. Additionally, Mr. Ehrlich may retire
(after age 68) or terminate his agreement for any reason upon 120 days' notice.
Upon termination of employment, the employment agreement provides for payment of
all accrued and unpaid compensation, and (unless we have terminated the
agreement for Cause or Mr. Ehrlich has terminated the agreement without Good
Reason and without giving us 120 days' notice of termination) bonuses due for
the year in which employment is terminated (in an amount of not less than 35% of
base salary) and severance pay in the amount of three years' base salary and
bonus at the minimum rate. Furthermore, certain benefits will continue and all
outstanding options will be fully vested.
Steven Esses
Mr. Esses is party to an employment agreement with us executed in May
2005, effective as of January 1, 2005. The term of this employment agreement
expires on December 31, 2006, and is extended automatically for additional terms
of two years each unless either Mr. Esses or we terminate the agreement sooner.
The employment agreement provides for a base salary of $5,000 per
month, as adjusted annually for Israeli inflation and devaluation of the Israeli
shekel against the U.S. dollar, if any. Additionally, the board may at its
discretion raise Mr. Esses's base salary.
The employment agreement provides that if the results we actually
attain in a given year are at least 90% of the amount we budgeted at the
beginning of the year, we will pay a bonus, on a sliding scale, in an amount
equal to a minimum of 25% of Mr. Esses's annual base salary then in effect, up
to a maximum of 75% of his annual base salary then in effect if the results we
actually attain for the year in question are 120% or more of the amount we
budgeted at the beginning of the year.
The employment agreement also contains various benefits customary in
Israel for senior executives, tax and financial planning expenses and an
automobile, and contain confidentiality and non-competition covenants. Pursuant
to the employment agreements, we granted Mr. Esses demand and "piggyback"
registration rights covering shares of our common stock held by him.
We can terminate Mr. Esses's employment agreement in the event of death
or disability or for "Cause" (defined as conviction of certain crimes, willful
failure to carry out directives of our Board of Directors or gross negligence or
willful misconduct). Mr. Esses has the right to terminate his employment upon a
change in our control or for "Good Reason," which is defined to include adverse
changes in employment status or compensation, our insolvency, material breaches
and certain other events. Additionally, Mr. Esses may retire (after age 65),
retire early (after age 55) or terminate his agreement for any reason upon 150
days' notice. Upon termination of employment, the employment agreement provides
for payment of all accrued and unpaid compensation, and (unless we have
terminated the agreement for Cause or Mr. Esses has terminated the agreement
without Good Reason and without giving us 150 days' notice of termination)
bonuses due for the year in which employment is terminated (in an amount of not
less than 35% of base salary) and severance pay in the amount of $330,000,
except that in the event of termination of the agreement following a change of
control, the amount payable is doubled. Furthermore, certain benefits will
continue (for a shorter period, in the event of early retirement) and all
outstanding options will be fully vested. See also "Certain Relationships and
Related Transactions - Consulting Agreement with Sampen Corporation," below.
15
Avihai Shen
Mr. Shen has signed our standard employee employment agreement,
described below. Additionally, Mr. Shen has an agreement with us that in the
event termination other than for cause, Mr. Shen will receive, in addition to
his statutory Israeli severance, an amount equal to (i) five months' base
salary, plus (ii) an additional month's salary for each year worked after 2004,
up to an aggregate maximum of one year's salary. These amounts are doubled in
the event that Mr. Shen's employment is terminated within three months of a
change of control, up to a maximum of eighteen months' salary.
Other
Other employees (including Mr. Shen) have entered into individual
employment agreements with us. These agreements govern the basic terms of the
individual's employment, such as salary, vacation, overtime pay, severance
arrangements and pension plans. Subject to Israeli law, which restricts a
company's right to relocate an employee to a work site farther than sixty
kilometers from his or her regular work site, we have retained the right to
transfer certain employees to other locations and/or positions provided that
such transfers do not result in a decrease in salary or benefits. All of these
agreements also contain provisions governing the confidentiality of information
and ownership of intellectual property learned or created during the course of
the employee's tenure with us. Under the terms of these provisions, employees
must keep confidential all information regarding our operations (other than
information which is already publicly available) received or learned by the
employee during the course of employment. This provision remains in force for
five years after the employee has left our service. Further, intellectual
property created during the course of the employment relationship belongs to us.
A number of the individual employment agreements, but not all, contain
non-competition provisions which restrict the employee's rights to compete
against us or work for an enterprise which competes against us. Such provisions
remain in force for a period of two years after the employee has left our
service.
Under the laws of Israel, an employee of ours who has been dismissed
from service, died in service, retired from service upon attaining retirement
age, or left due to poor health, maternity or certain other reasons, is entitled
to severance pay at the rate of one month's salary for each year of service. We
currently fund this obligation by making monthly payments to approved private
provident funds and by its accrual for severance pay in the consolidated
financial statements.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of our Board of Directors for the 2004
fiscal year consisted of Dr. Jay M. Eastman, Jack E. Rosenfeld and Edward J.
Borey. None of the members has served as our officers or employees.
REPORT OF THE COMPENSATION COMMITTEE
Notwithstanding anything to the contrary set forth in any of our previous
filings under the Securities Act of 1933, as amended (the "Securities Act"), or
the Exchange Act which might incorporate future filings, including this Proxy
Statement, in whole or in part, the following report and the Performance Graph
on page 18 shall not be incorporated by reference into any such filings.
Objectives and Philosophy
We maintain compensation and incentive programs designed to
motivate, retain and attract management and utilize various combinations
of base salary, bonuses payable upon the achievement of specified goals,
discretionary bonuses and stock options. Our Chief Executive Officer,
Robert S. Ehrlich, and our Chief Operating Officer, Mr. Steven Esses, are
parties to employment agreements with us. Our Chief Financial Officer, Mr.
Avihai Shen, is a party to a standard employment agreement that we enter
into with our employees generally.
16
Executive Officer Compensation
The employment agreement with Mr. Ehrlich provides that if the
results we actually attain in a given year are at least 80% of the amount
we budgeted at the beginning of the year, we will pay a bonus to Mr.
Ehrlich, on a sliding scale, in an amount equal to a minimum of 35% of his
annual base salary then in effect, up to a maximum of 90% of his annual
base salary then in effect if the results we actually attain for the year
in question are 120% or more of the amount we budgeted at the beginning of
the year. We paid Mr. Ehrlich $175,000 during 2004 in satisfaction of the
2004 bonus to which he was entitled according to his contract.
The employment agreement with Mr. Esses provides that if the results
we actually attain in a given year are at least 90% of the amount we
budgeted at the beginning of the year, we will pay a bonus to Mr. Esses,
on a sliding scale, in an amount equal to a minimum of 25% of his annual
base salary then in effect, up to a maximum of 75% of his annual base
salary then in effect if the results we actually attain for the year in
question are 120% or more of the amount we budgeted at the beginning of
the year. We paid Mr. Ehrlich $175,000 during 2004 in satisfaction of the
2004 bonus to which he was entitled according to his contract, which
amount does not include $110,000 that we paid as a bonus to Sampen
Corporation, a New York corporation owned by members of Steven Esses's
immediate family from which Mr. Esses receives a salary. See "Certain
Relationships and Related Transactions - Consulting Agreement with Sampen
Corporation," below.
As of December 31, 2004, Messrs. Ehrlich's, Esses's and Shen's total
options represented approximately 31.7%, 9.0% and 6.8%, respectively, of
our outstanding stock, which the Compensation Committee believes is an
appropriate level of options for them considering their positions with
Arotech.
Compensation of Other Employees
With respect to employees other than the Named Executive Officers,
compensation is determined not by formula, but based on the achievement of
qualitative and/or quantitative objectives established in advance of each
year by the Chief Executive Officer and Chief Operating Officer, who then,
pursuant to authority delegated by the Compensation Committee, determine
remuneration of our employees based on such objectives.
We seek to promote, including through our compensation plans, an
environment that encourages employees to focus on our continuing long-term
growth. Employee compensation is generally comprised of a combination of
cash compensation and grants of options under our stock option plans.
Stock options are awarded annually in connection with annual bonuses and,
occasionally, during the year on a discretionary basis. Stock options are
intended to offer an incentive for superior performance while basing
employee compensation on the achievement of higher share value, and to
foster the retention of key personnel through the use of schedules which
vest options over time if the person remains employed by us. There is no
set formula for the award of options to individual employees. Factors
considered in making option awards to the employees other than the Named
Executive Officers in 2003 included prior grants to the employees, the
importance of retaining the employees services, the amount of cash bonuses
received by the employees, the employees potential to contribute to our
success and the employees' past contributions to us.
17
Policy on Deductibility of Compensation
Changes made to the Internal Revenue Code of 1986, as amended (the
"Code") in 1993 limit our ability to deduct, for Federal income tax
purposes, certain compensation in excess of $1,000,000 per year paid to
individuals named in the Summary Compensation Table. This limitation was
effective beginning in 1994. Based on its review of the facts and
circumstances, the Committee has considered the provisions of Section
162(m) of the Code which, except in the case of "performance-based
compensation" and certain other types of compensation (including
compensation received under a stock option plan approved in accordance
with Section 162(m) of the Code), limits to $1,000,000 the amount of
Arotech's federal income tax deduction for the compensation paid to any of
the chief executive officer and the other four most highly paid executive
officers. The Committee believes that our current compensation
arrangements, which are primarily based on performance measures expected
to be reflected in increasing stockholder value over time, are appropriate
and in the best interests of Arotech and its stockholders, without regard
to tax considerations. Thus, in the event of changes in the tax laws or
their interpretation or other circumstances which might render some
portion of the executive compensation paid by us non-deductible for
federal tax purposes, the Committee would not anticipate making
significant changes in the basic philosophy and practices reflected in our
executive compensation program.
Submitted by the Compensation Committee
---------------------------------------
Dr. Jay M. Eastman
Jack E. Rosenfeld
Edward J. Borey
Performance Graph
The following graph compares the yearly percentage change in our
cumulative total stockholder return on our common stock with the cumulative
total return on the Nasdaq Market Index (Broad Market Index) and a
self-constructed peer group index (the "Peer Group Index") over the past five
years, from December 31, 1999 through December 31, 2004.
The cumulative total stockholder return is based on $100 invested in
our common stock and in the respective indices on December 31, 1999. The stock
prices on the performance graph are not necessarily indicative of future price
performance.
CUMULATIVE TOTAL RETURN THROUGH DECEMBER 31, 2004 AMONG
AROTECH CORPORATION, NASDAQ MARKET INDEX,
AND PEER GROUP INDEX
[LINE CHART OMITTED]
12/31/99 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04
-------- -------- -------- -------- -------- --------
AROTECH 100.00 134.00 47.43 18.29 52.00 46.86
PEER GROUP(1) 100.00 86.55 106.00 97.01 76.64 111.62
BROAD MARKET 100.00 60.71 47.93 32.82 49.23 53.53
----------
(1) The Peer Group Index is comprised of the following companies: Bio-Key
International, Inc., Command Security Corporation, Firearms Training
Systems, Inc., Guardian International, Inc. and ICTS International N.V.
The returns of each company have been weighted according to their
respective stock market capitalization for purposes of arriving at a peer
group average.
18
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors (the "Audit
Committee") consists of three non-employee directors, Bert W. Wasserman,
Lawrence M. Miller, and Jack E. Rosenfeld, each of whom has been
determined to be independent as defined by the Nasdaq rules and SEC
regulations. The Audit Committee operates under a written charter adopted
by the Board of Directors.
Management is responsible for Arotech's internal controls and the
financial reporting process. The independent accountants are responsible
for performing an independent audit of Arotech's consolidated financial
statements in accordance with generally accepted accounting principles and
to issue a report thereon. The Audit Committee's responsibility is to
monitor and oversee these processes.
In this context the Audit Committee has met and held discussions
with management and the independent accountants. Management represented to
the Audit Committee that Arotech's consolidated financial statements were
prepared in accordance with generally accepted accounting principles, and
the Audit Committee has reviewed and discussed the consolidated financial
statements with management and the independent accountants. The Audit
Committee discussed with the independent accountants matters required to
be discussed by Statement on Auditing Standards No. 61.
Arotech's independent accountants also provided to the Audit
Committee the written disclosure required by Independence Standards Board
Standard No. 1, "Independence Discussions with Audit Committees." The
Committee discussed with the independent accountants that firm's
independence and considered whether the non-audit services provided by the
independent accountants are compatible with maintaining its independence.
Based on the Audit Committee's discussion with management and the
independent accountants, and the Audit Committee's review of the
representation of management and the report of the independent accountants
to the Audit Committee, the Audit Committee recommended that the Board of
Directors include the audited consolidated financial statements in
Arotech's Annual Report on Form 10-K for the year ended December 31, 2004
filed with the Securities and Exchange Commission.
Submitted by the Audit Committee
--------------------------------
Bert W. Wasserman
Lawrence M. Miller
Jack E. Rosenfeld
FEES BILLED FOR SERVICES RENDERED BY PRINCIPAL ACCOUNTANT
In accordance with the requirements of the Sarbanes-Oxley Act of 2002
and the Audit Committee's charter, all audit and audit-related work and all
non-audit work performed by our independent accountants, Kost, Forer, Gabbay &
Kassierer, is approved in advance by the Audit Committee, including the proposed
fees for such work. The Audit Committee is informed of each service actually
rendered.
19
o Audit Fees. Audit fees billed or expected to be billed to us
by Kost, Forer, Gabbay & Kassierer for the audit of the
financial statements included in our Annual Report on Form
10-K, and reviews of the financial statements included in our
Quarterly Reports on Form 10-Q, for the years ended December
31, 2003 and 2004 totaled approximately $177,000 and $594,924,
respectively.
o Audit-Related Fees. Kost, Forer, Gabbay & Kassierer billed us
$34,500 and $214,659 for the fiscal years ended December 31,
2003 and 2004, respectively, for assurance and related
services that are reasonably related to the performance of the
audit or review of our financial statements and are not
reported under the caption "Audit Fees," above.
o Tax Fees. Kost, Forer, Gabbay & Kassierer billed us an
aggregate of $24,320 and $9,491 for the fiscal years ended
December 31, 2003 and 2004, respectively, for tax services,
principally advice regarding the preparation of income tax
returns.
o All Other Fees. The Audit Committee of the Board of Directors
has considered whether the provision of the Audit-Related
Fees, Tax Fees and all other fees are compatible with
maintaining the independence of our principal accountant.
Applicable law and regulations provide an exemption that permits
certain services to be provided by our outside auditors even if they are not
pre-approved. We have not relied on this exemption at any time since the
Sarbanes-Oxley Act was enacted.
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table sets forth information regarding the security
ownership, as of May 16, 2005, of those persons owning of record or known by us
to own beneficially more than 5% of our common stock and of each of our Named
Executive Officers and directors, and the shares of common stock held by all of
our directors and executive officers as a group.
Shares Beneficially Percentage of Total
Name and Address of Beneficial Owner(1) Owned(2)(3) Shares Outstanding(3)
--------------------------------------- ------------------- ---------------------
Robert S. Ehrlich 3,219,546(4) 3.9%
Steven Esses 806,808(5) 1.0%
Avihai Shen 528,904(6) *
Dr. Jay M. Eastman 95,001(7) *
Jack E. Rosenfeld 97,001(8) *
Lawrence M. Miller 543,580(9) *
Bert W. Wasserman 20,001(10) *
Edward J. Borey 36,001(11) *
All of our directors and executive
officers as a group (9 persons) 5,346,842(12) 6.4%
----------
* Less than one percent.
20
(1) The address of each named beneficial owner is in care of Arotech
Corporation, 354 Industry Drive, Auburn, Alabama 36830.
(2) Unless otherwise indicated in these footnotes, each of the persons or
entities named in the table has sole voting and sole investment power with
respect to all shares shown as beneficially owned by that person, subject
to applicable community property laws.
(3) Based on 80,180,147 shares of common stock outstanding as of May 16, 2005.
For purposes of determining beneficial ownership of our common stock,
owners of options exercisable within sixty days are considered to be the
beneficial owners of the shares of common stock for which such securities
are exercisable. The percentage ownership of the outstanding common stock
reported herein is based on the assumption (expressly required by the
applicable rules of the Securities and Exchange Commission) that only the
person whose ownership is being reported has converted his options into
shares of common stock.
(4) Includes 50,000 shares held by Mr. Ehrlich's wife (in which shares Mr.
Ehrlich disclaims beneficial ownership), 161,381 shares held in Mr.
Ehrlich's pension plan, 3,000 shares held by children sharing the same
household (in which shares Mr. Ehrlich disclaims beneficial ownership),
and 2,387,000 shares issuable upon exercise of options exercisable within
60 days.
(5) Includes 641,808 shares issuable upon exercise of options exercisable
within 60 days.
(6) Includes 488,404 shares issuable upon exercise of options exercisable
within 60 days.
(7) Consists of 95,001 shares issuable upon exercise of options exercisable
within 60 days.
(8) Includes 95,001 shares issuable upon exercise of options exercisable
within 60 days.
(9) Includes 441,665 shares held by Leon S. Gross and Lawrence M. Miller as
co-trustees of the Rose Gross Charitable Foundation, and 90,001 shares
issuable upon exercise of options exercisable within 60 days.
(10) Consists of 20,001 shares issuable upon exercise of options exercisable
within 60 days.
(11) Includes 20,001 shares issuable upon exercise of options exercisable
within 60 days.
(12) Includes 3,837,217 shares issuable upon exercise of options exercisable
within 60 days.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the securities laws of the United States, our directors, certain of our
officers and any persons holding more than ten percent of our common stock are
required to report their ownership of our common stock and any changes in that
ownership to the Securities and Exchange Commission. Specific due dates for
these reports have been established and we are required to report any failure to
file by these dates during 2004. Based solely on our review of such reports
furnished to us, we are not aware of any instances during 2004, not previously
disclosed by us, where such "reporting persons" failed to file the required
reports on or before the specified dates, except as follows:
(i) Mr. Ehrlich was required to file a Form 4 on or prior to December
12, 2004 in connection with his acquisition of 75,000 restricted
shares on December 10, 2004. He reported this transaction in a Form
4 filed on December 14, 2004. Additionally, Mr. Ehrlich was required
to file a Form 4 on or prior to August 11, 2004 in connection with
his receipt of 50,000 stock options on August 9, 2004. He reported
this transaction in a Form 5 filed on February 14, 2005.
(ii) Mr. Esses was required to file a Form 4 on or prior to April 10,
2004 in connection with his exercise and sale of 50,000 stock
options on April 8, 2004. He reported this transaction in a Form 4
filed on April 12, 2004.
(iii) Mr. Shen was required to file a Form 4 on or prior to December 12,
2004 in connection with his acquisition of 30,000 restricted shares
on December 10, 2004. He reported this transaction in a Form 4 filed
on December 14, 2004. Additionally, Mr. Shen was required to file a
Form 4 on or prior to August 11, 2004 in connection with his receipt
of 18,750 stock options on August 9, 2004. He reported this
transaction in a Form 5 filed on February 14, 2005.
21
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Officer Loans
On December 3, 1999, Robert S. Ehrlich purchased 125,000 shares of our
common stock out of our treasury at the closing price of the common stock on
December 2, 1999. Payment was rendered by Mr. Ehrlich in the form of
non-recourse promissory notes due in 2009 in the amount of $167,975, bearing
simple annual interest at a rate of 2%, secured by the shares of common stock
purchased and other shares of common stock previously held by him. As of
December 31, 2004, the aggregate amount outstanding pursuant to this promissory
note was $201,570.
On February 9, 2000, Mr. Ehrlich exercised 131,665 stock options. Mr.
Ehrlich paid the exercise price of the stock options and certain taxes that we
paid on his behalf by giving us a non-recourse promissory note due in 2025 in
the amount of $789,991, bearing annual interest (i) as to $329,163, at 1% over
the then-current federal funds rate announced from time to time by the Wall
Street Journal, and (ii) as to $460,828, at 4% over the then-current percentage
increase in the Israeli consumer price index between the date of the loan and
the date of the annual interest calculation, secured by the shares of our common
stock acquired through the exercise of the options and certain compensation due
to Mr. Ehrlich upon termination. As of December 31, 2004, the aggregate amount
outstanding pursuant to this promissory note was $657,146.
On June 10, 2002, Mr. Ehrlich exercised 50,000 stock options. Mr.
Ehrlich paid the exercise price of the stock options by giving us a non-recourse
promissory note due in 2012 in the amount of $36,500, bearing simple annual
interest at a rate equal to the lesser of (i) 5.75%, and (ii) 1% over the
then-current federal funds rate announced from time to time, secured by the
shares of our common stock acquired through the exercise of the options. As of
December 31, 2004, the aggregate amount outstanding pursuant to this promissory
note was $37,810.
Director Consulting Agreements
Beginning in February 2002, Mr. Steven Esses, who became one of our
directors in July 2002, entered into an oral consulting arrangement with us,
whereby he performed periodic financial and other consulting for us. We paid Mr.
Esses a total of $120,480 in consulting fees in 2002. Beginning in July 2002,
when Mr. Esses became a director, this consulting arrangement ceased.
Beginning in January 2004, Mr. Edward J. Borey, who became one of our
directors in December 2003, entered into a consulting agreement with us pursuant
to which he agreed to aid us in identifying potential acquisition candidates in
exchange for transaction fees in respect of acquisitions in which he plays a
"critical role" (as determined by us in our sole and absolute discretion) in
identifying and/or initiating and/or negotiating the transaction in the amount
of (i) 1.5% of the value of the transaction up to $10,000,000, plus (ii) 1.0% of
the value of the transaction in excess of $10,000,000 and up to $50,000,000,
plus (iii) 0.5% of the value of the transaction in excess of $50,000,000. We
also agreed to issue to Mr. Borey, at par value, a total of 32,000 shares of our
common stock, the value of which is to be deducted from any transaction fees
paid. 16,000 of these shares were earned and issued prior to termination of this
agreement in August 2004.
Consulting Agreement with Sampen Corporation
We have a consulting agreement with Sampen Corporation that we executed
in March 2005, effective as of January 1, 2005. Sampen is a New York corporation
owned by members of Steven Esses's immediate family, and Mr. Esses is an
employee of Sampen. The term of this consulting agreement expires on December
31, 2006, and is extended automatically for additional terms of two years each
unless either Sampen or we terminate the agreement sooner.
22
Pursuant to the terms of our agreement with Sampen, Sampen provides one
of its employees to us for such employee to serve as our Executive Vice
President and Chief Operating Officer. We pay Sampen $12,800 per month, plus an
annual bonus, on a sliding scale, in an amount equal to a minimum of 25% of
Sampen's annual base compensation then in effect, up to a maximum of 75% of its
annual base compensation then in effect if the results we actually attain for
the year in question are 120% or more of the amount we budgeted at the beginning
of the year. We also pay Sampen, to cover the cost of our use of Sampen's
offices as an ancillary New York office life and the attendant expenses and
insurance costs, an amount equal to 16% of each monthly payment of base
compensation.
STOCKHOLDER COMMUNICATIONS AND PROPOSALS
Stockholder Communications with the Board of Directors
The Board has established a process to receive communications from
stockholders. Stockholders may contact any member (or all members) of the Board
at directors@arotech.com. Non-management directors may be contacted as a group
at nonmanagement-directors@arotech.com. Any Board committee or any chair of any
such committee may be contacted as follows: audit-chair@arotech.com,
compensation-chair@arotech.com, or nominating-chair@arotech.com. If you cannot
send an electronic message, you may contact Board members by mail at: Arotech
Board Members, 354 Industry Drive, Auburn, Alabama 36830.
The Arotech Corporation Investor Relations Department is responsible
for forwarding all such communications to the Board of Directors, and where
appropriate, to management. Communications are screened to exclude certain items
that are unrelated to the duties and responsibilities of the Board, such as
spam, junk mail and mass mailings, product complaints, product inquiries, new
product suggestions, job inquiries, surveys, business solicitations or
advertisements, and material that is unduly hostile, threatening, illegal or
similarly unsuitable. Communications that are filtered out are made available to
any director upon request. The Board may involve management in preparing its
responses to stockholder communications.
Stockholder Proposals
Pursuant to the rules of the Securities and Exchange Commission,
stockholder proposals made in accordance with Rule 14a-8 under the Exchange Act
intended to be included in our proxy material for the next annual meeting must
be received by us on or before February 6, 2006. Any proposals must be received
at our principal executive offices, 354 Industry Drive, Auburn, Alabama 36830,
Attention: Corporate Secretary by the applicable date.
Stockholder proposals submitted outside the processes of Rule 14a-8
must be received by our Corporate Secretary in a timely fashion. To be timely,
such notice and information regarding the proposal and the stockholder must be
delivered to or mailed and received by our Corporate Secretary at our principal
executive offices, 354 Industry Drive, Auburn, Alabama 36830, not less than 45
days nor more than 60 days prior to the annual meeting; provided, however, that
in the event that less than 60 days' notice or prior public disclosure of the
date of the annual meeting is given or made to stockholders, notice by the
stockholder to be timely must be received not later than the close of business
on the 7th day following the day on which such notice of the date of the annual
meeting was mailed or such public disclosure was made.
23
ANNUAL REPORT
Copies of our Annual Report on Form 10-K (including audited financial
statements) filed with the Securities and Exchange Commission may be obtained
without charge by writing to Stockholder Relations, Arotech Corporation, 354
Industry Drive, Auburn, Alabama 36830. A request for a copy of our Annual Report
on Form 10-K must set forth a good-faith representation that the requesting
party was either a holder of record or a beneficial owner of our common stock on
May 16, 2005. Exhibits to the Form 10-K will be mailed upon similar request and
payment of specified fees to cover the costs of copying and mailing such
materials.
Our audited financial statements for the fiscal year ended December 31,
2004 and certain other related financial and business information are contained
in our 2004 Annual Report to Stockholders, which is being furnished to our
stockholders along with this proxy statement, but which is not deemed a part of
the proxy soliciting material.
OTHER MATTERS
We are not aware of any other matter that may come before the annual
meeting of stockholders and we do not currently intend to present any such other
matter. However, if any such other matters properly come before the meeting or
any adjournment thereof, the persons named as proxies will have discretionary
authority to vote the shares represented by the accompanying proxy in accordance
with their own judgment.
BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Yaakov Har-Oz
Yaakov Har-Oz
Vice President, General Counsel and Secretary
Auburn, Alabama
June 6, 2005
24
ANNUAL MEETING OF STOCKHOLDERS OF
AROTECH CORPORATION
July 11, 2005
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible
Please detach along perforated line and mail in the envelope provided
IF you are not voting via telephone or the Internet.
--------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
-----------------------------------------------------------------------------------------------------------------------------------
1. To fix the number of Class II directors at three
and to elect three Class II directors for a
three-year term ending in 2008 and continuing
until their successors are duly elected and
qualified:
NOMINEES:
[ ] FOR ALL NOMINEES o Jack E. Rosenfeld
o Lawrence M. Miller
o Seymour Jones
[ ] WITHHOLD AUTHORITY FOR PLEASE SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING THE
ALL NOMINEES ENCLOSED ENVELOPE.
[ ] FOR ALL EXCEPT The undersigned acknowledges receipt of the Notice of Annual
(See instructions below) Meeting of Stockholders and Proxy Statement of Arotech Corporation
dated June 6, 2005 and of Arotech Corporation's Annual Report for
the fiscal year ended December 31, 2004.
INSTRUCTION: To withhold authority to vote for
any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the
circle next to each nominee you
wish to withhold, as shown here:
( )
----------------------------------------------------------
Mark here if you plan to attend the meeting. [ ]
---------------------------------------------------------
To change the address on your account, please check
the box at right and indicate your new address in
the address space above. Please note that changes
to the registered name(s) on the account may not be
submitted via this method. [ ]
---------------------------------------------------------
------------------------------- -------------- -------------------------------- -------
Signature of Date: Signature of Date:
Stockholder Stockholder
------------------------------- -------------- -------------------------------- -------
NOTE: Please sign exactly as name appears on this Proxy. When shares are held by joint tenants, both should sign. If signing
as attorney, executor, administrator, trustee or guardian, please give full title as such. If you are signing for a
corporation, please sign in the full corporate name by President or other authorized officer. If you are signing for a
partnership, please sign in the partnership name by authorized person.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
AROTECH CORPORATION
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD JULY 11, 2005
The undersigned, having received the Notice of the Annual Meeting of
Stockholders and the Proxy Statement on behalf of the Board of Directors of
Arotech Corporation (the "Company"), hereby appoint(s) Robert S. Ehrlich and
Yaakov Har-Oz, and each of them, proxies of the undersigned (with full power of
substitution) to attend the Annual Meeting of the Company to be held on Monday,
July 11, 2005 at 10:00 a.m. local time in the Ballroom of the Shelburne Murray
Hill Hotel, 303 Lexington Avenue, New York, New York, and all postponements and
adjournments thereof (the "Meeting"), and there to vote all shares of common
stock of the Company that the undersigned would be entitled to vote, if
personally present, in regard to all matters that may come before the Meeting,
and without limiting the general authorization hereby given, the undersigned
directs that his or her vote be cast as specified in this Proxy.
This Proxy, when properly executed, will be voted in the manner specified
herein. If no specification is made, the proxies intend to vote FOR the nominees
and FOR the other proposals set forth herein and described in the Board of
Directors' Proxy Statement. If any of the nominees is not available to serve,
this Proxy may be voted for a substitute. This Proxy delegates discretionary
authority with respect to matters not known or determined at the time of
solicitation of this Proxy. The undersigned hereby revokes any other proxy
previously granted to vote the same shares of stock for said Meeting.
SEE REVERSE SIDE. If you wish to vote in accordance with the recommendations of
the Board of Directors, just sign on the reverse side. You need not mark any
boxes.
(Continued and to be signed on the reverse side)
ANNUAL MEETING OF STOCKHOLDERS OF
AROTECH CORPORATION
July 11, 2005
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PROXY VOTING INSTRUCTIONS
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MAIL - Date, sign and mail your proxy card in the envelope provided as
soon as possible.
- OR -
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TELEPHONE - Call toll-free 1-800-PROXIES (1-800-776-9437) from any COMPANY NUMBER |
touch-tone telephone and follow the instructions. Have your proxy card ---------------|------------------------------------
available when you call. ACCOUNT NUMBER |
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- OR - |
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INTERNET - Access "www.voteproxy.com" and follow the on-screen
instructions. Have your proxy card available when you access the web
page.
Please detach along perforated line and mail in the envelope provided
IF you are not voting via telephone or the Internet.
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
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1. To fix the number of Class II directors at three
and to elect three Class II directors for a
three-year term ending in 2008 and continuing
until their successors are duly elected and
qualified:
NOMINEES:
[ ] FOR ALL NOMINEES o Jack E. Rosenfeld
o Lawrence M. Miller
o Seymour Jones
[ ] WITHHOLD AUTHORITY FOR PLEASE SIGN, DATE AND RETURN THIS PROXY FORM PROMPTLY USING THE
ALL NOMINEES ENCLOSED ENVELOPE.
[ ] FOR ALL EXCEPT The undersigned acknowledges receipt of the Notice of Annual
(See instructions below) Meeting of Stockholders and Proxy Statement of Arotech Corporation
dated June 6, 2005 and of Arotech Corporation's Annual Report for
the fiscal year ended December 31, 2004.
INSTRUCTION: To withhold authority to vote for
any individual nominee(s), mark
"FOR ALL EXCEPT" and fill in the
circle next to each nominee you
wish to withhold, as shown here:
( )
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Mark here if you plan to attend the meeting. [ ]
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To change the address on your account, please check
the box at right and indicate your new address in
the address space above. Please note that changes
to the registered name(s) on the account may not be
submitted via this method. [ ]
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Signature of Date: Signature of Date:
Stockholder Stockholder
------------------------------- -------------- -------------------------------- -------
NOTE: Please sign exactly as name appears on this Proxy. When shares are held by joint tenants, both should sign. If signing
as attorney, executor, administrator, trustee or guardian, please give full title as such. If you are signing for a
corporation, please sign in the full corporate name by President or other authorized officer. If you are signing for a
partnership, please sign in the partnership name by authorized person.