Arotech to be Delisted? (ARTX) 10-K excerpts
sarp
s.
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Use-of-Force Training
Competition
We compete against a number of established companies that provide
similar
products and services, many of which have financial, technical,
marketing,
sales, manufacturing, distribution and other resources significantly
greater
than ours. There are also companies whose products do not compete
directly, but
are sometimes closely related. Firearms Training Systems, Inc.,
Advanced
Interactive Systems, Inc., and LaserShot Inc. are IESs main
competitors.
Aircraft Armoring
Competition
Aircraft armor competition includes LAST Armor (a division of
Foster-Miller,
Inc.), Simula Inc. (a subsidiary of Armor Holdings, Inc.), and
Protective
Materials Company (a division of The Protective Group, Inc.). Military
vehicle
armor competition includes: OGara-Hess & Eisenhardt (a subsidiary of
Armor
Holdings, Inc.), ArmorWorks Harl Facility, Protective Materials
Company, and
Ceradyne, Inc. Ballistic vests competition includes: Point Blank Body
Armor,
Inc. (a subsidiary of DHB Industries, Inc.), Second Chance Body Armor,
Inc.,
Protective Materials Company, American Body Armor (a subsidiary of
Armor
Holdings, Inc.), Protech Armor Systems (a subsidiary of Armor Holdings,
Inc.)
and Safariland, Ltd. (a subsidiary of Armor Holdings, Inc.). Marine
armor
competition includes Protective Materials Company. Many of our
competitors have
financial, technical, marketing, sales, manufacturing, distribution and
other
resources significantly greater than ours.
Vehicle Armoring
Competition
Among vehicle manufacturers, we believe Mercedes-Benz to have the
largest
vehicle-armoring market share. Among aftermarket specialists, we
believe the
largest share of the vehicle-armoring market is held by OGara-Hess &
Eisenhardt,
a subsidiary of Armor Holdings, Inc. Other aftermarket specialists
include
International Armoring Corp., Lasco, Texas Armoring and Chicago Armor
(Moloney).
Many of these companies have financial, technical, marketing, sales,
manufacturing, distribution and other resources significantly greater
than ours.
We believe the key factor in our competing successfully in this field
will be
our ability to penetrate new military and paramilitary markets outside
of
Israel, particularly those operating in Iraq and Afghanistan.
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Battery and Power Systems Division
Lithium Batteries and Charging Systems for the Military
Competition
The main competitors for our lithium battery products are Bren-tronics
Inc. in
the United States, which controls much of the U.S. rechargeable market,
AEA
Battery Systems (a wholly owned subsidiary of AEA Technology plc) in
the United
Kingdom, which has the majority of the English military market, and
Ultralife
Batteries, Inc. On the primary end of the market there are a host of
players who
include the cell manufacturers themselves, including Saft S.A. and
Ultralife
Batteries, Inc.
It should be noted that a number of OEMs, such as Motorola, have
internal
engineering groups that can develop competitive products in-house.
Additionally,
many of our competitors have financial, technical, marketing, sales,
manufacturing, distribution and other resources significantly greater
than ours.
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Zinc-Air Fuel Cells, Batteries and Chargers for the Military
Competition
The BA-8180/U is the only Zinc-Air battery to hold a US Army battery
designation. It does, however, compete with other primary (disposable)
batteries, and primarily lithium based batteries. In some cases,
primarily in
training missions, it will also compete with rechargeable batteries.
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Electric Vehicles
At this time the technical activity on our Electric Vehicle program is
on hold
while we seek funding to introduce this technology commercially.
The Electric Fuel Zinc-Air Energy System for Electric Vehicles
With its proprietary high-power air cathode and zinc anode
technologies, our
Zinc-Air fuel cell delivers a unique combination of high-energy density
and
high-power density, which together power electric vehicles with speed,
acceleration, driving range and driver convenience similar to that of
conventionally powered vehicles.
Competition
We believe that our products must be available at a price that is
competitive
with alternative technologies, particularly those intended for use in
zero or
low-emission vehicles. Besides other battery technologies, these
include
hydrogen fuel cells, hybrid systems that combine an internal combustion
engine
and battery technologies, and use of regular or low-pollution fuels
such as
gasoline, diesel, compressed natural gas, liquefied natural gas,
ethanol and
methanol. Other alternative technologies presently use costly
components,
including use of flywheels and catalytic removal of pollutants. These
various
technologies are at differing stages of development and any one of
them, or a
new technology, may prove to be more cost effective, or otherwise more
readily
acceptable by consumers, than the Electric Fuel Zinc-Air Energy System
for
electric vehicles. In addition, the California Air Resource Board has
expressed
to us concerns about the costs associated with the Zinc-Air
regeneration
infrastructure as compared to battery technologies that use electrical
recharging.
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Lifejacket Lights
Competition
Two of the largest manufacturers of aviation and marine safety
products,
including TSO and SOLAS-approved lifejacket lights, are ACR Electronics
Inc. of
Hollywood, Florida, and Pains Wessex McMurdo Ltd. of England. Other
significant
competitors in the marine market include Daniamant Aps of Denmark, and
SIC of
Italy.
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Major Customers
During 2005, including all of our divisions, various branches of the
United
States military accounted for approximately 33% of our revenues.
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Patents and Trade Secrets
We rely on the laws of unfair competition and trade secrets to protect
our
proprietary rights. We attempt to protect our trade secrets and other
proprietary information through confidentiality and non-disclosure
agreements
with customers, suppliers, employees and consultants, and through other
security
measures. However, we may be unable to detect the unauthorized use of,
or take
appropriate steps to enforce our intellectual property rights.
Effective trade
secret protection may not be available in every country in which we
offer or
intend to offer our products and services to the same extent as in the
United
States. Failure to adequately protect our intellectual property could
harm or
even destroy our brands and impair our ability to compete effectively.
Further,
enforcing our intellectual property rights could result in the
expenditure of
significant financial and managerial resources and may not prove
successful.
Although we intend to protect our rights vigorously, there can be no
assurance
that these measures will be successful.
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We were incorporated in 1990 and began our operations in 1991. We have
funded
our operations principally from funds raised in each of the initial
public
offering of our common stock in February 1994; through subsequent
public and
private offerings of our common stock and equity and debt securities
convertible
or exercisable into shares of our common stock; research contracts and
supply
contracts; funds received under research and development grants from
the
Government of Israel; and sales of products that we and our
subsidiaries
manufacture. We have incurred significant net losses since our
inception.
Additionally, as of December 31, 2005, we had an accumulated deficit of
approximately $143.0 million. In an effort to reduce operating expenses
and
maximize available resources, we intend to consolidate certain of our
subsidiaries, shift personnel and reassign responsibilities. We have
also
substantially reduced certain senior employee salaries during 2005, cut
directors fees, and taken a variety of other measures to limit spending
and will
continue to assess our internal processes to seek additional
cost-structure
improvements. Although we believe that such steps will help to reduce
our
operating expenses and maximize our available resources, there can be
no
assurance that we will ever be able to achieve or maintain
profitability
consistently or that our business will continue to exist.
Our existing indebtedness may adversely affect our ability to obtain
additional
funds and may increase our vulnerability to economic or business
downturns.
If the indebtedness under the
debentures, notes or other indebtedness were to be accelerated, there
can be no
assurance that our future cash flow or assets would be sufficient to
repay in
full such indebtedness.
We may not generate sufficient cash flow to service all of our debt
obligations.
Consequently, we cannot assure you that we will generate
sufficient cash flow to pay the principal and interest on our debt.
If additional funds are raised by
issuing equity securities or convertible debt securities, stockholders
may incur
further dilution.
The payment by us of our secured convertible notes in stock or the
conversion of
such notes by the holders could result in substantial numbers of
additional
shares being issued, with the number of such shares increasing if and
to the
extent our market price declines, diluting the ownership percentage of
our
existing stockholders.
Accordingly, the lower the market price of our common
stock at the time at which we make payments of principal in stock, the
greater
the number of shares we will be obliged to issue and the greater the
dilution to
our existing stockholders.
In either case, the issuance of the additional shares of our common
stock could
adversely affect the market price of our common stock.
Prior to the acquisitions of IES and MDT in 2002 and the acquisitions
of FAAC
and Epsilor in January 2004 and AoA in August 2004, our primary
business was the
marketing and sale of products based on primary and refuelable Zinc-Air
fuel
cell technology and advancements in battery technology for defense and
security
products and other military applications, electric vehicles and
consumer
electronics. As a result of our acquisitions, a substantial component
of our
business is the marketing and sale of high-tech multimedia and
interactive
training solutions and sophisticated lightweight materials and advanced
engineering processes used to armor vehicles. These are relatively new
businesses for us and our management group has limited experience
operating
these types of businesses.
The loss of, or a significant reduction in, U.S. military business
would have a
material adverse effect on us.
A reduction of U.S. force levels in Iraq may affect our results of
operations.
Some of the components of our products pose potential safety risks
which could
create potential liability exposure for us.
Our fields of business are highly competitive.
We are highly dependent on the president of our FAAC subsidiary and the
general
managers of our MDT and Epsilor subsidiaries, and the loss of the
services of
one or more of these persons could adversely affect us.
FINANCIAL REPORTING PROBLEMS
Our management has determined that we have material weaknesses in our
internal
controls. If we fail to achieve and maintain effective internal
controls in
accordance with Section 404 of the Sarbanes-Oxley Act, we may not be
able to
accurately report our financial results.
Our management has not yet
completed its assessment of the effectiveness of our internal control
over
financial reporting as of December 31, 2005. However, based on their
evaluation
procedures performed to date, management has concluded that internal
controls
over financial reporting were ineffective as of December 31, 2005.
Because we
have not yet completed our assessment of the effectiveness of our
internal
control over financial reporting, our independent auditors have
disclaimed any
opinion on our internal controls, as stated in their report which is
included
herein.
FACING DELISTING FROM NASDAQ
If our shares were to be delisted, our stock price might decline
further and we
might be unable to raise additional capital.
One of the continued listing standards for our stock on the Nasdaq
Stock Market
(both the Nasdaq National Market, on which our stock is currently
listed, and
the Nasdaq Capital Market (formerly known as the Nasdaq SmallCap
Market)) is the
maintenance of a $1.00 bid price. Our stock price is currently below
$1.00, and
has been so since August 15, 2005. On March 28, 2006, we received a
Nasdaq Staff
Determination indicating that we were not in compliance with the
minimum bid
price requirement for continued listing set forth in Marketplace Rule
4450(a)
and that our securities are, therefore, subject to delisting from the
Nasdaq
National Market at the opening of business on April 6, 2006.